EMPI INC, 10-K405, 1999-03-17

EMPI INC
10-K405, 1999-03-17
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 0-9387

Empi, Inc.
(Exact name of registrant as specified in its charter)

MINNESOTA 41-1310335
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)

599 CARDIGAN ROAD
ST. PAUL, MINNESOTA 55126
(Address of principal (Zip code)
executive offices)

Registrant's telephone number, including area code (651) 415-9000

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Securities registered pursuant to Section 12 (b) of the Act: NONE

Securities registered pursuant to Section 12 (g) of the Act:

NO PAR VALUE COMMON STOCK
--------------------------
(Title of Class)

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 twelve 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 /X/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/

The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 11, 1999, was approximately $141,276,435.

The number of shares outstanding of the registrant's class of common stock as
of March 11, 1999, was 6,176,019 shares of no par value common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held April 28, 1999 are incorporated by reference into Part III.

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PART I

ITEM 1. BUSINESS

GENERAL

Empi, Inc. ("Empi" or the "Company") is one of the largest medical device
companies in rehabilitative medicine in the United States according to
marketing data published by Frost & Sullivan, an independent consulting firm.
The Company is a leading supplier of electrotherapy, iontophoretic drug
delivery, orthotic and incontinence treatment products to the orthopedic
rehabilitation and incontinence treatment markets it serves. Empi develops,
markets and manufactures products, supported by clinical research, that
continuously improve the quality of life for patients with functional
disabilities, and are used in both the clinic and home setting.

Empi was organized as a Minnesota corporation in October 1977. The Company's
corporate headquarters are located at 599 Cardigan Road, St. Paul, Minnesota
55126, (651) 415-9000.

ORTHOPEDIC REHABILITATION MARKET

Currently, the Company manufactures and markets the following orthopedic
rehabilitation products: TENS (Transcutaneous Electrical Nerve Stimulation)
devices for the treatment of chronic and acute pain; NMES (Neuromuscular
Electrical Stimulation) devices for restoring muscle tone and mobility;
iontophoretic drug delivery systems to non-invasively deliver local
anesthesia and anti-inflammatory medications through the skin; and dynamic
splinting orthoses for restoring joint range of motion. In addition, the
Company distributes a functional active resistance orthoses for treatment of
knee dysfunction, patient-administered cervical traction devices to manage
chronic cervical pain and a complete line of accessories for its products.

To complement its orthopedic rehabilitation product line, the Company entered
into a strategic alliance in August of 1995 with Tennessee-based Rehab
Med+Equip, Inc. under which the Company markets a catalog of rehabilitation
products that meet the growing needs of its customers. The catalog includes
over 200 products, such as ice packs, whirlpool baths, lumbar and cervical
rolls and supports, as well as orthotics and bracing products.

INCONTINENCE TREATMENT MARKET

In 1992, the Company began marketing a proprietary pelvic floor stimulation
("PFS") system to physical therapists, family care physicians, gynecologists,
urogynecologists and urologists for the treatment of female urinary
incontinence. In 1993, the Company diversified its incontinence product line
by acquiring Physical Health Devices, Inc. ("PHD"), an electromyography
("EMG") biofeedback company. Electromyography is used in incontinence
treatment as a volitional method to reeducate the pelvic floor muscles. The
Company's incontinence treatment product line further expanded in 1998 with
the introduction of a clinical device that combines both PFS and EMG and a
simplified, low cost PFS device for home use.

INTERNATIONAL MARKET

The Company sells its products internationally through independent dealers.
With the acquisition of the Nortech division of Medtronic, Inc. in November
1992, the Company gained new international marketing opportunities through
independent dealer relationships in Canada, Europe, Australia and New
Zealand, allowing for expanded distribution of its new products in both the
orthopedic rehabilitation and incontinence treatment markets. In 1994, the
Company began to focus on establishing master distributors for each business
segment in key international markets. In April 1995, the Company closed its
Canadian office and now markets its products through a master distributor
located in Quebec, Canada.

PRODUCTS

ELECTROTHERAPY

TENS DEVICES: Physicians and physical therapists have treated their
patients' chronic and acute pain with electrical stimulation, often referred
to as "transcutaneous electrical nerve stimulation" or "TENS," for over 20
years. Although TENS may not be effective for every patient or every
condition, medical professionals have accepted TENS as an effective treatment
for chronic or acute pain resulting from a variety of medical conditions.
TENS

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devices are most frequently used to treat persistent orthopedic conditions
such as low back pain, joint stiffness and muscle spasm. Physicians have
also prescribed TENS for pain resulting from a variety of other conditions
including abdominal surgery, post-operative pain, arthritis, tendonitis,
phantom limb pain and childbirth. TENS devices generally reduce pain while
the device is being used, as well as for a period of time following usage,
but do not cure the cause of the pain.

TENS devices consist of a small, portable, battery-powered electrical pulse
generator which is connected via wires to electrodes placed at or near the
site of the patient's pain. The devices are small enough to fit into a shirt
pocket and weigh approximately 5 ounces, allowing patients to alleviate pain
conveniently at home or elsewhere. The electrodes are attached to the skin
with an interface layer of conductive gel. The stimulator produces low
voltage pulses of electricity that can be delivered continuously or
intermittently in different wave forms throughout the treatment session.
Empi's premier TENS products are market leaders due to their pre-programmed
features and high intensity capability. Epix VT-Registered Trademark-,
launched in 1997, was the first product in the market to provide additional
benefits through its outcomes measurement capabilities. These capabilities
offer physicians and payors objective documentation to validate the effect of
TENS for any given patient. The Company's other TENS devices are Epix
XL-Registered Trademark- and Eclipse+-Registered Trademark-.

Two theories have been advanced to explain the manner in which TENS
alleviates pain. The "gate control theory" postulates that the electrical
impulses from TENS devices block or interfere with the neurological
transmission of pain signals from the site of the injury to the brain. A
second theory suggests that the electrical impulses prompt the release of
endogenous endorphins, the body's natural pain suppressing agents. Neither
theory has conclusive support in the scientific literature. Under either
theory, TENS relieves pain without the costs and risks associated with
surgery or the undesirable side effects and physiological problems of
prolonged drug use which can include addiction, stupor, depression,
disorientation, nausea and ulcers.

NMES DEVICES: Medical professionals also use electrical stimulation to
activate and exercise muscles for rehabilitative purposes. "Neuromuscular
electrical stimulation" or "NMES" has proven effective in producing
controlled, nonvolitional muscle contractions which can maintain the strength
and mobility of a limb or prevent deterioration of muscle tissues in patients
who are unable to perform voluntary muscle contraction. Physicians have
prescribed neuromuscular stimulation in a variety of circumstances intended
to improve muscle tone, increase joint mobility and accelerate recovery from
traumatic injury. Common conditions for which NMES therapy may be prescribed
include common knee injuries, swelling, spasticity and improper gait. The
Company's current NMES devices are Focus-Registered Trademark- and Respond
Select-Registered Trademark-.

ACCESSORIES: The Company meets the needs of its customers by supplying
accessories such as electrodes, cables, conductive gel, skin care products,
batteries and other accessories, that are either manufactured by Empi or
purchased from vendors for resale. The Company has exclusive rights to
distribute several unique models of electrodes.

Empi believes that the U.S. retail market for TENS, NMES and accessories
exceeds $100 million when considering its revenue levels for these products
in addition to the reported revenue levels of its sole national competitor,
Rehabilicare, Inc. The Company expects the market to grow, in unit volume,
by less than 5% per annum based upon information provided by Frost &
Sullivan, but anticipates experiencing continued pricing pressures which may
result in flat or declining revenues.

IONTOPHORETIC DRUG DELIVERY

IONTOPHORESIS: Iontophoresis is a process using electric current to assist
drug transfer through the skin. Iontophoretic applications include the
delivery of local anesthesia and anti-inflammatory medication for joint and
tissue treatment. For many applications, use of iontophoresis can be
advantageous when compared to a syringe because it allows medications to be
dispersed without invading the joint space. It can also avoid many of the
systemic and other side effects frequently associated with oral medications
or injections.

The Company has developed both a proprietary iontophoresis device and
patented buffered electrode capable of delivering small molecular drugs that
can be ionized, such as drugs for arthritis, bursitis, tendonitis and related
conditions. The system is controlled by a microprocessor and uses continuous
low voltage electrical current that delivers charged drug particles through
the skin's surface. The Company received FDA 510(k) clearance in July 1990
for its Dupel-Registered Trademark- iontophoresis device and in November 1991
for its buffered electrode. The Company

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introduced its iontophoresis system, for human use, to the marketplace in the
first quarter of 1992. The product line was expanded in early 1999 with the
introduction of Dupel B.L.U.E.-TM- (BiLayer Ultra Electrode) which is a new
high performance design that incorporates the safety and cost effectiveness
attributes of the predecessor Dupel electrode while expanding available
shapes and sizes. Additionally, the Company is exploring opportunities for
the application of iontophoresis for dermatological anesthesia and in the
treatment of skin cancers.

The Company estimates that the current retail market for human iontophoresis
systems for acute joint inflammation is approximately $35 million
domestically, and that the market defined in sales dollars is growing at a
rate of 5 to 10% per annum, based upon the Company's revenue levels as well
as those of its primary competitor, IOMED, Inc.

During 1996, the Company developed and test marketed the
Relion-TM-iontophoresis drug delivery system for use in the equine veterinary
marketplace. Relion offers veterinarians a local drug delivery system for a
variety of drugs used in the treatment of horses. In February of 1997, the
Company launched Relion in the U.S. and international marketplaces through
regional veterinary distributors.

ORTHOTICS

ORTHOTICS: The Advance Dynamic ROM-Registered Trademark- orthoses product
line is used to correct joint range of motion limitations at the wrist,
elbow, knee or ankle. The Company's Advance Dynamic ROM orthosis is based on
the principle that particular connective tissue will remodel over time in
response to the type and amount of physical stress it receives. The Advance
Dynamic ROM orthosis addresses the permanent or plastic component of
connective tissue deformation to achieve long-term range of motion
improvement. It does this by gently delivering low-load stress at the
joint's end-range over a prolonged period of time. The Company's Advance
Dynamic ROM orthosis product line, introduced in the first quarter of 1995,
consists of models for forearm supination, elbow, wrist, knee and ankle
joints as well as below the knee amputee devices. Range of motion
limitations, generally referred to as contractures, often result following
long periods of restricted motion or when scar adhesions form following
trauma. The dynamic orthoses line fits very well with the Company's focus on
cost effective treatments used outside the clinic setting. The Company
estimates that the current ROM orthotics market is approximately $40 million
in the U.S. and that the potential sales growth rate over the next few years
will range between 10% and 15% per year based upon recently reported revenue
levels and growth rates of its two primary competitors, Dynasplint Systems,
Inc. and Ultraflex Systems, Inc.

Empi has an agreement with Inverse Technology Corporation to market
Protonics-TM-, a functional active resistance orthosis, to physicians and
physical therapists. The innovative technology of Protonics-TM- addresses
neuromuscular disorders in patients with knee dysfunction problems by helping
to strengthen muscles, ligaments and tendons surrounding the knee joint
through resistive exercise. The addition of Protonics-TM- is part of the
Company's strategy to become a leader in the growing therapeutic bracing
market. The Company launched Protonics-TM- nationally in the fourth quarter
of 1996.

The Company is a national distributor for Glacier Cross, Inc. to market
Pronex-Registered Trademark-, a cervical traction device used to relieve
chronic neck pain by relaxing muscle tension and spasms by mechanical
separation of the cervical vertebrae. The Company sells Pronex to patients
through physical therapists.

INCONTINENCE TREATMENT

FEMALE URINARY INCONTINENCE PRODUCTS: In 1987, the Company began a research
project related to the application of its electro-therapeutic technology for
the treatment of female urinary incontinence. In July 1991, the Company
received FDA 510(k) clearance for its first female pelvic floor
rehabilitation system, Innova-Registered Trademark- PFS. Urinary
incontinence is the involuntary loss of urine so severe as to have social,
psychological or hygienic consequences. According to the 1996 Agency for
Health Care Policy and Research ("AHCPR") guidelines, the U.S. spends $16
billion a year to care for people with urinary incontinence, up from $10
billion in 1990. At least 50% of the 1.5 million men and women in nursing
homes suffer from incontinence. This condition is often a principal reason
that families of the elderly commit them to full-time care. Current
treatments for female urinary incontinence range from surgical procedures,
with a three to four day hospital stay and a cost of $6,000 to $25,000, to
behavioral or pharmacologic therapy. Products designed to manage the problem
of urinary incontinence include appliances such as implantable stimulation
devices, catheters, collection devices and urethral plugs as well as
disposable products such as adult diapers or briefs, padded undergarments and
bed pads designed to keep urine away from the patient's skin. Clinical
studies have demonstrated that PFS is an effective treatment for stress, urge
and mixed incontinence.

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Stress incontinence, the most common form, is the inability of the sphincter
to hold back urine when there is sudden increased pressure on the bladder.
Leakage of urine commonly occurs with activities such as coughing, sneezing,
lifting and exercising. Urge incontinence occurs when the bladder is
irritated and contracts spontaneously causing a sudden need to urinate.
Mixed incontinence is a combination of both stress and urge incontinence.
Traditionally, urge incontinence has been treated with pharmacological
therapy. Many patients are intolerant of the medication's side effects.
Stress incontinence is poorly treated by pharmacological treatment and
therefore, in most cases, has resulted in surgical intervention.

Empi's urinary incontinence treatment devices, Innova PFS, InnoSense-TM- and
Minnova-TM- PFS, are composed of an externally worn, microprocessor-based
neuromuscular stimulator that activates a proprietary multi-channel vaginal
or rectal electrode. The devices automatically deliver timed dosages of
stimulation for the treatment of stress, urge and mixed incontinence during
twenty-minute treatment sessions. The treatment sessions are generally
performed twice a day in the convenience and privacy of the home. In
addition to PFS, InnoSense features EMG biofeedback capabilities for use in
volitional reeducation of the pelvic floor muscles. The regular use of PFS
can improve or cure stress, urge or mixed incontinence; published studies
indicate a cure/improvement rate of 60-90%. The cost of treatment with PFS
is approximately $1,000 or less, including physician fees.

The Company believes electro-therapeutic pelvic muscle stimulation will
eventually be selected as one of the first choice treatments before more
invasive treatments due to its noninvasive nature, lower cost, lower risk and
lack of side effects. The 1996 AHCPR guidelines, for the treatment of adult
urinary incontinence, give PFS a "B" strength of evidence recommendation for
stress, urge and mixed incontinence. This rating was determined based on the
support of scientific evidence, including the quality and amount of evidence,
the consistency of findings among studies, the clinical applicability of the
evidence, and the evidence on harms or costs of the application. There are
three possible ratings. An "A" rating is supported by scientific evidence
from properly designed and implemented controlled trials which are
consistently supported by statistical results. A rating of "B" indicates that
the recommendation is supported by scientific evidence from properly designed
and implemented clinical series. Finally, a "C" rating is supported by
expert opinion. The "B" strength given to PFS is the same rating currently
enjoyed by available surgical alternatives. While there are other pelvic
muscle stimulation devices available, Innova PFS has been proven to be safe
and effective based on controlled clinical studies published in peer-reviewed
journals. The Company has designed an intravaginal electrode which it
believes has several significant advantages over other electrodes, including
the patented ComfortPulse-TM- technology which makes the electrode more
comfortable and effective during treatment.

It is estimated that more than 13 million women in the United States suffer
from urinary incontinence. The Company believes that, for various reasons,
electro-therapeutic treatment will not be appropriate for a portion of these
women. The Company's initial target market includes women aged 35-65 who,
when properly diagnosed, would benefit from electrical stimulation therapy.
The Company estimates that at least 6 million women exist in this target
market. Future growth in incontinence product sales depends in part on broad
Medicare reimbursement. To date, Medicare coverage has been denied and
establishment of a favorable national policy coverage decision is uncertain
in the foreseeable future despite the cost effectiveness of this therapy.
The Company is also investigating the use of PFS for the treatment of
post-prostatectomy incontinence, fecal incontinence and interstitial
cystitis. Studies using Innova to treat these conditions are currently being
conducted.

MANUFACTURING

Empi manufactures its electrotherapy and Advance ROM orthotic devices, as
well as some components and related accessories, at its Clear Lake, South
Dakota facility. Manufacturing activities at the Clear Lake facility include
electronic and mechanical assembly, electrode fabrication and assembly, and
fabric sewing processes.

The Company's products are comprised of a variety of components including die
cast metal parts, injection-molded plastic parts, printed circuit boards,
electronic components, batteries and battery chargers, leadwires, electrodes
and other components. Parts for these components are purchased from outside
suppliers and are, in some instances, manufactured on a custom basis.

Many of the component parts and raw materials the Company uses in its
manufacturing and assembly operations are available from more than one
supplier. However, several component parts and accessory products are
currently purchased through a single supply source. If these components were
no longer available, or if such suppliers do not

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successfully deal with their Year 2000 compliance issues, the Company
believes it will be able to develop alternative sources for these components,
avoiding any material adverse effect upon the Company's operations.

CUSTOMERS, MARKETING AND SALES

The Company's primary customers are patients, physical therapists and
physical therapy clinics, U.S. dealers and international dealers. These
customers represented 58%, 36%, 3%, and 3%, respectively, of Empi's net sales
for fiscal 1998. As of year end 1998, Empi had approximately 100 field sales
representatives, selling rehabilitation products domestically on a direct
basis to physicians, physical therapists and their patients. The Company
currently serves nearly 80% of the 17,000 physical therapy clinics and
hospital physical therapy departments nationwide. The Company also provides
its customers a network for direct billing to insurance claims offices,
Medicare carriers, HMOs and other managed health care programs.

Empi has invested in both telemarketing and direct mail programs to contact
patients who use its TENS and NMES devices to help them meet their needs in
reordering accessory products. The Company utilizes direct sales programs to
contact home health care dealers who purchase the Company's products for
resale to hospitals, clinicians and patients.

Given the consolidation of provider networks and larger payor groups, which
have continued to gain leverage in coverage and reimbursement decisions, the
Company established a national accounts group in 1994 to address coverage and
reimbursement issues and to gain preferred supplier agreements with these
providers.

Empi believes that the combination of its direct sales force, and patient
care, clinic customer, third party billing and national account services
gives the Company a distinct competitive advantage in today's marketplace.

The Company sells its products internationally through independent dealers.
At the end of 1998, Empi had 21 international distributors covering 16
countries, worldwide. Empi has a contractual relationship with a majority of
these distributors. These contracts are exclusive and typically have terms
of one year. Either party has the right to terminate without cause with
appropriate notification, with the exception of Empi's master distributor in
Canada. The Company introduced the orthotic product line in Germany, Holland
and Belgium in mid-1997, and in England, Italy and Spain in 1998. In 1999,
the Company plans to introduce these products in Japan and the Scandinavian
countries.

No individual customer accounted for 10 percent or more of total revenue for
1998, 1997 or 1996, respectively.

COMPETITION

ELECTROTHERAPY

The Company's national competitor in the electrotherapy market is
Rehabilicare, Inc., who merged in 1998 with Staodyn, Inc. The Company also
competes regionally with smaller home medical equipment dealers who provide
TENS devices as part of their durable medical equipment line. The principal
competitive factors in the electrotherapy marketplace are access to contracts
due to managed care constraints, price, product quality and service. Empi
believes its competitive advantage in the electrotherapy marketplace results
from higher quality products and a strong distribution network.

IONTOPHORETIC DRUG DELIVERY

The Company believes its primary competitor in the iontophoretic drug
delivery market is IOMED, Inc. Dynatronics, Corp. and Henley Healthcare,
Inc. also compete in this market. The Company's present emphasis is the
orthopedic rehabilitation market and believes its products compete on the
basis of quality, efficacy, cost and safety.

ORTHOTICS

The Company's major competitors in the dynamic splinting market are
Dynasplint Systems, Inc., Ultraflex Systems, Inc. and the LMB division of
DeRoyal Industries, Inc. Relative to the knee dysfunction treatment market,
the Company competes with traditional methods of treatment such as surgical
procedures. In the cervical traction

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market, the Company distributes a product similar to a device manufactured by
the Saunders Group, Inc. Both products are considered high-end traction
devices when considering quality and price. The primary competition for
these products is the low-end over-the-door traction devices that sell for
less than 25% of the retail price of the high-end devices. While the Company
believes that the medical efficacy for its device has been established,
regional Medicare carriers have downcoded the amount of reimbursement for
high-end devices.

INCONTINENCE TREATMENT

Several companies are developing new treatment products designed to cure or
control incontinence problems, including injectable biomaterials, improved
drug therapy, other electro-therapeutic devices and muscle contraction
biofeedback devices. Each of these treatment approaches is aimed at
eliminating or reducing a patient's reliance on incontinence appliances or
disposable diapers. Both Utah Medical Products, Inc. and InCare Medical
Products, Inc. have pelvic floor stimulation devices on the market. As of
March 1, 1999, none of the companies developing these competitive devices
have published placebo-controlled clinical studies to support the
effectiveness of their product claims. Sales of these incontinence treatment
products continue to be adversely affected by lack of Medicare reimbursement.

PRODUCTS AND TECHNOLOGIES UNDER DEVELOPMENT

Empi's current research and development efforts are principally directed
towards the development of next generation products and technologies related
to the Company's orthotics, electrotherapy and iontophoretic drug delivery
businesses, enhancement of existing products, and manufacturing process
developments to improve product performance and costs. In 1998 research and
development focused on developing new and next-generation products, such as
Dupel B.L.U.E., and the development of new applications of existing
technology.

In fiscal 1998, 1997 and 1996, the Company's research and development
expenses (including clinical studies) were $3,449,000, $3,984,000 and
$3,476,000 respectively. The Company anticipates research and development to
grow incrementally as a percent of sales in future years as it emphasizes new
product lines. Expenditures on clinical research and outcomes studies are
expected to grow based on increased regulatory and provider requirements.

BACKLOG

As of February 28, 1999, Empi did not have a material backlog situation and
does not expect to experience a material backlog situation in the foreseeable
future.

PATENTS AND TRADEMARKS

The Company currently owns numerous U.S. patents issued between 1982 and
1998. These patents cover various aspects and features of Empi's
electrotherapy devices and associated electrodes, incontinence devices and
associated electrodes, and range of motion orthotic devices. A number of
patents and trademarks were obtained as a result of the Nortech and PHD
acquisitions that cover various aspects of electrodes, stimulators and
surface sEMG equipment. In addition, numerous patent applications have been
filed on various aspects of electrotherapy and incontinence devices, range of
motion orthoses, incontinence and iontophoresis electrodes. The initial life
of each patent issued to the Company is either 14 or 17 years from the date
of issue.

Although the Company generally seeks patent protection when possible, it does
not consider patent protection to be a significant, competitive advantage in
the marketplace for electro-therapeutic devices; however, patent protection
may be of significance with various aspects of the Company's incontinence
electrode technology and its orthosis technology. The Company has also
registered, and filed applications to register, various trademarks with the
U.S. Patent and Trademark Office and appropriate offices in foreign
countries.

GOVERNMENT REGULATIONS AND REIMBURSEMENT

GOVERNMENT REGULATIONS

Medical device development, testing, manufacturing, labeling and marketing
are regulated under the Federal Food, Drug and Cosmetic Act, as amended, and
additional regulations promulgated thereunder. These statutes and
regulations require that manufacturers adhere to certain standards designed
to assure product safety and effectiveness.

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The FDA's Quality System Regulation establishes standards for the Company's
manufacturing processes, requires maintenance of certain records and provides
for unscheduled inspections of the Company facilities. Certain requirements
of state, local and foreign governments must also be complied with in the
manufacture and marketing of the Company's products. The Company believes
its operations meet the requirements of these regulations.

New medical devices require regulatory approval prior to market introduction.
In the United States, new medical devices are subject to either the 510(k)
Pre-Market Notification regulation or the Pre-Market Approval (PMA)
regulation depending on the device's nature and intended use. International
registration and approval requirements vary and are country dependent. Most
regulatory approvals require submission of extensive documentation,
engineering, pre-clinical testing and manufacturing information to
demonstrate compliance with the pertinent regulations. In some cases,
product electronics, appearance or labeling must be modified in order to
comply with the foreign regulations. In addition, some products may require
extensive clinical testing to obtain regulatory approval. The Company
anticipates the FDA may require submission of additional clinical testing
concerning iontophoretic drug delivery. In this regard, the Company is
preparing the necessary clinical trial data to support the ongoing sale of
its iontophoresis product line, Dupel B.L.U.E.

The Company contracts with an outside certification authority to review the
conformance of its quality assurance system to two recognized international
quality system standards, ISO-9001 and EN 46001. Continued certification is
essential for compliance with the Medical Device Directive in the European
Union. The Company received this certification in 1996.

REIMBURSEMENT

The Company receives a significant portion of its revenues from third-party
payors, such as Medicare, workers compensation, private insurance companies
and HMOs, who pay on behalf of the patients who rent and/or purchase the
Company's products. The Company maintains a large support staff that
verifies third-party payor coverage and obtains physicians' prescriptions
prior to claim submission. When appropriate, the Company's staff obtains
authorizations from third-party payors and letters of medical necessity from
the prescribing physicians. Delays in obtaining appropriate documentation
and the time required for claims processing by the third-party payors
significantly impact Empi's outstanding receivables. The Company
electronically bills claims to a multitude of third-party payors including
Medicare.

Empi's dependence on third party payors exposes the Company to the risk of
government regulations and unilateral payor decisions, limiting the amount of
payor reimbursement and/or coverage for the Company's products. The Company
anticipates a continuing dependence on third party payors with respect to new
products, such as its pelvic floor stimulation devices. The process to
establish reimbursement for new technology in the current medical marketplace
is costly, time consuming and unpredictable.

EMPLOYEES

As of January 31, 1999, the Company had 499 employees. Of these, 161 were
engaged in production and production support, 27 in research and development,
104 in sales and marketing, 155 in sales operations, and 52 in various
administrative capacities.

None of the Company's employees are represented by a labor union, and the
Company believes that it has an amicable and positive working relationship
with its employees.

FORWARD-LOOKING STATEMENTS

The Company wishes to caution investors that certain statements made in this
Form 10-K, which are summarized below, are forward-looking statements that
involve risk and uncertainties, and actual results may be materially
different. Factors that could cause actual results to differ include, but are
not limited to those identified:

- - Growth within the TENS, NMES and accessories market, and the orthotics and
iontophoresis markets, as well as the Company's participation in such
growth, depends on general market and competitive conditions.

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ITEM 2. PROPERTIES

On June 14, 1996, the Company and Cardigan Investments Limited Partnership
entered into an office/light manufacturing lease for a 93,666 square foot
building located at 599 Cardigan Road, St. Paul, Minnesota that now serves as
the Company's corporate headquarters. The lease that commenced on October
11, 1996 is for ten years with two options to renew for five years each.
After assuming occupancy of the Cardigan Road location, the Company vacated
its other two office buildings in Fridley and Arden Hills, Minnesota. The
Company owns two properties in Clear Lake, South Dakota consisting of a
34,000 square foot manufacturing facility on 12.4 acres of property and a
10,000 square foot warehouse on 3.2 acres.

ITEM 3. LEGAL PROCEEDINGS

There are no material legal proceedings to which the Company is a party or of
which any of its property is the subject other than ordinary, routine
litigation incidental to the Company's business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

There were no matters submitted to a vote of shareholders during the fourth
quarter ended December 31, 1998.

<PAGE>

EXECUTIVE OFFICERS OF THE COMPANY

Each executive officer is elected to office by the Board of Directors and
holds the office until his or her successor is elected and qualified. There
are no family relationships among any of the Company's directors or officers.

The following table sets forth information with regard to the executive
officers of the Company as of March 11, 1999:

PRINCIPAL OCCUPATION, BUSINESS
NAME AND AGE OF OFFICER EXPERIENCE PAST FIVE YEARS
- ----------------------- --------------------------
<S> <C>
Joseph E. Laptewicz (49) Chairman and Chief Executive Officer since March
1999. President and Chief Executive Officer from
October 1994 to February 1999. Acting Chief
Financial Officer from March 1997 to July 1997.
Prior to joining the Company, Mr. Laptewicz was
President and Chief Executive Officer of Schneider
(USA), Inc., a manufacturer of products for
interventional medicine and a division of Pfizer,
Inc., from April 1992 to September 1994.

H. Philip Vierling (43) President and Chief Operating Officer of the
Company since March 1999. Vice President of Sales
and Marketing from February 1998 to February 1999.
Vice President of Marketing from May 1997 to
January 1998. Mr. Vierling was Director of
Business Development for the Company from January
1995 to April 1997 and Director of Marketing from
May 1993 to December 1994.

Robert W. Clapp (49) Vice President of Manufacturing of the Company
since March 1993. Mr. Clapp served in the
capacity of Vice President of Manufacturing at
Dacomed Corp., a medical products manufacturer and
distributor, from February 1987 to February 1993.

Robert N. Hamlin (54) Vice President of Research and Development since
January 1999. Director of Research and
Development from January 1998 to December 1998.
Prior to joining the Company, Mr. Hamlin was Vice
President of Research and Development of CariTech,
Inc., an electronics packaging company, from July
1993 to November 1997.

Barbara C. Hutto (51) Vice President of Human Resources/Facilities since
January 1999. Director of Human Resources from
July 1996 to December 1998. Ms. Hutto was Vice
President of Human Resources and International for
Symphony Rehabilitation, a division of Integrated
Health, from February 1994 to June 1996.

Deborah L. Jensen (42) Vice President of Regulatory Affairs, Quality
Assurance and Clinical Research since April 1997.
Ms. Jensen was Director of Regulatory Affairs for
the Company from October 1995 to March 1997. Ms.
Jensen served in the capacity of Regulatory
Affairs Manager for Scimed, a division of Boston
Scientific, Inc., from May 1993 to September 1995.

Patrick D. Spangler (43) Vice President, Chief Financial Officer and
Assistant Secretary since July 1997. Prior to
joining the Company, Mr. Spangler served in
various capacities at Medtronic, Inc. from March
1986 to June 1997, most recently as Director of
Treasury Operations.
</TABLE>

<PAGE>

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS

The Company's common stock trades on the Nasdaq Stock Market's National
Market under the symbol EMPI. High and low sale prices for each quarter of
fiscal years ended December 31, 1998 and 1997 are presented below.

<TABLE>
<CAPTION>
1998 1997
High Low High Low
<S> <C> <C> <C> <C>
First . . . . . . $ 21 1/2 $ 16 $ 20 5/8 $ 16 3/4

Second . . . . . . $ 20 $ 14 5/8 $ 18 1/2 $ 15 1/2

Third . . . . . . $ 18 3/4 $ 12 $ 24 $ 19 3/4

Fourth . . . . . . $ 26 1/2 $ 15 $ 25 3/8 $ 15
</TABLE>

The Company had 451 common shareholders of record at December 31, 1998. The
Company has never paid a cash dividend and does not anticipate the payment of
cash dividends in the foreseeable future since earnings are expected to be
retained to finance the Company's growth.

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

SELECTED FIVE-YEAR FINANCIAL DATA
EMPI, INC.

(IN THOUSANDS, EXCEPT PERCENTAGES AND YEAR ENDED DECEMBER 31
PER SHARE AMOUNTS) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA
Net sales. . . . . . . . . . . . . . . . . . . . . . . $73,108 $73,468 $70,630 $67,342 $61,304
Gross profit . . . . . . . . . . . . . . . . . . . . . 54,611 54,395 52,171 49,654 45,574
Percent of sales . . . . . . . . . . . . . . . . . . 74.7% 74.0% 73.9% 73.7% 74.3%
Operating expenses . . . . . . . . . . . . . . . . . . 36,112 38,290 37,751 37,319 39,377
Percent of sales . . . . . . . . . . . . . . . . . . 49.4% 52.1% 53.5% 55.4% 64.2%
Operating income . . . . . . . . . . . . . . . . . . . 18,499 16,105 14,420 12,335 6,197
Percent of sales . . . . . . . . . . . . . . . . . . 25.3% 21.9% 20.4% 18.3% 10.1%
Net earnings . . . . . . . . . . . . . . . . . . . . . 11,799 10,516 9,357 8,002 3,356
Percent of sales . . . . . . . . . . . . . . . . . . 16.1% 14.3% 13.3% 11.9% 5.5%

Basic earnings per share.. . . . . . . . . . . . . . . $1.68 $1.30 $1.11 $0.93 $0.39
Weighted average shares
outstanding . . . . . . . . . . . . . . . . . . 7,040 8,077 8,448 8,588 8,536

Diluted earnings per share . . . . . . . . . . . . . . $1.66 $1.27 $1.08 $0.90 $0.39
Diluted weighted averages shares
Outstanding . . . . . . . . . . . . . . . . . . 7,126 8,258 8,660 8,899 8,611

BALANCE SHEET DATA
Cash and security investments. . . . . . . . . . . . . $1,851 $24,500 $20,064 $21,039 $12,062
Working capital. . . . . . . . . . . . . . . . . . . . 29,902 50,357 43,186 44,512 35,445
Total assets . . . . . . . . . . . . . . . . . . . . . 41,300 63,893 60,355 60,737 52,708
Long-term debt . . . . . . . . . . . . . . . . . . . . --- 66 333 1,468 1,800
Shareholders' equity . . . . . . . . . . . . . . . . . $35,788 $58,689 $53,657 $53,079 $45,000
</TABLE>

QUARTERLY FINANCIAL DATA (UNAUDITED)
EMPI, INC.

<TABLE>
<CAPTION>
YEAR ENDED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FIRST SECOND THIRD FOURTH
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Net Sales . . . . . . . . . . . . . . . . . . . . . . $ 16,997 $ 18,266 $ 18,728 $ 19,117
Gross profit. . . . . . . . . . . . . . . . . . . . . 12,742 13,551 14,023 14,295
Operating income. . . . . . . . . . . . . . . . . . . 3,798 4,335 5,290 5,076
Net earnings. . . . . . . . . . . . . . . . . . . . . 2,541 2,788 3,315 3,155
Diluted earnings per share. . . . . . . . . . . . . . $0.32 $0.39 $0.49 $0.48

DECEMBER 31, 1997
Net sales . . . . . . . . . . . . . . . . . . . . . . $18,025 $18,444 $18,409 $18,590
Gross profit. . . . . . . . . . . . . . . . . . . . . 13,303 13,736 13,570 13,786
Operating income. . . . . . . . . . . . . . . . . . . 3,685 3,840 4,159 4,421
Net earnings. . . . . . . . . . . . . . . . . . . . . 2,407 2,513 2,684 2,912
Diluted earnings per share. . . . . . . . . . . . . . $0.29 $0.30 $0.33 $0.35
</TABLE>

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain items
reflected in the financial statements as a percent of sales:

PERCENT OF SALES

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of sales. . . . . . . . . . . . . . . . 25.3 26.0 26.1
------ ------ ------
Gross profit . . . . . . . . . . . . . . . . 74.7 74.0 73.9
Selling, general and administrative. . . . . 44.7 46.7 48.6
Research and development . . . . . . . . . . 4.7 5.4 4.9
------ ------ ------
Operating income . . . . . . . . . . . . . . 25.3 21.9 20.4
Other income, net. . . . . . . . . . . . . . 0.9 1.4 1.2
------ ------ ------
Earnings before income taxes . . . . . . . . 26.2 23.3 21.6
Income tax expense . . . . . . . . . . . . . 10.1 9.0 8.3
------ ------ ------
Net earnings . . . . . . . . . . . . . . . . 16.1 14.3 13.3
------ ------ ------
------ ------ ------
</TABLE>

RESULTS OF OPERATIONS

SALES

The Company's net sales for 1998 of $73.1 million were flat when compared to
1997 net sales of $73.5 million. Electrotherapy sales accounted for 63% of
net sales or $46.3 million, a 3% reduction from $47.9 million in 1997. Even
though Empi continues to encounter pricing pressures from third-party payors
and price volume concessions within preferred supplier agreements relative to
its electrotherapy products, the Company's overall average selling price for
these products improved in 1998 due to a shift from wholesale to retail
sales. Iontophoretic drug delivery product sales increased 7% over the prior
year, with increased volumes partially offset by slight decreases in the
average selling prices due to promotional activities. Orthotic sales
remained constant in comparison with the prior year period, even though the
Advance Dynamic ROM orthoses posted sales gains of 18%. Lack of consistent
reimbursement continued to adversely impact the growth of the Company's
incontinence product line as sales of these products represented only 1% of
net sales for 1998 and 1997.

International sales remained soft, due to the strength of the U.S. dollar,
accounting for approximately 3% of net sales for both 1998 and 1997. The
majority of international sales are generated through distribution agreements
with dealers located in Canada, Germany and Spain.

The Company's 1997 net sales increased by 4% over the prior year from $70.6
million to $73.5 million. Dupel, Protonics-TM- and Advance Dynamic ROM
accounted for most of the dollar gains in 1997 sales. Electrotherapy sales
accounted for 65% of net sales in 1997, decreasing 1% from the year-earlier
period due to continued pricing pressures. Iontophoretic drug delivery
product sales increased by 13% over the prior year as a result of increased
volumes offset by slight decreases in prices. Orthotic product sales had the
strongest increase at 26% over 1996 levels as the Company realized synergies
resulting from the marketing of Protonics-TM- and Advance Dynamic ROM
orthoses to both physical therapists and orthopedic surgeons. The Company's
incontinence treatment product sales decreased 13% from a relatively small
sales base in 1996 due to lack of consistent reimbursement.

Based on prior trends and faced with anticipated ongoing market pricing
pressures and offsetting price and volume concessions within preferred
supplier agreements, the Company anticipates that future electrotherapy sales
will remain flat at best. Empi's premier products, such as Epix VT and Dupel
B.L.U.E., enable the Company to maintain its market leadership position
within the physical therapy market. Looking forward, the Company anticipates
that Dupel B.L.U.E. will favorably impact the sales growth of its
iontophoresis product line. Orthotic product sales are also expected to
increase, at a more significant rate, with most of the growth in
Protonics-TM- and the Advance Dynamic ROM product lines. The Company
continues to dialogue with the Health Care Financing

13
<PAGE>

Administration ("HCFA") for a favorable national reimbursement decision
relative to its incontinence treatment products.

GROSS PROFIT

Gross profit for 1998 was $54.6 million, or 74.7% of net sales, as compared
to $54.4 million, or 74.0% of net sales, for 1997. The higher gross profit
margin was attributable to favorable pricing obtained from new supplier
agreements and a shift in product mix towards the Company's iontophoretic
drug delivery product line. Lower-margin wholesale sales were 6% of total
sales for 1998, compared with 7% for the year-earlier period.

In 1997, gross profit as a percentage of net sales remained relatively flat
at 74.0% compared with 73.9% in 1996. Continued distribution and
manufacturing efficiencies, such as new surface mount technology, were offset
by a shift in the product mix towards lower-margin orthotic products.
Wholesale sales were 7% and 9% of net sales for 1997 and 1996, respectively.

The Company anticipates that in 1999 gross profit, as a percentage of net
sales, may experience a slight decrease due primarily to ongoing pricing
pressures and price volume concessions offset by manufacturing efficiencies.
Factors that continue to influence the Company's gross profit margin include:
competitive pricing pressures, shifts in product mix, proportion of wholesale
to retail sales, and efficiencies achieved in manufacturing and distribution.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative ("SG&A") expenses were $32.7 million and
$34.3 million, or 44.7% and 46.7% of net sales, for 1998 and 1997,
respectively. Contributors to lower expenditures for 1998 included reductions
in payroll-related expenses, depreciation and facility-related expenses.

Selling, general and administrative expenses were constant at $34.3 million,
or 46.7% and 48.6% of net sales in 1997 and 1996, respectively. SG&A
expenditures remained flat due to continued efficiencies realized from the
consolidation of two corporate locations in 1996, offset by slight increases
in incentive compensation.

The Company plans for no significant increases or decreases in SG&A
expenditures for 1999.

RESEARCH AND DEVELOPMENT

Research and development expenses for 1998 were $3.4 million, or 4.7% of net
sales, as compared to $4.0 million, or 5.4% of net sales, for 1997. Research
and development spending continued to be driven in 1998 by activities related
to the development of new and next-generation products such as Dupel
B.L.U.E., and the development of new applications of existing technology,
such as the application of iontophoresis for dermatological anesthesia and in
the treatment of skin cancers.

Research and development expenses increased slightly to $4.0 million in 1997
from $3.5 million in 1996, or 5.4% of 1997 net sales as compared with 4.9% of
1996 net sales. The Company's 1997 research and development efforts were
focused on designing new incontinence treatment products - InnoSense and
Minnova PFS, Developing next-generation electrotherapy devices - Epix VT, and
expansion of the orthotic product line, as well as continued development of
next-generation orthotic devices.

The Company anticipates research and development to grow incrementally as a
percent of sales in future years as the Company focuses its efforts on new
product lines. Expenditures on clinical research and outcomes studies are
expected to grow based on increased regulatory and provider requirements.
Empi's products are regulated under the federal Food, Drug and Cosmetic Act
requiring clearance from the U.S. Food and Drug Administration ("FDA") prior
to market introduction. The Company's long-term growth is dependent upon
continued FDA clearance, which may be delayed or denied, thus determining the
successful introduction of new products or new applications of existing
technology.

OTHER INCOME AND EXPENSES

Other income, comprised primarily of interest and dividend income, totaled
$785,000 in 1998 in comparison to $1.0 million in 1997. An insurance
settlement of $173,000 in the first quarter of 1998 partially offset the
reduction in investment income that was attributable to a lower cash
position, resulting primarily from the Company's aggressive

14
<PAGE>

stock repurchasing efforts. Interest expense for 1998 was $12,000 versus
$2,000 in 1997. Non-recurring relocation expenses of $54,000 were recorded
in 1997.

In 1997 and 1996, investment income remained constant at $1.0 million. The
Company also recorded a one-time gain in excess of $200,000 from the
settlement of a trade dress infringement lawsuit in 1996. Interest expense
for 1997 was $2,000 versus $69,000 in 1996. The primary contributor to
interest expense in 1996 was an interest-bearing note issued to partially
finance the Company's 1992 acquisition of Nortech, a division of Medtronic,
Inc. In addition, non-recurring expenses of $54,000 and $378,000 related to
the Company's relocation to a new corporate facility were recorded in 1997
and 1996, respectively.

NET EARNINGS

Net earnings in 1998 improved to $11.8 million, an increase of $1.3 million,
or 12%. An increase in the gross margin percentage and an overall decrease
in operating expenses of approximately 6% were the primary contributors in
1998 to increased net earnings. Diluted earnings per share in 1998 rose to
$1.66 from $1.27 in 1997, a dramatic increase of 31%, resulting from higher
net earnings combined with the effect of the Company's stock repurchase
program. Diluted earnings per share increased by approximately $.13 and $.04
per share in 1998 and 1997, respectively, as a result of the Company's stock
repurchase program.

Net earnings in 1997 were $10.5 million, compared to $9.4 million in 1996.
Higher net sales, combined with relatively flat spending and no significant
one-time charges, were the main reasons for the increase. As a result of
higher net earnings and the Company's stock repurchase program, 1997 diluted
earnings per share increased from $1.08 to $1.27, or an 18% increase, over
1996.

While the Company experienced strong net earnings growth in 1998, Empi
believes that both growth in net sales and continued management of expenses
will be necessary in 1999 to sustain this earnings growth trend.

LIQUIDITY AND CAPITAL RESOURCES

Cash and security investments were $1.9 million as of December 31, 1998, a
decrease of approximately $22.6 million from the year ended December 31,
1997, reflecting the Company's aggressive stock repurchasing efforts in 1998.
The Company depleted, by the second quarter of 1998, the $17.5 million in
funds authorized by the Board of Directors in 1997 for such repurchases.
During the third quarter of 1998, the Board approved additional funding for
an expanded share repurchase program, to be executed by management over the
next several quarters. Some of the shares repurchased under the program will
be used to cover stock issuances in connection with the Company's stock
option and stock purchase plans. The Company repurchased and retired
1,829,496 shares of common stock, or $36.4 million in total cost, and 529,300
shares of common stock, or $10.5 million in total cost, in 1998 and 1997,
respectively. The Company intends to continue throughout 1999 its stock
repurchase program, initiated in 1995, given favorable market conditions and
the Company's cash position. As of December 31, 1998, the Company's working
capital was $29.9 million and its current ratio was 6.4 to 1.0. Cash flows
generated from operations were $13.4 million in 1998, $12.3 million in 1997
and $13.9 million in 1996.

Accounts receivable, net of allowances, as of December 31, 1998 increased 13%
over December 31, 1997 levels, primarily as a result of record sales in the
fourth quarter. Reduced trade cash receipts also unfavorably impacted, to a
lesser degree, accounts receivable levels at year end, as Medicare and other
large managed health care organizations have extended the timing of health
care payments. As a result of this increase, the allowances against
receivables increased $330,000, maintaining a reserve balance of 20% of gross
receivables. Inventories remained constant from 1997 to 1998. Expenditures
for property, plant and equipment were $664,000 in 1998, down 62% from 1997.
Fixed asset additions in 1998 were primarily related to machinery and
computer equipment. In December 1998, the Company entered into a conditional
line of credit for $10 million with Norwest Bank Minnesota, N.A. to fund
general corporate purposes. Empi has not borrowed against its conditional
line of credit, which extends through August 31, 1999. The Company believes
its cash and security investments, together with internally generated funds
and the line of credit, will be sufficient to meet the Company's currently
projected needs for working capital and capital requirements for both the
short-term and the foreseeable future.

15
<PAGE>

YEAR 2000

The Year 2000 ("Y2K") century date issue affects software, hardware and
databases from nearly every source. Historically, most computer systems were
designed to represent century dates with two digits rather than four. As a
result, if these systems recognize "00" as the year 1900 rather than the year
2000, the systems could fail or create erroneous results. Incomplete or
untimely resolution of the Y2K issue by the Company, its key suppliers,
customers and other parties could have a material adverse effect on the
Company's results of operations, financial condition and cash flows. To
address the Y2K issue, Empi has established a Year 2000 Project team led by
the Chief Financial Officer, with participation from the Director of
Information Systems and other business department representatives.

The Company's Y2K Project is divided into three major phases: Inventory and
Assessment of Business Systems, Remediation and Replacement, and Testing.

INVENTORY AND ASSESSMENT OF BUSINESS SYSTEMS

This phase commenced in August of 1998 and was designed to identify internal
and external business systems that are susceptible to failure or
miscalculation due to the Y2K issue. The Company has substantially completed
the inventory and assessment of its critical information technology ("IT")
business systems. The Company has substantially completed the inventory of
its non-critical IT and non-information technology ("non-IT") systems, with
the assessment of these systems planned to be substantially completed by
first quarter 1999. Non-IT systems include, but are not limited to,
manufacturing production lines, elevators, heating and air conditioning
systems.

As part of this phase, Empi sent questionnaires to over 3,000 suppliers and
service providers requesting representation as to their Y2K readiness. The
Company has identified 200 of these vendors as critical to its business
operations. The Company plans to submit similar questionnaires to
significant customers, including managed health care organizations and
governmental entities, in first quarter of 1999. The readiness of its key
suppliers and customers will continue to be monitored by Empi throughout
1999.

REMEDIATION AND REPLACEMENT

The Company commenced remediation and replacement efforts in early 1999, with
a projected completion date of May 1999 for all affected critical internal IT
business systems and a completion date of December 1999 for all non-critical
IT and non-IT systems. To date, the Company has spent only a minimal amount
in the inventory and assessment phase. Given the Company's initial
assessment, the estimated total cost of remediation and replacement will
approximate $500,000. Internally generated cash flows are expected to fund
these costs, of which a substantial amount will be capitalized.

TESTING

Testing of the remediation and replacement of all other internal and external
affected systems is expected to occur throughout 1999. Testing of all
critical IT business systems is expected to be completed by May 1999. Empi's
company-wide efforts involved with its Year 2000 Project are being designed
to minimize the adverse effects of significant disruptions. There is no
assurance that the Company's Y2K readiness efforts will prevent a material
adverse impact on the results of its operations, financial condition and cash
flows since its compliance is dependent upon third parties also being Y2K
ready in a timely manner. Noncompliance by the Company or these third
parties could result in, among other things, delays in billing and
collection, delays in the receipt of supplies, and delays in delivery of
finished product. Contingency plans are being developed by the Company to
mitigate, to the extent possible, potential disruptions. The Company
believes that if unforeseen delays were to occur within the manufacturing
process, consigned inventory of certain key products would be sufficient to
meet customers' immediate needs.

OUTLOOK

The Company's strategic goals are to: (i) expand into related rehabilitation
markets with new and existing technology; and (ii) broaden medical device
offerings by using its existing technology base to develop new products for
expanded new markets. The Company intends to pursue these objectives through
internal development efforts and strategic alliances, depending upon its
resources and the availability of opportunities, while reinforcing the

16
<PAGE>

Company's leadership position with physical therapists. The Company intends
to seek marketing partnerships to distribute new product developments in
market segments outside its core business.

The primary ongoing financial goals for the Company are to increase revenue
growth and enhance profitability by focusing on its mission: to continuously
improve the quality of life for patients with functional disabilities through
the development, manufacturing and marketing of innovative, cost effective,
biomedical products and services.

Certain statements made in this Management's Discussion and Analysis, which
are summarized here, are forward-looking statements that involve risk and
uncertainties, and actual results may be materially different. Factors that
could cause actual results to differ include, but are not limited to those
identified:

- - The expectations that in the future electrotherapy sales will remain
flat at best and iontophoresis and orthotic products sales will
increase, depend on retaining reimbursement by Medicare carriers,
workers' compensation programs, managed care and private insurance
payors. Increased sales of incontinence products also depend on the
Company's ability to obtain Medicare reimbursement approval for its
pelvic floor stimulation products. In addition, other general market
conditions and competitive factors within the rehabilitation market,
including the introduction of new products or technology by competitors,
could adversely effect sales.

- - From time to time, the Company has experienced unilateral coverage
denials or downcoding decisions by regional carriers despite the
issuance of favorable national policy decisions by HCFA. For example,
regional Medicare carriers have downcoded Pronex to a financially
unacceptable reimbursement code making it impossible for the Company to
supply product.

- - The expectation of a slight decrease in the gross profit percentage
depends on the actual product and customer mix, prices from suppliers,
other market conditions and actual manufacturing and distribution
efficiencies.

- - The Company's products are regulated under the federal Food, Drug and
Cosmetic Act, and the Company is required to secure clearance from the
FDA prior to marketing new products. Lack of clearance or delays in
securing clearance could negatively impact sales of new products.

- - The Company's intention to continue its stock repurchase program in 1999
depends on the market conditions and the Company's cash position.

- - The sufficiency of the Company's cash and security investments, together
with cash flow from operations, depends on the extent of its stock
repurchasing efforts, and general market and competitive conditions.

- - There is no assurance that the Company will be able to meet its Year
2000 Project goals or that such Y2K readiness efforts will prevent a
material adverse impact on its results of operations, financial
condition and cash flows since its compliance is dependent upon third
parties also being Y2K ready in a timely manner.

- - There is no assurance that the Company will succeed in establishing
joint marketing partnerships with companies outside its core business
segment.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not have material exposures to quantitative and qualitative
market risk.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Index to List of Financial Statements and Financial Statement Schedule,
along with such financial statements, immediately following the signature
page of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTING AND FINANCIAL
DISCLOSURE

None.

17
<PAGE>
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 regarding the Company's directors
included in the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held April 28, 1999 under the caption "Election of
Directors" is incorporated herein by reference.

The information required by Item 10 regarding the Company's executive
officers is set forth in Part I of this report.

The information required by Item 10 regarding compliance with Section 16(a)
of the Exchange Act included in the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held April 28, 1999 under the caption
"Compliance with Section 16 (a) of the Exchange Act" is incorporated herein
by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 regarding executive compensation included
in the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held April 28, 1999 under the caption "Executive Compensation" is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT

The information required by Item 12 regarding voting securities and principal
holders thereof included in the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held April 28, 1999 under the caption
"Principal Shareholders and Management Ownership" is incorporated herein by
reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) (1) AND (2) -- FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.

See Index to Consolidated Financial Statements and Schedules, which begins
on Page F-1 immediately following the signature page to this report.

(3) -- EXHIBITS.

(3.1) Restated Articles of Incorporation, as amended, have
been filed as Exhibit 3.1 to the Company's Report on
Form 10-K for the fiscal year ended December 31, 1996,
and are included herein by reference pursuant to Rule
12b-32.

(3.2) Bylaws together with amendment adopted June 12, 1986
have been filed as Exhibit 3.2 to the Company's Report
on Form 10-K for the fiscal year ended December 31,
1987, and are included herein by reference pursuant to
Rule 12b-32.

(4.1) Certificate for shares of Common Stock has been filed as
Exhibit 4.1 to the Company's Registration Statement on
Form S-2, Registration No. 33-42568, and is incorporated
herein by reference pursuant to Rule 12b-32.

(10.1) Empi, Inc. 1987 Stock Option Plan together with forms of
incentive and non-qualified option agreements has been
filed as Exhibit 10.7 to the Company's Report on Form
10-K for the fiscal year ended December 31, 1987, and is
incorporated herein by reference pursuant to Rule
12b-32.*

(10.2) Amendment to Empi, Inc. 1987 Stock Option Plan has been
filed as Exhibit 10.8 to the Company's Report on Form
10-K for the fiscal year ended December 31, 1992, and is
incorporated herein by reference pursuant to Rule
12b-32.*

(10.3) Amendment to Empi, Inc. 1987 Stock Option Plan dated
December 22, 1992 has been filed as Exhibit 10.13 to the
Company's Report on Form 10-K for the fiscal year ended
December 31, 1993, and is incorporated herein by
reference pursuant to Rule 12b-32.*

(10.4) Amendment to Empi, Inc. 1987 Stock Option Plan dated
February 9, 1995 has been filed as Exhibit 10.16 to the
Company's Report on Form 10-K for the fiscal year ended
December 31, 1994, and is incorporated herein by
reference pursuant Rule 12b-32.*

(10.5) Employment agreement with Joseph E. Laptewicz dated
October 1, 1994 has been filed as Exhibit 10 to the
Company's Report on Form 10-Q for the quarter ended
September 30, 1994, and is incorporated herein by
reference pursuant to Rule 12b-32.*

(10.6) Lease dated June 14, 1996 between the Company and
Cardigan Investments, a limited Partnership, covering
office/light manufacturing space in St. Paul, Minnesota
has been filed as Exhibit 10 to the Company's Report on
Form 10-Q for the quarter ended September 30, 1996, and
is included herein by reference pursuant to Rule 12b-32.

(10.7) Empi, Inc. 1997 Employee Stock Purchase Plan has been
filed as Exhibit 10.9 to the Company's Report on Form
10-K for the fiscal year ended December 31, 1996, and is
incorporated herein by reference pursuant to Rule
12b-32.*

<PAGE>

ITEM 14. -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K - CONTINUED

(10.8) Empi, Inc. 1997 Stock Option Plan together with forms of
incentive and non-qualified option agreements has been
filed as Exhibit 10.9 to the Company's Report on Form
10-K for the fiscal year ended December 31, 1997, and is
incorporated herein by reference pursuant to Rule 12b-32.*

(10.9) Separation Agreement with Donald D. Maurer dated
May 1, 1997 has been filed as Exhibit 10.10 to the
Company's Report on Form 10-K for the fiscal year ended
December 31, 1997, and is incorporated herein by reference
pursuant to Rule 12b-32.*

(21) A list of Subsidiaries of the Company has been filed as
Exhibit 21 to the Company's Report on Form 10-K for the
fiscal year ended December 31, 1993, and is incorporated
herein by reference pursuant to Rule 12b-32.

(23) Consent of Independent Auditors.

(24) Power of Attorney for Joseph E. Laptewicz Jr., Patrick
D. Spangler, Donald D. Maurer, Scott R. Anderson, M.
Nazie Eftekhari, Kenneth F. Tempero, Bradley J. Beard,
and Everett F. Carter. (Included on signature page of
this report.)

(27) Financial Data Schedule (Filed only in electronic format.)

* Management contract or compensatory plan.

(b) REPORTS ON FORM 8-K

No Reports on Form 8-K were filed during the quarter ended
December 31, 1998.

The response to this portion of Item 14 (a) (3) is submitted as a separate
section of this Report.

(d) FINANCIAL STATEMENT SCHEDULE

See Index to Consolidated Financial Statements and Financial Statement
Schedule beginning on Page F-1 immediately following the signature page of
this Report.

<PAGE>

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.

EMPI, INC.

March 17, 1999 By /s/ Joseph E. Laptewicz Jr.
------------------------------------------
Joseph E. Laptewicz Jr., Chairman and Chief
Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

March 17, 1999 /s/ Joseph E. Laptewicz Jr.
------------------------------------------
Joseph E. Laptewicz Jr., Chairman and
Chief Executive Officer (Principal
Executive Officer)

March 17, 1999 /s/ Patrick D. Spangler
------------------------------------------
Patrick D. Spangler, Vice President,
Chief Financial Officer and Assistant
Secretary (Principal Financial and
Accounting Officer)

March 17, 1999 /s/ Donald D. Maurer
------------------------------------------
Donald D. Maurer, Chairman Emeritus

March 17, 1999 /s/ Scott R. Anderson
------------------------------------------
Scott R. Anderson, Director

March 17, 1999 /s/ M. Nazie Eftekhari
------------------------------------------
M. Nazie Eftekhari, Director

March 17, 1999 /s/ Kenneth F. Tempero
------------------------------------------
Kenneth F. Tempero, Director

March 17, 1999 /s/ Bradley J. Beard
------------------------------------------
Bradley J. Beard, Director

March 17, 1999 /s/ Everett F. Carter
------------------------------------------
Everett F. Carter, Director

<PAGE>

ANNUAL REPORT ON FORM 10-K

ITEM 8, ITEM 14 (a) (1) AND (2), AND ITEM 14 (d)

LIST OF FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENT SCHEDULE

YEAR ENDED DECEMBER 31, 1998

EMPI, INC.

ST. PAUL, MINNESOTA

F-1

<PAGE>

CONSOLIDATED FINANCIAL STATEMENTS

EMPI, INC.

YEARS ENDED DECEMBER 31, 1998 AND 1997

F-2
<PAGE>

FORM 10-K -- ITEM 14 (a) (1) and (2)

<TABLE>
<CAPTION>
EMPI, INC.

INDEX TO LIST OF CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE

<S> <C> <C>
1. FINANCIAL STATEMENTS PAGE
----
Report of Independent Auditors ................................ F-4

Report of Management .......................................... F-5

Consolidated Balance Sheets -- December 31, 1998 and 1997 ..... F-6

Consolidated Statements of Operations -- Years ended
December 31, 1998, 1997 and 1996 .............................. F-7

Consolidated Statements of Shareholders' Equity -- Years ended
December 31, 1998, 1997 and 1996 .............................. F-8

Consolidated Statements of Cash Flows -- Years ended
December 31, 1998, 1997 and 1996 .............................. F-9

Notes to Consolidated Financial Statements --
December 31, 1998 ............................................. F-10

2. FINANCIAL STATEMENT SCHEDULE

Schedule II -- Valuation and Qualifying Accounts ................... F-16

</TABLE>

All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been
omitted.

F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders
Empi, Inc.

We have audited the accompanying consolidated balance sheets of Empi, Inc. as
of December 31, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years
in the period ended December 31, 1998. Our audit also included the financial
statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Empi, Inc. at
December 31, 1998 and 1997, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Minneapolis, Minnesota
January 22, 1999

F-4
<PAGE>

REPORT OF MANAGEMENT

Management is responsible for the accompanying consolidated financial
statements, which are prepared in accordance with generally accepted
accounting principles. In management's opinion, the consolidated financial
statements present fairly the Company's financial position, results of
operations and cash flows. In addition, information and representations
included in the Company's Annual Report are consistent with the financial
statements.

The Company maintains a system of internal accounting policies, procedures
and controls intended to provide reasonable assurance, given the inherent
limitations of all internal control systems, at appropriate costs, that
transactions are executed in accordance with Company authorization, are
properly recorded and reported in the financial statements, and that assets
are adequately safeguarded. Corporate financial management continually
evaluates the adequacy and effectiveness of this system of internal
accounting policies, procedures and controls, and actions are taken to
correct deficiencies as they are identified.

The Audit Committee of the Board of Directors is comprised solely of
non-employee directors and is responsible for overseeing and monitoring the
quality of the Company's accounting and auditing practices. The Audit
Committee meets regularly and on special occasions, as needed, with corporate
financial management and the independent auditors to review their activities.
The independent auditors have full and free access to the Audit Committee to
discuss the results of their work, the adequacy of internal financial
controls and the quality of financial reporting.

/s/ Joseph E. Laptewicz, Jr.
Joseph E. Laptewicz, Jr.
Chairman and Chief Executive Officer

/s/ Patrick D. Spangler
Patrick D. Spangler
Vice President, Chief Financial Officer and Assistant Secretary

F-5

<PAGE>

EMPI, INC. CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31
--------------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1998 1997
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,851 $ 3,020
Short-term investments - 21,480
Accounts receivable, net of allowances
($5,211 -- 1998; $4,881 -- 1997) 20,441 18,046
Inventories 8,023 8,003
Deferred income tax benefit 4,294 3,874
Other 805 1,072
------- -------
Total current assets 35,414 55,495

Equipment and improvements:
Equipment 12,956 12,558
Furniture and fixtures 1,687 1,663
Leasehold improvements 2,968 3,275
------- -------
17,611 17,496

Less accumulated depreciation and amortization 12,524 10,990
------- -------
Net equipment and improvements 5,087 6,506
------- -------

Other assets 799 1,892
------- -------
Total assets $41,300 $63,893
------- -------
------- -------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,720 $ 1,990
Customer advances 351 332
Employee compensation 1,801 1,655
Commissions payable 585 526
Current portion of long-term debt 66 269
Income taxes payable 584 -
Other 405 366
------- -------
Total current liabilities 5,512 5,138

Long-term debt, less current portion - 66

Shareholders' equity:
Common stock, no par value:
Authorized shares - 25,000,000
Issued and outstanding shares -- 6,320,069
in 1998 and 8,032,011 in 1997 (24,853) 9,847
Retained earnings 60,641 48,842
------- -------
Total shareholders' equity 35,788 58,689
------- -------
Total liabilities and shareholders' equity $41,300 $63,893
------- -------
------- -------
</TABLE>

SEE ACCOMPANYING NOTES.

F-6

<PAGE>

EMPI, INC. CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
- ---------------------------------------- ------- ------- -------
Net sales $73,108 $73,468 $70,630
Cost of goods sold 18,497 19,073 18,459
------- ------- -------
Gross profit 54,611 54,395 52,171

Operating expenses:
Selling, general and administrative 32,663 34,306 34,275
Research and development 3,449 3,984 3,476
------- ------- -------
Total operating expenses 36,112 38,290 37,751
------- ------- -------
Income from operations 18,499 16,105 14,420
Other income, net 684 995 795
------- ------- -------
Earnings before income taxes 19,183 17,100 15,215
Income tax expense 7,384 6,584 5,858
------- ------- -------
Net earnings $11,799 $10,516 $9,357
------- ------- -------
------- ------- -------

Basic earnings per share $ 1.68 $ 1.30 $ 1.11
------- ------- -------
------- ------- -------
Weighted average shares outstanding 7,040 8,077 8,448
------- ------- -------
------- ------- -------
Diluted earnings per share $ 1.66 $ 1.27 $ 1.08
------- ------- -------
------- ------- -------

Diluted weighted average shares outstanding 7,126 8,258 8,660
------- ------- -------
------- ------- -------
</TABLE>

SEE ACCOMPANYING NOTES.

F-7
<PAGE>

EMPI, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK
--------------------- RETAINED
(IN THOUSANDS, EXCEPT SHARE AMOUNTS) SHARES AMOUNT EARNINGS
- ------------------------------------ ---------- -------- --------
<S> <C> <C> <C>
Balance January 1, 1996 8,668,659 $ 24,110 $ 28,969
Exercise of stock options 60,384 411 -
Tax benefits of stock options - 311 -
Employee stock purchase plan 18,897 359 -
Purchase and retirement of stock (528,000) (8,160) -
Purchase and retirement of
warrant rights - (1,700) -
Net earnings - - 9,357
---------- -------- --------

Balance December 31, 1996 8,219,940 15,331 38,326
Exercise of stock options 318,159 3,897 -
Tax benefits of stock options - 720 -
Employee stock purchase plan 23,212 354 -
Purchase and retirement of stock (529,300) (10,455) -
Net earnings - - 10,516
---------- -------- --------

Balance December 31, 1997 8,032,011 9,847 48,842
Exercise of stock options 88,727 876 -
Tax benefits of stock options - 344 -
Employee stock purchase plan 28,827 519 -
Purchase and retirement of
stock (1,829,496) (36,439) -
Net earnings - - 11,799
---------- -------- --------

Balance December 31, 1998 6,320,069 $(24,853) $60,641
---------- -------- --------
---------- -------- --------
</TABLE>

SEE ACCOMPANYING NOTES.

F-8
<PAGE>

EMPI, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------
(IN THOUSANDS) 1998 1997 1996
- -------------- -------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 11,799 $ 10,516 $ 9,357
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 3,236 3,648 3,506
Provision for deferred income taxes (420) 1,128 (160)
Loss on sale of equipment - 5 101
Provisions for loss on accounts receivable 2,711 2,442 2,216
Changes in operating assets and liabilities:
Accounts receivable (5,106) (4,030) (2,828)
Inventories (20) (683) 949
Accounts payable and accrued expenses (46) (854) 731
Income taxes payable 928 334 63
Other assets/liabilities 367 (243) (50)
-------- -------- --------
Net cash provided by operating activities 13,449 12,263 13,885

INVESTING ACTIVITIES
Maturities of short-term investments 33,895 21,020 17,624
Purchase of short-term investments (12,415) (25,285) (19,749)
(Additions of) reductions in other assets (121) 405 (233)
Purchase of equipment and improvements (664) (1,743) (4,013)
-------- -------- --------
Net cash provided by (used in) investing activities 20,695 (5,603) (6,371)

FINANCING ACTIVITIES
Principal payments on long-term debt (269) (285) (1,524)
Purchase and retirement of common stock and warrant rights (36,439) (10,455) (9,860)
Proceeds from exercise of common stock options 1,395 4,251 770
-------- -------- --------
Net cash used in financing activities (35,313) (6,489) (10,614)
-------- -------- --------

Net increase (decrease) in cash and cash equivalents (1,169) 171 (3,100)
Cash and cash equivalents at beginning of year 3,020 2,849 5,949
-------- -------- --------
Cash and cash equivalents at end of year $ 1,851 $ 3,020 $ 2,849
-------- -------- --------
-------- -------- --------

</TABLE>

SEE ACCOMPANYING NOTES.

F-9
<PAGE>

EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

The Company develops, manufactures and distributes non-invasive biomedical
devices and accessories for applications in the orthopedic rehabilitation and
incontinence treatment markets. The primary market for the Company's products
is in the United States. The Company also does a small percentage of
business in Canada, Europe and the Far East.

BASIS OF PRESENTATION

The consolidated financial statements include the Company and its
wholly-owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.

CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.

INVESTMENTS

Short-term investments, consisting of debt securities and marketable equity
securities, are classified as available-for-sale. Available-for-sale
securities are stated at cost, which approximates fair value.

INVENTORIES

Inventories are valued at the lower of cost (first-in, first-out method) or
market.

EQUIPMENT AND IMPROVEMENTS

Equipment and improvements are stated on the basis of cost. Depreciation and
amortization of equipment and improvements are computed on the straight-line
method for book purposes (accelerated methods for income tax purposes) over
estimated useful lives of 25 years for building improvements, seven to eight
years for furniture and fixtures, five years for equipment, and three years
for computers.

OTHER ASSETS

Other assets consist primarily of intangible assets including goodwill,
non-compete agreements, costs paid to wholesale distributors for territorial
distribution rights and patent costs. These assets are being amortized on a
straight-line basis over their estimated useful lives ranging from four to
seven years. Accumulated amortization was $8,371,000 and $7,201,000 at
December 31, 1998 and 1997, respectively.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets' carrying amount.

F-10
<PAGE>

EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

STOCK-BASED COMPENSATION

The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," but applies Accounting Principles Board Opinion No. 25 (APB
25) and related interpretations in accounting for its plans. Under APB 25,
when the exercise price of employee stock options equals the market price of
the underlying stock on the date of grant, no compensation expense is
recognized.

NOTE 2. INVESTMENTS

Investments consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1998 1997
------ -------
(IN THOUSANDS)
<S> <C> <C>
Municipal bonds $ - $11,874
U. S. Government bonds - 9,606
Cash equivalents 336 662
------ -------
$ 336 $22,142
------ -------
------ -------
</TABLE>

Interest income included in other income was $629,000, $1,031,000, and
$1,039,000 for the years ended December 31, 1998, 1997 and 1996, respectively.

NOTE 3. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1998 1997
------ -------
(IN THOUSANDS)
<S> <C> <C>
Finished goods $5,670 $ 5,515
Work in process 651 556
Raw materials 1,702 1,932
------ -------
$8,023 $ 8,003
------ -------
------ -------
</TABLE>

NOTE 4. BORROWINGS

Long-term borrowings consist of:

<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1998 1997
------ -------
(IN THOUSANDS)
<S> <C> <C>
Notes payable $ 66 $ 335
Less current maturities 66 269
------ -------
$ - $ 66
------ -------
------ -------
</TABLE>

Notes payable at December 31, 1998 and 1997 consists entirely of debt issued
in conjunction with dealer acquisitions and non-compete agreements.

Annual maturities of long-term debt are: 1999--$66,000.

Total interest paid for the years ended December 31, 1998, 1997 and 1996 was
$12,000, $2,000 and $79,000, respectively. Interest expense included in other
income was $12,000, $2,000 and $69,000 for the years ended December 31, 1998,
1997 and 1996, respectively.

F-11

<PAGE>

EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5. INCOME TAXES

At December 31, 1998, the Company has a net operating loss carryforward of
$725,000 for income tax purposes, resulting from the Company's 1993
acquisition of Physical Health Devices, Inc., which will expire in the year
2007. The Company's ability to utilize the net operating loss carryforward
will be subject to Internal Revenue Code Section 382 limitations.

Deferred income taxes reflect the net effect of temporary differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of December 31, 1998
and 1997 are as follows:

<TABLE>
<CAPTION>
1998 1997
----------------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 1,982 $ 2,053
Amortization of non-compete agreement 939 805
Accrued expenses 330 316
Inventory 379 300
Other 706 675
----------------------
Total deferred tax assets 4,336 4,149
Deferred tax liabilities (42) (275)
----------------------
Net deferred tax assets $ 4,294 $ 3,874
----------------------
----------------------
</TABLE>

<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------
<S> <C> <C>
(IN THOUSANDS)
Current:
Federal $ 6,915 $ 4,834 $ 5,040
State 889 622 978
Deferred:
Federal (367) 999 (118)
State (53) 129 (42)
-------------------------------------
$ 7,384 $ 6,584 $ 5,858
-------------------------------------
-------------------------------------
</TABLE>

Reconciliation of the statutory federal income tax rate to the Company's
effective tax rate follows:

<TABLE>
<CAPTION>
1998 1997 1996
---------------------------
<S> <C> <C> <C>
Statutory rate 35.0% 34.0% 34.0%
Increase resulting from:
State taxes, net of federal tax benefit 4.0 4.0 4.0
Amortization of goodwill - - 0.5
Other (0.5) 0.5 -
---------------------------
Effective rate 38.5% 38.5% 38.5%
---------------------------
---------------------------
</TABLE>

Total income taxes paid during the years ended December 31, 1998, 1997 and
1996 were $6,653,000, $4,845,000 and $5,876,000, respectively.

NOTE 6. STOCK PLANS

The Company has a qualified and non-qualified stock option plan for officers,
key employees and non-employee directors. The options are granted at fair
market value and are exercisable over periods up to 10 years from grant date
in various increments. Shares reserved in the Company's 1987 and 1997 Stock
Option Plans for issuance upon the exercise of options were 1,098,554 at
December 31, 1998.

F-12

<PAGE>

EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Option activity in the stock option plans is summarized as follows:

<TABLE>
<CAPTION>
QUALIFIED NON-QUALIFIED WEIGHTED
OPTION OPTION AVERAGE EXERCISE
SHARES SHARES PRICE
----------- -----------------------------------
<S> <C> <C> <C>
Balance January 1,1996 412,110 318,825 $ 11.97
Granted 77,104 26,846 21.36
Canceled/expired (96,013) (30,806) 15.13
Exercised (44,479) (15,905) 6.82
----------- -------------

Balance December 31, 1996 348,722 298,960 13.34
----------- -------------
Granted 67,182 46,400 17.85
Canceled/expired (52,655) (8,106) 17.51
Exercised (184,906) (133,253) 12.25
----------- -------------

Balance December 31, 1997 178,343 204,001 14.93
----------- -------------
Granted 64,121 45,089 17.82
Canceled/expired (58,823) (18,313) 19.54
Exercised (56,828) (31,899) 9.87
----------- -------------

Balance December 31, 1998 126,813 198,878 $ 16.18
----------- -------------
----------- -------------
</TABLE>

As of December 31, 1998 there were 80,880 options outstanding with exercise
prices between $8.25 and $8.75, 177,811 options outstanding with exercise
prices between $9.88 and $17.88, and 67,000 options outstanding with exercise
prices between $19.00 and $28.00. At December 31, 1998 outstanding options
had a weighted average remaining contractual life of 7 years. The number of
options exercisable as of December 31, 1998, 1997 and 1996 were 73,221,
76,055 and 213,725, respectively, at weighted average exercise prices of
$19.95, $12.96 and $13.30.

The Company also has an Employee Stock Purchase Plan. The Plan enables
employees to contribute up to 10% of their compensation toward the purchase
of the Company's common stock at 85% of market value. At December 31, 1998,
247,961 shares were reserved for future employee purchases of stock under the
Plan.

The fair value of stock options used to compute pro forma net earnings and
earnings per share disclosures, as prescribed by SFAS No. 123, is the
estimated present value at grant date using a Black-Scholes option valuation
model with the following weighted average assumptions for 1998, 1997 and
1996: dividend yield of 0% for all three years; expected volatility of
52.6%, 56.6% and 61.1% for 1998, 1997 and 1996, respectively; a risk free
interest rate of 4.54%, 5.68% and 6.05% for 1998, 1997 and 1996,
respectively; and an expected holding period of 4 years for all three
periods.

The weighted average fair value of options granted during the years ended
December 31, 1998, 1997 and 1996 was $7.98, $8.41 and $10.47, respectively.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have
characteristics significantly different than those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options.

F-13

<PAGE>
EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

If the Company had elected to recognize compensation cost for the stock
option plan and employee stock purchase plan based on the fair value at the
grant dates for awards under those plans, consistent with the method
prescribed by SFAS 123, net earnings and earnings per share would have been
changed to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------------
<S> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Net earnings: As reported $11,799 $10,516 $9,357
Pro forma 11,326 9,933 9,051

Basic earnings per share: As reported $ 1.68 $ 1.30 $ 1.11
Pro forma 1.61 1.23 1.05

Diluted earnings per share: As reported $ 1.66 $ 1.27 $ 1.08
Pro forma 1.59 1.20 1.05
</TABLE>

NOTE: THE PRO FORMA EFFECT ON NET EARNINGS FOR 1998, 1997 AND 1996 IS NOT
REPRESENTATIVE OF THE PRO FORMA EFFECT ON NET EARNINGS IN FUTURE YEARS
BECAUSE IT DOES NOT TAKE INTO CONSIDERATION PRO FORMA COMPENSATION EXPENSE
RELATED TO GRANTS MADE PRIOR TO 1995.

NOTE 7. CAPITAL STOCK

The Company purchased and retired 1,829,496 shares of common stock for $36.4
million, 529,300 shares of common stock for $10.5 million and 528,000 shares
of common stock for $8.2 million in 1998, 1997 and 1996, respectively.

NOTE 8. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings
per share:

<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
-------------------------------
<S> <C> <C> <C>
Net earnings $11,799 $10,516 $9,357

Denominator for earnings per share:
Weighted average shares; denominator for basic
earnings per share 7,040 8,077 8,448

Effect of dilutive securities:
employee and non-employee stock options 86 181 212
-------------------------------
Dilutive common shares; denominator for
diluted earnings per share 7,126 8,258 8,660
-------------------------------
-------------------------------
Basic earnings per share $ 1.68 $ 1.30 $ 1.11
-------------------------------
-------------------------------
Diluted earnings per share $ 1.66 $ 1.27 $ 1.08
</TABLE>

NOTE 9. LEASES

The Company leases office space under noncancelable operating leases. These
leases expire on various dates through 2006.

Future minimum payments under all lease arrangements subsequent to 1998 are:
1999--$567,000, 2000--$564,000, 2001--$564,000, 2002--$564,000,
2003--$564,000 and thereafter--$1,578,000.

Rent expense for the years ended December 31, 1998, 1997 and 1996 was
$552,000, $576,000 and $660,000, respectively.

F-14

<PAGE>

EMPI, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10. RETIREMENT PLAN

The Company has a Retirement Profit Sharing and Savings Plan under Section
401(k) of the Internal Revenue Code. The Plan allows employees to defer up to
15% of their income on a pre-tax basis through contributions to the Plan. For
every dollar the employee contributes, up to 6% of their income, the Company
will contribute $.50. In 1998, 1997 and 1996, the Company's matching
contribution was $448,000, $444,000 and $404,000, respectively.

Note 11. SEGMENT INFORMATION

The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in the fiscal year ended December 31, 1998. SFAS 131 establishes
standards for reporting information regarding operating segments in annual
financial statements and requires selected information for those segments to
be presented in interim financial reports issued to stockholders. SFAS 131
also establishes standards for related disclosures about products and
services and geographic areas. Operating segments are identified as
components of an enterprise about which separate discrete financial
information is available for evaluation by the chief operating decision
maker, or decision making group, in making decisions how to allocate
resources and assess performance. To date, the Company has viewed its
operations as principally one segment, the sale of non-invasive biomedical
devices and accessories. As a result, the financial information disclosed
herein, materially represents all of the financial information related to the
Company's principal operating segment.

Net sales from the Company's product lines for 1998, 1997 and 1996 are as
follows:

<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
--------------------------------
<S> <C> <C> <C>
Electrotherapy $ 46,299 $ 47,871 $ 48,458
Iontophoresis and Orthotics 25,922 24,559 20,977
Incontinence 887 1,038 1,195
--------------------------------
Total net sales $ 73,108 $ 73,468 $ 70,630
--------------------------------
--------------------------------
</TABLE>

F-15

<PAGE>

EMPI, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
- ---------------------------------------------------------------------------------------------------------------
Additions
-----------------------------------
(1) (2)
Charged to Other
Beginning Of Charged to Costs Accounts -- Deductions -- Balance at End
Description Period and Expenses Describe Describe of Period
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended
December 31, 1998:
Allowance for
doubtful accounts $4,881 $2,711 $ -0- $2,381 $5,211

Inventory reserve 2,608 66 -0- -0- 2,674
------ ------ ------ ------ ------
Total $7,489 $2,777 $ -0- $2,381 $7,885
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Year ended
December 31, 1997:
Allowance for
doubtful accounts $5,062 $2,442 $ -0- $2,623 $4,881

Inventory reserve 2,769 128 -0- 289 2,608
------ ------ ------ ------ ------
Total $7,831 $2,570 $ -0- $2,912 $7,489
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Year ended
December 31, 1996:
Allowance for
doubtful accounts $5,966 $2,416 $ -0- $3,320 $5,062

Inventory reserve $2,757 766 -0- 754 2,769
------ ------ ------ ------ ------
Total $8,723 $3,182 $ -0- $4,074 $7,831
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>

(1) Provisions for write-off of uncollectable receivables and inventory
adjustments.

(2) Represents write-offs of doubtful accounts, net of recoveries, and
write-offs and disposals of inventory.

F-16

<PAGE>

EXHIBIT 23 -- CONSENT OF INDEPENDENT AUDITORS

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in Form S-8, Registration
Statement Nos. 33-28177, 33-42510, 33-49614, 33-49616, 333-02199, 333-18549
and 333-27249 dated May 4, 1989, August 23, 1991, July 10, 1992, July 10,
1992, April 3, 1996, December 23, 1996 and May 16,1997, respectively, and in
Registration Statement No. 33-57780 on Form S-3 dated February 3, 1993, of
our report dated January 22, 1999, with respect to the consolidated financial
statements and schedule of Empi, Inc. included in this Annual Report (Form
10-K) for the year ended December 31, 1998.

/s/ Ernst & Young LLP

Minneapolis, Minnesota
March 12, 1999

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS REFERENCED BELOW AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000317032
<NAME> EMPI, INC.
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1851
<SECURITIES> 0
<RECEIVABLES> 25652
<ALLOWANCES> 5211
<INVENTORY> 8023
<CURRENT-ASSETS> 35414
<PP&E> 17611
<DEPRECIATION> 12524
<TOTAL-ASSETS> 41300
<CURRENT-LIABILITIES> 5512
<BONDS> 0
0
0
<COMMON> (24853)
<OTHER-SE> 60641
<TOTAL-LIABILITY-AND-EQUITY> 41300
<SALES> 73108
<TOTAL-REVENUES> 73108
<CGS> 18497
<TOTAL-COSTS> 18497
<OTHER-EXPENSES> 36112
<LOSS-PROVISION> 2711
<INTEREST-EXPENSE> 12
<INCOME-PRETAX> 19183
<INCOME-TAX> 7384
<INCOME-CONTINUING> 11799
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11799
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.66

</TABLE>