Djo Finance 10Q 2008 Q2 Quarterly report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 28, 2008
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 333-142188

DJO Finance LLC
(Exact name of Registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		20-5653965 (I.R.S. Employer Identification Number)
1430 Decision Street Vista, California (Address of principal executive offices)		92081 (Zip Code)

Registrant's telephone number, including area code:(800) 336-5690

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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer o		Accelerated filer o		Non-accelerated filer ý (Do not check if a smaller reporting company)		Smaller reporting company 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

As of August 8, 2008, 100% of the issuer's membership interests were owned by DJO Holdings LLC.

DJO FINANCE LLC
FORM 10-Q
TABLE OF CONTENTS
Index to Condensed Consolidated Financial Statements

		Page No.

PART I—Financial Information
Item 1.	Unaudited Condensed Consolidated Balance Sheets as of June 28, 2008 and December 31, 2007	3
	Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 28, 2008 and June 30, 2007	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 28, 2008 and June 30, 2007	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57
Item 4T.	Controls and Procedures	59
PART II—Other Information
Item 1.	Legal Proceedings	59
Item 1A.	Risk Factors	61
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 3.	Defaults Upon Senior Securities	62
Item 4.	Submission of Matters to a Vote of Security Holders	62
Item 5.	Other Information	62
Item 6.	Exhibits	63
SIGNATURES		64

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DJO Finance LLC and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(in thousands)

			June 28, 2008			December 31, 2007

Assets
Current assets:
	Cash and cash equivalents		$	43,513		$	63,471
	Accounts receivable, net			173,964			154,767
	Inventories, net			105,606			110,904
	Deferred tax assets, net			29,645			28,999
	Prepaid expenses and other current assets			16,278			17,319

		Total current assets		369,006			375,460
Property and equipment, net				82,405			81,645
Goodwill				1,205,829			1,201,282
Intangible assets, net				1,325,652			1,360,361
Other non-current assets				60,784			67,524

		Total assets	$	3,043,676		$	3,086,272

Liabilities, Minority Interests, and Membership Equity
Current liabilities:
	Accounts payable		$	38,379		$	43,576
	Accrued interest			27,938			10,131
	Long-term debt and capital leases, current portion			14,170			14,209
	Other current liabilities			92,390			93,636

		Total current liabilities		172,877			161,552
Long-term debt and capital leases, net of current portion				1,816,558			1,818,598
Deferred tax liabilities, net				371,996			386,659
Other non-current liabilities				17,842			13,260

		Total liabilities		2,379,273			2,380,069

Minority interests				1,804			1,215
Commitments and contingencies
Membership equity:
	Additional paid-in capital			824,081			822,854
	Accumulated deficit			(169,016	)		(124,056	)
	Accumulated other comprehensive income			7,534			6,190

		Total membership equity		662,599			704,988

		Total liabilities, minority interests, and membership equity	$	3,043,676		$	3,086,272

See accompanying notes to unaudited condensed consolidated financial statements.

DJO Finance LLC and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
(in thousands)

			Three Months Ended						Six Months Ended

			June 28, 2008			June 30, 2007			June 28, 2008			June 30, 2007
Net sales			$	249,801		$	106,253		$	489,529		$	212,960
Cost of sales				91,831			43,861			186,915			89,143

		Gross profit		157,970			62,392			302,614			123,817
Operating expenses:
	Selling, general and administrative			116,537			51,282			227,149			102,256
	Research and development			7,230			4,106			13,906			7,741
	Amortization of acquired intangibles			19,140			6,671			38,256			13,178

Operating income				15,063			333			23,303			642
Other income (expense):
	Interest income			263			210			850			427
	Interest expense			(42,495	)		(14,051	)		(87,682	)		(28,072	)
	Other income (expense), net			323			(86	)		1,666			56

Loss before income taxes and minority interests				(26,846	)		(13,594	)		(61,863	)		(26,947	)
Benefit for income taxes				(6,343	)		(5,604	)		(17,398	)		(7,946	)
Minority interests				295			87			495			165

	Net loss		$	(20,798	)	$	(8,077	)	$	(44,960	)	$	(19,166	)

See accompanying notes to unaudited condensed consolidated financial statements.

DJO Finance LLC and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)

				Six Months Ended

				June 28, 2008			June 30, 2007
OPERATING ACTIVITIES:
Net loss				$	(44,960	)	$	(19,166	)
Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation			11,192			6,179
		Amortization of intangibles			38,256			13,178
		Amortization of debt issuance costs			6,849			1,906
		Stock-based compensation			1,227			1,004
		Asset impairments and loss on disposal of assets			1,176			418
		Deferred income taxes			(19,766	)		(9,750	)
		Provision for doubtful accounts and sales returns			10,040			4,144
		Inventory reserves			2,727			649
		Minority interests			495			165
		Excess tax benefit associated with stock option exercises			—			(17	)
		Effect of discontinued operations, net of gain on disposal			—			378
	Changes in operating assets and liabilities, net of acquired assets and liabilities:
		Accounts receivable			(27,635	)		(10,886	)
		Inventories			3,235			4,273
		Prepaid expenses, other assets and liabilities			903			(7,436	)
		Accrued interest			17,807			(829	)
		Accounts payable and other current liabilities			(6,731	)		7,866

			Net cash used in operating activities		(5,185	)		(7,924	)
INVESTING ACTIVITIES:
		Acquisition of businesses, net of cash acquired			(89	)		(7,678	)
		Acquisition of intangibles			(1,060	)		—
		Purchases of property and equipment			(12,555	)		(7,145	)
		Proceeds from sale of assets			—			4,487
		Other, net			933			—

			Net cash used in investing activities		(12,771	)		(10,336	)
FINANCING ACTIVITIES:
		Proceeds from debt and revolving line of credit			7,000			12,500
		Payment of debt issuance costs			—			(370	)
		Payments on debt and revolving line of credit			(10,137	)		(1,863	)
		Excess tax benefit associated with stock option exercises			—			17
		Dividend paid to minority interests			—			(226	)

			Net cash (used in) provided by financing activities		(3,137	)		10,058
Effect of exchange rate changes on cash and cash equivalents					1,135			166

Net decrease in cash and cash equivalents					(19,958	)		(8,036	)
Cash and cash equivalents at beginning of period					63,471			30,903

Cash and cash equivalents at end of period				$	43,513		$	22,867

Supplemental disclosures of cash flow information:
		Cash paid for interest		$	63,518		$	26,848
		Cash (received) paid for income taxes		$	2,365		$	(1,463	)

See accompanying notes to unaudited condensed consolidated financial statements.

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

Basis of Presentation and Principles of Consolidation. We are a global provider of high-quality, orthopedic devices, with a broad range of products used for rehabilitation, pain management and physical therapy. We also develop, manufacture and distribute a broad range of surgical reconstructive implant products. We offer healthcare professionals and patients a diverse range of orthopedic rehabilitation products addressing the complete spectrum of preventative, pre-operative, post-operative, clinical and home rehabilitation care. Our products are used by orthopedic specialists, spine surgeons, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers and other healthcare professionals to treat patients with musculoskeletal conditions resulting from degenerative diseases, deformities, traumatic events and sports-related injuries. In addition, many of our non-surgical medical devices and related accessories are used by athletes and patients for injury prevention and at-home physical therapy treatment.

We currently market and distribute our products through three operating segments, Domestic Rehabilitation, International Rehabilitation, and Surgical Implant. Our Domestic and International Rehabilitation Segments offer non-invasive medical products that are used before and after surgery to assist in the repair and rehabilitation of soft tissue and bone, and to protect against further injury; electrotherapy devices and accessories used to treat pain and restore muscle function; iontophoretic devices and accessories used to deliver medication; clinical therapy tables, traction equipment and other clinical therapy equipment; orthotic devices used to treat joint and spine conditions; orthopedic soft goods; rigid knee braces; and vascular systems which include products intended to prevent deep vein thrombosis following surgery. Our Surgical Implant Segment offers a comprehensive suite of reconstructive joint products.

On November 20, 2007, a subsidiary of ReAble Therapeutics, Inc. ("ReAble") was merged into DJO Opco Holdings, Inc. ("DJO Opco"), with DJO Opco continuing as the surviving corporation (the "DJO Merger"). As a result of the DJO Merger, DJO Opco became a subsidiary of ReAble Therapeutics Finance LLC, the entity filing this Quarterly Report on Form 10-Q, which was itself a subsidiary of ReAble. Following the DJO Merger, ReAble was renamed DJO Incorporated ("DJO"), ReAble Therapeutics Finance LLC was renamed DJO Finance LLC ("DJOFL") and ReAble Finance Corporation, the co-issuer of both the 10.875% senior notes and 11.75% senior subordinated notes (see Note 7), was renamed DJO Finance Corporation ("Finco").

Except as otherwise indicated, references to "us", "we", "our", "DJO", or "our Company", refers to DJO and its consolidated subsidiaries.

DJOFL directly or indirectly through its subsidiaries, owns all of the operating assets of DJO. Minority interests reflect the 50% separate ownership of Medireha GmbH ("Medireha") not owned by us, which we have consolidated due to our controlling interest. Our controlling interest consists of our 50% ownership and our control of one of the two director seats, our rights to prohibit certain business activities that are not consistent with our plans for the business and our exclusive distribution rights for products manufactured by Medireha. All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements as of June 28, 2008 and for the three and six months ended June 28, 2008 and June 30, 2007 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

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)

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, 2007. The accompanying unaudited condensed consolidated financial statements as of June 28, 2008 and for the three and six months ended June 28, 2008 and June 30, 2007 have been prepared on the same basis as the audited consolidated financial statements and include all adjustments consisting of normal recurring accruals which, in the opinion of management, are necessary for a fair presentation of the financial position, operating results and cash flows for the interim date and interim periods presented. Results for the interim periods are not necessarily indicative of the results to be achieved for the entire year or future periods.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to contractual allowances, doubtful accounts, inventories, rebates, product returns, warranty obligations, income taxes, goodwill and intangible assets and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe are 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 could differ from those estimates.

Cash and Cash Equivalents. Cash consists of deposits with financial institutions. We consider all short-term, highly liquid investments and investments in money market funds and commercial paper with original maturities of less than three months at the time of purchase to be cash equivalents. While our cash and cash equivalents are on deposit with high-quality institutions, such deposits exceed Federal Deposit Insurance Corporation insured limits.

Financial Instruments. We utilize derivative instruments to manage our exposure to market risks such as changes in interest rates and foreign currency exchange rates. In accordance with the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", we record derivative instruments as assets or liabilities in the condensed consolidated balance sheets, measured at fair value.

Foreign Currency Translation. The financial statements of our international subsidiaries, 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 membership 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 condensed consolidated statements of operations as either a component of costs of goods sold or other income or expense, depending on the nature of the transaction.

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (Continued)

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

	Three Months Ended						Six Months Ended

	June 28, 2008			June 30, 2007			June 28, 2008			June 30, 2007
Net loss, as reported	$	(20,798	)	$	(8,077	)	$	(44,960	)	$	(19,166	)
Foreign currency translation adjustments		(149	)		578			4,052			514
Change in fair value of interest rate swap, net of tax		3,284			1,591			(2,708	)		533

Comprehensive loss	$	(17,663	)	$	(5,908	)	$	(43,616	)	$	(18,119	)

Reclassifications. The condensed consolidated financial statements and accompanying footnotes reflect certain reclassifications, which have been made to prior period condensed consolidated financial statements to conform to the current period presentation.

Recent Accounting Pronouncements. In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" which requires entities to disclose the fair values of derivative instruments and their gains and losses in a tabular format and to disclose derivative-features that are credit risk-related. The statement is effective for fiscal years beginning after November 15, 2008. We will adopt this statement as of the beginning of 2009 and are currently assessing the potential impact of adoption.

In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements" which requires entities to report non-controlling (minority) interests in subsidiaries in the same way as equity in the consolidated financial statements. The statement is effective for fiscal years beginning after December 15, 2008. We will adopt this statement as of the beginning of 2009 and are currently assessing the potential impact of adoption.

In December 2007, the FASB issued SFAS No. 141 (Revised), "Business Combinations" which requires the acquiring entity in a business combination to recognize all the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. The statement is effective for fiscal years beginning after December 15, 2008. We will adopt this statement as of the beginning of 2009 and are currently assessing the potential impact of adoption.

2. ACQUISITIONS

As part of our growth strategy, we have completed three material business acquisitions since the beginning of 2007. We believe that the acquisition of these businesses has allowed us to serve our patients and their professional caregivers more effectively. In addition, through the acquisition of these businesses, we have achieved and expect to continue to achieve certain synergies that should reduce our combined manufacturing costs and selling and distribution costs, and enhance our product offerings and research and development efforts.

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

2. ACQUISITIONS (Continued)

We account for acquisitions in accordance with SFAS No. 141, "Business Combinations" ("SFAS 141"). The results of operations attributable to each acquisition are included in the condensed consolidated financial statements from the date of acquisition.

Acquisition of DJO Opco Holdings, Inc.

On July 15, 2007, we entered into an Agreement and Plan of Merger (the "DJO Merger Agreement") with DJO Opco, formerly known as DJO Incorporated, providing for the DJO Merger pursuant to which DJO Opco became a wholly owned subsidiary of DJOFL. The total purchase price for the DJO Merger, which was consummated on November 20, 2007, was approximately $1.3 billion and consisted of $1.2 billion paid to former equity holders (or $50.25 in cash for each share of common stock of DJO Opco they then held), $15.2 million related to the fair value of stock options held by DJO Opco management that were exchanged for options to purchase DJO common stock, and $22.8 million in direct acquisition costs. The DJO Merger was financed through a combination of equity contributed by our primary shareholder, an affiliate of Blackstone Capital Partners V, L.P. ("Blackstone"), borrowings under our senior secured credit facility (the "Senior Secured Credit Facility"), and proceeds from the newly issued 10.875% senior notes due 2014 (the "10.875% Notes") (see Note 7 for further information).

We are currently integrating the operations of ReAble with those of DJO Opco. See Note 11 for further details.

Acquisition of IOMED, Inc.

On August 9, 2007, a subsidiary of DJOFL acquired IOMED, Inc. ("IOMED"), which develops, manufactures and markets active drug delivery systems used primarily to treat acute local inflammation in the physical and occupational therapy and sports medicine markets. The purchase price was $23.3 million and consisted of $21.1 million in cash payments to former IOMED equity holders at $2.75 per share, $0.8 million related to the fair value of vested stock options that were outstanding at the time of the acquisition, and $1.4 million in direct acquisition costs. The IOMED acquisition was primarily financed with borrowings under our then existing revolving credit facility.

Acquisition of The Saunders Group, Inc.

On July 2, 2007, a subsidiary of DJOFL completed its purchase of substantially all of the assets of The Saunders Group, Inc. ("Saunders") for total cash consideration of $40.9 million, including $0.9 million of acquisition costs (the "Saunders Acquisition"). Saunders is a supplier of rehabilitation products to physical therapists, chiropractors, athletes, athletic trainers, physicians and patients, with a specialty in patented traction devices, back supports, and equipment for neck and back disorders. The Saunders Acquisition was financed with funds borrowed under our then existing senior credit facilities.

The fair values of the assets acquired and the liabilities assumed were estimated in accordance with SFAS 141 and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). The purchase prices and the allocation of the purchase prices in connection with the DJO Merger and IOMED acquisition remain preliminary as of June 28, 2008 and may be subject to adjustments as we finalize our estimates of certain items, including severance amounts for employees terminated, certain acquired inventories and accounts receivable and accruals for certain contingent liabilities that existed on the acquisition date. We expect to finalize estimates for the DJO Merger and IOMED acquisition

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

2. ACQUISITIONS (Continued)

by the fourth and third quarters of 2008, respectively. We believe that the purchase price and allocation of the purchase price for the acquisition of Saunders is final as of June 28, 2008.

The purchase prices for our recent acquisitions were allocated as follows to the fair values of the net tangible and intangible assets acquired, including the cumulative impact of adjustments made to such allocations through June 28, 2008 (see Note 5):

		DJO Opco			IOMED			Saunders			Wtd. Avg. Useful Lives

(in thousands):
Current assets		$	172,177		$	8,971		$	6,783
Tangible non-current assets			67,519			853			273
Liabilities assumed (see Note 11)			(684,379	)		(6,100	)		(628	)
Acquired in-process research and development			3,000			—			—
Identifiable intangible assets:
	Technology-based		354,000			6,616			10,171		3 - 20 years
	Customer-based		328,000			2,512			6,369		10 - 16 years
	Trademarks and tradenames		356,000			1,777			4,423		Indefinite
Goodwill			678,416			8,676			13,537		N/A

	Purchase price	$	1,274,733		$	23,305		$	40,928

The purchase price allocation for the DJO Merger included values assigned to certain specific identifiable intangible assets aggregating $1,038.0 million. An aggregate value of $354.0 million was assigned to patents and existing technology, determined primarily by estimating the present value of future royalty costs that will be avoided due to our ownership of the patents and technology acquired. An aggregate value of $328.0 million was assigned to certain DJO Opco customer relationships for group purchase organization ("GPO") customers and certain other customers existing on the acquisition date based upon an estimate of the future discounted cash flows that would be derived from those GPOs and other customers. A value of $356.0 million was assigned to tradenames and trademarks, determined primarily by estimating the present value of future royalty costs that will be avoided due to our ownership of the tradenames and trademarks acquired.

Goodwill represents the excess of the purchase price over the fair value of tangible and identifiable intangible assets acquired and liabilities assumed. A value of $678.4 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. We acquired DJO Opco to expand our product offerings, increase our addressable market, increase the size of our international business and increase our revenues. We also believe there are significant cost reduction synergies that may be realized as we integrate the acquired business. These are among the factors that contributed to a purchase price for the DJO Merger acquisition that resulted in the recognition of goodwill.

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

3. ACCOUNTS RECEIVABLE RESERVES

A summary of activity in our accounts receivable reserves for doubtful accounts and sales returns is presented below (in thousands):

	Six Months Ended

	June 28, 2008			June 30, 2007
Balance, beginning of period	$	30,954		$	513
Provision for doubtful accounts and sales returns		10,040			4,144
Write-offs, net of recoveries		(13,327	)		(855	)

Balance, end of period	$	27,667		$	3,802

4. INVENTORIES

Inventories consist of the following (in thousands):

	June 28, 2008			December 31, 2007

Components and raw materials	$	33,694		$	35,534
Work in process		6,892			6,626
Finished goods		52,137			54,411
Inventory held on consignment		21,801			22,159

		114,524			118,730
Less—inventory reserves		(8,918	)		(7,826	)

	$	105,606		$	110,904

A summary of the activity in our reserves for estimated slow moving, excess, obsolete and otherwise impaired inventory is presented below (in thousands):

	Six Months Ended

	June 28, 2008			June 30, 2007
Balance, beginning of period	$	7,826		$	918
Provision charged to cost of sales		2,727			649
Recoveries (write-offs) charged to reserve		(1,635	)		(374	)

Balance, end of period	$	8,918		$	1,193

The write-offs charged to the reserve were principally related to the disposition of fully reserved inventory.

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

5. GOODWILL AND INTANGIBLE ASSETS

A summary of adjustments to our goodwill balance for the six months ended June 28, 2008 is as follows (in thousands):


Balance, beginning of period	$	1,201,282
Foreign currency translation adjustments		5,340
Adjustments to purchase price allocation of acquired businesses		(793	)

Balance, end of period	$	1,205,829

For the six months ended June 28, 2008, goodwill related to the DJO Opco acquisition was reduced by $688,000 to reflect changes in our preliminary estimates of the acquired property and equipment and assumed liabilities (see Note 11). In addition, goodwill related to Blackstone's 2006 acquisition of ReAble (the "Prior Transaction") was reduced by $32,000 to reflect an adjustment to deferred taxes as of the acquisition date and goodwill related to our 2006 acquisition of Cefar AB was reduced by $73,000 in connection with the settlement of a contingent payment.

Identifiable intangible assets consisted of the following as of June 28, 2008 (in thousands):

		Gross Carrying Amount		Accumulated Amortization			Intangibles, Net

Amortizable intangible assets:
	Technology-based	$	458,187	$	(37,469	)	$	420,718
	Customer-based		478,278		(38,318	)		439,960

		$	936,465	$	(75,787	)	$	860,678

Indefinite-lived intangible assets:
	Trademarks							457,686
Accumulated foreign currency translation adjustments								7,288

	Total identifiable intangible assets						$	1,325,652

Identifiable intangible assets consisted of the following as of December 31, 2007 (in thousands):

		Gross Carrying Amount		Accumulated Amortization			Intangibles, Net

Amortizable intangible assets:
	Technology-based	$	457,463	$	(18,484	)	$	438,979
	Customer-based		477,942		(19,047	)		458,895

		$	935,405	$	(37,531	)	$	897,874

Indefinite-lived intangible assets:
	Trademarks							457,686
Accumulated foreign currency translation adjustments								4,801

	Total identifiable intangible assets						$	1,360,361

Our amortizable intangible assets are being amortized over the estimated useful lives ranging from two to 20 years.

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

5. GOODWILL AND INTANGIBLE ASSETS (Continued)

Future estimated amortization expense related to acquired intangible assets is as follows (in thousands):


Remaining 2008	$	38,115
2009		75,963
2010		75,024
2011		73,657
2012		72,454
Thereafter		525,465

	$	860,678

Our goodwill and intangible assets are allocated by segment as follows (in thousands):

June 28, 2008:	Goodwill		Intangible Assets, net

Domestic Rehabilitation Segment	$	960,662	$	1,069,102
International Rehabilitation Segment		197,761		228,253
Surgical Implant Segment		47,406		28,297

Total	$	1,205,829	$	1,325,652

December 31, 2007:	Goodwill		Intangibles, net

Domestic Rehabilitation Segment	$	961,382	$	1,104,093
International Rehabilitation Segment		192,494		226,842
Surgical Implant Segment		47,406		29,426

Total	$	1,201,282	$	1,360,361

6. OTHER CURRENT LIABILITIES

Other current liabilities consist of the following (in thousands):

	June 28, 2008		December 31, 2007

Wages and related expenses	$	28,404	$	31,232
Commissions and royalties		13,199		13,114
Taxes		5,334		6,119
Restructuring costs (see Note 11)		3,549		9,563
Professional fees		3,106		6,693
Other accrued liabilities		38,798		26,915

	$	92,390	$	93,636

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

7. LONG-TERM DEBT AND CAPITAL LEASES

Long-term debt (including capital lease obligations) consists of the following (in thousands):

	June 28, 2008			December 31, 2007

Term loan under Senior Secured Credit Facility, net of unamortized original issue discount ($11.7 million and $12.5 million at June 28, 2008 and December 31, 2007, respectively)	$	1,050,606		$	1,052,514
10.875% Senior notes		575,000			575,000
11.75% Senior subordinated notes		200,000			200,000
Loans and revolving credit facilities at various European banks		4,210			4,239
Capital lease obligations and other		912			1,054

		1,830,728			1,832,807
Less current portion		(14,170	)		(14,209	)

Long-term debt and capital leases, net of current portion	$	1,816,558		$	1,818,598

Senior Secured Credit Facility

On November 20, 2007, in connection with the DJO Merger, DJOFL and DJO Holdings LLC ("Holdings") entered into the Senior Secured Credit Facility. The Senior Secured Credit Facility consists of a six and a half-year $1,065.0 million term loan facility and a six-year $100.0 million revolving credit facility. We issued the term loan facility of the Senior Secured Credit Facility at a 1.2% discount, resulting in net proceeds of $1,052.4 million. The $12.6 million discount is being amortized as additional interest expense over the term of the term loan facility and increases the reported outstanding balance accordingly. As of June 28, 2008, no amounts were drawn related to our revolving credit facility; however, $0.9 million was used to secure outstanding letters of credit.

Interest Rate and Fees. Borrowings under the Senior Secured Credit Facility bear interest at a rate equal to an applicable margin plus, at our option, either (a) a base rate determined by reference to the higher of (1) the prime rate of Credit Suisse and (2) the federal funds rate plus 0.50% or (b) the Eurodollar rate determined by reference to the costs of funds for deposits in U.S. dollars for the interest period relevant to each borrowing adjusted for required reserves. The initial applicable margin for borrowings under the term loan facility and the revolving credit facility is 2.00% with respect to base rate borrowings and 3.00% with respect to Eurodollar borrowings. The applicable margin for borrowings under the term loan facility and the revolving credit facility may be reduced subject to us attaining certain leverage ratios.

On November 20, 2007, we entered into an interest rate swap agreement for a notional amount of $515.0 million in an effort to hedge our exposure to fluctuating interest rates related to a portion of our Senior Secured Credit Facility (see Note 14). As of June 28, 2008, our weighted average interest rate for all borrowings under the Senior Secured Credit Facility was 5.70%.

In addition to paying interest on outstanding principal under the Senior Secured Credit Facility, we are required to pay a commitment fee to the lenders under the revolving credit facility in respect of the unutilized commitments thereunder. The initial commitment fee rate is 0.50% per annum. The commitment fee rate may be reduced subject to us attaining certain leverage ratios. We must also pay customary letter of credit fees.

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

7. LONG-TERM DEBT AND CAPITAL LEASES (Continued)

Principal payments. We are required to pay annual payments in equal quarterly installments on the loans under the term loan facility in an amount equal to 1.00% of the funded total principal amount during the first six years and three months following the closing of the Senior Secured Credit Facility, with any remaining amount payable at maturity. Principal amounts outstanding under the revolving credit facility are due and payable in full at maturity.

Prepayments. The Senior Secured Credit Facility requires us to prepay outstanding term loans, subject to certain exceptions, with (1) 50% (which percentage can be reduced to 25% or 0% upon our attaining certain leverage ratios) of our annual excess cash flow, as defined; (2) 100% of the net cash proceeds above an annual amount to be agreed from non-ordinary course asset sales (including insurance and condemnation proceeds) by DJOFL and its restricted subsidiaries, subject to exceptions to be agreed upon, including a 100% reinvestment right if reinvested or committed to reinvest within 15 months of such sale or disposition so long as reinvestment is completed within 180 days thereafter; and (3) 100% of the net cash proceeds from issuances or incurrences of debt by DJOFL and its restricted subsidiaries, other than proceeds from debt permitted to be incurred under the Senior Secured Credit Agreement. The foregoing mandatory prepayments will be applied to the term loan facilities in direct order of maturity. We may voluntarily prepay outstanding loans under the Senior Secured Credit Facility at any time without premium or penalty, provided that voluntary prepayments of Eurodollar loans made on a date other than the last day of an interest period applicable thereto shall be subject to customary breakage costs.

Guarantee and Security. All obligations under the Senior Secured Credit Facility are unconditionally guaranteed by Holdings and each existing and future direct and indirect wholly-owned domestic subsidiary of DJOFL other than immaterial subsidiaries, unrestricted subsidiaries and subsidiaries that are precluded by law or regulation from guaranteeing the obligations (collectively, the "Guarantors").

All obligations under the Senior Secured Credit Facility, and the guarantees of those obligations, are secured by pledges of 100% of the capital stock of DJOFL, 100% of the capital stock of each wholly owned domestic subsidiary and 65% of the capital stock of each wholly owned foreign subsidiary that is, in each case, directly owned by DJOFL or one of the Guarantors; and a security interest in, and mortgages on, substantially all tangible and intangible assets of Holdings, DJOFL and each Guarantor.

Certain Covenants and Events of Default. The Senior Secured Credit Facility contains a number of covenants that, among other things, restrict, subject to certain exceptions, our and our subsidiaries' ability to:

•: incur additional indebtedness;
•: create liens on assets;
•: change fiscal years;
•: enter into sale and leaseback transactions;
•: engage in mergers or consolidations;
•: sell assets;
•: pay dividends and other restricted payments;

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

7. LONG-TERM DEBT AND CAPITAL LEASES (Continued)

•: make investments, loans or advances;
•: repay subordinated indebtedness;
•: make certain acquisitions;
•: engage in certain transactions with affiliates;
•: restrict the ability of restricted subsidiaries that are not Guarantors to pay dividends or make distributions;
•: amend material agreements governing our subordinated indebtedness; and
•: change our lines of business.

In addition, the Senior Secured Credit Facility requires us to maintain a declining maximum senior secured leverage ratio, starting at 5.1:1 as of the twelve months ended June 28, 2008 and stepping down over time to 3.25:1 by the end of 2011. The Senior Secured Credit Facility also contains certain customary affirmative covenants and events of default. Our maximum senior secured leverage ratio was within the initial covenant level as of June 28, 2008.

10.875% Senior Notes Payable

On November 20, 2007, DJOFL and Finco (collectively, the "Issuers") issued $575.0 million aggregate principal amount of 10.875% Notes under an indenture dated as of November 20, 2007 (the "10.875% Indenture") among the Issuers, the guarantors party thereto and The Bank of New York Mellon (formerly known as The Bank of New York), as trustee. On July 2, 2008, our amended registration statement, filed in June 2008 on Form S-4 with the Securities and Exchange Commission (the "Commission") relating to an offer to exchange these privately issued 10.875% Notes, for registered 10.875% Notes was declared effective. The exchange offer was completed July 31, 2008.

The 10.875% Notes require semi-annual interest payments of approximately $31.3 million each May 15 and November 15 and are due November 15, 2014. The market value of the 10.875% Notes was approximately equal to the principal amount of $575.0 million as of June 28, 2008 and was determined using trading prices for the notes on or near that date.

Optional Redemption. Under the 10.875% Indenture, prior to November 15, 2011, the Issuers have the option to redeem some or all of the 10.875% Notes for cash at a redemption price equal to 100% of the then outstanding principal balance plus an applicable make-whole premium plus accrued and unpaid interest. Beginning on November 15, 2011, the Issuers may redeem some or all of the 10.875% Notes at a redemption price of 105.438% of the then outstanding principal balance plus accrued and unpaid interest. The redemption price decreases to 102.719% and 100% of the then outstanding principal balance at November 2012 and November 2013, respectively. Additionally, from time to time, before November 15, 2010, the Issuers may redeem up to 35% of the 10.875% Notes at a redemption price equal to 110.875% of the principal amount then outstanding, in each case, with proceeds we raise, or a direct or indirect parent company raises, in certain offerings of equity of DJOFL or its direct or indirect parent companies, as long as at least 65% of the aggregate principal amount of the notes issued remains outstanding.

Change of Control. Upon the occurrence of a change of control, unless DJOFL has previously sent or concurrently sends a notice exercising its optional redemption rights with respect to all of the

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

7. LONG-TERM DEBT AND CAPITAL LEASES (Continued)

then-outstanding 10.875% Notes, DJOFL will be required to make an offer to repurchase all of the then-outstanding 10.875% Notes at 101% of their principal amount, plus accrued and unpaid interest.

Covenants. The 10.875% Indenture contains covenants limiting, among other things, our and our restricted subsidiaries' ability to incur additional indebtedness or issue certain preferred and convertible shares, pay dividends on, redeem, repurchase or make distributions in respect of the capital stock of DJO or make other restricted payments, make certain investments, sell certain assets, create liens on certain assets to secure debt, consolidate, merge, sell or otherwise dispose of all or substantially all of our assets, enter into certain transactions with affiliates, and designate our subsidiaries as unrestricted subsidiaries. As of June 28, 2008, we were in compliance with all applicable covenants.

11.75% Senior Subordinated Notes Payable

The Issuers issued $200.0 million aggregate principal amount of 11.75% senior subordinated notes in November 2006 (the "11.75% Notes"). The 11.75% Notes require semi-annual interest payments of approximately $11.8 million each May 15 and November 15 and are due November 15, 2014.

The market value of the 11.75% Notes was approximately $185.5 million as of June 28, 2008 and was determined using trading prices for the notes on or near that date. We believe the trading prices reflect certain differences between prevailing market terms and conditions and the actual terms of our 11.75% Notes.

The 11.75% Notes contain similar provisions as the 10.875% Notes with respect to change of control and covenant requirements. Under the Indenture governing the 11.75% Notes (the "11.75% Indenture"), prior to November 15, 2010, the Issuers have the option to redeem some or all of the 11.75% Notes for cash at a redemption price equal to 100% of the then outstanding principal balance plus an applicable make-whole premium plus accrued and unpaid interest. Beginning on November 15, 2010, the Issuers may redeem some or all of the 11.75% Notes at a redemption price of 105.875% of the then outstanding principal balance plus accrued and unpaid interest on the notes. The redemption price decreases to 102.938% and 100.000% of the then outstanding principal balance at November 2011 and November 2012, respectively. Additionally, from time to time, before November 15, 2009, the Issuers may redeem up to 35% of the 11.75% Notes at a redemption price equal to 111.75% of the principal amount then outstanding, in each case, with proceeds we raise, or a direct or indirect parent company raises, in certain offerings of equity of DJOFL or its direct or indirect parent companies, as long as at least 65% of the aggregate principal amount of the notes issued remains outstanding.

Our ability to continue to meet the covenants related to our indebtedness specified above in future periods will depend, in part, on events beyond our control, and we may not continue to meet those ratios. A breach of any of these covenants in the future could result in a default under the Senior Secured Credit Facility, the 11.75% Indenture and the 10.875% Indenture (collectively, the "Indentures"), at which time the lenders could elect to declare all amounts outstanding under the Senior Secured Credit Facility to be immediately due and payable. Any such acceleration would also result in a default under the Indentures.

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

7. LONG-TERM DEBT AND CAPITAL LEASES (Continued)

Cefar Indebtedness

Our Cefar-Compex division has certain debt outstanding under revolving credit facilities and term loans to various European banks. At June 28, 2008, the balances outstanding were $2.4 million for the revolving credit facilities and $1.8 million for the term loans.

Debt Issue Costs

We incurred $30.7 million, $24.1 million, and $10.2 million of debt issue costs in connection with the Senior Secured Credit Facility, the 10.875% Notes, and the 11.75% Notes, respectively. These costs have been capitalized and are included in other non-current assets in the condensed consolidated balance sheets at June 28, 2008 and December 31, 2007. Debt issue costs are being amortized over the terms of the respective debt instruments through November 2014.

8. STOCK OPTION PLANS AND STOCK-BASED COMPENSATION

2007 Incentive Stock Plan

In connection with the acquisition of ReAble by Blackstone on November 3, 2006 (the "Prior Transaction"), we adopted the 2006 Stock Incentive Plan (the "2006 Plan"). In connection with the DJO Merger, we terminated the 2006 Plan and adopted the DJO Incorporated 2007 Incentive Stock Plan (the "2007 Plan"), which provides for the grant of stock options and other stock-based awards to key employees, directors and consultants. Outstanding options to purchase ReAble common stock originally issued under the 2006 Plan are now governed by the terms of the 2007 Plan. The total number of shares of common stock of DJO that may be issued under the 2007 Plan is 7,500,000 shares, subject to adjustment in certain events. Options issued under the 2007 Plan can be either incentive stock options or non-qualified stock options. The exercise price of stock options granted under the 2007 Plan will not be less than 100% of the fair market value of the underlying shares on the date of grant, as determined under the 2007 Plan, and will expire no more than ten years from the date of grant.

Employee Stock Options

During the six months ended June 28, 2008 we have granted 4,417,114 stock options under the 2007 Plan to our executive officers, senior management, and certain other employees. DJO adopted a form of non-statutory stock option agreement (the "DJO Form Option Agreement") for employee stock option awards under the 2007 Plan. Under the DJO Form Option Agreement, one-third of stock options will vest over a specified period of time (typically five years) contingent solely upon the awardees' continued employment with us ("Time-Based Tranche"). Another one-third of stock options will vest over a specified performance period (typically five years) from the date of grant upon the achievement of certain pre-determined performance targets based on Adjusted EBITDA and free cash flow over time ("Performance-Based Tranche"), as defined in the DJO Form Option Agreement, while the final one-third vests based upon achieving enhanced pre-determined performance targets based on Adjusted EBITDA and free cash flow ("Enhanced Performance-Based Tranche"). The DJO Form Option Agreement includes certain forfeiture provisions upon an awardees' separation from service with us.

In addition, in an effort to align our objectives following the DJO Merger with vesting requirements for previously issued stock options under the 2006 Plan, we cancelled all stock options

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

8. STOCK OPTION PLANS AND STOCK-BASED COMPENSATION (Continued)

originally granted under the 2006 Plan, except for 63,806 vested Time-Based Tranche options held by 72 employees, and concurrently issued the same or a greater number of options to each 2006 Plan participant under the 2007 Plan (the "Replacement Options"). These Replacement Options were valued in accordance with the modification provisions pursuant to SFAS No. 123(R), "Share-Based Payment" ("SFAS 123(R)"), whereby the fair value of the options immediately prior to the date of modification is compared to the fair value of the options at the date of modification, with the incremental fair value, if any, being recognized as future compensation expense. However, under no circumstances can compensation expense be reduced to an amount lower than the original fair value at the date of grant. Replacement Options have an exercise price of $16.46 per share, vest ratably over a predefined period as further described below, and have a contractual term of ten years from the date of modification. The assumptions utilized to determine fair value for Replacement Options were the same as those used to compute the fair value of new options granted during the current year. We did not recognize any additional compensation expense for the three or six months ended June 28, 2008 as a result of the modification.

Options under the 2007 Plan become exercisable with respect to 25% of the Time-Based Tranche on December 31, 2008, 20% of the Time-Based Tranche on December 31, 2009, 18.33% of the Time-Based Tranche on each December 31, 2010 and 2011, and 18.34% on December 31, 2012 if such optionee remains employed with us or any of our subsidiaries or affiliates as of each such date. As previously discussed, each of the Performance-Based and Enhanced Performance-Based Tranches contain Adjusted EBITDA and free cash flow targets, with the Enhanced Performance-Based Tranche requiring greater performance than the Performance-Based Tranche. The optionee may earn the right to exercise the option to purchase up to 25% of the Performance-Based or both the Performance-Based and Enhanced Performance-Based Tranches on December 31, 2008 if the applicable performance targets are achieved, up to 20% of the Performance-Based or both the Performance-Based and Enhanced Performance-Based Tranches on December 31, 2009 if the applicable performance targets are achieved, up to 18.33% of the Performance-Based or both the Performance- Based and Enhanced Performance-Based Tranches on each December 31, 2010 and 2011, and up to 18.34% of the Performance-Based or both the Performance-Based and Enhanced Performance-Based Tranches on December 31, 2012, if the applicable performance targets are achieved as of such dates, and provided that the optionee remains employed with us or any of our subsidiaries or affiliates as of each such date.

Both new options granted and Replacement Options contain change-in-control provisions that cause the vesting of a portion of the tranches upon the occurrence of a change-in-control, as follows: 1) the option shares in the Time-Based Tranche will become immediately exercisable upon the occurrence of a change-in-control if the optionee remains in continuous employment of the Company until the consummation of the change-in-control and 2) the option shares of the Performance-Based Tranche and the Enhanced Performance-Based Tranche for the year in which such change-in-control is consummated and for any subsequent performance periods will become immediately exercisable if the optionee remains in continuous employment of the Company until the consummation of the change-in-control.

We recorded non-cash compensation expense of approximately $0.6 million and $1.2 million in the three and six months ended June 28, 2008, respectively, associated with stock options issued under the 2007 Incentive Stock Plan. We recorded non-cash compensation expense of $0.6 million and $1.0 million in the three and six months ended June 30, 2007, respectively, associated with stock options issued under the 2006 Stock Incentive Plan. We record compensation expense for awards with a

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

8. STOCK OPTION PLANS AND STOCK-BASED COMPENSATION (Continued)

performance condition only to the extent deemed probable of achievement, with the exception of market-based options originally issued under the 2006 Plan which were modified during the first quarter of 2008 and reallocated to the Time-Based, Performance-Based and Enhanced Performance-Based Tranches. The expense related to the modified stock options is recognized ratably over the expected term of the stock options using the original grant date fair value regardless of the probability of achieving the performance conditions. We are required to reassess at each reporting period whether achievement of any performance condition is probable, at which time we would recognize the related compensation expense over the remaining performance or service period, if any. To date, no amount has been recorded related to the Enhanced Performance-Based Tranche, as achievement of the performance criteria for that tranche is not deemed probable at this time.

The fair value of each option award is estimated on the date of grant, or modification, using the Black-Scholes-Merton option pricing model for service and performance based awards, and a binomial model for market based awards. In estimating fair value for both new options issued under the 2007 Plan and Replacement Options, expected volatility was based completely on implied volatility of comparable publicly-traded companies. Expected life assumptions were derived from a review of annual historical employee exercise behavior of option grants with similar vesting periods, modified to consider our current status as a privately-owned company. Expected life is calculated in two tranches based on the employment level defined as executive or employee. The risk-free rate used in calculating fair value of service and performance-based stock options for periods within the expected term of the option is based on the U.S. Treasury yield bond curve in effect at the time of grant.

The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and experience. The following table presents the assumptions we used in calculating the fair value of employee stock options for the six months ended June 28, 2008 and June 30, 2007:

	Six Months Ended

	June 28, 2008		June 30, 2007
Expected dividends		0.0%		0.0%
Expected volatility		27.4% - 60.0%		56.0% - 60.0%
Risk-free rate		3.22% - 4.7%		4.7%
Expected term (in years)		4.7 - 7.1 years		5.2 - 7.1 years

Non-Employee Stock Options

On May 22, 2008, we granted 37,800 stock options under the 2007 Plan to non-employees ("non-employee options"). The non-statutory stock option agreement for the non-employees states that the options have an exercise price of $16.46 per share, which was equal to 100% of the estimated fair market value of the stock and will become effective upon the defined effective date and expire ten years from that date. A number of shares equal to 25% of the options granted become vested and exercisable at the end of each of the first four years subsequent to the effective date, provided the optionee is still affiliated with and providing services to the Company. The nonemployee option agreement does not include any performance requirements on the optionee's part in order to vest in the options granted.

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

8. STOCK OPTION PLANS AND STOCK-BASED COMPENSATION (Continued)

Non-employee options are accounted for in accordance with the guidance in Emerging Issues Task Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF 96-18"). In accordance with EITF 96-18 the fair value of each option will be remeasured at the end of each reporting period until vested, when the final fair value of the vesting of the option is determined.

In estimating fair value for options issued, expected volatility was based completely on implied volatility of comparable publicly-traded companies. A contractual life of ten years was used in place of the expected term. The risk-free rate used in calculating the fair value of the non-employee stock options for periods within the contractual life is based on the U.S. Treasury yield bond curve in effect at the time of grant.

The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and experience. The following table presents the assumptions we used in calculating the fair value of the non-employee stock options for the six months ended June 28, 2008:

	Six Months Ended

	June 28, 2008
Expected dividends		0.0	%
Expected volatility		27.41	%
Risk-free rate		3.92	%
Contractual term (in years)		10 years

We recorded non-cash compensation expense of approximately $15,000 in each of the three and six month periods ended June 28, 2008, respectively, associated with non-employee stock options issued under the 2007 Incentive Stock Plan.

Summary of Activity for Employee & Non-Employee Stock Options

A summary of option activity under the 2007 Plan for the six months ended June 28, 2008 is presented below:

				Weighted- Average Exercise Price			Aggregate Intrinsic Value

Outstanding at January 1, 2008		3,550,627		$	12.97
	Granted, including Replacement Options	4,454,914		$	16.46
	Exercised	—			—
	Forfeited, including options cancelled	(1,084,386	)	$	16.46

Outstanding at June 28, 2008		6,921,155		$	14.67	8.81	$	12,458,820

Exercisable at June 28, 2008		2,481,351		$	11.46	7.43	$	12,458,820

For the three and six months ended June 28, 2008 and June 30, 2007, the weighted-average grant-date fair value of stock options granted was $5.06, $5.37, $9.38 and $9.36, respectively.

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

8. STOCK OPTION PLANS AND STOCK-BASED COMPENSATION (Continued)

Total unrecognized stock-based compensation expense, related to nonvested stock options under the 2007 Plan, net of expected forfeitures, was $15.7 million as of June 28, 2008. We anticipate this expense to be recognized over a weighted-average period of approximately 4.5 years. However, compensation expense associated with performance-based options under the 2007 Plan, with the exception of those that were issued in connection with a modification, will be recognized only to the extent achievement of certain performance targets are deemed probable.

Restricted Stock

On March 13, 2007, we granted 15,189 shares of restricted stock awards to an executive officer pursuant to the terms of a restricted stock agreement under the 2006 Plan. The shares are subject to a vesting schedule over a period of three years with the final vesting on November 3, 2009. On November 20, 2007, we granted 24,300 shares of restricted stock awards to the same executive officer pursuant to the terms of a restricted stock agreement under the 2007 Incentive Stock Plan, which will all vest on January 1, 2009. In connection with the termination of the employment of this executive officer (Refer to Note 12), we expect all of the unvested shares of these restricted stock awards to be cancelled.

9. SEGMENT AND GEOGRAPHIC INFORMATION

Prior to the fourth quarter of 2007, we operated and accounted for our results as two reportable segments: the Orthopedic Rehabilitation Segment and the Surgical Implant Segment. In the fourth quarter of 2007, in connection with the DJO Merger, which resulted in significant changes in our executive team, including a new Chief Executive Officer, who has been identified as the Chief Operating Decision Maker pursuant to SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", we effected an operational reorganization, which resulted in the creation of the three operating segments further described below.

Domestic Rehabilitation Segment

Our Domestic Rehabilitation Segment, which generates most of its revenues in the United States, is divided into three main businesses:

•: Bracing and Supports. Our Bracing and Supports division offers our DonJoy, ProCare and Aircast products, including rigid knee bracing, orthopedic soft goods, cold therapy products, and vascular systems.
•: Empi. Our Empi division offers products in the category of home electrotherapy, bone growth stimulation products, which were acquired with the DJO Merger, iontophoresis, and home traction.
•: Chattanooga. Our Chattanooga Group division offers products in the clinical rehabilitation market in the category of clinical electrotherapy devices, clinical traction devices, and other clinical products and supplies such as treatment tables, continuous passive motion ("CPM") devices and dry heat therapy.

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

9. SEGMENT AND GEOGRAPHIC INFORMATION (Continued)

International Rehabilitation Segment

Our International Rehabilitation Segment, which generates most of its revenues in Europe, is divided into three main businesses:

•: Bracing and Supports. The international sales of our Bracing and Supports division offers DonJoy, ProCare and Aircast products, including rigid knee bracing, orthopedic soft goods, cold therapy products, and vascular systems.
•: Ormed.DJO. Our Ormed.DJO business provides bracing, CPM, electrotherapy and other products primarily in Germany.
•: Cefar-Compex. Our Cefar-Compex business provides electrotherapy products for medical and consumer markets and other physical therapy and rehabilitation products primarily in Europe.

Surgical Implant Segment

Our Surgical Implant Segment develops, manufactures and markets a wide variety of knee, hip and shoulder implant products that serve the orthopedic reconstructive joint implant market.

Information regarding our reportable business segments is presented below (in thousands). This information excludes the impact of certain expenses not allocated to segments, primarily general

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

9. SEGMENT AND GEOGRAPHIC INFORMATION (Continued)

corporate expenses. Information for the three and six months ended June 30, 2007 has been restated to reflect our current reportable segments.

		Three Months Ended						Six Months Ended

		June 28, 2008			June 30, 2007			June 28, 2008			June 30, 2007
Net sales:
	Domestic Rehabilitation Segment	$	173,384		$	68,087		$	340,282		$	138,656
	International Rehabilitation Segment		63,823			25,997			121,694			49,789
	Surgical Implant Segment		18,737			16,644			37,900			33,445
	Intersegment revenues		(6,143	)		(4,475	)		(10,347	)		(8,930	)

	Consolidated net sales	$	249,801		$	106,253		$	489,529		$	212,960

Gross profit:
	Domestic Rehabilitation Segment	$	104,854		$	38,893		$	201,611		$	78,470
	International Rehabilitation Segment		39,611			14,114			72,729			24,559
	Surgical Implant Segment		13,714			11,502			28,484			23,111
	Expenses not allocated to segments/Eliminations		(209	)		(2,117	)		(210	)		(2,323	)

	Consolidated gross profit	$	157,970		$	62,392		$	302,614		$	123,817

Operating income:
	Domestic Rehabilitation Segment	$	18,049		$	3,305		$	29,691		$	9,073
	International Rehabilitation Segment		9,394			1,487			15,795			715
	Surgical Implant Segment		1,621			1,423			3,985			2,066
	Expenses not allocated to segments/Eliminations		(14,001	)		(5,882	)		(26,168	)		(11,212	)

	Consolidated operating income	$	15,063		$	333		$	23,303		$	642

The accounting policies of the reportable segments are the same as the accounting policies of the Company. We allocate resources and evaluate the performance of segments based on net sales, gross profit, operating income and other non-GAAP measures. We do not allocate assets to reportable segments because a significant portion of assets are shared by the segments.

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

9. SEGMENT AND GEOGRAPHIC INFORMATION (Continued)

Geographic Area

Following are our net sales by geographic area, based on location of customer (in thousands):

	Three Months Ended				Six Months Ended

	June 28, 2008		June 30, 2007		June 28, 2008		June 30, 2007
Net sales:
United States	$	178,474	$	75,464	$	352,247	$	153,277
Germany		22,129		9,574		42,369		19,368
Other Europe, Middle East, & Africa		38,058		17,118		73,510		32,362
Asia Pacific		3,418		1,810		6,518		3,324
Other		7,722		2,287		14,885		4,629

	$	249,801	$	106,253	$	489,529	$	212,960

Following are our long-lived assets by geographic area (in thousands):

	June 28, 2008		December 31, 2007

United States	$	134,242	$	2,592,799
International		2,540,428		118,013

	$	2,674,670	$	2,710,812

10. INCOME TAXES

Income taxes for the interim periods presented have been included in the accompanying unaudited condensed consolidated financial statements on the basis of an estimated annual effective tax rate, adjusted for discrete items. The tax benefit for these periods differed from the amount which would have been recorded using the U.S. statutory tax rate due primarily to the impact of foreign taxes and deferred taxes on the assumed repatriation of foreign earnings.

For the three and six months ended June 28, 2008, we recorded income tax benefits of approximately $6.3 million and $17.4 million, respectively, on pre-tax losses of approximately $26.8 million and $61.9 million, respectively, net of offsetting tax expense for foreign taxes, deferred taxes on the assumed repatriation of foreign earnings, and other non-deductible items. For the three and six months ended June 30, 2007, we recorded income tax benefits of approximately $5.6 million and $7.9 million, respectively, on pre-tax losses of approximately $13.6 million and $26.9 million, respectively, net of offsetting tax expense for foreign taxes, deferred taxes on the assumed repatriation of foreign earnings, and other non-deductible items.

In June 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109" ("FIN 48"). We adopted the provisions of FIN 48 on January 1, 2007. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

10. INCOME TAXES (Continued)

transition. Our gross unrecognized tax benefit has not materially changed from the $16.2 million recorded as of December 31, 2007.

11. RESTRUCTURING AND RELATED CHARGES

We have implemented several restructuring and reorganization programs, including workforce reductions and the exit and consolidation of facilities, related primarily to the integration of businesses we have acquired. At present, our restructuring efforts are primarily related to the integration of DJO Opco following the DJO Merger. As of June 28, 2008, these restructuring activities are ongoing and additional expenses are expected to be incurred in future periods.

At the time of the DJO Merger, management had begun to assess and formulate plans to restructure the operations of DJO to eliminate certain duplicative activities, reduce the cost structure and better align product and operating expenses with the existing markets in which we compete. The plan was approved and initiated after the consummation of the DJO Merger. In the fourth quarter of 2007, we announced the relocation of our headquarters to Vista, California. Activities were also initiated with respect to the relocation of certain manufacturing operations from our Chattanooga, Tennessee location to Tijuana, Mexico. We also announced the future termination of certain employees related to the move of certain activities of our Bone Growth Stimulation ("BGS") product line operations from Vista, California to St. Paul, Minnesota. Internationally, we closed a facility in Germany and anticipate facility closures in certain other locations in an effort to integrate and realize cost synergies in our international operations. As of June 28, 2008, approximately $2.7 million was accrued related to severance and facility exit costs not yet paid. Additionally, approximately $0.8 million has been accrued as of June 28, 2008 related to purchase of rights to distributor territories in connection with the DJO Merger. We also assumed $1.9 million of severance due to a former executive officer of a business acquired by DJO Opco prior to the DJO Merger, which was paid in the first quarter of 2008.

In certain cases, estimated severance and facility exit costs have been accrued as a liability with a corresponding increase to goodwill in accordance with the guidance specified in Emerging Issues Task Force Issue Number 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination" ("EITF 95-3"). However, not all of our restructuring costs meet the accrual requirements of EITF 95-3 and certain integration costs are expensed as incurred.

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

11. RESTRUCTURING AND RELATED CHARGES (Continued)

A summary of the activity relating to the restructuring for the six months ended June 28, 2008 is as follows (in thousands):

		Lease Termination Costs			Severance			Purchase of Rights to Distributor Territories			Total

Balance, beginning of period		$	1,349		$	6,087		$	2,127		$	9,563
	Expensed during period		—			2,184			—			2,184
	Adjustments to goodwill		46			(766	)		(458	)		(1,178	)
	Payments made during period		(403	)		(5,744	)		(745	)		(6,892	)
	Adjustments to estimated costs		—			(65	)		(123	)		(188	)
	Foreign currency translation		37			23			—			60

Balance, June 28, 2008		$	1,029		$	1,719		$	801		$	3,549

12. COMMITMENTS AND CONTINGENCIES

In December 2006, we recorded approximately $1.1 million as a contingent liability with an offsetting adjustment to goodwill relating to litigation against Compex Technologies, Inc. ("Compex") regarding a dispute over custom duties and VAT on imported goods prior to the date of acquisition. In February 2007, a judgment in the dispute with the custom officials was issued by the court which resulted in partial unfavorable rulings for each side. In June 2008, the Appeal Court of Paris announced a preliminary judgment in our favor. We are waiting on written notice of the final judgment. In the event the final ruling is in our favor, we will reverse the amount accrued and record it as a reduction to goodwill. We expect to receive final judgment before the end of the fiscal year.

In August 2007 and September 2007, two purported shareholder class action lawsuits were filed in California Superior Court, in the County of San Diego, on behalf of DJO Opco's public stockholders, challenging DJO Opco's proposed merger with ReAble. The court ordered the two lawsuits consolidated for all purposes in September 2007.

The two original complaints named DJO Opco, ReAble and the current members of DJO Opco's board of directors as defendants. One of the original complaints also named Blackstone as a defendant. The two substantially similar original complaints alleged, among other things, that the individual defendants breached their fiduciary duties of care, good faith and loyalty by approving the proposed merger with an allegedly inadequate price, without adequately informing themselves of DJO Opco's highest transactional value, and without adequately marketing DJO Opco to other potential buyers. The original complaints also alleged that the individual defendants and DJO Opco failed to make full and adequate disclosures in the preliminary proxy statement regarding the proposed merger. The original complaints pray for, among other things, class certification, declaratory relief, an injunction of the proposed merger or a rescission order, corrective disclosures to the proxy statement, damages, interest, attorneys' fees, expert fees and other costs; and such other relief as the court may find just and proper.

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

12. COMMITMENTS AND CONTINGENCIES (Continued)

resulted in a decision to provide additional information to DJO Opco's shareholders in the definitive proxy statement concerning the proposed merger and to modify certain terms in the merger agreement and to pay certain attorneys' fees, costs, and expenses incurred by the plaintiffs. As stated in the MOU, defendants deny all allegations of wrongdoing, fault, liability or damage to the plaintiffs and the putative class in the consolidated action and deny that they are engaged in any wrongdoing or violation of law or breach of duty. Defendants also do not make any admission that the supplemental disclosures are material. The parties signed a settlement agreement containing these terms and requested court approval. On June 13, 2008 the court entered an order granting final approval of the settlement after providing notice and opportunity to be heard to the members of the class. The court's order will be final if not appealed within 60 days after entry of the order.

Due to the nature of our business, we are subject to a variety of audits by government agencies and other private interests, including audits by the U.S. Food and Drug Administration (the "FDA") of our compliance with federal requirements for our facilities and related quality and manufacturing processes. In the first quarter of 2008 we received an FDA Form 483 "Inspectional Observations" in connection with an audit of our Chattanooga division of our Domestic Rehabilitation segment, stating that we failed to report certain customer complaints claiming that our muscle stimulator devices malfunctioned, and that we did not adequately implement corrective and preventive action to prevent recurrence of potential product failures relating to our muscle stimulator devices. The auditor also recommended that we recall a series of ultrasound devices that had experienced operating issues in 2005, and we are implementing such a recall. During the second quarter, we received a warning letter relating to the reporting issues on the muscle stimulator device complaints and requesting software verification and validation plans and reports regarding the correction of problems associated with the ultrasound product.

The manufacturing and sale of orthopedic devices and related products exposes us to significant risks of product liability claims, lawsuits and product recalls. From time to time, we have been, and we are currently, the subject of a number of product liability claims and lawsuits relating to our products. We are currently defendants in 14 product liability cases related to a drug infusion pump product manufactured by a third party manufacturer that we distribute through our Bracing and Supports division of our Domestic Rehabilitation segment. These cases have been brought against the manufacturers and certain distributors of these pumps, the manufacturers of the anesthetics used in these pumps, and the healthcare professionals involved in providing the pumps to their patients. All of these lawsuits allege that the use of these pumps with certain anesthetics in certain shoulder surgeries over prolonged periods have resulted in cartilage damage to the plaintiffs. We have tendered the defense of these cases both to the manufacturers who have supplied these pumps to us and to our product liability carrier. Our product liability carrier has accepted coverage of these cases, subject to customary reservations, and is providing the Company with the defense. The lawsuits allege damages ranging from unspecified amounts to claims between $1 million and $10 million.

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

12. COMMITMENTS AND CONTINGENCIES (Continued)

significant costs to us. As of June 28, 2008 and December 31, 2007, we have accrued approximately $2.2 million and $1.9 million, respectively, for product liability claims expense based upon previous claim experience in part due to the fact that we have exceeded the coverage limits on certain historical product liability claims involving our Surgical Implant Segment.

In May 2008, we announced that an executive officer tendered his resignation and as of June 28, 2008 he is no longer providing services to the Company. We expect to enter into a separation agreement with this executive officer in excess of the amounts due under his original employment agreement. Under the pending separation agreement we estimate that we would pay approximately $2.1 million plus any excise taxes in settlement of all potential obligations and a release of claims. As such, we have accrued an estimated $2.8 million, consisting of the $2.1 million separation payment and $0.7 million for other related costs, within other current liabilities in the condensed consolidated balance sheet as of June 28, 2008.

13. RELATED PARTY TRANSACTIONS

In connection with the DJO Merger, Blackstone Management Partners V L.L.C. ("BMP") has agreed to provide certain monitoring, advisory and consulting services to us for an annual monitoring fee equal to the greater of $7.0 million and 2% of consolidated EBITDA as defined in the Transaction and Monitoring Fee Agreement, payable in the first quarter of each year. Prior to the DJO Merger, the annual BMP monitoring fee was equal to $3.0 million. At any time in connection with or in anticipation of a change of control of DJOFL, a sale of all or substantially all of DJOFL's assets or an initial public offering of common stock of DJOFL, BMP may elect to receive, in lieu of remaining annual monitoring fee payments, a single lump sum cash payment equal to the then-present value of all then-current and future annual monitoring fees payable under the transaction and monitoring fee agreement, assuming a hypothetical termination date of the agreement to be the twelfth anniversary of such election. The monitoring fee agreement will continue until the earlier of the twelfth anniversary of the date of the agreement or such date as DJOFL and BMP may mutually determine. DJOFL will agree to indemnify BMP and its affiliates, directors, officers, employees, agents and representatives from and against all liabilities relating to the services contemplated by the transaction and monitoring fee agreement and the engagement of BMP pursuant to, and the performance of BMP and its affiliates of the services contemplated by, the transaction and monitoring fee agreement. For the six months ended June 28, 2008 and June 30, 2007, we expensed $3.5 million and $1.5 million, respectively, related to the monitoring fee. This is recorded as a component of selling, general and administrative expense in the unaudited condensed consolidated statements of operations.

14. DERIVATIVE INSTRUMENTS

We make use of debt financing as a source of funds and are therefore exposed to interest rate fluctuations in the normal course of our business. We operate internationally and are therefore exposed to foreign currency exchange rate fluctuations in the normal course of our business, in particular to changes in the Mexican Peso due to our Mexico-based manufacturing operations that incur costs that are largely denominated in Mexican Pesos. As part of our risk management strategy, we use derivative instruments to hedge portions of our exposure. Before acquiring a derivative instrument to hedge a specific risk, potential natural hedges are evaluated. Derivative instruments are only utilized to manage underlying exposures that arise from our business operations. Factors considered in the decision to hedge an underlying market exposure include the materiality of the risk, the volatility of the market,

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

14. DERIVATIVE INSTRUMENTS (Continued)

the duration of the hedge, and the availability, effectiveness and cost of derivative instruments. As of June 28, 2008, we had outstanding hedges in the form of forward contracts to purchase Mexican Pesos aggregating a U.S. dollar equivalent of $11.7 million. For the three and six months ended June 28, 2008, we recognized a gain on future forward Mexico peso contracts for the remainder of 2008 of approximately $371,000 and $751,000, respectively.

Our credit facilities are subject to floating interest rates. We manage the risk of unfavorable movements in interest rates by hedging a portion of the outstanding loan balance, thereby locking in a fixed rate on a portion of the principal, reducing the effect of possible rising interest rates and making interest expense more predictable. In February 2007, we swapped variable rates for fixed rates on $175.0 million of the borrowings under the then existing revolving credit facility. We had two agreements in place for a notional amount of $100.0 million and $75.0 million, expiring in 2010 and 2012, respectively. Under these agreements, we paid a fixed rate of 5.17% and received a variable rate equal to the then current three month LIBOR rate. On November 19, 2007, in anticipation of the DJO Merger and incurrence of new indebtedness, we terminated these swaps and recognized $4.8 million of related interest expense. On November 20, 2007, we entered into a new interest rate swap agreement for a notional amount of $515.0 million at a fixed LIBOR rate of 4.205% amortizing through an expiration date in 2009 (the notional amount was $500.0 million as of June 28, 2008).

The fair value of our interest rate swap agreement recorded in the accompanying unaudiated condensed consolidated balance sheets as of June 28, 2008 and December 31, 2007 was a loss of approximately $8.4 million and $3.9 million, respectively, and is recorded in other non-current liabilities. We believe our interest rate swap is highly effective. Derivative net losses on our interest rate swap agreement of $1.9 million and $1.1 million, on a pre-tax basis, were included in interest expense in the three and six months ended June 28, 2008, respectively. Derivative net gains on our interest rate swap agreement of $180,000 and $130,000, on a pre-tax basis, were included in interest expense in the three and six months ended June 30, 2007, respectively. Derivative gains and losses are reported as accumulated other comprehensive income, net of tax, until such time as they are reported in income along with the hedged item.

In accordance with SFAS No. 157, "Fair Value Measurement", we follow the three levels of the fair value hierarchy for disclosure of the inputs to valuation. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. At June 28, 2008, the fair value of our interest rate swap agreement was determined through the use of models that consider various assumptions, including time value, yield curves, as well as other relevant economic measures, which are inputs that are classified as Level 2 in the valuation hierarchy.

15. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

On November 20, 2007, in connection with the DJO Merger, DJOFL and its direct wholly-owned subsidiary, Finco, issued the 10.875% Notes with an aggregate principal amount of $575.0 million. On

DJO Finance LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

15. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS (Continued)

November 3, 2006, DJOFL and Finco issued the 11.75% Notes with an aggregate principal amount of $200.0 million. Finco was formed solely to act as a co-issuer of the notes, has only nominal assets and does not conduct any operations. The Indentures generally prohibit Finco from holding any assets, becoming liable for any obligations, or engaging in any business activity. The 10.875% Notes are jointly and severally, fully and unconditionally guaranteed, on an unsecured senior basis by all of the DJOFL's domestic subsidiaries (other than the co-issuer) that are 100% owned, directly or indirectly, by DJOFL (the "Guarantors"). The 11.75% Notes are jointly and severally, fully and unconditionally guaranteed, on an unsecured senior subordinated basis by the Guarantors. Our foreign subsidiaries (the "Non-Guarantors") do not guarantee the notes. The Guarantors also unconditionally guarantee the Senior Secured Credit Facility.

The following tables present the financial position, results of operations and cash flows of DJOFL, the Guarantors, the Non-Guarantors and certain eliminations as of June 28, 2008 and December 31, 2007 and for the three and six months ended June 28, 2008 and June 30, 2007, respectively.

DJO Finance LLC and Subsidiaries
Unaudited Condensed Consolidating Balance Sheets
As of June 28, 2008
(in thousands)

			DJOFL		Guarantors		Non- Guarantors		Eliminations			Consolidated

Assets
Current assets:
	Cash and cash equivalents		$	—	$	26,698	$	16,815	$	—		$	43,513
	Accounts receivable, net			—		129,543		44,421		—			173,964
	Inventories, net			—		90,613		22,276		(7,283	)		105,606
	Deferred tax assets, net			—		29,791		—		(146	)		29,645
	Prepaid expenses and other current assets			—		14,147		2,131		—			16,278

		Total current assets		—		290,792		85,643		(7,429	)		369,006
Property and equipment, net				—		70,706		13,267		(1,568	)		82,405
Goodwill				—		1,123,876		81,953		—			1,205,829
Intangible assets, net				—		1,288,071		37,581		—			1,325,652
Investment in subsidiaries				1,157,018		160,582		56,800		(1,374,400	)		—
Intercompany receivable				1,311,946		—		5,985		(1,317,931	)		—
Other non-current assets				55,493		3,850		1,441		—			60,784

		Total assets	$	2,524,457	$	2,937,877	$	282,670	$	(2,701,328	)	$	3,043,676

Liabilities, Minority Interests and Membership Equity
Current liabilities:
	Accounts payable		$	—	$	29,203	$	9,176	$	—		$	38,379
	Long-term debt and capital leases, current portion			10,650		719		2,801		—			14,170
	Other current liabilities			27,893		62,644		29,791		—			120,328

		Total current liabilities		38,543		92,566		41,768		—			172,877
Long-term debt and capital leases, net of current portion				1,814,955		179		1,424		—			1,816,558
Deferred tax liabilities, net				—		361,649		10,347		—			371,996
Intercompany payable				—		1,228,105		91,521		(1,319,626	)		—
Other non-current liabilities				8,360		9,482		—		—			17,842

		Total liabilities		1,861,858		1,691,981		145,060		(1,319,626	)		2,379,273
Minority interests				—		—		1,804		—			1,804
Membership equity				662,599		1,245,896		135,806		(1,381,702	)		662,599

		Total liabilities, minority interests and membership equity	$	2,524,457	$	2,937,877	$	282,670	$	(2,701,328	)	$	3,043,676

DJO Finance LLC and Subsidiaries
Unaudited Condensed Consolidating Balance Sheets
As of December 31, 2007
(in thousands)

			DJOFL		Guarantors		Non- Guarantors		Eliminations			Consolidated

Assets
Current assets:
	Cash and cash equivalents		$	519	$	44,694	$	18,258	$	—		$	63,471
	Accounts receivable, net			—		120,949		33,818		—			154,767
	Inventories, net			—		94,908		22,868		(6,872	)		110,904
	Deferred tax assets, net			—		29,145		—		(146	)		28,999
	Prepaid expenses and other current assets			9		13,669		3,641		—			17,319

		Total current assets		528		303,365		78,585		(7,018	)		375,460
Property and equipment, net				—		70,413		12,949		(1,717	)		81,645
Goodwill				—		1,132,388		68,894		—			1,201,282
Intangible assets, net				—		1,324,191		36,170		—			1,360,361
Investment in subsidiaries				1,140,111		184,420		53,114		(1,377,645	)		—
Intercompany receivable				1,344,358		—		—		(1,344,358	)		—
Other non-current assets				61,587		4,220		1,717		—			67,524

		Total assets	$	2,546,584	$	3,018,997	$	251,429	$	(2,730,738	)	$	3,086,272

Liabilities, Minority Interests and Membership Equity
Current liabilities:
	Accounts payable		$	54	$	34,722	$	8,800	$	—		$	43,576
	Long-term debt and capital leases, current portion			10,650		752		2,807		—			14,209
	Other current liabilities			10,116		66,985		26,666		—			103,767

		Total current liabilities		20,820		102,459		38,273		—			161,552
Long-term debt and capital leases, net of current portion				1,816,864		287		1,447		—			1,818,598
Deferred tax liabilities, net				—		376,778		9,881		—			386,659
Intercompany payable				—		1,255,008		89,350		(1,344,358	)		—
Other non-current liabilities				3,912		9,348		—		—			13,260

		Total liabilities		1,841,596		1,743,880		138,951		(1,344,358	)		2,380,069
Minority interests				—		—		1,215		—			1,215
Membership equity				704,988		1,275,117		111,263		(1,386,380	)		704,988

		Total liabilities, minority interests and membership equity	$	2,546,584	$	3,018,997	$	251,429	$	(2,730,738	)	$	3,086,272

DJO Finance LLC and Subsidiaries
Unaudited Condensed Consolidating Statements of Operations
For the Three Months Ended June 28, 2008
(in thousands)

			DJOFL			Guarantors			Non- Guarantors			Eliminations			Consolidated

Net sales			$	—		$	203,137		$	70,451		$	(23,787	)	$	249,801
Cost of sales				—			76,712			38,948			(23,829	)		91,831

		Gross profit		—			126,425			31,503			42			157,970
Operating expenses:
	Selling, general and administrative			—			91,617			24,924			(4	)		116,537
	Research and development			—			6,528			702			—			7,230
	Amortization of acquired intangibles			—			18,589			551			—			19,140

Operating income				—			9,691			5,326			46			15,063
Other income (expense):
	Interest income			10,572			966			195			(11,470	)		263
	Interest expense			(42,345	)		(10,607	)		(1,013	)		11,470			(42,495	)
	Other income (expense), net			10,977			500			(177	)		(10,977	)		323

Income (loss) before income taxes and minority interests				(20,796	)		550			4,331			(10,931	)		(26,846	)
Provision (benefit) for income taxes				—			(7,245	)		902			—			(6,343	)
Minority interests				—			—			295			—			295

Net income (loss)			$	(20,796	)	$	7,795		$	3,134		$	(10,931	)	$	(20,798	)

DJO Finance LLC and Subsidiaries
Unaudited Condensed Consolidating Statements of Operations
For the Six Months Ended June 28, 2008
(in thousands)

			DJOFL			Guarantors			Non- Guarantors			Eliminations			Consolidated

Net sales			$	—		$	399,900		$	133,718		$	(44,089	)	$	489,529
Cost of sales				—			156,090			75,005			(44,180	)		186,915

		Gross profit		—			243,810			58,713			91			302,614
Operating expenses:
	Selling, general and administrative			—			180,511			46,644			(6	)		227,149
	Research and development			—			12,485			1,421			—			13,906
	Amortization of acquired intangibles			—			37,179			1,077			—			38,256

Operating income				—			13,635			9,571			97			23,303
Other income (expense):
	Interest income			26,321			2,408			347			(28,226	)		850
	Interest expense			(87,305	)		(26,530	)		(2,073	)		28,226			(87,682	)
	Other income (expense), net			16,026			876			790			(16,026	)		1,666

Income (loss) before income taxes and minority interests				(44,958	)		(9,611	)		8,635			(15,929	)		(61,863	)
Provision (benefit) for income taxes				—			(19,402	)		2,004			—			(17,398	)
Minority interests				—			—			495			—			495

Net income (loss)			$	(44,958	)	$	9,791		$	6,136		$	(15,929	)	$	(44,960	)

DJO Finance LLC and Subsidiaries
Unaudited Condensed Consolidating Statements of Operations
For the Three Months Ended June 30, 2007
(in thousands)

			DJOFL			Guarantors			Non- Guarantors			Eliminations			Consolidated

Net sales			$	—		$	82,685		$	24,596		$	(1,028	)	$	106,253
Cost of sales				—			34,937			10,020			(1,096	)		43,861

		Gross profit		—			47,748			14,576			68			62,392
Operating expenses:
	Selling, general and administrative			—			40,455			10,827			—			51,282
	Research and development			—			3,003			1,103			—			4,106
	Amortization of acquired intangibles			—			5,956			715			—			6,671

Operating income				—			(1,666	)		1,931			68			333
Other income (expense):
	Interest income			3,915			2,007			71			(5,783	)		210
	Interest expense			(13,988	)		(4,154	)		(1,692	)		5,783			(14,051	)
	Other income (expense), net			1,996			(63	)		(26	)		(1,993	)		(86	)

Income (loss) before income taxes and minority interests				(8,077	)		(3,876	)		284			(1,925	)		(13,594	)
Provision (benefit) for income taxes				—			(5,828	)		224			—			(5,604	)
Minority interests				—			—			87			—			87

Net income (loss)			$	(8,077	)	$	1,952		$	(27	)	$	(1,925	)	$	(8,077	)

DJO Finance LLC and Subsidiaries
Unaudited Condensed Consolidating Statements of Operations
For the Six Months Ended June 30, 2007
(in thousands)

			DJOFL			Guarantors			Non- Guarantors			Eliminations			Consolidated

Net sales			$	—		$	167,676		$	47,610		$	(2,326	)	$	212,960
Cost of sales				—			68,853			22,654			(2,364	)		89,143

		Gross profit		—			98,823			24,956			38			123,817
Operating expenses:
	Selling, general and administrative			—			81,728			20,528			—			102,256
	Research and development			—			5,758			1,983			—			7,741
	Amortization of acquired intangibles			—			11,818			1,360			—			13,178

Operating income (loss)				—			(481	)		1,085			38			642
Other income (expense):
	Interest income			7,874			2,744			134			(10,325	)		427
	Interest expense			(27,930	)		(8,352	)		(2,115	)		10,325			(28,072	)
	Other income (expense), net			890			(2	)		58			(890	)		56

Loss before income taxes and minority interest				(19,166	)		(6,091	)		(838	)		(852	)		(26,947	)
Provision (benefit) for income taxes				—			(8,475	)		529			—			(7,946	)
Minority interests				—			—			165			—			165

Net income (loss)			$	(19,166	)	$	2,384		$	(1,532	)	$	(852	)	$	(19,166	)

DJO Finance LLC and Subsidiaries
Unaudited Condensed Consolidating Statements of Cash Flows
For the Six Months Ended June 28, 2008
(in thousands)

				DJOFL			Guarantors			Non- Guarantors			Eliminations			Consolidated

OPERATING ACTIVITIES:
Net income (loss)				$	(44,958	)	$	9,792		$	6,135		$	(15,929	)	$	(44,960	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
	Depreciation				—			9,010			2,552			(370	)		11,192
	Amortization of intangibles				—			37,179			1,077			—			38,256
	Amortization of debt issuance costs				6,849			—			—			—			6,849
	Stock-based compensation				—			1,227			—			—			1,227
	Asset impairments and loss on disposal of assets				—			977			247			(48	)		1,176
	Deferred income taxes				—			(19,551	)		(215	)		—			(19,766	)
	Non-cash income from subsidiaries				(16,026	)		—			—			16,026			—
	Provision for doubtful accounts and sales returns				—			9,697			343			—			10,040
	Inventory reserves				—			2,481			246			—			2,727
	Minority interests				—			—			495			—			495
Changes in operating assets and liabilities, net of acquired assets and liabilities:
	Accounts receivable				—			(18,242	)		(9,393	)		—			(27,635	)
	Inventories				—			2,583			599			53			3,235
	Prepaid expenses, other assets and liabilities				9			(1,106	)		2,000			—			903
	Accounts payable and other current liabilities				17,720			(8,532	)		1,888			—			11,076

		Net cash (used in) provided by operating activities			(36,406	)		25,515			5,974			(268	)		(5,185	)
INVESTING ACTIVITIES:
	Acquisition of intangible assets				—			(1,060	)		—			—			(1,060	)
	Acquisition of businesses, net cash acquired				—			(89	)		—			—			(89	)
	Purchases of property and equipment				—			(10,256	)		(2,567	)		268			(12,555	)
	Other, net				—			933			—			—			933

		Net cash (used in) provided by investing activities			—			(10,472	)		(2,567	)		268			(12,771	)
FINANCING ACTIVITIES:
	Intercompany				38,550			(32,899	)		(5,651	)		—			—
	Proceeds from debt and revolving line of credit				7,000			—			—			—			7,000
	Payments on debt and revolving line of credit				(9,663	)		(140	)		(334	)		—			(10,137	)

			Net cash provided by (used in) financing activities		35,887			(33,039	)		(5,985	)		—			(3,137	)
	Effect of exchange rate changes on cash and cash equivalents				—			—			1,135			—			1,135

	Net (decrease) increase in cash and cash equivalents				(519	)		(17,996	)		(1,443	)		—			(19,958	)
Cash and cash equivalents at beginning of period					519			44,694			18,258			—			63,471

Cash and cash equivalents at end of period				$	—		$	26,698		$	16,815		$	—		$	43,513

DJO Finance LLC and Subsidiaries
Unaudited Condensed Consolidating Statements of Cash Flows
For the Six Months Ended June 30, 2007
(in thousands)

				DJOFL			Guarantors			Non- Guarantors			Eliminations			Consolidated

OPERATING ACTIVITIES:
Net income (loss)				$	(19,166	)	$	2,384		$	(1,532	)	$	(852	)	$	(19,166	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
	Depreciation				—			4,813			1,742			(376	)		6,179
	Amortization of intangibles				—			11,818			1,360			—			13,178
	Amortization of debt issuance costs				1,906			—			—			—			1,906
	Stock-based compensation				—			1,004			—			—			1,004
	Asset impairments and loss on disposal of assets				—			113			353			(48	)		418
	Deferred income taxes				—			(8,801	)		(949	)		—			(9,750	)
	Non-cash income from subsidiaries				(890	)		—			—			890			—
	Provision for doubtful accounts and sales returns				—			3,902			242			—			4,144
	Inventory reserves				—			602			47			—			649
	Minority interests				—			—			165			—			165
	Excess tax benefit associated with stock option exercises				—			(17	)		—			—			(17	)
	Net effect of discontinued operations, net of gain on disposal				—			378			—			—			378
Changes in operating assets and liabilities, net of acquired assets and liabilities:
	Accounts receivable				—			(9,656	)		(1,230	)		—			(10,886	)
	Inventories				—			3,227			908			138			4,273
	Prepaid expenses, other assets and liabilities				(395	)		(6,162	)		(879	)		—			(7,436	)
	Accounts payable and other current liabilities				(319	)		7,245			111			—			7,037

		Net cash provided by (used in) operating activities			(18,864	)		10,850			338			(248	)		(7,924	)
INVESTING ACTIVITIES:
	Acquisition of businesses, net of cash acquired				—			(7,246	)		(432	)		—			(7,678	)
	Proceeds from sale of assets				—			4,480			7			—			4,487
	Purchases of property and equipment				—			(5,942	)		(1,451	)		248			(7,145	)

		Net cash used in investing activities			—			(8,708	)		(1,876	)		248			(10,336	)
FINANCING ACTIVITIES:
	Intercompany				8,499			(10,597	)		2,098			—			—
	Payments on long-term obligations				(1,750	)		(240	)		127			—			(1,863	)
	Proceeds on long-term obligations				12,500			—			—			—			12,500
	Payment of debt issuance costs				(370	)		—			—			—			(370	)
	Excess tax benefit associated with stock option exercises				—			17			—			—			17
	Dividend paid to minority interests				—			—			(226	)		—			(226	)

			Net cash provided by (used in) financing activities		18,879			(10,820	)		1,999			—			10,058
	Effect of exchange rate changes on cash and cash equivalents				—			—			166			—			166

	Net increase (decrease) in cash and cash equivalents				15			(8,678	)		627			—			(8,036	)
Cash and cash equivalents at beginning of period					12			22,650			8,241			—			30,903

Cash and cash equivalents at end of period				$	27		$	13,972		$	8,868		$	—		$	22,867

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

Forward Looking Statements

The following management's discussion and analysis contains "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act") that represent our expectations or beliefs concerning future events, including, but not limited to, statements regarding growth in sales of our products, profit margins and the sufficiency of our cash flow for future liquidity and capital resource needs. These forward-looking statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements. Some of these factors are described under the heading "Risk Factors" below. Results actually achieved may differ materially from expected results included in these statements as a result of these or other factors.

Introduction

This management's discussion and analysis of financial condition and results of operations is intended to provide an understanding of our results of operations, financial condition and where appropriate, factors that may affect future performance.

The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes to those financial statements as well as the other financial data included elsewhere in this Form 10-Q.

Overview of Business

We are a leading global provider of high-quality, orthopedic devices, with a broad range of products used for rehabilitation, pain management and physical therapy. We also develop, manufacture and distribute a broad range of surgical reconstructive implant products. We are the largest non-surgical orthopedic rehabilitation device company in the United States and among the largest globally, as measured by revenues. Many of our products have leading market positions. We believe that our strong brand names, comprehensive range of products, focus on quality, innovation and customer service, extensive distribution network, and our strong relationships with orthopedic and physical therapy professionals have contributed to our leading market positions. We believe that we are one of only a few orthopedic device companies that offer healthcare professionals and patients a diverse range of orthopedic rehabilitation products addressing the complete spectrum of preventative, pre-operative, post-operative, clinical and home rehabilitation care. Our products are used by orthopedic specialists, spine surgeons, primary care physicians, pain management specialists, physical therapists, podiatrists, chiropractors, athletic trainers and other healthcare professionals to treat patients with musculoskeletal conditions resulting from degenerative diseases, deformities, traumatic events and sports-related injuries. In addition, many of our non-surgical medical devices and related accessories are used by athletes and patients for injury prevention and at-home physical therapy treatment. We currently develop, manufacture and distribute our products through the following three operating segments:

Domestic Rehabilitation Segment

We market our domestic rehabilitation segment products through the three divisions described below.

•: Bracing and Supports. Our Bracing and Supports division was acquired with the DJO Merger and offers DonJoy, ProCare, and Aircast products, including rigid knee bracing, orthopedic soft goods, cold therapy products, and vascular systems. This division also includes our OfficeCare

business, through which we maintain an inventory of soft goods and other products at healthcare facilities, primarily orthopedic practices, for immediate distribution to patients.

•: Empi. Our Empi division offers products in the category of home electrotherapy, bone growth stimulation products, which were acquired with the DJO Merger, iontophoresis, and home traction. This division also includes our Rehab Med + Equip ("RME") and EmpiCare businesses. RME sells a wide range of proprietary and third party rehabilitation products to physical therapists and chiropractors through a printed catalog and through an on-line e-commerce site. Through our EmpiCare business, we maintain an inventory of soft goods and other products at healthcare facilities, primarily orthopedic practices, for immediate distribution to patients.
•: Chattanooga. Our Chattanooga Group division offers products in the clinical rehabilitation market in the category of clinical electrotherapy devices, clinical traction devices, and other clinical products and supplies such as treatment tables, CPM devices and dry heat therapy.

International Rehabilitation Segment

Our International Rehabilitation Segment, which generates most of its revenues in Europe, is divided into three main businesses:

•: the international sales of our Bracing and Supports division, which offers DonJoy, ProCare, and Aircast products,
•: our Ormed.DJO business, which provides bracing, CPM, electrotherapy and other products primarily in Germany, and
•: our Cefar-Compex business, which provides electrotherapy products for medical and consumer markets and other physical therapy and rehabilitation products primarily in Europe.

Surgical Implant Segment

Our Surgical Implant Segment develops, manufactures and markets a wide variety of knee, hip and shoulder implant products that serve the orthopedic reconstructive joint implant market.

Our three operating segments enable us to reach a diverse customer base through multiple distribution channels and give us the opportunity to provide a wide range of orthopedic devices and related products to orthopedic specialists operating in a variety of patient treatment settings. These three segments constitute our three reportable segments. See Note 9 to our unaudited condensed consolidated financial statements for additional information regarding our segments.

Set forth below is net revenue, gross profit and operating income information for our reporting segments for the three and six months ended June 28, 2008 and June 30, 2007, respectively. This information excludes the impact of certain expenses not allocated to segments, which are primarily comprised of general corporate expenses for all periods presented. The segment information includes the impact of purchase accounting and related amortization of acquired intangible assets related to our recent acquisitions as described in Note 2 to our unaudited condensed consolidated financial statements, as well as certain integration costs and restructuring costs as described in Note 11 to our

unaudited condensed consolidated financial statements. All prior periods presented have been restated to reflect our current reportable segments.

		Three Months Ended						Six Months Ended

($ in thousands)		June 28, 2008			June 30, 2007			June 28, 2008			June 30, 2007
Domestic Rehabilitation:
	Net sales	$	173,384		$	68,087		$	340,282		$	138,656
	Gross profit	$	104,854		$	38,893		$	201,611		$	78,470
	Gross profit margin		60.5	%		57.1	%		59.2	%		56.6	%
	Operating income	$	18,049		$	3,305		$	29,691		$	9,073
	Operating income as a percent of net segment sales		10.4	%		4.9	%		8.7	%		6.5	%
International Rehabilitation:
	Net sales	$	63,823		$	25,997		$	121,694		$	49,789
	Gross profit	$	39,611		$	14,114		$	72,729		$	24,556
	Gross profit margin		62.1	%		54.3	%		59.8	%		49.3	%
	Operating income	$	9,394		$	1,487		$	15,795		$	715
	Operating income as a percent of net segment sales		14.7	%		5.7	%		13.0	%		1.5	%
Surgical Implant:
	Net sales	$	18,737		$	16,644		$	37,900		$	33,445
	Gross profit	$	13,714		$	11,502		$	28,484		$	23,113
	Gross profit margin		73.2	%		69.1	%		75.2	%		69.1	%
	Operating income	$	1,621		$	1,423		$	3,984		$	2,066
	Operating income as a percent of net segment sales		8.7	%		8.5	%		10.5	%		6.2	%

Recent Acquisitions

DJO Merger

On July 15, 2007, we entered into the DJO Merger Agreement with DJO Opco providing for a merger transaction pursuant to which DJO Opco became a wholly owned subsidiary of DJOFL, the entity filing this Quarterly Report on Form 10-Q. The total purchase price for the DJO Merger, which was consummated on November 20, 2007, was approximately $1.3 billion and consisted of $1.2 billion paid to former equity holders (or $50.25 in cash for each share of common stock of DJO Opco they then held), $15.2 million related to the fair value of stock options held by DJO Opco management that were exchanged for options to purchase DJO common stock, and $22.8 million in direct acquisition costs. The DJO Merger was financed through a combination of equity contributed by Blackstone, borrowings under the Senior Secured Credit Facility, and proceeds from the newly issued 10.875% Notes (see Note 2 to our unaudited condensed consolidated financial statements for further information).

IOMED, Inc.

On August 9, 2007, a subsidiary of DJOFL acquired IOMED, which develops, manufactures and markets active drug delivery systems used primarily to treat acute local inflammation in the physical and occupational therapy and sports medicine markets. The purchase price was $23.3 million and consisted of $21.1 million in cash payments to former IOMED equity holders at $2.75 per share, $0.8 million related to the fair value of vested stock options that were outstanding at the time of the acquisition, and $1.4 million in direct acquisition costs. The acquisition was primarily financed with borrowings under our then existing revolving credit facility.

The Saunders Group

On July 2, 2007, a subsidiary of DJOFL completed its purchase of substantially all of the assets of Saunders for total cash consideration of $40.9 million, including $0.9 million of acquisition costs. Saunders is a supplier of rehabilitation products to physical therapists, chiropractors, athletes, athletic trainers, physicians and patients, with a specialty in patented traction devices, back supports, and equipment for neck and back disorders. The Saunders Acquisition was financed with funds borrowed under our then existing credit facilities.

Results of Operations

The following table sets forth our statements of operations as a percentage of sales for the periods indicated:

					Three Months Ended										Six Months Ended

					June 28, 2008					June 30, 2007					June 28, 2008					June 30, 2007
Net sales					$	249,801		100.0	%	$	106,253		100.0	%	$	489,529		100.0	%	$	212,960		100.0	%
Cost of sales						91,831		36.8			43,861		41.3			186,915		38.2			89,143		41.9

			Gross profit			157,970		63.2			62,392		58.7			302,614		61.8			123,817		58.1
Operating expenses:
	Selling, general and administrative					116,537		46.7			51,282		48.3			227,149		46.4			102,256		48.0
	Research and development					7,230		2.9			4,106		3.9			13,906		2.8			7,741		3.6
	Amortization of acquired intangibles					19,140		7.7			6,671		6.3			38,256		7.8			13,178		6.2

			Operating income			15,063		6.0			333		0.3			23,303		4.8			642		0.3
	Other income (expense):
		Interest income				263		0.1			210		0.2			850		0.2			427		0.2
		Interest expense				(42,495	)	(17.0	)		(14,051	)	(13.2	)		(87,682	)	(17.9	)		(28,072	)	(13.2	)
	Other income (expense), net					323		0.1			(86	)	(0.1	)		1,666		0.3			56		0.0

			Loss before income taxes and minority interests			(26,846	)	(10.8	)		(13,594	)	(12.8	)		(61,863	)	(12.6	)		(26,947	)	(12.7	)
Benefit for income taxes						(6,343	)	(2.5	)		(5,604	)	(5.3	)		(17,398	)	(3.6	)		(7,946	)	(3.7	)
Minority interests						295		0.1			87		0.1			495		0.1			165		0.1

				Net loss	$	(20,798	)	(8.3	)%	$	(8,077	)	(7.6	)%	$	(44,960	)	(9.2	)%	$	(19,166	)	(9.0	)%

Three Months Ended June 28, 2008 compared to Three Months Ended June 30, 2007

Net Sales. Our net sales for the three months ended June 28, 2008 were $249.8 million, representing an increase of 135.1% from net sales of $106.3 million for the three months ended June 30, 2007. The increase was primarily driven by business acquisitions, including the DJO Merger (November 2007) and the IOMED (August 2007) and Saunders (July 2007) acquisitions and continued growth across our product lines. Revenues associated with business acquisitions were approximately $130.8 million for three months ended June 28, 2008. For the three months ended June 28, 2008, we generated 25.5% of our net sales from customers outside the United States as compared to 24.5% for the three months ended June 30, 2007. Net sales were also positively impacted for the three months ended June 28, 2008 by $7.6 million due to favorable changes in foreign exchange rates compared to rates in effect for the three months ended June 30, 2007.

The following table sets forth the mix of our net sales for the three months ended June 28, 2008 compared to the three months ended June 30, 2007:

	Three Months Ended

($ in thousands)	June 28, 2008			% of Net Revenues			June 30, 2007			% of Net Revenues			Increase			% Increase
Domestic Rehabilitation Segment	$	173,384			69.4	%	$	68,087			64.1	%	$	105,297			154.7	%
International Rehabilitation Segment		63,823			25.5			25,997			24.5			37,826			145.5
Surgical Implant Segment		18,737			7.5			16,644			15.6			2,093			12.6
Intersegment revenues		(6,143	)		(2.4	)		(4,475	)		(4.2	)		(1,668	)		37.3

Consolidated net sales	$	249,801			100.0	%	$	106,253			100.0	%	$	143,548			135.1	%

Net sales in our Domestic Rehabilitation Segment were $173.4 million for the three months ended June 28, 2008, reflecting an increase of 154.7% over net sales of $68.1 million for the three months ended June 30, 2007. The increase was driven primarily by the addition of sales from the DJO Merger and the IOMED and Saunders acquisitions as discussed above and growth from our core product lines including catalog and electrotheraphy.

Net sales in our International Rehabilitation Segment for the three months ended June 28, 2008 were $63.8 million, reflecting an increase of 145.5% from net sales of $26.0 million for the three months ended June 30, 2007. The increase was driven primarily by the addition of sales from the DJO Merger and continued growth in our core international markets. Net sales were also positively impacted by $7.6 million for the three months ended June 28, 2008 due to favorable changes in foreign exchange rates compared to rates in effect for the three months ended June 30, 2007.

Net sales in our Surgical Implant Segment increased to $18.8 million from $16.6 million for the three months ended June 28, 2008, representing a 12.6% increase over the same period in the prior year. The increase was driven primarily by growth in our hip and knee implant product lines.

Sales of new products for all segments, which include products that have been on the market less than one year, were $12.0 million for the three months ended June 28, 2008, compared to new product sales of $8.7 million for the three months ended June 30, 2007.

Gross Profit. Consolidated gross profit as a percentage of net sales increased to 63.2% for the three months ended June 28, 2008 from 58.7% for the three months ended June 30, 2007. The increase in our gross profit margin is primarily attributable to cost improvement initiatives implemented in the past year and favorable changes in the mix of products we sell as a result of our recent acquisitions of businesses with higher margin products. Additionally, the increase in gross profit included $3.0 million of reduced amortization of purchased inventory fair value adjustments related to prior year acquisitions. The amortization of purchased inventory fair value adjustments included in cost of sales was $3.0 million for the three months ended June 30, 2007.

Gross profit in our Domestic Rehabilitation Segment as a percentage of net sales increased to 60.5% for the three months ended June 28, 2008 from 57.1% for the three months ended June 30, 2007. The increase was primarily driven by cost improvement initiatives implemented in the past year and favorable changes in the mix of products we sell as a result of our recent acquisitions of businesses with higher margin products. Additionally, the increase in gross profit included $0.7 million of reduced amortization of purchased inventory fair value adjustments related to prior year acquisitions. The amortization of purchased inventory fair value adjustments included in cost of sales was $0.7 million for the three months ended June 30, 2007.

Gross profit in our International Rehabilitation Segment as a percentage of net sales increased to 62.1% for the three months ended June 28, 2008 from 54.3% for the three months ended June 30, 2007. The increase was primarily driven by cost improvement initiatives implemented in the past year and favorable changes in the mix of products we sell as a result of our recent acquisitions of businesses with higher margin products. Additionally, the increase in gross profit included $0.4 million of reduced amortization of purchased inventory fair value adjustments related to prior year acquisitions. The amortization of purchased inventory fair value adjustments included in cost of sales was $0.4 million for the three months ended June 30, 2007.

Gross profit in our Surgical Implant Segment as a percentage of gross sales increased to 73.2% for the three months ended June 28, 2008 from 69.1% for the three months ended June 30, 2007. The increase was primarily driven by cost improvement initiatives implemented in the past year and included $2.0 million of reduced amortization of purchased inventory fair value adjustments related to the acquisition of this business in the prior year. The amortization of purchased inventory fair value adjustments included in cost of sales was $2.0 million for the three months ended June 30, 2007.

Selling, General and Administrative. Our selling, general and administrative expenses increased to $116.5 million for the three months ended June 28, 2008 from $51.3 million for the three months ended June 30, 2007 due to additional expenses associated with the operating activities of our recent acquisitions, including certain incremental costs related to the integration of the acquired businesses. The following table sets forth certain incremental costs associated with the integration of our recent acquisitions:

	Three Months Ended

($ in thousands)	June 28, 2008		June 30, 2007
Severance and relocation expenses	$	5,308	$	75
Integration expenses		8,575		1,846

	$	13,883	$	1,921

Severance and relocation expenses for the three months ended June 28, 2008 consists of $1.9 million of severance payments made to employees in connection with the DJO Merger, $0.6 million of severance payments made to employees in connection with other recent acquisitions and $2.8 million of estimated separation payments and other expenses in connection with the termination of one of the Company's executive officers. Integration expenses for the three months ended June 28, 2008 included $7.5 million of integration costs incurred in connection with the DJO Merger and $1.1 million of integration costs related to other recent acquisitions. Integration expenses for the three months ended June 30, 2007 included $1.5 million and $0.3 million of integration costs incurred in connection with recent acquisitions and the Prior Transaction, respectively.

Research and Development. Our research and development expense increased to $7.2 million for the three months ended June 28, 2008 from $4.1 million for the three months ended June 30, 2007. The increase is primarily due to expenses incurred by the operations of our recent acquisitions. As a percentage of net sales, research and development expense decreased to 2.9% compared to 3.9% in the prior year second quarter.

Amortization of Acquired Intangibles. Amortization of acquired intangibles includes amortization expense related to intangible assets acquired in connection with recent acquisitions, which are being amortized over the estimated lives ranging from two to twenty years. Our amortization of acquired intangibles increased to $19.1 million for the three months ended June 28, 2008 compared to $6.7 million for the three months ended June 30, 2007. At June 28, 2008, we expect the future amortization of intangibles to be approximately $38.1 million for the remainder of 2008, $76.0 million in 2009, $75.0 million in 2010, $73.7 million in 2011, $72.5 million in 2012, and $525.5 million for the

periods thereafter. Future acquisitions of businesses or intangible assets may cause these estimates to differ materially.

Interest Expense. Our interest expense increased to $42.5 million for the three months ended June 28, 2008 compared to interest expense of $14.1 million for the three months ended June 30, 2007. The increase was principally driven by incremental borrowings of $1,209.0 million to fund the DJO Merger and $77.0 million to fund the IOMED and Saunders acquisitions.

Benefit for Income Taxes. For the three months ended June 28, 2008, we recorded $6.3 million of income tax benefit on a pre-tax loss of $26.8 million, net of offsetting tax expense related to foreign taxes, deferred taxes on the assumed repatriation of foreign earnings, and other non-deductible items. For the three months ended June 30, 2007, we recorded $5.6 million of income tax benefit on a pre-tax loss of $13.6 million, net of offsetting tax expense related to foreign taxes, deferred taxes on the assumed repatriation of foreign earnings, and other non-deductible items.

Six Months Ended June 28, 2008 compared to Six Months Ended June 30, 2007

Net Sales. Our net sales for the six months ended June 28, 2008 were $489.5 million, representing an increase of 129.9% from net sales of $213.0 million for the six months ended June 30, 2007. The increase was primarily driven by business acquisitions, including the DJO Merger (November 2007) and the IOMED (August 2007) and Saunders (July 2007) acquisitions and continued growth across our product lines. Revenues associated with business acquisitions were approximately $252.8 million for six months ended June 28, 2008. For the six months ended June 28, 2008 and June 30, 2007, we generated 24.9% and 23.4% of our net sales from customers outside the United States, respectively. Net sales were also positively impacted for the six months ended June 28, 2008 by $14.1 million due to favorable changes in foreign exchange rates compared to rates in effect for the six months ended June 30, 2007.

The following table sets forth the mix of our net sales for the six months ended June 28, 2008 compared to the six months ended June 30, 2007:

	Six Months Ended

($ in thousands)	June 28, 2008			% of Net Revenues			June 30, 2007			% of Net Revenues			Increase			% Increase
Domestic Rehabilitation Segment	$	340,282			69.5	%	$	138,656			65.1	%	$	201,626			145.4	%
International Rehabilitation Segment		121,694			24.9			49,789			23.4			71,905			144.4
Surgical Implant Segment		37,900			7.7			33,445			15.7			4,455			13.2
Intersegment revenues		(10,347	)		(2.1	)		(8,930	)		(4.2	)		(1,417	)		158.7

Consolidated net sales	$	489,529			100.0	%	$	212,960			100.0	%	$	276,569			129.9	%

Net sales in our Domestic Rehabilitation Segment were $340.3 million for the six months ended June 28, 2008, reflecting an increase of 145.4% over net sales of $138.7 million for the six months ended June 30, 2007. The increase was driven primarily by the addition of sales from the DJO Merger and the IOMED and Saunders acquisitions as discussed above and growth from our core product lines including catalog, electrotheraphy and orthotics.

Net sales in our International Rehabilitation Segment for the six months ended June 28, 2008 were $121.7 million, reflecting an increase of 144.4% from net sales of $49.8 million for the six months ended June 30, 2007. The increase was driven primarily by the addition of sales from the DJO Merger and continued growth in our core international markets. Net sales were also positively impacted by $14.1 million for the six months ended June 28, 2008 due to favorable changes in foreign exchange rates compared to rates in effect for the six months ended June 30, 2007.

Net sales in our Surgical Implant Segment increased to $37.9 million from $33.4 million for the six months ended June 28, 2008, representing a 13.2% increase over the same period in the prior year. The increase was driven primarily by growth in our hip, knee and shoulder implant product lines.

Sales of new products for all segments, which include products that have been on the market less than one year, were $20.3 million for the six months ended June 28, 2008, compared to new product sales of $11.6 million for the six months ended June 30, 2007.

Gross Profit. Consolidated gross profit as a percentage of net sales increased to 61.8% for the six months ended June 28, 2008 from 58.1% for the six months ended June 30, 2007. The increase in our gross profit margin is primarily attributable to cost improvement initiatives implemented in the past year and favorable changes in the mix of products we sell as a result of our recent acquisitions of businesses with higher margin products. Additionally, the increase in consolidated gross profit included $3.0 million of reduced amortization of purchased inventory fair value adjustments related to prior year acquisitions. The amortization of purchased inventory fair value adjustments included in cost of sales was $4.7 million and $7.1 million for the six months ended June 28, 2008 and June 30, 2007, respectively.

Gross profit in our Domestic Rehabilitation Segment as a percentage of net sales increased to 59.2% for the six months ended June 28, 2008 from 56.6% for the six months ended June 30, 2007. The increase in our gross margin was primarily attributable to cost improvement initiatives implemented in the past year and favorable changes in the mix of products we sell as a result of our recent acquisitions of businesses with higher margin products. Additionally, the increase in gross profit included $3.0 million of higher amortization of purchased inventory fair value adjustments related to prior year acquisitions. The amortization of purchased inventory fair value adjustments included in cost of sales was $4.7 million and $1.7 million for the six months ended June 28, 2008 and June 30, 2007, respectively.

Gross profit in our International Rehabilitation Segment as a percentage of net sales increased to 59.8% for the six months ended June 28, 2008 from 49.3% for the six months ended June 30, 2007. The increase was primarily driven by cost improvement initiatives implemented in the past year and favorable changes in the mix of products we sell as a result of our recent acquisitions of businesses with higher margin products. Additionally, the increase in gross profit included $2.1 million of reduced amortization of purchased inventory fair value adjustments related to prior year acquisitions. The amortization of purchased inventory fair value adjustments included in cost of sales was $2.1 million for the six months ended June 30, 2007.

Gross profit in our Surgical Implant Segment as a percentage of gross sales increased to 75.2% for the six months ended June 28, 2008 from 69.1% for the six months ended June 30, 2007. The increase was primarily driven by cost improvement initiatives implemented in the past year and included $3.3 million of reduced amortization of purchased inventory fair value adjustments related to the acquisition of this business in the prior year. The amortization of purchased inventory fair value adjustments included in cost of sales was $3.3 million for the six months ended June 30, 2007.

Selling, General and Administrative. Our selling, general and administrative expenses increased to $227.2 million for the six months ended June 28, 2008 from $102.3 million for the six months ended June 30, 2007 due to additional expenses associated with the operations of our recent acquisitions,

including certain incremental costs related to the integration of the acquired businesses. The following table sets forth certain incremental costs associated with the integration of our recent acquisitions:

	Six Months Ended

($ in thousands)	June 28, 2008		June 30, 2007
Severance and relocation expenses	$	6,368	$	217
Integration expenses		16,356		3,953

	$	22,724	$	4,170

Severance and relocation expenses for the six months ended June 28, 2008 consists of $2.8 million of severance payments made related to the DJO Merger, $0.8 million of severance payments to employees in connection with other recent acquisitions, and $2.8 million of estimated separation payments and other expenses in connection with the termination of one of the Company's executive officers. Integration expenses for the six months ended June 28, 2008 included $13.4 million, $1.6 million and $1.4 million of integration costs incurred in connection with the DJO Merger, the IOMED acquisition and other recent acquisitions, respectively. Integration expenses for the six months ended June 30, 2007 included $2.8 million and $1.2 million of integration costs incurred in connection with recent acquisitions and the Prior Transaction, respectively.

Research and Development. Our research and development expense increased to $13.9 million for the six months ended June 28, 2008 from $7.7 million for the six months ended June 30, 2007. The increase is primarily due to expenses incurred by the operations of our recent acquisitions. As a percentage of net sales, research and development expense decreased to 2.8% compared to 3.6% in the prior year period.

Interest Expense. Our interest expense increased to $87.7 million for the six months ended June 28, 2008 compared to interest expense of $28.1 million for the six months ended June 30, 2007. The increase was principally driven by incremental borrowings of $1,209.0 million to fund the DJO Merger and $77.0 million to fund the IOMED and Saunders acquisitions.

Benefit for Income Taxes. For the six months ended June 28, 2008, we recorded $17.4 million of income tax benefit on a pre-tax loss of $61.9 million, net of offsetting tax expense related to foreign taxes, deferred taxes on the assumed repatriation of foreign earnings, and other non-deductible items. For the six months ended June 30, 2007, we recorded $7.9 million of income tax benefit on a pre-tax loss of $27.0 million, net of offsetting tax expense related to foreign taxes, deferred taxes on the assumed repatriation of foreign earnings, and other non-deductible items.

Liquidity and Capital Resources

As of June 28, 2008 our primary source of liquidity consisted of cash and cash equivalents totaling $43.5 million and $99.1 million of available borrowings under our revolving credit facility, described below. Working capital at June 28, 2008 was $196.1 million. We believe that our existing cash, plus the amounts we expect to generate from operations and amounts available through our revolving credit facility, will be sufficient to meet our operating needs for the next twelve months, including working capital requirements, capital expenditures, and debt repayment obligations. While we currently believe that we will be able to meet all of our financial covenants imposed by our Senior Secured Credit

Facility, there is no assurance that we will in fact be able to do so or that, if we do not, we will be able to obtain from our lenders waivers of default or amendments to the Senior Secured Credit Facility in the future. We and our subsidiaries, affiliates or significant shareholders (including Blackstone and its affiliates) may from time to time, in our or their sole discretion, purchase, repay, redeem or retire any of our outstanding debt or equity securities (including any publicly issued debt securities), in privately negotiated or open market transactions, by tender offer or otherwise.

A summary of our changes in cash and cash equivalents for the six months ended June 28, 2008 and June 30, 2007 is as follows:

		Six Months Ended

		June 28, 2008			June 30, 2007
Cash used in operating activities		$	(5,185	)	$	(7,924	)
Cash used in investing activities			(12,771	)		(10,336	)
Cash (used in) provided by financing activities			(3,137	)		10,058
Effect of exchange rate on cash and cash equivalents			1,135			166

	Net decrease in cash and cash equivalents	$	(19,958	)	$	(8,036	)

Cash Flows

Operating activities used $5.2 million of cash for the six months ended June 28, 2008 and used $7.9 million of cash for the six months ended June 30, 2007. Cash provided by operating activities for the six months ended June 28, 2008 and 2007 primarily reflect our net losses, partially offset by non-cash charges, and negative net changes in operating assets and liabilities. Cash paid for interest was $63.5 million for the six months ended June 28, 2008 and $26.8 million for the six months ended June 30, 2007.

Investing activities used $12.8 million of cash for the six months ended June 28, 2008, compared to $10.3 million for the six months ended June 30, 2007. Cash used in investing activities for the six months ended June 28, 2008 was primarily used for purchases of property and equipment totaling to $12.6 million. Included within purchases of property and equipment is approximately $3.0 million for the purchase of a new global ERP system. Cash used in investing activities for the six months ended June 30, 2007 included purchases of property and equipment amounting to $7.1 million and acquisition of certain assets amounting to $7.7 million, partially offset by proceeds from a sale of assets amounting to $4.5 million.

Financing activities used $3.1 million of cash for the six months ended June 28, 2008, compared to cash provided by financing activities of $10.1 million for the six months June 30, 2007. Cash used in financing activities for the six months ended June 28, 2008 included a net payment of $3.1 million for long-term debt and revolving lines of credit as compared to cash provided by financing activities for the six months ended June 30, 2007, which included net proceeds of $10.6 million for long-term debt and revolving credit lines.

For the remainder of 2008, we expect to spend total cash of approximately $160.6 million for the following:

•: up to approximately $64.0 million for scheduled principal and estimated interest payments on our senior secured credit facility;
•: up to approximately $43.0 million for scheduled estimated interest payments on our senior notes;
•: approximately $38.1 million scheduled payments for noncancellable operating leases;
•: up to approximately $15.5 million for capital expenditures.

In addition, we expect to make other general corporate payments in 2008. In addition, we expect to spend up to an additional $37 million implementing our new ERP system capital project over approximately the next two years.

Indebtedness

As of June 28, 2008, we had approximately $1,831 million in aggregate indebtedness outstanding.

Senior Secured Credit Facility

Overview. The Senior Secured Credit Facility provides senior secured financing of $1,165.0 million, consisting of a $1,065.0 million term loan facility and a $100.0 million revolving credit facility. We issued the term loan facility of the Senior Secured Credit Facility at a 1.2% discount, resulting in net proceeds of $1,052.4 million. In addition, we are permitted, subject to receipt of additional commitments from participating lenders and certain other conditions, to incur up to an additional $150.0 million of borrowings under the Senior Secured Credit Facility.

Historically, we have used derivative instruments to hedge portions of our exposure related to variable interest rates on our outstanding indebtedness. On November 20, 2007, we entered into an interest rate swap agreement for a notional amount of $515.0 million at a fixed LIBOR rate of 4.205% expiring in 2009. As of June 28, 2008, our weighted average interest rate for all borrowings under the Senior Secured Credit Facility was 5.70%.

Amortization. We are required to pay annual amortization (payable in equal quarterly installments) on the loans under the term loan facility in an amount equal to 1.00% of the funded total principal amount during the first six years and three months following the closing of the Senior Secured Credit Facility, with the remaining amount payable at maturity, which is six and one-half years from the date of the closing of the Senior Secured Credit Facility. Principal amounts outstanding under the revolving credit facility are due and payable in full at maturity, which is six years from the date of the closing of the Senior Secured Credit Facility.

•: incur additional indebtedness;
•: create liens on assets;

•: change fiscal years;
•: enter into sale and leaseback transactions;
•: engage in mergers or consolidations;
•: sell assets;
•: pay dividends and make other restricted payments;
•: make investments, loans or advances;
•: repay subordinated indebtedness;
•: make certain acquisitions;
•: engage in certain transactions with affiliates;
•: restrict the ability of restricted subsidiaries that are not Guarantors to pay dividends or make distributions;
•: amend material agreements governing our subordinated indebtedness; and
•: change our lines of business.

Pursuant to the terms of the credit agreement relating to the Senior Secured Credit Facility, we are required to maintain a ratio of consolidated senior debt to Adjusted EBITDA (or senior leverage ratio) starting at a maximum of 5.1:1 and stepping down over time to 3.25:1 by the end of 2011. Adjusted EBITDA represents net income (loss) plus interest expense, net, provision (benefit) for income taxes and depreciation and amortization, further adjusted for non-cash items, non-recurring items and other adjustment items permitted in calculating covenant compliance under our Senior Secured Credit Facility and the Indentures ("Adjusted EBITDA"). As of June 28, 2008, we were required to maintain a senior leverage ratio not to exceed 5.1:1. At June 28, 2008 our senior leverage ratio was 4.11:1.

10.875% Senior Notes and 11.75% Senior Subordinated Notes

The Indentures governing the $575.0 million principal amount of 10.875% Notes and the $200.0 million principal amount of 11.75% Notes limit our (and most or all of our subsidiaries') ability to:

•: incur additional debt or issue certain preferred shares;
•: pay dividends on or make other distributions in respect of our capital stock or make other restricted payments;
•: make certain investments;
•: sell certain assets;
•: create liens on certain assets to secure debt;
•: consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
•: enter into certain transactions with our affiliates; and
•: designate our subsidiaries as unrestricted subsidiaries.

Under the Indentures governing our 10.875% Notes and our 11.75% Notes, our ability to incur additional debt, subject to specified exceptions, is tied to improving our Adjusted EBITDA to fixed charges ratio or having a ratio of at least 2.00:1 on a pro forma basis after giving effect to such incurrence. Additionally, our ability to make certain restricted payments is also tied to having an

Adjusted EBITDA to fixed charge ratio of at least 2.00:1 on a pro forma basis. Our ratio of Adjusted EBITDA to fixed charges for the twelve months ended June 28, 2008, measured on that date, was 1.57:1. Notwithstanding these limitations, the aggregate amount of term loan increases and revolving commitment increases shall not exceed the greater of (i) $150.0 million and (ii) the additional aggregate amount of secured indebtedness which would be permitted to be incurred as of any date of determination (assuming for this purpose that the full amount of any revolving credit increase had been utilized as of such date) such that, after giving pro forma effect to such incurrence (and any other transactions consummated on such date), the senior secured leverage ratio for the immediately preceding test period would not be greater than 4.0:1. Fixed charges is defined in the Indentures as consolidated interest expense plus all cash dividends or other distributions paid on any series of preferred stock of any restricted subsidiary and all dividends or other distributions accrued on any series of disqualified stock.

Covenant Compliance

As described above, our Senior Secured Credit Facility consisting of a $1,065.0 million term loan facility and a $100.0 million revolving credit facility and the Indentures governing the $575.0 million principal amount of senior notes and the $200.0 million principal amount of senior subordinated notes represent significant components of our capital structure. Under our Senior Secured Credit Facility, we are required to maintain specified senior secured leverage ratios, which become more restrictive over time, that are determined based on our Adjusted EBITDA. If we fail to comply with the senior secured leverage ratio under our Senior Secured Credit Facility, we would be in default under the credit facility. Upon the occurrence of an event of default under the Senior Secured Credit Facility, the lenders could elect to declare all amounts outstanding under the Senior Secured Credit Facility to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under the Senior Secured Credit Facility could proceed against the collateral granted to them to secure that indebtedness. We have pledged a significant portion of our assets as collateral under the Senior Secured Credit Facility. Any acceleration under the Senior Secured Credit Facility would also result in a default under the Indentures governing the notes, which could lead to the noteholders electing to declare the principal, premium, if any, and interest on the then outstanding notes immediately due and payable. In addition, under the Indentures governing the notes, our ability to engage in activities such as incurring additional indebtedness, making investments, refinancing subordinated indebtedness, paying dividends and entering into certain merger transactions is governed, in part, by our ability to satisfy tests based on Adjusted EBITDA.

Adjusted EBITDA is defined as net income (loss) plus interest expense, net, provision (benefit) for income taxes and depreciation and amortization, further adjusted for non-cash items, non-recurring items and other adjustment items permitted in calculating covenant compliance under our Senior Secured Credit Facility and Indentures. We believe that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about the calculation of, and compliance with, certain financial covenants in our Senior Secured Credit Facility and the Indentures. Adjusted EBITDA is a material component of these covenants.

Adjusted EBITDA should not be considered as an alternative to net income or other performance measures derived in accordance with GAAP, or as an alternative to cash flow from operations as a measure of our liquidity. Adjusted EBITDA does not represent net loss or cash flow from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. In particular, the definition of Adjusted EBITDA in the Indentures and our Senior Secured Credit Facility allows us to add back certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating net loss. However, these are expenses that may recur, vary greatly and are difficult to predict. While Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, Adjusted EBITDA is not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation.

Our ability to meet the covenants specified above in future periods will depend on events beyond our control, and we cannot assure you that we will meet those ratios. A breach of any of these covenants in the future could result in a default under our Senior Secured Credit Facility and the Indentures, at which time the lenders could elect to declare all amounts outstanding under our Senior Secured Credit Facility to be immediately due and payable. Any such acceleration would also result in a default under the Indentures.

The following table provides a reconciliation from our net loss to Adjusted EBITDA for the three and twelve months ended June 28, 2008. The terms and related calculations are defined in the credit agreement relating to our Senior Secured Credit Facility and the Indentures.

	(unaudited)

	Three Months Ended June 28, 2008			Twelve Months Ended June 28, 2008
(in thousands)
Net loss	$	(20,798	)	$	(108,216	)
Interest expense, net		42,232			145,003
Income tax benefit		(6,343	)		(51,956	)
Depreciation and amortization		24,673			78,331
Non-cash items (a)		615			16,355
Non-recurring items (b)		13,883			58,840
Other adjustment items, before cost savings (c)		2,276			55,884
Other adjustment items—cost savings applicable for twelve month period only (d)		N/A			56,343

Adjusted EBITDA	$	56,538		$	250,584

(a): Non-cash items are comprised of the following:

		(unaudited)

		Three Months Ended June 28, 2008		Twelve Months Ended June 28, 2008
(in thousands)
Stock compensation expense		$	615	$	1,763
Purchase accounting adjustments(1)			—		14,592

	Total non-cash items	$	615	$	16,355

(1): Includes $9.4 million, $1.5 million and $0.7 million of expense related to the write-up to fair market value of acquired inventory in connection with the DJO Merger, the Saunders acquisition, and other recent acquisitions, respectively, for the twelve months ended June 28, 2008. Also included is $3.0 million of expense related to the write-off of in-process research and development costs in connection with the DJO Merger for the twelve months ended June 28, 2008.

(b): Non-recurring items are comprised of the following:

		(unaudited)

		Three Months Ended June 28, 2008		Twelve Months Ended June 28, 2008
(in thousands)
Employee severance and relocation(1)		$	5,308	$	22,523
Integration expense(2)			8,575		23,320
Reserve estimate change(3)			—		12,997

	Total non-recurring items	$	13,883	$	58,840

(1): Severance for the three months ended June 28, 2008 includes $1.9 million of severance payments made to employees in connection with the DJO Merger, $0.6 million of severance payments made to employees in connection with other recent acquisitions and $2.8 million of estimated separation payments and other expenses in connection with the termination of one of the Company's executive officers. Severance for the twelve months ended June 28, 2008, includes severance payments to former ReAble executives in the amount of $13.7 million, $2.8 million of estimated separation payments and other expenses in connection with the termination of one of the Company's executive officers, and $3.1 million, $1.3 million and $1.6 million of employee severance incurred in connection with the DJO Merger, the IOMED acquisition and other recent acquisitions, respectively.
(2): Integration expense for the three months ended June 28, 2008 includes $7.5 million of integration costs incurred in connection with the DJO Merger and $1.1 million of integration costs related to other recent acquisitions. Integration expense for the twelve months includes $13.8 million, $2.1 million, $2.9 million and $3.2 million of integration costs incurred in connection with the DJO Merger, the IOMED acquisition, the Saunders acquisition and other recent acquisitions, respectively. Also included is $1.3 million of integration costs related to the Prior Transaction for the twelve months ended June 28, 2008.
(3): Includes $9.8 million related to additional allowances for doubtful accounts receivable acquired in connection with the DJO Merger due to anticipated integration related collection issues, $1.1 million related to a change in estimate for inventory obsolescence of inventory acquired in connection with the DJO Merger and $2.1 million related to additional allowance for doubtful accounts due to a change in reserve estimate of the collectability of accounts receivable of Empi as a result of the DJO merger for the twelve months ended June 28, 2008.

(c): Other adjustment items, before cost savings, are comprised of the following:

		(unaudited)

		Three Months Ended June 28, 2008		Twelve Months Ended June 28, 2008
(in thousands)
Transaction expenses(1)		$	1,813	$	10,714
Minority interest			295		745
Pre-acquisition Adjusted EBITDA(2)			—		46,383
Other(3)			168		(1,958	)

	Total other adjustment items, before cost savings	$	2,276	$	55,884

(1): Includes $1.8 million of Blackstone monitoring fees for the three months ended June 28, 2008. Includes $4.7 million of transaction costs incurred in connection with the DJO Merger,

$5.0 million of monitoring fees, $0.5 million related to the Prior Transaction and $0.5 million related to other merger and acquisition activities for the twelve months ended June 28, 2008.

(2): Represents pre-acquisition Adjusted EBITDA from July 1, 2007 to November 19, 2007 for the DJO Merger and IOMED acquisition.
(3): Includes foreign currency transaction gains/losses.

(d): Includes projected cost savings of (i) $50.6 million related to headcount reductions, facilities consolidation and production efficiencies in connection with the DJO Merger, (ii) $2.7 million related to headcount reductions and production efficiencies in connection with the IOMED and Saunders acquisitions, (iii) $0.7 million related to facility and general administrative consolidation in relation to a 2006 acquisition, and (iv) $2.3 million principally from vertical integration and procurement savings related to purchases of certain product components.

The following is a summary of our covenant requirements and pro forma ratios as of June 28, 2008 are as follows:



Senior Secured Credit Facility
	Maximum ratio of consolidated net senior debt to Adjusted EBITDA	5.10:1	4.11:1
10.875% Notes and 11.75% Notes
	Minimum ratio of Adjusted EBITDA to fixed charges required to incur additional debt pursuant to ratio provision	2.00:1	1.57:1

Critical Accounting Policies and Estimates

Our management's discussion and analysis of financial condition and results of operations is based upon our 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 reserves for contractual allowances, doubtful accounts, rebates, product returns and rental credits, goodwill and intangible assets, deferred tax assets and liabilities, and inventory. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent that actual events differ from our estimates and assumptions, there could be a material impact on our financial statements.

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

Reserves for Contractual Allowances, Doubtful Accounts, Rebates, Product Returns and Rental Credits

We have established reserves to account for contractual allowances, doubtful accounts, rebates, product returns and rental credits. Significant management judgment must be used and estimates must be made in connection with establishing these reserves.

We maintain provisions for estimated contractual allowances for reimbursement amounts from our third party payor customers based on negotiated contracts and historical experience for non-contracted payors. We report these allowances as reductions in our gross revenue. We estimate the amount of the reduction based on historical experience and invoices generated in the period, and we consider the

impact of new contract terms or modifications of existing arrangements with our customers. We have contracts with certain third party payors for our third party reimbursement billings, which call for specified reductions in reimbursement of billed amounts based upon contractual reimbursement rates. For the first six months of 2008, we reserved for and reduced gross revenues from third party payors by 32% for estimated allowances related to these contractual reductions.

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 75% of our net revenues for the six months ended June 28, 2008 and approximately 69% of our net accounts receivable at June 28, 2008. We experienced write-offs of less than 0.2% of related net revenues for the six months ended June 28, 2008. Our third party reimbursement customers including insurance companies, managed care companies and certain governmental payors, such as Medicare, include all of our OfficeCare customers, most of our Empi customers, and certain other customers of our Domestic Rehabilitation Segment. Our third-party payor customers represented approximately 25% of our net revenues for the six months ended June 28, 2008 and approximately 31% of our net accounts receivable at June 28, 2008. For the six months ended June 28, 2008, we estimate bad debt expense to be approximately 5% of gross revenues from 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. Additions to this reserve are reflected as selling, general and administrative expense.

Our reserve for rebates accounts for incentives that we offer to certain of our distributors. These rebates generally are attributable to 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.

Our reserve for product returns accounts for estimated customer returns of our products after purchase. These returns are mainly attributable to a third party payor's refusal to provide reimbursement for the product or the inability of the product to adequately address the patient's condition. We provide for this reserve by reducing gross revenue based on our historical rate of returns.

Our reserve for rental credit recognizes a timing difference between billing for a sale and processing a rental credit associated with some of our rehabilitation devices. Many insurance providers require patients to rent our rehabilitation devices for a period of one to three months prior to purchase. If the patient has a long-term need for the device, these insurance companies may authorize purchase of the device after such time period. When the device is purchased, most providers require that rental payments previously made on the device be credited toward the purchase price. These credits are processed at the time the payment is received for the purchase of the device, which creates a time lag between billing for a sale and processing the rental credit. Our rental credit reserve estimates unprocessed rental credits based on the number of devices converted to purchase. The reserve is calculated by first assessing the number of our products being rented during the relevant period and our historical conversion rate of rentals to sales, and then reducing our revenue by the applicable amount. We provide for these reserves by reducing our gross revenue. The cost to refurbish rented products is expensed as incurred as part of cost of sales.

Inventory Reserves

We provide reserves for estimated excess and obsolete inventories equal to the difference between the costs 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. We also provide reserves

for newer product inventories, as appropriate, based on any minimum purchase commitments and our level of sales of the new products.

We consign a portion of our inventory to allow our products to be immediately dispensed to patients. This requires a large amount of inventory to be on hand for the products we sell through consignment arrangements. It also increases the sensitivity of these products to obsolescence reserve estimates. As this inventory is not in our possession, we maintain additional reserves for estimated shrinkage of these inventories based on the results of periodic inventory counts and historical trends.

Goodwill and Intangible Assets

In accordance with SFAS 142, we do not amortize 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 September 29, 2007, our goodwill was evaluated for impairment and we determined that no impairment existed at that date.

At September 29, 2007, other intangibles 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, 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 these 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 rate 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.

Deferred Tax Asset Valuation Allowance

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amount and the tax bases of assets, liabilities and net operating loss carry forwards. We establish valuation allowances when the recovery of a deferred tax asset is not likely based on historical income, projected future income, the expected timing of the reversals of temporary differences and the implementation of tax-planning strategies.

Our gross deferred tax asset balance was approximately $157.7 million at June 28, 2008 and primarily related to reserves for accounts receivable and inventory, accrued expenses, and net operating loss carryforwards (see Note 10 to our unaudited condensed consolidated financial statements). As of June 28, 2008, we maintained a valuation allowance of $15.8 million due to uncertainties related to our ability to realize certain net operating loss carryforwards acquired in connection with recent acquisitions and the Prior Transaction.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks as part of our ongoing business operations, primarily risks from changing interest rates and foreign currency exchange rates that could impact our financial condition, results of operations, and cash flows.

Interest Rate Risk

Our primary exposure is to changing interest rates. We have historically managed our interest rate risk by balancing the amounts of our fixed and variable debt. For our fixed rate debt, interest rate changes may affect the market value of the debt, but do not impact our earnings or cash flow. Conversely, for our variable rate debt, interest rate changes generally do not affect the fair market value of the debt, but do impact future earnings and cash flow, assuming other factors are held constant. We are exposed to interest rate risk as a result of our borrowings under our Senior Secured Credit Facility, which bear interest at floating rates based on the LIBOR or the prime rate of Credit Suisse. As of June 28, 2008, we had $1,062.3 million of borrowings under our Senior Secured Credit Facility. On November 20, 2007, we entered into a new interest rate swap agreement related to the Senior Secured Credit Facility for a notional amount of $515.0 million at a fixed LIBOR rate of 4.205% amortizing through an expiration date of 2009 (the notional amount was $500.0 million as of June 28, 2008). A hypothetical 1% increase in variable interest rates for the remaining portion of the Senior Secured Credit Facility not covered by the swap would have impacted our earnings and cash flow, for the three and six months ended June 28, 2008, by approximately $1.4 million and $2.8 million, respectively. All of our other debt of approximately $775.0 million was fixed rate debt at June 28, 2008. We may use additional derivative financial instruments where appropriate to manage our interest rate risk. However, as a matter of policy, we do not enter into derivative or other financial investments for trading or speculative purposes.

Foreign Currency Risk

Due to the global reach of our business, we are exposed to market risk from changes in foreign currency exchange rates, particularly with respect to the U.S. dollar compared to the Euro and the Mexican Peso. Our wholly owned foreign subsidiaries are consolidated into our financial results and are subject to risks typical of an international business including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange volatility. To date, we have not used international currency derivatives to hedge against our investment in our European subsidiaries or their operating results, which are converted into U.S. Dollars at period-end and average rates, respectively. However, as we continue to expand our business through acquisitions and organic growth, the sales of our products that are denominated in foreign currencies has increased as well as the costs associated with our foreign subsidiaries which operate in currencies other than the U.S. dollar. Accordingly, our future results could be materially impacted by changes in these or other factors. For the first three and six months of 2008, our average monthly sales denominated in foreign currencies was approximately $20.3 million and $38.9 million, respectively, of which $16.3 million and $31.2 million, respectively, was derived from Euro denominated sales. In addition, our exposure to fluctuations in foreign currencies arises because certain of our subsidiaries enter into purchase or sale transactions using a currency other than its functional currency. Our Mexico-based manufacturing operations incur costs that are largely denominated in Mexican Pesos. Accordingly, our future results could be materially impacted by changes in foreign exchange rates or other factors. Occasionally, we seek to reduce the potential impact of currency fluctuations on our business through hedging transactions. As of June 28, 2008, we had outstanding hedges in the form of forward contracts to purchase Mexican Pesos aggregating a U.S. dollar equivalent of $11.7 million.

Item 4T. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as the term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) 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 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.

Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based on this evaluation and subject to the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that, as of the end of the quarter covered by this report, the design and operation of our disclosure controls and procedures provide reasonable assurance that the disclosure controls and procedures are effective to accomplish their objectives.

Changes in Internal Control over Financial Reporting

There has been no change to our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) 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 plaintiffs or defendants in various litigation matters in the ordinary course of our business, some of which involve claims for damages that are substantial in amount. We believe that the disposition of claims currently pending will not have a material adverse effect on our financial position or results of operations.

The manufacture and sale of orthopedic devices and related products exposes us to significant risks of product liability claims, lawsuits and product recalls. From time to time, we have been, and we are currently, the subject of a number of product liability claims and lawsuits relating to our products. We face an inherent business risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in adverse effects, including injuries or death. If there is a significant increase in the number or amount of product liability claims, our business could be adversely affected. Even if we are successful in defending against any product liability claims, such claims could nevertheless distract our management, result in substantial costs, harm our reputation, adversely affect the sales of all our products and otherwise harm our business.

We are currently defendants in 14 product liability cases related to a drug infusion pump product manufactured by a third party manufacturer that we distribute through our Bracing and Supports division of our Domestic Rehabilitation segment. These cases have been brought against the manufacturers and certain distributors of these pumps, the manufacturers of the anesthetics used in these pumps, and the healthcare professionals involved in providing the pumps to their patients. All of these lawsuits allege that the use of these pumps with certain anesthetics in certain shoulder surgeries over prolonged periods have resulted in cartilage damage to the plaintiffs. We have tendered the defense of these cases both to the manufacturers who have supplied these pumps to us and to our product liability carrier. Our product liability carrier has accepted coverage of these cases, subject to

customary reservations, and is providing the Company with the defense. The lawsuits allege damages ranging from unspecified amounts to claims between $1 million and $10 million. These cases are in the early stages of discovery.

We currently carry product liability insurance up to a limit of $25.0 million, subject to a deductible of $50,000 on non-invasive products and a deductible of $250,000 on invasive products and an aggregate deductible of $750,000 for all product liability claims. Our insurance policy is subject to annual renewal. We believe our current product liability insurance coverage is adequate. As of June 28, 2008, we exceeded the coverage limits for certain historical product liability claims involving our Surgical Implant segment. The estimated exposure for these claims has been accrued for in our condensed consolidated balance sheet as of that date. Future product liability claims that could be made against us could significantly exceed the coverage limit of our policies or such insurance coverage may not continue to be available on commercially reasonable terms or at all. Additionally, we are also subject to the risk that our insurers will exclude from coverage claims made against us or the risk that insurers may become insolvent. If we do not or cannot maintain adequate product liability insurance, our business and results of operations may be adversely affected.

Pending Stockholder Litigation

In November 2007, the parties entered into a memorandum of understanding ("MOU"), pursuant to which the parties agreed to settle the consolidated action subject to court approval. The MOU provided for dismissal of the consolidated action with prejudice upon approval of a stipulation by the court. Pursuant to the terms of the MOU, the defendants acknowledged that the consolidated action resulted in a decision to provide additional information to DJO Opco's shareholders in the definitive proxy statement concerning the proposed merger and to modify certain terms in the merger agreement and to pay certain attorneys' fees, costs, and expenses incurred by the plaintiffs. As stated in the MOU, defendants deny all allegations of wrongdoing, fault, liability or damage to the plaintiffs and the putative class in the consolidated action and deny that they are engaged in any wrongdoing or violation of law or breach of duty. Defendants also do not make any admission that the supplemental disclosures are material. The parties signed a settlement agreement containing these terms and requested court approval. On June 13, 2008 the court entered an order granting final approval of the settlement after providing notice and opportunity to be heard to the members of the class. The courts order will be final if not appealed within 60 days after entry of the order.

ITEM 1A. RISK FACTORS

For a discussion of the Company's potential risks or uncertainties, please see Part I, Item IA, of the Company's 2007 Annual Report on Form 10-K filed with the Commission on March 28, 2008. Except for the following risk factors, there have been no material changes to the risk factors disclosed in such Form 10-K.

Recent changes in coverage and reimbursement policies for our products by Medicare or reductions in reimbursement rates for our products could adversely affect our business and results of operations.

The Medicare Modernization Act mandates a number of changes in the Medicare payment methodology and conditions for coverage of orthotic devices and durable medical equipment, including many of our products. These changes include a temporary freeze in annual increases in payments for durable medical equipment from 2004 through 2008, competitive bidding requirements, new clinical conditions for payment and quality standards. Although these changes affect our products generally, specific products may be affected by some but not all of the Medicare Modernization Act's provisions.

Prefabricated orthotic devices and certain durable medical equipment, including many of our products, may be subject to a competitive bidding process established under the Medicare Modernization Act. In April 2007, CMS issued final regulations in connection with the competitive bidding program. Under competitive bidding, Medicare will no longer reimburse for certain products and services based on the Medicare fee schedule amount in designated competitive bidding areas. Instead, CMS will provide reimbursement for these items and services based on a competitive bidding process. Only those suppliers selected through competitive bidding process within each designated region will be eligible to have their products reimbursed by Medicare. Competitive bidding was scheduled to go into effect July 1, 2008 initially in ten metropolitan statistical areas and will apply to ten product categories. In 2009, the program will be expanded to 70 additional metropolitan statistical areas and to apply to eight product categories. The program is expected to be expanded to additional areas thereafter, and additional product categories may be selected. On July 15, 2008, the U.S. Congress instituted an 18 month delay in the implementation of the program, postponing the first round of bidding until 2009 and the second round until 2011. When it is eventually implemented, the competitive bidding process may reduce the number of suppliers providing certain items and services to Medicare beneficiaries and the amounts paid for such items and services within a given geographic area. None of our products were included in the initial round of items subject to bidding; however, there is no assurance they will not be included in the future. Inclusion of any of our products in Medicare competitive bidding or other Medicare reimbursement or coverage reductions could result in such products being sold in lesser quantities or for a lower price, or coverage for such products being discontinued altogether. Any of these developments could have a material adverse effect on our results of operations. In addition, if we are not selected to participate in the competitive bidding program in a particular region, it could have a material adverse effect on our sales and profitability.

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, if we fail to pass a Quality System Regulation inspection or to comply with these and other applicable regulatory requirements, we may receive a warning letter or could otherwise be required to take corrective action

and, in severe cases, suffer a disruption of our operations and manufacturing delays. If we fail to take adequate corrective actions we could be subject to certain enforcement actions, including, among other things, significant fines, suspension of approvals, seizures or recalls of products, operating restrictions and criminal prosecutions. 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.

We have received FDA warning letters in the past. Most recently, we received a warning letter in January 2007 in which the FDA investigator concluded that we had failed to establish and maintain adequate procedures for handling and investigating complaints, failed to establish and maintain procedures for changes to specifications and processes, including verification or validation of such changes, and found that these failures caused certain products to be misbranded. In the warning letter, the FDA informed us that we would not receive premarket approval for Class III devices to which these issues are reasonably related until the issues have been corrected. During 2007, we submitted a response and met with FDA representatives, and instituted the necessary changes and improvements in our policies and procedures to correct these issues. During the first quarter of 2008, the FDA concluded their follow-up investigation concerning the January 2007 warning letter. We received no observations and all areas of concern were addressed satisfactorily. Also, in the first quarter of 2008, we received FDA Form 483 "Inspectional Observations" in connection with an FDA audit of the Chattanooga division of our Domestic Rehabilitation segment, stating that we failed to report certain customer complaints claiming that our muscle stimulator devices malfunctioned, and that we did not adequately implement corrective and preventive action to prevent recurrence of potential product failures relating to our muscle stimulator devices. The auditor also recommended that we recall a series of ultrasound devices that had experienced operating issues in 2005, and we are implementing such a recall. We recently received a warning letter relating to reporting issues on the muscle stimulator device complaints and requesting software verification and validation plans and reports regarding the correction of problems associated with the ultrasound product. We believe that we are in a position to address these areas of concern adequately. However, we cannot assure you that the FDA will not take further action along these lines in the future.

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

(a): Not applicable.
(b): Not applicable.
(c): Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

On April 25, 2008, the Board of Directors of DJO Incorporated, the parent ("Parent") of DJO Finance LLC (the "Company"), and the majority shareholder of Parent (representing 98.74% of the outstanding shares of Common Stock) approved an amendment to the Parent's 2007 Incentive Stock Plan ("Plan") to increase the maximum number of shares of Common Stock that may be issued under the Plan from 5,000,000 shares to 7,500,000 shares.

ITEM 5. OTHER INFORMATION

(a): None.

(b): None

ITEM 6. EXHIBITS

(a): Exhibits


3.1		Certificate of Formation of DJOFL and amendments thereto (incorporated by reference to Exhibit 3.1 to DJOFL's Annual Report on Form 10-K, filed on March 28, 2008).
3.2		Limited Liability Company Agreement of DJOFL (incorporated by reference to Exhibit 3.2 to DJOFL's Registration Statement on Form S-4, filed April 18, 2008 (File No. 333-142188)).
10.1		Amendment to DJO Incorporated 2007 Incentive Stock Plan (incorporated by reference to Exhibit 10.1 to DJOFL's Current Report on Form 8-K, filed May 1, 2008.
31.1+		Certification (pursuant to Securities Exchange Act Rule 13a-14a) by Chief Executive Officer.
31.2+		Certification (pursuant to Securities Exchange Act Rule 13a-14a) by Chief Financial Officer.
32.1+		Section 1350—Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) by Chief Executive Officer.
32.2+		Section 1350—Certification (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) by Chief Financial Officer.

+: Filed herewith

SIGNATURES

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


	DJO FINANCE LLC
Date: August 8, 2008	By:	/s/ LESLIE H. CROSS Leslie H. Cross Chief Executive Officer (Authorized Signatory)
Date: August 8, 2008	By:	/s/ VICKIE L. CAPPS Vickie L. Capps Executive Vice President, Chief Financial Officer and Treasurer (Authorized Signatory)

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DJO FINANCE LLC FORM 10-Q TABLE OF CONTENTS Index to Condensed Consolidated Financial Statements

PART I. FINANCIAL INFORMATION

ITEM 1. 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 4T. CONTROLS AND PROCEDURES

Part II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

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

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Legalese
Litigious
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Djo Finance Inactive 10-Q2008 Q2 Quarterly report

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