**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

(Mark One)

| **x** | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|-----------------------------------------------------------------------------------------------------|

 

**For the fiscal yearended December 31, 2005**

**OR**

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

 

**For the transition period from                    to                    .**

**Commission FileNumber  333-116038**

**SYMMETRYMEDICAL INC.**

(Exact name of Registrantas Specified in its Charter)

| **Delaware**                                                    | ** ** | **35-1996126**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **220 W. Market Street, Warsaw, Indiana**                       | ** ** | **46580**                             |
| (Address of Principal Executive Offices)                        |       | (Zip Code)                            |

 

**Registrant’s Telephone Number, Including Area Code:(574) 268-2252**

**SecuritiesRegistered Pursuant to Section 12(b) of the Act:**

| **Title of Each Class**         | ** ** | **Name of Exchange on Which Registered** |
|---------------------------------|------------|------------------------------------------|
| Common Stock, $0.0001 par value |       | New York Stock Exchange                  |

 

**SecuritiesRegistered Pursuant to Section 12(g) of the Act:None(Title of Class)**

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.   Yes o    No x

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Exchange Act.   Yes o   No x

**Note**—Checking  the box above will not relieve any registrant requiredto file reports pursuant to Section 13 or 15(d) of the Exchange Actfrom their obligations under those sections.

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes x   No o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (229.405 of this chapter) is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K.    x

Indicateby check mark whether the registrant is a large accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check One)

Largeaccelerated filer  o                                 Accelerated filer  x                              Non-accelerated filer  o

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act).  Yes o  No x

Theaggregate market value of voting stock of Symmetry Medical Inc. held bynon-affiliates as of the Registrant as of July 2, 2005, based on the closingprice of was $23.68, as reported on the New York Stock Exchange: Approximately$320,193,667.

Thenumber of shares outstanding of the registrant’s common stock as of February 17,2006, was 34,709,074.

**DOCUMENTSINCORPORATED BY REFERENCE**

Certain information is incorporated into Part IIIof this report by reference to the Registrant’s 2006 Proxy Statement to befiled with the Securities and Exchange Commission not later than 120 days afterthe end of the fiscal year covered by this Form 10-K.

 

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**TABLE OF CONTENTS**

|                   | ** ** |                                                                                                                       | ** ** | **Page**   | ** ** |
|-------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| **PART I**   | ** ** | ** **                                                                                                            | ** ** | ** ** |       |
| Item 1.           |       | Business                                                                                                              |       | 4          |       |
| Item 1A.     |       | Risk Factors.                                                                                                         |       | 15         |       |
| Item 1B.     |       | Unresolved Staff Comments.                                                                                            |       | 27         |       |
| Item 2.           |       | Properties                                                                                                            |       | 28         |       |
| Item 3.           |       | Legal Proceedings                                                                                                     |       | 29         |       |
| Item 4.           |       | Submission of Matters to a Vote of Security Holders                                                                   |       | 29         |       |
| **PART II**  | ** ** | ** **                                                                                                            | ** ** | ** ** |       |
| Item 5.           |       | Market for the Registrant’s Common Stock, Related  Stockholder Matters and Issuer Purchases of Equity Securities |       | 30         |       |
| Item 6.           |       | Selected  Financial Data                                                                                              |       | 31         |       |
| Item 7.           |       | Management’s Discussion and Analysis of Results of  Operations and Financial Condition                      |       | 33         |       |
| Item 7A.          |       | Quantitative and Qualitative Disclosures About Market  Risks                                                          |       | 43         |       |
| Item 8.           |       | Financial  Statements                                                                                                 |       | 45         |       |
| Item 9.           |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure.                                |       | 73         |       |
| Item 9A.     |       | Controls and Procedures.                                                                                              |       | 73         |       |
| Item 9B.     |       | Other  Information                                                                                                    |       | 73         |       |
| **PART III** | ** ** | ** **                                                                                                            | ** ** | ** ** |       |
| Item 10.          |       | Directors and Executive Officers of the Registrant                                                                    |       | 74         |       |
| Item 11.          |       | Executive Compensation                                                                                                |       | 74         |       |
| Item 12.          |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                       |       | 74         |       |
| Item 13.          |       | Certain Relationships and Related Transactions                                                                        |       | 74         |       |
| Item 14.          |       | Principal Accounting Fees and Services                                                                                |       | 74         |       |
| **PART IV**  | ** ** | ** **                                                                                                            | ** ** | ** ** |       |
| Item 15.     |       | Exhibits and Financial Statement Schedules                                                                            |       | 75         |       |
| Signatures        |       | 79                                                                                                                    |       |

 

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**Special Note Regarding Forward-Looking Statements**

Throughout this report, or inother reports or registration statements filed from time to time with theSecurities and Exchange Commission under the Securities Exchange Act of 1934,or under the Securities Act of 1933, as well as in documents we incorporate byreference or in press releases or oral statements made by our officers orrepresentatives, we may make statements that express our opinions, expectations,or projections regarding future events or future results, in contrast withstatements that reflect historical facts. These predictive statements, which wegenerally precede or accompany by such typical conditional words such as “anticipate,”“intend,” “believe,” “estimate,” “plan,” “seek,” “project” or “expect,” or bythe words “may,” “will,” or “should,” are intended to operate as “forwardlooking statements” of the kind permitted by the Private Securities LitigationReform Act of 1995, incorporated in Section 27A of the Securities Act and Section 21Eof the Securities Exchange Act. That legislation protects such predictivestatements by creating a “safe harbor” from liability in the event that aparticular prediction does not turn out as anticipated.

While we always intend toexpress our best judgment when we make statements about what we believe willoccur in the future, and although we base these statements on assumptions thatwe believe to be reasonable when made, these forward-looking statements are nota guarantee of performance, and you should not place undue reliance on suchstatements. Forward-looking statements are subject to many uncertainties andother variable circumstances, many of which are outside of our control, thatcould cause our actual results and experience to differ materially from thosewe thought would occur.

We also refer you to and believethat you should carefully read the portion of this report described in “RiskFactors” to better understand the risks and uncertainties that are inherent inour business and in owning our securities.

Any forward looking statementswhich we make in this report or in any of the documents that are incorporatedby reference herein speak only as of the date of such statement, and weundertake no ongoing obligation to update such statements. Comparisons ofresults between current and any prior periods are not intended to express anyfuture trends or indications of future performance, unless expressed as such,and should only be viewed as historical data.

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**PART I**

**ITEM 1.**   BUSINESS

**General**

Symmetry Medical Inc.(which we sometimes refer to, together with our consolidated subsidiaries, asthe “we”, “our” or “Symmetry”) is the world’s largest independent provider ofimplants and related instruments and cases to orthopedic device manufacturers.We design, develop and produce these products for companies in other segmentsof the medical device market, including the dental, osteobiologic and endoscopysegments, and we also provide limited specialized products and services tonon-healthcare markets, such as the aerospace market. Our Total Solutions® approach presents our customers with a broadrange of products, as well as comprehensive design, engineering and project managementservices and state of the art production capabilities to help them bring theirimplant systems to market quickly and efficiently. We believe that our TotalSolutions® approach gives us a competitive advantage,which should increase in the future.

During fiscal year 2005,we generated revenue of $263.8 million, derived primarily from the sale ofproducts and services to the orthopedic device market. Our Total Solutions® approach is supported by an experienced teamof designers, development engineers, logistics specialists and by our globalsales force that work with our customers to coordinate all of our products andservices.

Ourprimary products and services include:

•     implants,including forged, cast and machined products for the global orthopedic devicemarket;

•     instrumentsused in the placement and removal of orthopedic implants and in other surgicalprocedures;

•     cases,including plastic, metal and hybrid cases used to organize, secure andtransport medical devices for orthopedic and other surgical procedures; and

•     otherspecialized products and services for non-healthcare markets, primarily theaerospace market.

**History**

Our business wasestablished in 1976 as a supplier of instruments to orthopedic devicemanufacturers. Symmetry Medical Inc. was incorporated in Delaware on July 25,1996. During the 1990’s we made several acquisitions, which expanded ourcustomer base, enhanced our instrument product offerings and extended ourproduct line to include cases designed for various medical devices and theirrelated instruments. In October 2000, investment funds controlled byOlympus Partners (which we sometimes refer to as the “Olympus Funds”) acquiredcontrol of Symmetry through a recapitalization. In this transaction, theOlympus Funds invested a total of $40.5 million in cash to acquiresecurities representing approximately 94% of our then outstanding voting stock.In June 2003, we acquired Mettis (UK) Limited (which we sometimes referto, together with our consolidated subsidiaries, as “Mettis”), a leadingmanufacturer of forged, cast and machined implants for the global orthopedicdevice market. This acquisition significantly expanded our product offeringsand increased our European presence, allowing us to develop and manufactureimplants, instruments and cases for orthopedic device manufacturers on a globalbasis. In connection with the Mettis acquisition, the Olympus Fundscollectively invested an additional $63.0 million in equity and loanedSymmetry $8.0 million through the purchase of senior subordinated notesand stock purchase warrants. In December, 2004, we completed an initial publicoffering of our common stock and entered into a new senior credit facility. In July 2005,we successfully completed a secondary offering which included 11.0 millionshares. 0.5 million were sold as primary shares and 10.5 millionshares were sold by certain selling shareholders.

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**OurTotal Solutions**® Approach

Webelieve that we have created a distinctive competitive position in theorthopedic device market based upon our Total Solutions® approach. Our acquisition of Mettis in June 2003expanded our products and services, enabling us to offer an integrated outsourcingsolution. Our Total Solutions® approach presents our customers with a broadrange of products, as well as comprehensive design, engineering and projectmanagement services and state of the art production capabilities to help thembring their implant systems to market quickly and efficiently. Our TotalSolutions® offering isbased on:

•     *Comprehensive services*.   We cansupport our customers’ new product offerings from product concept throughmarket introduction and thereafter, by providing seamless design, engineering,prototyping and manufacturing services.

•     *Single source for complete systems*.   Weassist our customers in developing new implants, and we design and produceinstruments for implant-specific surgical procedures. We also providecustomized cases that provide a secure, clearly labeled and well organizedarrangement of instruments and devices.

•     *Proprietary Symmetry instruments and cases*.   Ourestablished lines of proprietary products allow our customers to complete theirproprietary implant systems and bring them to market sooner.

•     *Precision manufacturing expertise*.   Ourextensive expertise and know-how enable us to produce large volumes ofspecialized products to our customers’ precise standards, which we believemakes us a supplier of choice to the largest orthopedic companies. Our coreproduction competencies include net shaped forging, precision casting, thermoforming, precision sheet metal working and machining/finishing.

•     *Quality and regulatory compliance*.   Ourquality systems are based upon and in compliance with InternationalOrganization for Standardization, or ISO, requirements and, where applicable,United States Food and Drug Administration, or FDA, regulations. We believe ourlevel of quality and regulatory compliance systems meet our customers’expectations.

•     *Global reach.*   Our manufacturingcapabilities in the United States and Europe allow us to offer single-sourceproducts and services to our multinational customers, and the geographicbreadth of our experienced sales force effectively brings our Total Solutions® approach to customers globally.

Webelieve that our Total Solutions® approach offers a number of benefits to ourcustomers, including:

•     *Shorter time to market.  *Our design,engineering and prototyping skills, as well as our ability to transitionseamlessly from product development to production of implants, instruments andcases, enable our customers to reduce time to market for their new products.

•     *Reduced total product acquisition costs.  *Ourcomprehensive services, including design, engineering, prototyping, projectmanagement, production and inventory control, allow our customers to reducetheir procurement costs and inventory levels, resulting in lower productacquisition costs.

•     *Increased focus on marketing and research anddevelopment efforts.  *Our extensive production capabilities andcomprehensive services offer a one-stop outsourcing solution and allow ourcustomers to focus their resources on their design, development and marketingefforts.

•     *Rationalized and reliable supply chain.*   Ourscale, scope of products and services and Total Solutions® approach allow large orthopedic companies toreduce the number of their independent suppliers and streamline theiroperations.

•     *Enhanced product consistency on a global basis.  *Ourextensive production platform, Total Solutions® approach and international presence allow usto meet global demand for orthopedic devices, which is expected to increase.

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**Business Strategy**

Ourgoal is to increase our share of the orthopedic device market and to leverageour strengths to expand in other medical device market segments. The keyelements of our business strategy are to:

•     *Develop strategic relationships with our customersthrough access to key decision makers.*   Our scale, scope ofproducts and services and Total Solutions® approach positionus as an important partner to our customers. This position gives us access tokey decision makers, with whom we intend to continue to build strategicrelationships.

•     *Capitalize on our Total Solutions*®* approach.  *Webelieve that our Total Solutions® approach shortens product development cycles,reduces design and manufacturing costs and simplifies purchasing and logistics,and we intend to aggressively market these benefits to our customers.

•     *Increase sales to existing customers by cross sellingproducts and services.  *Our cases are currently sold in nearlyevery segment of the medical device market. We believe that our diversecustomer base offers us a natural entry point to new orthopedic andnon-orthopedic customers for our implants and instruments.

•     *Leverage manufacturing skills.*   Duringfiscal years 2005 and 2004, we expanded most of our facilities and opened newfacilities to add manufacturing capacity and design resources, and updated muchof our manufacturing and development equipment. We intend to continue toleverage our investments in sophisticated equipment and manufacturing know-howto expand our existing customer relationships and to obtain new customers.

•     *Increase new product offerings.*   OurDesign and Development Centers provide expertise and coordination for ourdesign, engineering and prototyping services. We intend to use the dedicatedexpertise of our Design and Development Centers to generate additionaldevelopment projects with our customers and to expand our line of innovativeand independently developed instruments and cases.

•     *Collaborate with emerging companies.  *Webelieve that new and innovative medical device companies are creating ameaningful market presence and that our Total Solutions® approach positions us to help these companies,many of which may have limited resources.

**Products andServices**

We design, develop andmanufacture implants and related surgical instruments and cases for orthopedicdevice companies. We also design, develop and manufacture products forcompanies in other medical device markets, such as dental, osteobiologic andendoscopy, and we provide limited specialized products and services used in theaerospace and other non-healthcare markets. Our revenue from the sale ofimplants, instruments, cases and other products and services represented 39.2%,32.9%, 21.0% and 6.9%, respectively, of our revenue in fiscal 2005, comparedwith 36.6%, 33.0%, 23.0% and 7.4%, respectively, of our revenue in fiscal 2004.

***Implants***

We design, develop andmanufacture implants for use in specific implant systems developed by ourcustomers. We make orthopedic implants used primarily in knee and hip implantsystems. Our orthopedic implants are used in reconstructive surgeries to replaceor repair hips, knees and other joints, such as shoulders, ankles and elbows,sometimes referred to as extremities that have deteriorated as a result ofdisease or injury. An orthopedic implant system is generally comprised ofseveral implants designed to work in concert to replicate the structure andfunction of a healthy joint.

We also manufactureimplant products for trauma, spine and other implant systems. Trauma implantsystems are used primarily to reattach or stabilize damaged bone or tissue whilethe body heals. Spinal 

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implantsystems are used by orthopedic surgeons and neurosurgeons in the treatment ofdegenerative diseases, deformities and injuries in various regions of thespine.

Our design, engineeringand prototyping expertise is an integral part of our implant offering. Medicaldevice companies, which typically focus their resources on developing newimplant systems as well as sales and marketing, may rely on us and companieslike us to design, develop and manufacture the implants that comprise theirimplant systems. Our manufacturing capabilities, including our net shapedforging capabilities, technologically advanced casting facility and machiningexpertise, allow us to produce consistent, tight tolerance implants in largevolumes for our customers.

We produce gross shaped,near-net shaped and net shaped implants for medical device manufacturers. Grossshaped implants require a significant amount of machining and hand processingpost-forging. Near-net shaped implants are distinguished by geometric featuresthat are thinner; more detailed and have tighter tolerances. Net shaped andnear-net shaped implants require far fewer machine and hand operationspost-forging. Net shaped implants typically require machining only on vitalareas, such as the taper segment of a hip where it is joined to the femoralhead.

We have the machiningexpertise needed to provide finished implants to our customers. Some customerspurchase finished implants from us while others purchase unfinished implantsand machine them to final specifications.

Ourprimary implant products and their applications are:

•     *Knees.  *The knee joint includes thesurfaces of three distinct bones: the lower end of the femur, the upper end ofthe tibia or shin bone, and the patella (knee cap). Cartilage on any of thesesurfaces can be compromised by disease or injury, leading to pain andinflammation that may require knee reconstruction. Our knee implants include afemoral component, a patella, a tibial tray and an articulating surface (placedon the tibial tray) and are used in total knee reconstruction, partial kneereconstruction and revision procedures. We provide one or more, and in somecases all, of these implants for our customers’ knee implant systems. We useproprietary manufacturing know-how and advanced computer aided simulationtechniques to produce tight tolerance near-net shaped to net shaped tibialimplants that require minimal if any machining.

•     *Hips.*   The hip joint consists of aball-and-socket joint that enables a wide range of motion. The hip joint isoften replaced due to degeneration of the cartilage between the head of thefemur (the ball) and the acetabulum or hollow portion of the pelvis (thesocket). This loss of cartilage causes pain, stiffness and a reduction in hipmobility. We produce tight tolerance femoral heads, hip stems, acetabular cupsand spiked acetabular cups used in bone conservation, total-hip reconstructionand revision replacement procedures. Our hip stems are forged with tighttolerance details.

•     *Extremities, Trauma and Spine.*   Extremityreconstruction involves the use of an implant system to replace or reconstructinjured or diseased joints, such as the finger, toe, wrist, elbow, foot, ankleand shoulder. Our forging capabilities allow us to produce thin cross sectionsof material to very tight tolerances for these smaller joint procedures. Traumaimplant procedures commonly involve the internal fixation of bone fragmentsusing an assortment of plates, screws, rods, wires and pins. Our spinal implantproducts consist primarily of plates and screws. We manufacture trauma andspinal plate implants to exact details to fit bone contours.

***Instruments***

We make high-precisionsurgical instruments used in hip, knee and shoulder reconstruction procedures,as well as in spinal, trauma and other implant procedures. We design, developand manufacture implant-specific and procedure-specific instruments. We rarelymanufacture general surgical instruments, but will procure them as a service toour customers in order to provide our customers with complete instrument sets.We have several reamer systems used by many of our large customers. Symmetry 

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currentlyhas over 500 standard products in our catalog, and we plan on adding over 1,000new products in a new catalog this coming year.

We primarily make a widerange of knee cutting blocks (instruments that guide blades that cut bone),osteotome revision systems (instruments used to cut through bone), reamers(instruments used for shaping bone sockets or cavities) and retractors(instruments used to pull back tissue for clear sight during surgery). Some ofour instrument handles are made with our patented plastic insertion machine,which is designed to withstand the intense heat produced during frequentsterilizations and is attached to the instrument. Our instruments are made totight tolerances to ensure precise alignment and fitting of implants.

Each implant systemtypically has an associated instrument set that is used in the surgicalprocedure to insert that specific implant system. Instruments included in a setvary by implant system. For example, hip and knee implant procedure instrumentsets often contain in excess of 100 instruments, whereas revision proceduresets may contain approximately 50 instruments. Usually, instrument sets aresterilized after each use and then reused.

Theinstruments we produce are typically used in either open, minimally invasive,or revision implant procedures and can generally be categorized as:

•     Implant-specificinstruments, which are used solely for a specific brand of implant, such ashigh-precision knee cutting blocks, certain reamers and broaches; and

•     Procedure-specificinstruments, which are designed for a particular type of procedure, such as aminimally invasive hip implant procedure, but can be used with the implantsystems of multiple companies.

*Implant-SpecificInstruments.*   The size, shape and other featuresof each implant system are unique. Consequently, unique instruments must beused to ensure precise alignment and fitting during the surgical procedure toinsert an implant system. Accordingly, when a medical device company develops anew implant system, it typically also develops instruments specificallydesigned to insert the implant system. Medical device companies typicallyprovide complete, customized implant-specific instrument sets to end users(hospitals, outpatient centers and physicians) in order to facilitate use ofthe implant.

We seek to collaboratewith our customers early in the development process to facilitate theconcurrent design of the implant system and the instruments that will accompanythe system. Our implant-specific instruments generally include customizedreamers, cutting blocks, broaches, rasps, guides and other instruments designedto accommodate the unique size, shape and other features of our customers’implant systems. These instruments are used by the surgeon to cut and shapebone and cavities during the surgical procedure and to align and fit theimplant system. We are recognized in the orthopedic community for constructingthese instruments to extremely tight tolerances.

*Procedure-SpecificInstruments.*   We also manufacture independentlydeveloped instruments referred to as our Symmetry Products. We have developedthese products through our years of experience serving the orthopedic marketand our investments in research and development. Complete implant procedureinstrument sets typically include certain instruments that are designed for aparticular type of procedure but can be used with the implant systems ofmultiple companies. By purchasing our proven Symmetry Products, customers canleverage our extensive experience and expertise to complete their instrumentsets more quickly and efficiently.

Our Symmetry Productsinclude successful hip and knee revision systems. Instruments that make uprevision systems, which are used to remove orthopedic implants, are typicallydesigned for a specific type of procedure but can be used to remove variousbrands of implants. These self-contained systems include an assortment ofosteotome blades that assist the surgeon in separating an implant from cementor bony in-growth where access is limited, while minimizing damage to the bone.Our established revision systems can also be readily modified for a customer byadding additional instruments. For example, we developed a hip 

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revisionsystem in 1996 that we currently sell to six different customers, with thesystem being customized for each customer.

***Cases***

We produce a wide range ofplastic, metal and hybrid cases used in over 25 medical device markets,including orthopedic, arthroscopy, osteobiologic, endoscopy, cardiovascular,dental, ophthalmology, diagnostic imaging and ear, nose and throat surgicalprocedures. Cases are used to store, transport and arrange implant systems andother medical devices and related surgical instruments. Our cases are generallydesigned to allow for sterilization and re-use after an implant or other surgicalprocedure is performed. Our plastic cases are designed to withstand the intenseheat produced during the sterilization process.

The majority of the caseswe make are tailored for specific implant procedures so that the instruments,implants and other devices are arranged within the case to match the order ofuse in the procedure and are securely held in clearly labeled, custom-formedpockets. We seek to collaborate with our customers early in the developmentprocesses to facilitate the concurrent design of the case and relatedinstruments.

We also produce standardcases which are primarily used in those non-orthopedic market segments wherethe security or presentation of the instruments and devices is less important.Over the past two years, we have made a significant investment to obtain 510(k) clearancefor our PolyVac line of standard cases through the FDA pre-market notificationprocess. We believe this allows our customers to reduce time to market and toreallocate financial and human resources that would otherwise be spent oncompliance efforts, which provides us with a significant competitive advantagein selling our standard cases.

We have more than 25patents related to our case designs and manufacturing processes. We believethat our complete line of plastic, metal and hybrid product offeringsstrategically positions us in the case market.

Highlightsof our case product offerings include:

•     *Orthopedic Cases.*   We produce custommetal, plastic and hybrid cases designed to store, transport and arrangesurgical instruments and related implant systems for orthopedic devicemanufacturers. Proper identification of instruments, such as reamers which aregenerally included in a range of sizes in one to two millimeter increments, iscritical in orthopedic implant procedures. Our graphics and thermo formed traypockets provide a secure and organized arrangement to assist surgeons duringprocedures.

•     *Dental Cases.*   We produce cases usedin dental implant and general dental procedures. Dental implant cases aretypically complex and include many levels of trays, while cases used in generaldental procedures tend to be smaller and less complex.

•     *Other Cases.*   We also manufacture andsell cases for arthroscopy, osteobiologic, endoscopy, cardiovascular,ophthalmology, diagnostic imaging and ear, nose and throat procedures.

***SpecializedNon-healthcare Products and Services***

We offer specializednon-healthcare products and services on a limited basis. One of our UK basedfacilities acquired as part of the Mettis acquisition produced a range ofcutting tools, cutlery and surgical instruments in the 1950’s. This facilityevolved to focus on net shaped forgings, which resulted in a business focusingon orthopedic instruments and aerospace products for jet engines in the late1990’s. Thereafter, this facility began focusing our net shaped forgingcapabilities on orthopedic implants and shifting our non-healthcare operations towardproduct development support and specialized products. Our core design,engineering and manufacturing competencies give us the expertise to offerspecialized non-healthcare 

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productsand services. Our non-healthcare products primarily are net shaped aerofoilsand non-rotating aircraft engine forgings produced for our aerospace customers.

***Product Development***

Our Design and DevelopmentCenters provide dedicated expertise and greater coordination for our design,engineering and prototyping services. The main Design and Development Center islocated in Warsaw, Indiana, and brings together talented engineering and designpersonnel and provides them with state-of-the-art design software andprototyping equipment. Our Design and Development Centers serve to centralizeand better institutionalize our design and engineering knowledge and creates afertile environment for new product development. We can coordinate the productdevelopment projects for our customers as well as the efforts of our engineersand designers in order to ensure that we have the appropriate people andtechnology focused on particular product development initiatives. Symmetry alsohas Design & Development Centers in Memphis, TN, Manchester, NH,Lansing, MI and Cheltenham, UK. We intend to open our new, larger WarsawDesign & Development Center in April 2006.

We seek to collaboratewith our customers’ product development teams and to assist in the design,engineering and prototyping of new medical device systems from the beginning ofthe development process. Our sales staff is technically trained and worksclosely with our customer’s staff. As new product concepts are formulated, oursales people bring in our design and engineering personnel and leverage theresources of our Design and Development Centers to provide dedicated designteams with exceptional knowledge and experience. As a project evolves, we canrapidly create prototypes of the proposed product, instrument, case or implant.Working closely with our customers through the conceptual, planning andprototyping stages positions allows us to quickly scale up for manufacturing ofthe product.

In addition to supportingour customers’ product development efforts, our Design and Development Centersare continuously developing our own product lines, referred to as SymmetryProducts. We develop products by leveraging years of experience and knowledge,investing in research and development and continually seeking to expand ourknowledge of the marketplace by consulting surgeons and other end users of ourproducts. We currently offer over 500 internally developed products, includinginstruments for minimally invasive surgical implant procedures and hip and kneerevision systems.

**EnvironmentalIssues**

Our discussion ofenvironmental issues is presented under the caption “Environmental” in Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations in this Form 10-K.

**Capital Investment**

Information concerning ourcapital expenditures is presented under the caption “Capital Expenditures” inItem 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations in this Form 10-K.

**Customers**

We supply our productsprimarily to manufacturers in the medical device market. Our customers includeall of the large orthopedic device manufacturers, including Biomet Inc., DePuyInc. (a subsidiary of Johnson & Johnson), Medtronic Sofamor Danek,Smith & Nephew plc, Stryker Corporation, and Zimmer Holdings, Inc.We also have established relationships, primarily through our cases productofferings, with leading medical device manufacturers in numerous other medicaldevice market segments, including Cardinal Health, Inc., 3i and St. JudeMedical Inc. We sold to approximately 750 customers, including over 100 newcustomers, in fiscal 2005. We may experience a seasonal impact of theorthopedic industry on revenue in the third quarter because many of ourproducts are used in elective procedures that tend to 

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declineto some degree during the summer months. Sales to our ten largest customersrepresented 78.8% and 78.7% of our revenue in 2005 and fiscal 2004,respectively. Our two largest customers accounted for 33.2%, and 13.6% of ourrevenue in fiscal 2005 and our three largest customers accounted for 25.4%,14.6% and 13.6% of our revenue in fiscal 2004. Our three largest customers inalphabetical order in fiscal 2004 were DePuy, Smith & Nephew andZimmer and our two largest customers in alphabetical order for fiscal 2005 wereDePuy and Zimmer. No other customer accounted for more than 10% of our revenuein fiscal 2005 or fiscal 2004. We typically serve several product teams andfacilities within each of our largest customers, which mitigates our relianceon any particular customer.

We sell our products tocustomers domestically and in a number of regions outside the United States. Inaddition, our customers often distribute globally products purchased from us inthe United States. Set forth below is a summary of revenue by selectedgeographic locations in our last three fiscal years, based on the location towhich we shipped our products:

**Percentof Revenue by Geographic Location**

| ** **               | ** ** | **Fiscal Year Ended** | ** ** |
|--------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| United States            |       | 65.1                            | %          | 66.6 | % | 73.2 | % |
| United Kingdom           |       | 12.5                            | %          | 13.3 | % | 16.1 | % |
| Ireland                  |       | 12.3                            | %          | 10.3 | % | 7.2 | % |
| Other foreign  countries |       | 10.1                            | %          | 9.8 | % | 3.5 | % |
| Total net revenues       |       | 100.0                           | %          | 100.0 | % | 100.0 | % |

 

**Sales and Marketing**

Our sales and marketingefforts emphasize our design and engineering expertise, internally developedSymmetry Products, manufacturing capabilities, international distributionnetwork and our ability to provide customers with a comprehensive productoffering. We are increasingly presenting our products and services to customersin a Total Solutions® concept which offers the customer acollaborator for developing complete implant, instrument and case solutions.

We have over 70 sales andmarketing personnel worldwide. In addition to our internal sales efforts, wealso sell standard cases through distributors. Our sales personnel are trainedin all of our products and services in order to cross-sell and identifyopportunities outside their immediate area of focus. We typically serve severalproduct teams and facilities within each customer which diminishes our relianceon any one purchasing decision. Our customer base for cases extends into nearlyevery segment of the medical device market. We believe there is a significantopportunity to leverage our existing relationships among this customer base toachieve greater penetration of our customized instrument and implant products.We intend to increase our marketing of implants, instruments and our TotalSolutions® concept to these customers.

Our sales personnel aretechnically trained and are based in close proximity to or located at ourlargest customers’ sites. This physical proximity allows sales personnel toengage quickly with the marketing, design, engineering and purchasing staffs ofthese orthopedic device manufacturers. Our sales people are empowered to bringin design and engineering product development teams to facilitate a customer’sefforts. Our goal is to collaborate with customers early in the developmentcycle and to continue through production, packaging, delivery and logistics.

**Manufacturing**

Wehave manufacturing facilities in the United States, the United Kingdom andFrance. We have made significant investments in recent years to modernize ourproduction facilities, improve our 

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production processes and develop superior technicalskills that complement our manufacturing capabilities. These investments haveallowed us to continue to improve the quality of our products, increase ourmanufacturing capacity and improve our efficiency. Our manufacturing processesinclude:

•     *Forging.*   Our forging process usespresses to force heated metal between two dies (called tooling) that contain aprecut profile of the desired implant. The forging process enhances thestrength of an implant, which is important for hip stems and other implants thatmust withstand significant stress. Many customers prefer forging because itprovides greater mechanical properties. We forge gross shaped, near-net shapedand net shaped implants. Our know-how enables us to produce precision netshaped forgings in large volumes.

•     *Casting.*   In the casting process,metal is heated until it is liquid and then poured into an implant mold.Casting can be used to produce implants with intricate shapes. We havedeveloped a technologically advanced, highly automated, casting facility inSheffield, United Kingdom.

•     *Plastic and Metal Forming.*   Ourknow-how and technology facilitates our extensive plastic and metal formingcapabilities. We use thermo form processes to draw uniform plastic cases andspecialized equipment to form metal. Our laser controlled metal workingmachines allow us to punch and shape metal in intricate and complex detail.

•     *Machining / Finishing.*   Machining isused extensively to enhance our forged, cast and formed products. We usecomputer numerically controlled, multi-axis and wire electric dischargeequipment to cut, bend, punch, polish and otherwise shape or detail metal orplastic. Our finishing processes include polishing, laser etch marking,graphics and other customer specific processes.

The majority of productsthat we produce are customized to the unique specifications of our customers.Our ability to maintain flexible operations is an important factor inmaintaining high levels of productivity. We primarily use “just-in-time”manufacturing and flexible manufacturing cells in our production processes.Just-in-time manufacturing is a production technique that minimizeswork-in-process inventory and manufacturing cycles. Manufacturing cells areclusters of individual manufacturing operations and work stations grouped in acircular configuration, with the operators placed centrally within theconfiguration. Cell manufacturing provides flexibility by allowing efficientchanges to the number of operations each operator performs, which enhances ourability to maintain product volumes that are consistent with our customers’requirements and reduce our level of inventory.

We use raw materials,including titanium, cobalt chrome, stainless steel and nickel alloys, andvarious other components in the manufacture of our products. Although wegenerally believe these materials are readily available from multiple sources,from time to time we rely on a limited number of suppliers and in some cases ona single source vendor. For example, we obtain patented plastic, which isdesigned to withstand intense heat produced during frequent sterilizations,from a single supplier for use in our instrument handles and plastic cases.

**Quality Assurance**

We maintain acomprehensive quality assurance and quality control program, which includes thecontrol and documentation of all material specifications, operating procedures,equipment maintenance and quality control methods. Our quality systems arebased upon FDA requirements and the ISO standards for medical devicemanufacturers. We believe that all of our facilities are currently insubstantial compliance with regulations applicable to them. For example, in theUnited States and United Kingdom these regulations include the current goodmanufacturing practice regulations and other quality system regulations imposedby the FDA. Our Sheffield, United Kingdom facility and our United States basedfacilities are registered with and audited by the FDA. Our line of PolyVacstandard case received FDA 510(k) clearance, which can reduce ourcustomers’ burden in obtaining FDA approval. Our facilities have obtainednumerous industry-specific quality and regulatory assurance certifications.

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**Competition**

Our customers, to varyingdegrees, are capable of internally developing and producing the products weprovide. While we believe that our comprehensive services and core productioncompetencies allow medical device companies to reduce costs and shorten time tomarket, one or more of our customers may seek to expand their development andmanufacturing operations which may reduce their reliance on independentsuppliers such as ours. 

We also compete withindependent suppliers of implants, instruments and cases to medical devicecompanies. The majority of these suppliers is privately owned and producessome, but not all, of the products required in orthopedic implant systems. Webelieve that we are the only independent supplier to offer a complete implant,instrument and case solution to orthopedic device manufacturers. We competewith other independent suppliers primarily on the basis of developmentcapability, breadth of product offering, manufacturing quality, cost andservice. We believe that we are the largest independent supplier of implants,instruments and cases to orthopedic device manufacturers. However, otherindependent suppliers may consolidate and some of our current and futurecompetitors, either alone or in conjunction with their respective parentcorporate groups, may have financial resources and research and development,sales and marketing, and manufacturing capabilities and brand recognition thatare greater than ours.

**IntellectualProperty**

We believe our patents arevaluable; however, our knowledge, experience, proprietary and trade secretinformation, manufacturing processes, product design and development staff andsales staff have been equally or more important in maintaining our competitiveposition. We seek to protect our non-patented know-how, trade secrets,processes and other proprietary confidential information principally throughconfidentiality, non-compete and invention assignment agreements.

We currently own 42 U.S.and 14 foreign patents related to our cases and instruments. These patentsexpire at various times beginning in 2006 and ending in 2020. We also have 26U.S. and 6 foreign patent applications at various stages of approval. Ourpolicy is to aggressively protect technology, inventions and improvements thatwe consider important through the use of patents, trademarks, copyrights andtrade secrets in the United States and significant foreign markets.

While we do not believethat any of our products infringe any valid claims of patents or otherproprietary rights held by third parties, we cannot provide complete assurancethat we do not infringe any patents or other proprietary rights held by thirdparties. If our products were found to infringe any proprietary right of athird party, we could be required to pay significant damages or license fees tothe third party or cease production, marketing and distribution of thoseproducts. Litigation may be necessary to enforce our intellectual propertyrights, to protect our trade secrets or other proprietary information we ownand to determine the validity and scope of our proprietary rights.

We cannot provide completeassurance that our existing or future patents, if any, will afford adequateprotection, that any existing patent applications will result in issuedpatents, that our patents will not be circumvented, invalidated, or heldunenforceable, that our proprietary information will not become known to, or beindependently developed by, our competitors, or that the validity orenforceability of any patents or other intellectual property owned by orlicensed to us will be upheld if challenged by others in litigation. Due tothese and other risks, we do not rely solely on our patents and otherintellectual property to maintain our competitive position. Althoughintellectual property is important to our business operations and in theaggregate constitutes a valuable asset, we do not believe that any singlepatent, trade secret, trademark or copyright, or group of patents, tradesecrets, trademarks or copyrights is critical to the success of our business.

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**Employees**

As of January 28,2006, we had 1,862 employees. Our employees are not represented by any unions.From time to time in the past, however, some of our employees have attempted tounionize at two of our facilities. We believe that we have a good relationshipwith our employees.

**ExecutiveOfficers of the Registrant**

Setforth below are the name, age, position and a brief account of the businessexperience of each of the Corporation’s executive officers, and key employees,as of December 31, 2005.

| **Name**               | ** ** | ** ** | ** ** | **Age**                                                                                        | ** ** | **Position** |
|------------------------|------------|------------|------------|------------------------------------------------------------------------------------------------|------------|--------------|
| *Executive  Officers:* | * *   | * *   | * *   | * *                                                                                       |
| Brian Moore            |       | 59         |       | President and  Chief Executive Officer                                                         |
| Fred Hite              |       | 38         |       | Senior Vice  President and Chief Financial Officer                                             |
| Andrew Miclot          |       | 50         |       | Senior Vice  President, Marketing, Sales, Business Development and Investor Relations  Officer |
| D. Darin Martin        |       | 54         |       | Senior Vice  President, Quality Assurance/Regulatory Affairs and Compliance Officer            |
| Richard J. Senior      |       | 42         |       | Senior Vice President  and General Manager, Europe                                             |

** **

**BRIANMOORE,** has served as the Corporation’s President andChief Executive Officer and a director of the Corporation since the Corporation’sacquisition of Mettis in June 2003. From April 1999 to June 2003,Mr. Moore served as the Chief Executive Officer of Mettis Group Limited,the parent company of Mettis. From April 1994 to March 1999, Mr. Mooreheld various positions with EIS Group plc, including Chairman of the Aircraftand Precision Engineering Division, and from 1987 to 1999, Mr. Mooreserved as Chief Executive Officer of AB Precision (Poole) Limited. Priorthereto, Mr. Moore served in various management positions at Vanderhoffplc, Land Rover Vehicles, Bass Brewing and Prudential Insurance, and as theFinancial Director for a subsidiary of GEC Ltd. (UK). Mr. Moore hasqualified as a Graduate Mechanical Engineer by the Institution of MechanicalEngineers (the qualifying body for mechanical engineers in the United Kingdom)and as an Accountant with the U.K. Chartered Institute of ManagementAccountants.

**FREDHITE** has served as the Corporation’s Chief FinancialOfficer since March 2004. From 1997 to 2004, Mr. Hite served invarious capacities at General Electric Industrial Systems, including FinanceManager of General Electric Motors and Controls from 2001 to 2004,Manufacturing Finance Manager from 2000 to 2001, and Finance Manager ofEngineering Services from 1997 to 2000. From 1995 to 1997, Mr. Hite servedas Sourcing Finance Manager and Commercial Finance Analyst at General ElectricIndustrial Control Systems. From 1990 to 1995, Mr. Hite served in variousfinance positions at General Electric Appliances. Mr. Hite received a B.S.in Finance at Indiana University.

**ANDREW MICLOT**has served as the Corporation’s Senior Vice President of Sales, Marketing andBusiness Development since June 2003 and as the Corporation’s VicePresident of Marketing, Sales & Business Development since 1994. From1992 to 1994, Mr. Miclot served as the Director of the Medical ProductsGroup of DePuy Inc. From 1987 to 1992, Mr. Miclot served as MarketingManager for Zimmer, Inc. and from 1986 to 1987, Mr. Miclot served asDirector of Marketing for Ulti-Med, Inc. Mr. Miclot received a B.A.and M.A. in Speech and Hearing Sciences and Audiology from Indiana Universityand a M.B.A. from Lake Forest Graduate School of Management.

**D.DARIN MARTIN**has served as the Corporation’s SeniorVice President of Quality Assurance and Regulatory Affairs since June 2003.From 1994 to 2003, Mr. Martin served as the Corporation’s Vice Presidentof Quality Assurance and Regulatory Affairs. Mr. Martin joined theCorporation in 1990 as Director of Quality Assurance. From 1984 to 1990, Mr. Martinserved as Quality Assurance Supervisor for 

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Owens-Illinois Inc.’sKimble HealthCare Division. Mr. Martin has been a member in variousmedical device industry associations, including a 20 year membership with theAmerican Society of Quality, Biomedical Devices-NE Indiana Division. Mr. Martinreceived a B.S. in Business Management from Ball State University, a S.P.C.Instructor Certification from Baldwin-Wallace College and a M.B.A. fromKennedy-Western University.

**RICHARD J. SENIOR**has served as Senior Vice President and General Manager of the Corporation’sEuropean Operations since the Corporation’s acquisition of Mettis in June 2003.He previously served in various capacities at Mettis in the Thornton PrecisionComponents operating unit, including Managing Director from 1999 to 2003,Director and General Manager from 1997 to 1998, Operations Director from 1995to 1996, Production Manager during 1995, CMR Operations Manager from 1993******to 1994 andOrthopaedic Sales Manager (UK) from 1990 to 1995. Mr. Senior attendedMyers Grove Comprehensive School in the United Kingdom.

**FamilyRelationships**

There are no familyrelationships between any of the executive officers or directors of theCorporation.

**Available Information**

*Symmetry Medical Website.*   Our Annual reportson Form 10-K, Quarterly Reports on Form 10-Q, CurrentReports on Form 8-K and amendments to those reports filed orfurnished pursuant to Section 13(a) or 15(d) of the Securities ExchangeAct of 1934 are available through our website www.symmetrymedical.com (from the“Investors” link on the home page, and “SEC Filings” within the “Investors” boxlocated in the text) free of charge as soon as reasonably practicable after weelectronically file such material with, or furnish it to, the Securities andExchange Commission (SEC). If you wish to receive a hard copy of any exhibit toour reports filed with or furnished to the SEC, such exhibit may be obtained,upon payment of reasonable expenses, by writing to: Fred Hite, Senior VicePresident, Chief Financial Officer and Secretary, Symmetry Medical Inc.,220 W. Market Street, Warsaw, IN 46580. You may read and copy anymaterials we file with the SEC at the SEC’s Public Reference Room at450 Fifth Street, N.W., Washington, D.C. 20549. You may obtaininformation on the operation of the Public Reference Room by calling theSEC at 1-800-SEC-0330.

Informationrelating to corporate governance at Symmetry, including our Principles ofCorporate Governance, Code of Conduct (including our Code of Ethics for SeniorFinancial Officers), Code of Business Conduct and Ethics for Board Members andinformation concerning our executive officers, directors and Board committees(including committee charters), and transactions in Symmetry securities bydirectors and officers, is available on or through our website at *www.symmetrymedical.com* under the “Corporate Governance” andInvestor Relations” captions.

We are not including the information on our website asa part of, or incorporating it by reference into, our Form 10-K.

**ITEM 1A.**   RISKFACTORS

Our profitability is subject to risks described underthis section on “Risk Factors” described below. Although the following are notnecessarily the only ones facing our company, our business, financial conditionor results of operations they could be maternally adversely affected by many ofthe following risks.

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**RisksRelated to Our Business**

***We depend heavilyon sales to our significant customers, and our business could be adverselyaffected if any of them reduced or terminated purchases from us.***

A limited number of large orthopedic devicemanufacturers, all of whom are our customers, control the predominate share ofthe orthopedic device market. We depend heavily on revenue from these largecompanies. Revenue from our ten largest customers represented approximately78.8% of our revenue in fiscal year 2005 and 78.7% of our revenue in fiscalyear 2004. Our two largest customers accounted for approximately 33.2% and13.6% of our revenue in the fiscal year 2005 and our three largest customersaccounted for 25.4%, 14.6% and 13.6% of our revenue in fiscal 2004.

We expect that we will continue to depend on a limitednumber of large customers for a significant portion of our revenue. Inaddition, our customer base could become more concentrated if, among otherthings, there is further consolidation among orthopedic device manufacturers.If a significant customer reduces or delays orders from us, terminates itsrelationship with us or fails to pay its obligations to us, our revenues coulddecrease significantly.

***If we are unable to continue to improve our currentproducts and develop new products, we may experience a decrease in demand forour products or our products could become obsolete, and our business would beadversely affected.***

We sell our products to customers in markets that arecharacterized by technological change, product innovation and evolving industrystandards. We are continually engaged in product development and improvementprograms, both in collaboration with our customers and independently. Ourcustomers may engage in additional in-house development and manufacturing, andwe may be unable to compete effectively with our independent competitors,unless we can continue to develop and assist our customers in developinginnovative products. Our competitors’ product development capabilities couldbecome more effective than ours, and their new products may get to marketbefore our products, may be more effective or less expensive than our productsor render our products obsolete. If one or more of these events were to occur,our business, financial condition and results of operation could be adverselyaffected.

***We face competition from our customers’ in-housecapabilities, established independent suppliers and potential new marketentrants, and if we lose customers it could have an adverse effect on ourrevenue and operating results.***

Our customers have varying degrees of development andmanufacturing capabilities, and one or more of them may seek to expand theirin-house capabilities in the future, including adding capacity in existingsites or expanding into low labor cost areas such as Asia. Many of ourcustomers are larger and have greater financial and other resources than we doand can commit significant resources to product development and manufacturing.Most of our independent competitors are smaller companies, many of which haveclose customer relationships and either a low cost structure or highlyspecialized design or production capabilities. Our independent competitors mayconsolidate and some of our current and future competitors, either alone or inconjunction with their respective parent corporate groups, may have financialresources and research and development, sales and marketing and manufacturingcapabilities or brand recognition that are greater than ours. In addition, theinnovative nature of our markets may attract new entrants to the field. Ourproducts may not be able to compete successfully with the products of othercompanies, which could result in the loss of customers and, as a result,decreased revenue and operating results.

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***Ifproduct liability lawsuits are brought against us or our customers our businessmay be harmed.***

Themanufacture and sale of our healthcare and other products, including ouraerospace products, expose us to potential product liability claims and productrecalls, including those which may arise from misuse or malfunction of, ordesign or manufacturing flaws in, our products, or use of our products withcomponents or systems not manufactured by us. Product liability claims orproduct recalls, regardless of their ultimate outcome, could require us tospend significant time and money in litigation or otherwise require us to paysignificant damages, which could adversely affect our earnings and financialcondition.

Wecarry product liability insurance but it is limited in scope and amount and maynot be adequate to protect us against product liability claims. We may beunable to maintain this insurance at reasonable costs and on reasonable terms,if at all.

***Ouroperating results are subject to significant potential fluctuation and youshould not rely on historical results as an indication of our future results.***

Our operating results have fluctuated in the past andmay vary significantly from quarter to quarter or year to year in the futuredue to a combination of factors, many of which are beyond our control. Thesefactors include:

•  the timing ofsignificant orders and shipments, including the effects of changes in inventorymanagement practices by our customers;

•  the number,timing and significance of new products and product introductions andenhancements by us, our customers and our competitors;

•  changes in pricing policies by us and ourcompetitors;

•  changes in medical treatment or regulatorypractices;

•  restrictions and delays caused by regulatoryreview of our customers’ products;

•  recalls of our customers’ products;

•  availability and cost of raw materials; and

•  general economic factors.

Ourquarterly revenue and operating results may vary significantly in the futureand period-to-period comparisons of our results of operations are notnecessarily meaningful and should not be relied upon as indications of ourfuture performance. We cannot assure you that our revenue will increase or besustained in future periods or that we will be profitable in any future period.Any shortfalls in revenue or earnings from levels expected by securities orindustry analysts could have an immediate and significant adverse effect on thetrading price of our common stock in any given period.

***If wedo not retain key individuals and retain and attract skilled manufacturingworkers, we may not be able to operate successfully, and we may not be able tomeet our strategic objectives.***

Oursuccess depends in part upon the retention of key managerial, sales andtechnical personnel, particularly skilled manufacturing workers. We compete forsuch personnel with other companies and other organizations, many of which arelarger and have greater name recognition and financial and other resources thanwe do. There can be no assurance that we will be successful in retaining ourcurrent personnel or in hiring or retaining qualified personnel in the future.The loss of key personnel or the inability to hire or retain qualifiedpersonnel in the future could have a material adverse effect on our ability tooperate successfully.

Wecompete with numerous precision manufacturing companies to attract and retainqualified and highly skilled manufacturing employees. Our Warsaw, Indianafacilities, in particular, faces significant competition, including fromcertain of our customers and other companies located in or near Warsaw that arelarger and have greater financial and other resources than we do, for skilledproduction employees. If 

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we are not able to retain and attract skilledmanufacturing employees, we may be unable to support our anticipated growth,which could adversely affect our profitability.

***Asignificant shift in technologies or methods used in the treatment of damagedor diseased bone and tissue could make our products obsolete or less attractive.***

Thedevelopment of new technologies could reduce demand for our products. Forexample, pharmaceutical advances could result in non-surgical treatmentsgaining more widespread acceptance as a viable alternative to orthopedicimplants. The emergence of successful new biological tissue-based or syntheticmaterials to regenerate damaged or diseased bone and to repair damaged tissuecould increasingly minimize or delay the need for implant surgery and provideother biological alternatives to orthopedic implants. New surgical procedurescould diminish demand for our instruments. A significant shift in technologiesor methods used in the treatment of damaged or diseased bone and tissue couldadversely affect demand for our products.

***Wedepend on third party suppliers, and in some cases a single third partysupplier, for key components and raw materials used in our manufacturingprocesses and the loss of these sources could harm our business.***

Weuse titanium, cobalt chrome, stainless steel and nickel alloys, and variousother raw materials in our products. Although we generally believe thesematerials are readily available from multiple sources, from time to time werely on a limited number of suppliers and in some cases on a single sourcevendor. For example, we obtain patented Radel R plastic, which is designedto withstand intense heat produced during frequent sterilizations, for use inour instrument handles and plastic cases from a single supplier. Any supplyinterruption in a limited or sole-sourced component or raw material couldmaterially harm our ability to manufacture our products until a new source ofsupply, if any, could be found. We may be unable to find a sufficientalternative supply channel in a reasonable time period or on commerciallyreasonable terms if at all. This could interrupt our business or reduce thequality of our products.

***If weare unable to manage changes in our business and our anticipated growth, ourbusiness could be harmed.***

Ouracquisition of Mettis on June 11, 2003 significantly increased the sizeand scope of our operations. Our business has continued to grow at a fast pacesince the acquisition, and we believe we will continue to grow at a significantrate. Rapid growth of our business may place a strain on our managerial, operationaland financial resources and systems. To execute our anticipated growthsuccessfully, we must attract and retain qualified personnel and manage andtrain them effectively. Any failure by us to expand and train our work force orincrease production capacity or otherwise manage our growth effectively couldhave an adverse effect on our ability to achieve our business strategy. Ourgrowth may be impaired if we are unable to meet the demands of our customers,which could result in our customers turning to alternative suppliers.

***Ourcurrent or future levels of indebtedness may limit our ability to operate ourbusiness, finance acquisitions and pursue new business strategies.***

Asof December 31, 2005, our total indebtedness, including short-term debt,long-term debt and capital lease obligations, was $39.3 million. As of December 31,2005, we had an additional $40.0 million of borrowings available under ourrevolving credit facility. Although covenants under our senior credit facilitylimit our ability to incur additional indebtedness, in the future we may incuradditional debt to finance acquisitions, business opportunities, capitalexpenditures or other capital requirements.

Our indebtedness could:

•  make us morevulnerable to unfavorable economic conditions;

•  make it moredifficult to obtain additional financing in the future for working capital,capital expenditures or other general corporate purposes;

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•  require us to dedicate or reserve a largeportion of our cash flow from operations for making payments on ourindebtedness, which would prevent us from using it for other purposes;

•  make us susceptible to fluctuations in marketinterest rates that affect the cost of our borrowings to the extent that ourvariable rate debt is not covered by interest rate derivative agreements; and

•  make it more difficult to pursue strategicacquisitions, alliances and collaborations.

Ourability to service our indebtedness will depend on our future performance,which will be affected by prevailing economic conditions and financial,business, regulatory and other factors. Some of these factors are beyond ourcontrol. We believe that, based upon current levels of operations, we will beable to meet our debt service obligations when due. Significant assumptionsunderlie this belief, including, among others, that we will continue to besuccessful in implementing our business strategy and that there will be nomaterial adverse developments in our business, liquidity or capitalrequirements. If we cannot generate sufficient cash flow from operations toservice our indebtedness and to meet our other obligations and commitments, wemay be required to refinance our debt or to dispose of assets to obtain fundsfor such purpose. We cannot assure you that refinancing or asset dispositionscould be effected on a timely basis or on satisfactory terms, if at all, orwould be permitted by the terms of our debt instruments. To the extent we incuradditional indebtedness or other obligations in the future, the risksassociated with our indebtedness described above, including our possibleinability to service our debt, would increase.

***Oursenior credit facility contains restrictions that limit our ability to paydividends, incur additional debt, make acquisitions and make other investments.***

Our seniorcredit facility contains covenants that restrict our ability to makedistributions to stockholders or other payments unless we satisfy certainfinancial tests and comply with various financial ratios. If we do not satisfythese tests or comply with these ratios, our creditors could declare a defaultunder our debt instruments, and our indebtedness could be declared immediatelydue and payable. Our ability to comply with the provisions of our senior creditfacility may be affected by changes in economic or business conditions beyondour control.

Oursenior credit facility also contains covenants that limit our ability to incurindebtedness, acquire other businesses and make capital expenditures, andimpose various other restrictions. These covenants could affect our ability tooperate our business and may limit our ability to take advantage of potentialbusiness opportunities as they arise. We may be unable to comply with theforgoing financial ratios or covenants and, if we fail to do so, we may be unableto obtain waivers from our lenders.

***Ourfuture capital needs are uncertain and we may need to raise additional funds inthe future.***

Our future capital needs are uncertain and we may needto raise additional funds in the future through debt or equity offerings. Ourfuture capital requirements will depend on many factors, including:

•  revenue generated by sales of our products;

•  expenses incurred in manufacturing and sellingour products;

•  costs of developing new products ortechnologies;

•  costs associated with capital expenditures;

•  costs associated with our expansion;

•  costs associated with regulatory compliance,including maintaining compliance with the quality system regulations imposed bythe FDA; and

•  the number and timing of acquisitions and otherstrategic transactions.

 

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As aresult of these factors, we may need to raise additional funds, and these fundsmay not be available on favorable terms, or at all. Furthermore, if we issueequity or convertible debt securities to raise additional funds, our existingstockholders may experience dilution, and the new equity or convertible debtsecurities may have rights, preferences and privileges senior to those of ourexisting stockholders. If we cannot raise funds on acceptable terms, we may notbe able to develop or enhance our products, execute our business strategy, takeadvantage of future opportunities, or respond to competitive pressures orunanticipated customer requirements.

***Wemay not realize all of the sales expected from new product developmentprograms.***

Weincur substantial expenses in developing and testing new products and relateddevices. The realization of additional revenue from new product developmentefforts is inherently subject to a number of important risks and uncertainties,including, directly or indirectly, end-user acceptance of the product,reimbursement approval of third-party payors such as Medicaid, Medicare andprivate insurers and, in some cases, FDA or comparable foreign regulatoryapproval of the product. In addition, our customers typically have nocontractual requirement to purchase from us the products that we develop fortheir medical devices, and they could seek to have another supplier or in-housefacilities manufacture products that we have developed for their medicaldevices. We also incur costs and make capital expenditures for new productdevelopment and production based upon certain estimates of production volumesfor our existing and anticipated products. If the actual demand for ourproducts is less than planned, our revenue and net income may decline.

***Ourearnings could decline if we write off goodwill or intangible assets created asa result of our various acquisitions.***

As aresult of acquisitions we have accumulated a substantial amount of goodwill,amounting to $124.5 million as of December 31, 2005, or approximately36.8% of our total assets as of such date. Goodwill and certain intangibleassets are not amortized but rather are tested for impairment by us annually ormore frequently if an event occurs or circumstances develop that would likelyresult in impairment. Examples of such events or circumstances include, but arenot limited to, a significant adverse change in legal or business climate, anadverse regulatory action or unanticipated competition. We completed annualimpairment tests as of October 2005 and 2004 and concluded at those datesthat no impairment of goodwill or intangible assets existed. During 2002, inconnection with the adoption of SFAS No. 142,*Goodwill and Other Intangible Assets,* we recognizedimpairment of approximately $1.1 million, which is reflected as acumulative effect of accounting change in our statement of operations. In thefuture, we could recognize impairment of our goodwill or other intangibleassets, and that impairment could result in a charge to our results ofoperation and have an adverse effect on our financial condition.

***If weare unable to protect our intellectual property and property rights, or aresubject to intellectual property claims by third parties, our business could beharmed.***

Werely on a combination of patents, trade secrets, copyrights, know-how,trademarks, license agreements and contractual provisions to establish andprotect our proprietary rights to our technologies and products. We cannotguarantee that the steps we have taken or will take to protect our intellectualproperty rights will be adequate or that they will deter infringement,misappropriation or violation of our intellectual property. Litigation may benecessary to enforce our intellectual property rights and to determine thevalidity and scope of our proprietary rights. Any litigation could result insubstantial expenses and may not adequately protect our intellectual propertyrights. In addition, the laws of some of the countries in which our productsare or may be sold may not protect our products and intellectual property tothe same extent as U.S. laws, or at all. We may be unable to protect our rightsin trade secrets and unpatented proprietary technology in these countries. Ifour trade secrets become known, we may lose our competitive advantages.

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We seek to protect our trade secrets, know-how andother unpatented proprietary technology, in part, with confidentialityagreements with our employees, independent distributors and customers. Wecannot assure you, however, that:

•  these agreements will not be breached;

•  we will have adequate remedies for any breach;or

•  trade secrets, know-how and other unpatentedproprietary technology will not otherwise become known to or independently developedby our competitors.

Wehold licenses with third parties that are necessary to utilize certaintechnologies used in the design and manufacturing of some of our products. Theloss of such licenses would prevent us from manufacturing, marketing and sellingthese products, which could harm our business.

Inaddition, third parties may claim that we are infringing, misappropriating orviolating their intellectual property rights. We could be found to infringethose intellectual property rights, which could affect our ability tomanufacture any affected product. In addition, any protracted litigation todefend or prosecute our intellectual property rights could drain our financialresources, divert the time and effort of our management and cause customers to delayor limit their purchases of the affected product until resolution of thelitigation.

Any litigation or claims against us, whether or notsuccessful, could result in substantial costs and could harm our reputation. Inaddition, intellectual property litigation or claims could force us to do oneor more of the following:

•  cease selling or using any of our productsthat incorporate the challenged intellectual property, which could adverselyaffect our revenue;

•  obtain a license from the holder of the intellectualproperty right alleged to have been infringed, which license may not beavailable on reasonable terms, if at all; and

•  redesign or, in the case of trademark claims,rename our products to avoid infringing the intellectual property rights of thirdparties, which may not be possible and could be costly and time-consuming if itis possible to do so.

***Effortsto acquire other companies or product lines may divert our managerial resourcesaway from our business operations, and if we complete an acquisition, we mayincur or assume additional liabilities or experience integration problems.***

We may seek to acquire businesses or product lines forvarious reasons, including to provide new product manufacturing and servicecapabilities, add new customers, increase penetration with existing customersor expand into new geographic markets. Our ability to successfully grow throughacquisitions depends upon our ability to identify, negotiate, complete andintegrate suitable acquisitions and to obtain any necessary financings. Theseefforts could divert the attention of our management and key personnel from ourbusiness operations. If we complete acquisitions, we may also experience:

•  difficulties in integrating any acquiredcompanies, personnel and products into our existing business;

•  delays in realizing the benefits of theacquired company or products;

•  diversion of our management’s time andattention from other business concerns;

•  limited or no direct prior experience in newmarkets or countries we may enter;

•  higher costs of integration than weanticipated;

•  difficulties in retaining key employees of theacquired business who are necessary to manage these businesses;

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•  difficulties in maintaining uniform standards,controls, procedures and policies throughout our acquired companies; or

•  adverse customer reaction to the businesscombination.

Inaddition, an acquisition could materially impair our operating results bycausing us to incur debt or requiring us to amortize acquisition expenses andacquired assets.

***Weare subject to risks associated with our foreign operations.***

We have significant international operations,specifically in the United Kingdom and France. Certain risks are inherent ininternational operations, including:

•  difficulties in enforcing agreements andcollecting receivables through certain foreign legal systems;

•  foreign customers who may have longer paymentcycles than customers in the United States;

•  tax rates in certain foreign countries thatmay exceed those in the United States and foreign earnings that may be subjectto withholding requirements or the imposition of tariffs, exchange controls orother restrictions including transfer pricing restrictions when productsproduced in one country are sold to an affiliated entity in another country;

•  general economic and political conditions incountries where we operate or where end users of orthopedic devices reside mayhave an adverse effect on our operations;

•  difficulties associated with managing a largeorganization spread throughout various countries;

•  difficulties in enforcing intellectualproperty rights; and

•  required compliance with a variety of foreignlaws and regulations.

Aswe continue to expand our business globally, our success will depend, in part,on our ability to anticipate and effectively manage these and other risks. Wecannot assure you that these and other factors will not have a material adverseeffect on our international operations or our business as a whole.

***Currencyexchange rate fluctuations could have an adverse effect on our revenue andfinancial results.***

Wegenerate a significant portion of our revenue and incur a significant portionof our expenses in currencies other than U.S. dollars. Currency exchange ratesare subject to fluctuation due to, among other things, changes in local,regional or global economic conditions, the imposition of currency exchangerestrictions and unexpected changes in regulatory or taxation environments. Tothe extent that we are unable to match revenue received in foreign currencieswith costs incurred in the same currency, exchange rate fluctuations in anysuch currency could have an adverse effect on our financial results. Duringfiscal year 2003 and 2004, we benefited from foreign exchange rates, inparticular because of the weakening U.S. dollar versus both the poundsterling and the euro, the primary currencies to which we are exposed. The U.S.dollar has recently strengthened against these currencies and caused anunfavorable impact to operations in fiscal 2005. We cannot assure you thatexchange rates will not impact us favorably or unfavorably in the future. Inaddition, as of December 31, 2005, we did not hold or issue foreignexchange options or forward contracts to mitigate this risk; however, we mayenter into such agreements in the future. Any change in the exchange rates ofcurrencies of jurisdictions into which we sell products or incur expenses couldresult in a decrease in our revenue or operating income.

***Wemay be adversely affected as a result of the long lead times required for salesof certain new products.***

Weoften compete for business at the beginning of the development of new medicaldevices or upon customer redesign of existing medical devices. Our customersgenerally must obtain clearance or approval from the FDA before commerciallydistributing their products. Unless exempt, a new medical device must beapproved for commercial distribution in the United States by the FDA throughthe 510(k) pre-market Notification Process or, in some cases, through themore burdensome pre-market approval, or PMA, process. It generally takes threeto six months from the date of submission to the FDA to obtain 

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510(k) clearance and one to three years from thedate of submission to the FDA to obtain approval through the PMA process, butin each case may take significantly longer. This results in long lead times forsome of our customers’ new products, which may make it difficult in the shortterm for us to obtain sales of new products to replace any unexpected declinein sales of existing products.

***Wemay be adversely impacted by work stoppages and other labor matters.***

Currently,none of our employees are unionized. However, from time to time some of ouremployees have attempted to unionize at two of our facilities. In addition, someof our orthopedic device customers have unionized work forces. While we havenot experienced any adverse effects from work stoppages or low-downs at ourcustomers’ facilities, work stoppages or slow-downs experienced by us, oursuppliers or our customers or their suppliers could result in slow-downs orclosures of facilities where our products are made or used. We cannot assureyou that we will not encounter strikes, further unionization efforts or othertypes of conflicts with labor unions or our employees, which could have anadverse effect on our financial results.

***If anatural or man-made disaster strikes one or more of our manufacturingfacilities, we may be unable to manufacture certain products for a substantialamount of time and our revenue could decline.***

We have thirteen manufacturing facilities, which arelocated in the United States, the United Kingdom and France. These facilitiesand the manufacturing equipment and personnel know-how that we use to produceour products would be difficult to replace and could require substantiallead-time to repair or replace. Our facilities may be affected by natural orman-made disasters. In the event that one of our facilities was affected by adisaster, we would be forced to attempt to shift production to our othermanufacturing facilities or rely on third-party manufacturers, and our otherfacilities or a third-party manufacturer may not have the capability toeffectively supply the affected products. Although we have insurance for damageto our property and the interruption of our business, this insurance may not besufficient in scope or amount to cover all of our potential losses and may notcontinue to be available to us on acceptable terms, or at all.

**RisksRelated to Our Industry**

***Orthopedicdevice manufacturers have significant leverage over their independent suppliersand consolidation could increase their leverage, which could result in the lossof customers or force us to reduce our prices.***

Wecompete with many distributors and manufacturers to develop and supplyimplants, surgical instruments and cases to a limited number of largeorthopedic device manufacturers. As a result, orthopedic device manufacturershave historically had significant leverage over their independent suppliers.For example, independent suppliers like us are subject to continuing pressurefrom the major orthopedic device manufacturers to reduce the cost of productsand services while maintaining quality levels. In recent years, the medicaldevice industry has experienced substantial consolidation. If the medicaldevice industry, and the orthopedic device industry in particular, continues toconsolidate, competition to provide products and services to orthopedic devicemanufacturers may become more intense. Orthopedic device manufacturers may seekto use their market power to negotiate price or other concessions for ourproducts. If we are forced to reduce prices or if we lose customers because ofcompetition, our revenue and results of operations would suffer.

***Ourbusiness is indirectly subject to healthcare industry cost containment measuresand other industry trends affecting pricing that could result in reduced salesof or prices for our products.***

Acceptanceof our customers’ products by hospitals, outpatient centers and physicians dependon, among other things, reimbursement approval of third-party payors such asMedicaid, Medicare and private insurers. The continuing efforts of government,insurance companies and other payors of healthcare costs to contain or reducethose costs could lead to lower reimbursement rates or non-reimbursement formedical devices that use our products. If that were to occur, medical devicemanufacturers might insist that 

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we lower prices on products related to the affectedmedical device or they might significantly reduce or eliminate their purchasesfrom us of these related products, which could affect our profitability.

Weare aware of several legal developments that could negatively impact prices oforthopedic devices. At least one major hospital chain is seeking permissionfrom the U.S. Office of the Inspector General to implement gain-sharinginitiatives which could, if approved, negatively impact the prices oforthopedic devices because it would enable hospitals to consolidate vendors andshare cost savings with doctors. We are also aware of governmentalinvestigations of some of the largest orthopedic device companies reportedlyfocusing on consulting and service agreements between these companies andorthopedic surgeons. If one of these investigations results in a judgmentagainst one of our large customers our results of operations could benegatively impacted.

***Weand our customers are subject to substantial government regulation that issubject to change and could force us to make modifications to how we develop,manufacture and price our products.***

Themedical device industry is regulated extensively by governmental authorities,principally the FDA and corresponding state and foreign regulatory agencies.Some of our manufacturing processes are required to comply with quality systemsregulations, including current good manufacturing practice requirements thatcover the methods and documentation of the design, testing, production,control, quality assurance, labeling, packaging and shipping of our products.Further, some of our facilities, records and manufacturing processes aresubject to periodic unscheduled inspections by the FDA or other agencies.Failure to comply with applicable medical device regulatory requirements couldresult in, among other things, warning letters, fines, injunctions, civilpenalties, repairs, replacements, refunds, recalls or seizures of products,total or partial suspensions of production, refusal of the FDA or otherregulatory agencies to grant future pre-market clearances or approvals,withdrawals or suspensions of current clearances or approvals and criminalprosecution.

Inaddition, orthopedic implants and other medical devices produced by ourcustomers are subject to intensive regulation and potential pre-approvalrequirements by the FDA and similar international agencies that govern a widevariety of product activities from design and development to labeling,manufacturing, promotion, sales and distribution. Compliance with theseregulations may be time consuming, burdensome and expensive for our customersand, indirectly, for us to the extent that our customers’ compliance depends onour operations. These regulations could negatively affect our customers’abilities to sell their products, which in turn would adversely affect ourability to sell our products. This may result in higher than anticipated costsor lower than anticipated revenue.

Theregulations that we and our customers are subject to are complex, changefrequently and have tended to become more stringent over time. Federal andstate legislatures have periodically considered programs to reform or amend theU.S. healthcare system at both the federal and state levels. In addition, theseregulations may contain proposals to increase governmental involvement in healthcare,lower reimbursement rates or otherwise change the environment in whichhealthcare industry participants operate. Foreign governmental authorities thatregulate the manufacture and sale of medical devices have become increasinglystringent and, to the extent we sell our products in foreign countries, we maybe subject to rigorous regulation in the future. Regulatory changes couldresult in restrictions on our ability to carry on or expand our operations,higher than anticipated costs or lower than anticipated revenue.

***Ifour customers fail to obtain, or experience significant delays in obtaining,FDA clearances or approvals to commercially distribute our future products ourability to sell our products could suffer.***

Someof our medical devices are subject to rigorous regulatory pre-approval by theFDA and other federal, state and foreign governmental authorities. Ourcustomers are typically responsible for obtaining the applicable regulatoryapproval for the commercial distribution of our products. The process ofobtaining this approval, particularly from the FDA, can be costly and timeconsuming, and there can be no assurance that our customers will obtain therequired approvals on a timely basis, if at all. The FDA, for example, assignsmedical devices to one of three classes which determines, among other things,the type and degree of FDA approval required to commercially distribute thedevice in the United States. We 

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produce Class I, II and III devices. Class Idevices are deemed to present little risk to patients and are generally exemptfrom FDA approval requirements. Class II devices can generally becommercially distributed only after the device has received “510(k) clearance”.The FDA will clear marketing of a medical device through the 510(k) processif certain design, testing and validation requirements are met and it isdemonstrated that the device is “substantially equivalent” to a device that waslegally marketed prior to May 28, 1976, or to another commerciallyavailable device subsequently cleared through the 510(k) Pre-MarketNotification process. This process generally takes three to six months, but maytake substantially longer. Before a Class III device can be commerciallydistributed in the United States, a pre-market approval, or PMA, must beobtained from the FDA. The PMA process can be expensive and uncertain, requiresdetailed and comprehensive scientific and other data and generally takesbetween one and three years, but may take significantly longer. The commercialdistribution of any products we develop that require regulatory clearance maybe delayed. In addition, because we cannot assure you that any new products orany product enhancements we develop for commercial distribution in the UnitedStates will be exempt from the FDA market clearance requirements or subject tothe shorter 510(k) clearance process, the regulatory approval process forour products or product enhancements may take significantly longer thananticipated by us or our customers.

***Wemay be adversely affected by the impact of environmental and safetyregulations.***

We are subject to foreign, federal, state, local andforeign laws and regulations governing the protection of the environment andoccupational health and safety, including laws regulating air emissions, wastewaterdischarges, and the management and disposal of hazardous materials and wastes;and the health and safety of our employees. We are also required to obtainpermits from governmental authorities for certain operations. If we violate orfail to comply with these laws, regulations or permits, we could incur fines,penalties or other sanctions, which could have a material adverse effect on us.Environmental laws tend to become more stringent over time, and we could incurmaterial expenses in the future relating to compliance with futureenvironmental laws. In addition, we could be held responsible for costs anddamages arising from any contamination at our past or present facilities or atthird-party waste disposal sites. Such costs could be material. We cannotcompletely eliminate the risk of contamination or injury resulting fromhazardous materials, and we may incur material liability as a result of anycontamination or injury.

**Risks Relating to Our Common Stock**

***Ourcommon stock may be volatile and could decline substantially.***

There has been significant volatility in the marketprice and trading volume of securities of companies operating in the medicaldevice industry, including our company, which has often been unrelated to theoperating performance of particular companies. These broad market fluctuationsmay adversely affect the trading price of our common stock. Price declines inour common stock could result from general market and economic conditions and avariety of other factors, including:

•  actual or anticipated fluctuations in ouroperating results;

•  our announcements or our competitors’announcements regarding new products, significant contracts, acquisitions orstrategic investments;

•  loss of any of our key management or technicalpersonnel;

•  conditions affecting orthopedic devicemanufacturers or the medical device industry generally;

•  product liability lawsuits against us or ourcustomers;

•  clinical trial results with respect or ourcustomers’ medical devices;

•  changes in our growth rates or ourcompetitors’ growth rates;

•  developments regarding our patents orproprietary rights, or those of our competitors;

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•  FDA and international actions with respect tothe government regulation of medical devices and third-party reimbursementpractices;

•  public concern as to the safety of ourproducts;

•  changes in health care policy in the UnitedStates and internationally;

•  conditions in the financial markets in generalor changes in general economic conditions;

•  our inability to raise additional capital;

•  changes in stock market analystrecommendations regarding our common stock, other comparable companies or themedical device industry generally, or lack of analyst coverage of our commonstock;

•  sales of our common stock by our executiveofficers, directors and five percent stockholders or sales of substantialamounts of common stock; and

•  changes in accounting principles.

Inthe past, following periods of volatility in the market price of a particularcompany’s securities, litigation has often been brought against that company.If litigation of this type is brought against us, it could be extremelyexpensive and divert management’s attention and the company’s resources.

***Alarge percentage of our voting stock is controlled by one principal stockholderwhose interests may conflict with those of our other stockholders.***

Asof December 31, 2005 the Olympus Funds beneficially own 24.9% of ourcommon stock. As a result of this ownership, the Olympus Funds have asubstantial influence on our affairs and their voting power will constitute alarge percentage of any quorum of our stockholders voting on any matterrequiring the approval of our stockholders. Such matters include the electionof directors, the adoption of amendments to our certificate of incorporationand by-laws and approval of mergers or sales of substantially all our assets.This concentration of ownership may also have the effect of delaying orpreventing a change in control of our company or discouraging others frommaking tender offers for our shares, which could prevent stockholders fromreceiving a premium for their shares. In addition, as of December 31,2005, three of our seven directors, including the chairman of our board, arerepresentatives of the Olympus Funds. The Olympus Funds may cause corporateactions to be taken even if the interests of the Olympus Funds conflict withthe interests of our other stockholders.

***Weare no longer a “controlled company” within the meaning of the New York StockExchange Rules, and as a result will no longer qualify for exemptions fromcertain corporate governance requirements.***

Weare listed on the New York Stock Exchange and are therefore subject to the NYSE’scorporate governance rules. We are no longer a “controlled company” within themeaning of Section 303A of the NYSE’s Listed Company Manual. Furthermore,by July 19, 2006, all of our committees must be comprised solely ofindependent directors and a majority of the directors on our board must beindependent. Currently our board consists of seven directors, three of whom areindependent. During the phase-in period granted to us by the NYSE, ourstockholders will not have the same protections afforded to stockholders ofcompanies that are subject to all NYSE corporate governance rules. If, by July 19,2006 we do not comply with NYSE requirements, we may be subject to enforcementactions by the NYSE. In addition, this change in our board and committeemembership may result in a change in corporate strategy and operatingphilosophies, and may result in deviations from our current growth strategy,and the board’s limited history of working together may inhibit its ability tofunction at current levels of efficiency.

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***A significantportion of our total outstanding shares may be sold into the market in the nearfuture. If there are substantial sales of our common stock or the perceptionthat these sales could occur, the price of our common stock could decline.***

Ourcurrent stockholders hold a substantial number of shares of our common stockthat they are able to sell in the public market in the near future. Asignificant portion of these shares are held by a small number of stockholders.Sales by our current stockholders of a substantial number of shares couldsignificantly reduce the market price of our common stock. As ofDecember 31, 2005, Olympus Funds held approximately 8.6 millionshares of our common stock, including shares issuable upon the exercise ofwarrants, have rights, subject to some conditions, to require us to file registrationstatements covering their shares or to include their shares in registrationstatements that we may file for ourselves or other stockholders. EffectiveFebruary 21, 2006, Olympus Funds distributed approximately3.6 million net shares to investors in their fund. After thisdistribution, Olympus funds held approximately 5.0 million shares of ourcommon stock.

Salesof substantial amounts of our common stock in the public market, or theperception that these sales could occur, could adversely affect the price ofour common stock and could impair our ability to raise capital through the saleof additional equity securities.

***Ourcertificate of incorporation, our by-laws and Delaware law contain provisionsthat could discourage another company from acquiring us and may preventattempts by our stockholders to replace or remove our current management.***

Provisions of the Delaware General Corporation Law,our certificate of incorporation and our by-laws may discourage, delay orprevent a merger or acquisition that stockholders may consider favorable,including transactions in which you might otherwise receive a premium for yourshares. In addition, these provisions may frustrate or prevent any attempts byour stockholders to replace or remove our current management by making it moredifficult for stockholders to replace or remove our board of directors. Theseprovisions include:

•  providing for a classified board of directorswith staggered terms;

•  requiring supermajority stockholder voting toeffect certain amendments to our certificate of incorporation and by-laws;

•  eliminating the ability of stockholders tocall special meetings of stockholders;

•  prohibiting stockholder action by writtenconsent;

•  establishing advance notice requirements fornominations for election to the board of directors or for proposing mattersthat can be acted on by stockholders at stockholder meetings.

•  limiting the ability of stockholders to amend,alter or repeal the by-laws; and

•  authorizing of the board of directors to issue,without stockholder approval, shares of preferred stock with such terms as theboard of directors may determine and shares of our common stock.

We are also protected by Section 203 of theDelaware General Corporation Law, which prevents us from engaging in a businesscombination with a person who becomes a 15.0% or greater stockholder for aperiod of three years from the date such person acquired such status unlesscertain board or stockholder approvals were obtained.

**ITEM 1B.**   UNRESOLVED STAFF COMMENTS

None.

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**ITEM 2.   PROPERTIES**

Ourcorporate office is located in Warsaw, Indiana. We have operations facilities,including warehouse, administrative and manufacturing facilities, located attwelve locations throughout the world. We believe that these facilities areadequate for our current and foreseeable purposes and that additional spacewill be available if needed.

Thelease on our approximately 122,000 square foot Manchester, New Hampshirefacility is a capital lease that runs through October 1, 2016. The initialannual base rent under the lease, as amended, was $0.6 million, payable inequal monthly installments. On October 31, 2001, and every five yearsthereafter, including extensions, the annual base rent will change based on thepercentage increase, if any, in the Consumer Price Index for the Northeast U.S.region. The current annual base rent under the lease is $0.7 million. We havean option to extend the lease for an additional five-year period and have aright of first opportunity to purchase the leased property.

Thetable below provides selected information regarding our facilities.

| **Location**                   | ** ** | ** **                                                                             | ** ** | **Use** | ** ** | **Approximate  Square  Footage(1)** | ** ** | **Own/  Lease** | ** ** |
|--------------------------------|------------|----------------------------------------------------------------------------------------|------------|---------|------------|-------------------------------------|------------|-----------------|------------|
| Warsaw, Indiana                |       | Instrument design and manufacturing                                                    |       |    | 63,000     |                                |       | Own             |       |
| Warsaw, Indiana                |       | Design and Development Center; instrument design and  manufacturing                    |       |    | 17,000     |                                |       | Lease           |       |
| Memphis, Tennessee             |       | Design and Development Center                                                          |       |    | 6,400      |                                |       | Lease           |       |
| Warsaw, Indiana                |       | Corporate headquarters                                                                 |       |    | 10,000     |                                |       | Own             |       |
| Claypool, Indiana              |       | Instrument design and manufacturing                                                    |       |    | 22,500     |                                |       | Own             |       |
| Cheltenham, United Kingdom     |       | Instrument design and manufacturing                                                    |       |    | 9,000      |                                |       | Lease           |       |
| Cheltenham, United Kingdom     |       | Instrument design and manufacturing                                                    |       |    | 25,000     |                                |       | Lease           |       |
| Manchester, New Hampshire      |       | Plastic and metal case design and manufacturing                                        |       |    | 122,000    |                                |       | Lease           |       |
| Villeneuve d’Ascq, France |       | Case design and assembly                                                               |       |    | 10,800     |                                |       | Lease           |       |
| Lansing, Michigan              |       | Implant design, forging and machining                                                  |       |    | 65,000     |                                |       | Own             |       |
| Lansing Michigan               |       | Implant Finishing and Design and Development Center                                    |       |    | 15,000     |                                |       | Lease           |       |
| Sheffield, United Kingdom      |       | Implant and specialized non-healthcare product  design, forging, casting and machining |       |    | 134,600    |                                |       | Own             |       |
| Sheffield, United Kingdom      |       | Implant machining                                                                      |       |    | 43,400     |                                |       | Own             |       |
| Avilla, Indiana                |       | Instrument and implant design and manufacturing                                        |       |    | 41,000     |                                |       | Lease           |       |

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(1)   We ownapproximately 21 acres of land in Warsaw, Indiana, and approximately 9 acres inLansing, Michigan. In fiscal 2005, we purchased approximately 3 acres of landadjacent to our Sheffield, United Kingdom facility. These sites are availablefor future expansion.

(2)   We arecurrently building a new Design & Development Center in Warsaw,Indiana on a portion of the 21 acres available. Completion is expected byApril 2006 at an estimated cost of $2.5 million and will beapproximately 30,000 square feet.

(3)   We are constructing a new building for future expansion at ourVilleneuve d’Ascq, France location. The new facility will be 25,000 square feetand will be a leased facility. Estimated completion is March 2006. 

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** ITEM 3.**   LEGALPROCEEDINGS

None

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

None

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**PART II**

**Item 5.**                        MARKETFOR THE REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES

 

Our common stock trades on the New York Stock Exchange(the “NYSE”) under the trading symbol SMA. As of February 17, 2006, therewere approximately 42 registered holders of record of our common stock.The transfer agent and registrar for our common stock is Computershare TrustCompany, N.A., P.O. Box 43023, Providence, RI 02940-3023,telephone (877) 282-1168.

We have not in the two most recent fiscal years, anddo not expect for the foreseeable future, to pay dividends on our common stock.Instead, we anticipate that our earnings in the foreseeable future will be usedin the operation and growth of our business. The payment of dividends by us toholders of our common stock is restricted by our senior credit facility. Anyfuture determination to pay dividends will be at the discretion of our board ofdirectors and will depend upon, among other factors, our results of operations,financial condition, capital requirements and contractual restrictions.

We currently do not have a share repurchase plan orprogram**.**

See Part III, Item 12, Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters, forinformation regarding common stock authorized for issuance under equitycompensation plans.

Ourcommon stock has been listed on the New York Stock Exchange since our initialpublic offering on December 9, 2004. The following table sets forth, forthe period indicated, the highest and lowest closing sale price for our commonstock by quarter for 2005, as reported by the New York Stock Exchange:

| ** **     | ** ** | **2005** | ** ** |
|----------------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
| Fourth Quarter |       | $        | 23.65      |   | $ | 17.18 |   |
| Third Quarter  |       | $        | 25.75      |   | $ | 22.42 |   |
| Second Quarter |       | $        | 24.31      |   | $ | 17.15 |   |
| First Quarter  |       | $        | 22.26      |   | $ | 18.00 |   |

 

| ** **                                         | ** ** | **2004** | ** ** |
|----------------------------------------------------|------------|----------|------------|
| ** **                                         | ** ** | **High** | ** ** | **Low** | ** ** |
| Fourth Quarter  (Commencing December 9, 2004) |       | $        | 21.05      |   | $ | 15.00 |   |
|                                                    |            |          |            |  |  |  |  |

 

The closing sale price forour common stock on February 22, 2006 was $22.02.

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**Item 6.**         SELECTEDFINANCIAL DATA

Thefollowing table sets forth our selected financial data for the year indicatedand should be read in conjunction with the disclosures to Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations and Item 8. Financial Statements of this Form 10-K.

| ** **                                                                                         | ** ** | **Fiscal Year Ended**                                                                   | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                         | ** ** | **2005**                                                                                          | ** ** | **2004** | ** ** | **2003(1)** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                                         | ** ** | ***(dollars in thousands, except share and per  share data)*** | ** ** |
| **Consolidated  Statements of Operations Data:**                                                   | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                                            |       | $                                                                                                 | 263,766    |   | $ | 205,391 |   | $ | 122,029 |   | $ | 65,395 |   | $ | 66,495 |   |
| Cost of Revenue                                                                                    |       | 185,227                                                                                           |       | 145,081 |   | 86,124 |   | 47,859 |   | 48,205 |   |
| Gross Profit                                                                                       |       | 78,539                                                                                            |       | 60,310 |   | 35,905 |   | 17,536 |   | 18,290 |   |
| Selling, general, and administrative expenses                                                      |       | 27,570                                                                                            |       | 22,569 |   | 17,115 |   | 9,440 |   | 10,494 |   |
| Operating Income                                                                                   |       | 50,969                                                                                            |       | 37,741 |   | 18,790 |   | 8,096 |   | 7,796 |   |
| Interest expense, net                                                                              |       | 2,954                                                                                             |       | 13,757 |   | 10,172 |   | 4,968 |   | 5,070 |   |
| Loss on debt extinguishment                                                                        |       | —                                                                                            |       | 8,956 | (5) | 1,436 | (2) | — |   | — |   |
| Interest rate swap valuation(3)                                                                    |       | (98                                                                                               | )          | (1,451 | ) | (1,358 | ) | 979 |   | 847 |   |
| Other (income) expense                                                                             |       | 1,872                                                                                             |       | (740 | ) | (374 | ) | (42 | ) | 290 |   |
| Income before income taxes and cumulative effect of  accounting change                             |       | 46,241                                                                                            |       | 17,219 |   | 8,914 |   | 2,191 |   | 1,589 |   |
| Income tax expense                                                                                 |       | 14,441                                                                                            |       | 5,524 |   | 3,009 |   | 841 |   | 1,400 |   |
| Net income (loss) before cumulative effect of  accounting change                                   |       | 31,800                                                                                            |       | 11,695 |   | 5,905 |   | 1,350 |   | 189 |   |
| Cumulative effect of accounting change(4)                                                          |       | —                                                                                            |       | — |   | — |   | (1,146 | ) | (293 | ) |
| Net income (loss)                                                                                  |       | 31,800                                                                                            |       | 11,695 |   | 5,905 |   | 204 |   | (104 | ) |
| Preferred stock dividends                                                                          |       | —                                                                                            |       | (8,977 | ) | (7,028 | ) | (4,410 | ) | (3,185 | ) |
| Net income (loss) applicable to common shareholders                                                |       | $                                                                                                 | 31,800     |   | $ | 2,718 |   | $ | (1,123 | ) | $ | (4,206 | ) | $ | (3,289 | ) |
| Basic per share:                                                                                   |       |                                                                                              |       |   |   |   |   |   |   |   |   |
| Net income (loss) applicable to common shareholders  before cumulative effect of accounting change |       | $                                                                                                 | 0.94       |   | $ | 0.16 |   | $ | (0.10 | ) | $ | (0.44 | ) | $ | (0.44 | ) |
| Cumulative effect of accounting change, net of tax                                                 |       | —                                                                                            |       | — |   | — |   | (0.17 | ) | (0.04 | ) |
| Net income (loss)                                                                                  |       | $                                                                                                 | 0.94       |   | $ | 0.16 |   | $ | (0.10 | ) | $ | (0.61 | ) | $ | (0.48 | ) |
| Diluted per share:                                                                                 |       |                                                                                              |       |   |   |   |   |   |   |   |   |
| Net income (loss) applicable to common shareholders  before cumulative effect of accounting change |       | $                                                                                                 | 0.92       |   | $ | 0.15 |   | $ | (0.10 | ) | $ | (0.44 |   | $ | (0.44 | ) |
| Cumulative effect of accounting change, net of tax                                                 |       | —                                                                                            |       | — |   | — |   | (0.17 | ) | (0.04 | ) |
| Net income (loss)                                                                                  |       | $                                                                                                 | 0.92       |   | $ | 0.15 |   | $ | (0.10 | ) | $ | (0.61 | ) | $ | (0.48 | ) |
| Weighted average common shares and equivalent shares  outstanding:                                 |       |                                                                                              |       |   |   |   |   |   |   |   |   |
| Basic                                                                                              |       | 33,841                                                                                            |       | 16,905 |   | 11,798 |   | 6,906 |   | 6,855 |   |
| Diluted                                                                                            |       | 34,670                                                                                            |       | 17,767 |   | 11,798 |   | 6,906 |   | 6,855 |   |
| **Consolidated Statements of Operations Data:**                                                    |       |                                                                                              |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                                          |       | $                                                                                                 | 12,471     |   | $ | 4,849 |   | $ | 2,348 |   | $ | 781 |   | $ | 835 |   |
| Working capital                                                                                    |       | 63,777                                                                                            |       | 50,854 |   | 36,064 |   | 9,587 |   | 10,533 |   |
| Total Assets                                                                                       |       | 337,645                                                                                           |       | 306,868 |   | 267,217 |   | 63,554 |   | 59,714 |   |
| Long-term debt and capital lease obligations, less  current portion                                |       | 34,782                                                                                            |       | 43,209 |   | 129,696 |   | 47,234 |   | 48,641 |   |
| Redeemable preferred stock                                                                         |       | —                                                                                            |       | — |   | — |   | 3,530 |   | — |   |
| Total shareholders’ equity (deficit)                                                          |       | 253,255                                                                                           |       | 216,145 |   | 100,390 |   | (1,121 | ) | (1,629 | ) |
| **Other Financial Data:**                                                                          |       |                                                                                              |       |   |   |   |   |   |   |   |   |
| Depreciation and  amortization                                                                     |       | $                                                                                                 | 13,674     |   | $ | 11,198 |   | $ | 6,662 |   | $ | 2,744 |   | $ | 4,151 |   |

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(1)          Includes the results of Mettis since itsacquisition on June 11, 2003.

(2)          In fiscal 2003, we refinancedsubstantially all of our existing indebtedness as part of the financing of theacquisition of Mettis, resulting in a loss on debt extinguishment of $1,436.

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(3)          We entered into interest rate swapagreements to offset against changes in interest rates on our variable ratelong-term debt. In accordance with SFAS No. 133, as amended,*Accounting For Derivative Instruments and HedgingActivities*, these agreements do not qualify for hedge accounting andaccordingly, changes in the fair market value of such agreements are recordedeach period in earnings.

(4)          For fiscal 2001, reflects the cumulativeeffect of change in accounting principles resulting in the adoption of SFASNo. 133. For fiscal 2002, reflects a write-off of goodwill in connectionwith the adoption of SFAS No. 142,*Goodwill and Other Intangible Assets*. Upon completion of theadoption of SFAS No. 142, we determined that the fair market value of thegoodwill was lower than book value for one reporting unit, which resulted in animpairment charge.

(5)          In fiscal 2004, we refinancedsubstantially all of our existing indebtedness as part of the proceeds from ourDecember 9, 2004 initial public offering, resulting in a loss on debtextinguishment of $8,956. This charge includes $5.1 million of unamortizeddiscount recorded upon the issuance of the subordinated notes and $3.9 millionof deferred debt issuance costs as a result of the Mettis acquisition onJune 11, 2003.

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**Item 7.**                        MANAGEMENT’SDISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

**Overview**

We are the world’s largest independent provider ofimplants and related instruments and cases to orthopedic device manufacturers.We also design, develop and produce these products for companies in othersegments of the medical device market, including dental, osteobiologic andendoscopy sectors, and provides limited specialized products and services tonon-healthcare markets.

The global medical device market was estimated to beapproximately $220 billion in 2004, according to our most recent researchreports available. The orthopedic device segment of the medical device marketwas estimated to be approximately $19 billion in 2004, and is expected to growapproximately 12% annually to greater than $30 billion by 2008. Orthopedicdevices principally consist of reconstructive implants used to replace orrepair knees, hips, shoulders and other joints, as well as other orthopedicdevices to repair bone fractures and the spine. There were approximately 1.7million reconstructive orthopedic implant procedures performed globally in2004, an increase of approximately 10% over the previous year. We expectcontinued growth in the orthopedic device market to be driven by a number oftrends including:

·       growingelderly population;

·       aging,affluent and active “baby boomers”;

·       improvingtechnologies that expand the market, including minimally invasive surgery;

·       successfulclinical outcomes increasing patient confidence;

·       increasingpatient awareness through orthopedic device companies’ direct marketingprograms;

·       increasingvolume of procedures to replace older implants (or revision procedures); and

·       developinginternational markets.

We acquired Mettis on June 11, 2003 for aggregateconsideration of approximately $164 million. Mettis is a leading manufacturerof forged, cast and machined implants for global orthopedic devicemanufacturers. This acquisition added implants to our product offerings andincreased our European presence. We offer a comprehensive line of implants,surgical instruments and cases for orthopedic device manufacturers on a globalbasis. In fiscal 2005, we had revenue of $263.8 million, operating income of$51.0 million and net income applicable to common shareholders of $31.8million.

Our acquisition of Mettis enabled us to offer ourcustomers “Total Solutions® ” for complete implant systems—implants,instruments and cases. While our revenue to date has been derived primarilyfrom the sale of implants, instruments and cases separately, or instruments andcases together, our ability to provide Total Solutions® forcomplete implant systems has already proven to be attractive to our customersand we expect this capability will provide us with growth opportunities. Inaddition, we expect that our Total Solutions® capability will increase the relativepercentage of value added products that we supply to our customers.

During fiscal 2005, we sold our products and servicesto approximately 750 customers, including over 100 new customers. Our twolargest customers accounted for approximately 33.2% and 13.6% of our revenue infiscal 2005 and our three largest customers accounted for 25.4%, 14.6% and13.6% of our revenue in fiscal 2004. Our ten largest customers collectivelyaccounted for approximately 78.8% and 78.7% of our revenue in fiscal 2005 andfiscal 2004, respectively. Within each of our largest customers, we typicallyserve several product teams and facilities, which diminishes our reliance onany single purchasing decision. Approximately 65.1%, 12.5%, 12.3% and 10.1% ofour revenue in fiscal 2005 and approximately 

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66.6%, 13.3%, 10.3% and9.8% of our revenue in fiscal 2004 was from sales to the United States, UnitedKingdom, Ireland and other foreign countries, respectively.

We believe that we have well-established relationshipswith our major customers and these relationships to a significant extentinvolve the sale of products that we have developed or modified specificallyfor our customers’ particular product lines. In connection with the launch of anew implant system, our customers typically provide a customizedimplant-specific instrument set in cases to end users (hospitals, outpatientcenters and physicians) for use with the new implant system. As a result, oursales of instruments and cases in any particular period are significantlyimpacted by the amount of new product launch activity by our customers.

Our revenue from the sale of implants, instruments,cases and other products and services represented 39.2%, 32.9%, 21.0%, and 6.9%respectively, of our revenue in fiscal 2005, compared with 36.6%, 33.0%, 23.0%and 7.4% respectively, of our revenue in fiscal 2004.

Our management reviews and analyzes several trends andkey performance indicators in order to manage our business. To assist us inevaluating our capacity, we monitor long-term trends in the orthopedicindustry, which currently include the growing elderly population, general agingof the population, affluent and active “baby boomers”, improving technologiesthat expand the market, including minimally invasive surgeries, and otherfactors. Further, we consider the information obtained from discussions withour customers on the upcoming demand for our products, including new productlaunches. We use this information to determine an appropriate level of capitalexpenditures to meet the anticipated demand for our products. To this end, werecently added approximately 100,000 square feet of capacity through facility expansionsand openings. In addition, we plan on moving our existing Villeneuve d’Ascq,France case facility to a newly-constructed, larger facility in Villeneuve d’Ascq,France and opening a new Design and Development Center in Warsaw, Indiana inthe first quarter of 2006.

On an ongoing basis, our management considers severalvariables associated with the ongoing operations of the business, includingscheduled production, utilization of machinery and equipment, monitoringpurchasing activity and inventory levels and associated costs, headcount,overhead costs, and selling and general and administrative expenses.

Our revenues are affectedby changes in the number and size of orders and the timing of delivery dates.Our revenues have fluctuated in the past and may vary in the future due to theeffects of changes in inventory management practices and new productintroductions by our customers.

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**Results of Operations**

Thetable below sets forth certain operating data expressed as a percentage ofrevenue for the periods indicated. Fiscal 2003 operating data in the tablebelow includes the results of Mettis since its acquisition on June 11,2003. Our historical results are not necessarily indicative of the operatingresults that may be expected in the future.

| ** **                                    | ** ** | **Fiscal Year Ended** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Statement  of Operations Data:**            | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                       |       | 100.0                           | %          | 100.0 | % | 100.0 | % |
| Cost of Revenue                               |       | 70.2                            | %          | 70.6 | % | 70.6 | % |
| Gross Profit                                  |       | 29.8                            | %          | 29.4 | % | 29.4 | % |
| Selling, general, and administrative expenses |       | 10.5                            | %          | 11.0 | % | 14.0 | % |
| Operating Income                              |       | 19.3                            | %          | 18.4 | % | 15.4 | % |
| Other (income) expense:                       |       |                            |       |   |   |   |   |
| Interest expense                              |       | 1.1                             | %          | 6.7 | % | 8.3 | % |
| Loss on debt extinguishment                   |       | —                          |       | 4.4 | % | 1.2 | % |
| Interest rate swap valuation                  |       | (0.0                            | )%         | (0.7 | )% | (1.1 | )% |
| Other                                         |       | 0.7                             | %          | (0.4 | )% | (0.3 | )% |
| Income before income taxes                    |       | 17.5                            | %          | 8.4 | % | 7.3 | % |
| Income tax expense                            |       | 5.5                             | %          | 2.7 | % | 2.5 | % |
| Net income                                    |       | 12.1                            | %          | 5.7 | % | 4.8 | % |

 

***Fiscal Year 2005 Compared to Fiscal Year 2004***

*Revenue.*   Revenuefor fiscal 2005 increased $58.4 million, or 28.4%, to $263.8 million from$205.4 million in fiscal 2004. Revenue for each of our principal productcategories in these periods was as follows:

| ** **                | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------------|------------|---------------------------------|------------|
| **Product Category** | ** ** | ** **                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                | ** ** | **(in millions)**          | ** ** |
| Implants                  |       | $                               | 103.5      |   | $ | 75.1 |   |
| Instruments               |       | 86.7                            |       | 67.7 |   |
| Cases                     |       | 55.5                            |       | 47.3 |   |
| Other                     |       | 18.1                            |       | 15.3 |   |
| Total                     |       | $                               | 263.8      |   | $ | 205.4 |   |
|                           |            |                                 |            |  |  |  |  |  |  |

 

The $58.4 million increase in revenue resulted fromincreased implant, instrument, case, and non-healthcare/other sales of $28.4million, $19.0 million, $8.2 million, and $2.8 million, respectively, as aresult of increased demand from customers due primarily to continued industrygrowth and their launches of new systems. We estimate that global orthopedicdevice procedures grew at approximately 7% to 9% in 2005 and expect similarindustry procedure growth in the near future. In addition to industry growth,our Total Solutions® model, new product offerings and increasedimplant finishing operations contributed to the increase in revenue.

*GrossProfit.*   Gross profit for fiscal 2005 increased$18.2 million, or 30.2%, to $78.5 million from $60.3 million in fiscal 2004.This increase in gross profit resulted from a slightly higher gross margin rateon significantly higher revenues. As a percentage of revenue, gross margin was29.8% for the fiscal 2005 compared to 29.4% in fiscal 2004. This slightincrease in gross margin was primarily driven by controlled fixed costs, whichgenerated volume leverage.

*Selling,General and Administrative Expenses.*   Selling,general and administrative expenses in fiscal 2005 increased $5.0 million, or22.2%, to $27.6 million from $22.6 million in fiscal 2004. However, as a 

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percentage of revenue,selling, general and administrative expenses declined to 10.5% of revenue infiscal 2005 from 11.0% in fiscal 2004 despite increases related toSarbanes-Oxley compliance and income tax consulting services. This 0.5%decrease as a percentage of revenue was driven by the 28.4% increase inrevenue, which outpaced the rise in expenses of 22.2%. We expect an approximate$0.5 million reduction in total Sarbanes-Oxley compliance expenses in fiscal2006 compared to fiscal 2005 as the initial implementation is now complete;however, we expect an increase related to stock-based compensation expense, whichincludes the impact of implementing FASB Statement No. 123(R).

*Other(Income) Expense.*   Interest expense for fiscal2005 decreased $10.8 million, or 78.5%, to $3.0 million from $13.8 million infiscal 2004. This decrease primarily reflects the decrease in senior andsubordinated debt that resulted from the proceeds of our initial public offeringof our common stock in the fourth quarter of fiscal 2004. The $9.0 million losson debt extinguishment incurred in the fourth quarter of fiscal 2004 was alsodue to the debt reduction as part of this initial public offering. Approximately$0.9 million of Other expense for fiscal 2005 was due to costs paid inconnection with the secondary public offering completed in the third quarter of2005.

*Provision for IncomeTaxes.*   Our effective tax rate was 31.2% infiscal 2005 as compared to 32.1% in fiscal 2004. The decrease in rate wasmainly due to research and development credits and the new qualified productionactivities deduction. Reconciliation to the Federal statutory rate of 35%  is more fully described in Note 7 to ourconsolidated financial statements that appear elsewhere in this Form 10-K.We would expect the rate to rise in 2006 because $1.3 million of the researchand development credits taken in 2005 relate to amendments of prior yearreturns.

***Fiscal Year 2004 Compared to Fiscal Year 2003***

*Revenue.*   Revenueincreased $83.4 million, or 68.3%, to $205.4 million in fiscal 2004 from $122.0million in fiscal 2003. Revenue for each of our principal product categories inthese periods was as follows:

| ** **                | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------------|------------|---------------------------------|------------|
| **Product Category** | ** ** | ** **                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                | ** ** | **(in millions)**          | ** ** |
| Implants                  |       | $                               | 75.1       |   | $ | 33.3 |   |
| Instruments               |       | 67.7                            |       | 45.6 |   |
| Cases                     |       | 47.3                            |       | 36.1 |   |
| Other                     |       | 15.3                            |       | 7.0 |   |
| Total                     |       | $                               | 205.4      |   | $ | 122.0 |   |
|                           |            |                                 |            |  |  |  |  |  |  |

 

This $83.4 million increase in revenue resulted fromincreased implant, instruments, cases, and non-healthcare/other sales of $14.3million, $18.7 million, $11.2 million, and $2.8 million respectively as aresult of increased demand from our customers due primarily to their launchesof new implant systems; and an increase of $27.5 million, $3.4 million, and$5.5 million from implant, instrument, and non-healthcare/other sales as aresult of a full year of sales from the Mettis acquisition. The sales fromthese operations are included in the full year of fiscal 2004, while fiscal2003 only include sales from the date of acquisition, June 11, 2003.

*GrossProfit.*   Gross profit increased $24.4 million, or68.0%, to $60.3 million in fiscal 2004 from $35.9 million in fiscal 2003. Thisincrease in gross profit resulted from $10.7 million of additional gross profitrelated to increased revenue resulting from the Mettis acquisition coupled withhigher revenue by Symmetry. As a percentage of revenue, gross profit was 29.4%in fiscal 2004, flat to fiscal 2003.

*Selling,General and Administrative Expenses.*   Selling,general and administrative expenses increased $5.5 million, or 31.9%, to $22.6million in fiscal 2004 from $17.1 million in fiscal 2003. This increase inexpenses primarily resulted from the Mettis acquisition partially offset bycontrolled spending with the overall increase in revenue. As a percentage ofrevenue, selling, general and administrative expenses 

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declined to 11.0% ofrevenue in fiscal 2004 from 14.0% of revenue in fiscal 2003. This 3.0% decreaseas a percentage of revenue was attributable to controlled spending combinedwith a 68.3% increase in revenue.

*Other(Income) Expense.*   Interest expense increased$3.6 million, or 35.2%, to $13.8 million in fiscal 2004 from $10.2 million infiscal 2003. This increase primarily reflects higher average borrowings underour senior credit facility during fiscal 2004 as compared to fiscal 2003 as aresult of increased borrowings used primarily to finance a portion of thepurchase price for Mettis. In fiscal 2004, we realized a $9.0 million loss ondebt extinguishment. This charge includes $5.1 million of unamortized discountrecorded upon the issuance of the subordinated notes and $3.9 million ofdeferred debt issuance costs as a result of the Mettis acquisition on June 11,2003.

*Provision for IncomeTaxes.*   Our effective tax rate was 32.1% infiscal 2004 as compared to 33.8% in fiscal 2003. The decrease was due torealization of deferred assets and net operating losses that were fullyreserved and tax rate differentials in foreign tax jurisdictions.

**Liquidity and Capital Resources**

Our principal sources ofcash in fiscal 2005 were cash generated from operations, borrowings under ourrevolving credit facility, and proceeds from the sale of 0.5 millionshares of newly issued common stock in July 2005. Principal uses of cashin fiscal 2005 included the financing of working capital, capital expendituresand debt service. We expect that our principal uses of cash in the future willbe to finance working capital, capital expenditures and to service debt.

***Cash Flows***

Thefollowing table summarizes our primary sources of cash in the periodspresented:

| ** **                                            | ** ** | **Fiscal Year Ended** | ** ** |
|-------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                            | ** ** | **(in millions)**          | ** ** |
| Cash Flow  Provided by (used in):                     |       |                            |       |   | ** ** | ** ** | ** ** |
| Operating activities                                  |       | $                               | 42.7       |   | $ | 25.3 |   | $ | 13.2 |   |
| Investing activities                                  |       | (37.5                           | )          | (19.9 | ) | (171.9 | ) |
| Financing activities                                  |       | 2.7                             |       | (3.1 | ) | 160.2 |   |
| Effect of exchange rates on changes in cash           |       | (0.3                            | )          | 0.2 |   | 0.1 |   |
| Net increase  (decrease) in cash and cash equivalents |       | $                               | 7.6        |   | $ | 2.5 |   | $ | 1.6 |   |

 

*OperatingActivities.*   We generated cash from operations of$42.7 million in fiscal 2005 compared to $25.3 million in fiscal 2004. Thisincrease is primarily the result of a $20.1 million increase in net income.This increase was partially offset by increases in working capital of $6.0million in fiscal 2005, which is in line with our year over year growth inrevenue. The working capital provided by changes in other assets, accountspayable and accrued expenses were offset by the use of working capital inaccounts receivable and inventories.

*InvestingActivities.*   Our investing activities in fiscal2005 and fiscal 2004 consist entirely of capital expenditures. Net cash used ininvesting activities was $19.9 million for fiscal 2004 compared to $171.9million in fiscal 2003. This decrease was primarily due to the acquisition ofMettis in 2003.

*FinancingActivities.*   Financing activities provided $2.7million of cash in fiscal 2005. In July 2005, we completed a secondaryoffering, which included 11.0 million shares. 0.5 million were sold as primaryshares and 10.5 million shares were sold by certain selling shareholders. Theseshares were sold at a net price of $22.25 and generated gross proceeds ofapproximately $11.1 million, which were used to reduce revolving debt in theUnited Kingdom and for general corporate purposes. Financing activities used$3.1 million of cash in fiscal 2004. The fiscal 2004 amount was due primarilyto cash generated by the initial public 

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offering of our commonstock, which included the issuance of 9.2 million shares of our common stockresulting in gross proceeds to us of $138.0 million. The per share price of ourcommon stock sold in our initial public offering, before underwriting discountsand commissions, was $15.00. The proceeds were used to (i) fund therepurchase of 18,361 shares of Class A Convertible Preferred Stock andwarrants to purchase 639 shares of Class A Convertible Preferred Stock foran aggregate price of approximately $23.3 million, (ii) repay all of ourexisting subordinated indebtedness in an amount of $36.0 million and (iii) repay$58.0 million, net of additional borrowings, of our existing seniorindebtedness. The fiscal 2003 amount was due primarily to cash generated tofinance the Mettis acquisition, which included the issuance of $134.0 millionin long-term indebtedness consisting of $98.0 million of borrowing under asenior credit facility and $36.0 million of subordinated notes, together withwarrants to purchase common stock and preferred stock, and the sale of commonstock and preferred stock for approximately $85.7 million. The per sharepurchase price for the common stock and preferred stock was $3.04 and $1,000,respectively. These items were partially offset by the extinguishment of ourprior senior credit facility and scheduled debt maturities.

***Capital Expenditures******  ******Capital expenditures totaled $37.5million in fiscal 2005, compared to $19.9 million in fiscal 2004 and $8.8million in fiscal 2003, and were primarily used to expand and enhanceproduction capacity in several of our facilities.  We recently purchased approximately 3 acresof land next to our Sheffield, United Kingdom facility, relocated our EuropeanDesign and Development Center and instrument manufacturing to a larger leasedfacility in Cheltenham, United Kingdom, leased a new Design and Development Centerin Memphis, Tennessee, leased a new implant finishing center and Design andDevelopment Center in Lansing, Michigan, expanded our trauma and spine facilitylocated in Avilla, Indiana and opened an additional facility for kneeinstruments located just outside of Warsaw, Indiana in Claypool, Indiana. Intotal, we added approximately 100,000 square feet of capacity through facilityexpansion and openings. In addition, we plan on moving to a newly-constructed,larger facility in Villeneuve d’Ascq, France and opening a new Design andDevelopment Center in Warsaw, Indiana in the first quarter of 2006. We expectcapital expenditures for fiscal 2006 to total approximately $25.0 million.***

***Debt and Credit Facilities***

In connection with our initial public offering in thefourth quarter of fiscal 2004, we entered into a $75.0 million senior securedcredit facility, consisting of a $35.0 million five-year term loan and a $40.0million five-year revolving credit facility. As of December 31, 2005, wehad an aggregate of approximately $39.3 million of outstanding indebtedness,which consisted of the following:

·  An aggregate of $27.6 million of term loanborrowings under our senior credit facility; and

·  $11.8 million of capital lease obligations.

Borrowings under this senior credit facility bearinterest at a floating rate, which is either a base rate, or at our option, aLIBOR rate, plus an applicable margin. As of December 31, 2005, anaggregate of $27.6 million was outstanding under the term loans at a weightedaverage interest rate of 5.62%. As of December 31, 2005, there were noborrowings outstanding under the revolving credit facility. We had nooutstanding letters of credit as of December 31, 2005.

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Historically, we have had a significant amount ofvariable rate long-term indebtedness. We have managed our exposure to changesin interest rates by entering into interest rate swap agreements. Theseagreements do not qualify for hedge accounting under the applicable accountingguidelines and, as a result, we are required to record changes to the fairmarket value of these agreements in our statement of operations for eachperiod. We recorded interest rate swap valuation expense (income) of $(0.1)million, $(1.5) million and $(1.4) million for fiscal 2005, fiscal 2004 andfiscal 2003, respectively. For additional information regarding our interestrate swap agreements, see “—Quantitative and Qualitative Disclosures aboutMarket Risks—Interest Rate Risk.”

The term loans require quarterly payments of scheduledprincipal and interest, with annual scheduled principal payments increasingeach year. The term loans and borrowings under the revolving credit facilitymature in December 2009. The senior credit agreement contains variousfinancial covenants, including covenants requiring a maximum total debt toEBITDA ratio, minimum EBITDA to interest ratio and a minimum EBITDA to fixedcharges ratio. The senior credit agreement also contains covenants restrictingcertain corporate actions, including asset dispositions, acquisitions, payingdividends and certain other restricted payments, changes of control, incurringindebtedness, incurring liens, making loans and investments and transactionswith affiliates. The senior credit facility is secured by substantially all ofour assets. Our senior credit agreement also contains customary events ofdefault. We were in compliance with our financial and restrictive covenantsunder the senior credit facility at the end of fiscal 2005.

We hold certain property and equipment pursuant tocapital leases. As of December 31, 2005, these leases have future minimumlease payments of $4.0 million, $3.7 million, $2.5 million, $1.2 million and$0.7 million in each of the next 5 fiscal years and $3.9 million thereafter.

We believe that cash flowfrom operating activities and borrowings under our senior credit facility willbe sufficient to fund currently anticipated working capital, planned capitalspending and debt service requirements for the foreseeable future, including atleast the next twelve months. We regularly review acquisitions and otherstrategic opportunities, which may require additional debt or equity financing.We currently do not have any pending agreements or understandings with respectto any acquisition or other strategic opportunity. Should the need arise, webelieve that lending institutions and equity markets would be receptive toproviding sources for financing.

**ContractualObligations and Commercial Commitments**

Thefollowing table reflects our contractual obligations as of December 31,2005:

| ** **                     | ** ** | **Payments due by period** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **Total**                                 | ** ** | **Less than   1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More  than  5 years** | ** ** |
| ** **                     | ** ** | **(in millions)**                    | ** ** |
| Long-term debt  obligations(1) |       | $                                         | 27.6       |   |   | $ | 1.3 |   |   |   | $ | 15.8 |   |   |   | $ | 10.5 |   |   |   | $ | — |   |   |
| Capital lease  obligations     |       | 16.0                                      |       |   | 4.0 |   |   |   | 6.2 |   |   |   | 1.9 |   |   |   | 3.9 |   |   |
| Operating lease  obligations   |       | 4.8                                       |       |   | 1.3 |   |   |   | 1.8 |   |   |   | 1.1 |   |   |   | 0.6 |   |   |
| Purchase  obligations(2)       |       | 47.5                                      |       |   | 17.8 |   |   |   | 29.7 |   |   |   | — |   |   |   | — |   |   |
| Total                          |       | $                                         | 95.9       |   |   | $ | 24.4 |   |   |   | $ | 53.5 |   |   |   | $ | 13.5 |   |   |   | $ | 4.5 |   |   |

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(1)          Represents principalmaturities only and, therefore, excludes the effects of interest and interestrate swaps. We have prepaid $3.9 million in term debt as of December 31,2005.

(2)          Representsa purchase agreement to buy minimum quantities of titanium throughAugust 2008.

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**Off-Balance Sheet Arrangements**

Our off-balance sheetarrangements include our operating leases and letters of credit, which areavailable under the senior credit facility. We had no letters of creditoutstanding as of December 31, 2005.

**Environmental**

Our facilities and operations are subject to extensivefederal, state, local and foreign environmental and occupational health andsafety laws and regulations. These laws and regulations govern, among otherthings, air emissions; wastewater discharges; the generation, storage,handling, use and transportation of hazardous materials; the handling anddisposal of hazardous wastes; the cleanup of contamination; and the health andsafety of our colleagues. Under such laws and regulations, we are required toobtain permits from governmental authorities for some of our operations. If weviolate or fail to comply with these laws, regulations or permits, we could befined or otherwise sanctioned by regulators. We could also be held responsiblefor costs and damages arising from any contamination at our past or presentfacilities or at third-party waste disposal sites. We cannot completelyeliminate the risk of contamination or injury resulting from hazardousmaterials, and we may incur material liability as a result of any contaminationor injury.

To avoid the need for certain potentially restrictiveair permits, we recently replaced a furnace at our Sheffield, U.K. facility andreplaced dust collectors at our Lansing, Michigan facility. We incurredapproximately $0.6 million in capital expenditures for environmental, healthand safety in 2005. Environmental laws tend to become more stringent over time,and we could incur material expenses in the future relating to compliance withfuture environmental laws. Our Sheffield, U.K. facility may be required toobtain an Integrated Pollution Prevention Control (IPPC) permit prior to 2007.Although the requirements of the IPPC permit are not yet known, because thefacility is currently operating in substantial compliance with applicable U.K.permit requirements and has, as described above, recently completed upgrades toa furnace and other equipment, we do not expect to have to make materialcapital expenditures to obtain or comply with the IPPC permit.

In connection with our 2000 recapitalization and our2003 acquisition of Mettis, environmental assessments were conducted at ourprimary manufacturing facilities. These assessments identified certainenvironmental issues, the majority of which we have addressed. In 2004, theIndiana Department of Environmental Management conducted an inspection of ourAvilla, Indiana facility and identified certain environmental regulatorycompliance issues. We have corrected these issues and did not receive anyfines. The cost to correct these issues was not material to the company’sresults of operations or financial condition. We have completed the process ofcertifying our manufacturing facilities according to the ISO 14001environmental management standard established by the International Organizationfor Standardization.

In 2000, we purchased pollution legal liabilityinsurance that covers certain environmental liabilities that may arise at ourWarsaw, Indiana facility, at a former facility located in Peru, Indiana, and atcertain non-owned locations that we use for the disposal of wastes. Theinsurance has a $5.0 million aggregate limit and is subject to a deductible andcertain exclusions. The policy period expires in 2010. While the insurance maymitigate the risk of certain environmental liabilities, we cannot guaranteethat a particular liability will be covered by this insurance.

Based on information currently available, we do notbelieve that we have any material environmental liabilities.

**CriticalAccounting Policies and Estimates**

Our discussion andanalysis of results of operations and financial condition are based upon ouraudited consolidated financial statements. These audited financial statementshave been prepared in accordance with U.S. generally accepted accountingprinciples. The preparation of these financial 

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statementsrequires us to make estimates and judgments that affect the amounts reported inthose financial statements. On an ongoing basis, we evaluate estimates. We baseour estimates on historical experiences and assumptions believed to bereasonable under the circumstances. Those estimates form the basis for ourjudgments that affect the amounts reported in the financial statements. Actualresults could differ from our estimates under different assumptions orconditions. Our significant accounting policies, which may be affected by ourestimates and assumptions, are more fully described in Note 2 to ourconsolidated financial statements that appear elsewhere in this Form 10-K.

***Revenue Recognition***

We recognize revenue inaccordance with Staff Accounting Bulletin No. 101, as amended by StaffAccounting Bulletin No. 104, on orders received from customers when thereis persuasive evidence of an arrangement with the customer that is supportiveof revenue recognition, the customer has made a fixed commitment to purchasethe product for a fixed or determinable sales price, collection is reasonablyassured under our normal billing and credit terms and ownership and all risksof loss have been transferred to the buyer, which is normally upon shipment.

***Inventory***

Inventories are stated atthe lower of cost (first-in, first-out) or market (net realizable value). Costsinclude material, labor and manufacturing overhead costs. We review ourinventory balances monthly for excess products or obsolete inventory levels andwrite down, if necessary, the inventory to net realizable value.

***Business Combinations, Goodwill and Intangible Assets***

In July 2001, the Financial Accounting StandardsBoard, or “FASB,” issued SFAS No. 141,*Business Combinations*, and SFAS No. 142,*Goodwill and Intangible Assets*. SFAS No. 141requires all business combinations initiated after June 30, 2001 to beaccounted for using the purchase method of accounting. Under SFAS No. 142,goodwill and intangible assets with indefinite lives are no longer amortized,but reviewed annually, or more frequently if impairment indicators arise.Separable intangible assets that are not deemed to have indefinite lives willcontinue to be amortized over their useful lives. The amortization provisionsof SFAS No. 142 apply to goodwill and intangible assets acquired after June 30,2001.

We perform impairment tests annually and wheneverevents or circumstances occur indicating that goodwill or other intangibleassets might be impaired. Examples of such events or circumstances include, butare not limited to, a significant adverse change in legal or business climateor an adverse regulatory action. We recorded no impairments as a result of SFAS142 during 2003, 2004 or 2005.

***Environmental Liability***

Governmental regulations relating to the discharge ofmaterials into the environment, or otherwise relating to the protection of theenvironment, have had, and will continue to have, an effect on our operationsand us. We have made and continue to make expenditures for projects relating tothe protection of the environment.

Any loss contingencieswith respect to environmental matters are recorded as liabilities in theconsolidated financial statements when it is both (1) probable or knownthat a liability has been incurred and (2) the amount of the loss isreasonably estimable, in accordance with Financial Accounting StandardsStatement No. 5, “*Accounting forContingencies.*” If the reasonable estimate of the loss is a rangeand no amount within the range is a better estimate, the minimum amount of therange is recorded as a liability. If a loss contingency is not probable or notreasonably estimable, a liability is not recorded in the consolidated financialstatements. In the opinion of our management, there are no known environmentalmatters that are expected to have a material impact on our consolidated balancesheet or results of 

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operations;however, the outcome of such matters are not within our control and are subjectto inherent uncertainty.

**New Accounting Pronouncements**

In May 2005, the FASB issued Statement No. 154,Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20,Accounting Changes, and SFAS 3, Reporting Accounting Changes In InterimFinancial Statements. SFAS 154 changes the requirements related to accountingfor and reporting of a change in accounting principle. This Statement appliesto all voluntary changes in accounting principle and changes required by a newaccounting pronouncement in the unusual instance that the pronouncement doesnot include specific transition provisions. SFAS 154 requires retrospectiveapplication to prior periods’ financial statements of changes in accountingprinciple versus the previous guidance which allowed the recording of theimpact of an accounting change in the current period’s net income as acumulative effect adjustment. The Statement is effective for the Corporationbeginning January 1, 2006.

On December 16, 2004, the FASB issued Statement No. 123(revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123,Accounting for Stock Based Compensation. Statement 123(R) supersedes APBOpinion No. 25, Accounting for Stock Issued to Employees, and amends FASBStatement No. 95, Statement of Cash Flows. Generally, the approach inStatement 123(R) is similar to the approach described in Statement 123.However, Statement 123 (R) requires all share-based payments to employees,including grants of employee stock options, to be recognized in the incomestatement based on their fair values. Pro forma disclosure is no longer an alternative.

Statement 123(R) must be adopted by theCorporation no later than January 1, 2006. We expect to adopt Statement123(R) on January 1, 2006 using the “modified prospective” method inwhich compensation cost is recognized beginning with the effective date basedon the requirements of Statement 123(R) for all share-based paymentsgranted after the effective date and based on the requirements of Statement 123for all awards granted to employees prior to the effective date of Statement123(R) that remain unvested on the effective date.

As permitted by Statement 123, the Corporationcurrently accounts for share-based payments to employees using Opinion 25’sintrinsic value method and, as such, generally recognizes no compensation costfor employee stock options. Accordingly, the adoption of Statement 123(R)’sfair value method will have an impact on the Corporation’s results ofoperations, although it will have no impact on our overall financial position.The impact of adoption of Statement 123(R) cannot be predicted at thistime because it will depend on levels of share-based payments granted in thefuture. However, had the Corporation adopted Statement 123(R) in priorperiods, the impact of that standard would have approximated the impact ofStatement 123 as described in the disclosure of pro forma net income andearnings per share in Note 2 to its consolidated financial statements.Statement 123(R) also requires the benefits of tax deductions in excess ofrecognized compensation cost to be reported as a financing cash flow, ratherthan as an operating cash flow as required under current literature. Thisrequirement will reduce net operating cash flows and increase net financingcash flows in periods after adoption.

In November 2004, the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting (SFAS) No. 151*, Inventory Costs—an amendment of Accounting ResearchBulletin (ARB) No. 43, Chapter 4.* The Statement clarifies thatabnormal amounts of idle facility expense, freight, handling costs and wastedmaterials should be recognized as current-period expenses regardless of howabnormal the circumstances. In addition, this Statement requires that theallocation of fixed overheads to the costs of conversion be based upon normalproduction capacity levels. The Statement is effective for inventory costsincurred during fiscal years beginning after June 15, 2005. We do notanticipate that this Statement will have a material effect on our financialposition, results of operations and cash flows.

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In January 2003, the FASB issued Interpretation No. 46(FIN 46), Consolidation of Variable Interest Entities and was effective for theCorporation beginning in the year ending January 1, 2005. FIN 46 defines avariable interest entity (VIE) as a corporation, partnership, trust or anyother legal structure that does not have equity investors with a controllingfinancial interest or has equity investors that do not provide sufficientfinancial resources for the entity to support its activities. FIN 46 did nothave a material impact on the Corporation’s financial position or results ofoperations.

In April 2003, the FASB issued SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities andwas effective for the Corporation in fiscal year 2003. This statement amendsand clarifies financial accounting and reporting for derivative instruments andhedging activities under SFAS No. 133, Accounting for DerivativeInstruments and Hedging Activities, by requiring contracts with similarcharacteristics to be accounted for comparably. The adoption of SFAS No. 149did not have a material effect on the Corporation’s financial position orresults of operations.

In May 2003, the FASB issued SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity. This statement changes the accounting for certainfinancial instruments that, under previous guidance, could be accounted for asequity. SFAS No. 150 may require that those instruments be classified asliabilities. SFAS No. 150 was effective for financial instruments enteredinto or modified after May 31, 2003, and otherwise was effective after June 15,2003. The adoption of SFAS No. 150 did not have an impact on theCorporation’s financial position or results of operation.

In April 2002,the FASB issued SFAS No. 145,*Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASBStatement No. 13, and Technical Corrections*. This statementeliminates the automatic classification of gain or loss on extinguishment ofdebt as an extraordinary item of income and requires that such gain or loss beevaluated for extraordinary classification under the criteria of AccountingPrinciples Board No. 30,*ReportingResults of Operations*. This statement also requires sales-leasebackaccounting for certain transactions, and makes various other technicalcorrections to existing pronouncements. The statement is effective forfinancial statements issued on or after May 15, 2002. The adoption of thisstatement on January 1, 2003 resulted in classifying the loss from earlyextinguishment of debt in connection with the acquisition of Mettis (UK)Limited as a separate component of net income before provision for incometaxes.

**Item 7a.**                 QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

***Interest Rate Risk***

We are exposed to market risk from fluctuations ininterest rates. We manage our interest rate risk by balancing the amount of ourfixed rate and variable rate debt and through the use of interest rate swaps.The objective of the swaps is to more effectively balance borrowing costs andinterest rate risk. For fixed rate debt, interest rate changes affect the fairmarket value of such debt but do not impact earnings or cash flows. Converselyfor variable rate debt, interest rate changes generally do not affect the fairmarket value of such debt, but do impact future earnings and cash flows,assuming other factors are held constant. At December 31, 2005, we hadapproximately $32.7 million of variable rate debt. The weighted averageinterest rate for this debt in 2005 was 6.50%. Holding other variables constant(such as foreign exchange rates and debt levels), a one percentage point changein interest rates would be expected to have an impact on pre-tax earnings and cashflows for the next year of approximately $0.3 million, before giving effect tothe interest rate swap agreements described below.

In 2000, we entered into an interest rate swapagreement that effectively converted $19 million of a portion of our variablerate term loans into a fixed rate obligation for the five-year periodcommencing October 24, 2000. We receive payments at variable rates, whilethe swap agreement counterparty makes payments at a fixed rate (6.25% at October 2,2004). This agreement was terminated effective December 13, 2004 inconjunction with our initial public offering and reduced debt levels. In 2003,we entered into a second interest rate swap agreement that effectivelyconverted $71.0 million of a portion of 

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our variable rate term loansinto a fixed rate obligation for an approximately three-year period ending June 30,2006. We receive payments at variable rates, while we make payments at a fixedrate (2.285% at December 31, 2005). Effective December 13, 2004, thisagreement was reduced in size from $71.0 million to $35.0 million inconjunction with our initial public offering and reduced debt levels. The netcost to change these agreements was $0.3 million.

Effective December 2004,the Corporation entered into an interest rate swap agreement to economicallyhedge $15 million of outstanding long-term debt at a fixed payment obligationof 3.98% per annum for the period commencing on June 30, 2006 and endingon December 31, 2007.

***Foreign Currency Risk***

As a global company with operations in the UK and inFrance, we experienced a negative impact from foreign exchange in fiscal 2005. Asa result of the fluctuation in rates, our revenue was reduced for the fourthquarter 2005 by $1.1 million and for the total year 2005 by$0.4 million. The adverse impact of rates also reduced net income by$0.1 million in the fourth quarter, but did not have a significant affecton net income  for the total year of2005.

Foreign currency risk is the risk that we will incureconomic losses due to adverse changes in foreign currency exchange rates. As aresult of the Mettis acquisition, we have significant operations in the UnitedKingdom. Consequently, a significant portion of our operating results aregenerated in currencies other than the U.S. dollar, principally the poundsterling and euro. Our operating results are therefore impacted by exchangerate fluctuations to the extent we are unable to match revenue received in suchcurrencies with costs incurred in such currencies. We do not hold or issueforeign exchange options or forward contracts for trading purposes. However, wemay utilize these tools to manage foreign exchange risk in the future.

Our primary exposures toforeign currency exchange fluctuations are pound sterling/U.S. dollar andeuro/U.S. dollar. At December 31, 2005, the potential reduction inearnings from a hypothetical instantaneous 10% increase or decrease in quotedforeign currency spot rates applied to foreign currency sensitive instrumentswould be approximately $0.6 million, net of tax. This foreign currencysensitivity model is limited by the assumption that all of the foreigncurrencies to which we are exposed would simultaneously decrease by 10% becausesuch synchronized changes are unlikely to occur.

***Commodity Price Risk***

We are exposed tofluctuations in commodity prices through the purchase of raw materials that areprocessed from commodities, such as titanium, stainless steel, cobalt chromeand aluminum. Given the historical volatility of certain commodity prices, thisexposure can impact product costs. Because we typically do not set prices forour products in advance of our commodity purchases, we can take into accountthe cost of the commodity in setting our prices for each order. However, to theextent that we are unable to offset the increased commodity costs in ourproduct prices, our results would be affected. A hypothetical instantaneous 10%change in commodity prices would have an immaterial impact on our results ofoperations in fiscal 2005. In addition, we have entered into a longer termpurchase contract for titanium that will aid in guaranteeing our supply of thatparticular commodity.

***Effects of Inflation***

Inflation potentially affects us in two principal ways.First, a significant portion of our debt is tied to prevailing short-terminterest rates that may change as a result of inflation rates, translating intochanges in interest expense. We have historically reduced our exposure tointerest rate risk through interest rate swap agreements. Second, generalinflation can impact material purchases, labor and other costs. In many cases,we have limited ability to pass through inflation-related cost increases due tothe competitive nature of the markets that we serve. In the past few years,however, inflation has not been a significant factor.

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**Item 8.**                        FINANCIALSTATEMENTS 

|                                                                        | ** ** | **Page** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|
| CONSOLIDATED FINANCIAL  STATEMENTS:                                    |       |     |       |   |   |
| Consolidated  Balance Sheets                                           |       |     | 46         |   |   |
| Consolidated  Statements of Operations                                 |       |     | 47         |   |   |
| Consolidated  Statements of Shareholders’ Equity (Deficit)        |       |     | 48         |   |   |
| Consolidated  Statements of Cash Flows                                 |       |     | 49         |   |   |
| Notes to Consolidated  Financial Statements                            |       |     | 50         |   |   |
| Report of  Independent Registered Public Accounting Firm               |       |     | 70         |   |   |
| REPORTS ON  INTERNAL CONTROL OVER FINANCIAL REPORTING:                 |       |     |       |   |   |
| Management’s  Report on Internal Control Over Financial Reporting |       |     | 71         |   |   |
| Report of  Independent Registered Public Accounting Firm               |       |     | 72         |   |   |

 

All schedules have been omitted because they are notrequired or applicable or the information is included in the consolidatedfinancial statements or notes thereto.

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**SymmetryMedical Inc.Consolidated Balance Sheets**

| ** **                                                                                                                                       | ** ** | **December 31,**                 | ** ** | **January 1,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|---------------------|------------|
| ** **                                                                                                                                       | ** ** | **2005**                              | ** ** | **2005**            | ** ** |
| ** **                                                                                                                                       | ** ** | **(In Thousands, Except Share Data)** | ** ** |
| **Assets:**                                                                                                                                      |       |                                  |       |                |       |   |   |
| Current Assets:                                                                                                                                  |       |                                  |       |                |       |   |   |
| Cash and cash equivalents                                                                                                                        |       |                                  | $          | 12,471              |       |   | $ | 4,849 |   |
| Accounts receivables, net                                                                                                                        |       |                                  | 44,908     |                |       | 39,640 |   |
| Inventories                                                                                                                                      |       |                                  | 38,783     |                |       | 34,083 |   |
| Refundable income taxes                                                                                                                          |       |                                  | 185        |                |       | 2,578 |   |
| Deferred income taxes                                                                                                                            |       |                                  | 1,867      |                |       | 2,036 |   |
| Other current assets                                                                                                                             |       |                                  | 4,032      |                |       | 5,635 |   |
| Total current assets                                                                                                                             |       |                                  | 102,246    |                |       | 88,821 |   |
| Property and  equipment, net                                                                                                                     |       |                                  | 93,106     |                |       | 71,854 |   |
| Interest rate  swap valuation asset                                                                                                              |       |                                  | 584        |                |       | 486 |   |
| Goodwill                                                                                                                                         |       |                                  | 124,518    |                |       | 127,369 |   |
| Intangible  assets, net of accumulated amortization                                                                                              |       |                                  | 16,327     |                |       | 17,327 |   |
| Other assets                                                                                                                                     |       |                                  | 864        |                |       | 1,011 |   |
| Total Assets                                                                                                                                     |       |                                  | $          | 337,645             |       |   | $ | 306,868 |   |
| **Liabilities  and Shareholders’ Equity:**                                                                                                  |       |                                  |       |                |       |   |   |
| Current Liabilities:                                                                                                                             |       |                                  |       |                |       |   |   |
| Accounts payable                                                                                                                                 |       |                                  | $          | 18,983              |       |   | $ | 17,908 |   |
| Accrued wages and benefits                                                                                                                       |       |                                  | 10,997     |                |       | 9,384 |   |
| Other accrued expenses                                                                                                                           |       |                                  | 2,696      |                |       | 3,012 |   |
| Income tax payable                                                                                                                               |       |                                  | 1,241      |                |       | 2,008 |   |
| Revolving line of credit                                                                                                                         |       |                                  | —     |                |       | 1,204 |   |
| Current portion of capital lease obligations                                                                                                     |       |                                  | 3,239      |                |       | 3,572 |   |
| Current portion of long-term debt                                                                                                                |       |                                  | 1,313      |                |       | 879 |   |
| Total current liabilities                                                                                                                        |       |                                  | 38,469     |                |       | 37,967 |   |
| Deferred income taxes                                                                                                                            |       |                                  | 11,139     |                |       | 9,547 |   |
| Capital lease obligations, less current portion                                                                                                  |       |                                  | 8,532      |                |       | 11,709 |   |
| Long-term debt, less current portion                                                                                                             |       |                                  | 26,250     |                |       | 31,500 |   |
| Total Liabilities                                                                                                                                |       |                                  | 84,390     |                |       | 90,723 |   |
| Commitments and contingencies (Note 15)                                                                                                          |       |                                  | —     |                |       | — |   |
| Shareholders’  Equity:                                                                                                                      |       |                                  |       |                |       |   |   |
| Common Stock, $.0001 par value; 72,410 shares  authorized; shares issued (December 31, 2005—34,704; January 1,  2005—33,174) |       |                                  | 3          |                |       | 3 |   |
| Additional paid-in capital                                                                                                                       |       |                                  | 269,789    |                |       | 255,509 |   |
| Unearned compensation                                                                                                                            |       |                                  | (816       | )                   |       | — |   |
| Retained earnings (deficit)                                                                                                                      |       |                                  | (17,378    | )                   |       | (49,178 | ) |
| Accumulated other comprehensive income                                                                                                           |       |                                  | 1,657      |                |       | 9,811 |   |
| Total Shareholders’ Equity                                                                                                                  |       |                                  | 253,255    |                |       | 216,145 |   |
| Total Liabilities  and Shareholders’ Equity                                                                                                 |       |                                  | $          | 337,645             |       |   | $ | 306,868 |   |

 

See accompanying notes to consolidated financial statements.

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**Symmetry Medical Inc.Consolidated Statements of Operations**

 

| ** **                                                         | ** ** | **Fiscal Year Ended**                      | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                         | ** ** | **December 31,**                                | ** ** | **January 1,** | ** ** | **January 3,** | ** ** |
| ** **                                                         | ** ** | **2005**                                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                         | ** ** | **(In Thousands, Except Share and  Per Share Data)** | ** ** |
| Revenue                                                            |       |                                                 | $          | 263,766 |   |   | $ | 205,391 |   | $ | 122,029 |   |
| Cost of Revenue                                                    |       |                                                 | 185,227    |   |   | 145,081 |   | 86,124 |   |
| Gross Profit                                                       |       |                                                 | 78,539     |   |   | 60,310 |   | 35,905 |   |
| Selling, general,  and administrative expenses                     |       |                                                 | 27,570     |   |   | 22,569 |   | 17,115 |   |
| Operating Income                                                   |       |                                                 | 50,969     |   |   | 37,741 |   | 18,790 |   |
| Other (income) expense:                                            |       |                                                 |       |   |   |   |   |   |   |
| Interest expense                                                   |       |                                                 | 2,954      |   |   | 13,757 |   | 10,172 |   |
| Loss on debt extinguishment                                        |       |                                                 | —     |   |   | 8,956 |   | 1,436 |   |
| Interest rate swap valuation                                       |       |                                                 | (98        | ) |   | (1,451 | ) | (1,358 | ) |
| Other                                                              |       |                                                 | 1,872      |   |   | (740 | ) | (374 | ) |
| Income before income taxes                                         |       |                                                 | 46,241     |   |   | 17,219 |   | 8,914 |   |
| Income tax  expense                                                |       |                                                 | 14,441     |   |   | 5,524 |   | 3,009 |   |
| Net income (loss)                                                  |       |                                                 | 31,800     |   |   | 11,695 |   | 5,905 |   |
| Preferred stock  dividends                                         |       |                                                 | —     |   |   | (8,977 | ) | (7,028 | ) |
| Net income (loss)  applicable to common shareholders               |       |                                                 | $          | 31,800 |   |   | $ | 2,718 |   | $ | (1,123 | ) |
| Net income (loss)  applicable to common shareholders per share:    |       |                                                 |       |   |   |   |   |   |   |
| Basic                                                              |       |                                                 | $          | 0.94 |   |   | $ | 0.16 |   | $ | (0.10 | ) |
| Diluted                                                            |       |                                                 | $          | 0.92 |   |   | $ | 0.15 |   | $ | (0.10 | ) |
| Weighted average common  shares and equivalent shares outstanding: |       |                                                 |       |   |   |   |   |   |   |
| Basic                                                              |       |                                                 | 33,841     |   |   | 16,905 |   | 11,798 |   |
| Diluted                                                            |       |                                                 | 34,670     |   |   | 17,767 |   | 11,798 |   |

 

See accompanying notes to consolidated financial statements.

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**SymmetryMedical Inc.Consolidated Statements of Shareholders’ Equity (Deficit)**

| ** **                                                                                             | ** ** | **Class A**   | ** ** | ** ** | ** ** | ** **     | ** ** | ** **       | ** ** | ** **    | ** ** | **Accumulated**        | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------|------------|----------------|------------|------------------|------------|---------------|------------|------------------------|------------|------------|------------|
| ** **                                                                                             | ** ** | **Convertible**    | ** ** | ** ** | ** ** | **Additional** | ** ** | **Unearned**     | ** ** | **Retained**  | ** ** | **Other**              | ** ** | ** ** | ** ** |
| ** **                                                                                             | ** ** | **Preferred**      | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Compensation** | ** ** | **Earnings**  | ** ** | **Comprehensive**      | ** ** | ** ** | ** ** |
| ** **                                                                                             | ** ** | **Stock**          | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Cost**         | ** ** | **(Deficit)** | ** ** | **Income (Loss)** | ** ** | **Total**  | ** ** |
| ** **                                                                                             | ** ** | **(In Thousands)** | ** ** |
| **Balance  at December 28, 2002**                                                                 |       |               | $          | 49,629     |       |           |       | $                | 1          |          |       |                   | $          | 9          |       |   |   | $ | (81 | ) |   |   | $ | (50,773 | ) |   |   | $ | 94 |   |   | $ | (1,121 | ) |
| Comprehensive income:                                                                                  |       |               |       |       |       |           |       |             |       |          |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                             |       |               |       |       |       |           |       |             |       |          |       |                   |       |       |       |   |   |   | 5,905 |   |   |   |   |   |   | 5,905 |   |
| Other  comprehensive income—foreign currency translation adjustment                               |       |               |       |       |       |           |       |             |       |          |       |                   |       |       |       |   |   |   |   |   |   |   | 4,765 |   |   | 4,765 |   |
| Comprehensive  income                                                                                  |       |               |       |       |       |           |       |             |       |          |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   | 10,670 |   |
| Amortization of  unearned compensation cost                                                            |       |               |       |       |       |           |       |             |       |          |       |                   |       |       | 24         |   |   |   |   |   |   |   |   |   |   | 24 |   |
| Conversion of  Preferred Stock—Class B to Common Stock and Preferred Stock—Class A |       |               | 2,652      |       |       |           | —     |             |       |          | 1,170      |                   |       |       |       |   |   |   |   |   |   |   |   |   |   | 3,822 |   |
| Repurchase of  stock                                                                                   |       |               | (2,672     | )          |       |           | —     |             |       |          | (1,085     | )                      |       |       |       |   |   |   |   |   |   |   |   |   |   | (3,757 | ) |
| Sale of stock                                                                                          |       |               | 59,486     |       |       |           | 1          |             |       |          | 26,246     |                   |       |       |       |   |   |   |   |   |   |   |   |   |   | 85,733 |   |
| Common Stock and  Preferred Stock—Class A warrants                                           |       |               |       |       |       |           |       |             |       |          | 5,311      |                   |       |       |       |   |   |   |   |   |   |   |   |   |   | 5,311 |   |
| Preferred stock  dividends                                                                             |       |               | 6,736      |       |       |           |       |             |       |          |       |                   |       |       |       |   |   |   | (7,028 | ) |   |   |   |   |   | (292 | ) |
| **Balance  at January 3, 2004**                                                                   |       |               | 115,831    |       |       |           | 2          |             |       |          | 31,651     |                   |       |       | (57        | ) |   |   | (51,896 | ) |   |   | 4,859 |   |   | 100,390 |   |
| Comprehensive income:                                                                                  |       |               |       |       |       |           |       |             |       |          |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                             |       |               |       |       |       |           |       |             |       |          |       |                   |       |       |       |   |   |   | 11,695 |   |   |   |   |   |   | 11,695 |   |
| Other  comprehensive income— foreign currency translation adjustment                              |       |               |       |       |       |           |       |             |       |          |       |                   |       |       |       |   |   |   |   |   |   |   | 4,952 |   |   | 4,952 |   |
| Comprehensive  income                                                                                  |       |               |       |       |       |           |       |             |       |          |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   | 16,647 |   |
| Amortization of  unearned compensation cost                                                            |       |               |       |       |       |           |       |             |       |          |       |                   |       |       | 57         |   |   |   |   |   |   |   |   |   |   | 57 |   |
| Redemption of  Preferred Stock—Class A warrants                                              |       |               | 720        |       |       |           | —     |             |       |          | (720       | )                      |       |       |       |   |   |   |   |   |   |   |   |   |   | — |   |
| Repurchase of  stock                                                                                   |       |               | (23,332    | )          |       |           | —     |             |       |          |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   | (23,332 | ) |
| Sale of stock, net  of expenses                                                                        |       |               |       |       |       |           | 1          |             |       |          | 122,382    |                   |       |       |       |   |   |   |   |   |   |   |   |   |   | 122,383 |   |
| Preferred Stock  dividends                                                                             |       |               | 8,977      |       |       |           |       |             |       |          |       |                   |       |       |       |   |   |   | (8,977 | ) |   |   |   |   |   | — |   |
| Conversion of  Preferred Stock—Class A to Common Stock                                       |       |               | (102,196)  |       |       |           | —     |             |       |          | 102,196    |                   |       |       |       |   |   |   |   |   |   |   |   |   |   | — |   |
| **Balance  at January 1, 2005**                                                                   |       |               | —     |       |       |           | 3          |             |       |          | 255,509    |                   |       |       | —     |   |   |   | (49,178 | ) |   |   | 9,811 |   |   | 216,145 |   |
| Comprehensive income:                                                                                  |       |               |       |       |       |           |       |             |       |          |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                             |       |               |       |       |       |           |       |             |       |          |       |                   |       |       |       |   |   |   | 31,800 |   |   |   |   |   |   | 31,800 |   |
| Other  comprehensive income—foreign currency translation adjustment                               |       |               |       |       |       |           |       |             |       |          |       |                   |       |       |       |   |   |   |   |   |   |   | (8,154 | ) |   | (8,154 | ) |
| Comprehensive  income                                                                                  |       |               |       |       |       |           |       |             |       |          |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   | 23,646 |   |
| Sale of stock, net  of expenses                                                                        |       |               |       |       |       |           | —     |             |       |          | 10,500     |                   |       |       |       |   |   |   |   |   |   |   |   |   |   | 10,500 |   |
| Exercise of Common  Stock warrants                                                                     |       |               |       |       |       |           | —     |             |       |          | —     |                   |       |       |       |   |   |   |   |   |   |   |   |   |   | — |   |
| Exercise of Common  Stock options                                                                      |       |               |       |       |       |           | —     |             |       |          | 1,978      |                   |       |       |       |   |   |   |   |   |   |   |   |   |   | 1,978 |   |
| Issuance of Common  Stock—Restricted Stock                                                        |       |               |       |       |       |           | —     |             |       |          | 75         |                   |       |       | (75        | ) |   |   |   |   |   |   |   |   |   | — |   |
| Issuance of Common  Stock—Equity Incentive Plan                                                   |       |               |       |       |       |           | —     |             |       |          | 893        |                   |       |       | (893       | ) |   |   |   |   |   |   |   |   |   | — |   |
| Amortization of  unearned compensation cost                                                            |       |               |       |       |       |           |       |             |       |          |       |                   |       |       | 15         |   |   |   |   |   |   |   |   |   |   | 152 |   |
| Issuance of Common  Stock—                                                                        |       |               |       |       |       |           |       |             |       |          |       |                   |       |       |       |   |   |   |   |   |   |   |   |   |   | — |   |
| Employee Stock  Purchase Plan                                                                          |       |               |       |       |       |           | —     |             |       |          | 834        |                   |       |       |       |   |   |   |   |   |   |   |   |   |   | 834 |   |
| **Balance  at December 31, 2005**                                                                 |       |               | $          | —     |       |           |       | $                | 3          |          |       |                   | $          | 269,789    |       |   |   | $ | (816 | ) |   |   | $ | (17,378 | ) |   |   | $ | 1,657 |   |   | $ | 253,255 |   |

 

See accompanying notes to consolidated financial statements.

48

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**SymmetryMedical Inc.Consolidated Statements of Cash Flow**

| ** **                                                                                   | ** ** | **Fiscal Year Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                   | ** ** | **December 31,**           | ** ** | **January 1,** | ** ** | **January 3,** | ** ** |
| ** **                                                                                   | ** ** | **2005**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                   | ** ** | **(In Thousands)**              | ** ** |
| **Operating activities**                                                                     |       |                            |       |   |   |   |   |   |   |
| Net Income                                                                                   |       |                            | $          | 31,800 |   |   | $ | 11,695 |   | $ | 5,905 |   |
| Adjustments to reconcile  net income to net cash provided by (used in) operating activities: |       |                            |       |   |   |   |   |   |   |
| Depreciation                                                                                 |       |                            | 13,067     |   |   | 10,589 |   | 6,339 |   |
| Amortization                                                                                 |       |                            | 607        |   |   | 609 |   | 323 |   |
| Loss from sale of  assets                                                                    |       |                            | 75         |   |   | 35 |   | 62 |   |
| Deferred income  tax provision                                                               |       |                            | 1,858      |   |   | 2,751 |   | 1,813 |   |
| Loss on debt  extinguishment                                                                 |       |                            | —     |   |   | 8,346 |   | 1,436 |   |
| Income tax  benefits from exercise of stock options                                          |       |                            | 1,432      |   |   | — |   | — |   |
| Interest rate  swap valuation change                                                         |       |                            | (98        | ) |   | (1,451 | ) | (1,358 | ) |
| Change in operating  assets and liabilities:                                                 |       |                            |       |   |   |   |   |   |   |
| Accounts  receivable                                                                         |       |                            | (7,743     | ) |   | (8,844 | ) | (2,429 | ) |
| Other assets                                                                                 |       |                            | 1,165      |   |   | (549 | ) | 1,444 |   |
| Inventories                                                                                  |       |                            | (6,366     | ) |   | (6,773 | ) | (4,009 | ) |
| Accounts payable                                                                             |       |                            | 2,541      |   |   | 7,959 |   | 801 |   |
| Accrued expenses  and other                                                                  |       |                            | 4,397      |   |   | 961 |   | 2,824 |   |
| Net cash provided  by operating activities                                                   |       |                            | 42,735     |   |   | 25,328 |   | 13,151 |   |
| **Investing  activities**                                                                    |       |                            |       |   |   |   |   |   |   |
| Purchases of  property and equipment                                                         |       |                            | (37,546    | ) |   | (19,891 | ) | (8,816 | ) |
| Acquisition, net  of cash received                                                           |       |                            | —     |   |   | — |   | (163,128 | ) |
| Net cash used in  investing activities                                                       |       |                            | (37,546    | ) |   | (19,891 | ) | (171,944 | ) |
| **Financing  activities**                                                                    |       |                            |       |   |   |   |   |   |   |
| Proceeds from  bank revolver                                                                 |       |                            | 37,065     |   |   | 36,079 |   | 14,779 |   |
| Payments on bank  revolver                                                                   |       |                            | (37,896    | ) |   | (34,864 | ) | (28,461 | ) |
| Issuance of  long-term debt                                                                  |       |                            | —     |   |   | 35,000 |   | 134,000 |   |
| Payments on  long-term debt and capital lease obligations                                    |       |                            | (8,321     | ) |   | (137,275 | ) | (36,889 | ) |
| Proceeds from the  issuance of common and preferred stock, net of expenses                   |       |                            | 11,880     |   |   | 122,383 |   | 85,733 |   |
| Payments for  redemption of common and preferred stock                                       |       |                            | —     |   |   | (23,332 | ) | (3,757 | ) |
| Debt issuance  costs paid                                                                    |       |                            | —     |   |   | (1,073 | ) | (5,193 | ) |
| Net cash provided  by financing activities                                                   |       |                            | 2,728      |   |   | (3,082 | ) | 160,212 |   |
| Effect of  exchange rate changes on cash                                                     |       |                            | (295       | ) |   | 146 |   | 148 |   |
| Net increase  (decrease) in cash and cash equivalents                                        |       |                            | 7,622      |   |   | 2,501 |   | 1,567 |   |
| Cash and cash  equivalents at beginning of period                                            |       |                            | 4,849      |   |   | 2,348 |   | 781 |   |
| Cash and cash  equivalents at end of period                                                  |       |                            | $          | 12,471 |   |   | $ | 4,849 |   | $ | 2,348 |   |
| Supplemental  disclosures:                                                                   |       |                            |       |   |   |   |   |   |   |
| Cash paid for  interest                                                                      |       |                            | $          | 2,534 |   |   | $ | 13,377 |   | $ | 8,339 |   |
| Cash paid for  income taxes                                                                  |       |                            | $          | 8,919 |   |   | $ | 2,976 |   | $ | 1,734 |   |
| Assets acquired under  capital leases                                                        |       |                            | $          | 283 |   |   | $ | 7,357 |   | $ | 4,042 |   |

 

See accompanying notes to consolidated financial statements.

49

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**Notes to Consolidated Financial Statements (in thousands, except share and per share data)**

**1.**   Descriptionof the Business

The consolidated financial statements include theaccounts of Symmetry Medical, Inc. and its wholly-owned subsidiaries(collectively referred to as the Corporation), Symmetry Medical USA Inc., JetEngineering, Inc. (Jet), Ultrexx, Inc. (Ultrexx), Othy Limited,Poly-Vac S.A. and Mettis UK Limited, including its wholly-owned subsidiary,Thornton Precision Components Limited (TPC).

The Corporation is a global supplier of integratedproducts and services consisting of surgical implants, instruments and cases toorthopedic and other medical device companies.

During 2003, the Corporation acquired Mettis UKLimited, including Jet, Ultrexx and TPC from the Mettis Companies (the MettisAcquisition). Refer to note 3 for further discussion.

In December 2004,the Corporation completed an initial public offering (IPO) of its common stockand entered into a new senior credit facility. In connection with thisoffering, the Corporation received net proceeds of $122,383. Approximately$36,360 of the net proceeds from the offering were used to repay all of itsexisting subordinated indebtedness, $58,025 to repay a portion of its existingsenior indebtedness and $23,332 to repurchase a portion of its Class AConvertible Preferred Stock and warrants to purchase Class A ConvertiblePreferred Stock. In addition, the remaining outstanding shares of Class AConvertible Preferred Stock and warrants to purchase Class A ConvertiblePreferred Stock converted into 8,015,150 shares of the Corporation’s Common Stockand warrants to purchase 255,334 shares of the Corporation’s Common Stock.. In July 2005,the Corporation completed a secondary offering which included 11.0 millionshares. 0.5 million were sold as primary shares and 10.5 million shares weresold by certain selling shareholders. These shares were sold at a net price of$22.25. The Corporation received gross proceeds of $11.1 million, which wereused to reduce revolving debt in the United Kingdom and for general corporatepurposes.

**2.**   Summaryof Significant Accounting Policies

**Principles ofConsolidation**

The consolidated financialstatements include the accounts of the Corporation and its wholly-ownedsubsidiaries. Significant intercompany accounts and transactions have beeneliminated in consolidation. Certain prior period amounts have beenreclassified to conform to the current year presentation. Suchreclassifications had no impact on net income previously reported.

**Year End**

The Corporation’s year endis the 52 or 53 week period ending the Saturday closest to December 31,resulting in fiscal 2005 (ending December 31, 2005) being 52 weeks, fiscal2004 (ending January 1, 2005) being 52 weeks, and fiscal 2003 (ending January 3,2004) being 53 weeks. References in these consolidated financial statements to2005, 2004 and 2003 refer to these financial years, respectively.

**Use of Estimates**

Preparation of theseconsolidated financial statements requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates, butmanagement does not believe such differences will materially affect theCorporation’s financial position or results of operations.

50

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**Notes to Consolidated Financial Statements—(Continued) (in thousands, except share and per share data)**

**2.**   Summary of Significant Accounting Policies(Continued)

**Cash and CashEquivalents**

Cash and cash equivalentsinclude all highly liquid investments with a maturity of three months or lessat the time of purchase.

**Inventories**

Inventories are stated at the lower of cost,determined on the first-in, first-out (FIFO) method, or market. Costs includematerial, labor and manufacturing overhead costs. Inventory balances arereviewed monthly for excess products or obsolete inventory levels and writtendown, if necessary, to net realizable value.

Inventoriesconsist of the following:

| ** **                 | ** ** | **December 31,  2005** | ** ** | **January 1,  2005** | ** ** |
|----------------------------|------------|-----------------------------|------------|---------------------------|------------|
| Raw material and  supplies |       |                        | $          | 7,325                     |       |   |   | $ | 6,012 |   |   |
| Work-in-process            |       |                        | 23,418     |                      |       |   | 20,561 |   |   |
| Finished goods             |       |                        | 8,040      |                      |       |   | 7,510 |   |   |
|                       |       |                        | $          | 38,783                    |       |   |   | $ | 34,083 |   |   |

 

**Property andEquipment**

Property and equipment are stated on the basis ofcost. Depreciation is calculated on the straight-line method over the estimateduseful lives of the respective assets or lease terms. Repair and maintenancecosts are charged to expense as incurred.

Propertyand equipment, including depreciable lives, consists of the following:

| ** **                                   | ** ** | **December 31,  2005** | ** ** | **January 1,  2005** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| Land                                         |       |                        | $          | 1,283                     |       |   | $ | 1,337 |   |
| Buildings and  improvements (20 to 40 years) |       |                        | 24,128     |                      |       | 22,117 |   |
| Machinery and  equipment (5 to 15 years)     |       |                        | 101,437    |                      |       | 74,064 |   |
| Office equipment  (3 to 5 years)             |       |                        | 5,421      |                      |       | 5,307 |   |
| Construction-in-progress                     |       |                        | 5,695      |                      |       | 4,170 |   |
|                                         |       |                        | 137,964    |                      |       | 106,995 |   |
| Less accumulated  depreciation               |       |                        | (44,858    | )                         |       | (35,141 | ) |
|                                         |       |                        | $          | 93,106                    |       |   | $ | 71,854 |   |

 

51

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**Notes to Consolidated Financial Statements—(Continued) (in thousands, except share and per share data)**

**2.**   Summary of Significant Accounting Policies (Continued)

**Goodwill**

Thechanges in the carrying amounts of goodwill for the years ended December 31,2005, January 1, 2005 and January 3, 2004 are as follows:

| Balance as of  January 3, 2004   |   | $       | 125,413 |   |
|---------------------------------------|--------|---------|---------|--------|
| Effects of foreign currency           |   | 1,956   |    |
| Balance as of  January 1, 2005   |   | 127,369 |    |
| Effects of foreign currency           |   | (2,851  | )       |
| Balance as of  December 31, 2005 |   | $       | 124,518 |   |

 

In accordance withStatement of Financial Accounting Standards (SFAS) No. 142, Goodwill andOther Intangible Assets, goodwill is no longer amortized but is subject to anannual impairment test in accordance with this statement. Goodwill is definedby the Corporation as the excess of purchase cost over the fair value of thenet tangible and identifiable intangible assets acquired. Statement No. 142requires the Corporation to test goodwill for impairment using a two-stepprocess. The first step is a screen for potential impairment, while the secondstep measures the amount of impairment. Potential impairment is determined bycomparing estimated fair value to the net book value of the reporting unit.Fair value is calculated as the present value of estimated future cash flowsusing a risk-adjusted discount rate commensurate with the Corporation’sweighted-average cost of capital. The Corporation has multiple operatingsegments as defined by SFAS 131. The Corporation has defined its reportingunits at the operating segment level as this is the lowest level for whichdiscrete financial information is available and the operating results of thatcomponent are regularly reviewed by management. The Corporation completed itsannual impairment tests and concluded that no impairment of goodwill existedfor fiscal 2005, 2004 or 2003.

**Other IntangibleAssets**

Intangible assets subject to amortization consist oftechnology and customer related intangible assets acquired in connection withthe Mettis Acquisition. These assets ($12,656 at December 31, 2005 and$13,482 at January 1, 2005) are being amortized using the straight-linemethod over 9 to 25 years. The accumulated amortization related to these assetsis $1,525 at December 31, 2005 and $947 at January 1, 2005.Amortization expense for the next 5 fiscal years approximates $607 per year.The Corporation is required to reassess the expected useful lives of existingintangible assets. The Corporation also evaluates the recoverability ofintangible assets subject to amortization based on undiscounted operating cashflows when factors indicate impairment may exist. In the event of impairment,the Corporation makes appropriate write-downs of recorded costs to fair value.

In accordance with Statement of Financial AccountingStandards (SFAS) No. 142, Goodwill and Other Intangible Assets, intangibleassets with an indefinite life are no longer amortized but are subject toreview each reporting period to determine whether events and circumstancescontinue to support an indefinite useful life as well as an annual impairmenttest in accordance with this statement. The Corporation has $3,671 ofindefinite lived intangible assets at December 31, 2005 and $3,845 at January 1, 2005.

52

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**Notes to Consolidated Financial Statements—(Continued) (in thousands, except share and per share data)**

**2.**   Summary of Significant Accounting Policies (Continued)

The Corporation reviewedits intangible assets in accordance with SFAS No. 142 and has not recordedany impairment related to these assets for fiscal 2005, 2004 or 2003.

**Foreign CurrencyAccounting**

The financial statementsof the Corporation’s foreign subsidiaries are accounting for and have beentranslated into U.S. dollars in accordance with Financial Accounting StandardsBoard (FASB) Statement No. 52, Foreign Currency Translation. Foreigncurrency transaction gains and losses resulting from a subsidiary’s foreigncurrency denominated assets and liabilities included in other income were a$1,265 loss, $761 gain, and $384 gain in 2005, 2004 and 2003, respectively.Assets and liabilities have been translated using the exchange rate in effectat the balance sheet date. Revenues and expenses have been translated using aweighted-average exchange rate for the period. Currency translation adjustmentshave been recorded as a separate component of shareholders’ equity.

**Revenue Recognition**

The Corporation recognizesrevenue on orders received from its customers when there is persuasive evidenceof an arrangement with the customer that is supportive of revenue recognition,the customer has made a fixed commitment to purchase the product for a fixed ordeterminable price, collection is reasonably assured under the Corporation’snormal billing and credit terms and ownership and all risks of loss have beentransferred to the buyer, which is normally upon shipment.

**Shipping andHandling Costs**

In accordance with EITF 00-10:Accounting for Shipping and Handling Fees and Costs, the Corporation reflectsfreight costs associated with shipping its products to customers as a componentof cost of revenues.

**Advertising Costs**

Advertising costs areexpensed as incurred. Advertising costs were $237, $265 and $208 for the yearsending December 31, 2005, January 1, 2005 amd  January 3, 2004, respectively.

**Allowance forDoubtful Accounts**

The Corporation performs periodic credit evaluationsof customers’ financial condition and generally does not require collateral.Receivables are generally due within 30 to 60 days. The Corporation maintainsan allowance for doubtful accounts for estimated losses in the collection ofaccounts receivable. The Corporation makes estimates regarding the future abilityof its customers to make required payments based on historical creditexperience and expected future trends.

53

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**Notes to Consolidated Financial Statements—(Continued) (in thousands, except share and per share data)**

**2.**   Summary of Significant Accounting Policies (Continued)

The activity in theallowance for doubtful accounts was as follows:

| ** **          | ** ** | **December 31,  2005** | ** ** | **January 1,  2005** | ** ** | **January 3,  2004** | ** ** |
|---------------------|------------|-----------------------------|------------|---------------------------|------------|---------------------------|------------|
| Beginning balance   |       |                        | $          | 535                       |       |                      |       | $ | 238 |   |   |   | $ | 58 |   |   |
| Provision           |       |                        | 123        |                      |       |                      | 426        |   |   |   | 3 |   |   |
| Acquired  allowance |       |                        | —     |                      |       |                      | —     |   |   |   | 179 |   |   |
| Write-offs, net     |       |                        | (470       | )                         |       |                      | (129       | ) |   |   | (2 | ) |   |
| Ending balance      |       |                        | $          | 188                       |       |                      |       | $ | 535 |   |   |   | $ | 238 |   |   |

 

**New AccountingPronouncements**

In May 2005, the FASB issued Statement No. 154,Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20,Accounting Changes, and SFAS 3, Reporting Accounting Changes In InterimFinancial Statements. SFAS 154 changes the requirements related to accountingfor and reporting of a change in accounting principle. This Statement appliesto all voluntary changes in accounting principle and changes required by a newaccounting pronouncement in the unusual instance that the pronouncement doesnot include specific transition provisions. SFAS 154 requires retrospectiveapplication to prior periods’ financial statements of changes in accountingprinciple versus the previous guidance which allowed the recording of theimpact of an accounting change in the current period’s net income as acumulative effect adjustment. The Statement is effective for the Corporationbeginning January 1, 2006.

On December 16, 2004, the FASB issued Statement No. 123(revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123,Accounting for Stock Based Compensation. Statement 123(R) supersedes APBOpinion No. 25, Accounting for Stock Issued to Employees, and amends FASBStatement No. 95, Statement of Cash Flows. Generally, the approach inStatement 123(R) is similar to the approach described in Statement 123.However, Statement 123 (R) requires all share-based payments to employees,including grants of employee stock options, to be recognized in the incomestatement based on their fair values. Pro forma disclosure is no longer analternative.

Statement 123(R) must be adopted by theCorporation no later than January 1, 2006. We expect to adopt Statement123(R) on January 1, 2006 using the “modified prospective” method inwhich compensation cost is recognized beginning with the effective date basedon the requirements of Statement 123(R) for all share-based paymentsgranted after the effective date and based on the requirements of Statement 123for all awards granted to employees prior to the effective date of Statement123(R) that remain unvested on the effective date.

As permitted by Statement 123, the Corporationcurrently accounts for share-based payments to employees using Opinion 25’sintrinsic value method and, as such, generally recognizes no compensation costfor employee stock options. Accordingly, the adoption of Statement 123(R)’sfair value method will have an impact on the Corporation’s results ofoperations, although it will have no impact on our overall financial position.The impact of adoption of Statement 123(R) cannot be predicted at thistime because it will depend on levels of share-based payments granted in thefuture. However, had the Corporation adopted Statement 123(R) in priorperiods, the impact of that standard would have approximated the impact ofStatement 123 as described in the disclosure of pro forma net income and earningsper share in Note 2 to its consolidated financial statements. Statement 123(R) alsorequires the benefits of tax 

54

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**Notes to Consolidated Financial Statements—(Continued) (in thousands, except share and per share data)**

**2.**   Summary of Significant Accounting Policies (Continued)

deductions in excess ofrecognized compensation cost to be reported as a financing cash flow, ratherthan as an operating cash flow as required under current literature. Thisrequirement will reduce net operating cash flows and increase net financingcash flows in periods after adoption.

In November 2004, the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting (SFAS) No. 151*, Inventory Costs—an amendment of Accounting ResearchBulletin (ARB) No. 43, Chapter 4.* The Statement clarifies thatabnormal amounts of idle facility expense, freight, handling costs and wastedmaterials should be recognized as current-period expenses regardless of howabnormal the circumstances. In addition, this Statement requires that theallocation of fixed overheads to the costs of conversion be based upon normalproduction capacity levels. The Statement is effective for inventory costsincurred during fiscal years beginning after June 15, 2005. We do notanticipate that this Statement will have a material effect on our financialposition, results of operations and cash flows.

In January 2003, the FASB issued Interpretation No. 46(FIN 46), Consolidation of Variable Interest Entities and was effective for theCorporation beginning in the year ending January 1, 2005. FIN 46 defines avariable interest entity (VIE) as a corporation, partnership, trust or anyother legal structure that does not have equity investors with a controllingfinancial interest or has equity investors that do not provide sufficientfinancial resources for the entity to support its activities. FIN 46 did nothave a material impact on the Corporation’s financial position or results ofoperations.

In April 2003, the FASB issued SFAS No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities andwas effective for the Corporation in fiscal year 2003. This statement amendsand clarifies financial accounting and reporting for derivative instruments andhedging activities under SFAS No. 133, Accounting for DerivativeInstruments and Hedging Activities, by requiring contracts with similarcharacteristics to be accounted for comparably. The adoption of SFASNo. 149 did not have a material effect on the Corporation’s financialposition or results of operations.

In May 2003, the FASB issued SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity. This statement changes the accounting for certainfinancial instruments that, under previous guidance, could be accounted for asequity. SFAS No. 150 may require that those instruments be classified asliabilities. SFAS No. 150 was effective for financial instruments enteredinto or modified after May 31, 2003, and otherwise was effective afterJune 15, 2003. The adoption of SFAS No. 150 did not have an impact onthe Corporation’s financial position or results of operation.

In April 2002, theFASB issued SFAS No. 145,*Rescission ofFASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13,and Technical Corrections*. This statement eliminates the automaticclassification of gain or loss on extinguishment of debt as an extraordinaryitem of income and requires that such gain or loss be evaluated forextraordinary classification under the criteria of Accounting Principles BoardNo. 30,*Reporting Results of Operations*.This statement also requires sales-leaseback accounting for certaintransactions, and makes various other technical corrections to existingpronouncements. The statement is effective for financial statements issued onor after May 15, 2002. The adoption of this statement on January 1,2003 resulted in classifying the loss from early extinguishment of debt in connectionwith the acquisition of Mettis (UK) Limited as a separate component of netincome before provision for income taxes.

55

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**Notes to Consolidated Financial Statements—(Continued) (in thousands, except share and per share data)**

**2.**   Summaryof Significant Accounting Policies (Continued)

**DerivativeFinancial Instruments**

SFAS No. 133, as amended, requires recognition ofevery derivative instrument in the balance sheet as either an asset orliability measured at its fair value. Changes in the fair value of derivativesare to be recorded each period in earnings or comprehensive income, dependingon whether the derivative is designated and effective as part of a hedgeaccounting transaction. The Corporation’s derivatives discussed below do notqualify for hedge accounting and accordingly, adjustments to fair value arerecorded in earnings.

The Corporation enters into interest rate swapagreements (SWAP) to offset against changes in interest rates on theCorporation’s variable rate long-term debt. The SWAP agreements are contractsto exchange variable rate obligations for fixed interest payments to be madeperiodically over the life of the SWAP agreement. Effective October 2000,the Corporation entered into a SWAP agreement to economically hedge $19,000 ofoutstanding long-term debt at a fixed rate payment obligation of 6.25% perannum for the five-year period commencing October 24, 2000; however, thisSWAP was terminated in December 2004.

Effective July 2003, the Corporation entered intoa SWAP agreement to economically hedge an additional $71,000 of outstandinglong-term debt at a fixed payment obligation of 2.285% per annum for the periodcommencing on July 21, 2003 and ending on June 30, 2006. In December 2004,this SWAP was reduced to $35,000.

Effective December 2004, the Corporation enteredinto a SWAP agreement to economically hedge $15,000 of outstanding long-termdebt at a fixed payment obligation of 3.98% per annum for the period commencingon June 30, 2006 and ending on December 31, 2007.

As of December 31,2005 and January 1, 2005, the Corporation had a derivative asset of $584and $486, respectively, which are reflected in non-current assets in theconsolidated balance sheets. The entire change in the fair market value of theSWAP in 2005 and 2004 of $98 and $1,451, respectively, was included inearnings.

**Stock-BasedCompensation**

The Corporation has elected to follow APB No. 25,Accounting for Stock Issued to Employees, in accounting for its stock optionsand; accordingly, no compensation cost has been recognized for stock options inthe consolidated financial statements. However, SFAS 123, Accounting forStock-Based Compensation, as amended by SFAS No. 148, Accounting forStock-Based Compensation—Transition and Disclosure, requires pro-formapresentation as if compensation costs had been expensed under the fair valuemethod of SFAS No. 123. For purposes of pro forma disclosure, theestimated fair value of the options at the date of grant is amortized toexpense over the vesting period.

56

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**Notes to Consolidated Financial Statements—(Continued) (in thousands, except share and per share data)**

**2.**   Summary of Significant Accounting Policies (Continued)

The following tableillustrates the effect on net income as if compensation expense had beenrecognized for the years ended:

| ** **                                                 | ** ** | **Fiscal Year Ended** | ** ** |
|------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                 | ** ** | **December 31,**           | ** ** | **January 1,** | ** ** | **January 3,** | ** ** |
| ** **                                                 | ** ** | **2005**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| Reported net  income applicable to common shareholders     |       |                            | $          | 31,800 |   |   |   | $ | 2,718 |   |   |   | $ | (1,123 | ) |   |
| Pro forma  stock-based compensation expense (net of tax)   |       |                            | (219       | ) |   |   | (235 | ) |   |   | (122 | ) |   |
| Stock-based  employee compensation recorded (net of tax)   |       |                            | 90         |   |   |   | — |   |   |   | — |   |   |
| Adjusted net  income                                       |       |                            | $          | 31,671 |   |   |   | $ | 2,483 |   |   |   | $ | (1,245 | ) |   |
| Basic net income  per share applicable to common:          |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Reported net  income (loss) per share                      |       |                            | $          | 0.94 |   |   |   | $ | 0.16 |   |   |   | $ | (0.10 | ) |   |
| Stock-based  compensation expense (net of tax) per share   |       |                            | —     |   |   |   | (0.01 | ) |   |   | (0.01 | ) |   |
| Adjusted net  income (loss) per share                      |       |                            | $          | 0.94 |   |   |   | $ | 0.15 |   |   |   | $ | (0.11 | ) |   |
| Diluted net  income (loss) per share applicable to common: |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Reported net  income (loss) per share                      |       |                            | $          | 0.92 |   |   |   | $ | 0.15 |   |   |   | $ | (0.10 | ) |   |
| Stock-based  compensation expense (net of tax) per share   |       |                            | (0.01      | ) |   |   | (0.01 | ) |   |   | (0.01 | ) |   |
| Adjusted net income  (loss) per share                      |       |                            | $          | 0.91 |   |   |   | $ | 0.14 |   |   |   | $ | (0.11 | ) |   |

 

**3.**   MettisAcquisition

On June 11, 2003, the Corporation acquired 100%of the ownership interests of Mettis UK Limited which included Jet, Ultrexx andTPC in exchange for aggregate consideration of $163,942 consisting ofapproximately $146,000 of cash, $15,000 of stock and acquisition costs, net ofliabilities assumed. The acquisition provided the Corporation with a newproduct line, orthopedic implants which are forged at Jet and TPC as well asadditional production capacity for instruments. The purchase price of theMettis acquisition exceeded the fair value of identifiable tangible andintangible assets which reflects the synergistic and strategic fit of thisacquisition into the Corporation’s business. Results of the Mettis acquisitionare included in the statement of operations from the acquisition date.

Theaggregate purchase price of $163,942 was allocated to the opening balance sheetas follows:

| Current assets                                       |   | $       | 33,970  |   |
|------------------------------------------------------|--------|---------|---------|--------|
| PP&E                                             |   | 30,789  |    |
| Acquired  technology (amortized over 9 years)        |   | 445     |    |
| Acquired  customers (amortized over 25 years)        |   | 13,672  |    |
| Acquired  manufacturing processes (indefinite-lived) |   | 3,626   |    |
| Goodwill                                             |   | 100,009 |    |
| Current  liabilities                                 |   | (11,025 |    |
| Non-current  liabilities                             |   | (7,544  | )       |
| Purchase price, net                                  |   | $       | 163,942 |   |

 

57

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**Notes to Consolidated Financial Statements—(Continued) (in thousands, except share and per share data)**

**3.**   Mettis Acquisition (Continued)

The following unauditedpro forma consolidated revenues, net income and earnings per share amounts havebeen prepared by applying pro forma adjustments to our historical amounts. Theunaudited pro forma information for the periods presented gives effect to theacquisition of Mettis (UK) Limited as if it had been consummated at thebeginning of the periods presented. We completed the Mettis (UK) Limitedacquisition on June 11, 2003.

| ** **                               | ** ** | **January 3,  2004** | ** ** |
|------------------------------------------|------------|---------------------------|------------|
| Revenue                                  |       | $                         | 158,355    |   |
| Net Income                               |       | 5,871                     |       |
| Income available  to common shareholders |       | (1,157                    | )          |
| Earnings per  share—basic           |       | (0.10                     | )          |
| Earnings per  share—diluted         |       | (0.10                     | )          |
|                                          |            |                           |            |  |

 

**4.**   DebtArrangements

Long-termdebt consists of the following:

| ** **                                                                                                                                          | ** ** | **December 31,** | ** ** | **January 1,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                                                                                                          | ** ** | **2005**              | ** ** | **2005**            | ** ** |
| Bank term loan  payable in quarterly installments, plus interest at a variable rate (5.625%  at December 31, 2005), through December 2009 |       |                  | $          | 27,563              |       |   |   | $ | 32,375 |   |   |
| Revolving line of  credit, due December 2009                                                                                                   |       |                  | —     |                |       |   | — |   |   |
| Installment loan                                                                                                                                    |       |                  | —     |                |       |   | 4 |   |   |
|                                                                                                                                                |       |                  | 27,563     |                |       |   | 32,379 |   |   |
| Less current  portion                                                                                                                               |       |                  | (1,313     | )                   |       |   | (879 | ) |   |
|                                                                                                                                                |       |                  | $          | 26,250              |       |   |   | $ | 31,500 |   |   |

 

During 2003, theCorporation refinanced substantially all of its debt arrangements as part offinancing the Mettis Acquisition resulting in a loss on debt extinguishment of$1,436. During 2004, the Corporation refinanced substantially all of its debtarrangements as part of the initial public offering resulting in a loss on debtextinguishment of $8,956.

The Corporation’s revolving credit facility has atotal capacity of up to $40 million and the Corporation pays a 0.375% annualcommitment fee for the average unused portion of the revolving line of creditfacility. There are no borrowings under this line of credit at December 31,2005.

The bank term loan and revolving line of credit(senior credit agreement) contain various financial covenants, includingcovenants requiring a maximum total debt to EBITDA ratio, minimum EBITDA tointerest ratio and a minimum EBITDA to fixed charges ratio. The senior creditagreement also contains covenants restricting certain corporate actions,including asset dispositions, acquisitions, paying dividends and certain otherrestricted payments, changes of control, incurring indebtedness, incurringliens, making loans and investments and transactions with affiliates. Thesenior credit facility is secured by substantially all of the Corporation’sassets. The Corporation’s senior credit agreement also contains customaryevents of default. The Corporation was in compliance with our financial andrestrictive covenants under the senior credit facility at the end of fiscal2005 and fiscal 2004.

58

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**Notes to Consolidated Financial Statements—(Continued) (in thousands, except share and per share data)**

**4.**   Debt Arrangements (Continued)

On June 11, 2003, theCorporation issued $36,000 of 12% senior unsecured subordinated notes due 2011.These notes were issued with detachable warrants exercisable for an aggregateof 585,377 shares of common stock, par value $0.01 per share and 3,530 sharesof Class A Preferred Stock par value $0.01 per share exercisable at anytime prior to June 2013 at an exercise price of $0.01 per share. Inaccordance with Accounting Principles Board Opinion 14 (APB 14), Accounting forConvertible Debt and Debt Issued with Stock Purchase Warrants, the Corporationrecorded a discount equal to the fair value of the warrants of $5,311. Theremaining balance of the discount was recorded to loss on debt extinguishmentduring the fourth quarter of 2004 in connection with the Corporation’sextinguishment of the subordinated notes. As of December 31, 2005, 123 ofCommon Stock warrants remain outstanding.

As of December 31,2005, the Corporation had prepaid the next three scheduled quarterly term loanpayments. Maturities of long-term debt for the five years succeeding January 1,2005 are as follows:

| 2006   |   | $      | 1,313  |   |
|--------|--------|--------|--------|--------|
| 2007   |   | 7,000  |   |
| 2008   |   | 8,750  |   |
| 2009   |   | 10,500 |   |
|   |   | $      | 27,563 |   |

 

**5.**   PreferredStock

The Class A Convertible Preferred Stock had aliquidation value of $1,000 per share, was nonvoting, and accrued cumulativedividends at 8% per annum on the sum of the liquidation value plus allaccumulated and unpaid dividends. Holders of the Class A ConvertiblePreferred Stock had liquidation preference rights, including the right in theevent of an initial public offering of the Corporation’s common stock toconvert Class A convertible preferred stock into common stock, at aconversion price equal to 85% of the per share price paid by the public for thecommon stock in the initial public offering. In June 2003, the Corporationsold 59,486 shares of Class A convertible preferred stock for $1,000 pershare. Of these shares, 44,499 were sold to related parties including OlympusPartners and employees of the Corporation. In December 2004 uponcompletion of the IPO, the Corporation repurchased $23,332 of its Class AConvertible Preferred Stock and warrants to purchase Class A ConvertiblePreferred Stock. In addition, the remaining outstanding shares of Class AConvertible Preferred Stock and warrants to purchase Class A ConvertiblePreferred Stock converted into 8,015,150 shares of the Corporation’s CommonStock and warrants to purchase 255,334 shares of the Corporation’s Common Stockat an exercise price of $0.01 per share which are exercisable at any time priorto June 2013. After the December 2004 IPO, no Preferred Stock remainsoutstanding.

In connection with a debtamendment, on February 22, 2002 the Corporation issued 3,000 shares of Class BRedeemable Convertible Preferred Stock (Class B Preferred Stock) for$1,000 per share. The Class B Preferred Stock was senior to all otheroutstanding equity securities issued by the Corporation and did not have votingrights. The Class B shareholders were entitled to a dividend of 18% perannum which is cumulative. All shares of the Class B Preferred Stock wereconverted into 2,652 shares of the Corporation’s Class A Preferred Stockand 383,773 shares of Common Stock during 2003.

59

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**Notes to Consolidated Financial Statements—(Continued) (in thousands, except share and per share data)**

**6.**   Leases

TheCorporation has a capital lease arrangement through October 1, 2016 forits New Hampshire plant facility. On October 1, 2001, and every five yearsthereafter, including extensions, the annual base rent will change based on theConsumer Price Index. The Corporation has an option to extend the lease for anadditional five-year period and has a right of first opportunity to purchasethe leased property. Any leasehold improvements are depreciated over theshorter of the useful asset life or the minimum lease period. Additionally, theCorporation has entered into capital leases for various machinery andequipment.

Propertyand equipment and related accumulated amortization for building and equipmentcapital leases are as follows:

| ** **                     | ** ** | **December 31,** | ** ** | **January 1,** | ** ** |
|--------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                     | ** ** | **2005**              | ** ** | **2005**            | ** ** |
| Buildings and  improvements    |       |                  | $          | 4,991               |       |   |   | $ | 4,991 |   |   |
| Machinery and equipment        |       |                  | 13,896     |                |       |   | 17,285 |   |   |
|                           |       |                  | 18,887     |                |       |   | 22,276 |   |   |
| Less accumulated  amortization |       |                  | (7,052     | )                   |       |   | (5,815 | ) |   |
|                           |       |                  | $          | 11,835              |       |   |   | $ | 16,461 |   |   |

 

Amortization of leasedassets is included in depreciation expense.

Futureminimum payments for capital leases with initial terms of one year or more areas follows at December 31, 2005:

| 2006                                                                                     |   | $      | 4,021  |   |
|------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| 2007                                                                                     |   | 3,692  |   |
| 2008                                                                                     |   | 2,511  |   |
| 2009                                                                                     |   | 1,195  |   |
| 2010                                                                                     |   | 682    |   |
| Thereafter                                                                               |   | 3,921  |   |
| Total minimum payments                                                                   |   | 16,022 |   |
| Amounts representing  interest                                                           |   | (4,251 | )      |
| Present value of net minimum lease payments  (including total current portion of $3,239) |   | $      | 11,771 |   |

 

**7.**   IncomeTaxes

Incomebefore income taxes consisted of:

| ** ** | ** ** | **Fiscal Year Ended** | ** ** |
|------------|------------|---------------------------------|------------|
| ** ** | ** ** | **December 31,**           | ** ** | **January 1,** | ** ** | **January 3,** | ** ** |
| ** ** | ** ** | **2005**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| Domestic   |       |                            | $          | 34,338 |   |   |   | $ | 9,455 |   |   |   | $ | 6,602 |   |   |
| Foreign    |       |                            | 11,903     |   |   |   | 7,764 |   |   |   | 2,312 |   |   |
|       |       |                            | $          | 46,241 |   |   |   | $ | 17,219 |   |   |   | $ | 8,914 |   |   |

 

60

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**Notes to Consolidated Financial Statements—Continued (in thousands, except share and per share data)**

**7.**   IncomeTaxes (Continued)

Significantcomponents of the Corporation’s net deferred tax liabilities are as follows:

| ** **                                                           | ** ** | **December 31,  2005** | ** ** | **January 1,  2005** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| Compensation                                                         |       |                        | $          | 741                       |       |   |   | $ | 660 |   |   |
| Intangibles                                                          |       |                        | (5,082     | )                         |       |   | (4,855 | ) |   |
| Inventory                                                            |       |                        | 1,151      |                      |       |   | 911 |   |   |
| PP&E                                                             |       |                        | (6,330     | )                         |       |   | (4,772 | ) |   |
| Net operating  loss carryforwards of states and foreign subsidiaries |       |                        | 112        |                      |       |   | 425 |   |   |
| SWAP agreements                                                      |       |                        | (232       | )                         |       |   | (193 | ) |   |
| Other                                                                |       |                        | 430        |                      |       |   | 584 |   |   |
|                                                                 |       |                        | (9,210     | )                         |       |   | (7,240 | ) |   |
| Valuation  allowance                                                 |       |                        | (62        | )                         |       |   | (271 | ) |   |
|                                                                 |       |                        | $(9,272    | )                         |       |   | $ | (7,511 | ) |   |

 

Significantcomponents of the income tax provision are as follows:

| ** ** | ** ** | **Fiscal Year Ended** | ** ** |
|------------|------------|---------------------------------|------------|
| ** ** | ** ** | **December 31,  2005**     | ** ** | **January 1,  2005** | ** ** | **January 3,  2004** | ** ** |
| Current:   |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Federal    |       |                            | $          | 8,786 |   |   |   | $ | 922 |   |   |   | $ | 205 |   |   |
| State      |       |                            | 565        |   |   |   | 202 |   |   |   | 60 |   |   |
| Foreign    |       |                            | 3,312      |   |   |   | 1,649 |   |   |   | 931 |   |   |
|       |       |                            | 12,663     |   |   |   | 2,773 |   |   |   | 1,196 |   |   |
| Deferred   |       |                            | 1,778      |   |   |   | 2,751 |   |   |   | 1,813 |   |   |
|       |       |                            | $          | 14,441 |   |   |   | $ | 5,524 |   |   |   | $ | 3,009 |   |   |

 

Theprovision for income taxes differs from that computed at the Federal statutoryrate of 35% as follows:

| ** **                                          | ** ** | **Fiscal Year Ended** | ** ** |
|-----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | **December 31,  2005**     | ** ** | **January 1,  2005** | ** ** | **January 3,  2004** | ** ** |
| Tax at Federal  statutory rate                      |       |                            | $          | 16,184 |   |   |   | $ | 5,854 |   |   |   | $ | 3,031 |   |   |
| State income  taxes                                 |       |                            | 997        |   |   |   | 244 |   |   |   | 257 |   |   |
| Foreign income  taxes                               |       |                            | (138       | ) |   |   | (260 | ) |   |   | 43 |   |   |
| Qualified  production activities deduction          |       |                            | (334       | ) |   |   | — |   |   |   | — |   |   |
| Research and  development credits—current year |       |                            | (633       | ) |   |   | — |   |   |   | — |   |   |
| Research and  development credits—prior years  |       |                            | (1,341     | ) |   |   | — |   |   |   | — |   |   |
| Valuation  allowance                                |       |                            | (224       | ) |   |   | (349 | ) |   |   | (96 | ) |   |
| Other                                               |       |                            | (70        | ) |   |   | 35 |   |   |   | (226 | ) |   |
|                                                |       |                            | $          | 14,441 |   |   |   | $ | 5,524 |   |   |   | $ | 3,009 |   |   |

 

At December 31, 2005,the Corporation had state and foreign net operating loss carryforwards ofapproximately $889 and $189. The state carryforwards have an expiration periodof up to twenty years, while the foreign carryforwards have no expiration date.However, due to the uncertainty of the realization 

61

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**Notes to Consolidated Financial Statements—Continued (in thousands, except share and per share data)**

**7.**   Income Taxes (Continued)

of thefull benefit of the foreign net operating loss carryforwards, the Corporationhas established a valuation allowance of $62. No provision has been made forUnited States federal and state or foreign taxes that may result from futureremittances of undistributed earnings of foreign subsidiaries because it isexpected that such earnings will be reinvested in these foreign operationsindefinitely.

**8.   Profit SharingPlan**

During 2005, theCorporation maintained two qualified profit sharing plans, which qualify under Section 401(k)of the Internal Revenue Code. Contributions by the Corporation are based uponboth discretionary and matching nondiscretionary amounts. The matching amountsrepresent a 50% match of employees’ contributions, up to a maximum of $1 perparticipant per year. Expense recorded for the plans was $1,012, $857 and $686for 2005, 2004 and 2003, respectively. Effective January 1, 2006 theseplans were combined.

**9.**   Stock-BasedCompensation Plans

***Restrictive StockPlan***   In January 2001 certain members ofmanagement were awarded a total of 677,758 shares of common stock whichvest on December 31, 2007 or earlier in increments of 25% per year, if theCorporation’s EBITDA, as defined, meets specified levels as outlined in theagreement. However, 263,572 shares have been forfeited. Compensationexpense is charged to the income statement as earned over the vesting period.The unearned compensation resulting from this agreement is reflected as areduction to shareholder equity. For the years ended January 1, 2005 andJanuary 3, 2004, the Corporation recognized approximately, $57 and $24 ofexpense, respectively. The initial public offering in December 2004 resultedin all shares becoming vested, and these shares are no longer restricted as ofJanuary 1, 2005.

***2002 Stock OptionPlan***   The 2002 Stock Option Plan provides forthe grant of nonqualified stock options to the Corporation’s directors,officers and employees and other persons who provide services to us. A total of52,135 shares of common stock are reserved for issuance under this plan.Options for 52,135 shares of common stock have been granted. These optionsvest ratably over a four year period as of the end of each of our fiscal yearsduring that period, subject to the Corporation achieving certain minimum EBITDAtargets in each fiscal year, and, if those targets are not met, on the seventhanniversary of the grant date so long as the option holder is still an employee.Options granted under the 2002 Stock Option Plan are generally not transferableby the optionee, and such options must be exercised within 30 days after theend of an optionee’s status as an employee, director or consultant of ours(other than a termination by us for cause, as defined in the 2002 Stock OptionPlan), within 180 days after such optionee’s termination by death ordisability, or within 90 days after such optionee’s retirement, but in no eventlater than the expiration of the option term. All options were granted at thefair market value of the Corporation’s common stock, as determined by its boardof directors, on the date of grant. The term of all options granted under the2002 Stock Option Plan may not exceed ten years.

62

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**Notes to Consolidated Financial Statements—Continued (in thousands, except share and per share data)**

**9.**   Stock-BasedCompensation Plans (Continued)

***2003 Stock OptionPlan***   The 2003 Stock Option Plan provides forthe grant of nonqualified stock options to the Corporation’s directors,officers and employees and other persons who provide services to it. A total of907,167 shares of common stock are reserved for issuance under this plan.Options for 813,034 shares of common stock have been granted. Theseoptions vest ratably over a four year period as of the end of each of ourfiscal years during that period. Options granted under the 2003 Stock OptionPlan are generally not transferable by the optionee, and such options must beexercised within 30 days after the end of an optionee’s status as anemployee, director or consultant of the Corporation (other than a terminationby us for cause, as defined in the 2003 Stock Option Plan), within 180 daysafter such optionee’s termination by death or disability, or within 90 daysafter such optionee’s retirement, but in no event later than the expiration ofthe option term.

All options were granted at the fair market value ofthe Corporation’s common stock, as determined by its board of directors, on thedate of grant. The term of all options granted under the 2003 Stock Option Planmay not exceed ten years.

Asummary of stock option activity and weighted-average exercise prices for theperiods indicated are as follows:

| ** **                             | ** ** | **Number of Options** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
|----------------------------------------|------------|---------------------------------|------------|-------------------------------------------|------------|
| Outstanding at  December 28, 2002 |       |                            | 52,135     |                                      |       |   | $ | 0.28 |   |   |
| Granted                                |       |                            | 740,624    |                                      |       |   | 3.04 |   |   |
| Exercised                              |       |                            | —     |                                      |       |   | — |   |   |
| Cancelled                              |       |                            | —     |                                      |       |   | — |   |   |
| Outstanding at  January 3, 2004   |       |                            | 792,759    |                                      |       |   | $ | 2.86 |   |   |
| Granted                                |       |                            | 72,410     |                                      |       |   | 4.83 |   |   |
| Exercised                              |       |                            | —     |                                      |       |   | — |   |   |
| Cancelled                              |       |                            | (34,214    | )                                         |       |   | 3.04 |   |   |
| Outstanding at  January 1, 2005   |       |                            | 830,955    |                                      |       |   | $ | 3.02 |   |   |
| Exercised                              |       |                            | 201,111    |                                      |       |   | 2.72 |   |   |
| Outstanding at  December 31, 2005 |       |                            | 629,844    |                                      |       |   | $ | 3.12 |   |   |

 

Thefollowing table summarizes information about stock options outstanding at December 31,2005:

| ** **        | **Range of Exercise** | ** ** | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining  Life** | ** **     | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable at  December 31,  2005** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|-------------------|---------------------------------|------------|------------|-------------------------|------------|----------------------------------------|----------------|----------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------|------------|
| $0.28             |                            |       | 16,894     |                    |       |                                   | 5.9 years |                                   |       |                                                     | $          | 0.28                                   |       |   |   | 16,894 |   |   |   | $ | 0.28 |   |   |
| 3.04 -  4.83 |                            |       | 612,950    |                    |       |                                   | 7.5 years      |                                   |       |                                                     | 3.20       |                                   |       |   | 399,002 |   |   |   | 3.12 |   |   |

 

63

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**Notes to Consolidated Financial Statements—Continued (in thousands, except share and per share data)**

**9.**   Stock-Based Compensation Plans (Continued)

Using the minimum valueoption valuation model, the estimated fair values of options granted during2004 and 2003 were $1.62 and $1.13 per option, respectively. There were nooptions granted subsequent to completion of the IPO. Principal assumptions usedin applying the minimum value model were as follows:

| ** **                             | ** ** | **2005** | ** ** | **2004**      | ** ** | **2003**      | ** ** |
|----------------------------------------|------------|----------|------------|---------------|------------|---------------|------------|
| ***Minimum  Value Model Assumptions*** |       |     |       |          |       |          |       |
| Risk-free  interest rate               |       | —   |       | 4.08%         |       | 4.65%         |       |
| Expected dividend  yield               |       | —   |       | 0.00%         |       | 0.00%         |       |
| Expected term                          |       | —   |       | 10 years |       | 10 years |       |

 

***2004Equity Incentive Plan***.   The 2004 IncentivePlan is designed to enable us to attract, retain and motivate our directors,officers, employees and consultants, and to further align their interests withthose of the corporation’s stockholders, by providing for or increasing theirownership interests in our company. The 2004 Incentive Plan provides for theissuance of stock options, stock appreciation rights (“SARs”), restrictedstock, deferred stock, dividend equivalents, other stock-based awards andperformance awards. Performance awards will be based on the achievement of oneor more business or personal criteria or goals, as determined by thecompensation committee. The compensation committee shall not grant, in any onecalendar year, to any one participant awards to purchase or acquire a number ofshares of common stock in excess of 15% of the total number of sharesauthorized for issuance under the 2004 Incentive Plan.

An aggregate of 1,673,333 sharesof our common stock are reserved for issuance under the 2004 Incentive Plan,subject to certain adjustments reflecting changes in the corporation’scapitalization. In fiscal 2005, 45,192 shares of restricted common stockwere granted to certain of the corporation’s officers and employees pursuant tothe 2004 Equity Incentive Plan. Restricted stock is a grant of shares of commonstock that may not be sold or disposed of, and that may be forfeited in theevent of certain terminations of employment, prior to the end of a restrictedperiod set by the compensation committee. A participant granted restrictedstock generally has all of the rights of a shareholder, unless the compensationcommittee determines otherwise.

**10.**   2004Employee Stock Purchase Plan

The 2004 Employee Stock Purchase Plan is designed toprovide an incentive for our employees to purchase our common stock and acquirea proprietary interest in us. Each person who was employed either by thecorporation or by one of its designated subsidiaries on December 8, 2004and was expected on a regularly-scheduled basis to work more than 30 hours perweek for more than ten months per calendar year, automatically was enrolled inthe plan. Persons who subsequently are employed by us or one of our designatedsubsidiaries are eligible once they have completed three months of service orare an employee as of an offering date of an exercise period, provided they areexpected on a regularly-scheduled basis to work more than 30 hours per week formore than ten months per calendar year.

Each participant is granted an option to purchaseshares of our common stock at the beginning of each 6-month “offering period”under the plan, on each “exercise date,” during the offering period. Exercisedates occur on the last date on which the NYSE is open for trading prior toeach June 30 and December 31. Participants purchase the shares of ourcommon stock through after-tax payroll deductions, not to exceed 10% of theparticipant’s total base salary on each payroll date. No participant maypurchase 

64

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**Notes to Consolidated Financial Statements—Continued (in thousands, except share and per share data)**

**10.**   2004 Employee Stock Purchase Plan(Continued)

more than 750 sharesof common stock on any one exercise date, or more than $25,000 of common stockin any one calendar year. The purchase price for each share is 95% of the fairmarket value of such share on the exercise date. If a participant’s employmentwith the corporation or one of its designated subsidiaries terminates, anyoutstanding option of that participant also will terminate.

Atotal of 600,000 shares of our common stock are reserved for issuance overthe term of the plan. On June 30, 2005, 50,468 shares of the corporation’scommon stock were purchased by the participants in the plan at a price of$12.75 per share. On December 31, 2005, 10,325 shares of thecorporation’s common stock were purchased by the participants in the plan at aprice of $18.42 per share.

**11.**   RelatedParty Transactions

During the years ended December 31,2005 and January 1, 2005, the Corporation purchased contract manufacturingservices totaling $1,057 and $1,034, respectively, from ADS Precision Limited(ADS), a company controlled by a relative of the general manager of TPC. TheCorporation maintains an ongoing relationship with this vendor and believes alltransactions have been executed on an arms length basis. The Corporation has apayable to ADS of $247 as of December 31, 2005 and $368 as of January 1,2005.

During2004, and 2003 the Corporation paid management fees to a related party of $375,and $375, respectively. These fees are included in selling, general andadministrative expenses. Additionally, the Corporation paid a transaction feeupon the completion of the Mettis acquisition and the sale of seniorsubordinated notes to this related party of $1,717 in 2003 and a transactionfee upon completion of the initial public offering of $2,000 in 2004.

**12.**   FairValue of Financial Instruments

Financial instrumentsconsist of cash and cash equivalents, accounts receivable, and long-term debt,including interest-rate swap agreements. The carrying value of these financialinstruments approximates fair value.

**13.**   SegmentReporting

The Corporation primarilydesigns, develops and manufactures implants and related surgical instrumentsand cases for orthopedic device companies and companies in other medical devicemarkets such as dental, osteobiologic and edoscopy. The Corporation also has aspecial services business serving primarily aerospace customers, which does notmeet the quantitative disclosure requirements of SFAS 131. The Corporationmanages its business and operates in a single reportable business segment. Becauseof the similar economic characteristics of the operations, including the natureof the products, comparable level of FDA regulations, same or similarcustomers, those operations have been aggregated following the provisions of SFAS 131for segment reporting purposes.

The Corporation is amulti-national corporation with operations in the United States, the UnitedKingdom and France. As a result, the Corporation’s financial results can beimpacted by currency exchange rates in the foreign markets in which theCorporation sells its products. While exposure to variability in foreigncurrency exists, the Corporation does not believe it is significant to itsoperations and any variability is somewhat offset through the location of itsmanufacturing facilities. Revenues are attributed to geographic locations basedon the location to which we ship our products.

65

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**Notes to Consolidated Financial Statements—Continued (in thousands, except share and per share data)**

**13.**   SegmentReporting (Continued)

*Revenues to External Customers:*

| ** **               | ** ** | **Fiscal Year Ended** | ** ** |
|--------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **December 31,  2005**     | ** ** | **January 1,  2005** | ** ** | **January 3,  2004** | ** ** |
| United States            |       |                            | $          | 171,618 |   |   | $ | 136,791 |   | $ | 89,408 |   |
| United Kingdom           |       |                            | 32,953     |   |   | 27,222 |   | 19,624 |   |
| Ireland                  |       |                            | 32,508     |   |   | 21,097 |   | 8,809 |   |
| Other foreign  countries |       |                            | 26,687     |   |   | 20,281 |   | 4,188 |   |
| Total net revenues       |       |                            | $          | 263,766 |   |   | $ | 205,391 |   | $ | 122,029 |   |

 

*Long-Lived Assets:*

| ** **              | ** ** | **December 31,  2005** | ** ** | **January 1,  2005** | ** ** |
|-------------------------|------------|-----------------------------|------------|---------------------------|------------|
| United States           |       |                        | $          | 170,703                   |       |   | $ | 157,886 |   |
| United Kingdom          |       |                        | 60,798     |                      |       | 55,969 |   |
| France                  |       |                        | 3,898      |                      |       | 4,192 |   |
| Total long-lived assets |       |                        | $          | 235,399                   |       |   | $ | 218,047 |   |

 

*Concentration ofCredit Risk:*

A substantialportion of the Corporation’s net revenues is derived from a limited number ofcustomers. Net revenues include revenues to customers of the Corporation whichindividually account for 10% or more of net revenues as follows:

2005—Two customers representing approximately 33% and14% of net revenues, respectively.

2004—Four customers representing approximately 25%,15%, 14% and 10% of net revenues, respectively.

2003—Three customers representing approximately 19%,15% and 11% of net revenues, respectively.

The customers listed above, which are orthopedicimplant manufacturers, comprised approximately 37% and 52% of the accountsreceivable balance at December 31, 2005 and January 1, 2005,respectively.

Followingis a summary of the composition by product category of the Corporation’srevenues to external customers. Revenues of the specialty services business areincluded in the “other” category.

| ** **         | ** ** | **Fiscal Year Ended** | ** ** |
|--------------------|------------|---------------------------------|------------|
| ** **         | ** ** | **December 31,  2005**     | ** ** | **January 1,  2005** | ** ** | **January 3,  2004** | ** ** |
| Implants           |       |                            | $          | 103,481 |   |   | $ | 75,130 |   | $ | 33,289 |   |
| Instruments        |       |                            | 86,736     |   |   | 67,675 |   | 45,624 |   |
| Cases              |       |                            | 55,496     |   |   | 47,292 |   | 36,118 |   |
| Other              |       |                            | 18,053     |   |   | 15,294 |   | 6,998 |   |
| Total net revenues |       |                            | $          | 263,766 |   |   | $ | 205,391 |   | $ | 122,029 |   |

 

66

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**Notes to Consolidated Financial Statements—Continued (in thousands, except share and per share data)**

**14.**   NetIncome (Loss) Per Share

Thefollowing table sets forth the computation of earnings per share.

| ** **                                                          | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **December 31,  2005**     | ** ** | **January 1,  2005** | ** ** | **January 3,  2004** | ** ** |
| Net income                                                          |       |                            | $          | 31,800 |   |   |   | $ | 11,695 |   |   |   | $ | 5,905 |   |   |
| Preferred stock  dividends                                          |       |                            | —     |   |   |   | (8,977 | ) |   |   | (7,028 | ) |   |
| Net income  available to common shareholders                        |       |                            | $          | 31,800 |   |   |   | $ | 2,718 |   |   |   | $ | (1,123 | ) |   |
| Weighted-average common shares outstanding basic                    |       |                            | 33,841     |   |   |   | 16,905 |   |   |   | 11,798 |   |   |
| Effect of stock  options and warrants                               |       |                            | 829        |   |   |   | 862 |   |   |   | — |   |   |
| Weighted-average  common shares outstanding and assumed conversions |       |                            | 34,670     |   |   |   | 17,767 |   |   |   | 11,798 |   |   |
| Net income per  share available to common shareholders:             |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                                               |       |                            | $          | 0.94 |   |   |   | $ | 0.16 |   |   |   | $ | (0.10 | ) |   |
| Diluted                                                             |       |                            | $          | 0.92 |   |   |   | $ | 0.15 |   |   |   | $ | (0.10 | ) |   |

 

**15.**   Commitmentsand Contingencies

*Environmental*

The Corporation has beennotified by the U.S. Environmental Protection Agency or by state governmentsthat it may be liable under environmental laws with respect to the cleanup ofhazardous substances at sites we previously used for the disposal of wastes.Based on information currently available, the Corporation does not believethese liabilities will be material to its results of operations or financialposition.

*Operating Leases*

TheCorporation has various operating leases, primarily for equipment. Total rentalexpense for these operating leases amounted to $1,894, $2,214 and $1,889 in2005, 2004 and 2003, respectively. Future minimum payments for operating leaseswith initial terms of one year or more are as follows at December 31,2005:

| 2006                   |   | $     | 1,271  |   |
|------------------------|--------|-------|--------|--------|
| 2007                   |   | 1,019 |   |
| 2008                   |   | 812   |   |
| 2009                   |   | 588   |   |
| 2010                   |   | 499   |   |
| Thereafter             |   | 564   |   |
| Total minimum payments |   | $     | 4,753  |   |

 

67

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**Notes to Consolidated Financial Statements—Continued (in thousands, except share and per share data)**

**15.**   Commitmentsand Contingencies (Continued)

*UnconditionalPurchase Obligations*

The Corporation has acontract to purchase minimum quantities of titanium through August 2008. Basedon current market pricing at December 31, 2005, the minimum purchase obligationstotal $17,835, $17,835 and $11,890 in fiscal 2006, 2007 and 2008, respectively.Purchases under this contract totaled approximately $2,900 in fiscal 2005.

*Legal Matters*

The Corporation isinvolved, from time to time, in various contractual, product liability, patent(or intellectual property) and other claims and disputes incidental to itsbusiness. Currently, no material environmental or other material litigation ispending or, to the knowledge of the Corporation, threatened. The Corporationcurrently believes that the disposition of all claims and disputes,individually or in the aggregate, should not have a material adverse effect onthe Corporation’s consolidated and combined financial condition, results ofoperations or liquidity.

**16.**   QuarterlyResults of Operations (Unaudited)

Thequarterly results of operations are as follows (in thousands, except per sharedata):

| ** **                                   | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** | **Fiscal  Year** | ** ** |
|----------------------------------------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|------------------|------------|
| *2005*                                       |       |      |       |       |       |      |       |       |       |             |       |   | ** ** |
| Revenue                                      |       | $         | 63,760     |       | $          | 70,177    |       | $          | 67,228     |             |       | $ | 62,601 |   |   | $ | 263,766 | ** ** |
| Gross profit                                 |       | 19,387    |       | 21,442     |       | 19,742    |       |       | 17,967     |             |       | 78,539 | ** ** |
| Net income                                   |       | 7,664     |       | 8,619      |       | 8,223     |       |       | 7,293      |             |       | 31,800 | ** ** |
| Net income applicable to common shareholders |       | 7,664     |       | 8,619      |       | 8,223     |       |       | 7,293      |             |       | 31,800 | ** ** |
| Basic net income per share                   |       | $         | 0.23       |       | $          | 0.26      |       | $          | 0.24       |             |       | $ | 0.21 |   |   | $ | 0.94 | ** ** |
| Diluted net income per share                 |       | $         | 0.22       |       | $          | 0.25      |       | $          | 0.24       |             |       | $ | 0.21 |   |   | $ | 0.92 | ** ** |

 

| ** **                                            | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth(1)** | ** ** | **Fiscal  Year** | ** ** |
|-------------------------------------------------------|------------|-----------|------------|------------|------------|-----------|------------|---------------|------------|------------------|------------|
| *2004*                                                |       |      |       |       |       |      |       |          |       |             |       |   |   |
| Revenue                                               |       | $         | 45,838     |       | $          | 53,089    |       | $             | 54,126     |             |       | $ | 52,338 |   |   | $ | 205,391 |   |
| Gross profit                                          |       | 12,583    |       | 16,067     |       | 16,039    |       |          | 15,620     |             |       | 60,310 |   |
| Net income (loss)                                     |       | 2,210     |       | 5,148      |       | 4,434     |       |          | (99        | )                |       | 11,695 |   |
| Net income (loss) applicable to common   shareholders |       | (106      | )          | 2,804      |       | 2,025     |       |          | (2,007     | )                |       | 2,718 |   |
| Basic net income (loss) per share                     |       | $         | (0.01      | )          | $          | 0.18      |       | $             | 0.13       |             |       | $ | (0.10 | ) |   | $ | 0.16 |   |
| Diluted net  income (loss) per share                  |       | $         | (0.01      | )          | $          | 0.17      |       | $             | 0.12       |             |       | $ | (0.10 | ) |   | $ | 0.15 |   |

----

(1)          Thefourth quarter of 2004 includes a loss on debt extinguishment, net of tax, of$5,409.

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**Notes to Consolidated Financial Statements—Continued (in thousands, except share and per share data)**

**17.**   ComprehensiveIncome

Comprehensiveincome is comprised of net income and gains and losses resulting from currencytranslations of foreign operations. Comprehensive income consists of thefollowing:

| ** **                                | ** ** | **Fiscal Year Ended** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|
| ** **                                | ** ** | **December 31,  2005**     | ** ** | **January 1,  2005** | ** ** | **January 1,  2005** | ** ** |
| Net Income                                |       |                            | $          | 31,800 |   |   |   | $ | 11,695 |   |   |   | $ | 5,905 |   |   |
| Foreign currency  translation adjustments |       |                            | (8,154     | ) |   |   | 4,952 |   |   |   | 4,765 |   |   |
| Comprehensive income                      |       |                            | $          | 23,646 |   |   |   | $ | 16,647 |   |   |   | $ | 10,670 |   |   |

 

69

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**Report of Independent Registered Public AccountingFirm**

The Board ofDirectors and Shareholders of Symmetry Medical Inc.:

We have audited the accompanying consolidated balancesheets of Symmetry Medical Inc. as of December 31, 2005 and January 1,2005, and the related consolidated statements of operations, shareholders’equity (deficit), and cash flows for each of the three years in the periodended December 31, 2005. These financial statements are the responsibilityof the Company’s management. Our responsibility is to express an opinion onthese financial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 toabove present fairly, in all material respects, the consolidated financialposition of Symmetry Medical Inc. at December 31, 2005 and January 1,2005, and the consolidated results of its operations and its cash flows foreach of the three years in the period ended December 31, 2005, inconformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standardsof the Public Company Accounting Oversight Board (United States), the effectivenessof Symmetry Medical Inc.’s internal control over financial reporting as of December 31,2005, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated February 17, 2006, expressed an unqualified opinionthereon.

Indianapolis, IndianaFebruary 17, 2006

/s/ ERNST & YOUNG LLP

70

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**Management’s Report on Internal ControlOver Financial Reporting**

The management of Symmetry MedicalInc. (the Company), is responsible for establishing and maintaining adequateinternal control over financial reporting. The Company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with U.S. generally accepted accountingprinciples. Internal control over financial reporting includes those policiesand procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the Company; (2) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of thefinancial statements in accordance with U.S. generally accepted accountingprinciples, and that receipts and expenditures of the Company are being madeonly in accordance with authorizations of management and directors of theCompany; and (3) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use or disposition of the Company’sassets that could have a material effect on the financial statements.

Because of its inherent limitations,internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies andprocedures may deteriorate.

Management assessed theeffectiveness of the Company’s internal control over financial reporting as ofDecember 31, 2005, based on criteria for effective internal control overfinancial reporting described in Internal Control – Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (COSO).Based on this assessment, we have concluded that internal control overfinancial reporting is effective as of December 31, 2005.

Ernst& Young LLP, an Independent Registered Public Accounting Firm, has auditedthe Company’s consolidated financial statements and has issued an attestationreport on management’s assessment of the Company’s internal control overfinancial reporting which appears on the following page. 
| /s/ BRIAN  MOORE          |     |
|---------------------------|----------|
| Brian Moore               |     |
| *Chief Executive Officer* | * * |

 
| /s/ FRED HITE             |     |
|---------------------------|----------|
| Fred Hite                 |     |
| *Chief Financial Officer* | * * |

 

February17, 2006

71

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**Report of Independent Registered Public AccountingFirm**

The Board of Directors and Shareholders of SymmetryMedical Inc.:

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control over FinancialReporting, that Symmetry Medical Inc. maintained effective internal controlover financial reporting as of December 31, 2005, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission(the COSO criteria). Symmetry Medical Inc.’s management is responsiblefor maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the company’s internal control over financialreporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that SymmetryMedical Inc. maintained effective internal control over financial reporting asof December 31, 2005, is fairly stated, in all material respects, based onthe COSO criteria. Also, in our opinion, Symmetry Medical Inc. maintained, inall material respects, effective internal control over financial reporting asof December 31, 2005, based on****the COSO criteria**.**

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of Symmetry Medical Inc. as ofDecember 31, 2005 and January 1, 2005, and the related consolidatedstatements of operations, shareholders’ equity (deficit), and cash flows foreach of the three years in the period ended December 31, 2005 of SymmetryMedical Inc. and our report dated February 17, 2006 expressed an unqualified opinion thereon.

Indianapolis, IndianaFebruary 17, 2006

/s/ ERNST & YOUNG LLP

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**Item 9.**                        CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**Item 9A.**                CONTROLSAND PROCEDURES

*Evaluationof disclosure controls and procedures.*   Asrequired by Rule 13a-15(b) under the Securities Exchange Act of1934, as amended (the “Exchange Act”), the Company’s management carried out anevaluation, with the participation of the Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of the design and operation of ourdisclosure controls and procedures (as defined in Rules 13(a)-15(e) ofthe Exchange Act, as of the period covered by this report. Based upon theirevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat, as of the end of the period covered by this report, our disclosurecontrols and procedures were effective to provide reasonable assurance that (i) informationrequired to be disclosed by the Company (including its consolidatedsubsidiaries) in the reports we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms; and (ii) that information required tobe disclosed by the Company in the reports that it files or submits under theExchange Act is accumulated and communicated to the Company’s management,including its chief executive officer and chief financial officer, to allow fortimely decisions regarding required disclosure.

*Changesin Internal Control Over Financial Reporting.**  *During our most recent fiscal quarter, there wasno change in our internal control over financial reporting (as that term isdefined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act)that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

*Management’sReport on Internal Control Over Financial Reporting.*   Ourmanagement is responsible for establishing and maintaining adequate internalcontrol over financial reporting, as such term is defined in Rule 13a-15(f)of the Exchange Act. Our management, including our Chief Executive Officer andour Chief Financial Officer, conducted an evaluation of the effectiveness ofour internal control over financial reporting, as of December 31, 2005,based on the Committee of SponsoringOrganizations of the Treadway Commission (COSO) criteria. Managementconcluded that, as of December 31, 2005, our internal control overfinancial reporting was effective.

Our Management’s Report onInternal Control Over Financial Reporting, as of December 31, 2005, can befound on page 71 of this Form 10-K and is incorporated by referenceinto this Item 9A. Our independent registered public accounting firm,Ernst & Young LLP has issued the Attestation Report on Management’sAssessment of Internal Control Over Financial Reporting. The Attestation Reportcan be found on page 72 of this Form 10-K and is incorporatedby reference into this item 9A. 

**Item 9B.**               OtherInformation

*None*

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**PART III**

**Item 10.**                 DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

The information requiredto be furnished pursuant to this Item 10 will be set forth under thecaption “Election of Directors” in our 2006 Proxy Statement which we will fileno later than 120 days after the end of our fiscal year with the SecuritiesExchange Commission. We incorporate that information herein by reference.Information regarding our Company’s executive officers has been included inPart I of this report.

**Item 11.**                 EXECUTIVECOMPENSATION

The information requiredto be furnished pursuant to this Item 11 will be set forth under thecaption “Executive Compensation” in our 2006 Proxy Statement which we will fileno later than 120 days after the end of our fiscal year with the SecuritiesExchange Commission. We incorporate that information herein by reference.

**Item 12.**                 SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

The information requiredto be furnished pursuant to this Item 12 will be set forth under thecaption “Information on Directors and Executive Officers” in our 2006 ProxyStatement which we will file no later than 120 days after the end of our fiscalyear with the Securities Exchange Commission. We incorporate that informationherein by reference.

**Item 13.**                 CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

The information requiredto be furnished pursuant to this Item 13 will be set forth under thecaption “Related Party Transactions” in our 2006 Proxy Statement which we willfile no later than 120 days after the end of our fiscal year with theSecurities Exchange Commission. We incorporate that information herein byreference.

**Item 14.**                 PRINCIPALACCOUNTING FEES AND SERVICES

The information required to be furnished pursuant tothis Item 14 will be set forth under the caption “Accounting Fees andServices” in our 2006 Proxy Statement which we will file no later than 120 daysafter the end of our fiscal year with the Securities Exchange Commission. Weincorporate that information herein by reference.

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**PART IV**

**Item 15.**                 EXHIBITSAND FINANCIAL STATEMENT SCHEDULES 

(a)           1.and 2. See Part II, Item 8. Financial Statements for an index of theCorporation’s consolidated financial statements schedule. 

| Exhibit   Number | ** ** | 3. Exhibits (Reg. S-K, Item   601) | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                     |
|------------------|------------|------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             | 3.1        |                               |       | Restated  Certificate of Incorporation of Symmetry Medical Inc. (incorporated by  reference to Exhibit 3.2 of Amendment No. 3 to our Registration  Statement, on Form S-1/A, filed July 22, 2004).                                                                                                                                                                         |
|             | 3.2        |                               |       | Amended and  Restated By-Laws of Symmetry Medical Inc., as amended through March 24,  2005 (incorporated by reference to Exhibit 3.2 from our 2004 Annual  Report on Form 10-K, filed March 25, 2005).                                                                                                                                                                     |
|             | 4.1        |                               |       | Form of  Common Stock certificate (incorporated by reference to Exhibit 4.1 of  Amendment No. 3 to our Registration Statement, on Form S-1/A,  filed July 22, 2004).                                                                                                                                                                                                  |
|             | 10.1       |                               |       | Form of  Common Stock Purchase Warrant of Symmetry Medical Inc. (incorporated by  reference to Exhibit 10.2 of our Registration Statement on Form S-1,  filed May 28, 2004).                                                                                                                                                                                               |
|             | 10.2       |                               |       | Credit Agreement,  dated as of December 14, 2004, by and among Symmetry Medical Inc.,  Wachovia Bank, National Association as administrative agent and several  financial institutions named therein as lenders (incorporated by reference to  Exhibit 10.2 from our 2004 Annual Report on Form 10-K, filed  March 25, 2005).                                              |
|             | 10.3       |                               |       | Stockholders  Agreement, dated as of October 18, 2000, by and among Symmetry Medical  Inc., Olympus/Symmetry Holdings LLC, each of the management stockholders  named therein and each management employee who at any time acquires  securities of the Company (incorporated by reference to Exhibit 10.6 of  our Registration Statement on Form S-1, filed May 28, 2004). |
|             | 10.4       |                               |       | Amendment to  Stockholders Agreement, dated as of June 11, 2003, by Symmetry Medical  Inc. and Olympus/Symmetry Holdings LLC (incorporated by reference to  Exhibit 10.7 of our Registration Statement on Form S-1, filed  May 28, 2004).                                                                                                                                  |
|             | 10.5       |                               |       | Joinder to Stockholders  Agreement, dated as of June 11, 2003, by and among Mettis Group Limited,  Symmetry Medical Inc. and Olympus/Symmetry Holdings LLC (incorporated by  reference to Exhibit 10.8 of our Registration Statement on Form S-1,  filed May 28, 2004).                                                                                                    |
|             | 10.6       |                               |       | Form of  Joinder and Amendment to Stockholders Agreement, dated as of June 11,  2003, by and among Symmetry Medical Inc. and each of the stockholders party  thereto (incorporated by reference to Exhibit 10.9 of our Registration  Statement on Form S-1, filed May 28, 2004).                                                                                      |
|             | 10.7       |                               |       | Amendment to  Stockholders Agreement dated as of August 3, 2004, by and among Symmetry  Medical Inc. and each of the Stockholders party thereto (incorporated by  reference to Exhibit 10.7 from our 2004 Annual Report on Form 10-K,  filed March 25, 2005).                                                                                                              |
|             | 10.8       |                               |       | Symmetry Medical  Inc. 2002 Stock Option Plan (incorporated by reference to Exhibit 10.10  of our Registration Statement on Form S-1, filed May 28,  2004).*                                                                                                                                                                                                                    |
|             | 10.9       |                               |       | Form of  Nonqualified Stock Option Agreement issued under 2002 Stock Option Plan  (incorporated by reference to Exhibit 10.11 of our Registration  Statement on Form S-1, filed May 28, 2004).*                                                                                                                                                                            |

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|        | 10.10 |   |   | Symmetry Medical Inc. 2003 Stock Option Plan  (incorporated by reference to Exhibit 10.12 of our Registration  Statement on Form S-1, filed May 28, 2004).*                                                                                                                                                                                                                                                   |
|--------|-------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.11 |   |   | Form of  Nonqualified Stock Option Agreement issued under 2003 Stock Option Plan  (incorporated by reference to Exhibit 10.13 of our Registration  Statement on Form S-1, filed May 28, 2004).*                                                                                                                                                                                                          |
|   | 10.12 |   |   | Symmetry Medical  Inc. Amended and Restated 2004 Equity Incentive Plan (incorporated by  reference to Exhibit 10.12 from our 2004 Annual Report on Form 10-K,  filed March 25, 2005).                                                                                                                                                                                                                         |
|   | 10.13 |   |   | Symmetry Medical  Inc. Amended and Restated 2004 Employee Stock Purchase Plan (incorporated by  reference to Exhibit 10.13 from our 2004 Annual Report on Form 10-K,  filed March 25, 2005).                                                                                                                                                                                                                  |
|   | 10.14 |   |   | Amendment to  Symmetry Medical Inc. 2004 Employee Stock Purchase Plan (incorporated by  reference to Exhibit 10.14 from our 2004 Annual Report on Form 10-K,  filed March 25, 2005).                                                                                                                                                                                                                          |
|   | 10.15 |   |   | Employment  Agreement, dated as of June 11, 2003, by and between Symmetry Medical  Inc. and Brian Moore (incorporated by reference to Exhibit 10.16 of our  Registration Statement on Form S-1, filed May 28, 2004).*                                                                                                                                                                                    |
|   | 10.16 |   |   | Employment  Agreement, dated as of January 6, 2004, by and between Symmetry Medical  Inc. and Fred Hite (incorporated by reference to Exhibit 10.17 of  Amendment No. 4 to our Registration Statement, on Form S-1/A,  filed July 30, 2004).*                                                                                                                                                       |
|   | 10.17 |   |   | Employment  Agreement, dated as of June 5, 2003, by and between Thornton Precision  Components Ltd. and Richard J. Senior (incorporated by reference to  Exhibit 10.18 of Amendment No. 6 to our Registration Statement, on  Form S-1/A, filed December 6, 2004).*                                                                                                                                  |
|   | 10.18 |   |   | Form of  Restricted Stock Agreement issued under the 2004 Equity Incentive Plan  (incorporated by reference to Exhibit 10.1 to our Form 8-K  filed May 4, 2004)                                                                                                                                                                                                                                          |
|   | 10.19 |   |   | Form of  Restricted Stock Agreement issued under the Amended and Restated 2004 Equity  Incentive Plan (incorporated by reference to Exhibit 10.1(a) to our  Form 8-K filed February 15, 2006)                                                                                                                                                                                                       |
|   | 10.20 |   |   | Form of  Restricted Stock Agreement issued under the Amended and Restated 2004 Equity  Incentive Plan (incorporated by reference to Exhibit 10.1(b) to our  Form 8-K filed February 15, 2006)                                                                                                                                                                                                       |
|   | 10.21 |   |   | Amendment to  Stockholders Agreement, dated as of June 6, 2005, by and among Symmetry  Medical Inc., Olympus/Symmetry Holdings LLC, 3i Parallel Ventures LP, 3i UKIP  II LP, Mayflower LP and Windjammer Mezzanine & Equity Fund, L.P.  (incorporated by reference to Exhibit 10.8 to the Corporation’s  Registration Statement on Form S-1, as amended, originally filed  June 27, 2005). |
|   | 21.1  |   |   | Subsidiaries  (incorporated by reference to Exhibit 21.1 from our 2004 Annual Report  on Form 10-K, filed March 25, 2005).                                                                                                                                                                                                                                                                                    |
|   | 23.1  |   |   | Consent of  Ernst & Young LLP **                                                                                                                                                                                                                                                                                                                                                                                    |
|   | 24.1  |   |   | Power of Attorney **                                                                                                                                                                                                                                                                                                                                                                                                         |

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|        | 31.1 |   |   | Certification of Chief Executive Officer required by  Item 307 of Regulation S-K as promulgated by the Securities and Exchange  Commission and pursuant to Section 302 of the Sarbanes-Oxley Act of  2002** |
|--------|------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 31.2 |   |   | Certification of  Chief Financial Officer required by Item 307 of Regulation S-K as promulgated  by the Securities and Exchange Commission and pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002** |
|   | 32.1 |   |   | Certification of  Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 **                    |

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*                    ManagementContract of compensatory plan or arrangement required to be filed as an exhibitpursuant to Item 15 of Form 10-K. 

**             Filed or furnishedherewith. 

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**Indexto Exhibits Filed or Furnishedwith the Annual Report on Form 10-Kfor the year ended December 31, 2005**

| Exhibit | ** ** | ** **                                                                                                                                                                                                     |
|---------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 23.1    |       | Consent of  Ernst & Young LLP                                                                                                                                                                         |
| 24.1    |       | Power of Attorney                                                                                                                                                                                              |
| 31.1    |       | Certification of Chief  Executive Officer required by Item 307 of Regulation S-K as promulgated by  the Securities and Exchange Commission and pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 |
| 31.2    |       | Certification of Chief  Financial Officer required by Item 307 of Regulation S-K as promulgated by  the Securities and Exchange Commission and pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 |
| 32.1    |       | Certification of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                     |

ty

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. 

|                         | SYMMETRY MEDICAL INC. |
|-------------------------|-----------------------|
| February 27,  2006 | By:                   | /s/  BRIAN MOORE |
|                    |                  | Brian Moore*Chief Executive Officer and President* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the date indicated.

|                        | **Name** | ** **                                      | ** ** |                         | **Title** | ** ** | ** ** |  | **Date** | ** ** |
|------------------------|----------|-------------------------------------------------|------------|-------------------------|-----------|------------|------------|--|----------|------------|
| /s/ BRIAN  MOORE       |     | *Chief  Executive Officer and President*        |       | February 27,  2006 |
| Brian  Moore           |     | *(Principal Executive Officer)*                 |       |                    |
| /s/ FRED HITE          |     | *Senior Vice President,*                        |       | February 27,  2006 |
| Fred  Hite             |     | *Chief  Financial Officer and Secretary*        |       |                    |
|                   |     | *(Principal  Financial and Accounting Officer)* |       |                    |
| *                      |     | *Director*                                      |       | February 27, 2006       |
| Robert  S. Morris      |     |                                            |       |                    |
|                   |     |                                            |       |                    |
| *                      |     | *Director*                                      |       | February 27, 2006       |
| James  A. Conroy       |     |                                            |       |                    |
| *                      |     | *Director*                                      |       | February 27, 2006       |
| Manu  Bettegowda       |     |                                            |       |                    |
| *                      |     | *Director*                                      |       | February 27, 2006       |
| Frank  Turner          |     |                                            |       |                    |
| *                      |     | *Director*                                      |       | February 27, 2006       |
| Stephen  B. Oresman    |     |                                            |       |                    |
| *                      |     | *Director*                                      |       | February 27, 2006       |
| Francis T.  Nusspickel |     |                                            |       |                    |

 
| *By:   |   | /s/ FRED HITE                         |
|--------|--------|---------------------------------------|
|   |   | Fred Hite                             |
|   |   | *Attorney-in-fact*                    |
|   |   | *Pursuant  to Power of Attorney* |
|   |   | (Exhibit 24.1  hereto)                |

 

 

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