The following discussion and analysis addresses our liquidity, financial condition, and the results of our operations for the three months ended March 31, 2009 compared to our results of operations for the three months ended March 31, 2008. These discussions should be read in conjunction with our historical consolidated financial statements and related notes thereto and the other financial information included in this Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

General

We are a diversified orthopedic products company offering a broad line of surgical and non-surgical products for the Spine, Orthopedics, Sports Medicine and Vascular market sectors. Our products are designed to address the lifelong bone-and-joint health needs of patients of all ages, helping them achieve a more active and mobile lifestyle. We design, develop, manufacture, market and distribute medical equipment used principally by musculoskeletal medical specialists for orthopedic applications. Our main products are invasive and minimally invasive spinal implant products and related human cellular and tissue based products ("HCT/P products"), non-invasive bone growth stimulation products used to enhance the success rate of spinal fusions and to treat non-union fractures, external and internal fixation devices used in fracture treatment, limb lengthening and bone reconstruction; and bracing products used for ligament injury prevention, pain management and protection of surgical repair to promote faster healing. Our products also include a device for enhancing venous circulation, cold therapy, bone cement and devices for removal of bone cement used to fix artificial implants and airway management products used in anesthesia applications.

We have administrative and training facilities in the United States and Italy and manufacturing facilities in the United States, the United Kingdom, Italy and Mexico. We directly distribute our products in the United States, the United Kingdom, Italy, Germany, Switzerland, Austria, France, Belgium, Mexico, Brazil, and Puerto Rico. In several of these and other markets, we also distribute our products through independent distributors.

Our condensed consolidated financial statements include the financial results of the Company and its wholly-owned and majority-owned subsidiaries and entities over which we have control. All intercompany accounts and transactions are eliminated in consolidation.

Our reporting currency is the United States Dollar. All balance sheet accounts, except shareholders' equity, are translated at period-end exchange rates, and revenue and expense items are translated at weighted average rates of exchange prevailing during the period. Gains and losses resulting from foreign currency transactions are included in other income (expense). Gains and losses resulting from the translation of foreign currency financial statements are recorded in the accumulated other comprehensive income component of shareholders' equity.

Our financial condition, results of operations and cash flows are not significantly impacted by seasonality trends. However, sales associated with products for elective procedures appear to be influenced by the somewhat lower level of such procedures performed in the late summer. Certain of the Breg® bracing products experience greater demand in the fall and winter corresponding with high school and college football schedules and winter sports. In addition, we do not believe our operations will be significantly affected by inflation. However, in the ordinary course of business, we are exposed to the impact of changes in interest rates and foreign currency fluctuations. Our objective is to limit the impact of such movements on earnings and cash flows. In order to achieve this objective, we seek to balance non-dollar income and expenditures. During the three months ended March 31, 2009 and all of 2008, we have used derivative instruments to hedge certain foreign currency fluctuation exposures as well as interest rate exposure on LIBOR-based borrowings. See Item 3 - "Quantitative and Qualitative Disclosures About Market Risk."

We manage our operations as four business segments: Domestic, Spinal Implants and Biologics, Breg, and International. Domestic consists of operations of our subsidiary Orthofix Inc. Spinal Implants and Biologics consist of our Blackstone subsidiary and their domestic and international operations. Breg consists of Breg Inc.'s domestic operations and international distributors. International consists of operations which are located in the rest of the world as well as independent export distribution operations. Group Activities are comprised of the operating expenses and identifiable assets of Orthofix International N.V. and its U.S. holding company subsidiary, Orthofix Holdings, Inc.

Segment and Market Sector Revenues

The following tables display net sales by business segment and net sales by
market sector. We keep our books and records and account for net sales, costs of
sales and expenses by business segment. We provide net sales by market sector
for information purposes only.

Business Segment:

                                                     Three Months Ended March 31,
(US$ in thousands)                              2009                                2008
                                                    Percent of                          Percent of
                                  Net Sales       Total Net Sales      Net Sales      Total Net Sales       Growth
Domestic                          $   49,797                    39 %   $   44,127                  34 %           13 %

Spinal Implants and Biologics         28,519                    22 %       28,831                  23 %           -1 %

Breg                                  23,110                    18 %       22,063                  17 %            5 %

International                         27,548                    21 %       33,011                  26 %          -17 %

Total                             $  128,974                   100 %   $  128,032                 100 %            1 %

Market Sector:

                                          Three Months Ended March 31,
                                     2009                               2008
                                                                                                                       Constant
                                         Percent of                         Percent of                                 Currency
                        Net Sales      Total Net Sales     Net Sales      Total Net Sales      Reported Growth          Growth
Spine                   $   66,128                  51 %   $   62,458                  49 %                   6 %                6 %
Orthopedics                 29,593                  23 %       29,761                  23 %                  -1 %               10 %
Sports Medicine             24,246                  19 %       23,323                  18 %                   4 %                5 %
Vascular                     4,408                   3 %        5,376                   4 %                 -19 %              -13 %
Other                        4,599                   4 %        7,114                   6 %                 -35 %              -17 %

Total                   $  128,974                 100 %   $  128,032                 100 %                   1 %                5 %

The following table presents certain items from our Condensed Consolidated Statements of Operations as a percent of total net sales for the periods indicated:

                                                     Three Months Ended
                                                          March 31,
                                                    2009            2008
                                                     (%)             (%)

          Net sales                                     100             100
          Cost of sales                                  25              27
          Gross profit                                   75              73
          Operating expenses
          Sales and marketing                            41              39
          General and administrative                     18              17
          Research and development                        7               5
          Amortization of intangible assets               1               4
          Gain on sale of Pain Care® operations           -              (1 )
          Total operating income                          8               9
          Net income                                      2               3

Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008

Net sales increased 1% to $129.0 million in the first quarter of 2009 compared $128.0 million for the same period last year. The impact of foreign currency decreased sales by $5.1 million during the first quarter of 2009 when compared to the first quarter of 2008.

Sales by Business Segment:

Net sales in Domestic increased to $49.8 million in the first quarter of 2009 compared to $44.1 million for the same period last year, an increase of 13%. Domestic's net sales represented 39% and 34% of total net sales during the first quarter of 2009 and 2008, respectively. The increase in Domestic's net sales was partially the result of a 12% increase in sales in our Spine market sector, which was mainly driven by the increase in sales of our Spinal-Stim® and Cervical-Stim® products. The increase in Domestic's net sales was also attributable to the 16% increase in our Orthopedic market sector which included a 28% increase in sales of Physio-Stim® products as compared to the prior year period as well as more than doubled sales growth in sales of human cellular and tissue based products ("HCT/P products", often referred to as Biologic products) used in orthopedic applications when comparing these same two periods.

Domestic Sales by Market Sector:

                                               Net Sales for the
                                         Three Months Ended March 31,
              (US$ in thousands)      2009              2008         Growth

              Spine                $    37,283       $    33,373          12 %
              Orthopedics               12,514            10,754          16 %

              Total                $    49,797       $    44,127          13 %

Net sales in Spinal Implants and Biologics decreased $0.3 million to $28.5 million in the first quarter of 2009 compared to $28.8 million for the same period last year, a decrease of 1%. Spinal Implants and Biologics' net sales represented 22% and 23% of total net sales during the first quarter of 2009 and 2008, respectively. The decrease in sales was primarily related to sales of Spinal Implants and Biologics' products through our wholly-owned international distributor. Sales from our biologics products increased 19% when compared to the same period in the prior year which was offset by a decrease in product sales for thoracolumbar and interbody use, where new products are scheduled for release in the second quarter of 2009. All of Spinal Implants and Biologics' sales are recorded in our Spine market sector.

Net sales in Breg increased $1.0 million to $23.1 million in the first quarter of 2009 compared to $22.1 million for the same period last year, an increase of 5%. Breg's net sales represented 18% and 17% of total net sales during first quarter of 2009 and 2008, respectively. The increase in Breg's net sales was primarily due to a 12% increase in sales of our Breg® bracing products when compared to the same period in the prior year, primarily as a result of the sales of our new products which include spine bracing. Further, sales of our cold therapy products increased 8% over the same period in the prior year which is due to the recent launch of our new Kodiak® cold therapy products. These increases were partially offset by a decrease in sales of our pain therapy products as a result of the sale of operations related to our Pain Care® line of ambulatory infusion pumps during March 2008. All of Breg's sales are recorded in our Sports Medicine market sector.

Net sales in International decreased 17% to $27.5 million in the first quarter of 2009 compared to $33.0 million for the same period last year. International's net sales represented 21% and 26% of our total net sales in the first quarter of 2009 and 2008, respectively. The impact of foreign currency decreased International net sales by 16% or $5.1 million, during the first quarter of 2009 as compared to the first quarter of 2008. On a constant currency basis, both Orthopedics and Sports Medicine sales in our International segment increased 7% in the first quarter of 2009 when compared to the prior year. The Orthopedic segment was primarily driven by increases in our internal fixation and stimulation product lines. Sales in our Vascular sector, which consist of the A-V Impulse System, and sales from our Other distributed products, primarily the Laryngeal Mask, decreased 13% and 17%, respectively, on a constant currency basis when compared to the prior year.

International Sales by Market Sector:

                                                   Net Sales for the Three Months Ended March 31,
                                                                                                      Constant
                                                                                                      Currency
(US$ in thousands)                      2009                2008             Reported Growth           Growth
Spine                               $         326       $         254                      28 %                30 %
Orthopedics                                17,079              19,007                     -10 %                 7 %
Sports Medicine                             1,136               1,260                     -10 %                 7 %
Vascular                                    4,408               5,376                     -18 %               -13 %
Other                                       4,599               7,114                     -35 %               -17 %

Total                               $      27,548       $      33,011                     -17 %                -1 %

Sales by Market Sector:

Sales of our Spine products increased to $66.1 million in the first quarter of 2009 compared to $62.5 in the first quarter of 2008. Sales of our Cervical- Stim® and Spinal-Stim® products increased 12% and 11%, respectively, in the first quarter of 2009 compared to 2008. These increases were offset by a 1% decrease in sales of Spinal Implants and Biologics' products from the first quarter of 2008 as a result of lower sales of Spinal Implants and Biologics' products through our international distributor. Spine product sales were 51% and 49% of our total net sales in the first quarters of both 2009 and 2008, respectively.

Sales of our Orthopedic products remained relatively constant at $29.6 million in the first quarter of 2009 compared to $29.8 million for the same period last year. On a constant currency basis, sales increased 10% compared to the same period last year due to increased sales of our Physio Stim®, external fixation, and Biologic products. Orthopedic product sales were 23% of our total net sales both in the first quarter of 2009 and 2008.

Sales of our Sports Medicine products increased 4% to $24.2 million in the first quarter of 2009 compared to $23.3 million for the same period last year. As discussed above, the increase of $0.9 million is primarily due to sales of our Breg® cold therapy and bracing products, offset by a decrease in our pain therapy products, which is principally attributable to the sale of operations relating to our Pain Care® line in March 2008. Sports Medicine product sales were 19% and 18% of our total net sales in the first quarter of 2009 and 2008, respectively.

Sales of our Vascular products, which consist of our A-V Impulse System®, decreased 18% to $4.4 million in the first quarter of 2009 compared to $5.4 million for the same period last year. On a constant currency basis, sales decreased 13% compared to the prior period due to decreased sales in the United Kingdom. Vascular product sales were 3% and 4% of our total net sales in the first quarter of 2009 and 2008, respectively.

Sales of our Other products, which include the sales of our Laryngeal Mask as well as our Woman's Care line, decreased 35% to $4.6 million in the first quarter of 2009 when compared to $7.1 million for the same period last year. On a constant currency basis, sales decreased 17% when compared to the first quarter of 2008. We distribute the Laryngeal Mask product in the United Kingdom and in Italy. In June 2010, we will transition out of the agreement to distribute the Laryngeal Mask product in the United Kingdom. Other product sales were 4% and 6% of our total net sales in the first quarter of 2009 and 2008, respectively.

Gross Profit - Our gross profit increased 3% to $96.2 million in the first quarter of 2009, compared to $93.8 million for the same period last year. Gross profit as a percent of net sales in the first quarter of 2009 was 74.6% compared to 73.3% in the first quarter of 2008. The increase in the gross profit is primarily due to the increased sales of higher margin stimulation products.

Sales and Marketing Expense - Sales and marketing expense, which includes commissions, certain royalties and the bad debt provision, generally increase and decrease in relation to sales. Sales and marketing expense increased $2.1 million, or 4%, to $52.3 million in the first quarter of 2009 compared to $50.2 million in the first quarter of 2008. As a percent of sales, sales and marketing expense was 40.5% and 39.2% in the first quarter of 2009 and 2008, respectively. The increase in sales and marketing expense as a percent of sales was due primarily to an increase in commission expenses reflecting the implementation of sales programs with new distributor partners. This increase investment in sales and marketing has facilitated the development of new customer relationships and increased sales, and has directly contributed to the improvement in the year-over-year operating profit margin in the Domestic segment.

General and Administrative Expense - General and administrative expense increased $0.5 million, or 2%, in the first quarter of 2009 to $22.7 million compared to $22.2 million in the first quarter of 2008. The increase is primarily due a restructuring charge to consolidate substantially all of Blackstone's current operations in Wayne, NJ and Springfield, MA into the same facility housing its spine stimulation and US orthopedics business in the Dallas, TX area. In addition, the Company also incurred legal and other professional services associated with a proxy contest with one of the Company's shareholders. The contest was settled in a special shareholder meeting on April 2, 2009. As a result, the Company does not anticipate incurring any further expenses associated with this matter going forward. General and administrative expense as a percent of sales was 17.6% in the first quarter of 2009 compared to 17.3% for the same period last year.

Research and Development Expense - Research and development expense increased $2.7 million in the first quarter of 2009 to $9.1 million compared to $6.4 million for the same period last year. This increase is primarily the result of two collaborative arrangements: one with Musculoskeletal Transplant Foundation ("MTF") for which we incurred approximately $1.8 million in expenses and the other with Intelligent Implant Systems, LLC ("IIS") in which we incurred approximately $1.0 million of expenses. As a percent of sales, research and development expense was 7.0% in the first quarter of 2009 compared to 5.0% for the same period last year. We expect to incur up to $5.0 million of expense related to these agreements in 2009; see Liquidity and Capital Resources for further detail.

Amortization of Intangible Assets - Amortization of intangible assets decreased $3.4 million in the first quarter of 2009 to $1.6 million compared to $5.0 million for the same period last year. This decrease can be primarily attributed to the impairment of $105.7 million of definite-lived intangible assets at Blackstone during the third quarter of 2008.

Gain on Sale of Pain Care® Operations - Gain on sale of Pain Care® operations was $1.6 million in the first quarter of 2008 and represented the gain on the sale of operations related to our Pain Care® line of ambulatory infusion pumps during March 2008. No such gain was recorded in the first quarter of 2009.

Interest Expense, net - Interest expense, net was $6.1 million for the first quarter of 2009 compared to $5.4 million for the same period last year. Included in interest expense, net for both the first quarters of 2009 and 2008 was interest expense of $5.9 million related to the senior secured term loan used to finance the Blackstone acquisition.

Unrealized Non-cash Gain on Interest Rate Swap - In June 2008, the Company entered into a three year fully amortizable interest rate swap agreement (the "Swap") with a notional amount of $150.0 million and an expiration date of June 30, 2011. During the fourth quarter of 2008, the Company incurred an unrealized, non-cash loss of approximately $8.0 million when it was determined that the Swap was no longer deemed highly effective. Therefore, cash flow accounting is no longer applied and mark-to-market adjustments are required to be reported in current earnings through the expiration of the swap in June 2011. For the three months ended March 31, 2009, the Company recorded an unrealized non-cash gain of $0.2 million in other income (expense), net.

Other Income (Expense), net - Other income (expense), net was expense of $0.3 million for the first quarter of 2009 compared to income of $0.5 million for the same period last year. The decrease can be mainly attributed to the effect of foreign exchange. During the first quarter, we recorded foreign exchange losses of $0.2 million compared with foreign exchange gains of $0.5 for the same period last year. The decrease is principally as a result of a rapid strengthening of the US Dollar against various foreign currencies including the Euro, Pound, Peso and Brazilian Real. Several of our foreign subsidiaries hold trade payables or receivables in currencies (most notably the US Dollar) other than their functional (local) currency which results in foreign exchange gains or losses when there is relative movement between those currencies.

Income Tax Expense - Our effective tax rate, which represents a tax provision as a percentage of income before income taxes was 33% and 46% during the first quarters of 2009 and 2008, respectively. The effective tax rate for the first quarter of 2008 included an unfavorable discrete item resulting from the sale of our Pain Care® operations. Excluding this discrete item, the effective rate for the first quarter of 2008 was 33%.

Net Income - Net income for the first quarter of 2009 was $2.9 million, or $0.17 per basic and diluted share, compared to net income of $3.6 million, or $0.21 per basic and diluted share, for the same period last year. The weighted average number of basic common shares outstanding was 17,103,543 and 17,087,003 during the first quarters of 2009 and 2008, respectively. The weighted average number of diluted common shares outstanding was 17,121,571 and 17,261,172 during the first quarters of 2009 and 2008, respectively.

Liquidity and Capital Resources

Cash and cash equivalents at March 31, 2009 were $18.0 million, of which $11.2 million was subject to certain restrictions under the senior secured credit agreement described below. This compares to cash and cash equivalents of $25.6 million at December 31, 2008, of which $11.0 million was restricted.

Net cash provided by operating activities was $11.1 million for the three months ended March 31, 2009 compared to $0.9 million for the same period last year. Net cash provided by operating activities is comprised of net income, non-cash items (including depreciation and amortization, share-based compensation, provision for doubtful accounts and gain on the sale of Pain Care® operations) and changes in working capital, including changes in restricted cash. Net income decreased $0.7 million to $2.9 million for the three months ended March 31, 2009 from net income of $3.6 million for the comparable period in the prior year. Non-cash items for the three months ended March 31, 2009 increased $3.9 million compared to the same period last year primarily as a result of the gain on the sale of Pain Care® operations of $1.6 million in the prior year that did not occur this year, and increases in share based compensation and provision for doubtful accounts of $0.7 million and $0.5 million, respectively. Working capital accounts consumed $2.9 million of cash in the three months ended March 31, 2009 compared to $10.0 million for the same period last year. The principal change in working capital can be mainly attributable to accounts receivable and inventory due to quicker collections of accounts receivable outstanding and improved inventory purchasing policies at our Spinal Implants and Biologics business. Overall performance indicators for our two primary working capital accounts, accounts receivable and inventory, reflect days sales in receivables of 76 days at March 31, 2009 compared to 82 days at March 31, 2008 and inventory turns of 1.4 times at March 31, 2009 compared to 1.3 times at March 31, 2008. Also included in the uses of working capital were $2.3 million in costs related to matters occurring at Blackstone prior to the acquisition and for which we are seeking reimbursement from the applicable escrow fund.

Net cash used in investing activities was $3.5 million during the three months ended March 31, 2009 compared to $1.9 million provided by investing activities during the same period last year. During the first quarter of 2009 and 2008, we invested $3.5 and $4.1 million in capital expenditures, respectively. During the first quarter of 2008, we sold the operations of our Pain Care® line of ambulatory infusion pumps for net proceeds of $6.0 million.

Net cash used in financing activities was $15.1 million for the three months ended March 31, 2009 compared to $1.2 million for the same period last year. During the three months ended March 31, 2009, we repaid approximately $12.8 million against the principal on our senior secured term loan and repaid $1.1 million related to borrowings by our Italian subsidiary. During the three months ended March 31, 2008, we repaid $4.5 million against the principal on our senior secured term loan and borrowed $1.4 million to support working capital in our Italian subsidiary. During the first quarter of 2009, we used approximately $1.1 million to purchase an additional 32% minority interest in our Breg distributor in Germany. In addition, we received proceeds of $1.9 million from the issuance of 50,052 shares of our common stock upon the exercise of stock options during the three months ended March 31, 2008. . . .