DJO Opco 10Q 2005 Q3 Quarterly report

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 OCTOBER 1, 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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No ý

The number of shares of the registrant’s Common Stock outstanding at October 28, 2005 was 21,867,122 shares.

DJ ORTHOPEDICS, INC.

FORM 10-Q INDEX



PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Unaudited Condensed Consolidated Balance Sheets as of October 1, 2005 and December 31, 2004

	Unaudited Condensed Consolidated Statements of Income for the three and nine months ended October 1, 2005 and September 25, 2004

	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended October 1, 2005 and September 25, 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 CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and par value data)

	October 1, 2005			December 31, 2004
Assets
Current assets:
Cash and cash equivalents	$		1,077	$		11,182
Accounts receivable, net of provisions for contractual allowances and doubtful accounts of $24,593 and $26,628 at October 1, 2005 and December 31, 2004, respectively	60,146			46,981
Inventories, net	23,904			19,071
Deferred tax asset, current portion	7,902			7,902
Other current assets	4,814			5,359
Total current assets	97,843			90,495
Property, plant and equipment, net	15,353			15,463
Goodwill	100,981			96,639
Intangible assets, net	53,229			54,717
Debt issuance costs, net	2,619			2,374
Deferred tax asset	32,576			46,100
Other assets	2,444			1,062
Total assets	$	305,045		$			306,850

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	9,034		$			7,300
Accrued compensation	6,983			5,484
Accrued commissions	3,569			4,425
Long-term debt, current portion	5,000			5,000
Accrued restructuring costs	417			2,288
Other accrued liabilities	10,527			9,315
Total current liabilities	35,530			33,812

Long-term debt, less current portion	59,750			90,000

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized, none issued and outstanding at October 1, 2005 and December 31, 2004	—			—
Common stock, $0.01 par value; 39,000,000 shares authorized, 21,867,022 shares and 21,459,428 shares issued and outstanding at October 1, 2005 and December 31, 2004, respectively	219			215
Additional paid-in-capital	125,467			121,139
Notes receivable from officers for stock purchases	—			(1,749				)
Accumulated other comprehensive income	515			931
Retained earnings	83,564			62,502
Total stockholders’ equity	209,765			183,038
Total liabilities and stockholders’ equity	$	305,045		$	306,850

See accompanying Notes.

DJ ORTHOPEDICS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

	Three Months Ended								Nine Months Ended
	October 1, 2005				September 25, 2004				October 1, 2005			September 25, 2004
Net revenues	$	72,133			$	62,471			$	211,210		$	187,898
Costs of goods sold	26,501				23,033				77,295			69,345
Gross profit	45,632				39,438				133,915			118,553
Operating expenses:
Sales and marketing	21,286				19,092				64,058			58,056
General and administrative	7,679				7,114				22,179			20,662
Research and development	1,486				1,307				4,749			4,087
Amortization of acquired intangibles	1,255				1,152				3,560			3,577
Restructuring costs	—				2,085				—			2,085
Total operating expenses	31,706				30,750				94,546			88,467
Income from operations	13,926				8,688				39,369			30,086
Interest expense, net of interest income	(983			)	(1,129			)	(3,445		)	(7,777		)
Prepayment premium and other costs related to senior subordinated notes redemption	—				—				—			(7,760		)
Other income (expense)	(383			)	221				(821		)	(28		)
Income before income taxes	12,560				7,780				35,103			14,521
Provision for income taxes	(5,024			)	(3,112			)	(14,041		)	(5,806		)
Net income	$		7,536		$		4,668		$	21,062		$	8,715

Net income per share:
Basic	$		0.34		$		0.21		$	0.97		$	0.41
Diluted	$		0.33		$		0.20		$	0.93		$	0.39
Weighted average shares outstanding used to calculate per share information:
Basic	21,845				21,962				21,722			21,108
Diluted	22,761				23,114				22,613			22,323

See accompanying Notes.

DJ ORTHOPEDICS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Nine Months Ended
	October 1, 2005			September 25, 2004
Operating activities
Net income	$	21,062		$		8,715
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for contractual allowances and doubtful accounts	24,712			22,312
Provision (credit) for excess and obsolete inventories	285			(165			)
Provision for restructuring costs	—			2,085
Depreciation and amortization	9,865			9,581
Step-up to fair value of inventory charged to costs of goods sold	305			438
Amortization of debt issuance costs and discount on senior subordinated notes	420			678
Changes in current and deferred tax asset, net	13,524			4,923
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	(37,706		)	(23,321			)
Net cash provided by operating activities	32,467			33,006

Investing activities
Purchases of property, plant and equipment	(3,627		)	(4,580			)
Purchases of businesses	(12,536		)	122
Purchases of intangible assets	—			(3,277			)
Purchase of short-term investments	—			(18,509			)
Sale of short-term investments	—			18,509
Changes in other assets, net	(1,308		)	67
Net cash used in investing activities	(17,471		)	(7,668			)

Financing activities
Repayment of long-term debt	(38,250		)	(2,500			)
Proceeds from long-term debt	8,000			—
Debt issuance costs	(665		)	(313			)
Net proceeds from issuance of common stock	4,143			60,755
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	(25,023		)	(21,462			)
Effect of exchange rate changes on cash and cash equivalents	(78		)	(115			)
Net increase (decrease) in cash and cash equivalents	(10,105		)	3,761
Cash and cash equivalents at beginning of period	11,182			19,146
Cash and cash equivalents at end of period	$	1,077		$	22,907

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 October 1, 2005 and for the three and nine months ended October 1, 2005 and September 25, 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 October 1, 2005 and for the three and nine months ended October 1, 2005 and September 25, 2004 have been prepared on the same basis as the audited consolidated financial statements and include all adjustments (consisting of normal recurring accruals and the adjustments described in Note 3) 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 October 1, 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		Nine months ended
	October 1, 2005	September 25, 2004	October 1, 2005	September 25, 2004
Shares used in computations of basic net income per share — weighted average shares outstanding	21,845	21,962	21,722	21,108
Net effect of dilutive common share equivalents based on treasury stock method	916	1,152	891	1,215
Shares used in computations of diluted net income per share	22,761	23,114	22,613	22,323

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 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						Nine months ended
	October 1, 2005			September 25, 2004			October 1, 2005				September 25, 2004
Net income, as reported	$	7,536		$	4,668		$		21,062		$	8,715
Total stock-based employee compensation expense determined under fair value method for all option plans and stock purchase plan, net of related tax effects	(756		)	(1,414		)	(5,198			)	(4,002		)
Pro forma net income	$	6,780		$	3,254		$	15,864			$	4,713
Basic net income per share:
As reported	$	0.34		$	0.21		$	0.97			$	0.41
Pro forma	$	0.31		$	0.15		$	0.73			$	0.22
Diluted net income per share:
As reported	$	0.33		$	0.20		$	0.93			$	0.39
Pro forma	$	0.30		$	0.14		$	0.70			$	0.21

Recently Issued Accounting Standards

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which is a replacement of APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. Among other changes, SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement”. SFAS No. 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005.

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 gain/(loss) included in determining net income for the nine months ended October 1, 2005 and September 25, 2004 was $(0.5) million and $0.1 million, respectively.

2. Financial Statement Information

Inventories consist of the following (in thousands):

	October 1, 2005			December 31, 2004
Raw materials	$	7,843		$	7,116
Work-in-progress	864			1,027
Finished goods	17,690			14,109
	26,397			22,252
Less reserves, primarily for excess and obsolete inventories	(2,493		)	(3,181		)
Inventories, net	$	23,904		$	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. In the first quarter of 2005, the Company added $0.8 million of gross inventories acquired in the asset acquisition of Superior Medical Equipment, LLC, and in the third quarter of 2005, the Company added $3.9 million of gross inventories acquired in the asset acquisition of Encore Medical, L.P.’s orthopedic soft goods business (see Note 3).

3. Acquisitions

OSG Acquisition

On August 8, 2005, the Company completed the purchase of substantially all of the assets of the orthopedics soft goods (OSG) business of Encore Medical, L.P. (OSG acquisition) for approximately $9.5 million, paid in cash upon closing, plus the assumption of certain liabilities aggregating approximately $0.6 million. The OSG business is comprised of the manufacture and sale of orthopedic soft goods, patient safety products and pressure care products.

The fair values of the assets acquired and the liabilities assumed in connection with the OSG acquisition were estimated in accordance with SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. The Company used an independent valuation firm to assist management in estimating these fair values. The purchase price was allocated as follows to the fair values of the net tangible and intangible assets acquired:

Inventories, net	$	3,945
Fixed assets, net	500
Accrued liabilities	(568		)
Tangible assets, net	3,877
Identifiable intangible assets	3,500
Goodwill	2,114
Net assets acquired	$	9,491

The identifiable intangible assets are being amortized over their estimated useful lives, which range from three to eight years.

The purchase price allocation included values assigned to certain specific identifiable intangible assets aggregating $3.5 million. A value of $2.0 million was assigned to existing technology, determined primarily by estimating the future discounted cash flows to be derived from the OSG products that existed at the date of the acquisition. An aggregate value of $1.5 million was assigned to certain OSG customer relationships existing on the acquisition date based upon an estimate of the future discounted cash flows that would be derived from those customers. A value of $2.1 million, representing the difference between the total purchase price and the aggregate fair values assigned to the net tangible assets acquired and liabilities assumed and the identifiable intangible assets acquired, was assigned to goodwill.

The Company acquired the OSG business to expand its portfolio of national contracts and increase its related revenues and also to gain access to the patient safety products and pressure care products, which were not previously included in the Company’s product portfolio. These are among the factors that contributed to a purchase price for the OSG acquisition that resulted in the recognition of goodwill.

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 nine months ended October 1, 2005, the Company purchased and resold territory rights for amounts aggregating $1.9 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 October 1, 2005 are as follows (in thousands):

	Total Costs Incurred		Completed Activity (Cash)			Completed Activity (Non-Cash)			Accrued Liability at October 1, 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 October 1, 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 9).

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 October 1, 2005, the Company repaid $27.8 million of the amounts outstanding under the revolving line of credit (net of a borrowing of $8.0 million on the revolving line of credit in the third quarter of 2005) and $16.0 million remained outstanding as of October 1, 2005. In addition, the Company was contingently liable for outstanding letters of credit aggregating approximately $4.1 million at October 1, 2005. Under the amended agreement, up to $25 million of outstanding borrowings may be denominated in British Pounds or Euros. As of October 1, 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 1.25% or base rate plus 0.25%. The weighted average interest rate applicable to the Company’s borrowings as of October 1, 2005 was 4.92%.

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. Prior to October 1, 2005, the Company repaid $1.25 million of the amounts outstanding under the term loan and $48.75 million remained outstanding under the term loan as of October 1, 2005.

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 on or 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 October 1, 2005.

Debt issuance costs. In connection with the amendment, the Company incurred costs of approximately $0.7 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					Nine months ended
	October 1, 2005		September 25, 2004			October 1, 2005			September 25, 2004
Net income, as reported	$	7,536	$	4,668		$	21,062		$	8,715
Foreign currency translation adjustment	19		(112		)	(416		)	(321		)
Comprehensive income	$	7,555	$	4,556		$	20,646		$	8,394

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 45 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 October 1, 2005, the OfficeCare program was located at over 800 physician offices throughout the United States. The Company has contracts with over 650 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 nine months ended October 1, 2005 and September 25, 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 nine months ended October 1, 2005 and September 25, 2004, Regeneration income from operations was reduced by amortization of acquired intangible assets amounting to $1.2 million and $1.2 million and $3.5 million and $3.6 million, respectively. For both the three and nine months ended October 1, 2005, Domestic Rehabilitation income from operations was reduced by amortization of acquired intangible assets amounting to $0.1 million.

	Three Months Ended							Nine Months Ended
	October 1,				September 25,			October 1,			September 25,
	2005				2004			2005			2004
Net revenues:
Domestic rehabilitation	$	50,793			$	44,288		$	145,391		$	129,999
Regeneration	13,600				11,547			40,712			36,458
International	7,740				6,636			25,107			21,441
Consolidated net revenues	72,133				62,471			211,210			187,898

Gross profit:
Domestic rehabilitation	28,519				25,265			81,257			73,668
Regeneration	12,275				10,076			36,232			31,384
International	4,838				4,097			16,426			13,501
Consolidated gross profit	45,632				39,438			133,915			118,553

Income from operations:
Domestic rehabilitation	11,483				9,604			30,519			26,493
Regeneration	3,616				718			10,815			5,695
International	1,715				1,293			6,560			5,083
Income from operations of reportable segments	16,814				11,615			47,894			37,271
Expenses not allocated to segments	(2,888			)	(2,927		)	(8,525		)	(7,185		)
Consolidated income from operations	$		13,926		$	8,688		$	39,369		$	30,086

Number of operating days	63				63			192			188

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 nine months ended October 1, 2005 and September 25, 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				Nine months ended
	October 1, 2005		September 25, 2004		October 1, 2005		September 25, 2004
United States	$	64,393	$	55,835	$	186,103	$	166,457
Europe	4,945		4,573		17,529		15,153
Other countries	2,795		2,063		7,578		6,288
Total consolidated net revenues	$	72,133	$	62,471	$	211,210	$	187,898

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

	October 1, 2005		December 31, 2004
United States	$	295,168	$	296,923
International	9,877		9,927
Total consolidated assets	$	305,045	$	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 has undertaken 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. Construction of the new facility is underway and 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. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of selected factors, including those set forth under “Risk Factors” in this Form 10-Q.

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 31.4%, 41.6%, 7.7% and 19.3%, respectively, of our consolidated net revenues for the first nine 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 45 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 October 1, 2005, the OfficeCare program was located at over 800 physician offices throughout the United States. We have contracts with over 650 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 nine months ended October 1, 2005, we launched 25 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 nine months ended October 1, 2005, we added approximately 177 new offices to our OfficeCare channel, net of account terminations, 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 nine months ended October 1, 2005, we signed three new significant national contracts, including a new three-year, multi-source contract with MedAssets Supply Chain Systems for our soft goods products and we renewed one other significant national contract. In addition, in connection with our August 2005 acquisition of the orthopedic soft goods business from Encore Medical L.P. (OSG acquisition), we added one new significant national contract and increased our penetration into several other national account opportunities already within our portfolio.

• 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. In the first nine months of 2005, we completed two strategic acquisitions that meet these criteria as discussed in Note 3 to the financial statements included in Item 1 herein.

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 nine 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 2004) and by between 30% and 39% (for the first nine months of 2005) 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 29% 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 52% of our net accounts receivable at both October 1, 2005 and 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 30% of our net revenues for the three months ended October 1, 2005 and September 25, 2004, respectively, and approximately 32% and 30% of our net revenues for the nine months ended October 1, 2005 and September 25, 2004, respectively, and approximately 45% of our net accounts receivable at October 1, 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 16%. 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 October 1, 2005, we have approximately $40.5 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 October 1, 2005 and September 25, 2004 each included 63 days. The nine months ended October 1, 2005 and September 25, 2004 included 192 days and 188 days, respectively.

Three Months Ended October 1, 2005 Compared To Three Months Ended September 25, 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
	October 1, 2005		% of Net Revenues	September 25, 2004		% of Net Revenues	Increase			% Increase
Domestic Rehabilitation	$	50,793	70.4	$	44,288	70.9	$		6,505	14.7
Regeneration	13,600		18.9	11,547		18.5	2,053			17.8
International	7,740		10.7	6,636		10.6	1,104			16.6
Consolidated net revenues	$	72,133	100.0	$	62,471	100.0	$	9,662		15.5

Average revenues per day:

	Three Months Ended
	October 1, 2005		September 25, 2004		Increase		% Increase
Domestic Rehabilitation	$	806.2	$	703.0	$	103.2	14.7
Regeneration	215.9		183.3		32.6		17.8
International	122.9		105.3		17.6		16.6
Consolidated average net revenues per day	$	1,145.0	$	991.6	$	153.4	15.5
Number of operating days	63		63

Net revenues in our Domestic Rehabilitation segment increased for several reasons. Sales force productivity in our DonJoy sales channel contributed to increased sales in several product lines, including ACL/PCL knee braces and fracture boots. Net revenues in this segment also increased due to sales of new products, sales attributed to the OSG acquisition, an increase in the number of units billed to third-party payors and growth in sales related to national contracts in our ProCare sales channel. We have also gained incremental revenue from the addition of approximately 177 new OfficeCare locations since the beginning of 2005, net of account terminations, including approximately 45 accounts added in connection with our March 2005 SME acquisition. Net revenues in our Regeneration segment increased due to an increase in units billed to both third-party payors and distributors. These increases resulted, in part, from the efforts of our sales force integration and expansion within this segment. International net revenues increased due to the launch of new products, incremental revenues from the OSG acquisition and the addition of our new direct sales subsidiary in the Nordic countries, effective September 1, 2004. Excluding the impact of exchange rates, local currency international revenues increased 15.4% in the third quarter of 2005 compared to the third quarter of 2004.

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

	Three Months Ended
	October 1, 2005		% of Net Revenues	September 25, 2004s		% of Net Revenue	Increase		% Increase
Domestic Rehabilitation	$	28,519	56.1	$	25,265	57.0	$	3,254	12.9
Regeneration	12,275		90.3	10,076		87.3	2,199		21.8
International	4,838		62.5	4,097		61.7	741		18.1
Consolidated gross profit	$	45,632	63.3	$	39,438	63.1	$	6,194	15.7

The improvement in consolidated gross profit and gross profit margin is related partly to the favorable impact of increased revenues 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 decrease in gross profit margin in our Domestic Rehabilitation segment is primarily due to the impact on product mix of incremental sales from the OSG acquisition, which are primarily sold to third-party distributors at a reduced gross margin, partially offset by gross margin improvements in other Domestic Rehabilitation product categories. The increase in gross profit and gross profit margin in our Regeneration segment is due to increased sales volume, an increase in the proportion of unit sales sold to third-party payors and certain cost benefits realized upon the consolidation of the Regeneration product manufacturing into our facility in Vista, California. 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
	October 1, 2005			% of Net Revenues	September 25, 2004		% of Net Revenues	Increase (Decrease)			% Increase (Decrease)
Sales and marketing	$	21,286		29.5	$	19,092	30.6	$	2,194		11.5
General and administrative	7,679			10.6	7,114		11.4	565			7.9
Research and development	1,486			2.1	1,307		2.1	179			13.7
Amortization of acquired intangibles	1,255			1.7	1,152		1.8	103			8.9
Restructuring costs	—			—	2,085		3.3	(2,085		)	(100.0	)
Consolidated operating expenses	$		31,706	43.9	$	30,750	49.2	$	956		3.1

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

Amortization of Acquired Intangibles. Amortization of acquired intangibles relates to intangible assets acquired in connection with the acquisition of our bone growth stimulation business from Orthologic in 2003 (Regeneration acquisition), which are being amortized over lives ranging from four months to 10 years, and intangible assets acquired in connection with the OSG acquisition, which are being amortized over lives ranging from three to eight years.

Restructuring Costs. In the third quarter of 2004, we recorded charges of $2.1 million related to the integration of our Regeneration business and our manufacturing move, including charges for severance, recruiting, training and other related exit costs.

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

	Three Months Ended
	October 1, 2005				% of Net Revenues		September 25, 2004				% of Net Revenues		Increase (Decrease)				% Increase (Decrease)
Domestic Rehabilitation	$		11,483		22.6		$	9,604			21.7		$	1,879			19.6
Regeneration	3,616				26.6		718				6.2		2,898				403.6
International	1,715				22.2		1,293				19.5		422				32.6
Income from operations of reportable segments	16,814				23.3		11,615				18.6		5,199				44.8
Expenses not allocated to segments	(2,888			)	(4.0	)	(2,927			)	(4.7	)	(39			)	(1.3	)
Consolidated income from operations	$	13,926			19.3		$		8,688		13.9		$		5,238		60.3

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 $1.0 million in the third quarter of 2005 compared to $1.1 million in the third quarter of 2004. The decrease is due to reduced interest rates following the May 2005 amendment to our credit agreement and debt repayments made after the third quarter of 2004.

Other Income (Expense). Other income (expense) for the third quarter of 2005 reflects write-off of costs related to potential acquisitions that were abandoned in the third quarter and net foreign exchange transaction losses. Other income (expense) for the third quarter of 2004 reflects net foreign exchange transaction gains.

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

Net Income. Net income was $7.5 million for the third quarter of 2005 compared to net income of $4.7 million for the third quarter of 2004 as a result of the changes discussed above.

Nine Months Ended October 1, 2005 Compared To Nine Months Ended September 25, 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:

	Nine Months Ended
	October 1, 2005		% of Net Revenues	September 25, 2004		% of Net Revenues	Increase		% Increase
Domestic Rehabilitation	$	145,391	68.8	$	129,999	69.2	$	15,392	11.8
Regeneration	40,712		19.3	36,458		19.4	4,254		11.7
International	25,107		11.9	21,441		11.4	3,666		17.1
Consolidated net revenues	$	211,210	100.0	$	187,898	100.0	$	23,312	12.4

Average revenues per day:

	Nine Months Ended
	October 1, 2005		September 25, 2004		Increase		% Increase
Domestic Rehabilitation	$	757.3	$	691.5	$	65.8	9.5
Regeneration	212.0		193.9		18.1		9.3
International	130.8		114.1		16.7		14.6
Consolidated average net revenues per day	$	1,100.1	$	999.5	$	100.6	10.1
Number of operating days	192		188

Net revenues in all of our segments increased partly due to the nine months ended October 1, 2005 including four more operating days than the nine months ended September 25, 2004. Net revenues in our Domestic Rehabilitation segment also increased due to

increased sales force productivity in our DonJoy sales channel which contributed to increased sales in several product lines, including ACL/PCL knee braces and fracture boots. Net revenues in this segment also increased due to sales of new products, sales attributed to the OSG acquisition, an increase in the number of units billed to third-party payors and growth in sales related to national contracts in our ProCare sales channel. We have also gained incremental revenue from the addition of approximately 177 new OfficeCare locations, net of account terminations, since the beginning of 2005, including approximately 45 accounts added in connection with our March 2005 SME acquisition. Net revenues in our Regeneration segment increased due to an increase in units billed to both third-party payors and distributors. These increases resulted, in part, from the efforts of our sales force integration and expansion within this segment. International net revenues increased partly due to favorable changes in exchange rates compared to the rates in effect in the first nine months of 2004, the launch of new products, incremental revenues from the OSG acquisition, and the addition of our new direct sales subsidiary in the Nordic countries, effective September 1, 2004. Excluding the impact of exchange rates, local currency international revenues increased 14.2% (11.8% based on average revenues per day) in the first nine months of 2005 compared to the first nine months of 2004.

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

	Nine Months Ended
	October 1, 2005		% of Net Revenues	September 25, 2004		% of Net Revenues	Increase		% Increase
Domestic Rehabilitation	$	81,257	55.9	$	73,668	56.7	$	7,589	10.3
Regeneration	36,232		89.0	31,384		86.1	4,848		15.4
International	16,426		65.4	13,501		63.0	2,925		21.7
Consolidated gross profit	$	133,915	63.4	$	118,553	63.1	$	15,362	13.0

The improvement in consolidated gross profit and gross profit margin is related partly to the favorable impact of increased revenues 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 our Domestic Rehabilitation segment primarily due to increased freight costs and a change in product mix including the impact on product mix of incremental sales from the OSG acquisition, which are primarily sold to third-party distributors at a reduced gross margin. The Regeneration segment gross profit increased as a percentage of revenues due to increased sales volume, an increase in the proportion of unit sales sold to third-party payors and certain cost benefits realized upon the consolidation of the Regeneration product manufacturing into our facility in Vista, California. 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):

	Nine Months Ended
	October 1, 2005		% of Net Revenues	September 25, 2004		% of Net Revenues	Increase (Decrease)			% Increase (Decrease)
Sales and marketing	$	64,058	30.3	$	58,056	30.9	$	6,002		10.3
General and administrative	22,179		10.5	20,662		11.0	1,517			7.3
Research and development	4,749		2.2	4,087		2.2	662			16.2
Amortization of acquired intangibles	3,560		1.7	3,577		1.9	(17		)	(0.5	)
Restructuring costs	—		—	2,085		1.1	(2,085		)	(100.0	)
Consolidated operating expenses	$	94,546	44.7	$	88,467	47.1	$	6,079		6.9

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 nine months ended October 1, 2005 including four more operating days than the nine months ended September 25, 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 nine months ended October 1, 2005 including four more operating days than the nine months ended September 25, 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 nine months ended October 1, 2005 including four more operating days than the nine months ended September 25, 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 four months to 10 years, and intangible assets acquired in connection with the OSG acquisition, which are being amortized over lives ranging from three to eight years. The decrease in amortization of acquired intangibles is due to 2004 amortization expense related to an intangible asset for acquired customer backlog related to the Regeneration acquisition that became fully amortized in the first quarter of 2004, offset by the addition of the amortization of the Encore Medical, L.P. acquired intangibles.

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

	Nine Months Ended
	October 1, 2005			% of Net Revenues		September 25, 2004			% of Net Revenues		Increase		% Increase
Domestic Rehabilitation	$	30,519		21.0		$	26,493		20.4		$	4,026	15.2
Regeneration	10,815			26.6		5,695			15.6		5,120		89.9
International	6,560			26.1		5,083			23.7		1,477		29.1
Income from operations of reportable segments	47,894			22.6		37,271			19.8		10,623		28.5
Expenses not allocated to segments	(8,525		)	(4.0	)	(7,185		)	(3.8	)	1,340		18.6
Consolidated income from operations	$	39,369		18.6		$	30,086		16.0		$	9,283	30.9

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 $3.4 million for the first nine months of 2005 compared to $7.8 million in the first nine months of 2004. The decrease is due to reduced debt levels following the June 2004 redemption of our senior subordinated notes and other debt repayments made after the third 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 Income (Expense). Other income (expense) for the first nine months of 2005 reflects write-off of costs related to potential acquisitions that were abandoned in the third quarter and net foreign exchange transaction losses. Other income (expense) for the first nine months of 2004 reflects a net foreign exchange transaction gain offset by a write-off of costs related to a potential acquisition.

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

Net Income. Net income was $21.1 million for the first nine months of 2005 compared to net income of $8.7 million for the first nine 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 October 1, 2005 was $64.8 million. Total cash and cash equivalents were $1.1 million at October 1, 2005.

Net cash provided by operating activities was $32.5 million and $33.0 million for the nine months ended October 1, 2005 and September 25, 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. In connection with the move of the billing and collections activities of our Regeneration segment from Tempe, Arizona to Vista, California in 2004, we were required to amend certain registrations and contracts with certain of our third-party payor customers of this business. As a result of this transition, certain payments owed to us

by these payors were delayed, contributing to an increase in accounts receivable in this segment of $6.2 million. We continue to work with these third-party payors to expedite the delayed payments. For the nine months ended October 1, 2005 and September 25, 2004, cash of approximately $1.9 million and $0.3 million, respectively, was used to pay for restructuring costs accrued in 2004.

Cash flows used in investing activities were $17.5 million and $7.7 million for the nine months ended October 1, 2005 and September 25, 2004, respectively. Cash used in investing activities for the first nine months of 2005 included $3.1 million used for the SME acquisition, $9.5 million used for the OSG acquisition and $3.6 million used for capital expenditures. Cash used in investing activities for the first nine months of 2004 included the final $1.5 million payment for the acquisition of certain patent licenses in connection with the settlement of a patent litigation matter in 2003 and $4.6 million used for capital expenditures.

Cash flows used in financing activities were $25.0 million and $21.5 million for the nine months ended October 1, 2005 and September 25, 2004, respectively. In the first nine months of 2005, the cash used by financing activities included $3.6 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, approximately $1.8 million received from the collection of a note receivable, and proceeds of $8.0 million from a draw on our revolving line of credit, offset by approximately $38.3 million used to repay debt and $0.7 million paid for debt issuance costs incurred in connection with the amendment to our credit agreement. Cash used in financing activities in the first nine 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 nine months of 2004, proceeds of $4.6 million were received from the issuance of common stock through our Employee Stock Purchase Plan and the exercise of stock options and $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 October 1, 2005, we repaid $27.8 million of the amounts outstanding under the revolving line of credit (net of a borrowing of $8.0 million on the revolving line of credit in the third quarter of 2005) and $16.0 million remained outstanding as of October 1, 2005. In addition, we were contingently liable for outstanding letters of credit aggregating approximately $4.1 million at October 1, 2005. Under the amended agreement, up to $25 million of outstanding borrowings may be denominated in British Pounds or Euros. As of October 1, 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 1.25% or base rate plus 0.25%. The weighted average interest rate applicable to our borrowings as of October 1, 2005 was 4.92%.

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. Prior to October 1, 2005, we repaid $1.25 million of the amounts outstanding under the term loan and $48.75 million remained outstanding under the term loan as of October 1, 2005. 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.

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

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 on or 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 October 1, 2005, our ratio of total debt to consolidated EBITDA was approximately 1.01 to 1.00 and our ratio of consolidated EBITDA to fixed charges was approximately 4.09 to 1.00. We were in compliance with all covenants as of October 1, 2005.

Debt issuance costs. In connection with the amendment, we incurred costs of approximately $0.7 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 October 1, 2005, we had available a total of approximately $1.1 million in cash and cash equivalents and $54.9 million available under our revolving credit facility, net of $4.1 million of outstanding letters of credit. For the remainder of 2005, we expect to spend total cash of up to approximately $4.6 million for the following requirements:

• approximately $2.1 million scheduled principal and interest payments on our credit facility; and

• up to approximately $2.5 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 as well as the risks discussed under the heading “Risk Factors” in this Form 10-Q. 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.

Risk Factors

Our ability to achieve our operating and financial goals is subject to a number of risks, including risks relating to our business operations, our debt level and government regulations. If any of the following risks actually occur, our business, operating results, prospects or financial condition could be materially and adversely affected. The risks described below are not the only ones that we face. Additional risks not presently known to us or that we currently deem immaterial may also affect our business operations.

Risks Related to Our Business

Prior to the Regeneration acquisition, we did not have experience operating in the regeneration segment of the non-operative orthopedic and spine markets.

Historically, our principal focus has been the market for orthopedic rehabilitation products. Accordingly, prior to our acquisition of the bone growth stimulation device business from OrthoLogic in November 2003, we did not have any experience operating in the regeneration segment of the non-operative orthopedic and spine markets. The regeneration segment of the non-operative orthopedic and spine markets has different competitive characteristics from those we have experienced in the market for our rehabilitation products and the third party payor coverage and reimbursement issues are more complex than in our traditional rehabilitation markets. In addition, the products we acquired from OrthoLogic are subject to Class III Food and Drug Administration, or FDA, review. This level of review is more stringent than that required for our rehabilitation products.

In addition, we did not have existing relationships with spine surgeons that could facilitate our ability to market and sell the SpinaLogic bone growth stimulator. Furthermore, DePuy Spine acts as the exclusive distributor of the SpinaLogic device in significant portions of the U.S. and can unilaterally terminate its arrangement with us on four months notice. If this were to occur, we may not be able to find a replacement distribution channel for this product in a timely manner.

As a result of these factors, we cannot assure you that we will be successful in operating in the regeneration segment of the non-operative orthopedic and spine markets.

We have integrated the Regeneration sales force into our domestic rehabilitation sales force and we may be unsuccessful in our strategy relative to this integration.

In August 2004, we announced our intention to integrate fully the Regeneration business sales force and sales management into our DonJoy sales organization, and that integration was completed by the end of 2004. This integrated sales force has not yet demonstrated the ability to accelerate sales growth to the full level of our expectations and is subject to a variety of risks and uncertainties, including the following:

· part of our integration plan consisted of hiring a significant number of additional Regeneration specialists and encouraging our independent sales agents to hire a similar number of specialists. We may have difficulty training and retaining that number of product specialists. To date, we have experienced, and may continue to experience, relatively high turnover among our Regeneration sales specialists and sales managers, which can lead to disruption of customer relations and increased training time and costs;

· our existing customers may not have a need for bone growth stimulation products or may have existing relationships with our competitors for similar products;

· competitive products or technologies in fracture repair or spinal fusion surgery may undermine our sales and profitability goals;

· our rehabilitation product distribution channel is unfamiliar with bone growth stimulation (BGS) products and may not be as effective as the established channels for BGS products.

Because of these and other factors, we may not be successful in implementing our strategy relative to the integration of the Regeneration sales force. Furthermore, the implementation of our strategy may not improve our sales or operating results.

We may be unsuccessful in obtaining the synergies and expense reduction we seek from the integration of the operations and administrative functions of the Regeneration business into our Vista operations.

Part of our Regeneration integration plan was to combine the administrative functions of the Regeneration business with our existing functions in Vista and to move the assembly and calibration operations for BGS products from Tempe, Arizona to Vista. We have completed these steps, but our ability to obtain synergies and expense reductions through this strategy is subject to risks, including the following:

· we may not be able to successfully replace the former Regeneration business employees who did not relocate to Vista with equally qualified personnel, or we may experience high rates of turnover among the new employees we hire;

· we may experience difficulty in the billing and collection functions for BGS products since our work force is newly hired;

· our prior experience in billing Medicare is limited, and we may encounter difficulties in processing the higher level of Medicare claims in the Regeneration business as compared to our other businesses; and

· we may experience difficulty in coordinating the placement and billing of BGS products between our largely new sales force and our largely new reimbursement staff.

As a result of these risks, we cannot be certain we will realize the financial benefits and operating synergies that we anticipated as a part of the Regeneration integration.

Changes in the regulatory status of our BGS products could adversely affect the operations and financial results of our Regeneration business.

Earlier in 2005 a petition was filed with the US Food and Drug Administration (“FDA”) seeking to reclassify products such as our BGS products from Class III to Class II. If that petition were to succeed, there would likely be increased competition from new

products in the electrical bone growth stimulation device business which could result in downward price pressures on our products and business. In addition, the committee responsible for providing guidance and advice on clinical matters to Medicare held a meeting during 2005 for the purpose of, among other things, considering the effectiveness of products such as our BGS products on healing nonunion fractures among the Medicare patient population. We have actively opposed the granting of the petition to the FDA to reclassify BGS products, and we have provided information to the Medicare committee on the effectiveness of our BGS products. We cannot be certain of the outcome of either regulatory matter, and an adverse outcome on either such matter could impact our ability to grow sales and realize profits in our Regeneration business. Furthermore, we cannot be sure that other regulatory changes will not be proposed or implemented that adversely impact our Regeneration business. See additional risk factors under the heading “Risks Relating to Government Regulation” below.

If we do not effectively manage our growth, our existing infrastructure may become strained, and we may be unable to increase sales of our products or generate revenue growth.

In connection with the Regeneration integration, we hired approximately 50 new employees, many of whom are sales specialists located around the country. The growth that we have experienced, and in the future may experience, may provide challenges to our organization, requiring us to expand our personnel, manufacturing and distribution operations. Future growth may strain our infrastructure, operations, product development and other managerial and operating resources. If our business resources become strained, we may be unable to increase sales of our products or generate revenue growth.

We have outsourced certain administrative functions relating to our OfficeCare sales channel to a third-party contractor and this arrangement may not prove successful.

Our OfficeCare sales channel maintains an inventory of products (mostly soft goods) on hand at orthopedic practices for immediate distribution to patients. For these products, we arrange billing to a patient or third-party payor after the product is provided to the patient. In March 2003, we began outsourcing the revenue cycle of this program, from billing to collections, to an independent third-party contractor. This provider may not remain successful in achieving or maintaining our billing and collections goals and there can be no assurance that we will not have to resume these administrative functions in the future.

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

We hold or license U.S. and foreign patents relating to a number of our components and products and have patent applications pending with respect to other components and products. We also expect to apply for additional patents as we deem appropriate.

The U.S. patent for our “Four Points of Leverage” system expired in January 2005. Revenues generated from the sale of products in the U.S. using our “Four Points of Leverage” system represented approximately 15%, 22% and 23% of our historical net revenues for 2004, 2003 and 2002, respectively. The majority of our anterior cruciate ligament, or ACL, braces, including Defiance, Legend and 4TITUDE, and certain of our osteoarthritic braces use this system. We believe a number of our competitors will introduce ligament braces that incorporate aspects of our “Four Points of Leverage” system now that the patent has expired. In such event, our competitors may be able to sell products that are similar to ours at lower prices than we currently sell our products, which could adversely affect our revenue and profitability.

We believe that several of our additional existing patents are, and will continue to be, extremely important to our success. These include the patents relating to our:

· knee ligament bracing product lines, including components and features such as frame construction and shape, strap attachment systems, anti-migration padding systems and extreme sport features;

· custom contour measuring system, which serves as an integral part of the measurement process for patients ordering our customized ligament and osteoarthritic braces;

· series of hinges for our rigid braces, including the FourcePoint™ hinge;

· pneumatic pad design and production technologies which utilize air inflatable cushions that allow the patient to vary the

location and degree of support provided by braces such as the Defiance knee ligament brace;

· osteoarthritis bracing concepts;

· ankle bracing, both rigid and soft;

· rigid shoulder bracing; and

· combined magnetic field technology, which is used in our bone growth stimulation products.

However, we cannot assure you that:

· our existing or future patents, if any, will afford us adequate protection;

· our patent applications will result in issued patents; or

· our patents will not be circumvented or invalidated.

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

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

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

· continue to develop or license successful new products and enhance existing products;

· obtain required regulatory clearances and approvals for such products;

· market such products in a commercially viable manner; or

· gain market acceptance for such products.

We may pursue acquisitions of other companies or product lines to expand our product portfolio. Our ability to grow through acquisitions depends on our ability to identify, negotiate, complete and integrate suitable acquisitions. Even if we complete acquisitions we may experience:

· difficulties in integrating any acquired companies, personnel and products into our existing business;

· delays in realizing the benefits of the acquired company or products;

· diversion of our management’s time and attention;

· higher costs of integration than we anticipated; or

· difficulties in retaining key employees of the acquired business who are necessary to manage these acquisitions.

In addition, we may require additional debt or equity financing for future acquisitions. Such financing may not be available on favorable terms, if at all. Finally, in the event we decide to discontinue pursuit of a potential acquisition, we will be required to immediately expense all costs incurred in pursuit of the possible acquisition that could have an adverse effect on our results of operations in the period in which the expense is recognized.

We may be unable to remain competitive if we fail to develop, license or acquire and market new products and product enhancements. In addition, if any of our new or enhanced products contain undetected errors or design defects, especially when first introduced, our ability to market these products could be substantially delayed, resulting in lost revenue, potential damage to our reputation and/or delays in obtaining acceptance of the product by orthopedic and spine surgeons and other healthcare professionals.

We rely heavily on our relationships with orthopedic professionals who prescribe and dispense our products and our failure to maintain these relationships could adversely affect our business.

The sales of our products depend significantly on the prescription or recommendation of such products by orthopedic and spine surgeons and other healthcare professionals. We have developed and maintain close relationships with a number of widely recognized orthopedic surgeons and specialists who support and recommend our products. Failure of our products to retain the support of these surgeons and specialists, or the failure of our products to secure and retain similar support from leading surgeons and specialists, could have an adverse effect on our business.

The majority of our sales force consists of independent agents and distributors who maintain close relationships with our hospital and physician customers.

Our success also depends largely upon arrangements with independent agents and distributors and their relationships with our hospital and physician customers in the marketplace. These agents and distributors are not our employees, and our ability to influence their actions and performance is limited. Our inability to effectively manage these agents and distributors or our failure generally to maintain relationships with these independent agents and distributors could have an adverse effect on our business.

We operate in a very competitive business environment.

The non-operative orthopedic and spine markets are highly competitive and fragmented. Our competitors include several large, diversified general orthopedic products companies and numerous smaller niche companies. Some of our competitors are part of corporate groups that have significantly greater financial, marketing and other resources than we have. Accordingly, we may be at a competitive disadvantage with respect to these competitors.

In the rehabilitation market, our primary competitors in the rigid knee bracing product line include Orthofix International, N.V., Bledsoe Brace Systems, Innovation Sports Incorporated, Generation II USA, Inc. and Townsend Industries Inc. Our competitors in the soft goods products segment include Aircast Inc., Biomet, Inc., DeRoyal Industries, Royce Medical Co. and Zimmer Holdings, Inc. Our primary competitors in the pain management products market include I-Flow Corp., Aircast, Orthofix and Stryker Corporation.

In the regeneration market, our primary competitors selling bone growth stimulation products approved by the FDA for the treatment of nonunion fractures are Orthofix, Biomet, Inc. and Smith & Nephew. Biomet and Orthofix also sell bone growth stimulation products for use by spinal fusion patients. We estimate that Biomet has a dominant share of the market for bone growth stimulation products for nonunion fractures in the United States and a dominant share of the market for use of its product as an adjunct therapy after spinal fusion surgery.

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

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

· the number of business days in each quarter;

· demand for our products, which historically has been higher in the fourth quarter when scholastic sports and ski injuries are more frequent;

· our ability to meet the demand for our products;

· the direct distribution of our products in foreign countries;

· the number, timing and significance of new products and product introductions and enhancements by us and our competitors, including delays in obtaining government review and clearance of medical devices;

· our ability to develop, introduce and market new and enhanced versions of our products on a timely basis;

· the impact of any acquisitions that occur in a quarter;

· the impact of any changes in generally accepted accounting principles;

· changes in pricing policies by us and our competitors and reimbursement rates by third-party payors, including government healthcare agencies and private insurers;

· the loss of any of our distributors;

· changes in the treatment practices of orthopedic and spine surgeons and their allied healthcare professionals; and

· the timing of significant orders and shipments.

Accordingly, our quarterly sales and operating results may vary significantly in the future and period-to-period comparisons of our results of operations may not be meaningful and should not be relied upon as indications of future performance. We cannot assure you that our sales will increase or be sustained in future periods or that we will be profitable in any future period.

Our business plan relies on certain assumptions for the market for our products, which, if incorrect, may adversely affect our profitability.

We believe that various demographics and industry specific trends will help drive growth in the rehabilitation and regeneration markets, including:

· a growing elderly population with broad medical coverage, increased disposable income and longer life expectancy;

· a growing emphasis on physical fitness, leisure sports and conditioning, which has led to increased injuries, especially among women; and

· the increasing awareness and use of non-invasive devices for prevention, treatment and rehabilitation purposes.

These demographics and trends are beyond our control. The projected demand for our products could materially differ from actual demand if our assumptions regarding these factors prove to be incorrect or do not materialize or if alternative treatments to those offered by our products gain widespread acceptance.

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

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

· subject us to significant liabilities to third-parties;

· require disputed rights to be licensed from a third-party for royalties that may be substantial; or

· require us to cease using such technology.

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

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

We have limited suppliers for some of our components and products which makes us susceptible to supply shortages and could disrupt our operations.

Some of our important suppliers are in China and other parts of Asia and provide us predominately finished soft goods products. In fiscal year 2004, we obtained approximately 12% of our total purchased materials from suppliers in China and other parts of Asia. Political and economic instability and changes in government regulations in these areas could affect our ability to continue to receive materials from our suppliers there. The loss of our suppliers in China and other parts of Asia, any other interruption or delay in the supply of our required materials or our inability to obtain these materials at acceptable prices and within a reasonable amount of time could impair our ability to meet scheduled product deliveries to our customers and could hurt our reputation and cause customers to cancel orders.

In addition, we purchase the microprocessor used in the OL1000â and SpinaLogic devices from a single manufacturer. Although there are feasible alternate microprocessors that might be used immediately, all are produced by a single supplier. In addition, there are single suppliers for other components used in the OL1000 and SpinaLogic devices and only two suppliers for the magnetic field sensor employed in them. Establishment of additional or replacement suppliers for these components cannot be accomplished quickly.

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

We sell products in foreign currency through our foreign subsidiaries. The U.S. dollar equivalent of international sales denominated in foreign currencies in the nine months ended October 1, 2005 and in fiscal years 2004, 2003 and 2002 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 was unfavorably impacted during the same periods. 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.

We are also subject to other risks inherent in international operations such as political and economic conditions, foreign regulatory requirements, exposure to different legal requirements and standards, exposure to different approaches to treating injuries, potential difficulties in protecting intellectual property, import and export restrictions, increased costs of transportation or shipping, currency fluctuations, difficulties in staffing and managing international operations, labor disputes, difficulties in collecting accounts receivable and longer collection periods and potentially adverse tax consequences. For example, in Germany, our largest foreign market, orthopedic professionals began re-using our bracing devices on multiple patients during 2004, which adversely impacted our sales of these devices in this market in 2004. As we continue to expand our international business, our success will be dependent, in part, on our ability to anticipate and effectively manage these and other risks. If we are unable to do so, these and other factors may have an adverse effect on our international operations.

The direct distribution of our products in selected foreign countries involves financial and operational risks.

We have implemented a strategy to selectively replace our third-party international distributors with wholly-owned distributorships. In 2002, we began to distribute our products in Germany/Austria, the United Kingdom and Canada through wholly-owned subsidiaries. We established a wholly-owned distributorship in France in September 2003 and one in the Nordic countries in August 2004. The creation of direct distribution capabilities in foreign markets requires additional financial and operational controls. We cannot assure you that we will be able to successfully maintain organizational controls in our foreign operations or that our international strategy will result in increased revenues or profitability.

Our lack of manufacturing operations outside North America may cause our products to be less competitive in international markets.

We currently have no manufacturing operations in any foreign country other than Mexico. For our international sales to third-party distributors, the cost of transporting our products to foreign countries is currently borne by our third-party distributors who are also often required to pay foreign import duties on our products. As a result, the cost of our products to our third-party distributors is often greater than products manufactured by our competitors in that country. In addition, foreign manufacturers of competitive products may receive various local tax concessions that lower their overall manufacturing costs. In order to compete successfully in international markets, we may be required to open or acquire manufacturing operations abroad, which would be costly to implement and would increase our exposure to the risks of doing business in foreign countries. We may not be able to successfully operate offshore manufacturing operations.

Product liability claims may harm our business if our insurance proves inadequate or the number of claims increases significantly.

We face an inherent business risk of exposure to product liability claims in the event that the use of our technology or products is alleged to have resulted in adverse effects. We have, from time to time, been subject to product liability claims. In addition, we have operated a Knee Guarantee program since 2001 in relation to our Defiance knee brace. The Knee Guarantee program will, in specified instances, cover a patient’s insurance deductible up to $1,000, or give uninsured patients $1,000, towards surgery should an ACL re-injury occur while wearing the brace. In 2003, the Technology You Can Trust program was introduced in connection with our BGS products. If a patient has a nonunion fracture that fails to heal while using a BGS product, the Technology You Can Trust program will, if the patient meets the specified requirements of the program, refund the costs for treatment using the BGS product. If there is a significant increase in claims under these programs, our business could be adversely affected.

We maintain product liability insurance with coverage of an annual aggregate maximum of $20 million. The policy is provided on a claims made basis and is subject to annual renewal. There can be no assurance that liability claims will not exceed the coverage limit of such policy or that such insurance will continue to be available on commercially reasonable terms or at all. If we do not or cannot maintain sufficient liability insurance, our ability to market our products may be significantly impaired.

We may be adversely affected if we lose the services of any member of our senior management team.

We are dependent on the continued services of our senior management team, who have made significant contributions to our growth and success. Leslie H. Cross, our President and Chief Executive Officer, for example, has worked for us for 15 years and helped lead our 1999 recapitalization and transition from ownership by Smith & Nephew to a stand-alone company. The loss of any one or more members of our senior management team could have a material adverse effect on us.

Any claims relating to our improper handling, storage or disposal of wastes could be time consuming and costly.

Our facilities and operations are subject to federal, state and local environmental and occupational health and safety requirements of the United States and foreign countries, including those relating to discharges of substances to the air, water, and land, the handling, storage and disposal of wastes and the cleanup of properties affected by pollutants. In the future, federal, state, local or foreign governments could enact new or more stringent laws or issue new or more stringent regulations concerning environmental and worker health and safety matters that could affect our operations. Also, contamination may be found to exist at our current, former or future facilities, including the facility in Tempe, Arizona that we occupied following the Regeneration acquisition, or off-site locations where we have sent wastes. We could be held liable for such contamination, which could have a material adverse effect on our business or financial condition. In addition, changes in environmental and worker health and safety requirements or liabilities from newly discovered contamination could have a material effect on our business or financial condition.

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

Nearly all of our rehabilitation products are manufactured in our new facility in Tijuana, Mexico. The products that are still manufactured in Vista, California consist of our custom rigid bracing products, which remain in the U.S. to facilitate quick turn-around on custom orders and the Regeneration product line. These facilities and the manufacturing equipment we use to produce our products would be difficult to repair or replace. Our facilities may be affected by natural or man-made disasters. If one of our facilities were affected by a disaster, we would be forced to rely on third-party manufacturers or shift production to another manufacturing facility. In addition, our insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, or at all.

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

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

· authorizing the issuance of “blank check” preferred stock by our board of directors to increase the number of outstanding shares and thwart a takeover attempt;

· a classified board of directors with staggered, three-year terms, which may lengthen the time required to gain control of the board of directors;

· prohibiting cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;

· requiring supermajority voting to effect particular amendments to our certificate of incorporation and bylaws;

· limitations on who may call special meetings of stockholders;

· prohibiting stockholder action by written consent, thereby requiring all actions to be taken at a meeting of the stockholders; and

· establishing advance notice requirements for the nomination of candidates for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally defined as a person that together with its affiliates owns or within the last three years has owned 15% of the corporation’s voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Section 203 may discourage, delay or prevent a change in control of our company.

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

Risks Related to our Debt

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

The operating and financial restrictions and covenants in our credit agreement and any future financing agreements may adversely affect our ability to finance future operations, meet our capital needs or engage in our business activities. Currently, our existing credit agreement restricts our ability to:

· incur additional indebtedness;

· issue redeemable equity interests and preferred equity interests;

· pay dividends or make distributions, repurchase equity interests or make other restricted payments;

· redeem subordinated indebtedness;

· create liens;

· enter into certain transactions with affiliates;

· make investments;

· sell assets; or

· enter into mergers or consolidations.

With respect to mergers or acquisitions, our credit agreement limits our ability to finance acquisitions through additional borrowings. In addition, our credit agreement prohibits us from acquiring assets or the equity of another company unless:

· we are not in default under the credit agreement;

· after giving pro forma effect to the transaction, we remain in compliance with the financial covenants contained in the credit agreement;

· if the acquisition price is greater than $10 million, the company we are acquiring has positive EBITDA;

· the acquisition price is less than $50 million individually and less than $75 million in the aggregate with all other permitted acquisitions consummated during the term of the credit agreement; and

· if the acquisition involves assets outside the United States, the acquisition price is less than $25 million in the aggregate with all other permitted acquisitions consummated outside the United States during the term of the agreement.

Restrictions contained in our credit agreement could:

· limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities or business plans; and

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

A breach of any of these covenants, ratios, tests or other restrictions could result in an event of default under the credit agreement. Upon the occurrence of an event of default under the credit agreement, the lenders could elect to declare all amounts outstanding under the credit agreement, together with accrued interest, to be immediately due and payable. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure such indebtedness. If the lenders under the credit agreement accelerate the payment of the indebtedness, there can be no assurance that our assets would be sufficient to repay in full such indebtedness and our other indebtedness.

We may not be able to generate sufficient cash to service our indebtedness, which could require us to reduce our expenditures, sell assets, restructure our indebtedness or seek additional equity capital.

We may not have sufficient cash to service our indebtedness. Our ability to satisfy our obligations will depend upon, among other things:

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

· the future availability of borrowings under our revolving credit facility or any successor facility, the availability of which depends or may depend on, among other things, our complying with covenants in the credit agreement.

If we cannot service our indebtedness, we will be forced to take actions such as reducing or delaying acquisitions, investments, strategic alliances and/or capital expenditures, selling assets, restructuring or refinancing our indebtedness, or seeking additional equity capital or bankruptcy protection. We cannot assure you that any of these remedies can be effected on satisfactory terms, if at all. In addition, the terms of existing or future debt agreements may restrict us from adopting any of these alternatives.

Risks Related to Government Regulation

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

Our products are medical devices that are subject to extensive regulation in the United States by the Food and Drug Administration, or FDA, and by respective authorities in foreign countries where we do business. The FDA regulates virtually all aspects of a medical device’s testing, manufacture, safety, labeling, storage, recordkeeping, reporting, promotion and distribution. The FDA also regulates the export of medical devices to foreign countries. Failure to comply with the regulatory requirements of the FDA and other applicable U.S. regulatory requirements may subject a company to administrative or judicially imposed sanctions ranging from warning letters to criminal penalties or product withdrawal. Unless an exemption applies, a medical device must receive either clearance or premarket approval from the FDA before it can be marketed in the United States. The FDA’s 510(k) clearance process for Class II devices usually takes from three to twelve months, but may take significantly longer. The premarket approval process for Class III devices generally takes from one to three years from the time the application is filed with the FDA, but also can be significantly longer. Premarket approval typically requires extensive clinical data and can be significantly longer, more expensive and more uncertain than the 510(k) clearance process. Despite the time, effort and expense expended, there can be no assurance that a particular device will be approved or cleared by the FDA through either the 510(k) clearance process or the premarket approval process.

Modifications

Medical devices may only be marketed for the indications for which they are approved or cleared. We may be required to obtain additional new premarket approvals, premarket approval supplements or 510(k) clearances to market additional products or for new indications for or modifications to our existing products. We cannot be certain that we would obtain additional premarket approvals or 510(k) clearances in a timely manner or at all. We have modified various aspects of our devices in the past and we determined that new approvals, supplements or clearances either were not required or we filed a PMA supplement. The FDA may not agree with our decisions not to seek approvals, supplements or clearances for particular device modifications. If the FDA requires us to obtain premarket approvals, supplement approvals or 510(k) clearances for any modification to a previously cleared or approved device, we may be required to cease manufacturing and marketing the modified device or to recall such modified device until we obtain FDA clearance or approval and we may be subject to significant regulatory fines or penalties. In addition, there can be no assurance that the FDA will clear or approve such submissions in a timely manner, if at all.

Our failure to obtain FDA clearance or approvals of new products, new indications or product modifications that we develop in the future, any limitations imposed by the FDA on such products’ development or use, or the costs of obtaining FDA clearance or approvals could have a material adverse effect on our business.

International Regulation

In many of the foreign countries in which we market our products, we are subject to extensive regulations essentially the same as those of the FDA, including those in Germany, our largest foreign market. The regulation of our products in Europe falls primarily within the European Economic Area, which consists of the fifteen member states of the European Union, as well as Iceland, Liechtenstein and Norway. The Council of the European Union (formerly the Council of the European Communities) and the Council of the European Parliament have adopted three directives in order to harmonize national provisions regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices to ensure that medical devices marketed are safe and effective for their intended uses. The member states of the European Economic Area have implemented the directives into their respective national law. Medical devices that comply with the conformity requirements of the national provisions and the directives will be entitled to bear a CE marking. Unless an exemption applies, only medical devices which bear a CE marking may be marketed within the European Economic Area. Switzerland also allows the marketing of medical devices that bear a CE marking. Due to the movement towards harmonization of standards in the European Union and the expansion of the European Union, we expect a changing regulatory environment in Europe characterized by a shift from a country-by-country regulatory system to a European Union-wide single regulatory system. Failure to receive, or delays in the receipt of, relevant foreign qualifications, such as the CE marking, could have a material adverse effect on our international operations.

Our products are subject to recalls even after receiving FDA clearance or approval, or after receiving CE-markings, which would harm our reputation and business.

We are subject to medical device reporting regulations that require us to report to the FDA or respective governmental authorities in other countries if our products cause or contribute to a death or serious injury or malfunction in a way that would be reasonably likely to contribute to death or serious injury if the malfunction were to recur. The FDA and similar governmental authorities in other countries have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacturing, and we have been subject to product recalls in the past. A government mandated, or voluntary, recall by us could occur as a result of component failures, manufacturing errors or design defects, including defects in labeling. Any recall would divert managerial and financial resources and could harm our reputation with customers. There can be no assurance that there will not be product recalls in the future or that such recalls would not have a material adverse effect on our business.

If we fail to comply with the FDA’s Quality System Regulation, our manufacturing could be delayed, and our product sales and profitability could suffer.

Our manufacturing processes are required to comply with the FDA’s Quality System Regulation, which covers the procedures concerning (and documentation of) the design, testing, production processes, controls, quality assurance, labeling, packaging, storage and shipping of our devices. We also are subject to state requirements and licenses applicable to manufacturers of medical devices. In addition, we must engage in extensive recordkeeping and reporting and must make available our manufacturing facilities and records for periodic unscheduled inspections by governmental agencies, including the FDA, state authorities and comparable agencies in other countries. Moreover, failure to pass a Quality System Regulation inspection or to comply with these and other applicable regulatory requirements could result in disruption of our operations and manufacturing delays. Failure to take adequate corrective action could result in, among other things, significant fines, suspension of approvals, seizures or recalls of products, operating restrictions and criminal prosecutions. We have previously received warning letters and untitled letters from the FDA regarding regulatory non-compliance. We cannot assure you that the FDA or other governmental authorities would agree with our interpretation of applicable regulatory requirements or that we have in all instances fully complied with all applicable requirements. Any failure to comply with applicable requirements could adversely affect our product sales and profitability.

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

Our products are sold to healthcare providers and physicians who may receive reimbursement for the cost of our products from private third-party payors and, to a lesser extent, from Medicare, Medicaid and other governmental programs. In certain circumstances, such as for our Regeneration products and the products sold through our OfficeCare program, we submit claims to third-party payors for reimbursement. Our ability to sell our products successfully will depend in part on the purchasing and practice

patterns of healthcare providers and physicians, who are influenced by cost containment measures taken by third-party payors. Limitations or reductions in third-party reimbursement for our products can have a material adverse effect on our sales and profitability.

Congress and state legislatures consider reforms in the healthcare industry that may modify reimbursement methodologies and practices, including controls on healthcare spending of the Medicare and Medicaid programs. It is not clear at this time what proposals, if any, will be adopted or, if adopted, what effect the proposals would have on our business. Many private health insurance plans model their coverage and reimbursement policies after Medicare policies. Congressional or regulatory measures that reduce Medicare reimbursement rates could cause private health insurance plans to reduce their reimbursement rates for our products, which could have an adverse effect on our ability to sell our products or cause our orthopedic professional customers to prescribe less expensive products introduced by us and our competitors.

With the passage of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or Modernization Act, a number of changes have been mandated to the Medicare payment methodology and conditions for coverage for our orthotic devices and durable medical equipment, including our bone growth stimulators. These changes include a freeze in reimbursement levels for certain medical devices from 2004 through 2008, competitive bidding requirements, new clinical conditions for payment and quality standards. The changes affect our products generally, although specific products may be affected by some but not all of the Modernization Act’s provisions. Our Class III bone growth stimulator devices, for example, are not affected by the reimbursement level freeze and are not subject to competitive bidding. Off-the-shelf orthotic devices are subject to competitive bidding. Under competitive bidding, which will be phased in beginning in 2007, Medicare will change its approach to reimbursing certain items and services covered by Medicare from the current fee schedule amount to an amount established through a bidding process between the government and suppliers. Competitive bidding may reduce the number of suppliers providing certain items and services to Medicare beneficiaries and the amounts paid for such items and services. Also, Medicare payments in regions not subject to competitive bidding may be reduced using payment information from regions subject to competitive bidding. Any payment reductions or the inclusion of certain of our orthotic devices in competitive bidding, in addition to the other changes to Medicare reimbursement and standards contained in the Modernization Act, could have a material adverse effect on our results of operations.

In addition, on February 11, 2003, the Centers for Medicare and Medicaid Services, or CMS, the agency responsible for implementing the Medicare program, made effective an interim final regulation implementing “inherent reasonableness” authority, which allows adjustments to payment amounts for certain items and services covered by Medicare when the existing payment amount is determined to be grossly excessive or grossly deficient. The regulation lists factors that may be used to determine whether an existing reimbursement rate is grossly excessive or grossly deficient and to determine what is a realistic and equitable payment amount. Also, under the regulation, a payment amount will not be considered grossly excessive or grossly deficient if an overall payment adjustment of less than fifteen percent would be necessary to produce a realistic and equitable payment amount. The regulation remains in effect after the Modernization Act, although the new legislation precludes the use of inherent reasonableness authority for devices subject to competitive bidding. When using the inherent reasonableness authority, CMS may reduce reimbursement levels for certain items and services, which could have a material adverse effect on our results of operations.

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

Changes in international regulations regarding reimbursement for our products could adversely affect our business and results of operations.

Similar to our domestic business, our success in international markets also depends upon the eligibility of our products for reimbursement through government sponsored healthcare payment systems and third-party payors, the portion of cost subject to reimbursement, and the cost allocation between the patient and government sponsored healthcare payment systems and third-party payors. Reimbursement practices vary significantly by country, with certain countries requiring products to undergo a lengthy regulatory review in order to be eligible for third-party reimbursement. In addition, healthcare cost containment efforts similar to those we face in the United States are prevalent in many of the foreign countries in which our products are sold, and these efforts are expected to continue in the future, possibly resulting in the adoption of more stringent standards. Any developments in our foreign markets that eliminate or reduce reimbursement rates for our products could have an adverse effect on our ability to sell our products or cause our orthopedic professional customers to use less expensive products in these markets.

Medicare laws mandating new supplier standards and conditions for coverage could adversely impact our business.

Medicare regulations require entities or individuals submitting claims and receiving payment to obtain a supplier number, which in turn is predicated on compliance with a number of supplier standards. Under the Modernization Act, any entity or individual that bills Medicare for durable medical equipment, such as bone growth stimulators, and orthotics and that has a supplier number for submission of such bills will be subject to new quality standards as a condition of receiving payment from the Medicare program. The Modernization Act also authorizes CMS to establish clinical conditions for payment for durable medical equipment. These new supplier standards and clinical conditions for payment could affect our ability to bill Medicare, limit or reduce the number of individuals who can fit, sell or provide our products and could restrict coverage for our products.

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

The development of managed care programs in which the providers contract to provide comprehensive healthcare to a patient population at a fixed cost per person (referred to as capitation) has put pressure on, and is expected to continue to cause, healthcare providers to lower costs. One result has been, and is expected to continue to be, a shift toward lower priced products, and any such shift in our product mix to lower margin, off-the-shelf products could have an adverse impact on our operating results. For example, in our rigid knee-bracing segment, we and many of our competitors are offering lower priced, off-the-shelf products in response to managed care customers.

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

In international markets, we have experienced downward pressure on product pricing and other effects of healthcare reform similar to that which we have experienced in the United States. We expect healthcare reform and managed care to continue to develop in our primary international markets, which we expect will result in further downward pressure in product pricing. The timing and effects on us of healthcare reform and the development of managed care in international markets cannot currently be predicted.

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

In response to pressure from mostly orthopedic practitioners, Congress and state legislatures have from time to time considered proposals that limit the types of orthopedic professionals who can fit or sell our orthotic device products or who can seek reimbursement for them. Several states have adopted legislation which imposes certification or licensing requirements on the measuring, fitting and adjusting of certain orthotic devices. Some of these laws have exemptions for manufacturers’ representatives. Other laws apply to the activities of such representatives. Other states may be considering similar legislation. Such laws could limit our potential customers in those jurisdictions in which such legislation or regulations are enacted by limiting the measuring and fitting of these devices to certain licensed individuals. We may not be successful in opposing their adoption and, therefore, such laws could have a material adverse effect on our business. In addition, efforts have been made to establish such requirements at the federal level for the Medicare program. Most recently, in 2000 Congress passed the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA). BIPA contained a provision requiring as a condition for payment by the Medicare program that certain certification or licensing requirements be met for individuals and suppliers furnishing certain, but not all, custom-fabricated orthotic devices. CMS is in the process of implementing this requirement, and we cannot predict the effect its implementation or implementation of other such laws will have on our business.

We may need to change our business practices to comply with healthcare fraud and abuse laws and regulations.

We are subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and physician self-referral laws. Violations of these laws are punishable by criminal and civil sanctions, including, in some instances, imprisonment and exclusion from participation in federal and state healthcare programs, including Medicare, Medicaid, Veterans Administration health programs and TRICARE. Because of the far-reaching nature of these laws, we may be required to alter one or more of our practices. Healthcare fraud and abuse regulations are complex and even minor, inadvertent irregularities in submissions can potentially give rise to claims that a fraud and abuse law or regulation has been violated. Any violations of these laws or regulations could result in a material adverse effect on our business, financial condition and results of operations. If there is a change in law, regulation or administrative or judicial interpretations, we may have to change our business practices or our existing business practices could be challenged as unlawful.

Audits or denials of our claims by government agencies could reduce our revenue or profits.

As part of our business structure, we submit claims directly to and receive payments directly from the Medicare and Medicaid programs. Therefore, we are subject to extensive government regulation, including requirements for maintaining certain documentation to support our claims. Medicare contractors and Medicaid agencies periodically conduct pre- and post-payment review and other audits of claims, and are under increasing pressure to scrutinize more closely healthcare claims and supporting documentation generally. We periodically receive requests for documentation during the governmental audits of individual claims either on a pre-payment or post-payment basis. We cannot assure you that review and/or other audits of our claims will not result in material delays in payment, as well as material recoupments or denials, which could reduce our revenue or profits.

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 October 1, 2005, we had $64.8 million of variable rate debt represented by borrowings under our credit facility (at a weighted-average interest rate of 4.92% at October 1, 2005). Based on the balance outstanding under the credit facility as of October 1, 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 October 1, 2005, up to $54.9 million of variable rate borrowings were available under our $75.0 million revolving credit facility, net of $4.1 million of outstanding letters of credit. As of October 1, 2005, we had $16.0 million outstanding under the revolving credit facility, and we were contingently liable for letters of credit issued under the facility aggregating approximately $4.1 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 October 1, 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 third 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 October 1, 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 nine months ended October 1, 2005 under the program authorized by our board of directors in September 2004 that allowed us to repurchase up to $20 million of our common stock. The shares could be repurchased at times and prices as determined by management and may be completed through open market or privately negotiated transactions. The repurchase program provided that repurchases would 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 would 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. The stock repurchase program expired in September 2005.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

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#	dj Orthopedics Executive Deferred Compensation Plan and related Adoption Agreement (Incorporated by reference to dj Orthopedics, Inc.’s Report on Form 8-K dated July 27, 2005).

10.2#	Trust agreement between dj Orthopedics, LLC and Fidelity Management Trust Company (Incorporated by reference to dj Orthopedics, Inc.’s Report on Form 8-K dated July 27, 2005).

10.3	Asset purchase agreement between dj Orthopedics, LLC, and Encore Medical, L.P., dated as of August 8, 2005 (Incorporated by reference to dj Orthopedics, Inc.’s Report on Form 8-K dated August 8, 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: October 31, 2005	BY:	/s/ Leslie H. Cross
	Leslie H. Cross
	President and Chief Executive Officer
	(Principal Executive Officer)

Date: October 31, 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#	dj Orthopedics Executive Deferred Compensation Plan and related Adoption Agreement (Incorporated by reference to dj Orthopedics, Inc.’s Report on Form 8-K dated July 27, 2005).

10.2#	Trust agreement between dj Orthopedics, LLC and Fidelity Management Trust Company (Incorporated by reference to dj Orthopedics, Inc.’s Report on Form 8-K dated July 27, 2005).

10.3	Asset purchase agreement between dj Orthopedics, LLC, and Encore Medical, L.P., dated as of August 8, 2005 (Incorporated by reference to dj Orthopedics, Inc.’s Report on Form 8-K dated August 8, 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 Q3 Quarterly report

Content analysis

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):