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 addition to surgeon's preference, hospitals and buying groups, as the economic customer, are actively participating with physicians in the choice of implants and services.

Overview of the Three and Nine Months Ended September 30, 2009

During the quarter ended September 30, 2009, sales increased 12% to $42.4 million from $37.9 million in the comparable quarter ended September 30, 2008, as we experienced a return to procedural volume growth as compared to what we experienced in the prior two quarters. Gross margins improved slightly to 64.0% from 63.9% as a result of increased domestic sales with higher gross margins. Operating expenses increased 12% from the quarter ended September 30, 2008, and as a percentage of sales, operating expenses remained stable at 54% during each of the three quarters ended September 30, 2009 and 2008. This increase was primarily due to higher expenditures for research and development and product launches. Net income for the quarter ended September 30, 2009 increased 28% and diluted earnings per share were $0.21 as compared to $0.16 during the third quarter last year.

During the nine months ended September 30, 2009, sales increased 6% to $129.0 million from $121.4 million in the comparable nine months ended September 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 64.2% from 63.1% as a result of continued growth in our domestic sales with higher margins as well as the impact of lower product costs with more components being manufactured internally. Operating expenses increased 12% from the nine month period ended September 30, 2008, and as a percentage of sales, operating expenses increased to 54% during the first nine months of 2009 as compared to 52% for the same period in 2008. This increase was partially due to $3.4 million in legal and other expenses 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 nine months ended September 30, 2009 decreased 2% to $7.8 million and diluted earnings per share were $0.61 as compared to $0.63 last year. Net income for the nine months was also affected by the DOJ inquiry, which had a net of tax impact of $2.1 million on net income and $0.16 effect on earnings per share. Excluding the impact of the DOJ inquiry costs, net income increased 7% to $10.0 million.

During the nine months ended September 30, 2009, we acquired $12.8 million in property and equipment, including new production equipment, surgical instrumentation, and facility expansion. Cash flow from operations was $20.3 million for the nine months ended September 30, 2009 as compared to a net cash flow from operations of $2.5 million during the nine months ended September 30, 2008.

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

                                                        Sales by Product Line
                                                        (dollars in thousands)

                                               Three Months Ended                                    Nine Months Ended
                                 September 30, 2009         September 30, 2008         September 30, 2009         September 30, 2008

Knee Products                   $    17,278      40.8 %    $    16,594      43.7 %    $    54,706      42.4 %    $    55,585      45.8 %
Hip Products                          6,794      16.0            5,490      14.5           20,034      15.5           17,509      14.4
Biologics & Spine                     6,527      15.4            6,116      16.1           20,471      15.9           19,437      16.0
Extremity                             5,510      13.0            4,199      11.1           16,371      12.7           11,831       9.7
Other Products                        6,254      14.8            5,535      14.6           17,387      13.5           17,058      14.1

Total                           $    42,363     100.0 %    $    37,934     100.0 %    $   128,969     100.0 %    $   121,420     100.0 %

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

                                         Comparative Statement of Income Data

                                            Three Months Ended                2009 - 2008
                                              September 30,                   Inc (decr)                 % of Sales
                                            2009           2008              $          %             2009       2008
Net sales                                $  42,363      $  37,934          4,429        11.7          100.0 %    100.0 %
Cost of goods sold                          15,269         13,708          1,561        11.4           36.0       36.1
    Gross profit                            27,094         24,226          2,868        11.8           64.0       63.9
Operating expenses:
  Sales and marketing                       13,267         11,775          1,492        12.7           31.3       31.1
  General and administrative                 4,353          4,630           (277 )      (6.0 )         10.3       12.2
  Research and development                   2,932          2,086            846        40.6            6.9        5.5
  Depreciation and amortization              2,131          1,800            331        18.4            5.1        4.8
    Total operating expenses                22,683         20,291          2,392        11.8           53.6       53.6
Income from operations                       4,411          3,935            476        12.1           10.4       10.3
Other (expenses) income, net                   (22 )         (227 )          205       (90.3 )            -       (0.6 )
Income before taxes                          4,389          3,708            681        18.4           10.4        9.7
Provision for income taxes                   1,649          1,571             78         5.0            3.9        4.1
Net income                               $   2,740      $   2,137            603        28.2            6.5        5.6

                                           Nine Months Ended                 2009 - 2008
                                             September 30,                    Inc (decr)                 % of Sales
                                           2009           2008              $           %             2009       2008
Net sales                               $ 128,969      $ 121,420           7,549         6.2          100.0 %    100.0 %
Cost of goods sold                         46,111         44,830           1,281         2.9           35.8       36.9
     Gross profit                          82,858         76,590           6,268         8.2           64.2       63.1
Operating expenses:
  Sales and marketing                      40,942         37,343           3,599         9.6           31.7       30.7
  General and administrative               13,899         12,875           1,024         8.0           10.8       10.6
  Research and development                  8,492          7,028           1,464        20.8            6.6        5.8
  Depreciation and amortization             6,643          5,412           1,231        22.7            5.1        4.5
     Total operating expenses              69,976         62,658           7,318        11.7           54.2       51.6
Income from operations                     12,882         13,932          (1,050 )      (7.5 )         10.0       11.5
Other (expenses) income, net                 (377 )         (390 )            13        (3.3 )         (0.3 )     (0.3 )
Income before taxes                        12,505         13,542          (1,037 )      (7.7 )          9.7       11.2
Provision for income taxes                  4,672          5,461            (789 )     (14.4 )          3.6        4.5
Income before equity in net loss of
other investments                           7,833          8,081            (248 )      (3.1 )          6.1        6.7
Equity in net loss of other
investments                                     -            (98 )            98      (100.0 )            -       (0.1 )
Net income                              $   7,833      $   7,983            (150 )      (1.9 )          6.1        6.6

Three and Nine Months Ended September 30, 2009 Compared to Three and Nine Months Ended September 30, 2008

Sales

For the quarter ended September 30, 2009, total sales increased 12% to $42.4 million from $37.9 million in the comparable quarter ended September 30, 2008. Sales of knee implant products increased 4% to $17.3 million during the third quarter of 2009 from $16.6 million for the quarter ended September 30, 2008. We believe this increase is partially a result of sequential improvement in same customer surgical volumes as well as adding new customers. Hip implant sales of $6.8 million during the quarter ended September 30, 2009 were an increase of 24% over the $5.5 million in sales during the quarter ended September 30, 2008, primarily due to the continued success of our Novation ® hip products. Sales from biologics and spine increased 7% during the quarter ended September 30, 2009 to $6.5 million, up from $6.1 million in the comparable quarter in 2008, due to the continued growth and market penetration from our Optecure® service and the Accelerate™ platelet concentrating system. Sales of our extremity products were up 31% to $5.5 million as compared to $4.2 million for the same period in 2008, as we continue to see increasing market acceptance of our Equinoxe® shoulder system, including the reverse product line extension. Sales of all other products increased to $6.3 million as compared to $5.5 million in the same quarter last year. Domestically, total sales increased 15% to $30.2 million, or 71% of total sales, during the quarter ended September 30, 2009, up from $26.3 million, which represented 69% of total sales, in the comparable quarter last year. Internationally, total sales increased 5% to $12.2 million, representing 29% of total sales, for the quarter ended September 30, 2009, as compared to $11.6 million, which was 31% of total sales, for the same quarter in 2008.

For the nine months ended September 30, 2009, total sales increased 6% to $129.0 million from $121.4 million in the comparable nine months ended September 30, 2008. Sales of knee implant products decreased 2% to $54.7 million during the nine months ended September 30, 2009, compared to $55.6 million for the same period in 2008, which we believe is partially due to a decrease in the volume of elective surgical procedures due to the economic downturn. Hip implant sales of $20.0 million during the nine months ended September 30, 2009 were an increase of 14% over the $17.5 million in sales during the nine months ended September 30, 2008, due to the continued momentum of our Novation® hip product line. Sales from biologics and spine increased 5% during the nine months ended September 30, 2009 to $20.5 million, up from $19.4 million in the comparable period in 2008, due to growth contributions from our Optecure® service and the Accelerate™ platelet concentrating system. Sales of our extremity products were up 38% to $16.4 million as compared to $11.8 million for the same period in 2008, as we

continue to see market acceptance of our Equinoxe® shoulder system. Sales of all other products increased to $17.4 million as compared to $17.1 million in the same nine month period last year. Domestically, sales increased 8% to $90.2 million, or 70% of total sales, during the nine months ended September 30, 2009, up from $83.4 million, which represented 69% of total sales, in the comparable period last year. Internationally, sales increased 2% to $38.8 million, representing 30% of total sales, for the nine months ended September 30, 2009, as compared to $38.0 million, which was 31% of total sales, for the same nine months in 2008.

Gross Profit

Gross profit increased 12% to $27.1 million in the quarter ended September 30, 2009 from $24.2 million in the quarter ended September 30, 2008. As a percentage of sales, gross profit increased to 64.0% during the quarter ended September 30, 2009 as compared to 63.9% in the quarter ended September 30, 2008, primarily as a result of the higher percentage of domestic sales, with higher gross margins.

Gross profit increased 8% to $82.9 million in the nine months ended September 30, 2009 from $76.6 million in the nine months ended September 30, 2008. As a percentage of sales, gross profit increased to 64.2% during the nine month period ended September 30, 2009 as compared to 63.1% in the nine months ended September 30, 2008, as a result of growth in our domestic sales, as well as obtaining higher margin international sales, as opposed to the prior year where we experienced low margin sales as a result of stocking product at several new international distributors. Looking forward, we expect full year gross profit, as a percentage of sales, to be approximately 1% higher than 2008.

Operating Expenses

Total operating expenses increased 12% to $22.7 million in the quarter ended September 30, 2009 from $20.3 million in the quarter ended September 30, 2008. As a percentage of sales, total operating expenses remained at 54% for each of the quarters ended September 30, 2009 and 2008. The increase in operating expenses during the third quarter is primarily a result of additional research and development and product launch expenditures as we continue to invest in expanding our product offerings. For the nine month period ended September 30, 2009, total operating expenses increased 12% to $70.0 million from $62.7 million in the nine months ended September 30, 2008. As a percentage of sales, total operating expenses increased to 54% for the nine months ended September 30, 2009, as compared to 52% for the same period in 2008.

Sales and marketing expenses, the largest component of total operating expenses, increased 13% for the quarter ended September 30, 2009 to $13.3 million from $11.8 million in the same quarter last year, primarily as a result of variable selling and product launch expenses. Sales and marketing expenses, as a percentage of sales remained flat at 31% for the comparable quarters ended September 30, 2009 and 2008. Sales and marketing expenses increased 10% for the nine months ended September 30, 2009 to $40.9 million from $37.3 million in the same period last year, partially due to our increased sales efforts, as well as, the effect of a full current year of operating expenses for our French distributor that was acquired in April 2008. Sales and marketing expenses, as a percentage of sales increased to 32% for the nine months ended September 30, 2009, from 31% for the nine months ended September 30, 2008. Looking forward, sales and marketing expenditures, as a percentage of sales, are expected to be in the range of 30% to 32%.

General and administrative expenses decreased 6% to $4.4 million in the quarter ended September 30, 2009 from $4.6 million in the quarter ended September 30, 2008. This decrease was principally a result of reduced expenses related to the DOJ inquiry of $845,000 in 2009 from $1.2 million for the quarter ended September 30, 2008. As a percentage of sales, general and administrative expenses decreased to 10% for the quarter ended September 30, 2009, compared to 12% for the same quarter in 2008. General and administrative expenses increased 8% to $13.9 million in the nine months ended September 30, 2009 from $12.9 million in the nine months ended September 30, 2008. Included in the nine month amounts are expenses related to the DOJ inquiry of $3.4 million and $2.2 million for 2009 and 2008, respectively. As a percentage of sales, general and administrative expenses remained constant at 11% for both nine

month periods. Excluding the DOJ expenses, General and administrative expenses were 8% of sales for the nine months of 2009, and 9% of sales for 2008. General and administrative expenses for the balance of the year ending December 31, 2009 are expected to be in the range of 8% to 9%, as a percentage of sales, excluding the impact of DOJ expenses.

Research and development expenses increased 41% for the quarter ended September 30, 2009 to $2.9 million from $2.1 million in the same quarter last year. Our increase in research and development expenses is associated with continued focus on development projects as well as collection of clinical data. As a percentage of sales, research and development expenses increased to 7% for the quarter ended September 30, 2009 from 6% for the comparable quarter last year. Research and development expenses increased 21% for the nine months ended September 30, 2009 to $8.5 million from $7.0 million in the same period last year. Our increase in research and development expenses is associated with ongoing clinical studies, research projects, and product development expenses. As a percentage of sales, research and development expenses increased to 7% for the nine months ended September 30, 2009 from 6% for the comparable nine months last year. Continued robust growth rates in research and development expenditures are expected due to increases in product development and testing expenses throughout the remainder of the year, ranging from 7% to 8% of sales.

Depreciation and amortization increased 18% to $2.1 million during the quarter ended September 30, 2009 from $1.8 million in the quarter ended September 30, 2008, primarily as a result of continuing expansion and surgical instrumentation. We placed $3.4 million of surgical instrumentation and $867,000 of manufacturing equipment in service during the quarter. As a percentage of sales, depreciation and amortization remained at 5% for the quarters ended September 30, 2009 and 2008, respectively. Depreciation and amortization increased 23% to $6.6 million during the nine months ended September 30, 2009 from $5.4 million in the nine months ended September 30, 2008, primarily as a result of continuing investment in our facilities and operations, surgical instrumentation and amortization of intangibles associated with our 2008 acquisitions. We placed $8.3 million of surgical instrumentation, $3.0 million of new manufacturing equipment, and $2.1 million in facilities expansion in service during the nine months. As a percentage of sales, depreciation and amortization increased during the nine months ended September 30, 2009 to 5% as compared to 4% for the nine months ended September 30, 2008.

Income from Operations

Our income from operations increased 12% to $4.4 million in the quarter ended September 30, 2009 from $3.9 million in the quarter ended September 30, 2008. Our income from operations decreased 8% to $12.9 million in the nine months ended September 30, 2009 from $13.9 million in the nine months ended September 30, 2008, as growth in operating expenses outpaced growth in top line sales during the first half of the year.

Other Income and Expenses

We had other expenses, net of other income, of $22,000 during the quarter ended September 30, 2009, as compared to other expenses, net of other income of $227,000 in the quarter ended September 30, 2008, as a result of a reduction of interest expense on borrowings under the line of credit and other long-term debt, and gains on currency exchange. We incurred net interest expense for the quarter ended September 30, 2009 of $167,000 as compared to $204,000 during the quarter ended September 30, 2008. During the quarter ended September 30, 2009, we experienced currency exchange gains of $128,000 as compared to a currency change loss of $23,000 during the third quarter ended September 30, 2008 primarily as a result of strengthening of the Euro and Japanese Yen vs. the U.S. Dollar. For the full nine months, we had other expenses, net of other income, of $377,000 during the nine months ended September 30, 2009, as compared to other expenses, net of other income of $390,000 for the same nine months in 2008, primarily due to a first quarter 2008 before tax gain of $485,000 we recognized on a forward currency option we entered into in anticipation of our acquisition of France Medica, offset by a reduced interest expense on borrowings under the line of credit and other long-term debt. We incurred net interest expense for the nine months ended September 30, 2009 of $544,000 as compared to $800,000 during the nine months ended September 30, 2008.

Taxes and Net Income

Income before provision for income taxes increased 18% to $4.4 million in the quarter ended September 30, 2009 from $3.7 million in the quarter ended September 30, 2008. The effective tax rate, as a percentage of income before taxes, was 38% for the quarter ended September 30, 2009, compared to 42% for the quarter ended September 30, 2008. The decrease in the effective tax rate was primarily due to the utilization of a tax credit for research and development activities during 2009, which had not been enacted during the same period of 2008. Income before provision for income taxes decreased 8% to $12.5 million in the nine months ended September 30, 2009 from $13.5 million in the nine months ended September 30, 2008. The effective tax rate, as a percentage of income before taxes, was 37% for the nine months ended September 30, 2009 compared to 40% for the nine months ended September 30, 2008. We expect our effective tax rates to range from 37% to 38% for the balance of 2009. We evaluated our material tax positions and determined that we did not have any uncertain tax positions requiring recognition. Our policy is to recognize interest and penalties accrued on uncertain tax positions as part of income tax expense. For the three and nine months ended September 30, 2009, no estimated interest or penalties were recognized for the uncertainty of certain tax positions.

As a result of the foregoing, we realized net income of $2.7 million in the quarter ended September 30, 2009, an increase of 28% from $2.1 million in the quarter ended September 30, 2008. As a percentage of sales, net income increased to 6.5% for the quarter ended September 30, 2009 as compared to 5.6% for the same quarter in 2008. Earnings per share, on a diluted basis, increased to $0.21 for quarter ended September 30, 2009, from $0.16 for the quarter ended September 30, 2008. During the nine months ended September 30, 2009, we realized net income of $7.8 million, a decrease of 2% from $8.0 million in the nine months ended September 30, 2008. As a percentage of sales, net income decreased to 6.1% for the first nine months of 2009 as compared to 6.6% for the same period in 2008. Earnings per share, on a diluted basis, decreased to $0.61 for nine months ended September 30, 2009, from $0.63 for the nine months ended September 30, 2008.

Non-GAAP Financial Measures

In addition to providing results that are determined in accordance with accounting principles generally accepted in the United States, referred to as GAAP, we have provided certain financial measures that are not in accordance with GAAP. Our non-GAAP financial measures of adjusted net income and adjusted diluted earnings per share exclude the charges we incurred in relation to the DOJ inquiry, less the tax effect of the charges. Because the DOJ inquiry is a unique event, not directly related to our normal operations, we believe these non-GAAP financial measures may help investors better understand and compare our quarterly operating results and trends by eliminating this unusual component included in GAAP financial measures.

Excluding the impact of the pre-tax expenses of $845,000 for the DOJ inquiry recognized during the third quarter of 2009, and $1.2 million during the third quarter of 2008, income from operations for the quarter ended September 30, 2009, increased 2% to $5.3 million from $5.1 million adjusted income from operations during the third quarter of 2008. Adjusted net income for the quarter ended September 30, 2009, increased 14% to $3.3 million, as compared to an adjusted 2008 net income of $2.9 million, also adjusted for DOJ inquiry expenses incurred during the same quarter of 2008. Adjusted diluted earnings per share for the third quarter of 2009 increased to $0.25 as compared to adjusted diluted earnings per share of $0.22 for the third quarter of 2008. Excluding the impact of the pre-tax expenses of $3.4 million for the DOJ inquiry recognized during the first nine months of 2009, and $2.2 million during the first nine months of 2008, income from operations for the nine months ended September 30, 2009, increased 1% to $16.3 million from $16.1 million adjusted income from operations during the same nine months of 2008. Adjusted net income for the nine months ended September 30, 2009, increased 7% to $10.0 million, as compared to an adjusted 2008 net income of $9.3 million, also adjusted for DOJ inquiry expenses incurred during the same period of 2008. Adjusted diluted earnings per share for the nine months ended September 30, 2009, increased to $0.77 as compared to . . .