UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

		FOR THE QUARTERLY PERIOD ENDED JULY 2, 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 File Number 001-16757

DJ ORTHOPEDICS, INC.

(Exact name of registrant as specified in its charter)

DELAWARE		33-0978270
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

2985 Scott Street
Vista, California		92081
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (760) 727-1280

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

Yes ý No o

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

Yes ý No o

The number of shares of the registrant’s Common Stock outstanding at July 29, 2005 was 21,839,018 shares.

DJ ORTHOPEDICS, INC.

FORM 10-Q INDEX

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Unaudited Consolidated Balance Sheets as of July 2, 2005 and December 31, 2004

	Unaudited Condensed Consolidated Statements of Income for the three and six months ended July 2, 2005 and June 26, 2004

	Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended July 2, 2005 and June 26, 2004

	Notes to Unaudited Condensed Consolidated Financial Statements

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.	Defaults upon Senior Securities

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

Item 5.	Other Information

Item 6.	Exhibits

SIGNATURES

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DJ ORTHOPEDICS, INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and par value data)

	July 2, 2005		December 31, 2004

Assets
Current assets:
Cash and cash equivalents	$	6,214	$	11,182
Accounts receivable, net of provisions for contractual allowances and doubtful accounts of $22,762 and $26,628 at July 2, 2005 and December 31, 2004, respectively	54,895		46,981
Inventories, net	18,842		19,071
Deferred tax asset, current portion	7,902		7,902
Other current assets	4,710		5,359
Total current assets	92,563		90,495
Property, plant and equipment, net	14,817		15,463
Goodwill	98,822		96,639
Intangible assets, net	51,549		54,717
Debt issuance costs, net	2,736		2,374
Deferred tax asset	37,412		46,100
Other assets	1,670		1,062
Total assets	$	299,569	$	306,850

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	8,650	$	7,300
Accrued compensation	6,375		5,484
Accrued commissions	3,358		4,425
Long-term debt, current portion	5,000		5,000
Accrued restructuring costs	417		2,288
Other accrued liabilities	8,667		9,315
Total current liabilities	32,467		33,812

Long-term debt, less current portion	65,750		90,000

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized, none issued and outstanding at July 2, 2005 and December 31, 2004	—		—
Common stock, $0.01 par value; 39,000,000 shares authorized, 21,817,841 shares and 21,459,428 shares issued and outstanding at July 2, 2005 and December 31, 2004, respectively	218		215
Additional paid-in-capital	124,610		121,139
Notes receivable from officers for stock purchases	—		(1,749		)
Accumulated other comprehensive income	496		931
Retained earnings	76,028		62,502
Total stockholders’ equity	201,352		183,038
Total liabilities and stockholders’ equity	$	299,569	$	306,850

See accompanying Notes.

DJ ORTHOPEDICS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

	Three Months Ended						Six Months Ended
	July 2, 2005			June 26, 2004			July 2, 2005			June 26, 2004

Net revenues	$	68,827		$	63,186		$	139,077		$	125,427
Costs of goods sold	24,573			22,953			50,794			46,312
Gross profit	44,254			40,233			88,283			79,115
Operating expenses:
Sales and marketing	21,336			19,770			42,772			38,964
General and administrative	7,052			6,804			14,500			13,548
Research and development	1,691			1,402			3,263			2,780
Amortization of acquired intangibles	1,153			1,153			2,305			2,425
Total operating expenses	31,232			29,129			62,840			57,717
Income from operations	13,022			11,104			25,443			21,398
Interest expense, net of interest income	(1,195		)	(3,095		)	(2,462		)	(6,648		)
Prepayment premium and other costs related to senior subordinated notes redemption	—			(7,760		)	—			(7,760		)
Other expense	(277		)	(143		)	(438		)	(249		)
Income before income taxes	11,550			106			22,543			6,741
Provision for income taxes	(4,621		)	(39		)	(9,017		)	(2,694		)
Net income	$	6,929		$	67		$	13,526		$	4,047

Net income per share:
Basic	$	0.32		$	—		$	0.62		$	0.20
Diluted	$	0.31		$	—		$	0.60		$	0.18
Weighted average shares outstanding used to calculate per share information:
Basic	21,745			21,687			21,660			20,672
Diluted	22,645			23,039			22,540			21,932

See accompanying Notes.

DJ ORTHOPEDICS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Six Months Ended
	July 2, 2005			June 26, 2004

Operating activities
Net income	$	13,526		$	4,047
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for contractual allowances and doubtful accounts	16,336			14,863
Provision for excess and obsolete inventories	248			(70		)
Depreciation and amortization	6,468			6,397
Step-up to fair value of inventory charged to costs of goods sold	160			438
Amortization of debt issuance costs and discount on senior subordinated notes	278			546
Changes in current and deferred tax asset, net	8,688			2,094
Write-off of debt issuance costs and discount on senior subordinated notes	—			3,025
Liquidation preference on redemption of senior subordinated notes	—			4,735
Changes in operating assets and liabilities, net	(25,487		)	(17,612		)
Net cash provided by operating activities	20,217			18,463

Investing activities
Purchases of property, plant and equipment	(2,124		)	(2,836		)
Purchase of business	(3,045		)	—
Purchases of intangible assets	—			(1,200		)
Purchase of short-term investments	—			(18,509		)
Sale of short-term investments	—			18,509
Changes in other assets, net	(98		)	15
Net cash used in investing activities	(5,267		)	(4,021		)

Financing activities
Repayment of long-term debt	(24,250		)	(1,250		)
Debt issuance costs	(640		)	(57		)
Net proceeds from issuance of common stock	3,330			58,039
Proceeds from repayment of notes receivable issued in connection with sale of common stock	1,749			331
Repayment of senior subordinated notes	—			(75,000		)
Liquidation preference on redemption of senior subordinated notes	—			(4,735		)
Net cash used in financing activities	(19,811		)	(22,672		)
Effect of exchange rate changes on cash and cash equivalents	(107		)	(42		)
Net decrease in cash and cash equivalents	(4,968		)	(8,272		)
Cash and cash equivalents at beginning of period	11,182			19,146
Cash and cash equivalents at end of period	$	6,214		$	10,874

See accompanying Notes.

DJ ORTHOPEDICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

1. General

Business and Organization

dj Orthopedics, Inc. (the Company), is a global medical device company specializing in rehabilitation and regeneration products for the non-operative orthopedic and spine markets.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of July 2, 2005 and for the three and six months ended July 2, 2005 and June 26, 2004 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States for complete financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The accompanying unaudited condensed consolidated financial statements as of July 2, 2005 and for the three and six months ended July 2, 2005 and June 26, 2004 have been prepared on the same basis as the audited consolidated financial statements and include all adjustments (consisting of normal recurring accruals) which, in the opinion of management, are necessary for a fair presentation of the financial position, operating results and cash flows for the interim date and interim periods presented. Results for the interim period ended July 2, 2005 are not necessarily indicative of the results to be achieved for the entire year or future periods.

The accompanying consolidated financial statements present the historical financial position and results of operations of the Company and include the accounts of its operating subsidiary, dj Orthopedics, LLC (dj Ortho), dj Orthopedics Development Corporation (dj Development), DJ Orthopedics Capital Corporation (dj Capital), dj Ortho’s wholly owned Mexican subsidiary that manufactures a majority of dj Ortho’s products under Mexico’s maquiladora program, and dj Ortho’s wholly-owned subsidiaries in Canada, Germany, France, the United Kingdom and Denmark. All intercompany accounts and transactions have been eliminated in consolidation.

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

The Company’s fiscal year ends on December 31. Each quarter consists of one five-week and two four-week periods.

Cash Equivalents

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

Per Share Information

Earnings per share are computed in accordance with the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. Basic earnings per share are computed using the weighted average number of common shares outstanding during each period. Diluted earnings per share include the dilutive effect of weighted average common share equivalents potentially issuable upon the exercise of stock options. For purposes of computing diluted earnings per share, weighted average common share equivalents (computed using the treasury stock method) do not include stock options with an exercise price that exceeds the average fair market value of the Company’s common stock during the periods presented. The weighted average shares outstanding used to calculate basic and diluted share information consist of the following (in thousands):

	Three months ended		Six months ended
	July 2, 2005	June 26, 2004	July 2, 2005	June 26, 2004
Shares used in computations of basic net income per share – weighted average shares outstanding	21,745	21,687	21,660	20,672
Net effect of dilutive common share equivalents based on treasury stock method	900	1,352	880	1,260
Shares used in computations of diluted net income per share	22,645	23,039	22,540	21,932

Stock-Based Compensation

The Company accounts for its employee stock option plans and employee stock purchase plan using the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and its related interpretations, and has adopted the disclosure only provisions of SFAS No. 123, Accounting for Stock-Based Compensation and its related interpretations. Accordingly, no compensation expense has been recognized for the Company’s fixed stock option plans or its employee stock purchase plan. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, using the Black-Scholes method, to stock-based employee compensation (in thousands, except per share amounts):

	Three months ended						Six months ended
	July 2, 2005			June 26, 2004			July 2, 2005			June 26, 2004
Net income, as reported	$	6,929		$	67		$	13,526		$	4,047
Total stock-based employee compensation expense determined under fair value method for all option plans and stock purchase plan, net of related tax effects	(2,764		)	(1,321		)	(4,442		)	(2,587		)
Pro forma net income (loss)	$	4,165		$	(1,254	)	$	9,084		$	1,460
Basic net income (loss) per share:
As reported	$	0.32		$	—		$	0.62		$	0.20
Pro forma	$	0.19		$	(0.06	)	$	0.42		$	0.07
Diluted net income (loss) per share:
As reported	$	0.31		$	—		$	0.60		$	0.18
Pro forma	$	0.18		$	(0.06	)	$	0.40		$	0.07

Recently Issued Accounting Standards

On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), or SFAS No. 123(R), Share-Based Payment, which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes APB Opinion No. 25, and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No.
123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values and pro forma disclosure will no longer be an alternative. The Company has not yet quantified the impact that adoption of SFAS No. 123(R) will have on its financial statements, but expects such impact to be material. On April 14, 2005, the U.S. Securities and Exchange Commission announced a deferral of the effective date of SFAS No. 123(R) until the first interim period beginning after December 15, 2005. The Company expects to adopt SFAS No. 123(R) effective in its fiscal quarter beginning January 1, 2006. The Company is currently determining how or if the adoption of SFAS No. 123(R) will impact the magnitude or form of its future share-based compensation to employees.

Foreign Currency Translation

The financial statements of the Company’s international operations where the local currency is the functional currency are translated into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates during the period for revenues and expenses. Cumulative translation gains and losses are excluded from results of operations and recorded as a separate

component of consolidated stockholders’ equity. Gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity’s local currency) are included in the consolidated statements of income as either a component of costs of goods sold or other income or expense, depending on the nature of the transaction. The aggregate foreign currency transaction loss included in determining net income for the six months ended July 2, 2005 and June 26, 2004 was $0.4 million and $0.1 million, respectively.

2. Financial Statement Information

Inventories consist of the following (in thousands):

	July 2, 2005			December 31, 2004

Raw materials	$	6,585		$	7,116
Work-in-progress	1,004			1,027
Finished goods	13,740			14,109
	21,329			22,252
Less reserves, primarily for excess and obsolete inventories	(2,487		)	(3,181		)
Inventories, net	$	18,842		$	19,071

In the first quarter of 2005, the Company disposed of gross inventories aggregating $0.7 million which had been fully reserved for in a previous year.

3. Acquisitions

Superior Medical Equipment Acquisition

On March 10, 2005, the Company completed the purchase of substantially all of the assets of Superior Medical Equipment, LLC (SME), a Connecticut based distributor of orthopedic products and supplies, for an aggregate purchase price of up to $4.2 million, of which approximately $3.1 million was paid upon closing, $0.1 million was paid as a final purchase price adjustment in April 2005 and $0.5 million will be paid in March 2006. The remaining amount of up to $0.5 million will be paid in March 2006 subject to achievement of certain operating targets. The assets acquired from SME included tangible and intangible assets related to the distribution of orthopedic products and supplies. The SME acquisition has been accounted for using the purchase method of accounting whereby the total purchase price was allocated to tangible and intangible assets acquired based on estimated fair market values with the remainder classified as goodwill.

Purchase of Rights to Distributor Territories

From time to time the Company purchases rights to certain distributor territories in the U.S. and then sells the distribution rights to another party for similar amounts. These distribution reorganizations are intended to achieve several objectives, including improvement of sales results within the affected territories. The Company generally receives promissory notes for the resale amounts, which are recorded as notes receivable and included in other current and long-term assets in the accompanying unaudited consolidated balance sheet. For the six months ended July 2, 2005 the Company purchased and resold territory rights for amounts aggregating $0.7 million and did not record any gains or losses from the transfer of these distribution rights.

4. Accrued Restructuring Costs

In 2004, the Company integrated its bone growth stimulation, or Regeneration, sales organization into its DonJoy sales channel and most of its remaining Regeneration operations in Tempe, Arizona into its corporate facility in Vista, California. In addition, in 2004, the Company completed construction of a new leased 200,000 square foot manufacturing facility in Tijuana, Mexico to replace three separate facilities it operated in the same area. All of the Company’s existing Mexico facilities were moved to this new facility in 2004 and the Company relocated the manufacturing of its cold therapy products and machine shop activities from Vista, California to the new Mexico plant.

Restructuring costs accrued in 2004 in connection with these activities and reflected in the accompanying unaudited consolidated balance sheet at July 2, 2005 are as follows (in thousands):

	Total Costs Incurred		Completed Activity (Cash)			Completed Activity (Non-Cash)			Accrued Liability at July 2, 2005

Employee severance and retention costs	$	2,435	$	(2,435	)	$	—		$	—
Other	2,258		(2,091		)	(167		)	—
Total	$	4,693	$	(4,526	)	$	(167	)	$	—

Accrued restructuring costs in the accompanying unaudited consolidated balance sheet at July 2, 2005, includes $0.4 million of lease termination and other exit costs remaining from an amount accrued in 2002. This amount relates to vacant land previously leased by the Company (see Note 8).

5. Long-Term Debt

Credit Agreement Amendment

On May 5, 2005, the Company completed an amendment to its credit agreement. Previously, the credit agreement consisted of a $100 million term loan, of which approximately $93.8 million was owed as of the date of the amendment, and a $30 million revolving line of credit on which no amounts had been drawn. The amended credit agreement provides for total borrowings of $125 million, consisting of a term loan of $50 million, which was fully drawn at closing and $75 million available under a revolving line of credit, of which approximately $43.8 million was drawn at closing. Prior to July 2, 2005, the Company repaid $23.0 million of the amounts outstanding under the revolving line of credit and $20.8 million remained outstanding as of July 2, 2005. In addition, the Company was contingently liable for outstanding letters of credit aggregating approximately $4.0 million at July 2, 2005. Under the amended agreement, up to $25 million of outstanding borrowings may be denominated in British Pounds or Euros. As of July 2, 2005, all borrowings under the credit agreement were denominated in U.S. dollars. Borrowings under the term loan and on the revolving credit facility bear interest at variable rates (either a London Inter-Bank Offered Rate (LIBOR) or the lenders’ base rate, as elected by the Company) plus an applicable margin, which varies based on the Company’s leverage ratio. The amended agreement reduced the Company’s interest rate to LIBOR plus an applicable margin of 1.25% to 2.00%, or the lenders’ base rate plus an applicable margin of 0.25% to 1.00%. At the Company’s current leverage ratio, the applicable interest rate is either LIBOR plus 1.50% or base rate plus 0.50%. The weighted average interest rate applicable to the Company’s borrowings as of July 2, 2005 was 5.03%.

Repayment. The Company is required to make quarterly principal payments on the term loan of $1.25 million, beginning in September 2005 and increasing to $1.875 million in September 2007, $3.125 million in September 2008 and $5.0 million in September 2009. The balance of the term loan, if any, and any borrowings under the revolving credit facility are due in full on May 5, 2010. The Company is also required to make mandatory prepayments under certain circumstances.

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

Covenants. The credit facility contains a number of covenants that, among other things, restrict the ability of the Company to (i) incur additional indebtedness; (ii) incur or guarantee obligations; (iii) pay dividends or make other distributions (except for certain tax distributions); (iv) redeem or repurchase equity, make investments, loans or advances, make acquisitions; (v) engage in mergers or

consolidations; (vi) change the business conducted by the Company; (vii) grant liens, sell its assets; or (viii) engage in certain other activities. The amended agreement provides less restriction than the Company’s previous agreement in most of these areas. In addition, the amended credit agreement requires the Company to maintain specified financial ratios, including a maximum leverage ratio and a minimum fixed charge coverage ratio. The Company was in compliance with all covenants as of July 2, 2005.

Debt issuance costs. In connection with the amendment, the Company incurred costs of approximately $0.6 million, which were capitalized. These costs, along with the unamortized balance of the costs incurred in connection with the original agreement and a previous amendment, are being amortized over the term of the amended credit agreement.

6. Comprehensive Income

Comprehensive income consists of the following components (in thousands):

	Three months ended						Six months ended
	July 2, 2005			June 26, 2004			July 2, 2005			June 26, 2004

Net income, as reported	$	6,929		$	67		$	13,526		$	4,047
Foreign currency translation adjustment	(253		)	(74		)	(435		)	(209		)
Comprehensive income (loss)	$	6,676		$	(7	)	$	13,091		$	3,838

7. Segment and Related Information

Prior to 2005, the Company disclosed the following reportable segments, which, except for Regeneration, were based on the Company’s sales channels: DonJoy, ProCare, OfficeCare, Regeneration and International. Effective 2005, the Company has aggregated the DonJoy, ProCare and OfficeCare segments into one new segment, Domestic Rehabilitation. In accordance with the aggregation criteria in SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, the historical segments have been aggregated due to changes in the Company’s management and compensation structure that focus on the results of Domestic Rehabilitation, taken as a whole, rather than on its separate components. Segment data for all prior periods have been restated (aggregated) to conform to the new segmentation. The following are the Company’s current reportable segments.

• Domestic Rehabilitation consists of the sale of the Company’s rehabilitation products (rigid knee braces, soft goods and pain management products) in the United States through three sales channels, DonJoy, ProCare and OfficeCare.

Through the DonJoy sales channel, the Company sells its rehabilitation products utilizing a few of the Company’s direct sales representatives and a network of approximately 300 independent commissioned sales representatives who are employed by approximately 45 independent sales agents. These sales representatives are primarily dedicated to the sale of the Company’s products to orthopedic surgeons, podiatrists, orthopedic and prosthetic centers, hospitals, surgery centers, physical therapists, athletic trainers and other healthcare professionals. Because certain of the DonJoy product lines require customer education on the application and use of the product, these sales representatives are technical specialists who receive extensive training both from the Company and the agent and use their expertise to help fit the patient with the product and assist the orthopedic professional in choosing the appropriate product to meet the patient’s needs. After a product order is received by a sales representative, the Company generally ships the product directly to the orthopedic professional and pays a sales commission to the agent. These commissions are reflected in sales and marketing expense in the Company’s consolidated financial statements.

Through the ProCare sales channel, which is comprised of approximately 37 direct and independent representatives that manage over 310 dealers focused on primary and acute facilities, the Company sells its rehabilitation products to national third-party distributors, other regional medical supply dealers and medical product buying groups, generally at a discount from list prices. The majority of these products are soft goods which require little or no patient education. The distributors and dealers generally resell these products to large hospital chains, hospital buying groups, primary care networks and orthopedic physicians for use by the patients.

Through the OfficeCare sales channel, the Company maintains an inventory of rehabilitation products (mostly soft goods) on hand at orthopedic practices for immediate distribution to the patient. For these products, the Company

arranges billing to the patient or third-party payor after the product is provided to the patient. As of July 2, 2005, the OfficeCare program was located at over 800 physician offices throughout the United States. The Company has contracts with over 800 third-party payors.

• Regeneration consists of the sale of the Company’s bone growth stimulation products in the United States. The Company’s OL1000 product is sold through a combination of the DonJoy channel direct sales representatives and over 100 additional sales representatives dedicated to selling the OL1000 product, of which approximately 45 are employed by the Company. The SpinaLogic product is also included in this segment and was, until the end of 2004, sold by DePuy Spine in the U.S. under an exclusive sales agreement. In January 2005, the Company amended the agreement with DePuy to divide the U.S. into territories in which DePuy Spine has exclusive sales rights and non-exclusive territories in which the Company is permitted to engage in its own sales efforts or retain another sales agent. These products are sold either directly to the patient or to independent distributors. The Company arranges billing to the third-party payors or patients, for products sold directly to the patient.

• International consists of the sale of the Company’s products in foreign countries through wholly-owned subsidiaries or independent distributors. The Company sells its products in over 40 foreign countries, primarily in Europe, Australia, Canada and Japan.

Set forth below is net revenues, gross profit and operating income information for the Company’s reporting segments for the three and six months ended July 2, 2005 and June 26, 2004 (in thousands). This information excludes the impact of expenses not allocated to segments, which are comprised primarily of general corporate expenses, for all periods presented. Information for the Regeneration segment includes the impact of purchase accounting and related amortization of acquired intangible assets. For the three and six months ended July 2, 2005 and June 26, 2004, Regeneration income from operations was reduced by amortization of acquired intangible assets amounting to $1.2 million and $1.2 million and $2.3 million and $2.4 million, respectively.

	Three Months Ended						Six Months Ended
	July 2,			June 26,			July 2,			June 26,
	2005			2004			2005			2004
Net revenues:
Domestic rehabilitation	$	47,078		$	43,301		$	94,598		$	85,711
Regeneration	13,520			12,705			27,112			24,911
International	8,229			7,180			17,367			14,805
Consolidated net revenues	68,827			63,186			139,077			125,427

Gross profit:
Domestic rehabilitation	26,686			24,515			52,738			48,403
Regeneration	12,003			11,278			23,957			21,308
International	5,565			4,440			11,588			9,404
Consolidated gross profit	44,254			40,233			88,283			79,115

Income from operations:
Domestic rehabilitation	9,969			8,548			19,036			16,889
Regeneration	3,519			3,075			7,199			4,977
International	2,203			1,449			4,845			3,790
Income from operations of reportable Segments	15,691			13,072			31,080			25,656
Expenses not allocated to segments	(2,669		)	(1,968		)	(5,637		)	(4,258		)
Consolidated income from operations	$	13,022		$	11,104		$	25,443		$	21,398

Number of operating days	64			64			129			125

The accounting policies of the reportable segments are the same as the accounting policies of the Company. The Company allocates resources and evaluates the performance of segments based on income from operations and therefore has not disclosed certain other items, such as interest, depreciation and amortization by segment. The Company does not allocate assets to reportable segments because a significant portion of assets are shared by the segments.

For the three and six months ended July 2, 2005 and June 26, 2004, the Company had no individual customer or distributor that accounted for 10% or more of total revenues.

Net revenues, attributed to the geographic location of the customer, were as follows (in thousands):

	Three months ended				Six months ended
	July 2, 2005		June 26, 2004		July 2, 2005		June 26, 2004

United States	$	60,598	$	56,006	$	121,710	$	110,622
Europe	5,819		5,144		12,584		10,580
Other countries	2,410		2,036		4,783		4,225
Total consolidated net revenues	$	68,827	$	63,186	$	139,077	$	125,427

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

	July 2, 2005		December 31, 2004
United States	$	289,616	$	296,923
International	9,953		9,927
Total consolidated assets	$	299,569	$	306,850

8. Related Party Transaction

In the first quarter of 2005, the Company received full repayment of $1.8 million, including interest, for all remaining notes receivable from officers for historical stock purchases.

9. Commitments and Contingencies

In October 2004, the Company entered into a lease agreement with Professional Real Estate Services, Inc. (PRES) under which PRES will undertake to build a new 110,000 square foot corporate headquarters facility for the Company on vacant land currently leased to the Company in Vista, California. Once completed, the Company will occupy the facility under a 15-year lease with two five-year options to extend the term and will move out of its existing facilities in Vista. Rent for the new facility will be based on an agreed percentage of the total project cost for the construction of the facility and is not expected to exceed the rent currently paid by the Company for its existing Vista facilities. The Company cannot yet determine future rent payments under this new lease agreement.

The new lease with PRES was contingent on PRES closing a transaction to purchase the existing facilities in Vista, California leased by the Company, as well as the vacant land underlying the new lease. The purchase transaction closed in February 2005. Effective on the closing date, the Company’s lease for the vacant land was terminated, and when the new headquarters facility is completed and occupied, the Company’s leases for its existing Vista facilities will be terminated. Those leases would otherwise have continued through February 2008. Upon occupancy of the new facility, expected to occur in mid-2006, the Company will make a lump sum rent payment to PRES equal to 40% of the rent that would have been due under the existing facilities leases from the termination date of the existing leases through the original expiration date. If PRES is able to lease all or part of the Company’s former Vista facilities during what would have remained of the term of the Company’s existing leases, a portion of the lump sum payment may be refunded to the Company. This lump sum rent payment, net of the remaining $0.4 million accrual related to lease termination costs and other exit costs originally accrued in 2002 (see Note 4), will be accounted for as additional rent expense over the term of the new lease.

From time to time, the Company has been involved in lawsuits arising in the ordinary course of business. This includes patent and other intellectual property disputes between its various competitors and the Company. With respect to these matters, management believes that it has adequate insurance coverage or has made adequate accruals for related costs, and it may also have effective legal defenses. The Company is not aware of any pending lawsuits that could have a material adverse effect on its business, financial condition and results of operations.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our historical consolidated financial statements and the related notes thereto and the other financial data included in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2004.

Overview

We are a global medical device company specializing in rehabilitation and regeneration products for the non-operative orthopedic and spine markets. Marketed under the DonJoy and ProCare brands, our broad range of over 600 rehabilitation products, including rigid knee braces, soft goods, and pain management products, are used in the prevention of injury, in the treatment of chronic conditions and for recovery after surgery or injury. Our regeneration products consist of bone growth stimulation devices that are used to treat nonunion fractures and as an adjunct therapy after spinal fusion surgery. We sell our products in the United States and in more than 40 other countries through networks of agents, distributors and our direct sales force that market our products to orthopedic and spine surgeons, podiatrists, orthopedic and prosthetic centers, third-party distributors, hospitals, surgery centers, physical therapists, athletic trainers and other healthcare professionals. Our rigid knee braces, soft goods, pain management and regeneration products represented 32.0%, 40.5%, 8.0% and 19.5%, respectively, of our consolidated net revenues for the first six months of 2005.

Segments

Prior to 2005, we disclosed the following reportable segments, which, except for Regeneration, were based on our sales channels: DonJoy, ProCare, OfficeCare, Regeneration and International. Effective 2005, we have aggregated the DonJoy, ProCare and OfficeCare segments into one new segment, Domestic Rehabilitation. In accordance with the aggregation criteria in SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, the historical segments have been aggregated due to changes in our management and compensation structure that focus on the results of Domestic Rehabilitation, taken as a whole, rather than on its separate components. The segment data for all prior periods have been restated (aggregated) to conform to the new segmentation. The following are our current reportable segments.

• Domestic Rehabilitation consists of the sale of our rehabilitation products (rigid knee braces, soft goods and pain management products) in the United States through three sales channels, DonJoy, ProCare and OfficeCare.

Through the DonJoy sales channel, we sell our rehabilitation products utilizing a few of our direct sales representatives and a network of approximately 300 independent commissioned sales representatives who are employed by approximately 45 independent sales agents. These sales representatives are primarily dedicated to the sale of our products to orthopedic surgeons, podiatrists, orthopedic and prosthetic centers, hospitals, surgery centers, physical therapists, athletic trainers and other healthcare professionals. Because certain of the DonJoy product lines require customer education on the application and use of the product, our sales representatives are technical specialists who receive extensive training both from us and the agent and use their expertise to help fit the patient with the product and assist the orthopedic professional in choosing the appropriate product to meet the patient’s needs. After a product order is received by a sales representative, we generally ship the product directly to the orthopedic professional and pay a sales commission to the agent. These commissions are reflected in sales and marketing expense in our consolidated statements of income.

Through the ProCare sales channel, which is comprised of approximately 37 direct and independent representatives that manage over 310 dealers focused on primary and acute facilities, we sell our rehabilitation products to national third-party distributors, other regional medical supply dealers and medical product buying groups, generally at a discount from list prices. The majority of these products are soft goods which require little or no patient education. The distributors and dealers generally resell these products to large hospital chains, hospital buying groups, primary care networks and orthopedic physicians for use by the patients.

Through the OfficeCare sales channel, we maintain an inventory of rehabilitation products (mostly soft goods) on hand at orthopedic practices for immediate distribution to the patient. For these products, we arrange billing to the patient or third-party payor after the product is provided to the patient. As of July 2, 2005, the OfficeCare program was located at over 800 physician offices throughout the United States. We have contracts with over 800 third-party payors.

• Regeneration consists of the sale of our bone growth stimulation products in the United States. Our OL1000 product is sold through a combination of the DonJoy channel direct sales representatives and over 100 additional sales representatives dedicated to selling our OL1000 product, of which approximately 45 are employed by us. The SpinaLogic product is also included in this segment and was, until the end of 2004, sold by DePuy Spine in the U.S. under an exclusive sales agreement. In January 2005, we amended the agreement with DePuy to divide the U.S. into territories in which DePuy Spine has exclusive sales rights and non-exclusive territories in which we are permitted to engage in our own sales efforts or retain another sales agent. These products are sold either directly to the patient or to independent distributors. We arrange billing to the third-party payors or patients, for products sold directly to the patient.

• International consists of the sale of our products in foreign countries through wholly-owned subsidiaries or independent distributors. We sell our products in over 40 foreign countries, primarily in Europe, Canada, Australia and Japan.

Our Strategy

Our strategy is to increase revenue and profitability and enhance cash flow by strengthening our market leadership position. Our key initiatives to implement this strategy include:

• Grow Our Regeneration Business. We have integrated the sales force for our OL1000 Regeneration product into our domestic rehabilitation sales organization. We have also increased the number of regeneration sales specialists dedicated to selling our OL1000 product. We believe these specialists will be able to use the established relationships of our DonJoy sales representatives to enhance sales of the OL1000 product. We have also restructured our distribution arrangement with DePuy Spine to permit us to sell the SpinaLogic product directly or through other independent sales representatives in those geographical parts of the country where sales were not previously meeting our expectations. We believe that our new selling strategies for Regeneration products will drive faster growth for this business.

• Further Penetrate Our Existing Customer Base. We are focused on increasing the number and variety of products sold to our existing customers. We believe that our OfficeCare program provides us with a strong platform for selling additional products to our existing customers because of the amount of contact our sales representatives have with the orthopedic practices who participate in the program. We also believe that the addition of the bone growth stimulation products to our existing product lines will further this goal by providing significant cross-selling opportunities.

• Continue to Introduce New Products and Product Enhancements. We have a history of developing and introducing innovative products into the marketplace, and are committed to continuing that tradition by introducing new products across our product platform. In the six months ended July 2, 2005, we launched 7 new products. We believe that product innovation through effective and focused research and development will provide a sustainable competitive advantage. We believe we are currently a technology leader in several product categories and we intend to continue to develop next generation technologies.

• Expand Our OfficeCare Channel. Our OfficeCare channel currently includes over 800 physician offices encompassing over 3,000 physicians. We believe that our OfficeCare channel serves a growing need among orthopedic practices to have a number of products readily available for immediate distribution to patients and represents an opportunity for sales growth. We intend to expand our OfficeCare channel into more “high-volume” orthopedic offices, thereby increasing the number of potential customers to whom we sell our products. In the six months ended July 2, 2005, we added approximately 109 net new offices to our OfficeCare channel, including approximately 45 accounts added through our acquisition of the stock and bill business of Superior Medical Equipment, LLC.

• Maximize Existing and Secure Additional National Accounts. We plan to capitalize on the growing practice in healthcare in which hospitals and other large healthcare providers seek to consolidate their purchasing activities to national buying groups. Contracts with these national accounts represent a significant opportunity for sales growth. We believe that our broad range of products is well suited to the goals of these buying groups and intend to aggressively pursue these contracts. In the six months ended July 2, 2005, we signed a new three-year, multi-source contract with MedAssets Supply Chain Systems for our soft goods products.

• Expand Product Offerings for the Spine. Our SpinaLogic product is used as an adjunct therapy following spinal fusion surgery. SpinaLogic was our first product that targeted the spine market. According to Frost & Sullivan, back pain is the number one cause of healthcare expenditure in the United States. As a result, we believe that expanding our product offerings in this market represents a significant growth opportunity. In 2004, we launched a new compression back brace to expand our product offering for the spine market.

• Expand International Sales. International sales have historically represented less than 15% of our revenues. Although our presence outside the United States has been limited, we have successfully established direct distribution capabilities in major international markets. We believe that sales to foreign markets continue to represent a significant growth opportunity and we intend to continue to develop direct distribution capabilities in selected foreign markets.

• Pursue Selective Strategic Acquisitions. We believe that strategic acquisitions represent an attractive and efficient means to broaden our product lines and increase our revenue. We intend to pursue acquisition opportunities that enhance sales growth, are accretive to earnings, increase customer penetration and/or provide geographic diversity.

Critical Accounting Policies and Estimates

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

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

Provisions for Contractual Allowances and Doubtful Accounts. We maintain provisions for contractual allowances for reimbursement amounts from our third-party payor customers based on negotiated contracts and historical experience for non-contracted payors. We also maintain provisions for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We have contracts with certain third-party payors for our third-party reimbursement billings, which call for specified reductions in reimbursement of gross billed amounts based upon contractual reimbursement rates related to our rehabilitation products. For 2004 and for the first six months of 2005, we reserved for and reduced gross revenues from third-party payors related to our rehabilitation products by between 29% and 39% for allowances related to these contractual reductions. For our Regeneration business, we record revenue net of actual contractual allowances and discounts from our gross prices, which are determined on a specific identification basis and amount to approximately 30% to 34% of our gross prices for bone growth stimulation products.

Our reserve for doubtful accounts is based upon estimated losses from customers who are billed directly and the portion of third-party reimbursement billings that ultimately become the financial responsibility of the end user patients. Direct-billed customers represented approximately 51% of our net accounts receivable at July 2, 2005 and approximately 52% of our net accounts receivable at December 31, 2004, and we have historically experienced write-offs of less than 2% of these accounts receivable. Our third-party reimbursement customers include all of the customers of our OfficeCare business segment, the majority of our Regeneration business segment and certain third-party payor customers of our DonJoy business segment, including insurance companies, managed care companies and certain governmental payors such as Medicare. Our third-party payor customers represented approximately 32% and 31% of our net revenue for the three months ended July 2, 2005 and June 26, 2004, respectively, and approximately 32% and 30% of our net revenue for the six months ended July 2, 2005 and June 26, 2004, respectively, and approximately 49% of our net accounts receivable at July 2, 2005 and approximately 48% of our net accounts receivable at December 31, 2004. We estimate bad debt expense to be approximately 3% to 8% of gross amounts billed to these third-party reimbursement customers. If the financial condition of our

customers were to deteriorate resulting in an impairment of their ability to make payments or if third-party payors were to deny claims for late filings, incomplete information or other reasons, additional provisions may be required.

Historically, we have relied on third-party billing service providers to provide information about the accounts receivable of certain of our third-party payor customers, including the data utilized to determine reserves for contractual allowances and doubtful accounts. Based on information currently available to us, we believe we have provided adequate reserves for our third-party payor accounts receivable. If claims are denied, or amounts are otherwise not paid, in excess of our estimates, the recoverability of our net accounts receivable could be reduced by a material amount. In addition, if our third-party insurance billing service provider does not perform to our expectations we may be required to increase our reserve estimates.

Reserves for Excess and Obsolete Inventories. We provide reserves for estimated excess or obsolete inventories equal to the difference between the cost of inventories on hand plus future purchase commitments and the estimated market value based upon assumptions about future demand. If future demand is less favorable than currently projected by management, additional inventory write-downs may be required. In addition, reserves for inventories on hand in our OfficeCare locations are provided based on historical shrinkage rates of approximately 12%. If actual future demand or actual shrinkage rates differ from our estimates, revisions to these reserves may be required.

Reserves for Rebates. We offer rebates to certain of our distributors based on sales volume, sales growth and to reimburse the distributor for certain discounts. We record estimated reductions to revenue for customer rebate programs based upon historical experience and estimated revenue levels.

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

Valuation Allowance for Deferred Tax Asset. As of July 2, 2005, we have approximately $45.3 million of net deferred tax assets on our balance sheet related primarily to tax deductible goodwill arising at the date of our reorganization in 2001 and not recognized for book purposes and net losses reported during 2002. Realization of our deferred tax assets is dependent on our ability to generate future taxable income prior to the expiration of our net operating loss carryforwards. Our management believes that it is more likely than not that the deferred tax assets will be realized based on forecasted future taxable income. However, there can be no assurance that we will meet our expectations of future taxable income. Management will evaluate the realizability of the deferred tax assets on a quarterly basis to assess any need for valuation allowances.

Goodwill and Other Intangibles. In 2002, Statement of Financial Accounting Standards No. 142, or SFAS No. 142, Goodwill and Other Intangible Assets became effective and as a result, we ceased amortization of goodwill. In lieu of amortization, we are required to perform an annual review for impairment. Goodwill is considered to be impaired if we determine that the carrying value of the segment or reporting unit exceeds its fair value. At October 1, 2004, our goodwill was evaluated for impairment and we determined that no impairment existed at that date. With the exception of goodwill related to our Regeneration acquisition of $39 million, we believe that the goodwill acquired through December 31, 2004 benefits the entire enterprise and since our reporting units share the majority of our assets, we compared the total carrying value of our consolidated net assets (including goodwill) to the fair value of the Company. With respect to goodwill related to our Regeneration acquisition, we compared the carrying value of the goodwill related to the Regeneration segment to the fair value of the Regeneration segment.

At December 31, 2004, our other intangible assets were evaluated for impairment as required by SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. The determination of the fair value of certain acquired assets and liabilities is subjective in nature and often involves the use of significant estimates and assumptions. Determining the fair values and useful lives of intangible assets requires the exercise of judgment. Upon initially recording certain of our other intangible assets, including the intangible assets that were acquired in connection with the Regeneration acquisition, we used independent valuation firms to assist us in determining the appropriate values for these assets. Subsequently, we have used the same methodology and updated our assumptions. While there are a number of different generally accepted valuation methods to estimate the value of intangible assets acquired, we primarily used the undiscounted cash flows expected to result from the use of the assets. This method requires significant management judgment to forecast the future operating results used in the analysis. In addition, other significant estimates are required such as residual growth rates and discount factors. The estimates we have used are consistent with the plans and estimates that we use to manage our business and are based on available historical information and industry averages.

The value of our goodwill and other intangible assets is exposed to future impairments if we experience future declines in operating results, if negative industry or economic trends occur or if our future performance is below our projections or estimates.

Results of Operations

We operate our business on a manufacturing calendar, with our fiscal year always ending on December 31. Each quarter is 13 weeks, consisting of one five-week and two four-week periods. Our first and fourth quarters may have more or less operating days from year to year based on the days of the week on which holidays and December 31 fall. The quarters ended July 2, 2005 and June 26, 2004 each included 64 days. The six months ended July 2, 2005 and June 26, 2004 included 129 days and 125 days, respectively.

Three Months Ended July 2, 2005 Compared To Three Months Ended June 26, 2004

Net Revenues. Set forth below are net revenues, in total and on a per day basis, for our reporting segments (in thousands):

Net revenues:

	Three Months Ended
	July 2, 2005		% of Net Revenues	June 26, 2004		% of Net Revenues	Increase		% Increase
Domestic Rehabilitation	$	47,078	68.4	$	43,301	68.5	$	3,777	8.7
Regeneration	13,520		19.6	12,705		20.1	815		6.4
International	8,229		12.0	7,180		11.4	1,049		14.6
Consolidated net revenues	$	68,827	100.0	$	63,186	100.0	$	5,641	8.9

Average revenues per day:

	Three Months Ended
	July 2, 2005		June 26, 2004		Increase		% Increase
Domestic Rehabilitation	$	735.6	$	676.6	$	59.0	8.7
Regeneration	211.3		198.5		12.8		6.4
International	128.5		112.1		16.4		14.6
Consolidated average net revenues per day	$	1,075.4	$	987.2	$	88.2	8.9
Number of operating days	64		64

Net revenues in our Domestic Rehabilitation segment increased due to sales force productivity in our DonJoy sales channel which contributed to increased sales in several product lines, including cold therapy and osteoarthritis braces, sales of new products, growth in sales related to national contracts in our ProCare sales channel and the addition of new OfficeCare locations, including approximately 45 accounts added in connection with our March 2005 acquisition of SME. Net revenues in our Regeneration segment increased due to an increase in units billed to third-party payors partially offset by a reduction in sales to distributors. International net revenues increased partly due to favorable changes in exchange rates compared to the rates in effect in the second quarter of 2004. Excluding the impact of exchange rates, local currency international revenue increased 10.9% in the second quarter of 2005 compared to the second quarter of 2004, due to the launch of new products and the addition of our new direct sales subsidiary in the Nordic countries, effective September 1, 2004.

Gross Profit. Set forth below is gross profit information for our reporting segments (in thousands):

	Three Months Ended
	July 2, 2005		% of Net Revenues	June 26, 2004		% of Net Revenues	Increase		% Increase
Domestic Rehabilitation	$	26,686	56.7	$	24,515	56.6	$	2,171	8.9
Regeneration	12,003		88.8	11,278		88.8	725		6.4
International	5,565		67.6	4,440		61.8	1,125		25.3
Consolidated gross profit	$	44,254	64.3	$	40,233	63.7	$	4,021	10.0

The improvement in consolidated gross profit and gross profit margin is related partly to the favorable impact of increased revenue from the higher gross margin of products sold in our Regeneration segment and partly due to certain manufacturing cost reductions, offset by increased freight costs. The increase in the International segment gross profit is primarily related to the favorable impact of changes in exchange rates and the addition of the incremental in-market gross margin from our direct sales in the Nordic countries since September 1, 2004.

Operating Expenses. Set forth below is operating expense information (in thousands):

	Three Months Ended
	July 2, 2005		% of Net Revenues	June 26, 2004		% of Net Revenues	Increase (Decrease)		% Increase (Decrease)
Sales and marketing	$	21,336	31.0	$	19,770	31.3	$	1,566	7.9
General and administrative	7,052		10.2	6,804		10.8	248		3.6
Research and development	1,691		2.5	1,402		2.2	289		20.6
Amortization of acquired intangibles	1,153		1.7	1,153		1.8	—		—
Consolidated operating expenses	$	31,232	45.4	$	29,129	46.1	$	2,103	7.2

Research and Development Expenses. The increase in research and development expense is primarily due to an increase in costs associated with prototyping new products and certain severance costs incurred in the current year.

Income from Operations. Set forth below is income from operations information for our reporting segments (in thousands):

	Three Months Ended
	July 2, 2005			% of Net Revenue		June 26, 2004			% of Net Revenue		Increase (Decrease)			% Increase (Decrease)
Domestic Rehabilitation	$	9,969		21.2		$	8,548		19.7		$	1,421		16.6
Regeneration	3,519			26.0		3,075			24.2		444			14.4
International	2,203			26.8		1,449			20.2		754			52.0
Income from operations of reportable segments	15,691			22.8		13,072			20.7		2,619			20.0
Expenses not allocated to segments	(2,669		)	(3.9	)	(1,968		)	(3.1	)	(701		)	35.6
Consolidated income from operations	$	13,022		18.9		$	11,104		17.6		$	1,918		17.3

The increase in income from operations for each of our segments is due to increased net revenues and gross profit, which exceed increased operating expenses for each respective segment.

Interest Expense, Net of Interest Income. Interest expense, net of interest income, was $1.2 million in the second quarter of 2005 compared to $3.1 million in the second quarter of 2004. The decrease is due to reduced debt levels following the June 2004 redemption of our senior subordinated notes and other debt payments made after the second quarter of 2004.

We incurred charges aggregating $7.8 million in the second quarter of 2004 related to the redemption of our senior subordinated notes.

Other Expense. Other expense reflects net foreign exchange transaction losses for the second quarters of both 2005 and 2004.

Provision for Income Taxes. Our estimated worldwide effective tax rate was 40% for the second quarters of both 2005 and 2004.

Net Income. Net income was $6.9 million for the second quarter of 2005 compared to net income of $0.1 million for the second quarter of 2004 as a result of the changes discussed above.

Six Months Ended July 2, 2005 Compared To Six Months Ended June 26, 2004

Net Revenues. Set forth below are net revenues, in total and on a per day basis, for our reporting segments (in thousands):

Net revenues:

	Six Months Ended
	July 2, 2005		% of Net Revenues	June 26, 2004		% of Net Revenues	Increase		% Increase
Domestic Rehabilitation	$	94,598	68.0	$	85,711	68.3	$	8,887	10.4
Regeneration	27,112		19.5	24,911		19.9	2,201		8.8
International	17,367		12.5	14,805		11.8	2,562		17.3
Consolidated net revenues	$	139,077	100.0	$	125,427	100.0	$	13,650	10.9

Average revenues per day:

	Six Months Ended
	July 2, 2005		June 26, 2004		Increase		% Increase
Domestic Rehabilitation	$	733.3	$	685.7	$	47.6	6.9
Regeneration	210.2		199.3		10.9		5.5
International	134.6		118.4		16.2		13.7
Consolidated average net revenues per day	$	1,078.1	$	1,003.4	$	74.7	7.4
Number of operating days	129		125

Net revenues in all of our segments increased partly due to the six months ended July 2, 2005 including four more operating days than the six months ended June 26, 2004. Net revenues in our Domestic Rehabilitation segment also increased due to sales force productivity in our DonJoy sales channel which contributed to increased sales in several product lines, including cold therapy and osteoarthritis braces, sales of new products, growth in sales related to national contracts in our ProCare sales channel and the addition of approximately 109 net new OfficeCare locations, including approximately 45 accounts added in connection with our March 2005 acquisition of SME. Net revenues in our Regeneration segment increased due to an increase in units billed to third-party payors, partially offset by a reduction in sales to distributors. International net revenues increased partly due to favorable changes in exchange rates compared to the rates in effect in the first six months of 2004. Excluding the impact of exchange rates, local currency international revenue increased 13.9% (10.4% based on average revenues per day) in the first six months of 2005 compared to the first six months of 2004, due to the launch of new products and the addition of our new direct sales subsidiary in the Nordic countries, effective September 1, 2004.

Gross Profit. Set forth below is gross profit information for our reporting segments (in thousands):

	Six Months Ended
	July 2, 2005		% of Net Revenues	June 26, 2004		% of Net Revenues	Increase		% Increase
Domestic Rehabilitation	$	52,738	55.7	$	48,403	56.5	$	4,335	9.0
Regeneration	23,957		88.4	21,308		85.5	2,649		12.4
International	11,588		66.7	9,404		63.5	2,184		23.2
Consolidated gross profit	$	88,283	63.5	$	79,115	63.1	$	9,168	11.6

The improvement in consolidated gross profit and gross profit margin is related partly to the favorable impact of increased revenue from the higher gross margin of the products sold in our Regeneration segment and partly due to certain manufacturing cost reductions, offset by increased freight costs. Gross profit decreased as a percentage of net revenues in the Domestic Rehabilitation segment primarily due to increased freight costs and a change in product mix. The Regeneration segment gross profit increased as a percentage of revenues due to reduced costs of goods sold for these products due to the integration of this business, and a higher mix of insurance sales, which have higher average selling prices and therefore generate higher gross margins than sales to distributors. The increase in the International segment gross profit is primarily related to the favorable impact of changes in exchange rates and the addition of the incremental in-market gross margin from our direct sales in the Nordic countries since September 1, 2004.

Operating Expenses. Set forth below is operating expense information (in thousands):

	Six Months Ended
	July 2, 2005		% of Net Revenues	June 26, 2004		% of Net Revenues	Increase (Decrease)			% Increase (Decrease)
Sales and marketing	$	42,772	30.8	$	38,964	31.1	$	3,808		9.8
General and administrative	14,500		10.4	13,548		10.8	952			7.0
Research and development	3,263		2.3	2,780		2.2	483			17.4
Amortization of acquired intangibles	2,305		1.7	2,425		1.9	(120		)	(4.9	)
Consolidated operating expenses	$	62,840	45.2	$	57,717	46.0	$	5,123		8.9

Sales and Marketing Expenses. The increase in sales and marketing expenses is due to costs associated with increased commissions on increased sales, additional sales personnel related to our new selling strategies in our Regeneration segment, increased advertising and marketing programs and increased costs due to the six months ended July 2, 2005 including four more operating days than the six months ended June 26, 2004.

General and Administrative Expenses. The increase in general and administrative expenses is primarily due to increased legal costs and costs associated with our compliance with the Sarbanes-Oxley Act of 2002 and increased costs due to the six months ended July 2, 2005 including four more operating days than the six months ended June 26, 2004, partially offset by savings related to the integration of the Regeneration business.

Research and Development Expenses. The increase in research and development expense is primarily due to an increase in costs associated with prototyping new products, severance costs incurred in the current year and increased costs due to the six months ended July 2, 2005 including four more operating days than the six months ended June 26, 2004.

Amortization of Acquired Intangibles. Amortization of acquired intangibles relates to intangible assets acquired in connection with the Regeneration acquisition, which are being amortized over lives ranging from 4 months to 10 years. The decrease in amortization of acquired intangibles is due to 2004 amortization expense related to an intangible asset for acquired customer backlog that became fully amortized in the first quarter of 2004.

Income from Operations. Set forth below is income from operations information for our reporting segments (in thousands):

	Six Months Ended
	July 2, 2005			% of Net Revenue		June 26, 2004			% of Net Revenue		Increase (Decrease)			% Increase (Decrease)
Domestic Rehabilitation	$	19,036		20.1		$	16,889		19.7		$	2,147		12.7
Regeneration	7,199			26.6		4,977			20.0		2,222			44.6
International	4,845			27.9		3,790			25.6		1,055			27.8
Income from operations of reportable segments	31,080			22.3		25,656			20.5		5,424			21.1
Expenses not allocated to segments	(5,637		)	(4.1	)	(4,258		)	(3.4	)	(1,379		)	32.4
Consolidated income from operations	$	25,443		18.3		$	21,398		17.1		$	4,045		18.9

The increase in income from operations for each of our segments is due to increased net revenues and gross profit, which exceed increased operating expenses for each respective segment.

Interest Expense, Net of Interest Income. Interest expense, net of interest income, was $2.5 million for the first six months of 2005 compared to $6.6 million in the first six months of 2004. The decrease is due to reduced debt levels following the June 2004 redemption of our senior subordinated notes and other debt payments made after the second quarter of 2004.

We incurred charges aggregating $7.8 million in the second quarter of 2004 related to the redemption of our senior subordinated notes.

Other Expense. Other expense reflects net foreign exchange transaction losses for the first six months of both 2005 and 2004.

Provision for Income Taxes. Our estimated worldwide effective tax rate was 40% for the first six months of both 2005 and 2004.

Net Income. Net income was $13.5 million for the first six months of 2005 compared to net income of $4.0 million for the first six months of 2004 as a result of the changes discussed above.

Liquidity and Capital Resources

Our principal liquidity requirements are to service our debt and meet our working capital and capital expenditure needs. Total indebtedness at July 2, 2005 was $70.8 million. Total cash and cash equivalents were $6.2 million at July 2, 2005.

Net cash provided by operating activities was $20.2 million and $18.5 million for the six months ended July 2, 2005 and June 26, 2004, respectively. The net cash provided by operations in both the 2005 and 2004 periods primarily reflects positive operating results, partially offset by an increase in net working capital. For the six months ended July 2, 2005, cash of approximately $1.9 million was used to pay for restructuring costs accrued in 2004.

Cash flows used in investing activities were $5.3 million and $4.0 million for the six months ended July 2, 2005 and June 26, 2004, respectively. Cash used in investing activities for the first six months of 2005 included $3.1 million used for the acquisition of SME and $2.1 million used for capital expenditures. Cash used in investing activities for the first six months of 2004 included the final $1.0 million payment for the acquisition of certain patent licenses in connection with the settlement of a patent litigation matter in 2003 and $2.8 million used for capital expenditures.

Cash flows used in financing activities were $19.8 million and $22.7 million for the six months ended July 2, 2005 and June 26, 2004, respectively. In the first six months of 2005, the cash used by financing activities included $2.8 million of net proceeds received from

the exercise of stock options, $0.5 million from the issuance of stock under our Employee Stock Purchase Plan and approximately $1.8 million received from the collection of a note receivable, offset by approximately $24.3 million used to pay down long-term debt and $0.6 million paid for debt issuance costs incurred in connection with the amendment to our credit agreement. Cash used in financing activities in the first six months of 2004 included $79.7 million used to redeem our senior subordinated notes, offset by the net proceeds, amounting to $56.4 million, from the sale of shares by us in February 2004. Also in the first six months of 2004, proceeds of $1.9 million were received from the issuance of common stock through our Employee Stock Purchase Plan and the exercise of stock options and the $0.3 million was received from collection of a note receivable.

Contractual Obligations and Commercial Commitments

On May 5, 2005, we completed an amendment to our credit agreement. Previously, the credit agreement consisted of a $100 million term loan, of which approximately $93.8 million was owed as of the date of the amendment, and a $30 million revolving line of credit on which no amounts had been drawn. The amended credit agreement provides for total borrowings of $125 million, consisting of a term loan of $50 million, which was fully drawn at closing and $75 million available under a revolving line of credit, of which approximately $43.8 million was drawn at closing. Prior to July 2, 2005, we repaid $23.0 million of the amounts outstanding under the revolving line of credit and $20.8 million remained outstanding as of July 2, 2005. In addition, we were contingently liable for outstanding letters of credit aggregating approximately $4.0 million at July 2, 2005. Under the amended agreement, up to $25 million of outstanding borrowings may be denominated in British Pounds or Euros. As of July 2, 2005, all borrowings under the credit agreement were denominated in U.S. dollars. Borrowings under the term loan and on the revolving credit facility bear interest at variable rates (either a LIBOR rate or the lenders’ base rate, as elected by us) plus an applicable margin, which varies based on our leverage ratio. The amended agreement reduced our interest rate to LIBOR plus an applicable margin of 1.25% to 2.00%, or the lenders’ base rate plus an applicable margin of 0.25% to 1.00%. At our current leverage ratio, the applicable interest rate is either LIBOR plus 1.50% or base rate plus 0.50%. The weighted average interest rate applicable to our borrowings as of July 2, 2005 was 5.03%.

Repayment. We are required to make quarterly principal payments on the term loan of $1.25 million, beginning in September 2005 and increasing to $1.875 million in September 2007, $3.125 million in September 2008 and $5 million in September 2009. The balance of the term loan, if any, and any borrowings under the revolving credit facility are due in full on May 5, 2010. In addition to scheduled principal payments, we are required to make annual mandatory payments of the term loan in an amount equal to 50% of our excess cash flow if our ratio of total debt to consolidated EBITDA (earnings before interest, taxes, depreciation and amortization) exceeds 2.25 to 1.00. Excess cash flow represents our net income adjusted for extraordinary gains or losses, depreciation, amortization and other non-cash charges, changes in working capital, changes in deferred revenues, payments for capital expenditures, repayment of certain indebtedness and payments for certain common stock repurchases. In addition, the term loan is subject to mandatory prepayments in an amount equal to (a) 50% of the net cash proceeds of certain equity issuances by us if our ratio of total debt to consolidated EBITDA exceeds 2.25 to 1.00, (b) 100% of certain debt issuances by us and (c) 100% of the net cash proceeds of certain asset sales or other dispositions of property by us, in each case subject to certain exceptions.

Covenants. The credit facility contains a number of covenants that, among other things, restrict our ability to (i) incur additional indebtedness; (ii) incur or guarantee obligations; (iii) pay dividends or make other distributions (except for certain tax distributions); (iv) redeem or repurchase equity, make investments, loans or advances, make acquisitions; (v) engage in mergers or consolidations; (vi) change the business we conduct; (vii) grant liens, sell our assets; (viii) or engage in certain other activities. The amended agreement provides less restriction than our previous agreement in most of these areas. The credit agreement also requires us to maintain a ratio of total debt to consolidated EBITDA of no more than 2.75 to 1.00 and a ratio of consolidated EBITDA to fixed charges of at least 1.50 to 1.00. At July 2, 2005, our ratio of total debt to consolidated EBITDA was approximately 1.15 to 1.00 and our ratio of consolidated EBITDA to fixed charges was approximately 3.82 to 1.00. We were in compliance with all covenants as of July 2, 2005.

Debt issuance costs. In connection with the amendment, we incurred costs of approximately $0.6 million, which were capitalized. These costs, along with the unamortized balance of the costs incurred in connection with the original agreement and a previous amendment, are being amortized over the term of the amended credit agreement.

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

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

We do not currently have and have never had any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

As of July 2, 2005, we had available a total of approximately $6.2 million in cash and cash equivalents and $54.2 million available under our revolving credit facility. For the remainder of 2005, we expect to spend total cash of up to approximately $8.0 million for the following requirements:

• approximately $2.5 million scheduled principal and interest payments on our credit facility; and

• up to approximately $5.5 million for capital expenditures.

In addition, we expect to make other general corporate payments in 2005.

Seasonality

We generally record our highest net revenues per day in the fourth quarter due to a greater number of orthopedic surgeries and injuries resulting from increased sports activity, particularly football and skiing. In addition, during the fourth quarter, a patient has a greater likelihood of having satisfied his or her annual insurance deductible than in the first three quarters of the year, and thus there is an increase in the number of elective orthopedic surgeries. We follow a manufacturing calendar that has a varied number of operating days in each quarter. Although on a per day basis revenues may be higher in a certain quarter, total net revenues may be higher or lower based upon the number of operating days in such quarter. Conversely, we generally have lower net revenues per day during our second quarter as a result of decreased sports activity, with the end of both football and skiing seasons. For 2005 and 2004, our number of operating days per quarter is as follows:

	2005	2004
First quarter	65	61
Second quarter	64	64
Third quarter	63	63
Fourth quarter	61	65
Total operating days	253	253

Forward-Looking Statements

This quarterly report on Form 10-Q contains, in addition to historical information, statements by us with respect to our expectations regarding financial results and other aspects of our business that involve risks and uncertainties and may constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These statements reflect our current views and are based on certain assumptions. Actual results could differ materially from those currently anticipated as a result of a number of factors, including, in particular, risks and uncertainties associated with the growth of the bone growth stimulation market, changes in coding and reimbursement levels by government and private payers, changes in other government regulations and other material risks discussed under the heading “Risk Factors” in our Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission in March 2005. If the expectations or assumptions underlying our forward-looking statements prove inaccurate or if risks or uncertainties arise, actual results could differ materially from those predicted in any forward-looking statement.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks as part of our ongoing business operations. Our primary exposures include changes in interest rates and foreign exchange rates.

We are exposed to interest rate risk in connection with the term loan and borrowings under our revolving credit facility, which bear interest at floating rates based on the LIBOR rate or the prime rate plus an applicable borrowing margin. For variable rate debt, interest rate changes generally do not affect the fair market value of the underlying debt, but do impact future earnings and cash flows, assuming other factors are held constant.

As of July 2, 2005, we had $70.8 million of variable rate debt represented by borrowings under our credit facility (at a weighted-average interest rate of 5.03% at July 2, 2005). Based on the balance outstanding under the credit facility as of July 2, 2005, an immediate change of one percentage point in the applicable interest rate would have caused an increase or decrease in interest expense of approximately $0.7 million on an annual basis. At July 2, 2005, up to $54.2 million of variable rate borrowings were available under our $75.0 million revolving credit facility. As of July 2, 2005, we had $20.8 outstanding under the revolving credit facility, and we were contingently liable for letters of credit issued under the facility aggregating approximately $4.0 million. We may use derivative financial instruments, where appropriate, to manage our interest rate risks; however, as a matter of policy, we do not enter into derivative or other financial investments for trading or speculative purposes. At July 2, 2005, we had no such derivative financial instruments outstanding.

Through our wholly-owned international subsidiaries, we sell products in Euros, Pounds Sterling, Canadian Dollars and Danish Krones. The U.S. dollar equivalent of our international sales denominated in foreign currencies in the second quarter of 2005 and 2004 were favorably impacted by foreign currency exchange rate fluctuations with the weakening of the U.S. dollar against the foreign currencies of our subsidiaries. The U.S. dollar equivalent of the related costs denominated in these foreign currencies were unfavorably impacted during the same period. In addition, the costs associated with our Mexico-based manufacturing operations are incurred in Mexican pesos. As we continue to distribute and manufacture our products in selected foreign countries, we expect that future sales and costs associated with our activities in these markets will continue to be denominated in the applicable foreign currencies, which could cause currency fluctuations to materially impact our operating results. Occasionally we seek to reduce the potential impact of currency fluctuations on our business through hedging transactions. At July 2, 2005, we had no hedging transactions in place.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in SEC Rules 13a – 15(e) and 15d – 15(e)) as of the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There has been no change to our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in lawsuits arising in the ordinary course of business. This includes patent and other intellectual property disputes between our various competitors and us. With respect to these matters, we believe that we have adequate insurance coverage or have made adequate accruals for related costs, and we may also have effective legal defenses. We are not aware of any pending lawsuits that could have a material adverse effect on our business, financial condition and results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There have been no repurchases of our common stock during the six months ended July 2, 2005 under the program authorized by our board of directors in September 2004 that allows us to repurchase up to $20 million of our common stock. The shares may be repurchased at times and prices as determined by management and may be completed through open market or privately negotiated transactions. The repurchase program provides that repurchases will be made in accordance with applicable state and federal law and in accordance with the terms and subject to the restrictions of Rule 10b-18 under the Securities Exchange Act of 1934, as amended. Shares will be retired and cancelled upon repurchase. We obtained an amendment to our credit agreement permitting the stock repurchase program. Through December 31, 2004, we had repurchased 837,300 shares of our common stock at an average price of $17.62 per share, for an aggregate total cost of approximately $14.8 million.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

We held the 2005 annual meeting of stockholders on May 26, 2005. The stockholders were asked to vote on the election of three individuals to the Board of Directors of the Company and on one other proposal. All director nominees were elected to the Board and the other proposal was approved. The results of the voting were as follows:

(i) Kirby L. Cramer, Leslie H. Cross and Lesley H. Howe were elected as members of the Board in Class I. Mr. Cramer received 17,954,281 votes in favor of his nomination and 2,568,906 votes were cast withholding approval. Mr. Cross received 19,547,081 votes in favor of his nomination and 976,106 votes were cast withholding approval. Mr. Howe received 20,197,152 votes in favor of his nomination and 326,035 votes were cast withholding approval.

(ii) The second proposal submitted to the stockholders was ratification of the appointment of Ernst & Young LLP, certified public accountants, as independent accountants to audit the accounts of the Company for the fiscal year ending December 31, 2005. This proposal received 20,476,169 votes in favor, 45,566 votes against and 1,452 votes to abstain, and there were no broker non-votes.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

(a) Exhibits

3.1		Amended and Restated Certificate of Incorporation of dj Orthopedics, Inc. (Incorporated by reference to Exhibit 4.1 to the Registration Statement of dj Orthopedics, Inc. on Form S-8 (Reg. No. 333-73966)).

3.2		Certificate of Amendment of Amended and Restated Certificate of Incorporation of dj Orthopedics, Inc. (Incorporated by reference to the Registration Statement of dj Orthopedics, Inc. on Form S-3 (Reg. No. 333-111465)).

3.3		Amended and Restated By-laws of dj Orthopedics, Inc. (Incorporated by reference to Exhibit 4.2 to the Registration Statement of dj Orthopedics, Inc. on Form S-8 (Reg. No. 333-73966)).

10.1#		Amendment Number Two to the dj Orthopedics, Inc. 2001 Non-Employee Director Stock Option Plan, dated May 3, 2005 (Incorporated by reference to dj Orthopedics, Inc.’s Report on 8-K dated April 29, 2005).

10.2		Amended and Restated Credit Agreement, dated May 5, 2005, among dj Orthopedics, LLC, dj Orthopedics, Inc., certain foreign subsidiaries party thereto from time to time, Wachovia Bank, National Association, as administrative agent, and lenders party thereto (Incorporated by reference to dj Orthopedics, Inc.’s Report on 8-K dated May 5, 2005).

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.0*		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

#		Indicates management contract or compensation plans.

*		This certification is being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of dj Orthopedics, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	DJ ORTHOPEDICS, INC.
	(Registrant)

Date: August 5, 2005	BY:	/s/ Leslie H. Cross
	Leslie H. Cross
	President and Chief Executive Officer
	(Principal Executive Officer)

Date: August 5, 2005	BY:	/s/ Vickie L. Capps
	Vickie L. Capps
	Senior Vice President, Finance, Chief
	Financial Officer and Treasurer
	(Principal Financial and Accounting Officer)

INDEX TO EXHIBITS

3.1		Amended and Restated Certificate of Incorporation of dj Orthopedics, Inc. (Incorporated by reference to Exhibit 4.1 to the Registration Statement of dj Orthopedics, Inc. on Form S-8 (Reg. No. 333-73966))

3.2		Certificate of Amendment of Amended and Restated Certificate of Incorporation of dj Orthopedics, Inc. (Incorporated by reference to the Registration Statement of dj Orthopedics, Inc. on Form S-3 (Reg. No. 333-111465))

3.3		Amended and Restated By-laws of dj Orthopedics, Inc. (Incorporated by reference to Exhibit 4.2 to the Registration Statement of dj Orthopedics, Inc. on Form S-8 (Reg. No. 333-73966))

10.1#		Amendment Number Two to the dj Orthopedics, Inc. 2001 Non-Employee Director Stock Option Plan, dated May 3, 2005 (Incorporated by reference to dj Orthopedics, Inc.’s Report on 8-K dated April 29, 2005).

10.2		Amended and Restated Credit Agreement, dated May 5, 2005, among dj Orthopedics, LLC, dj Orthopedics, Inc., certain foreign subsidiaries party thereto from time to time, Wachovia Bank, National Association, as administrative agent, and lenders party thereto (Incorporated by reference to dj Orthopedics, Inc.’s Report on 8-K dated May 5, 2005).

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.0*		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

#		Indicates management contract or compensation plans.

*		This certification is being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of dj Orthopedics, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

DJO Opco (DJO) Inactive 10-Q2005 Q2 Quarterly report

Content analysis

Critical Accounting Policies and Estimates

Income from Operations. Set forth below is income from operations information for our reporting segments (in thousands):

Income from Operations. Set forth below is income from operations information for our reporting segments (in thousands):

Disclosure Controls and Procedures