The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes appearing elsewhere herein.

Overview of the Company

We develop, manufacture, market and sell orthopaedic implant devices, related surgical instrumentation, supplies and biologic materials to hospitals and physicians in the United States and internationally. Our revenues are derived from sales of knee, hip, and extremity joint replacement systems and spinal fusion products. Revenue from the worldwide distribution of biologic materials contributes to our total reported sales and has been a key component of growth over the last few years. Our continuing research and development projects will enable us to continue the introduction of new, advanced biologic materials and other products and services. Revenue from sales of other products, including surgical instrumentation, Cemex ® bone cement, the InterSpace™ pre-formed, antibiotic cement hip, knee and shoulder spacers have contributed to revenue growth and are expected to continue to be an important part of our anticipated future revenue growth.

Our operating expenses consist of sales and marketing expenses, general and administrative expenses, research and development expenses, and depreciation expenses. The largest component of operating expenses, sales and marketing expenses, primarily consists of payments made to independent sales representatives for their services to hospitals and surgeons on our behalf. These expenses tend to be variable in nature and related to sales growth. Research and development expenses primarily consist of expenditures on projects concerning knee, extremities, spine and hip implant product lines and biologic materials and services.

In marketing our products, we use a combination of traditional targeted media marketing together with our primary marketing focus, direct customer contact and service to orthopaedic surgeons. Because surgeons are the primary decision maker when it comes to the choice of products and services that best meet the needs of their patients, our marketing strategy is focused on meeting the needs of the orthopaedic surgeon community. In cooperation with our organization of independent sales agencies in the United States and network of independent distributors and subsidiaries internationally, we conduct this marketing effort through continuing education forums, training programs and product development advisory panels.

Overview of the Three and Six Months Ended June 30, 2009

During the quarter ended June 30, 2009, sales decreased 1% to $43.3 million from $43.7 million in the comparable quarter ended June 30, 2008, as we experienced the foreign currency effect of the weakened Euro and Pound Sterling (GBP) and the impact of the current economic downturn. Gross margins decreased to 62.3% from 62.6% as a result of variances associated with lower production volumes and inventory reductions. Operating expenses increased 4% from the quarter ended June 30, 2008, and as a percentage of sales, operating expenses increased to 52% during the second quarter of 2009 as compared to 50% for the same quarter in 2008. This increase was primarily due to $1.2 million in legal and other charges related to a Department of Justice, or DOJ, inquiry and higher research and development expenses. Net income for the quarter ended June 30, 2009 decreased 14% and diluted earnings per share were $0.20 as compared to $0.24 last year. Net income was also affected by the DOJ inquiry, which had a net of tax impact of $750,000 on net income and $0.06 effect on earnings per share. Excluding the impact of the DOJ inquiry costs, net income decreased 3% to $3.4 million.

During the six months ended June 30, 2009, sales increased 4% to $86.6 million from $83.5 million in the comparable six months ended June 30, 2008, as we experienced some expansion in the market, which was partially offset by the effect of foreign currency fluctuations and the current economic downturn. Gross margins increased to 64.4% from 62.7% as a result of growth in our domestic sales with higher margins. Operating expenses increased 12% from the period ended June 30, 2008, and as a percentage

of sales, operating expenses increased to 55% during the first six months of 2009 as compared to 51% for the same period in 2008. This increase was partially due to $2.6 million in legal and other charges related to the DOJ, inquiry. We also incurred additional sales and marketing expenses and depreciation and amortization expenses as a result of our acquisitions during 2008. Net income for the six months ended June 30, 2009 decreased 13% and diluted earnings per share were $0.40 as compared to $0.47 last year. Net income was also affected by the DOJ inquiry, which had a net of tax impact of $1.6 million on net income and $0.12 effect on earnings per share. Excluding the impact of the DOJ inquiry costs, net income increased 3% to $6.7 million.

During the six months ended June 30, 2009, we acquired $8.0 million in property and equipment, including new production equipment, surgical instrumentation, and facility expansion. Cash flow from operations was $9.4 million for the six months ended June 30, 2009 as compared to a net cash flow from operations of $1.4 million during the six months ended June 30, 2008.

The following table includes the net sales and percentage of net sales for each of our product lines for the three and six month periods ended June 30, 2009 and June 30, 2008:

                             Sales by Product Line

                             (dollars in thousands)



                                            Three Months Ended                           Six Months Ended
                                   June 30, 2009         June 30, 2008         June 30, 2009         June 30, 2008
Knee Products                     $ 18,948    43.7 %    $ 20,475    46.9 %    $ 37,428    43.2 %    $ 38,991    46.7 %
Hip Products                         6,694    15.4         5,659    13.0        13,240    15.3        12,019    14.4
Biologics & Spine                    6,882    15.9         6,647    15.2        13,944    16.1        13,321    16.0
Extremity                            5,073    11.7         3,944     9.0        10,861    12.5         7,632     9.1
Other Products                       5,705    13.2         6,970    15.9        11,133    12.9        11,523    13.8

Total                             $ 43,302   100.0 %    $ 43,695   100.0 %    $ 86,606   100.0 %    $ 83,486   100.0 %

The following tables include items from the unaudited Condensed Statements of Income for the three and six months ended June 30, 2009 as compared to the three and six months ended June 30, 2008, the dollar and percentage change from period to period and the percentage relationship to net sales (dollars in thousands):