You should read the following discussion of our financial condition and results of operations together with the consolidated financial statements and the notes thereto included elsewhere in this report, and other financial information included in this report. The following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under "Special Note Regarding Forward Looking Statements," "Part 1, Item 1A. Risk Factors" and elsewhere in this report. These risks could cause our actual results to differ materially from any future performance suggested below.

Basis of Presentation

Our fiscal year-end is generally determined on a 52-week basis and always falls on the Sunday nearest to December 31. Every few years, it is necessary to add an extra week to the year making it a 53-week period in order to have our year end fall on the Sunday nearest to December 31. For example, the year ended January 2, 2011 (2010) includes an extra week of operations relative to the years ended December 30, 2012 (2012) and January 1, 2012 (2011). The extra week was added in the first quarter of the year ended January 2, 2011, making the first quarter 14 weeks in length, as opposed to 13 weeks in length.

Overview

We are a global medical device company focused on surgeons that treat musculoskeletal injuries and disorders of the shoulder, elbow, wrist, hand, ankle and foot. We refer to these surgeons as extremity specialists. We sell to this extremity specialist customer base a broad line of joint replacement, trauma, sports medicine and biologic products to treat extremity joints. Our motto of "specialists serving specialists" encompasses this focus. In certain international markets, we also offer joint replacement products for the hip and knee. We currently sell approximately 100 product lines in approximately 40 countries.

We believe we are differentiated by our full portfolio of upper and lower extremity products, our focused extremity-focused sales organization and our strategic focus on extremities. We further believe that we are well positioned to benefit from the opportunities in the extremity products marketplace, primarily in the shoulder and ankle joint replacement markets and also the foot and ankle trauma market with our acquisition of OrthoHelix. We also have expanded our technology base and product offering to include: new joint replacement products based on new materials; improved trauma products based on innovative designs; and proprietary biologic materials for soft tissue repair. In the United States, which is the largest orthopaedic market, we believe that our "specialists serving specialists" market approach is strategically aligned with what we believe is an ongoing trend in orthopaedics for surgeons to specialize in certain parts of the anatomy or certain types of procedures.

Our principal products are organized in four major categories: upper extremity joints and trauma, lower extremity joints and trauma, sports medicine and biologics, and large joints and other. Our upper extremity joints and trauma products include joint replacement and bone fixation devices for the shoulder, hand, wrist and elbow. Our lower extremity joints and trauma products, which include our OrthoHelix portfolio, include joint replacement and bone fixation devices for the foot and ankle. Our sports medicine and biologics product category includes products used across several anatomic sites to mechanically repair tissue-to-tissue or tissue-to-bone injuries, in the case of sports medicine, or to support or induce remodeling and regeneration of tendons and ligaments, in the case of biologics. Our large joints and other products include hip and knee joint replacement implants and ancillary products.

In the United States, we sell products from our upper extremity joints and trauma, lower extremity joints and trauma, and sports medicine and biologics product categories; we do not currently market large joints in the United States. While we market our products to extremity specialists, our revenue is generated from sales to healthcare institutions and distributors. In the United States, we currently sell through our legacy Tornier and OrthoHelix sales channels, which both consist of independent commission-based sales agencies, with variations based upon individual territories. As we integrate OrthoHelix, we plan to organize our sales channels to focus on upper extremities and lower extremities to allow us to increase our selling opportunities by improving our overall procedure coverage, leveraging our entire product portfolio, and accessing new specialists and accounts. Although this may result in some disruption our U.S. distribution channels, we believe that this strategy will be a significant competitive advantage longer term. Internationally, we sell our full product portfolio, including upper extremity joints and trauma, lower extremity joints and trauma, sports medicine and biologics and large joints. We utilize several distribution approaches depending on the individual market requirements, including direct sales organizations in the largest European markets, Australia, Japan and Canada and independent distributors for most other international markets. As we receive required regulatory approvals, we will begin to selectively introduce the OrthoHelix product portfolio

into select international markets. In 2012, we generated revenue of $277.5 million, of which 56% was in the United States and 44% of which was international.

OrthoHelix Acquisition

On October 4, 2012, we acquired OrthoHelix Surgical Designs, Inc (OrthoHelix). In the transaction, we paid consideration consisting of $100.4 million cash and 1,941,270 of our ordinary shares (which was determined to be equal to $35 million divided by the average closing sale price per ordinary share during the five trading days immediately prior to and after the date of our initial public announcement of the merger agreement). In addition, we agreed to make additional earn-out payments in cash of up to an aggregate of $20.0 million based upon our sales of lower extremity joints and trauma products during fiscal years 2013 and 2014. Of the transaction consideration, $10.0 million in cash remains in an escrow account to fund payment obligations with respect to post-closing indemnification obligations of OrthoHelix's former equity holders. In addition, a portion of the earn-out payments are subject to certain rights of set-off for post-closing indemnification obligations of OrthoHelix's equity holders.

In addition, and as part of the OrthoHelix transaction, on October 4, 2012, we and our U.S. operating subsidiary, Tornier, Inc. (Tornier USA), entered into a credit agreement with Bank of America, N.A., as administrative agent, SG Americas Securities, LLC, as syndication agent, BMO Capital Markets and JPMorgan Chase Bank, N.A., as co-documentation agents, Merrill Lynch, Pierce, Fenner & Smith Incorporated and SG Americas Securities, LLC, as joint lead arrangers and joint bookrunners, and the other lenders party thereto. The credit agreement provides for an aggregate credit commitment to Tornier USA, as borrower, of $145.0 million, consisting of: (1) a senior secured term loan facility to Tornier USA denominated in dollars in an aggregate principal amount of up to $75.0 million; (2) a senior secured term loan facility to Tornier USA denominated in euros in an aggregate principal amount of up to the U.S. dollar equivalent of $40.0 million; and (3) a senior secured revolving credit facility to Tornier USA denominated at the election of Tornier USA, in U.S. dollars, euros, pounds sterling and yen in an aggregate principal amount of up to the U.S. dollar equivalent of $30.0 million. Funds available under the revolving credit facility may be used for general corporate purposes. The borrowings under the credit facility were used to pay the consideration for the OrthoHelix acquisition, and fees, costs and expenses incurred in connection with the OrthoHelix acquisition and the credit agreement and to repay prior existing indebtedness. The credit agreement contains customary covenants, including financial covenants which require us to maintain minimum interest coverage, annual capital expenditure limits and maximum total net leverage ratios, as well as customary events of default. The obligations under the credit agreement are guaranteed by us, Tornier USA and certain other of our subsidiaries, and subject to certain exceptions, are secured by a first priority security interest in substantially all of our assets and the assets of certain of our existing and future subsidiaries of Tornier.

Facilities Consolidation Initiative

We recently implemented a facilities consolidation initiative pursuant to which we consolidated a number of our facilities in France, Ireland and the United States. The facilities consolidation initiative was driven by our strategy to drive operational productivity and to realize operating costs savings beginning in 2013. Under the initiative, we consolidated our Dunmanway, Ireland manufacturing facility into our Macroom, Ireland manufacturing facility and our St. Ismier, France manufacturing facility into our existing Montbonnot, France manufacturing facility. We also leased a new facility located in Bloomington, Minnesota to use as our U.S. business headquarters and consolidated our Minneapolis-based marketing, training, regulatory, clinical, supply chain and corporate functions with our Stafford, Texas-based distribution operations. With the completion of the U.S. consolidation in the fourth quarter of 2012, the global facilities consolidation initiative has been concluded. For the year ended December 30, 2012, we recognized a pretax charge of $6.4 million related to the global facilities consolidation initiative. Any remaining payments related to the charges taken as part of the initiative will be paid in 2013. For further discussion, please refer to Note 18 to our consolidated financial statements.

Medical Device Tax

An excise tax of 2.3% on the sale, lease, rental or use of certain medical devices was mandated by the 2010 health care reform legislation and went into effect January 1, 2013. The excise tax applies to manufacturers, producers and importers of taxable medical devices. The excise tax generally is based on the medical device's wholesale price and is imposed on the manufacturer or importer when the taxable device is first sold, leased, rented or used by the manufacturer or importer. A taxable device generally is considered sold, for purposes of the excise tax, when title passes from the manufacturer to the purchaser. The tax could create a risk up to 2.3% of our United States revenue.

Foreign Currency Exchange Rates

A substantial portion of our business is located outside the United States and as a result we generate revenue and

incur expenses denominated in currencies other than the U.S. dollar. As a result, fluctuations in the value of foreign currencies relative to the U.S. Dollar can impact our operating results. The majority of our operations denominated in currencies other than the U.S. dollar are denominated in Euros. In the years ended December 30, 2012 and January 1, 2012, approximately 44% and 46% of our revenue was denominated in foreign currencies. As a result, our revenue can be significantly impacted by fluctuations in foreign currency exchange rates. We expect that foreign currencies will continue to represent a similarly significant percentage of our revenue in the future. Selling, marketing and administrative costs related to these sales are largely denominated in the same foreign currencies, thereby limiting our foreign currency transaction risk exposure. In addition, we also have significant levels of other selling, general and administrative expenses and research and development expenses denominated in foreign currencies. We, therefore, believe that the risk of a significant impact on our earnings from foreign currency fluctuations is mitigated to some extent.

A substantial portion of the products we sell in the United States are manufactured in countries where costs are incurred in Euros. Fluctuations in the Euro to U.S. dollar exchange rate will have an impact on the cost of the products we manufacture in those countries, but we would not likely be able to change our U.S. dollar selling prices of those same products in the United States in response to those cost fluctuations. As a result, fluctuations in the Euro to U.S. dollar exchange rates could have a significant impact on our gross profit in future periods in which that inventory is sold. Impacts associated with fluctuations in foreign currency exchange rates are discussed in more detail under "Item 7A. Quantitative and Qualitative Disclosures about Market Risk."

We evaluate our results of operations on both an as reported and a constant currency basis. The constant currency presentation is a non-GAAP financial measure, which excludes the impact of fluctuations in foreign currency exchange rates. We believe providing constant currency information provides valuable supplemental information regarding our results of operations, consistent with how we evaluate our performance. We calculate constant currency percentages by converting our current-period local currency financial results using the prior-period foreign currency exchange rates and comparing these adjusted amounts to our prior-period reported results. This calculation may differ from similarly-titled measures used by others; and, accordingly, the constant currency presentation is not meant to be a substitution for recorded amounts presented in conformity with GAAP nor should such amounts be considered in isolation.

Revenue and Expense Components

The following is a description of the primary components of revenue and expenses.

Revenue

We derive our revenue from the sale of medical devices that are used by orthopaedic surgeons who treat diseases and disorders of extremity joints including the shoulder, elbow, wrist, hand, ankle and foot, and large joint, including the hip and knee. We report our sales in four primary product categories: upper extremity joints and trauma, lower extremity joints and trauma, sports medicine and biologics, and large joints and other. Our revenue is generated from sales to two types of customers: healthcare institutions and distributors, with sales to healthcare institutions representing a majority of our revenue. In the United States, we sell through a focused sales channel consisting of a network of mostly independent commission-based sales agencies, with some direct sales organizations in certain territories. Internationally, in select markets, we sell our full product portfolio, including upper extremity joints and trauma, lower extremity joints and trauma, sports medicine and biologics and large joints. Revenue from sales to healthcare institutions is recognized at the time of surgical implantation. We generally record revenue from sales to our distributors at the time the product is shipped to the distributor. These distributors, who sell the products to their customers, take title to the products and assume all risks of ownership at the time of shipment. Our distributors are obligated to pay within specified terms regardless of when, if ever, they sell the products. We charge our customers for shipping and record shipping revenue as part of revenue.

Cost of Goods Sold

We manufacture a majority of the products that we sell. Our cost of goods sold consists primarily of direct labor, manufacturing overhead, raw materials and components, and excludes amortization of intangible assets, which is presented as a separate component of operating expenses. A portion of the products we sell are manufactured by third parties, and our cost of goods sold for those products consists primarily of the price invoiced to us by our third-party vendors. Cost of goods sold also includes share-based compensation expenses related to individuals whose salaries are also included within this category. All of our internal manufacturing facilities are located in Europe and the related manufacturing costs are incurred in Euro. As a result, the cost of goods sold for our products manufactured in Europe and then sold in the United States and other geographies with functional currencies other than the Euro is subject to foreign currency exchange rate fluctuations, which can impact our gross profits.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist of both variable components, which fluctuate based on our revenues, and non-variable components, which do not fluctuate based on our revenues. Our variable selling costs consist primarily of commissions paid to our independent sales agencies used in the United States and some other countries to generate sales, royalties based on certain product sales and freight expense we pay to ship our products to customers. Our non-variable sales costs consist primarily of salaries, personnel costs, including share-based compensation and other support costs related to the selling, marketing and support of our products as well as trade shows, promotions and physician training. Selling, general and administrative expenses also include the cost of distributing our products, which includes the operating costs and certain administrative costs related to our various worldwide sales and distribution operations. We provide surgical instrumentation to our customers for use during procedures involving our products. There are no contractual arrangements related to our customers' use of our surgical instrumentation and we do not charge a fee for providing access to the related instrumentation. We record surgical instrumentation on our balance sheet as a long-lived asset. The depreciation expense related to our surgical instrumentation is included in sales, general and administrative expenses. Additionally, expenses for our executive, finance, legal, compliance, administrative, information technology and human resource departments are included in selling, general and administrative expenses, as well as the U.S. Medical Device Excise tax which was effective on January 1, 2013.

Research and Development Expenses

Research and development expenses include costs associated with the design, development, testing, deployment and enhancement of products and certain regulatory costs. This category also includes costs associated with the design and execution of our clinical trials and regulatory submissions. Research and development expenses also include share-based compensation related to individuals within our research and development groups.

Amortization of Intangible Assets

Our intangible assets include developed technology, customer relationships, trademarks and trade names and other identified intangibles as a result of business acquisitions. In addition, intangible assets also include purchases of intellectual property including patents, license rights and customer lists, among other things. The amortization expenses related to these items is recorded in amortization of intangible assets within operating expenses.

Special Charges

Special charges are recorded as a separate line item within our operating expenses on the consolidated statement of operations and include operating expenses directly related to business combinations and related integration activities, restructuring initiatives, management exit costs, and certain other items that are typically infrequent in nature and that affect the comparability and trend of operating results.

Interest Income

Interest income reflects interest associated with both our cash held at financial institutions and highly liquid investments with maturities of three months or less.

Interest Expense

Interest expense reflects interest associated with our senior secured term loans, revolving line of credit, mortgage-related debt and capital leases. We also accrete interest expense on our earnout liabilities related to previous business acquisitions.

Foreign Currency Transaction (Loss) Gain

Foreign currency transaction (loss) gain consists primarily of foreign currency gains and losses on transactions denominated in a currency other than the functional currency of the related entity. Our foreign currency transactions primarily consist of foreign currency denominated cash, liabilities and intercompany receivables and payables.

Other Non-Operating Income (Expense)

Other non-operating income (expense) primarily relates to the results of transactions that are not directly associated with the results of our ongoing primary operating activities.

Income Tax Benefit

Income tax benefit includes federal income taxes, income taxes in foreign jurisdictions, state income taxes and changes to our deferred taxes and deferred tax valuation allowance.

Results of Operations

Fiscal Year Comparisons

The following table sets forth, for the periods indicated, certain items from
our consolidated statements of operations and the percentage of revenue that
such items represent for the periods shown.



                                                                          Year ended
                                              December 30,                January 1,                 January 2,
                                                  2012                       2012                       2011
Statements of Operations Data:
Revenue                                   $ 277,520        100 %     $ 261,191        100 %     $ 227,378        100 %
Cost of goods sold                           81,918         30          74,882         29          63,437         28

Gross profit                                195,602         70         186,309         71         163,941         72
Selling, general and administrative         170,447         61         161,448         62         149,175         66
Research and development                     22,524          8          19,839          8          17,896          8
Amortization of intangible assets            11,721          4          11,282          4          11,492          5
Special charges                              19,244          7             892          0             306          0

Operating loss                              (28,334 )      (10 )        (7,152 )       (3 )       (14,928 )       (7 )
Interest income                                 338          0             550          0             223          0
Interest expense                             (3,733 )       (1 )        (4,326 )       (2 )       (21,805 )      (10 )
Foreign currency transaction (loss)
gain                                           (473 )       (0 )           193          0          (8,163 )       (4 )
Loss on extinguishment of debt                 (593 )       (0 )       (29,475 )      (11 )             -          -
Other non-operating income                      116          0           1,330          1              43          0

Loss before income taxes                    (32,679 )      (12 )       (38,880 )      (15 )       (44,630 )      (20 )
Income tax benefit                           10,935          4           8,424          3           5,121          2

Consolidated net loss                       (21,744 )       (8 )       (30,456 )      (12 )       (39,509 )      (17 )
Net loss attributable to noncontrolling
interest                                          -          -               -          -            (695 )        0

Net loss attributable to Tornier            (21,744 )       (8 )       (30,456 )      (12 )       (38,814 )      (17 )
Accretion of noncontrolling interest              -          -               -          -            (679 )        0

Net loss attributable to ordinary
shareholders                              $ (21,744 )       (8 )%    $ (30,456 )      (12 )%    $ (39,493 )      (17 )%

The following tables set forth, for the periods indicated, our revenue by product category and geography expressed as dollar amounts and the changes in revenue between the specified periods expressed as percentages:

Revenue by Product Category



                                                           Year ended                                        Percent change
                                         December 30,       January 1,       January 2,       2012/        2011/        2012/        2011/
                                             2012              2012             2011          2011         2010         2011         2010
                                                        ($ in thousands)                         (as stated)                (constant
                                                                                                                            currency)
Upper extremity joints and trauma       $      175,242     $    164,064     $    139,175           7 %         18 %          9 %         16 %
Lower extremity joints and trauma               34,109           26,033           23,629          31           10           33            8
Sports medicine and biologics                   15,526           14,779           13,210           5           12            7           10

Total extremities                              224,877          204,876          176,014          10           16           12           14
Large joints and other                          52,643           56,315           51,364          (7 )         10            1            4

Total                                   $      277,520     $    261,191     $    227,378           6 %         15 %          9 %         12 %

Revenue by Geography



                                  Year ended                                Percent change
                 January 1,       January 1,       January 2,       2012/        2011/        2012/        2011/
                    2012             2012             2011          2011         2010         2011         2010
                               ($ in thousands)                        (as stated)                (constant
                                                                                                  currency)
United States   $    156,750     $    141,496     $    127,762          11 %         11 %         11 %         11 %
International        120,770          119,695           99,616           1           20            8           14

Total           $    277,520     $    261,191     $    227,378           6 %         15 %          9 %         12 %

Year Ended December 30, 2012 (2012) Compared to Year Ended January 1, 2012
(2011)

Revenue. Revenue increased by 6% to $277.5 million in 2012 from $261.2 million in 2011 as a result of increased sales in all of our extremities categories, partially offset by a decrease in sales of large joints and other due primarily to the negative impact of foreign currency exchange rates. The growth experienced in the extremities categories was driven primarily by increased demand, product expansion and our acquisition of OrthoHelix. Excluding the negative impacts of foreign currency exchange rate fluctuations of approximately $8.1 million, principally due to the performance of the U.S. dollar against the Euro, on a constant currency basis, our revenue grew by 9%.

. . .