HANGER ORTHOPEDIC GROUP, INC.
(Exact name of registrant as specified in its charter.)

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 12 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 þ No o

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. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one).

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes o No þ

State the aggregate market value of the registrant's voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. $383,173,430

As of February 18, 2009, the registrant had 31,029,835 shares of its Common Stock issued and outstanding.

The information called for by Part III of the Form 10-K is incorporated by reference from the registrant's definitive proxy statement or amendment hereto which will be filed not later than 120 days after the end of the fiscal year covered by this report.

We are the largest owner and operator of orthotic and prosthetic ("O&P") patient-care centers ("patient-care centers") in the United States, accounting for approximately 27% of the estimated $2.6 billion O&P patient-care market. At December 31, 2008, we operated 668 O&P patient-care centers in 45 states and the District of Columbia and employed in excess of 1,000 revenue-generating O&P practitioners ("practitioners"). In addition, through our wholly-owned subsidiary, Southern Prosthetic Supply, Inc. ("SPS"), we are the largest distributor of branded and private label O&P devices and components in the United States, all of which are manufactured by third parties. We also create new products, through our wholly-owned subsidiary, Innovative Neurotronics, Inc. ("IN, Inc.") for patients who have had a loss of mobility due to strokes, multiple sclerosis or other similar conditions. Another subsidiary, Linkia LLC ("Linkia"), develops programs to manage all aspects of O&P patient care for large private payors.

For the years ended December 31, 2008, 2007, and 2006, our net sales were $703.1 million, $637.4 million, and $598.8 million, respectively. We recorded net income of $26.7 million, $19.3 million, and $3.4 million, for the years ended December 31, 2008, 2007, and 2006, respectively.

We conduct our operation in two segments-patient care services and distribution. For the year ended December 31, 2008, net sales attributable to our patient-care services segment and distribution segment were $620.0 and $80.7 million, respectively, and for the year ended December 31, 2007, net sales attributable to our patient-care services segment and distribution segment were $571.7 million and $64.4 million, respectively. For the year ended December 31, 2006, net sales attributable to our patient-care services segment and distribution segment were $543.2 million and $55.4 million, respectively. See Note P to our consolidated financial statements contained herein elsewhere in this Annual Report on Form 10-K for financial information about our segments.

We estimate that the O&P patient care market in the United States is approximately $2.6 billion, of which we account for approximately 27%. The O&P patient care services market is highly fragmented and is characterized by local, independent O&P businesses, with the majority generally having a single facility with annual revenues of less than $1.0 million. We do not believe that any of our patient care competitors account for a market share of more than 2% of the country's total estimated O&P patient care services revenue.

The care of O&P patients is part of a continuum of rehabilitation services including diagnosis, treatment and prevention of future injury. This continuum involves the integration of several medical disciplines that begins with the attending physician's diagnosis. A patient's course of treatment is generally determined by an orthopedic surgeon, vascular surgeon or physiatrist, who writes a prescription and refers the patient to an O&P patient care services provider for treatment. A practitioner then, using the prescription, consults with both the referring physician and the patient to formulate the design of an orthotic or prosthetic device to meet the patient's needs.

The O&P industry is characterized by stable, recurring revenues, primarily resulting from the need for periodic replacement and modification of O&P devices. Based on our experience, the average replacement time for orthotic devices is one to three years, while the average replacement time for prosthetic devices is three to five years. There is also an attendant need for continuing O&P patient care services. In addition to the inherent need for periodic replacement and modification of O&P

devices and continuing care, we expect the demand for O&P services will continue to grow as a result of several key trends, including:

Aging U.S. Population. The growth rate of the over-65 age group is nearly triple that of the under-65 age group. There is a direct correlation between age and the onset of diabetes and vascular disease, which are the leading causes of amputations. With broader medical insurance coverage, increasing disposable income, longer life expectancy, greater mobility expectations and improved technology of O&P devices, we believe the elderly will increasingly seek orthopedic rehabilitation services and products.

Growing Physical Health Consciousness. The emphasis on physical fitness, leisure sports and conditioning, such as running and aerobics, is growing, which has led to increased injuries requiring orthopedic rehabilitative services and products. These trends are evidenced by the increasing demand for new devices that provide support for injuries, prevent further or new injuries or enhance physical performance.

Increased Efforts to Reduce Healthcare Costs. O&P services and devices have enabled patients to become ambulatory more quickly after receiving medical treatment in the hospital. We believe that significant cost savings can be achieved through the early use of O&P services and products. The provision of O&P services and products in many cases reduces the need for more expensive treatments, thus representing a cost savings to third-party payors.

Advancing Technology. The range and effectiveness of treatment options for patients requiring O&P services have increased in connection with the technological sophistication of O&P devices. Advances in design technology and lighter, stronger and more cosmetically acceptable materials have enabled patients to replace older O&P devices with new O&P products that provide greater comfort, protection and patient acceptability. As a result, treatment can be more effective or of shorter duration, giving the patient greater mobility and a more active lifestyle. Advancing technology has also increased the prevalence and visibility of O&P devices in many sports, including skiing, running and tennis.

We believe the combination of the following competitive strengths will help us in growing our business through an increase in our net sales, net income and market share:

Our goal is to continue to provide superior patient care and to be the most cost-efficient, full service, national O&P operator. The key elements of our strategy to achieve this goal are to:

As of December 31, 2008, we provided O&P patient care services through 668 patient-care centers and over 1,000 practitioners in 45 states and the District of Columbia. Substantially all of our practitioners are certified, or are candidates for formal certification, by the O&P industry certifying boards. One or more practitioners closely manage each of our patient-care centers. Our patient-care centers also employ highly trained technical personnel who assist in the provision of services to patients and who fabricate various O&P devices, as well as office administrators who schedule patient visits, obtain approvals from payors and bill and collect for services rendered.

An attending physician determines a patient's treatment, writes a prescription and refers the patient to one of our patient-care centers. Our practitioners then consult with both the referring physician and the patient with a view toward assisting in the formulation of the prescription for, and design of, an orthotic or prosthetic device to meet the patient's need.

The fitting process often involves several stages in order to successfully achieve desired functional and cosmetic results. The practitioner creates a cast and takes detailed measurements, frequently using our digital imaging system (Insignia), of the patient to ensure an anatomically correct fit. Prosthetic devices are custom fabricated by technicians and fit by skilled practitioners. The majority of the orthotic devices provided by us are custom designed, fabricated and fit; the remainder are prefabricated but custom fit.

Custom devices are fabricated by our skilled technicians using the plaster castings, measurements and designs made by our practitioners as well as utilization of our proprietary Insignia system. The Insignia system replaces plaster casting of a patient's residual limb with the generation of a computer scanned image. Insignia provides a very accurate image, faster turnaround for the patient, and a more professional overall experience. Technicians use advanced materials and technologies to fabricate a custom device under quality assurance guidelines. Custom designed devices that cannot be fabricated at the patient-care centers are fabricated at one of several central fabrication facilities. After final adjustments to the device by the practitioner, the patient is instructed in the use, care and maintenance of the device. Training programs and scheduled follow-up and maintenance visits are used to provide post-fitting treatment, including adjustments or replacements as the patient's physical condition and lifestyle change.

To provide timely service to our patients, we employ technical personnel and maintain laboratories at many of our patient-care centers. We have earned a strong reputation within the O&P industry for the development and use of innovative technology in our products, which has increased patient comfort and capability, and can significantly enhance the rehabilitation process. The quality of our products and the success of our technological advances have generated broad media coverage, building our brand equity among payors, patients and referring physicians.

A substantial portion of our O&P services involves the treatment of a patient in a non-hospital setting, such as our patient-care centers, a physician's office, an out-patient clinic or other facility. In addition, O&P services are increasingly rendered to patients in hospitals, long-term care facilities, rehabilitation centers and other alternate-site healthcare facilities. In a hospital setting, the practitioner works with a physician to provide either orthotic devices or temporary prosthetic devices that are later replaced by permanent prosthetic devices.

We provide all accounting, accounts payable, payroll, sales and marketing, management information systems, real estate, acquisitions and human resources services for our patient-care centers on either a centralized or out-sourced basis. As a result, we are able to provide these services more efficiently and cost-effectively than if these services had to be generated at each patient-care center. Moreover, the centralization or out-sourcing of these services permits our practitioners to allocate a greater portion of their time to patient care activities by reducing their administrative responsibilities.

We also develop and implement programs designed to increase sales and enhance the efficiency of our patient-care centers. These programs include: (i) sales and marketing initiatives to attract new patient referrals by establishing relationships with physicians, therapists, employers, managed care organizations, hospitals, rehabilitation centers, out-patient clinics and insurance companies; (ii) professional management and information systems to improve efficiencies of administrative and operational functions; (iii) professional education programs for practitioners emphasizing new developments in the increasingly sophisticated field of O&P clinical therapy; (iv) the establishment of shared fabrication and centralized purchasing activities, which provide access to component parts and products within two business days at prices that are typically lower than traditional procurement methods; (v) access to virtually every product available at lower cost due to the combined purchasing

power of our patient-care centers; and (vi) access to technology, such as Insignia, that is not available to our competitors.

We distribute O&P components to the O&P market as a whole and to our own patient-care centers through our wholly-owned subsidiary, SPS, which is the nation's largest O&P distributor. We are also a leading manufacturer and distributor of therapeutic footwear for diabetic patients in the podiatric market For the year ended December 31, 2008, 37.1% or approximately $80.7 million of SPS' distribution sales were to third-party O&P services providers, and the balance of approximately $136.7 million represented intercompany sales to our patient-care centers. SPS maintains in inventory approximately 25,000 O&P related items, all of which are manufactured by other companies. SPS maintains distribution facilities in California, Florida, Georgia, Pennsylvania, and Texas, which allows us to deliver products via ground shipment anywhere in the United States within two business days.

This is accomplished at competitive prices as a result of our direct purchases from manufacturers.

Marketing of our distribution services is conducted on a national basis through a dedicated sales force, print and e-commerce catalogues and exhibits at industry and medical meetings and conventions. We direct specialized catalogues to segments of the healthcare industry, such as orthopedic surgeons, physical and occupational therapists, and podiatrists.

IN, Inc. specializes in product development principally in the field of functional electrical stimulation. IN, Inc. identifies emerging MyoOrthotics Technologies® developed at research centers and universities throughout the world that use neuromuscular stimulation to improve the functionality of an impaired limb. MyoOrthotics Technologies® represents the merging of orthotic technologies with electrical stimulation. Working with the inventors under licensing and consulting agreements, IN, Inc. commercializes the design, obtains regulatory approvals, develops clinical protocols for the technology, and then introduces the devices to the marketplace through a variety of distribution channels. IN, Inc's. first product, the WalkAide System ("WalkAide"), has received FDA approval, achieved ISO 13485:2004 and ISO 9001:2000 certification, as well as the European CE Mark, which are widely accepted quality management standards for medical devices and related services. Additionally, in September 2007 the WalkAide earned the esteemed da Vinci Award for Adaptive Technologies from the National Multiple Sclerosis Society which honors outstanding engineering achievements in adaptive and assistive technology that provide solutions to accessibility issues for people with disabilities. In November 2008, the Centers for Medicare and Medicaid Services overturned a non-coverage decision and assigned a specific E-code to the WalkAide, which is reimbursable for beneficiaries with foot drop due to incomplete spinal cord injuries. The code was effective January 1, 2009. The WalkAide is sold in

the United States through our patient care centers and SPS. IN, Inc. is also marketing the WalkAide internationally through licensed distributors.

Linkia is the first provider network management service company dedicated solely to serving the O&P market. Linkia is dedicated to managing the O&P services of national and regional insurance companies. Linkia partners with healthcare insurance companies by securing a national or regional contract either as a preferred provider or to manage their O&P network of providers. Linkia's network now totals over 1,000 O&P provider locations. As of December 31, 2008, Linkia had nine contracts with national and regional providers.

We estimate that government reimbursement, comprised of Medicare, Medicaid and the U.S. Department of Veterans Affairs, in the aggregate, accounted for approximately 39.7%, 40.3%, and 41.1% of our net sales in 2008, 2007, and 2006, respectively. These payors have set maximum reimbursement levels for O&P services and products. Medicare prices are adjusted each year based on the Consumer Price Index-Urban ("CPIU") unless congress acts to change or eliminate the adjustment. The Medicare price increases for 2008 and 2007 were 2.7% and 4.3%, respectively. Effective January 1, 2009, the Medicare price increase was 5.0%. There can be no assurance that future changes will not reduce reimbursements for O&P services and products from these sources.

We enter into contracts with third-party payors that allow us to perform O&P services for a referred patient and be paid under the contract with the third-party payor. These contracts typically have a stated term of one to three years. These contracts generally may be terminated without cause by either party on 60 to 90 days' notice or on 30 days' notice if we have not complied with certain licensing, certification, program standards, Medicare or Medicaid requirements or other regulatory requirements. Reimbursement for services is typically based on a fee schedule negotiated with the third-party payor that reflects various factors, including geographic area and number of persons covered. Renewals can be impacted by competition from small independent O&P providers who from time to time will accept contracts with below market reimbursement in order to gain market share.

Through the normal course of business, we receive patient deposits on devices not yet delivered. At December 31, 2008 and 2007, we had received $0.9 million and $0.8 million, respectively, of deposits from our patients.

We purchase prefabricated O&P devices, components and materials that our technicians use to fabricate O&P products from in excess of 400 suppliers across the country. These devices, components and materials are used in the products we offer in our patient-care centers throughout the country. Currently, only four of our third-party suppliers accounted for more than 5% of our total patient care purchases. In addition, four of our purchased products accounted for a significant portion of total purchases from four of our existing suppliers.

The individual practitioners in local patient-care centers historically have conducted our sales and marketing efforts. Due primarily to the fragmented nature of the O&P industry, the success of a particular patient-care center has been largely a function of its local reputation for quality of care, responsiveness and length of service in the local communities. Individual practitioners have relied almost exclusively on referrals from local physicians or physical therapists and typically are not involved in more sophisticated marketing techniques.

We have developed a centralized marketing department the goal of which is to augment the responsibilities of the individual practitioner, enabling the practitioner to focus more of his or her efforts on patient care. Our sales and marketing effort targets the following:

In 2008, we acquired 13 O&P companies and related businesses operating a total of 19 patient care centers in California, Colorado, Florida, Louisiana, Maine, New York, Ohio, and Washington. The aggregate purchase price for these O&P businesses, excluding potential contingent consideration provisions, was $13.5 million. In 2007, we acquired seven O&P companies and related businesses operating a total of 13 patient-care centers in Arizona, Texas, Florida, Tennessee, Utah, Maryland, and West Virginia. The aggregate purchase price for these O&P businesses, excluding potential contingent

consideration provisions, was $6.1 million. In addition, during 2007 SPS acquired certain assets of SureFit LLC for $14.0 million, excluding potential contingent consideration provisions. SureFit is a leading manufacturer and distributor of therapeutic footwear for diabetic patients in the podiatric market.

The O&P services industry is highly fragmented, consisting mainly of local O&P patient-care centers. The business of providing O&P patient care services is highly competitive in the markets in which we operate. We compete with numerous small independent O&P providers for referrals from physicians, therapists, employers, HMOs, PPOs, hospitals, rehabilitation centers, out-patient clinics and insurance companies on both a local and regional basis. We compete with other patient care service providers on the basis of quality and timeliness of patient care, location of patient-care centers and pricing for services.

We also compete with independent O&P providers for the retention and recruitment of qualified practitioners. In certain markets, the demand for practitioners exceeds the supply of qualified personnel.

We are subject to a variety of federal, state and local governmental regulations. We make every effort to comply with all applicable regulations through compliance programs, policies and procedures, manuals, and personnel training. Despite these efforts, we cannot guarantee that we will be in absolute compliance with all regulations at all times. Failure to comply with applicable governmental regulations may result in significant penalties, including exclusion from the Medicare and Medicaid programs, which would have a material adverse effect on our business. In November 2003, Congress legislated a three-year freeze on Medicare reimbursement levels for all O&P services starting January 1, 2004. The effect of this legislation has been a downward pressure on our income from operations, however, we have initiated certain purchasing and efficiency programs which we believe will minimize such effects. During 2006, Congress enacted legislation that increased Medicare reimbursement levels by approximately 4.3% effective January 1, 2007. During 2007, Congress enacted legislation that increased Medicare reimbursement levels by approximately 2.7% effective January 1, 2008. During 2008, Congress enacted legislation that increased Medicare reimbursement levels by approximately 5.0% effective January 1, 2009. There can be no assurance that future changes will not reduce Medicare reimbursements for O&P services and products from these sources.

Medical Device Regulation. We distribute products that are subject to regulation as medical devices by the U.S. Food and Drug Administration ("FDA") under the Federal Food, Drug and Cosmetic Act ("FDCA") and accompanying regulations. With the exception of two products which have been cleared for marketing as prescription medical devices under section 510(k) of the FDCA, we believe that the products we distribute, including O&P medical devices, accessories and components, are exempt from the FDA's regulations for pre-market clearance or approval requirements and from requirements relating to quality system regulation (except for certain recordkeeping and complaint handling requirements). We are required to adhere to regulations regarding adverse event reporting, establishment registration, and product listing; and we are subject to inspection by the FDA for compliance with all applicable requirements. Labeling and promotional materials also are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. Our medical device operations are subject to inspection by the FDA for compliance with applicable FDA requirements, and the FDA has raised compliance concerns in connection with these investigations. We believe we have addressed these concerns and are in compliance with applicable FDA requirements, but we cannot assure that we will be found to be in compliance at all times. Non-compliance could

result in a variety of civil and/or criminal enforcement actions, which could have a material adverse effect on our business and results of operations.

Fraud and Abuse. Violations of fraud and abuse laws are punishable by criminal and/or civil sanctions, including, in some instances, imprisonment and exclusion from participation in federal healthcare programs, including Medicare, Medicaid, U.S. Department of Veterans Affairs health programs and the Department of Defense's TRICARE program, formerly known as CHAMPUS. These laws, which include but are not limited to, antikickback laws, false claims laws, physician self-referral laws, and federal criminal healthcare fraud laws, are discussed in further detail below. We believe our billing practices, operations, and compensation and financial arrangements with referral sources and others materially comply with applicable federal and state requirements. However, we cannot assure that such requirements will not be interpreted by a governmental authority in a manner inconsistent with our interpretation and application. The failure to comply, even if inadvertent, with any of these requirements could require us to alter our operations and/or refund payments to the government. Such refunds could be significant and could also lead to the imposition of significant penalties. Even if we successfully defend against any action against us for violation of these laws or regulations, we would likely be forced to incur significant legal expenses and divert our management's attention from the operation of our business. Any of these actions, individually or in the aggregate, could have a material adverse effect on our business and financial results.

Antikickback Laws. Our operations are subject to federal and state antikickback laws. The federal Antikickback Statute (Section 1128B(b) of the Social Security Act) prohibits persons or entities from knowingly and willfully soliciting, offering, receiving, or paying any remuneration in return for, or to induce, the referral of persons eligible for benefits under a federal healthcare program (including Medicare, Medicaid, the U.S. Department of Veterans Affairs health programs and TRICARE), or the ordering, purchasing, leasing, or arranging for, or the recommendation of purchasing, leasing or ordering of, items or services that may be paid for, in whole or in part, by a federal healthcare program. Courts have held that the statute may be violated when even one purpose (as opposed to a primary or sole purpose) of the renumeration is to induce referrals or other business.

Recognizing that the Antikickback Statute is broad and may technically prohibit beneficial arrangements, the Office of Inspector General of the Department of Health and Human Services has developed regulations addressing certain business arrangements that will offer protection from scrutiny under the Antikickback Statute. These "Safe Harbors" describe activities which may be protected from prosecution under the Antikickback Statute, provided that they meet all of the requirements of the applicable Safe Harbor. For example, the Safe Harbors cover activities such as offering discounts to healthcare providers and contracting with physicians or other individuals or entities that have the potential to refer business to us that would ultimately be billed to a federal healthcare program. Failure to qualify for Safe Harbor protection does not mean that an arrangement is illegal. Rather, the arrangement must be analyzed under the Antikickback Statute to determine whether there is an intent to pay or receive remuneration in return for referrals. Conduct and business arrangements that do not fully satisfy one of the Safe Harbors may result in increased scrutiny by government enforcement authorities. In addition, some states have antikickback laws that vary in scope and may apply regardless of whether a federal healthcare program is involved.

Our operations and business arrangements include, for example, discount programs or other financial arrangements with individuals and entities, such as lease arrangements with hospitals and certain participation agreements. Therefore, our operations and business arrangements are required to comply with the antikickback laws. Although our business arrangements and operations may not always satisfy all the criteria of a Safe Harbor, we believe that our operations are in material compliance with federal and state antikickback statutes.

HIPAA Violations. The Health Insurance Portability and Accountability Act ("HIPAA") provides criminal penalties for, among other offenses: health care fraud; theft or embezzlement with respect to a health care benefit program; false statements in connection with the delivery of or payment for health care benefits, items or services; and obstruction of criminal investigation of health care offenses. Unlike other federal laws, these offenses are not limited to Federal health care programs.

In addition, HIPAA authorizes the imposition of civil monetary penalties where a person offers or pays remuneration to any individual eligible for benefits under a federal healthcare program that such person knows or should know is likely to influence the individual to order or receive covered items or services from a particular provider, practitioner or supplier. Excluded from the definition of "remuneration" are incentives given to individuals to promote the delivery of preventive care (excluding cash or cash equivalents), incentives of nominal value and certain differentials in or waivers of coinsurance and deductible amounts.

These laws may apply to certain of our operations. As noted above, we have established various types of discount programs and other financial arrangements with individuals and entities. We also bill third-party payors and other entities for items and services provided at our patient-care centers. While we endeavor to ensure that our discount programs and other financial arrangements, and billing practices comply with applicable laws, such programs, arrangements and billing practices could be subject to scrutiny and challenge under HIPAA.

False Claims Laws. We are also subject to federal and state laws prohibiting individuals or entities from knowingly presenting, or causing to be presented, claims for payment to third-party payors (including Medicare and Medicaid) that are false or fraudulent, are for items or services not provided as claimed, or otherwise contain misleading information. Each of our patient-care centers is responsible for the preparation and submission of reimbursement claims to third-party payors for items and services furnished to patients. In addition, our personnel may, in some instances, provide advice on billing and reimbursement to purchasers of our products. While we endeavor to assure that our billing practices comply with applicable laws, if claims submitted to payors are deemed to be false, fraudulent, or for items or services not provided as claimed, we may face liability for presenting or causing to be presented such claims.

Physician Self-Referral Laws. We are also subject to federal and state physician self-referral laws. With certain exceptions, the federal Medicare physician self-referral law (the "Stark Law") (Section 1877 of the Social Security Act) prohibits a physician from referring Medicare beneficiaries to an entity for "designated health services"—including prosthetic and orthotic devices and supplies—if the physician or the physician's immediate family member has a financial relationship with the entity. A financial relationship includes both ownership or investment interests and compensation arrangements. An entity that furnishes designated health services pursuant to a prohibited referral may not present or cause to be presented a claim or bill for such designated health services. Penalties for violating the Stark Law include denial of payment for the service, an obligation to refund any payments received, civil monetary penalties, and the possibility of being excluded from the Medicare or Medicaid programs.

With respect to ownership/investment interests, there is an exception under the Stark Law for referrals made to a publicly traded entity in which the physician or the physician's immediate family member has an investment interest if the entity's shares are generally available to the public at the time of the designated health service referral, and are traded on certain exchanges, including the New York Stock Exchange, and the entity had shareholders' equity exceeding $75.0 million for its most recent fiscal year or as an average during the three previous fiscal years. We meet these tests and, therefore, believe that referrals from physicians who have ownership interests in our stock, or whose immediate family members have ownership interests in our stock, should not result in liability under the Stark Law.

With respect to compensation arrangements, there are exceptions under the Stark Law that permit physicians to maintain certain business arrangements, such as personal service contracts and equipment or space leases, with healthcare entities to which they refer patients for designated health services. Unlike the Antikickback Statute, all of the elements of a Stark Law exception must be met in order for the exception to apply. We believe that our compensation arrangements with physicians comply with the Stark Law, either because the physician's relationship fits fully within a Stark Law exception or because the physician does not generate prohibited referrals. If, however, we receive a prohibited referral, our submission of a bill for services rendered pursuant to such a referral could subject us to sanctions under the Stark Law and applicable state self-referral laws. State self-referral laws may extend the prohibitions of the Stark Law to Medicaid beneficiaries.

Certification and Licensure. Our practitioners and/or certain operating units may be subject to certification or licensure requirements under the laws of some states. Most states do not require separate licensure for practitioners. However, several states currently require practitioners to be certified by an organization such as the American Board for Certification. The American Board for Certification conducts a certification program for practitioners and an accreditation program for patient-care centers. The minimum requirements for a certified practitioner are a college degree, completion of an accredited academic program, one to four years of residency at a patient-care center under the supervision of a certified practitioner and successful completion of certain examinations. Minimum requirements for an accredited patient-care center include the presence of a certified practitioner and specific plant and equipment requirements.

Some states may require licensure or registration of facilities that dispense or distribute prescription medical devices within or from outside of the state. In addition, some states may require a license or registration to provide services such as those offered by Linkia. We are in the process of meeting these requirements.

While we endeavor to comply with all state licensure requirements, we cannot assure that we will be in compliance at all times with these requirements. Failure to comply with state licensure requirements could result in suspension or termination of licensure, civil penalties, termination of our Medicare and Medicaid agreements, and repayment of amounts received from Medicare and Medicaid for services and supplies furnished by an unlicensed individual or entity.

Confidentiality and Privacy Laws. The Administrative Simplification Provisions of HIPAA, and their implementing regulations, set forth privacy standards and implementation specifications concerning the use and disclosure of individually identifiable health information (referred to as "protected health information") by health plans, healthcare clearinghouses and healthcare providers that transmit health information electronically in connection with certain standard transactions ("Covered Entities"). HIPAA further requires Covered Entities to protect the confidentiality of health information by meeting certain security standards and implementation specifications. In addition, under HIPAA, Covered Entities that electronically transmit certain administrative and financial transactions must utilize standardized formats and data elements ("the transactions/code sets standards"). HIPAA imposes civil monetary penalties for non-compliance, and, with respect to knowing violations of the privacy standards, or violations of such standards committed under false pretenses or with the intent to sell, transfer or use individually identifiable health information for commercial advantage, criminal penalties. We believe that we are subject to the Administrative Simplification Provisions of HIPAA and are taking steps to meet applicable standards and implementation specifications. The new requirements have had a significant effect on the manner in which we handle health data and communicate with payors. Our new billing system, OPS, was designed to meet these requirements.

In addition, state confidentiality and privacy laws may impose civil and/or criminal penalties for certain unauthorized or other uses or disclosures of individually identifiable health information. We are also subject to these laws. While we endeavor to assure that our operations comply with applicable laws

governing the confidentiality and privacy of health information, we could face liability in the event of a use or disclosure of health information in violation of one or more of these laws.

None of our employees are subject to a collective-bargaining agreement. We believe that we have satisfactory relationships with our employees and strive to maintain these relationships by offering competitive benefit packages, training programs and opportunities for advancement. During the year ended December 31, 2008, we had an average of 3,211 employees. The following table summarizes our average number of employees for the year:

We have established an affiliation with the University of Connecticut pursuant to which we own and operate a school at the Newington, Connecticut campus that offers a certificate in orthotics and/or prosthetics after the completion of a nine-month course. We believe there are only nine schools of this kind in the United States. The program director is a Hanger employee, and our practitioners teach most of the courses. After completion of the nine-month course, graduates receive a certificate and go on to complete a residency in their area of specialty. After their residency is complete, graduates can choose to complete a course of study in another area of specialty. Most graduates will then sit for a certification exam to either become a certified prosthetist or certified orthotist. We offer exam preparation courses for graduates who agree to become our practitioners to help them prepare for those exams.

We also provide a series of ongoing training programs to improve the professional knowledge of our practitioners. For example, we have an annual Education Fair which is attended by over 750 of our practitioners and consists of lectures and seminars covering many clinical topics including the latest technology and process improvements, basic accounting and business courses and other courses which allow the practitioners to fulfill their ongoing continuing education requirements.

We currently maintain insurance coverage for malpractice liability, product liability, workers' compensation, executive protection and property damage. Our general liability insurance coverage is $1.0 million per incident, with a $25.0 million umbrella insurance policy. The coverage for malpractice, product and workers' compensation is self-insured with both individual specific claim and aggregate stop-loss policies to protect us from either significant individual claims or dramatic changes in our loss experience. Based on our experience and prevailing industry practices, we believe our coverage is adequate as to risks and amount. We have not incurred a material amount of expenses in the past as a result of uninsured O&P claims.

Some of the statements contained in this report discuss our plans and strategies for our business or make other forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act. The words "anticipates," "believes," "estimates," "expects," "plans," "intends" and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. These forward-looking statements reflect the current views of our management; however, various risks, uncertainties and contingencies could cause our actual results, performance or

achievements to differ materially from those expressed in, or implied by, these statements, including the following:

For a discussion of important risk factors affecting our business, including factors that could cause actual results to differ materially from results referred to in the forward-looking statements, see "Item 1A-Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" below. We do not have any obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

We are highly leveraged and have significant fixed operating costs; therefore our profitability and ability to service our debt could be negatively impacted by an inability to generate sales growth.

We are highly leveraged and have a significant amount of fixed costs. Therefore, our ability to continue to service our debt and fund necessary capital additions is dependent on our ability to grow sales and control inflationary increases in our fixed costs.

Changes in government reimbursement levels could adversely affect our net sales, cash flows and profitability.

We derived 39.7%, 40.3%, and 41.1% of our net sales for the years ended December 31, 2008, 2007, and 2006, respectively, from reimbursements for O&P services and products from programs administered by Medicare, Medicaid and the U.S. Department of Veterans Affairs. Each of these programs sets maximum reimbursement levels for O&P services and products. If these agencies reduce reimbursement levels for O&P services and products in the future, our net sales could substantially decline. In addition, the percentage of our net sales derived from these sources may increase as the portion of the U.S. population over age 65 continues to grow, making us more vulnerable to maximum reimbursement level reductions by these organizations. Reduced government reimbursement levels could result in reduced private payor reimbursement levels because fee schedules of certain third-party payors are indexed to Medicare. Furthermore, the healthcare industry is experiencing a trend towards cost containment as government and other third-party payors seek to impose lower reimbursement rates and negotiate reduced contract rates with service providers. This trend could adversely affect our net sales. Medicare provides for reimbursement for O&P products and services based on prices set forth in fee schedules for ten regional service areas. Medicare prices are adjusted each year based on the Consumer Price Index- Urban ("CPIU") unless Congress acts to change or eliminate the adjustment. The Medicare price increases for 2008 and 2007 were 2.7% and 4.3%, respectively.

Effective January 1, 2009, the Medicare price increase was 5.0%. If the U.S. Congress were to legislate additional modifications to the Medicare fee schedules, our net sales from Medicare and other payors could be adversely and materially affected. We cannot predict whether any such modifications to the fee schedules will be enacted or what the final form of any modifications might be.

On April 24, 2006, the Centers for Medicare & Medicaid Services announced a proposed rule that would call for a competitive bidding program for certain covered prosthetic and orthotic equipment as required by the Medicare Modernization Act of 2003. We cannot now identify the impact of such proposed rule on us.

Changes in payor reimbursements could negatively affect our net sales volume.

Recent years have seen a consolidation of healthcare companies coupled with certain payors terminating contracts, imposing caps or reducing reimbursement for O&P products. Additionally, employers are increasingly pushing healthcare costs down to their employees. These trends could result in decreased O&P revenue.

We depend on the continued employment of our orthotists and prosthetists who work at our patient-care centers and their relationships with physicians and patients. Our ability to provide O&P services at our patient-care centers would be impaired and our net sales reduced if we were unable to maintain these relationships.

Our net sales would be reduced if a significant number of our practitioners leave us. In addition, any failure of our practitioners to maintain the quality of care provided or to otherwise adhere to certain general operating procedures at our facilities, or any damage to the reputation of a significant number of our practitioners, could adversely affect our reputation, subject us to liability and significantly reduce our net sales. A substantial amount of our business is derived from orthopedic surgeons and other healthcare providers. If the quality of our services and products declines in the opinion of these healthcare providers, they may cease to recommend our products, which would adversely affect our net sales.

If the non-competition agreements we have with our key executive officers and key practitioners were found by a court to be unenforceable, we could experience increased competition resulting in a decrease in our net sales.

We generally enter into employment agreements with our executive officers and a significant number of our practitioners which contain non-compete and other provisions. The laws of each state differ concerning the enforceability of non-competition agreements. State courts will examine all of the facts and circumstances at the time a party seeks to enforce a non-compete covenant. We cannot predict with certainty whether or not a court will enforce a non-compete covenant in any given situation based on the facts and circumstances at that time. If one or more of our key executive officers and/or a significant number of our practitioners were to leave us and the courts refused to enforce the non-compete covenant, we might be subject to increased competition, which could materially and adversely affect our business, financial condition and results of operations.

We face periodic reviews, audits and investigations under our contracts with federal and state government agencies, and these audits could have adverse findings that may negatively impact our business.

We contract with various federal and state governmental agencies to provide O&P services. Pursuant to these contracts, we are subject to various governmental reviews, audits and investigations to verify our compliance with the contracts and applicable laws and regulations. Any adverse review, audit or investigation could result in:

We are subject to numerous federal, state and local governmental regulations, noncompliance with which could result in significant penalties that could have a material adverse effect on our business.

A failure by us to comply with the numerous federal, state and/or local healthcare and other governmental regulations to which we are subject, including the regulations discussed under "Government Regulation" in Item 1 above, could result in significant penalties and adverse consequences, including exclusion from the Medicare and Medicaid programs, which could have a material adverse effect on our business.

If the results of the current investigations over the billing allegations at the West Hempstead patient-care center are not resolved in our favor or if such allegations are expanded to other patient-care centers and are not resolved in our favor, our operations may be negatively impacted and we may be subject to significant fines.

If the results of the investigation at the West Hempstead patient-care center and any other patient-care centers uncover billing discrepancies, we may be responsible for noncompliance fines and the extension of such investigation to other patient-care centers.

Funds associated with certain of our auction rate securities are not currently accessible and our auction rate securities have experienced other than temporary decline in value, which could adversely affect our income.

Our investments include two auction rate securities ("ARS") reported at an aggregate fair value of $5.5 million and an aggregate cost of $7.5 million, as of December 31, 2008. ARS are securities that are structured with short-term interest rate reset dates which generally occur every 28 days, but with contractual maturities that can be well in excess of ten years. At the end of each reset period, investors can attempt to sell via auction or continue to hold the securities at par. The auctions for all of the ARS held by us were unsuccessful as of December 31, 2008. The funds associated with these will not be accessible until a successful auction occurs, a buyer is found outside of the auction process or the underlying securities have matured.

Our website is http://www.hanger.com. We make available free of charge, on or through our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and Section 16 filings (i.e. Forms 3, 4 and 5) as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission at http://www.sec.gov. Our website also contains the charters of the Audit Committee, Corporate Governance and Nominating Committee, Compensation Committee and Quality and Technology Committee of our board of directors; our Code of Business Conduct and Ethics for Directors and Employees, which includes our principal executive, financial and accounting officers; as well as our Corporate Governance Guidelines. Information contained on our website is not part of this report.

As of December 31, 2008, we operated 668 patient-care centers and facilities in 45 states and the District of Columbia. We own 18 buildings that house a patient-care center. The remaining centers are occupied under leases expiring between the years of 2009 and 2019. We believe our leased or owned centers are adequate for carrying on our current O&P operations at our existing locations, as well as our anticipated future needs at those locations. We believe we will be able to renew such leases as they expire or find comparable or additional space on commercially suitable terms.

The following table sets forth the number of our patient-care centers located in each state as of December 31, 2008:

We also lease distribution facilities in Texas, California, Georgia, Florida, and Pennsylvania. We lease our corporate headquarters in Bethesda, Maryland. Substantially all of our owned properties are pledged to collateralize bank indebtedness. See Note G to our Consolidated Financial Statements.

The Company is subject to legal proceedings and claims which arise in the ordinary course of its business, including additional payments under business purchase agreements. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not have a materially adverse effect on the financial position, liquidity or results of operations of the Company.

On June 15, 2004, the Company announced that one employee at its patient-care center in West Hempstead, New York alleged in a television news story aired on June 14, 2004 that there were instances of billing discrepancies at that facility. On June 18, 2004, the Company announced that on June 17, 2004, the Audit Committee of the Company's Board of Directors had engaged a law firm to serve as independent counsel to the Audit committee and to conduct an independent investigation of the allegations. The scope of that independent investigation was expanded to cover certain of the Company's other patient-care centers. On June 17, 2004, the U.S. Attorney's Office for the Eastern District of New York subpoenaed records of the Company regarding various billing activities and locations. In addition, the Company also announced on June 18, 2004 that the Securities and Exchange Commission had commenced an informal inquiry into the matter. The Company is cooperating with the regulatory authorities. The Audit Committee's investigation will not be complete until all regulatory authorities have indicated that their inquiries are complete.

Management believes that any billing discrepancies are likely to be primarily at the West Hempstead patient-care center. Furthermore, management does not believe the resolution of the matters raised by the allegations will have a materially adverse effect on the Company's financial statements. The West Hempstead facility generated $0.5 million and $0.6 million net sales during 2008 and 2007, respectively, or less than 0.1% of the Company's net sales for each year.

It should be noted that additional regulatory inquiries may be raised relating to the Company's billing activities at other locations. No assurance can be given that the final results of the regulatory agencies' inquiries will be consistent with the results to date or that any discrepancies identified during the ongoing regulatory review will not have a material adverse effect on the Company's financial statements.

The Company is also party to various legal proceedings that are ordinary and incidental to its business. Management does not expect that any legal proceedings currently pending will have a material adverse impact on the Company's financial statements.

No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of stockholders.

The following table sets forth information regarding current executive officers of the Company and certain of its subsidiaries:

Ivan R. Sabel, CPO has been our Chairman of the Board of Directors since August 1995 and was our Chief Executive Officer from August 1995 until March 2008. Mr. Sabel was our President from November 1987 to January 2002. Mr. Sabel also served as the Chief Operating Officer from November 1987 until August 1995. Prior to that time, Mr. Sabel had been Vice President, Corporate Development from September 1986 to November 1987. Mr. Sabel was the founder, owner and President of Capital Orthopedics, Inc. from 1968 until that company was acquired by us in 1986. Mr. Sabel is a Certified Prosthetist and Orthotist ("CPO"), a former clinical instructor in orthopedics at the Georgetown University Medical School in Washington, D.C., a member of the Government Relations Committee of

the American Orthotic and Prosthetic Association ("AOPA"), a former Chairman of the National Commission for Health Certifying Agencies, a former member of the Strategic Planning Committee, a current member of the U.S. Department of Veterans Affairs Affairs Committee of AOPA and a former President of the American Board for Certification in Orthotics and Prosthetics. Mr. Sabel also serves as a member of the Medical Advisory Board of DJ Orthopedics, Inc., a manufacturer of knee braces. Mr. Sabel has been a director since 1986. Mr. Sabel holds a B.S. in Prosthetics and Orthotics from New York University.

Thomas F. Kirk has been our President and Chief Executive Officer since March 2008. Mr. Kirk also served as our Chief Operating Officer from January 2002 until March 2008. From September 1998 to January 2002, Mr. Kirk was a principal with AlixPartners, LLC (formerly Jay Alix & Associates, Inc.), a management consulting company retained by Hanger to facilitate its reengineering process. From May 1997 to August 1998, Mr. Kirk served as Vice President, Planning, Development and Quality for FPL Group, a full service energy provider located in Florida. From April 1996 to April 1997, he served as Vice President and Chief Financial Officer for Quaker Chemical Corporation in Pennsylvania. From December 1987 to March 1996, he served as Senior Vice President and Chief Financial Officer for Rhone-Poulenc, S.A. in Princeton, New Jersey and Paris, France. From March 1977 to November 1987, he was employed by St. Joe Minerals Corp., a division of Fluor Corporation. Prior to this he held positions in sales, commercial development, and engineering with Koppers Co., Inc. Mr. Kirk holds a Ph.D. degree in strategic planning/marketing, and an M.B.A. degree in finance, from the University of Pittsburgh. He also holds a Bachelor of Science degree in mechanical engineering from Carnegie Mellon University. He is a registered professional engineer and a member of the Financial Executives Institute.

Richmond L. Taylor is our Executive Vice President, and the President and Chief Operating Officer of Hanger Prosthetics & Orthotics, Inc. and HPO, Inc., our two wholly-owned subsidiaries which operate all of our patient-care centers. Previously, Mr. Taylor served as the Chief Operating Officer of NovaCare O&P from June 1996 until July 1999, and held the positions of Region Vice-President and Region President of NovaCare O&P for the West Region from 1989 to June 1996. Prior to joining NovaCare O&P, Mr. Taylor spent 20 years in the healthcare industry in a variety of management positions including Regional Manager at American Hospital Supply Corporation, Vice President of Operations at Medtech, Vice President of Sales at Foster Medical Corporation and Vice President of Sales at Integrated Medical Systems.

George E. McHenry has been our Executive Vice President and Chief Financial Officer since October 2001. From 1987 until he joined us in October 2001, Mr. McHenry served as Executive Vice President, Chief Financial Officer and Secretary of U.S. Vision, Inc., an optical company with 600 locations in 47 states. Prior to joining U.S. Vision, Inc., he was employed principally as a Senior Manager by the firms of Touche Ross & Co. (now Deloitte & Touche) and Main Hurdman (now KPMG LLP) from 1974 to 1987. Mr. McHenry is a Certified Public Accountant and received a Bachelor of Science degree in accounting from St. Joseph's University.

Vinit K. Asar joined us as our Executive Vice President and Chief Growth Officer in December 2008. Mr. Asar comes to Hanger from the Medical Device & Diagnostic sector at Johnson and Johnson, having worked at the Ethicon, Ethicon-Endo-Surgery, Cordis and Biosense Webster franchises. During his 18 year career at Johnson and Johnson, Mr. Asar held various roles of increasing responsibility in Finance, Product Development, Manufacturing, Marketing and Sales in the US and in Europe. Prior to joining Hanger, Mr. Asar was the Worldwide Vice-President at Biosense Webster, the Electrophysiology division of Johnson and Johnson, responsible for the Worldwide Sales, Marketing and Services organizations. Mr. Asar has a B.S.B.A from Aquinas College and an M.B.A. from Lehigh University.

Ron N. May has been the President and Chief Operating Officer of Southern Prosthetic Supply, Inc., our wholly-owned subsidiary that distributes orthotic and prosthetic products, since December 1998. From January 1984 to December 1998, Mr. May was Executive Vice President of the distribution division of J.E. Hanger, Inc. of Georgia until that company was acquired by us in November 1996. Mr. May also currently serves as a Board Member of the O&P Athletic Fund.

Thomas C. Hofmeister joined us in October of 2004 as our Vice President of Finance and Chief Accounting Officer and was previously employed as the Chief Financial Officer of Woodhaven Health Services from October 2002 through October 2004. Prior to that, Mr. Hofmeister served as Senior Vice President and Chief Accounting Officer of Magellan Health Services, Inc. from 1999 to 2002; Controller of London Fog Industries, Inc. from 1998 to 1999 and Vice President and Controller of Pharmerica, Inc. from 1995 to 1998. Mr. Hofmeister was also employed as a senior manager at KPMG Peat Marwick from 1988 to 1995. Mr. Hofmeister holds a B.S. degree in accounting from Mount Saint Mary's College.

Kenneth J. Abod has been our Vice President and Treasurer since May of 2008. Prior to joining us, Mr. Abod was a business consultant from 2006 to 2008. From 1996 until 2005, Mr. Abod held various positions with Sunrise Senior Living, Inc., including Senior Vice President and Treasurer (2001 to 2005), Chief Financial Officer—Management Services Division (2000-2001), and Senior Vice President and Controller (1996-2000). Prior to that, Mr. Abod served as Manager of Defined Contribution Services for Bolton Offutt Donovan, Inc. from 1994 to 1996; Treasurer and Vice President—Accounting for Bankers Finance Investment Management Corp. from 1993 to 1994; Staff Accountant in Division of Enforcement of the U. S. Securities and Exchange Commission from 1992 to 1993; and Supervisory Senior Accountant with Ernst & Young LLP from 1987 to 1992. Mr. Abod is a Certified Public Accountant and received a Bachelor of Business Administration degree in accounting from James Madison University.

Marion L. Mullauer has been our Vice President and Chief Information Officer since August 2005. She is an experienced CIO, having previously held that position at the American Chemical Society and Lippincott Williams & Wilkins, Inc., a leading publisher of health care information. She has over 25 years of experience in information technology in senior management positions, much of it with healthcare companies. Ms. Mullauer holds a B.S. degree in Business Administration from Towson University and a Masters in Business Administration from Loyola College.

Brian A. Wheeler has been our Vice President, Human Resources since November 2002. Prior to joining Hanger, he was the Vice President of Human Resources for Rhodia Inc., a wholly-owned U.S. subsidiary of the French Specialty Chemicals Company. Mr. Wheeler holds a B.A. degree in Political Science from the University of Florida.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our common stock has been listed and traded on the New York Stock Exchange since December 15, 1998, under the symbol "HGR." The following table sets forth the high and low closing sale prices for the common stock for the periods indicated as reported on the New York Stock Exchange:

At February 18, 2009, there were approximately 317 holders of record of our common stock.

We have never paid cash dividends on our common stock and intend to continue this policy for the foreseeable future. We plan to retain earnings for use in our business. The terms of our agreements with our financing sources and certain other agreements prohibit the payment of dividends on our common stock and such agreements will continue to prohibit the payment of dividends in the future.

We have paid cash dividends on the Series A Preferred Stock, which provides for cumulative dividends at a rate of 3.33% per annum, payable quarterly in arrears. All cash dividends on the Series A Preferred Stock were paid prior to its conversion into shares of the Company's common stock in August 2008.

Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent on our results of operations, financial condition, contractual and legal restrictions and any other factors deemed to be relevant.

The following table sets forth information as of December 31, 2008 regarding our equity compensation plans:

During the year ended December 31, 2008, we issued no securities without registration under the Securities Act of 1933 ("Securities Act").

During the year ended December 31, 2008, we made no repurchases of our common stock.

The annual changes in the cumulative total shareholder return on Hanger's common stock for the five-year period shown in the graph shown below are based on the assumption that $100 had been invested in Hanger common stock, the Standard & Poor's 500 Stock Index, the Standard & Poor's Small Cap Stock Index, the Russell 2000 Stock Index and a company determined peer group index on December 31, 2003, and that all quarterly dividends were reinvested at the average of the closing stock prices at the beginning and end of the quarter. The total cumulative dollar returns shown on the graph represent returns that such investments would have had on December 31, 2008.

Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2008

The selected consolidated financial data presented below is derived from the audited Consolidated Financial Statements and Notes thereto that are included in this Annual Report on Form 10-K.

	Year Ended December 31,

Statement of Operations Data:	2008		2007		2006			2005		2004
(In thousands, except per share data)
Net sales	$	703,129	$	637,350	$	598,766		$	578,241	$	568,721
Cost of goods sold (exclusive of depreciation and amortization)		343,421		307,952		300,065			283,591		275,961
Selling, general and administrative		264,797		245,542		221,592			219,454		218,689
Depreciation and amortization		17,183		15,876		14,670			13,920		13,531
Other charges(1)		—		—		—			—		45,808

Income from operations		77,728		67,980		62,439			61,276		14,732
Interest expense		32,549		36,987		38,643			37,141		34,558
Unrealized loss from interest rate swap(4)		738		—		—			—		—
Extinguishment of debt(2)		—		—		16,953			—		—

Income (loss) before taxes		44,441		30,993		6,843			24,135		(19,826	)
Provision for income taxes		17,695		11,726		3,409			6,382		3,568

Net income (loss)		26,746		19,267		3,434			17,753		(23,394	)
Preferred stock dividends and accretion(5)		5,670		1,665		7,518			5,892		4,587

Net income (loss) applicable to common stock	$	21,076	$	17,602	$	(4,084	)	$	11,861	$	(27,981	)

Basic Per Common Share Data
Net income (loss)	$	0.81	$	0.78	$	(0.19	)	$	0.55	$	(1.30	)

Shares used to compute basic per common share amounts		25,930		22,476		21,981			21,695		21,474

Diluted Per Common Share Data(3)
Net income (loss)	$	0.78	$	0.64	$	(0.19	)	$	0.53	$	(1.30	)

Shares used to compute diluted per common share amounts		27,091		30,257		21,981			22,232		21,474

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

The following is a discussion of our results of operations and financial condition for the periods described below. This discussion should be read in conjunction with our consolidated financial statements included elsewhere in this Form 10-K. Our discussion of our results of operations and financial condition includes various forward-looking statements about our markets, the demand for our products and services and our future results. These statements are based on our current expectations, which are inherently subject to risks and uncertainties. Our actual results and the timing of certain events may differ materially from those indicated in the forward looking statements.

We are the largest owner and operator of orthotic and prosthetic ("O&P") patient-care centers in the United States. Through our subsidiary, Southern Prosthetic Supply, Inc. ("SPS"), we are also the largest distributor of branded and private label O&P devices and components in the United States, all of which are manufactured by third parties. We also create products, through our subsidiary, Innovative Neurotronics, Inc. ("IN, Inc."), for sale in our patient-care centers, internationally through distribution agreements, and through a sales force. The first such product was available for sale starting May 1, 2006 for patients who have had a loss of mobility due to strokes, multiple sclerosis or other similar conditions. Another subsidiary, Linkia LLC ("Linkia"), is a provider network management company.

We have increased our net sales during the past two years principally through acquisitions of patient-care centers, increased distribution revenues, sales generated by the two national contracts signed by our Linkia subsidiary and by opening new patient-care centers. We strive to improve our local market position to enhance operating efficiencies and generate economies of scale. We generally acquire small and medium-sized O&P patient-care businesses and open new patient-care centers to achieve greater density in our existing markets.

We conduct our operations in two reportable segments—patient-care centers and distribution.

At December 31, 2008, we operated 668 O&P patient-care centers in 45 states and the District of Columbia and employed in excess of 1,000 revenue-generating O&P practitioners ("practitioners").

In our orthotics business, we design, fabricate, fit and maintain a wide range of standard and custom-made braces and other devices (such as spinal, knee and sports-medicine braces) that provide external support to patients suffering from musculoskeletal disorders, such as ailments of the back, extremities or joints and injuries from sports or other activities. In our prosthetics business, we design, fabricate, fit and maintain custom-made artificial limbs for patients who are without limbs as a result of traumatic injuries, vascular diseases, diabetes, cancer or congenital disorders. O&P devices are increasingly technologically advanced and are custom-designed to add functionality and comfort to patients' lives, shorten the rehabilitation process and lower the cost of rehabilitation.

Patients are referred to our local patient-care centers directly by physicians as a result of our reputation with them or through our agreements with managed care providers. Practitioners, technicians and office administrators staff our patient-care centers. Our practitioners generally design and fit patients with, and the technicians fabricate, O&P devices as prescribed by the referring physician. Following the initial design, fabrication and fitting of our O&P devices, our technicians conduct regular, periodic maintenance of O&P devices as needed.

Our practitioners are also responsible for managing and operating our patient-care centers and are compensated, in part, based on their success in managing costs and collecting accounts receivable. We provide centralized administrative, marketing and materials management services to take advantage of

economies of scale and to increase the time practitioners have to provide patient care. In areas where we have multiple patient-care centers, we also utilize shared fabrication facilities where technicians fabricate devices for practitioners in that region.

This is accomplished at competitive prices as a result of our direct purchases from manufacturers.

Marketing of our distribution services is conducted on a national basis through a dedicated sales force, print and e-commerce catalogues and exhibits at industry and medical meetings and conventions. We direct specialized catalogues to segments of the healthcare industry, such as orthopedic surgeons and physical and occupational therapists and podiatrists.

IN, Inc. specializes in product development principally in the field of functional electrical stimulation, IN, Inc. identifies emerging MyoOrthotics Technologies® developed at research centers and universities throughout the world that use neuromuscular stimulation to improve the functionality of an impaired limb. MyoOrthotics Technologies® represents the merging of orthotic technologies with electrical stimulation. Working with the inventors under licensing and consulting agreements, IN, Inc. commercializes the design, obtains regulatory approvals, develops clinical protocols for the technology, and then introduces the devices to the marketplace through a variety of distribution channels. IN, Inc's. first product, the WalkAide System ("WalkAide"), has received FDA approval, achieved ISO 13485:2004 and ISO 9001:2000 certification, as well as the European CE Mark, which are widely accepted quality management standards for medical devices and related services. Additionally, in September 2007 the WalkAide earned the esteemed da Vinci Award for Adaptive Technologies from the National Multiple Sclerosis Society which honors outstanding engineering achievements in adaptive and assistive technology that provide solutions to accessibility issues for people with disabilities. In November 2008, the Centers for Medicare and Medicaid Services overturned a non-coverage decision and assigned a specific E-code to the WalkAide, which is reimbursable for beneficiaries with foot drop

due to incomplete spinal cord injuries. The code was effective January 1, 2009. The WalkAide is sold in the United States through our patient care centers and SPS. IN, Inc. is also marketing the WalkAide internationally through licensed distributors.

Linkia is the first provider network management service company dedicated solely to serving the O&P market. Linkia is dedicated to managing the O&P services of national and regional insurance companies. Linkia partners with healthcare insurance companies by securing a national or regional contract either as a preferred provider or to manage their O&P network of providers. Linkia's network now totals over 1,000 O&P providers locations. As of December 31, 2008, Linkia had nine contracts with national and regional providers.

Net sales for the year ended December 31, 2008 increased by $65.7 million, or 10.3%, to $703.1 million from $637.4 million for the prior year. The sales growth was principally the result of a $41.3 million, or 7.3%, increase in same-center sales in our patient care business, an $11.9 million increase related to acquired entities, and an $11.5 million, or 19.1%, increase in sales by the Company's distribution segment. Cost of goods sold for the year ended December 31, 2008 increased by $35.4 million to $343.4 million, or 48.8% of net sales, compared to $308.0 million, or 48.3% of net sales, in the prior year. The increase in cost of goods sold was due to the increase in sales. As a percentage of net sales, cost of materials increased due to the increase in sales at SPS which have higher material costs and to a lesser extent an increase in costs in the patient care centers.

Income from operations increased by $9.7 million, or 14.3%, in 2008 to $77.7 million from $68.0 million in the prior year due principally to the sales increase. Income from operations as a percentage of net sales increased to 11.1% for the year ended December 31, 2008, from 10.7% in the prior year. This is a result of leveraging operating costs over increased sales, partially offset by increased material costs. Selling, general and administrative expenses increased by $19.3 million, however, they decreased 0.8% to 37.7% of net sales from 38.5% in 2007. The increase is primarily the result of $4.1 million of personnel costs, $2.9 million of merit pay increases to employees, $3.3 million of benefits costs, $3.7 million related to acquisitions, $3.1 million in variable compensation accruals, and $2.1 million of additional investment in growth initiatives.

Net income increased to $26.7 million in 2008 from $19.3 million the prior year primarily due to increased sales volume and a related increase in income from operations, as well as a $4.4 million reduction in interest expense resulting from lower interest rates in the financial markets.

For the year ended December 31, 2008 cash flow from operations increased by $1.5 million to $53.2 million compared to $51.7 million in the prior year. We continue to improve collections, and day sales outstanding, which is the number of days between the billing of our revenues and the date of receipt of payment, decreased to 51 days at the end of 2008 compared to 56 days at the end of 2007.

The Company had total liquidity of $96.6 million, comprised of $58.4 million of cash and $38.2 million available under its revolving credit facility at December 31, 2008. The Company believes that it has sufficient liquidity to conduct its normal operations and fund its acquisition plan in 2009.

For 2009, the Company expects revenues to be between $750 million and $760 million which would result in growth of 6.7% to 8.1% compared to 2008. The Company also expects diluted earnings per share for 2009 to be in the range of $0.96 to $0.98, which would represent a 23.1% to 25.6% increase over 2008 diluted earnings per share.

Our analysis and discussion of our financial condition and results of operations is based upon our Consolidated Financial Statements that have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. GAAP provides the framework from which to make these estimates, assumptions and disclosures. We have chosen accounting policies within GAAP that management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions. Our accounting policies are stated in Note B to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. We believe the following accounting policies are critical to understanding our results of operations and the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.

The following represents the composition of our patient-care segment's accounts receivable balance by payor:

Disallowed sales generally relate to billings to payors with whom we do not have a formal contract. In these situations, we record the sale at usual and customary rates and simultaneously record an estimate to reduce the sale to net realizable value, based on our historical experience with the payor in question. Disallowed sales may also result if the payor rejects or adjusts certain billing codes. Billing codes are frequently updated within our industry. As soon as updates are received, we reflect the change in our centralized billing system.

As part of our preauthorization process with payors, we validate our ability to bill the payor for the service we are providing before we deliver the device. Subsequent to billing for our devices and services, there may be problems with pre-authorization or with other insurance coverage issues with payors. If there has been a lapse in coverage, the patient is financially responsible for the charges related to the devices and services received. If we do not collect from the patient, we record bad debt expense. Occasionally, a portion of a bill is rejected by a payor due to a coding error on our part and we are prevented from pursuing payment from the patient due to the terms of our contract with the insurance company. We appeal these types of decisions and are generally successful. This activity is factored into our methodology to determine the estimate for the allowance for doubtful accounts. We immediately record, as a reduction of sales, a disallowed sale for any claims that we know we will not recover and adjust our future estimates accordingly.

Certain accounts receivable may be uncollectible, even if properly pre-authorized and billed. Regardless of the balance, accounts receivable amounts are periodically evaluated to assess collectibility. In addition to the actual bad debt expense recognized during collection activities, we estimate the amount of potential bad debt expense that may occur in the future. This estimate is based upon our historical experience as well as a review of our receivable balances. On a quarterly basis, we evaluate cash collections, accounts receivable balances and write-off activity to assess the adequacy of our allowance for doubtful accounts. Additionally, a company-wide evaluation of collectibility of receivable balances older than 180 days is performed at least semi-annually, the results of which are used in the next allowance analysis. In these detailed reviews, the account's net realizable value is estimated after considering the customer's payment history, past efforts to collect on the balance and the outstanding balance, and a specific reserve is recorded if needed. From time to time, the Company may outsource the collection of such accounts to collection agencies after internal collection efforts are exhausted. In the cases when valid accounts receivable cannot be collected, the uncollectible account is written off to bad debt expense.

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standard No. 159, or SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities Fair Value Measurements ("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings.

We believe the assumptions used are appropriate. However, changes in assumptions or differences in actual experience may affect our benefit obligation and future expenses.

In December 2007, the FASB issued SFAS 141(R), Business Combinations ("SFAS 141(R)"). SFAS 141(R) provides revised guidance to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141(R) revises the accounting literature previously issued under SFAS 141, Business Combinations. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. The Company believes that SFAS 141(R) will result in increased operating expenses primarily related to legal costs associated with completing acquisitions.

In December 2007, the FASB issued SFAS 160, Noncontrolling Interest in Consolidated Financial Statements ("SFAS 160"). SFAS 160 revises ARB 51 accounting for non-controlling interests in subsidiaries. SFAS 160 is effective for fiscal years beginning after December 15, 2008. SFAS 160 will not have a material impact on the Company's financial statements.

In February 2008, the FASB issued FSP No. FAS 157-2, Effective Date of FASB Statement No. 157 ("SFAS 157-2"). SFAS 157-2 delays the application of SFAS 157 for all non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008. SFAS 157 provides guidance on the application of fair value measurement objectives required in existing GAAP literature to ensure consistency and comparability. Additionally, SFAS 157 requires additional disclosures on the fair value measurements used. The Company is currently evaluating the impact that adopting SFAS 157 will have on non-financial assets or liabilities disclosed in the Company's financial statements.

In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging Activities ("SFAS 161"), an amendment of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 161 is intended to enhance the current disclosure framework in SFAS 133. SFAS 161 requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company is currently evaluating the impact that adopting SFAS 161 will have on our financial statements.

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets ("SFAS 142-3"). SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. The intent of SFAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R), and other U.S. generally accepted accounting principles (GAAP). SFAS 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The Company believes SFAS 142-3 will not have a material impact on our financial statements.

In May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting Principles ("SFAS 162"). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This Statement will be effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SFAS 162 will not have a material impact on the Company's financial statements.

In May 2008, the FASB issued SFAS 163, Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60 ("SFAS 163"). SFAS 163 clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement of premium revenue and claim liabilities. SFAS 163 also requires expanded disclosures about financial guarantee insurance contracts. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. SFAS 163 will not have a material impact on the Company's financial statements.

The following table sets forth for the periods indicated certain items from our statements of operations as a percentage of our net sales:

Year-ended December 31, 2008 compared with the year ended December 31, 2007

Net Sales. Net sales for the year ended December 31, 2008 were $703.1 million, an increase of $65.7 million, or 10.3%, versus net sales of $637.4 million for the year ended December 31, 2007. The net sales growth was the result of a $41.3 million, or 7.3%, increase in same-center sales, an $11.5 million, or 19.1%, increase in external sales of the distribution segment, and $11.9 million contributed from acquired entities.

Cost of Goods Sold. Cost of goods sold for the year increased by $35.4 million to $343.4 million, or 48.8% of net sales, compared to $308.0 million, or 48.3% of net sales, in the prior year principally due to the increase in sales of the distribution business which have higher material costs and to a lesser extent increase in material costs at the patient care centers.

Selling, General and Administrative. Selling, general and administrative expenses for the year increased by $19.2 million to $264.8 million, or 37.7% of net sales, compared to $245.6 million, or 38.5% of net sales. Selling, general and administrative expenses increased by $19.2 million primarily the result of (i) $4.1 million of personnel costs, (ii) $2.9 million of merit pay increases to employees, (iii) $3.3 million of benefits costs, (iv) $3.7 million related to acquisitions, (v) $3.1 million in variable compensation accruals, and (vi) $2.1 million of additional investment in growth initiatives. As a percentage of sales, selling, general, and administrative expenses decreased 0.8% due to leveraging operating expenses over the increased sales volume.

Depreciation and Amortization. Depreciation and amortization expense increased $1.3 million for the year to $17.2 million from $15.9 million in prior year. The increase is a result of investments in leasehold improvements, computer hardware, and computer software over the last 18 months. In addition, as part of acquisitions completed in 2008, the Company recorded customer relationship and other intangibles. Amortization related to current year acquisitions, as well as a full year of amortization of intangibles related to SureFit, which we acquired mid-2007, resulted in an additional $0.2 million of amortization expense.

Income from Operations. Income from operations increased 14.3%, or $9.7 million, to $77.7 million from $68.0 million in the prior year due principally to the increase in net sales. Income

from operations as a percentage of net sales increased by 0.4% to 11.1% from 10.7% in the prior year due to leveraging operating costs over increased sales, offset by a slight increase in material costs.

Interest Expense. Interest expense for the year ended December 31, 2008 was $32.5 million, a decrease of $4.5 million from the $37.0 million incurred in 2007. The decrease in interest expense was attributable to more favorable variable interest rates on the Company's loans and credit facilities.

Unrealized loss from Interest Rate Swap. During 2008, the Company entered into two interest rate swap agreements under which $150.0 million of the Company's variable term loans were converted to a fixed rate. These interest rate swaps are accounted for under SFAS 133 and during the period a portion of the swaps were deemed to be ineffective resulting in the Company recording an unrealized loss of $0.7 million.

Income Taxes. The provision for income taxes for the year ended December 31, 2008 was $17.7 million, or 39.8% of pretax income, compared to $11.7 million, or 37.8% of pretax income, for the year ended December 31, 2007. The increase in income tax expense as a percentage of pretax income is partially attributable to an increase in state tax expenses and partially offset by a reduction in valuation allowances.

Net Income. As a result of the above, we recorded net income of $26.7 million for the year ended December 31, 2008, compared to net income of $19.3 million in the prior year.

Year ended December 31, 2007 compared with the year ended December 31, 2006

Net Sales. Net sales for the year ended December 31, 2007 were $637.4 million, an increase of $38.6 million, or 6.4%, versus net sales of $598.8 million for the year ended December 31, 2006. The net sales growth was the result of a $27.2 million, or 5.0%, increase in same-center sales, a $5.1 million, or 9.3%, increase in external sales of the distribution segment, and $5.9 million contributed from acquired entities, $1.1 million in other sales, offset by $0.7 million decrease as a result of closed patient care centers.

Cost of Goods Sold. Cost of goods sold for the year ended December 31, 2007 totaled $308.0 million, or 48.3% of net sales, compared to $300.1 million, or 50.1% of net sales, for the year ended December 31, 2006. Cost of goods sold as a percentage of revenue benefited from increased labor efficiency resulting from the same center sales growth, a favorable change in product mix and favorable purchasing activities.

Selling, General and Administrative. Selling, general and administrative expenses for the year ended December 31, 2007 totaled $245.6 million, or 38.5% of net sales, which was $24.0 million higher than the prior year amount of $221.6 million, or 36.9% of net sales. The increase in selling, general and administrative expenses was primarily due to: (i) $8.1 million in labor cost resulting from merit increases and increased benefits expense; (ii) $8.4 million increase in variable and incentive compensation resulting from increased performance and cash collections; (iii) $4.3 million in expenditures to support growth initiatives; and (iv) $1.4 million in rent and $2.2 million in travel and other costs, offset by a $0.4 million decrease in bad debt expense due to improved collections.

Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2007 amounted to $15.9 million, an 8.2% increase from $14.7 million for the year ended December 31, 2006. The increase in depreciation and amortization was a result of placing into service $6.5 million of computer software and peripherals, $7.7 million of leasehold improvements and $4.8 million in machinery and equipment during 2007. These additions are a result of our continued investment in our infrastructure and system enhancements. In addition, as part of SPS's acquisition of the assets of SureFit, the Company recorded customer relationship and other intangibles of $ 2.6 million which are

being amortized over ten and twenty years respectively. This contributed an additional $0.1 million in amortization expense.

Income from Operations. Principally as a result of the above, income from operations for the year ended December 31, 2007 was $68.0 million compared to $62.4 million for the year ended December 31, 2006. Income from operations as a percentage of net sales increased by 0.2% to 10.7% for the year ended December 31, 2007 from 10.5% for the year ended December 31, 2006.

Interest Expense. Interest expense for the year ended December 31, 2007 was $37.0 million, a decrease of $1.6 million from the $38.6 million incurred in 2006. The decrease in interest expense was attributable to more favorable interest rates on the Company's loans and credit facilities as a result of the Company's refinancing of outstanding bank and bond indebtedness in 2006.

Income Taxes. The provision for income taxes for the year ended December 31, 2007 was $11.7 million, or 37.8% of pretax income, compared to $3.4 million, or 49.8% of pretax income, for the year ended December 31, 2006. The 2006 tax rate was unfavorably impacted by additional tax expense associated with adjustments relating to prior years' state tax expense and non-deductible expenses.

Net Income. As a result of the above, we recorded net income of $19.3 million for the year ended December 31, 2007, compared to net income of $3.4 million in the prior year.

Our working capital at December 31, 2008 was $200.2 million compared to $165.8 million at December 31, 2008. Working capital increased principally as a result of a $28.9 million increase in cash and short-term investments. Cash on hand increased due to a $15.3 million draw on our revolving credit facility in September 2008 and continued improvements in cash collections. Days sales outstanding ("DSO"), which is the number of days between the billing for our O&P services and the date of our receipt of payment thereof, for the year ended December 31, 2008, decreased to 51 days, compared to 56 days for the same period last year. The decrease in DSO was due to a continued effort at our patient-care centers to target collections as well as the implementation of electronic billing and standard workflow protocols. The ratio of current assets to current liabilities was 3.7 to 1 at December 31, 2008 compared to 3.4 to 1 at December 31, 2007. Net cash provided by operating activities was $53.2 million for the year ended December 31, 2008, compared to $51.7 million in the prior year. The current year operating cash flows reflected improved financial performance and improved collections.

Net cash used in investing activities was $30.2 million for the year ended December 31, 2008, compared to $42.1 million in the prior year. In 2008 and 2007, we have invested $19.3 million and $20.1 million respectively, in improvements to our patient care centers and in upgrades to our computer hardware and software. During 2008, we acquired thirteen orthotic and prosthetic companies which had a total of 19 patient care centers. In 2007, we acquired two orthotic and prosthetic companies along with the assets of SureFit, LLC, a manufacturer and distributor of custom footwear. During 2007, we invested in two auction rate securities with a par value of $7.5 million.

Net cash provided by financing activities was $8.4 million for the year ended December 31, 2008 compared to net cash used of $5.8 million for the year ended December 31, 2007. In response to the volatility in the current global credit markets, on September 26, 2008 the Company decided to validate its borrowing capacity and availability by submitting a $20.0 million borrowing request under its revolving credit facility. As anticipated Lehman Commercial Paper, Inc. ("LCPI"), a subsidiary of Lehman Brothers Holdings, Inc. ("Lehman"), failed to fund its pro-rata commitment of $4.7 million and the Company borrowed a total of $15.3 million under the facility on September 29, 2008. LCPI's

total commitment is $17.8 million of our total $75.0 million dollar facility. As of December 31, 2008, the Company had $38.2 million available under the revolving credit facility, net of LCPI's $17.8 million commitment, $15.3 million already borrowed, and $3.7 million of outstanding letters of credit.

On May 26, 2006, we refinanced our debt and preferred stock with the issuance of the following instruments: (i) $175.0 million of 10¹/4% Senior Notes due 2014; (ii) a $230.0 million term loan facility (variable rate of 2.48% at December 31, 2008) which matures on May 26, 2013; and (iii) $50.0 million of Series A Convertible Preferred Stock. We also established a new $75.0 million revolving credit facility, which also matures May 26, 2013. The proceeds from these instruments were used to retire (i) $200.0 million of the 10³/8% Senior Notes; (ii) $15.6 million of the 11¹/4% Senior Subordinated Notes; (iii) $146.3 million of the Term Loan; (iv) $11.0 million outstanding under the Revolving Credit facility; (v) $64.7 million of 7% Redeemable Preferred Stock; and (vi) pay $24.7 million of transaction costs. In conjunction with the refinancing, we incurred a $17.0 million loss on the extinguishment of debt. The extinguishment loss is comprised of $11.9 million of premiums paid to debt holders, $0.3 million of fees paid to the 7% Redeemable Preferred Stock holders and $6.1 million write-off of debt issuance costs offset by a $1.3 million gain related to the interest rate swap.

The $75.0 million Revolving Credit Facility matures on May 26, 2011 and bears interest, at the Company's option, at LIBOR plus 2.75% or a Base Rate (as defined in the credit agreement) plus 1.75%. The obligations under the Revolving Credit Facility are guaranteed by the Company's subsidiaries and are secured by a first priority perfected interest in the Company's subsidiaries' shares, all of the Company's assets and all the assets of the Company's subsidiaries. The Revolving Credit Facility requires compliance with various covenants including but not limited to a maximum total leverage ratio and a maximum annual capital expenditures limit. As of December 31, 2008, the Company was in compliance with all such covenants. In response to the volatility in the current global credit markets, on September 26, 2008 the Company decided to validate its borrowing capacity and availability by submitting a $20.0 million borrowing request under the facility. As anticipated Lehman Commercial Paper, Inc. ("LCPI"), a subsidiary of Lehman Brothers Holdings, Inc. ("Lehman"), failed to fund its pro-rata commitment of $4.7 million and the Company borrowed a total of $15.3 million under the facility on September 29, 2008. LCPI's total commitment is $17.8 million of our total $75.0 million dollar facility. As of December 31, 2008, the Company had $38.2 million available under the revolving credit facility, net of LCPI's $17.8 million commitment, $15.3 million already borrowed,

and $3.7 million of outstanding letters of credit. At December 31, 2008, the interest rate under the Revolving Credit Facility was 3.22%.

The $230.0 million Term Loan matures on May 26, 2013 and requires quarterly principal and interest payments that commenced on September 30, 2006. From time to time, mandatory payments may be required as a result of capital stock issuances, additional debt incurrences, asset sales or other events as defined in the credit agreement. The obligations under the Term Loan are guaranteed by the Company's subsidiaries and are secured by a first priority perfected interest in the Company's subsidiaries' shares, all of the Company's assets and all the assets of the Company's subsidiaries. The Term Loan is subject to covenants that mirror those of the Revolving Credit Facility and as of December 31, 2008, the Company was in compliance with all such covenants. The Company secured, effective March 13, 2007, certain amendments to the Term Loan that included reducing the margin over LIBOR that the Company pays as interest under the existing Term Loan from 2.50% to 2.00%. As of December 31, 2008, the Term Loan bears interest, at the Company's option, at LIBOR plus 2.00% or a Base Rate (as defined in the credit agreement) plus 1.00%. At December 31, 2008, the interest rate on the Term Loan was 2.48%.

In May 2008, the Company entered into two interest rate swap agreements under which $150.0 million of the Company's variable rate Term Loan was converted to a fixed rate of 5.4%. The agreements, which expire April 2011, qualify as cash flow hedges in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS 133. The fair value of the interest rate swaps is an estimate of the present value of expected future cash flows the Company is to receive under the interest rate swap agreement. The valuation models used to determine the fair value of the interest rate swap are based upon forward yield curve of one month LIBOR (level 2 inputs), the hedged interest rate. There was ineffectiveness relating to the interest rate swaps for the twelve months ended December 31, 2008 of $0.7 million, which is reported as unrealized loss from interest rate swap on the income statement. Unrealized losses, related to the effective portion of the interest rate swap, of $6.5 million are reported in accumulated other comprehensive income, a component of shareholders' equity. The interest rate swap current liability of $3.7 million is reported in accrued expenses, while the interest rate swap long-term liability of $3.5 million is reported in other liabilities on the Company's balance sheet as of December 31, 2008.

The 10¹/4% Senior Notes mature June 1, 2014, are senior indebtedness and are guaranteed on a senior unsecured basis by all of the Company's current and future domestic subsidiaries. Interest is payable semi-annually on June 1 and December 1, and commenced on December 1, 2006. The Senior Notes are subject to covenants that mirror those of the Revolving Credit Facility and as of December 31, 2008, the Company was in compliance with all such covenants.

On or prior to June 1, 2009, the Company may redeem up to 35% of the aggregate principal amount of the notes at a redemption price of 110.250% of the principal amount thereof, plus accrued and unpaid interest and additional interest, if any, with the net cash proceeds of an equity offering; provided that (i) at least 65% of the aggregate principal amount of the notes remains outstanding immediately after the redemption (excluding notes held by the Company and its subsidiaries); and (ii) the redemption occurs within 90 days of the date of the closing of the equity offering.

Except as discussed above, the notes are not redeemable at the Company's option prior to June 1, 2010. On or after June 1, 2010, the Company may redeem all or part of the notes upon not less than 30 days and no more than 60 days' notice, for the twelve-month period beginning on June 1 of the following years; at (i) 105.125% during 2010; (ii) 102.563% during 2011; and (iii) 100.0% during 2012 and thereafter.

We believe that, based on current levels of operations and anticipated growth, cash generated from operations, together with other available sources of liquidity, including borrowings available under the Revolving Credit Facility, will be sufficient for at least twelve months to fund anticipated capital expenditures and make required payments of principal and interest on our debt, including payments due on our outstanding debt. We also believe that based on the Company's cash and cash equivalents balances of $58.4 million at December 31, 2008 and our expected continued increase in operating cash flows, the current lack of liquidity in the ARS market will not have a material impact on the Company's liquidity, financial condition, results of operations or cash flows. In addition, we will continue to evaluate potential acquisitions and expect to fund such acquisitions from our available sources of liquidity, as discussed above. We are limited to $40.0 million in acquisitions annually by the terms of the Revolving Credit Facility agreement. As of December 31, 2008, the Company had $38.2 million of available credit under the Revolving Credit Facility. Availability under the Company's Revolving Credit Facility is net of LCPI's $17.8 million commitment, $15.3 million already borrowed, and $3.7 million of outstanding letters of credit.

In June 2008, the Company's average closing price of its common stock price exceeded the Company's forced conversion price of the Series A Convertible Preferred Stock by 200% for a 20-trading day period, triggering an acceleration of the Series A Preferred dividends that were otherwise payable through May 26, 2011. The accelerated dividends were paid in the form of increased stated value of preferred stock, in lieu of cash. On July 25, 2008, the Company notified the holder of Series A Preferred of its election to force the conversion of the Series A Preferred into 7,308,730 shares of common stock. The conversion of the preferred shares to common stock occurred on August 8, 2008.

The following table sets forth our contractual obligations and commercial commitments as of December 31, 2008:

In addition to the table above, the Company has certain other tax liabilities as of December 31, 2008 comprised of $1.4 million of tax effected unrecognized tax benefits, of which $0.5 million is expected to be settled in the fiscal year 2009, with the remainder thereafter.

In 2004, we implemented an unfunded noncontributory defined benefit plan that covers certain of our senior executives. We have engaged an actuary to calculate the benefit obligation and net benefits cost as of December 31, 2008, and 2007 and have utilized the actuarial calculations as a basis for establishing our benefit obligation liability.

The following weighted average assumptions were used to determine the benefit obligation and net benefit cost at December 31:

The discount rate at December 31, 2008 of 6.25% is consistent with the discount rate used at December 31, 2007. The average rate of increase in compensation increased 25 basis points to 3.25 percent at December 31, 2008, compared to 3.00% at December 31, 2007.

Future payments under the supplemental executive retirement plan as of December 31, 2008 are as follows:

The Company's wholly-owned subsidiary, Innovative Neurotronics, Inc. ("IN, Inc."), is party to a non-binding purchase agreement under which it purchases assembled WalkAide System kits. As of December 31, 2008, IN, Inc. had outstanding purchase commitments of approximately $0.4 million.

The following table sets forth selected operating data as of the end of the years indicated:

We are exposed to the market risk that is associated with changes in interest rates. At December 31, 2008, all our outstanding debt, with the exception of the Revolving Credit Facility and $73.1 million of the Term Loan, is subject to fixed interest rates. (see Item 7A below.)

We have existing obligations relating to our 10¹/4% Senior Notes, Term Loan, Subordinated Seller Notes, and Series A Convertible Preferred Stock. As of December 31, 2008, we have cash flow exposure to the changing interest rates on $73.1 million of the Term Loan and the entire $15.3 million borrowed under the Revolving Credit Facility. The other obligations have fixed interest or dividend rates.

We have a $75.0 million revolving credit facility, with an outstanding balance of $15.3 million at December 31, 2008, as discussed in Note G of the Notes to Consolidated Financial Statements included in this report. The rates at which interest accrues under the entire outstanding balance are variable.

In addition, in the normal course of business, we are exposed to fluctuations in interest rates. From time to time, we execute LIBOR contracts to fix interest rate exposure for specific periods of time. At December 31, 2008, we had one contract outstanding which fixed LIBOR at 2.48% and the contract expires on January 29, 2009.

Presented below is an analysis of our financial instruments as of December 31, 2008 that are sensitive to changes in interest rates. The table demonstrates the changes in estimated annual cash flow related to the outstanding balance under the Term Loan, the Revolving Credit Facility, and the Interest

Rate Swap, calculated for an instantaneous parallel shift in interest rates, plus or minus 50 basis points ("BPS"), 100 BPS, and 150 BPS.

The consolidated financial statements and schedules required hereunder and contained herein are listed under Item 15(a) below and included beginning at page F-4 of this Annual Report on Form 10-K.

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

The Company's disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by it in its periodic reports filed with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. Based on an evaluation of the Company's disclosure controls and procedures conducted by the Company's Chief Executive Officer and Chief Financial Officer, such officers concluded that the Company's disclosure controls and procedures were effective as of December 31, 2008. Additionally, the Company's officers concluded that the Company's disclosure controls and procedures were effective as of December 31, 2008 to ensure that information required to be disclosed in the reports filed with the Exchange Act was accumulated and communicated to management, including the Company's Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

In accordance with Section 404(a) of the Sarbanes-Oxley Act of 2002 and Item 308(a) of the Commission's Regulation S-K, the report of management on the Company's internal control over financial reporting is set forth immediately preceding the Company's financial statements included in this Annual Report on Form 10-K.

The effectiveness of the Company's internal control over financial reporting as of December 31, 2008 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report included in this Annual Report on Form 10-K.

In accordance with Rule 13a-15(d) under the Securities Exchange Act of 1934, management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, determined that there was no change in the Company's internal control over financial reporting that occurred during the fourth quarter ended December 31, 2008, that has materially effected, or is reasonably likely to materially effect, the Company's internal control over financial reporting.

Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item regarding directors is hereby incorporated by reference from our definitive proxy statement or amendment hereto to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report. Information regarding our executive officers is set forth at the end of Part I of this Annual Report on Form 10-K.

Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item is hereby incorporated by reference from our definitive proxy statement or amendment hereto to be filed

pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Pursuant to General Instruction G(3) of Form 10-K, the information called for by this item is hereby incorporated by reference from our definitive proxy statement or amendment hereto to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Consolidated Statements of Operations for the Three Years Ended December 31, 2008

Consolidated Statements of Changes in Shareholders' Equity for the Three Years Ended December 31, 2008

Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2008

All other schedules are omitted either because they are not applicable or required, or because the required information is included in the financial statements or notes thereto.

		Document

3(a	)	Certificate of Incorporation, as amended, of the Registrant. (Incorporated herein by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1988).
3(b	)	Certificate of Amendment of the Registrant's Certificate of Incorporation (which, among other things, changed the Registrant's corporate name from Sequel Corporation to Hanger Orthopedic Group, Inc.), as filed on August 11, 1989 with the Office of the Secretary of State of Delaware. (Incorporated herein by reference to Exhibit 3(b) to the Registrant's Current Report on Form 8-K dated February 13, 1990).
3(c	)	Certificate of Agreement of Merger of Sequel Corporation and Delaware Sequel Corporation. (Incorporated herein by reference to Exhibit 3.1(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1988).
3(d	)	Certificate of Ownership and Merger of Hanger Acquisition Corporation and J. E. Hanger, Inc. as filed with the Office of the Secretary of the State of Delaware on April 11, 1989. (Incorporated herein by reference to Exhibit 2(f) to the Registrant's Current Report on Form 8-K dated May 15, 1989).
3(e	)	Certificate of Designation, Preferences and Rights of Preferred Stock of the Registrant as filed on February 12, 1990 with the Office of the Secretary of State of Delaware. (Incorporated herein by reference to Exhibit 3(a) to the Registrant's Current Report on Form 8-K dated February 13, 1990).
3(f	)	Certificate of Amendment to Certificate of Incorporation of the Registrant, as filed with the Secretary of State of Delaware on September 16, 1999. (Incorporated herein by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
3(g	)	Certificate of Designation, Rights and Preferences of 7% Redeemable Preferred Stock as filed with the Office of the Secretary of State of Delaware on June 28, 1999. (Incorporated herein by reference to Exhibit 2(b) to the Registrant's Current Report on Form 8-K dated July 1, 1999).
3(h	)	Certificate of Elimination of Class A, B, C, D, E and F Preferred Stock of the Registrant as filed with the Office of the Secretary of State of Delaware on June 18, 1999. (Incorporated herein by reference to Exhibit 2(c) to the Registrant's Current Report on Form 8-K dated July 1, 1999).
3(i	)	Amended and Restated By-Laws of the Registrant. (Incorporated herein by reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008).

		Document

3(j	)	Certificate of Designations of Series A Convertible Preferred Stock as filed by the Registrant with the Delaware Secretary of State on May 26, 2006 (Incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the Registrant on May 30, 2006).
10(a	)	1991 Stock Option Plan of the Registrant, as amended through September 16, 1999. (Incorporated herein by reference to Exhibit 4(a) to the Registrant's Proxy Statement, dated July 28, 1999, relating to the Registrant's Annual Meeting of Stockholders held on September 8, 1999).*
10(b	)	1993 Non-Employee Directors Stock Option Plan of the Registrant. (Incorporated herein by reference to Exhibit 4(b) to the Registrant's Registration Statement on Form S-8 (File No. 33-63191)).*
10(c	)	Asset Purchase Agreement, dated as of March 26, 1997, by and between Hanger Prosthetics & Orthotics, Inc., Acor Orthopedic, Inc., and Jeff Alaimo, Greg Alaimo and Mead Alaimo. (Incorporated by reference to Exhibit 2 to the Current Report on Form 8-K filed by the Registrant on April 15, 1997).
10(d	)	Asset Purchase Agreement, dated as of May 8, 1997, by and between Hanger Prosthetics & Orthotics, Inc., Fort Walton Orthopedic, Inc., Mobile Limb and Brace, Inc. and Frank Deckert, Ronald Deckert, Thomas Deckert, Robert Deckert and Charles Lee. (Incorporated by reference to Exhibit 2 to the Current Report on Form 8-K filed by the Registrant on June 5, 1997).
10(e	)	Asset Purchase Agreement, dated as of November 3, 1997, by and between Hanger Prosthetics & Orthotics, Inc., Morgan Prosthetic-Orthotics, Inc. and Dan Morgan. (Incorporated herein by reference to Exhibit 10(v) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997).
10(f	)	Asset Purchase Agreement, dated as of December 23, 1997, by and between Hanger Prosthetics & Orthotics, Inc., Harshberger Prosthetic & Orthotic Center, Inc., Harshberger Prosthetic & Orthotic Center of Mobile, Inc., Harshberger Prosthetic & Orthotic Center of Florence, Inc., FAB-CAM, Inc. and Jerald J. Harshberger. (Incorporated herein by reference to Exhibit 10(w) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997).
10(g	)	Stock Purchase Agreement, dated as of April 2, 1999, by and among NovaCare, Inc., NC Resources, Inc., the Registrant and HPO Acquisition Corporation, Amendment No. 1 thereto, dated as of May 19, 1999, and Amendment No. 2 thereto, dated as of June 30, 1999. (Incorporated herein by reference to Exhibit 2(a) to the Registrant's Current Report on Form 8-K dated July 15, 1999.)
10(h	)	Amended and Restated 2002 Stock Incentive Plan, as amended through May 10, 2007. (Incorporated herein by reference to Appendix 1 to the Registrant's Proxy Statement, dated April 10, 2007, relating to the Registrant's Annual Meeting of Stockholders held on May 10, 2007).*
10(i	)	Amended and Restated 2003 Non-Employee Directors' Stock Incentive Plan, as amended through May 10, 2007. (Incorporated herein by reference to Appendix 2 to the Registrant's Proxy Statement, dated April 10, 2007, relating to the Registrant's Annual Meeting of Stockholders held on May 10, 2007).*

		Document

10(j	)	Master Amendment, dated as of October 9, 2004, between the Registrant, Seattle Systems, Inc.(formerly known as USMC Corp., the successor in interest to United States Manufacturing Company, LLC, and which merged with and into OPMC Acquisition Corp. on December 26, 2001), Southern Prosthetic Supply, Inc., and DOBI-Symplex, Inc. (formerly known as Seattle Orthopedic Group, Inc.) (Incorporated herein by reference to Exhibit 10(ee) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2004).
10(k	)	Third Amendment to Amended and Restated Credit Agreement and Waiver, dated as of September 2, 2004, among the Registrant, the lenders' signatory thereto and General Electric Capital Corporation, as Administrative Agent. (Incorporated herein by reference to Exhibit 10 to the Registrant's Form 8-K dated September 2, 2004).
10(l	)	Form of Stock Option Agreement (Non-Executive Employees), Stock Option Agreement (Executive Employees), Restricted Stock Agreement (Non-Executive Employees) and Restricted Stock Agreement (Executive Employees). (Incorporated herein by reference to Exhibits 10.1, 10.2, 10.3 and 10.4, respectively, to the Registrant's Current Report on Form 8-K filed on February 24, 2005).
10(m	)	Supplemental Executive Retirement Plan, dated January 1, 2005 (Incorporated herein by reference to Exhibit 10(dd) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2005).*
10(n	)	Fourth Amendment to Amended and Restated Credit Agreement, dated as of August 26, 2005, among the Registrant, the lenders' signatory thereto and General Electric Capital Corporation, as Administrative Agent. (Incorporated herein by reference to Exhibit 10 to the Registrant's Form 8-K filed on August 30, 2005).
10(o	)	Employment and Non-Compete Agreement, commencing as of April 1, 2006, between the Registrant and John Rush, M.D. (Incorporated herein by reference to Exhibit 10(ff) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2005).*
10(p	)	Second Amended and Restated Employment Agreement, effective as of January 1, 2005, by and between Richmond L. Taylor and the Registrant. (Incorporated herein by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006).*
10(q	)	Second Amended and Restated Employment Agreement, effective as of January 1, 2005, by and between George E. McHenry and the Registrant. (Incorporated herein by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006).*
10(r	)	Purchase Agreement, dated as of May 23, 2006, between the Registrant and the Initial Purchasers named in Schedule I thereto relating to the Registrant's 10¹/4% Senior Notes due 2014. (Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on May 30, 2006).
10(s	)	Indenture, dated as of May 26, 2006, among the Registrant, the Registrant's subsidiaries signatory thereto and Wilmington Trust Company, as trustee, relating to the Registrant's 10¹/4% Senior Notes due 2014. (Incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Registrant on May 30, 2006).

		Document

10(t	)	Registration Rights Agreement, dated as of May 26, 2006, among the Registrant, the Registrant's subsidiaries signatory thereto and the initial purchasers named therein relating to the Registrant's 10¹/4% Senior Notes due 2014. (Incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the Registrant on May 30, 2006).
10(u	)	Amended and Restated Preferred Stock Purchase Agreement, dated as of May 25, 2006, by and among the Registrant, Ares Corporate Opportunities Fund, L.P. and the Initial Purchasers identified therein. (Incorporated herein by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
10(v	)	Registration Rights Agreement, dated as of May 26, 2006, among the Registrant and Ares Corporate Opportunities Fund, L.P. (Incorporated herein by reference to Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
10(w	)	Letter Agreements, dated May 26, 2006, between the Registrant and Ares Corporate Opportunities Fund, L.P. regarding board and management rights. (Incorporated herein by reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
10(x	)	Credit Agreement, dated as of May 26, 2006, among the Registrant, the Several Lenders identified therein, Lehman Brothers Inc. and Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint Book-Runners, Citicorp North America, Inc., as Administrative Agent, Lehman Commercial Paper Inc., as Syndication Agent, and LaSalle Bank National Association and General Electric Capital Corporation, as Co-Documentation Agents. (Incorporated herein by reference to Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
10(y	)	Guarantee and Collateral Agreement, dated as of May 26, 2006, made by the Registrant, as Borrower, and certain of its subsidiaries, in favor of Citicorp North America, Inc., as Administrative Agent. (Incorporated herein by reference to Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
10(z	)	Amended and Restated Employment and Non-Compete Agreement, dated as of January 1, 2003, between the Registrant and Ron May. (Incorporated herein by reference to Exhibit 10(z) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2006).*
10(aa	)	Third Amended and Restated Employment Agreement, effective as of January 1, 2005, by and between Ivan R. Sabel and the Company. (Incorporated herein by reference to Exhibit 10(aa) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2006).*
10(bb	)	Third Amended and Restated Employment Agreement, effective as of January 1, 2005, by and between Thomas F. Kirk and the Company. (Incorporated herein by reference to Exhibit 10(bb) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2006).*
10(cc	)	First Amendment to Credit Agreement, by and among the Registrant, the Lenders party thereto and Citicorp North America, Inc., dated as of March 12, 2007. (Incorporated herein by reference to Exhibit 10 (cc) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2006).

		Document

10(dd	)	Fourth Amended and Restated Employment Agreement, effective as of January 1, 2005, by and between and Ivan R. Sabel and the Registrant. (Incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007).*
10(ee	)	Third Amended and Restated Employment Agreement, effective as of January 1, 2005, by and between George E. McHenry and the Registrant. (Incorporated herein by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007).*
10(ff	)	Fourth Amended and Restated Employment Agreement, effective as of January 1, 2005, by and between Thomas F. Kirk and the Registrant. (Incorporated herein by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007).*
10(gg	)	Third Amended and Restated Employment Agreement, effective as of January 1, 2005, by and between Richmond L. Taylor and the Registrant. (Incorporated herein by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007).*
10(hh	)	Second Amended and Restated Employment Agreement, effective as of September 13, 2007, by and between Ronald N. May and the Registrant. (Incorporated herein by reference to Exhibit 10 to the Current Report on Form 8-K filed by the Registrant on November 13, 2007).*
10(ii	)	Amendment to Fourth Amended and Restated Employment Agreement, dated as of February 5, 2008, by and between Ivan R. Sabel and the Registrant. (Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on February 6, 2008).*
10(jj	)	Amendment to Fourth Amended and Restated Employment Agreement, dated as of February 5, 2008, by and between Thomas F. Kirk and the Registrant. (Incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Registrant on February 6, 2008).*
21		List of Subsidiaries of the Registrant. (Filed herewith).
23.1		Consent of PricewaterhouseCoopers LLP. (Filed herewith).
31.1		Written Statement of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith).
31.2		Written Statement of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith).
32		Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Furnished herewith).

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.

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.

The following sets forth, in accordance with Section 404(a) of the Sarbanes-Oxley Act of 2002 and Item 308(a) of the Securities and Exchange Commission's Regulation S-K, the annual report of management of Hanger Orthopedic Group, Inc. (the "Company") on the Company's internal control over financial reporting.

1. Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process designed by, or under the supervision of, the Company's Chief Executive Officer and Chief Financial Officer, and effected by the Company's Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

2. Management of the Company, in accordance with Rule 13a-15(c) under the Securities Exchange Act of 1934 and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's internal control over financial reporting as of December 31, 2008. The framework on which management's evaluation of the Company's internal control over financial reporting is based is the "Internal Control—Integrated Framework" published in 1992 by the Committee of Sponsoring Organizations ("COSO") of the Treadway Commission.

3. Management has determined that the Company's internal control over financial reporting, as of December 31, 2008, was effective. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

4. Management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2008 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statement of income, comprehensive income, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Hanger Orthopedic Group, Inc. and its subsidiaries at December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing on page S-1, presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting appearing on page F-1. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note B to the consolidated financial statements, the Company changed the manner in which it accounts for uncertainty in income taxes effective January 1, 2007.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

HANGER ORTHOPEDIC GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share amounts)

			December 31,

			2008		2007
		ASSETS
CURRENT ASSETS
	Cash and cash equivalents		$	58,413	$	26,938
	Short-term investments			4,968		7,500
	Accounts receivable, less allowance for doubtful accounts of $6,099 and $3,965 in 2008 and 2007, respectively			99,861		99,117
	Inventories			85,960		82,228
	Prepaid expenses, other current assets and income taxes receivable			12,512		10,747
	Deferred income taxes			12,312		8,571

		Total current assets		274,026		235,101

PROPERTY, PLANT AND EQUIPMENT
	Land			949		975
	Buildings			4,967		4,881
	Furniture and fixtures			13,310		12,747
	Machinery and equipment			32,070		31,093
	Leasehold improvements			47,579		41,520
	Computer and software			67,802		56,231

		Total property, plant and equipment, gross		166,677		147,447
	Less accumulated depreciation and amortization			115,943		100,133

		Total property, plant and equipment, net		50,734		47,314

INTANGIBLE ASSETS
	Excess cost over net assets acquired			470,411		459,562
	Patents and other intangible assets, $13,854 and $12,246 in 2008 and 2007 respectively, less accumulated amortization of $8,782 and $7,647 in 2008 and 2007, respectively			5,072		4,599

		Total intangible assets, net		475,483		464,161

OTHER ASSETS
	Debt issuance costs, net			7,482		9,304
	Other assets			6,025		3,803

		Total other assets		13,507		13,107

TOTAL ASSETS			$	813,750	$	759,683

The accompanying notes are an integral part of the consolidated financial statements.

HANGER ORTHOPEDIC GROUP, INC.

CONSOLIDATED BALANCE SHEETS (Continued)

(Dollars in thousands, except share and per share amounts)

			December 31,

			2008			2007
LIABILITIES, PREFERRED STOCK, AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
	Current portion of long-term debt		$	3,794		$	5,691
	Accounts payable			18,764			17,257
	Accrued expenses			16,810			11,316
	Accrued interest payable			2,074			1,937
	Accrued compensation related costs			32,336			33,106

		Total current liabilities		73,778			69,307

LONG-TERM LIABILITIES
	Long-term debt, less current portion			418,530			405,201
	Deferred income taxes			33,166			30,574
	Other liabilities			21,410			16,409

		Total liabilities		546,884			521,491

COMMITMENTS AND CONTINGENCIES (Note H)
PREFERRED STOCK
	Series A Convertible Preferred Stock, liquidation preference of $1,000 per share, 50,000 shares authorized, no shares and 50,000 issued and outstanding at December 31, 2008 and 2007, respectively			—			47,654

SHAREHOLDERS' EQUITY
	Common stock, $.01 par value; 60,000,000 shares authorized, 32,513,190 shares and 24,432,518 shares issued and outstanding in 2008 and 2007, respectively			325			244
	Additional paid-in capital			221,623			161,955
	Accumulated other comprehensive income			(4,497	)		—
	Retained earnings			50,071			28,995

				267,522			191,194
	Treasury stock at cost (141,154 shares)			(656	)		(656	)

		Total shareholders' equity		266,866			190,538

TOTAL LIABILITIES, PREFERRED STOCK, AND SHAREHOLDERS' EQUITY			$	813,750		$	759,683

The accompanying notes are an integral part of the consolidated financial statements.

HANGER ORTHOPEDIC GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31,

(Dollars in thousands, except share and per share amounts)

		2008		2007		2006

Net sales		$	703,129	$	637,350	$	598,766
Cost of goods sold (exclusive of depreciation and amortization)			343,421		307,952		300,065
Selling, general and administrative			264,797		245,542		221,592
Depreciation and amortization			17,183		15,876		14,670

	Income from operations		77,728		67,980		62,439
Interest expense			32,549		36,987		38,643
Extinguishment of debt			—		—		16,953
Unrealized loss from interest rate swap			738		—		—

	Income before taxes		44,441		30,993		6,843
Provision for income taxes			17,695		11,726		3,409

	Net income		26,746		19,267		3,434
Preferred stock dividend and accretion-7% Redeemable Preferred Stock			—		—		2,751
Preferred stock dividend-Series A Convertible Preferred Stock			5,670		1,665		999
Accretion of beneficial conversion feature			—		—		3,768

	Net income (loss) applicable to common stock	$	21,076	$	17,602	$	(4,084	)

Basic Per Common Share Data
Net income (loss)		$	0.81	$	0.78	$	(0.19	)

Shares used to compute basic per common share amounts			25,930,096		22,475,513		21,981,026

Diluted Per Common Share Data
Net income (loss)		$	0.78	$	0.64	$	(0.19	)

Shares used to compute diluted per common share amounts			27,090,817		30,257,021		21,981,026

The accompanying notes are an integral part of the consolidated financial statements.

HANGER ORTHOPEDIC GROUP, INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

For the Three Years Ended December 31, 2008

(In thousands)

			Common Stock			Additional Paid in Capital			Unearned Compensation			Retained Earnings			Other Comprehensive Income			Treasury Stock			Total

Balance, December 31, 2005	22,228		$	222		$	156,346		$	(2,615	)	$	11,945		$	—		$	(656	)	$	165,242
Preferred dividends declared	—			—			—			—			(3,730	)		—			—			(3,730	)
Accretion of Redeemable Convertible Preferred Stock	—			—			—			—			(20	)		—			—			(20	)
Net income	—			—			—			—			3,434			—			—			3,434
Issuance of Common Stock in connection with the exercise of stock options	160			2			586			—			—			—			—			588
Adoption of FAS123R	—			—			(2,615	)		2,615			—			—			—			—
Forfeiture of restricted stock	(10	)		—			—			—			—			—			—			—
Preferred Stock beneficial conversion feature—Series A	—			—			—			—			(3,768	)		—			—			(3,768	)
Accretion of preferred stock beneficial conversion feature	—			—			—			—			3,768			—			—			3,768
Compensation expense associated with stock options	—			—			100			—			—			—			—			100
Compensation expense associated with restricted stock	—			—			2,063			—			—			—			—			2,063

Balance, December 31, 2006	22,378		$	224		$	156,480		$	—		$	11,629		$	—		$	(656	)	$	167,677
Preferred dividends declared	—			—			—			—			(1,665	)		—			—			(1,665	)
Net income	—			—			—			—			19,267			—			—			19,267
Issuance of Common Stock in connection with the exercise of stock options	399			4			1,621			—			—			—			—			1,625
Issuance of restricted stock	1,686			17			(17	)		—			—			—			—			—
Forfeiture of restricted stock	(30	)		(1	)		1			—			—			—			—			—
Adoption of FIN 48	—			—			—			—			(236	)		—			—			(236	)
Compensation expense associated with stock options	—			—			38			—			—			—			—			38
Compensation expense associated with restricted stock	—			—			3,295			—			—			—			—			3,295
Tax benefit associated with vesting of restricted stock	—			—			537			—			—			—			—			537

Balance, December 31, 2007	24,433		$	244		$	161,955		$	—		$	28,995		$	—		$	(656	)	$	190,538
Preferred dividends declared	—			—			—			—			(5,670	)		—			—			(5,670	)
Net income	—			—			—			—			26,746			—			—			26,746
Issuance of Common Stock in connection with the exercise of stock options	206			2			658			—			—			—			—			660
Issuance of restricted stock	594			6			(6	)		—			—			—			—			—
Forfeiture of restricted stock	(29	)		—			—			—			—			—			—			—
Compensation expense associated with stock options	—			—			9			—			—			—			—			9
Compensation expense associated with restricted stock	—			—			4,702			—			—			—			—			4,702
Tax benefit associated with vesting of restricted stock	—			—			1,470			—			—			—			—			1,470
Unrealized loss on interest rate swaps	—			—			—			—			—			(3,899	)		—			(3,899	)
Unrealized loss on auction rate securities	—			—			—			—			—			(598	)		—			(598	)
Conversion of Series A Convertible Preferred Stock	7,309			73			52,835			—			—			—			—			52,908

Balance, December 31, 2008	32,513		$	325		$	221,623		$	—		$	50,071		$	(4,497	)	$	(656	)	$	266,866

The accompanying notes are an integral part of the consolidated financial statements.

HANGER ORTHOPEDIC GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31,

(Dollars in thousands)

			2008			2007			2006

Cash flows from operating activities:
	Net income		$	26,746		$	19,267		$	3,434
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Extinguishment of debt			—			—			16,953
	Tender premium related to extinguishment of debt			—			—			(11,866	)
	Unrealized loss on interest rate swap			738			—			—
	Unrealized loss on investments classified as trading securities			32			—			—
	Gain on disposal of assets			60			255			(15	)
	Provision for bad debt			15,906			15,774			16,174
	Provision for deferred income taxes			456			1,508			(985	)
	Depreciation and amortization			17,183			15,877			14,670
	Amortization of debt issuance costs			1,822			1,813			2,010
	Compensation expense on stock options and restricted stock			4,712			3,332			2,163
	Amortization of terminated interest rate swaps			—			—			(207	)
	Changes in assets and liabilities, net of effects of acquired companies:
		Accounts receivable		(15,404	)		(13,519	)		(12,378	)
		Inventories		(3,118	)		(5,569	)		1,047
		Prepaid expenses, other current assets, and income taxes receivable		774			(3,226	)		(2,408	)
		Other assets		(213	)		(114	)		(37	)
		Accounts payable		631			(2,451	)		(508	)
		Accrued expenses, accrued interest payable, and income taxes payable		995			(65	)		(6,473	)
		Accrued compensation related costs		(769	)		12,346			(914	)
		Other liabilities		2,669			6,459			3,377

Net cash provided by operating activities				53,220			51,687			24,037

Cash flows from investing activities:
	Purchase of property, plant and equipment (net of acquisitions)			(19,330	)		(20,129	)		(12,827	)
	Acquisitions and contingent considerations (net of cash acquired)			(10,911	)		(14,833	)		(693	)
	Purchase of short-term investments			—			(7,500	)		—
	Proceeds from sale of property, plant and equipment			73			366			308

Net cash used in investing activities				(30,168	)		(42,096	)		(13,212	)

Cash flows from financing activities:
	Borrowings under revolving credit agreement			15,253			—			21,000
	Repayments under revolving credit agreement			—			—			(26,000	)
	Repayment of term loan			(3,485	)		(2,301	)		(147,774	)
	Repayment of senior notes			—			—			(200,000	)
	Repayment of senior subordinated debt			—			—			(15,562	)
	Repurchase of 7% Redeemable Convertible Preferred Stock			—			—			(64,693	)
	Proceeds from new term loan facility			—			—			230,000
	Proceeds from senior note issuance			—			—			175,000
	Proceeds from issuance of Series A Convertible Preferred Stock			—			—			50,000
	Scheduled repayment of long-term debt			(3,590	)		(3,186	)		(2,966	)
	Increase in debt issue costs			—			(265	)		(13,534	)
	Proceeds from issuance of Common Stock			661			1,625			588
	Change in book overdraft			—			—			(667	)
	Series A Convertible Preferred Stock dividend payment			(416	)		(1,665	)		(999	)

Net cash provided by (used in) financing activities				8,423			(5,792	)		4,393

Increase (Decrease) in cash and cash equivalents				31,475			3,799			15,218
Cash and cash equivalents, at beginning of year				26,938			23,139			7,921

Cash and cash equivalents, at end of year			$	58,413		$	26,938		$	23,139

The accompanying notes are an integral part of the consolidated financial statements.

Hanger Orthopedic Group, Inc. is the nation's largest owner and operator of orthotic & prosthetic ("O&P") patient-care centers. In addition to providing patient care services through its operating subsidiaries, the Company also is the largest distributor of branded and private label O&P devices and components in the United States. Hanger's subsidiary, Hanger Prosthetics & Orthotics, Inc., formerly known as J.E. Hanger, Inc., was founded in 1861 by a Civil War amputee and is the oldest company in the O&P industry in the United States of America. The Company also creates products, through its wholly-owned subsidiary Innovative Neurotronics, Inc. ("IN, Inc."), for sale in its patient-care centers and through a sales force, to patients who have had a loss of mobility due to strokes, multiple sclerosis or other similar conditions. Another subsidiary, Linkia LLC ("Linkia"), develops programs to manage all aspects of O&P patient care for large private payors.

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

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. At various times throughout the year, the Company maintains cash balances in excess of Federal Deposit Insurance Corporation limits.

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standard No. 157, Fair Value Measurements, or SFAS 157, which establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS 157 requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be grouped, based on significant levels of inputs as follows:

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

The following is a listing of the Company's assets and liabilities required to be measured at fair value on a recurring basis and where they are classified within the hierarchy as of December 31, 2008:

Investment securities available-for-sale consist of auction rate securities accounted for in accordance with Statement of Financial Accounting Standards No. 115 ("FAS 115"), "Accounting for Certain Investments in Debt and Equity Securities." Available-for-sale securities are reported at fair value with unrealized gains and losses excluded from earnings and reported in shareholders' equity. Under FAS 115, securities purchased to be held for indeterminate periods of time and not intended at the time of purchase to be held until maturity are classified as available-for-sale securities with any unrealized gains and losses reported as a separate component of accumulated other comprehensive loss. We continually evaluate whether any marketable investments have been impaired and, if so, whether such impairment is temporary or other than temporary.

Our investments consist of two auction rate securities ("ARS") with a credit rating of either A2 or AAA. ARS are securities that are structured with short-term interest rate reset dates which generally occur every 28 days and are linked to LIBOR. At the reset date, investors can attempt to sell via auction or continue to hold the securities at par. As of December 31, 2008, both investments failed at auction due to sell orders exceeding buy orders. The funds associated with these securities will not be accessible until a successful auction occurs, a buyer is found outside of the auction process, the issuer refinances the underlying debt, or the underlying security matures. The Company's ARS are reported at fair value.

The fair values of our ARSs were estimated through use of discounted cash flow models. These models consider, among other things, the timing of expected future successful auctions, collateralization of underlying security investments and the credit worthiness of the issuer. Since these inputs were not observable, they are classified as level 3 inputs under the fair value accounting rules discussed below under "Fair Value". As a result of the lack of liquidity in the ARS market and not as a result of the quality of the underlying collateral, for the twelve months ended December 31, 2008, the Company recorded an unrealized loss of $1.0 million related to the ARS which has a par value of $2.5 million and is classified as other long term assets. This loss is reflected in other comprehensive income in our consolidated balance sheet.

On November 4, 2008, the Company agreed to accept Auction Rate Security Rights ("the Rights") from UBS offered through a prospectus filed on October 7, 2008. The Rights permit the Company to sell, or put, its auction rate securities back to UBS at par value, which is $5.0 million, at any time during the period from June 30, 2010 through July 2, 2012. The Company expects to exercise these Rights and put its auction rate securities back to UBS on June 30, 2010, the earliest date allowable under the Rights.

By accepting the Rights, the Company can no longer assert that it has the intent to hold the auction rate securities until anticipated recovery. Therefore, the Company recognized an other-than-temporary impairment charge of approximately $1.0 million during the year ending December 31, 2008 to adjust the value of the ARS to its fair value of $4.0 million. Under the Rights agreement the Company is permitted to put the auction rate securities back to UBS at par value, accordingly the Company has accounted for the Rights as a separate asset with a fair value of $1.0 million. The fair value of the Rights was determined by utilizing a discounted cash flow models adjusted for the economic ability of UBS to meet the obligation. Recordation of the Rights asset resulted in a gain of $1.0 million during the year ended December 31, 2008. The charge related to the impairment and the gain resulting from the Rights asset are reflected as components of earnings.

The Company has elected to classify the Rights and reclassify our investments in auction rate securities as trading securities, as defined by FAS 115. As a result, the Company will be required to assess the fair value of these two individual assets and record changes each period until the Rights are exercised or the auction rate securities are redeemed.

In May 2008, the Company entered into two interest rate swap agreements under which $150.0 million of the Company's variable rate Term Loans were converted to a fixed rate of 5.4%. The agreements, which expire April 2011, qualify as cash flow hedges in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS 133. The fair value of the interest rate swaps is an estimate of the present value of expected future cash flows the Company is to receive under the interest rate swap agreement. The valuation models used to determine the fair value of the interest rate swap are based upon forward yield curve of one month LIBOR (level 2 inputs), the hedged interest rate. There was ineffectiveness relating to the interest rate swaps for the twelve months ended December 31, 2008 of $0.7 million, which is reported as unrealized loss from the interest rate swap on the income statement. Unrealized losses, related to the effective portion of the interest rate swap, of $6.5 million are reported in accumulated other comprehensive income, a component of shareholders' equity. The interest rate swap current liability of $3.7 million is reported in accrued expenses, while the interest rate swap long-term liability of $3.5 million is reported in other liabilities on the Company's balance sheet as of December 31, 2008.

Revenues from the sale of orthotic and prosthetic devices and associated services to patients are recorded when the device is accepted by the patient, provided that (i) delivery has occurred or services have been rendered; (ii) persuasive evidence of an arrangement exists; (iii) the sales price is fixed or determinable; and (iv) collectibility is reasonably assured. Revenues on the sale of orthotic and prosthetic devices to customers by the distribution segment are recorded upon the shipment of products, in accordance with the terms of the invoice, net of merchandise returns received and the amount established for anticipated returns. Discounted sales are recorded at net realizable value. Deferred revenue represents prepaid tuition and fees received from students enrolled in our practitioner education program. Revenue at the patient-care centers segment is recorded net of all governmental adjustments, contractual adjustments and discounts. A systematic process is employed to ensure that sales are recorded at net realizable value and that any required adjustments are recorded on a timely basis. The contracting module of the Company's centralized, computerized billing system is designed to record revenue at net realizable value based on the Company's contract with the patient's insurance company. Updated billing information is received periodically from payors and is uploaded into the Company's centralized contract module and then disseminated, electronically, to all patient-care centers.

Disallowed sales generally relate to billings to payors with whom the Company does not have a formal contract. In these situations the Company records the sale at usual and customary rates and simultaneously recognizes a disallowed sale to reduce the sale to net value, based on its historical experience with the payor in question. Disallowed sales may also result if the payor rejects or adjusts certain billing codes. Billing codes are frequently updated. As soon as updates are received, the Company reflects the change in its centralized billing system.

As part of the Company's preauthorization process with payors, it validates its ability to bill the payor, if applicable, for the service provided before the delivery of the device. Subsequent to billing for devices and services, there may be problems with pre-authorization or with other insurance coverage issues with payors. If there has been a lapse in coverage, the patient is financially responsible for the charges related to the devices and services received. If the Company is unable to collect from the patient, a bad debt expense is recognized. Occasionally, a portion of a bill is rejected by a payor due to a coding error on the Company's part and the Company is prevented from pursuing payment from the patient due to the terms of its contract with the insurance company. The Company appeals these types of decisions and is generally successful. This activity is factored into the Company's methodology of determining the estimate for the allowance for doubtful accounts. The Company recognizes, as reduction of sales, a disallowed sale for any claims that it believes will not be recovered and adjusts future estimates accordingly.

On a quarterly basis, the Company evaluates cash collections, accounts receivable balances and write-off activity to assess the adequacy of the allowance for doubtful accounts. Additionally, a company-wide evaluation of collectibility of receivable balances older than 180 days is performed at least semi-annually, the results of which are used in the next allowance analysis. In these detailed reviews, the account's net realizable value is estimated after considering the customer's payment history, past efforts to collect on the balance and the outstanding balance, and a specific reserve is recorded if needed. From time to time, the Company may outsource the collection of such accounts to outsourced agencies after internal collection efforts are exhausted. In the cases when valid accounts receivable cannot be collected, the uncollectible account is written off to bad debt expense.

The Company primarily provides customized O&P devices throughout the United States of America and is reimbursed by the patients' third-party insurers or governmentally funded health insurance programs. The Company performs ongoing credit evaluations of its distribution customers. Accounts receivable are not collateralized. The ability of the Company's debtors to meet their obligations is dependent upon the financial stability of the insurers of the Company's customers and future legislation and regulatory actions. Additionally, the Company maintains reserves for potential losses from these receivables that historically have been within management's expectations.

Inventories, which consist principally of raw materials, work in process and finished goods, are stated at the lower of cost or market using the first-in, first-out method. For its patient-care centers segment, the Company calculates cost of goods sold in accordance with the gross profit method for all reporting periods. The Company bases the estimates used in applying the gross profit method on the actual results of the most recently completed fiscal year and other factors affecting cost of goods sold during the current reporting periods, such as a change in the sales mix or changes in the trend of

purchases. Cost of goods sold during the interim periods is reconciled and adjusted when the annual physical inventory is taken. The Company treats these adjustments as changes in accounting estimates. The Company recorded a $0.8 million and a $4.2 million increase to inventory and a $4.4 million decrease to inventory in conjunction with our physical inventory during fiscal years 2008, 2007, and 2006, respectively. For its distribution segment, a perpetual inventory is maintained. Management adjusts the reserve for inventory obsolescence whenever the facts and circumstances indicate that the carrying cost of certain inventory items is in excess of its market price. Shipping and handling activities are reported as part of cost of goods sold.

Property, plant and equipment are recorded at cost. Equipment acquired under capital leases is recorded at the lower of fair market value or the present value of the future lease payments. The cost and related accumulated depreciation of assets sold, retired or otherwise disposed of are removed from the respective accounts, and any resulting gains or losses are included in the Consolidated Statements of Operations. Depreciation is computed for financial reporting purposes using the straight-line method over the estimated useful lives of the related assets as follows:

Depreciation expense related to property, plant and equipment was approximately $16.0 million, $14.9 million, and $13.8 million for the years ended December 31, 2008, 2007, and 2006, respectively.

In accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, the Company capitalizes internally developed computer software costs incurred during the application development stage. At December 31, 2008 and 2007, computers and software included capitalized computer software currently under development of $1.0 million and $1.2 million, respectively.

Statement of Financial Accounting Standard ("SFAS") 142, Goodwill and Other Intangible Assets ("SFAS 142"), requires that purchased goodwill and certain indefinite-lived intangibles no longer be amortized, but instead be tested for impairment at least annually (the Company has selected October 1^st as its annual test date). The Company evaluated its intangible assets, other than goodwill, and determined that all such assets have determinable lives. Refer to Note D for further discussion.

Non-compete agreements are recorded based on agreements entered into by the Company and are amortized, using the straight-line method, over their estimated useful lives ranging from five to seven years. Other definite-lived intangible assets are recorded at cost and are amortized, using the straight-line method, over their estimated useful lives of up to 20 years. The Company periodically

evaluates the recoverability of intangible assets and takes into account events or circumstances that may warrant revised estimates of useful lives or that indicate that impairment had occurred.

Amortization expense related to definite-lived intangible assets for the years ended December 31, 2008, 2007, and 2006, was $1.1 million, $0.9 million, and $0.8 million, respectively. Estimated aggregate amortization expense for definite-lived intangible assets for each of the five years ending December 31, 2013 and thereafter is as follows:

Debt issuance costs incurred in connection with the Company's long-term debt are amortized, on a straight-line basis, which is not materially different from the effective interest method, through the maturity of the related debt instrument. Amortization of these costs is included in Interest Expense in the Consolidated Statements of Operations.

The Company evaluates the carrying value of long-lived assets to be held and used whenever events or changes in circumstance indicate that the carrying amount may not be recoverable. The carrying value of a long-lived asset is considered impaired when the undiscounted cash flow value is less than the asset's carrying value. The Company measures impairment as the amount by which the carrying value exceeds the fair market value. Fair market value is determined primarily using the projected future cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose. There are no long-lived asset impairments for the year ended December 31, 2008.

Expense and liability balances associated with the Company's Supplemental Executive Retirement Plan are calculated based on certain assumptions including benefits earned, discount rates, interest costs, mortality rates and other factors. Refer to Note L for further discussion.

The carrying value of the Company's short-term financial instruments, such as receivables and payables, approximate their fair values, based on the short-term maturities of these instruments. The carrying value of the Company's long-term debt, excluding the Senior Notes, approximates fair value

based on rates currently available to the Company for debt with similar terms and remaining maturities. The fair value of the Senior Notes, at December 31, 2008, was $162 million, as compared to the carrying value of $175 million at that date. The fair values of the Senior Notes were based on quoted market prices at December 31, 2008.

Repairs and maintenance costs are expensed as incurred. During the years ended December 31, 2008, 2007, and 2006, the Company incurred $1.4 million, $1.7 million, and $1.2 million, respectively, in repair and maintenance costs.

Marketing costs, including advertising, are expensed as incurred. The Company incurred $4.7 million, $4.6 million, and $3.8 million in marketing costs during the years ended December 31, 2008, 2007, and 2006, respectively.

The Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes"("FIN 48"), on January 1, 2007. As a result of adoption, the Company recognized a decrease of approximately $0.2 million to the January 1, 2007 retained earnings balance. The Company recognizes interest accrued and penalties related to unrecognized tax benefits as a component of income tax expense. The Company recognizes deferred income tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred income tax liabilities and assets are determined based on the difference between the financial statement and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company recognizes a valuation allowance on the deferred tax assets if it is more likely than not that the assets will not be realized in future years.

The Company issues options and restricted shares of common stock under two active share-based compensation plans, one for employees and the other for the Board of Directors. At December 31, 2008, 4.7 million shares of common stock were authorized for issuance under the Company's share-based compensation plans. Shares of common stock issued under the share-based compensation plans are issued from the Company's authorized, but unissued shares. Stock option and restricted share awards are granted at the fair market value of the Company's common stock on the date immediately preceding the date of grant. Stock option awards vest over a period determined by the compensation plan, ranging from one to three years, and generally have a maximum term of ten years. Restricted shares of common stock vest over a period of time determined by the compensation plan, ranging from one to four years.

The Company applies the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") 123R, Share-Based Payment ("SFAS 123R"), which require companies to measure and recognize compensation expense for all share-based payments at fair value.

The Company adopted SFAS 123R using the modified prospective method allowed for in SFAS 123R. Under the modified prospective method, compensation expense related to awards granted prior to and unvested as of the adoption of SFAS 123R is calculated in accordance with SFAS 123, Accounting for Stock-Based Compensation ("SFAS 123") and recognized in the statements of operations over the requisite remaining service period; compensation expense for all awards granted after the adoption of SFAS 123R is calculated according to the provision of SFAS 123R. For the year ended December 31, 2008, 2007, and 2006, the Company recognized $4.7 million, $3.3 million, and $2.2 million, respectively, in compensation expense.

Compensation expense primarily relates to restricted share grants, as the amount of expense related to options is immaterial in all periods presented. The Company calculates the fair value of stock options using the Black-Scholes model. The total value of the stock option awards is expensed ratably over the requisite service period of the employees receiving the awards.

The Company applies a "management" approach to disclosure of segment information. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the basis of the Company's reportable segments. The description of the Company's reportable segments and the disclosure of segment information are presented in Note P.

measurements used. The Company is currently evaluating the impact that adopting SFAS 157 will have on non-financial assets or liabilities disclosed in the Company's financial statements.

In May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting Principles ("SFAS 162"). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This Statement will be effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SFAS 162 will not have a material impact on the Company's financial statements.

In May 2008, the FASB issued SFAS 163, Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60 ("SFAS 163"). SFAS 163 clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement of premium revenue and claim liabilities. SFAS 163 also requires expanded disclosures about financial guarantee insurance contracts. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. SFAS 163 will not have a material impact on the Company's financial statements.

The supplemental disclosure requirements for the statements of cash flows are as follows:

		2008			2007		2006

(In thousands)
Cash paid during the period for:
	Interest	$	31,339		$	36,312	$	43,882
	Income taxes		17,520			11,518		3,142
Non-cash financing and investing activities:
	Non-cash accelerated dividends on preferred stock	$	5,254		$	—	$	—
	Conversion of Series A Convertible Preferred Stock		52,908
Accretion of preferred stock beneficial conversion feature—Series A			—			—		3,768
	Unrealized loss on auction rate securities		(598	)		—		—
	Unrealized loss on interest rate swaps		(3,899	)		—		—
	Issuance of notes in connection with acquisitions		3,256			5,755		100
	Issuance of restricted shares of common stock		9,192			14,630		(81	)

The Company completed its annual goodwill impairment analysis in October 2008, which did not result in an impairment. In completing the analysis, the Company determined that it had two reporting units with goodwill to be evaluated, which were the same as its reportable segments: (i) patient-care centers and (ii) distribution. The fair value of the Company's reporting units was primarily determined based on the income approach and considered the market and cost approach.

The activity related to goodwill for the two years ended December 31, 2008 is as follows:

Inventories, which are recorded at the lower of cost or market using the first-in, first-out method, were as follows at December 31:

During 2008, 2007, and 2006, the Company acquired thirteen, seven, and two orthotic and prosthetic companies and related businesses, respectively. The aggregate purchase price, excluding potential contingent consideration provisions, for 2008 acquisitions was $13.5 million, consisting of $9.6 million in cash, $3.7 million in promissory notes, and a $0.2 million holdback. In 2007, the Company also acquired certain assets of SureFit LLC, a manufacturer and distributor of custom footwear. The aggregate purchase price, excluding potential contingent consideration provisions, for 2007 acquisitions was $20.1 million, consisting of $14.3 million in cash, and $5.8 million in promissory notes. The aggregate purchase price, excluding potential contingent consideration provisions, for 2006 acquisitions was $0.3 million, consisting of $0.2 million in cash, $0.1 million in promissory notes, and $0.03 million in transaction costs. The notes are payable over the next one to six years with interest rates ranging from 5.0% to 10.8%.

The Company accounts for its acquisitions using the purchase method of accounting. The results of operations for these acquisitions are included in the Company's results of operations from their date of acquisition. Pro forma results would not be materially different.

In connection with acquisitions, the Company occasionally agrees to make contingent consideration payments if cash collection targets are reached that verify the value of the target negotiated at acquisition. Contingent considerations are defined in the purchase agreement and are accrued based on the attainment of contingent consideration targets. In connection with these agreements, the Company paid $1.1 million in 2008, $0.2 million in 2007, and $0.4 million in 2006. The Company has accounted for these amounts as additional purchase price, resulting in an increase in excess cost over net assets acquired. The Company estimates that it may pay up to $4.1 million related to contingent consideration provisions in future periods.

On May 26, 2006, the Company refinanced its debt and preferred stock with the issuance of the following instruments: (i) $175.0 million of 10¹/4% Senior Notes due 2014; (ii) a $230.0 million term loan facility (variable rate of 2.48% at December 31, 2008) which matures on May 26, 2013; and (iii) $50.0 million of Series A Convertible Preferred Stock. The Company also established a new $75.0 million revolving credit facility, which also matures May 26, 2013. The proceeds from these instruments were used to retire (i) $200.0 million of the 10³/8% Senior Notes; (ii) $15.6 million of the 11¹/4% Senior Subordinated Notes; (iii) $146.3 million of the Term Loan; (iv) $11.0 million outstanding under the Revolving Credit facility; (v) $64.7 million of 7% Redeemable Preferred Stock; and (vi) pay $24.7 million of transaction costs. In conjunction with the refinancing, the Company incurred a $17.0 million loss on the extinguishment of debt. The extinguishment loss is comprised of $11.9 million of premiums paid to debt holders, $0.3 million of fees paid to the 7% Redeemable Preferred Stock holders and $6.1 million write-off of debt issuance costs offset by a $1.3 million gain related to the interest rate swap.

The $75.0 million Revolving Credit Facility matures on May 26, 2011 and bears interest, at the Company's option, at LIBOR plus 2.75% or a Base Rate (as defined in the credit agreement) plus 1.75%. The obligations under the Revolving Credit Facility are guaranteed by the Company's subsidiaries and are secured by a first priority perfected interest in the Company's subsidiaries' shares, all of the Company's assets and all the assets of the Company's subsidiaries. The Revolving Credit Facility requires compliance with various covenants including but not limited to a maximum total leverage ratio and a maximum annual capital expenditures limit. As of December 31, 2008, the Company is in compliance with all such covenants. In response to the volatility in the current global credit markets, on September 26, 2008 the Company decided to validate its borrowing capacity and availability by submitting a $20.0 million borrowing request under the facility. As anticipated Lehman Commercial Paper, Inc. ("LCPI"), a subsidiary of Lehman Brothers Holdings, Inc. ("Lehman"), failed

to fund its pro-rata commitment of $4.7 million and the Company borrowed a total of $15.3 million under the facility on September 29, 2008. LCPI's total commitment is $17.8 million of our total $75.0 million dollar facility. As of December 31, 2008, the Company had $38.2 million available under the revolving credit facility, net of LCPI's $17.8 million commitment, $15.3 million already borrowed, and $3.7 million of outstanding letters of credit. At December 31, 2008, the interest rate under the Revolving Credit Facility was 3.22%.

The $230.0 million Term Loan matures on May 26, 2013 and requires quarterly principal and interest payments that commenced on September 30, 2006. From time to time, mandatory payments may be required as a result of capital stock issuances, additional debt incurrences, asset sales or other events as defined in the credit agreement. The obligations under the Term Loan are guaranteed by the Company's subsidiaries and are secured by a first priority perfected interest in the Company's subsidiaries' shares, all of the Company's assets and all the assets of the Company's subsidiaries. The Term Loan is subject to covenants that mirror those of the Revolving Credit Facility. The Company secured, effective March 13, 2007, certain amendments to the Term Loan that included reducing the margin over LIBOR that the Company pays as interest under the existing Term Loan from 2.50% to 2.00%. As of December 31, 2008, the Term Loan bears interest, at the Company's option, at LIBOR plus 2.00% or a Base Rate (as defined in the credit agreement) plus 1.00%. At December 31, 2008, the interest rate on the Term Loan was 2.48%.

On or prior to June 1, 2009, the Company may redeem up to 35% of the aggregate principal amount of the notes at a redemption price of 110.250% of the principal amount thereof, plus accrued

and unpaid interest and additional interest, if any, with the net cash proceeds of an equity offering; provided that (i) at least 65% of the aggregate principal amount of the notes remains outstanding immediately after the redemption (excluding notes held by the Company and its subsidiaries); and (ii) the redemption occurs within 90 days of the date of the closing of the equity offering.

The terms of the Senior Notes, the Revolving Credit Facility, and the Term Loan limit the Company's ability to, among other things, incur additional indebtedness, create liens, pay dividends on or redeem capital stock, make certain investments, make restricted payments, make certain dispositions of assets, engage in transactions with affiliates, engage in certain business activities and engage in mergers, consolidations and certain sales of assets. At December 31, 2008, the Company was in compliance with all covenants under these debt agreements.

IN, Inc., is party to a non-binding purchase agreement under which it agrees to purchase assembled WalkAide System kits. As of December 31, 2008, IN, Inc. had outstanding purchase commitments of approximately $0.4 million.

On June 18, 2004, the Company announced that on June 17, 2004, the Audit Committee of the Company's Board of Directors had engaged a law firm to serve as independent counsel to the Audit committee and to conduct an independent investigation of the allegations. The scope of that independent investigation was expanded to cover certain of the Company's other patient-care centers. On June 17, 2004, the U.S. Attorney's Office for the Eastern District of New York subpoenaed records of the Company regarding various billing activities and locations. In addition, the Company also announced on June 18, 2004 that the Securities and Exchange Commission had commenced an informal inquiry into the matter. The Company is cooperating with the regulatory authorities. The Audit Committee's investigation will not be complete until all regulatory authorities have indicated that their inquiries are complete.

Management believes that any billing discrepancies are likely to be primarily at the West Hempstead patient-care center. Furthermore, management does not believe the resolution of the matters raised by the allegations will have a materially adverse effect on the Company's financial statements. The West Hempstead facility generated $0.5 million, $0.6 million, and $0.6 million in net sales during 2008, 2007, and 2006, respectively, or less than 0.1% of the Company's net sales for each year.

In the ordinary course of its business, the Company may enter into service agreements with service providers in which it agrees to indemnify or limit the service provider against certain losses and liabilities arising from the service provider's performance of the agreement. The Company has reviewed its existing contracts containing indemnification or clauses of guarantees and does not believe that its liability under such agreements will result in any material liability.

In May 2006, the Company issued 50,000 shares of Series A Convertible Preferred Stock ("Series A Preferred") with a stated value of $1,000 per share to Ares Corporate Opportunities Fund, L.P. ("ACOF"). The Series A Preferred provided for cumulative dividends at a rate of 3.33% per annum, payable quarterly in arrears. In addition, the initial holders of the Series A Preferred were entitled to have representation on the Board of Directors of the Company and were entitled to vote on all matters on which the holders of the Company's common stock are entitled to vote.

The Company separately accounted for the beneficial conversion feature granted to the holders of the Series A Preferred. The value of the beneficial conversion feature was $3.8 million and was comprised of $1.8 million related to the cost paid by the Company on behalf of the holders and

$2.0 million related to the difference between the stated conversion price of the preferred shares and the fair market value of the common stock at the commitment date. The beneficial conversion feature was included in the value of the Series A Preferred; and was amortized by a reduction of income available to common stockholders over the 61 day holding period.

In June 2008, the average closing price of the Company's common stock exceeded the forced conversion price of the Series A Preferred by 200% for a 20-trading day period, triggering an acceleration, pursuant to the Certificate of Designations of the Series A Preferred, of the Series A Preferred dividends that were otherwise payable through May 26, 2011. The accelerated dividends were paid in the form of increased stated value of the Series A Preferred, in lieu of cash. On July 25, 2008, the Company notified the holder of the Series A Preferred of its election pursuant to the Certificate of Designations of the Series A Preferred to force the conversion of the Series A Preferred into 7,308,730 shares of common stock. The conversion of the Series A Preferred occurred on August 8, 2008.

Basic per common share amounts are computed using the weighted average number of common shares outstanding during the year. Diluted per common share amounts are computed using the weighted average number of common shares outstanding during the year and dilutive potential common shares. Dilutive potential common shares consist of stock options and restricted shares and are calculated using the treasury stock method.

	2008		2007		2006

(In thousands, except share and per share data)
Net income	$	26,746	$	19,267	$	3,434
Less preferred stock dividends declared and accretion—7% Redeemable Preferred Stock(1)		—		—		2,751
Less preferred stock dividends declared-Series A Convertible Preferred Stock(1)		5,670		1,665		999
Accretion of beneficial conversion feature		—		—		3,768

Net income (loss) applicable to common stock	$	21,076	$	17,602	$	(4,084	)

Shares of common stock outstanding used to compute basic per common share amounts		25,930,096		22,475,513		21,981,026
Effect of dilutive restricted stock and options		1,160,721		1,167,751		—
Effect of dilutive convertible preferrred stock		—		6,613,757		—

Shares used to compute diluted per common share amounts(2)		27,090,817		30,257,021		21,981,026

Basic income (loss) per share applicable to common stock	$	0.81	$	0.78	$	(0.19	)
Diluted income (loss) per share applicable to common stock		0.78		0.64		(0.19	)

As discussed in Note B, the Company adopted FIN 48 as of January 1, 2007. As of the adoption date, the Company had tax effected unrecognized tax benefits of $3.3 million of which $1.1 million, if recognized, would affect the effective tax rate. Over the next 12 months the Company may recognize gross tax effected unrecognized tax benefits of up to $0.5 million, of which $0.4 million is expected to impact the effective tax rate, due to the pending expiration of the period of limitations for assessing tax deficiencies for certain income tax returns. A reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:

As of the January 1, 2007 adoption date, the Company had accrued interest expense and penalties related to the unrecognized tax benefits of $0.4 million and $0.4 million, respectively. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Total penalties and interest accrued as of December 31, 2007 and 2008, respectively, was $1.0 million and $0.1 million. Accrued interest and penalties for the twelve month period ended December 31, 2007 was $0.2 million. Reduction in accrued interest and penalties resulting from statute of limitation releases, net of additional accruals of interest and penalties, for the twelve month period ended December 31, 2008 was $0.7 million.

The Company is subject to income tax in U.S. federal, state and local jurisdictions and is subject to examination by federal, state, and local authorities. The Company is no longer subject to US Federal income tax examinations for years before 2005 and with few exceptions is no longer subject to state and local income tax examinations by tax authorities for years before 2004. The Company established a $1.3 million reserve for taxes at December 31, 2006 under pre-FIN 48 principles, which was included in income taxes payable.

A reconciliation of the federal statutory tax rate to the Company's effective tax rate is as follows:



Federal statutory tax rate		35.0	%	35.0	%	35.0	%
Increase in taxes resulting from:
	State income taxes (net of federal effect)	4.5		2.6		5.3
	Nondeductible expenses (i.e. M&E)	1.8		1.5		5.8
	Domestic manufacturing deduction	(1.1	)	(2.1	)	(0.6	)
	Expired state net operating losses	—		1.5		—
	Adjustments to state valuation allowance	0.8		2.4		(8.9	)
	Resolution in uncertain tax positions	(1.9	)	—		(2.5	)
	Share-based compensation shortfall	—		—		1.3
	Adjustment of prior year's taxes	0.3		(3.2	)	12.1
	Change in uncertain tax positions	0.4		0.1		—
	Other, net	—		—		2.3

Provision for income taxes		39.8	%	37.8	%	49.8	%

During the fourth quarter of 2006, the Company recorded $1.2 million of additional tax expense associated with adjustments relating to prior years. Of this amount, $0.7 million related to adjustments of 2005 state tax expense and state operating loss carryforwards. The remainder, $0.5 million, related to additional state operating loss carryforwards, the write-off of uncollectible state tax refunds and state tax payments attributable to 2004 and prior.

The Company has accumulated state net operating losses as of December 31, 2008 totaling $229.9 million; the Company anticipates utilizing $37.8 million in years 2009 through 2028. The state operating loss carryforwards without a valuation allowance expire in varying amounts between years 2009 and 2028. The following table summarizes the state net operating loss activity for the years ended December 31:

The following table summarizes the activity in state net operating losses, for which valuation allowances have been established, for the years ended December 31:

In addition to valuation allowances reported for net operating losses, there were $1.0 and $0.7 million of valuation allowances reported for other state net deferred tax assets as of December 31, 2008, and December 31, 2007, respectively.

The Company's management believes that it is more likely than not that the majority of the deferred tax assets will be realized. Temporary differences and carryforwards which give rise to deferred tax assets and liabilities as of December 31 are as follows:

		2008			2007

(In thousands)
Deferred tax liabilities:
	Goodwill amortization	$	41,832		$	36,132
	Patent amortization		355			657

			42,187			36,789

Deferred tax assets:
	State net operating loss		11,990			12,255
	Accrued expenses		5,272			4,534
	Property, plant and equipment		968			834
	Deferred benefit plan compensation		4,527			3,351
	Accrued vacation		969			871
	Provision for bad debt allowance		2,255			1,488
	Inventory capitalization and reserves		1,801			1,517
	Investments in debt and equity securities		3,311			—
	Restricted stock		823			846
	Other		695			(97	)

			32,611			25,599

Valuation allowance on NOL			(11,278	)		(10,813	)

			21,333			14,786

Net deferred tax liabilities		$	(20,854	)	$	(22,003	)

The Company records a valuation allowance when it is more likely than not that some portion of all the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character in the

appropriate jurisdictions. The Company has reported a valuation allowance for state operating loss carryforwards and other state net deferred tax assets for certain subsidiaries.

The Company maintains a 401(k) Savings and Retirement plan that covers all of the employees of the Company. Under this 401(k) plan, employees may defer such amounts of their compensation up to the levels permitted by the Internal Revenue Service. The Company recorded matching contributions of $2.8 million, $2.5 million, and $2.2 million, respectively, of contributions under this plan during 2008, 2007 and 2006, respectively.

In conjunction with the acquisition of J.E. Hanger, Inc. of Georgia ("JEH") in 1996, the Company assumed the unfunded deferred compensation plan that had been established for certain key JEH officers. The plan provides for benefits ratably over the period of active employment from the time the contract is entered into to the time the participant retires. Participation was determined by JEH's Board of Directors. The Company purchased individual life insurance contracts with respect to each employee covered by this plan. The Company is the owner and beneficiary of the insurance contracts. The liability related to the deferred compensation arrangements amounted to approximately $0.3 million at December 31, 2008 and 2007.

Effective January 2004, the Company implemented an unfunded noncontributory defined benefit plan (the "Plan") for certain senior executives. The Company has engaged an actuary to calculate the benefit obligation and net benefits cost at December 31, 2008; and have utilized the actuarial calculation as a basis for our benefit obligation liability. The Plan, which is administered by the Company, calls for annual payments upon retirement based on years of service and final average salary. Net periodic benefit expense is actuarially determined.

The Company uses a December 31 measurement date for the Plan. The Plan's net benefit cost is as follows:

		(In thousands)

Change in Benefit Obligation
Benefit obligation at December 31, 2006		$	5,851
	Service cost		2,082
	Interest cost		336

Benefit obligation at December 31, 2007		$	8,269

	Service cost		2,221
	Interest cost		518

Benefit obligation at December 31, 2008		$	11,008

Unfunded status		$	10,891
Unamortized net (gain) loss			117

Net amount recognized		$	11,008

Amounts Recognized in the Consolidated Balance Sheet
Non-Current Accrued liabilities		$	11,008

The following weighted average assumptions were used to determine the benefit obligation and net benefit cost at December 31:

The discount rate at December 31, 2008 and 2007 was 6.25%. The average rate of increase in compensation increased 25 basis points to 3.25% at December 31, 2008 compared to 3.00% at December 31, 2007. The updated rate was actuarially determined and represents an average of benefit liability indices.

At December 31, 2008, the estimated accumulated benefit obligation is $11.0 million. Future payments under the Plan are as follows:

Under the Company's 2002 Stock Option Plan, 1.5 million shares of common stock were authorized for issuance. Options may only be granted at an exercise price that is not less than the fair market value of the common stock on the date of grant and may expire no later than ten years after grant. Vesting and expiration periods are established by the Compensation Committee of the Board of Directors, generally with vesting of four years following the date of grant and generally with expirations of ten years after grant. In 2003, the 2002 Stock Option Plan was amended to permit the grant of restricted shares of common stock in addition to stock options and to change the name of the plan to the 2002 Stock Incentive Plan. In May 2006, an additional 2.7 million shares of common stock were authorized for issuance. In May 2007, the Company's shareholders approved amendments to the 2002 Stock Incentive Plan, most notably the incorporation of the Company's current annual incentive plan for certain executive officers into the 2002 Stock Incentive Plan. The amendments resulted in the following changes to the 2002 Stock Incentive Plan: (i) addition of performance-based cash awards ("Incentive Awards") and renaming the 2002 Stock Incentive Plan to be the 2002 Stock Incentive and Bonus Plan; (ii) limitation on the number of options, shares of restricted stock, annual Incentive Awards and long term Incentive Awards that an individual can receive during any calendar year; (iii) addition of a list of specific performance goals that the Company may use for the provision of awards under the 2002 Stock Incentive and Bonus Plan; (iv) limitation on the total number of shares of stock issued pursuant to the exercise of incentive stock options; and (v) addition of a provision allowing for the Company to institute a compensation recovery policy, which would allow the Compensation Committee, in appropriate circumstances, to seek reimbursement of certain compensation realized under awards granted under the 2002 Stock Incentive and Bonus Plan. In August 2007, 205,000 performance-based restricted shares were granted to certain executives. These performance-based restricted shares are subject to the same vesting period as the service-based restricted shares for employees. However, the quantity of restricted shares to be released under this grant was dependent on the diluted EPS for the twelve month period from July 1, 2007 through June 30, 2008. The target EPS for this period was met, therefore, 100% of the performance-based restricted shares were released based on the four year vesting period. In November 2008, 165,490 performance-based restricted shares were granted to certain executives. These performance-based restricted shares are subject to the same vesting period as the service-based restricted shares for employees. However, the quantity of restricted shares to be released under this grant is dependent on the diluted EPS for the twelve month period from October 1, 2008 through September 30, 2009.

During 2008, no options were cancelled under the 2002 Stock Incentive Plan. During 2007, options for 4,000 shares were cancelled under the 2002 Stock Incentive and Bonus Plan. During 2006, no options were cancelled under the 2002 Stock Incentive Plan. At December 31, 2008, 883,069 shares of common stock were available for issuance.

During April and May 2003, the Compensation Committee of the Board of Directors and the shareholders of the Company, respectively, approved the 2003 Non-Employee Directors' Stock Incentive Plan ("2003 Directors' Plan") which replaced the Company's 1993 Non-Employee Director Stock Option Plan ("Director Plan"). The 2003 Directors' Plan authorized 500,000 shares of common stock for grant and permits the issuance of stock options and restricted shares of common stock. The 2003 Directors' Plan also provides for the automatic annual grant of 8,500 shares of restricted shares of

common stock to each director and permits the grant of additional restricted stock in the event the director elects to receive his or her annual director fee in restricted shares of common stock rather than cash. Options may only be granted at an exercise price that is not less than the fair market value of the common stock on the date of grant and may expire no later than ten years after grant. Vesting and expiration periods are established by the Compensation Committee of the Board of Directors, generally with vesting of three years following grant and generally with expirations of ten years after grant. In May 2007, the Company's shareholders further approved an amendment to the 2003 Directors' Plan providing for the issuance by the Company of restricted stock units to its non-employee directors, at the option of such director. The restricted stock units effectively allow the director to elect to defer receipt of the shares of restricted stock which the director would ordinarily receive on an annual basis until (i) the January 15th of the year following the calendar year in which the director terminates service on the Board of Directors, or (ii) the fifth, tenth or fifteenth anniversary of the annual meeting date on the election form for that year. The director may elect to receive his or her annual grant of restricted stock, including shares to be received in lieu of the annual director fee, in the form of restricted stock units, with such election to take place on or prior to the date of the annual meeting of stockholders for such year. The restricted stock units are subject to the same vesting period as the shares of restricted stock issued under the 2003 Directors' Plan. There were no Director Plan option cancellations during 2007 and 2008. At December 31, 2008, 141,623 shares of common stock were available for issuance.

A summary of the activity of restricted shares of common stock for the year ended December 31, 2008 is as follows:

	Employee Plans					Director Plans

	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Nonvested at December 31, 2005		388,000		$	8.28		28,571		$	5.18
Granted		742,250			7.96		92,012			7.53
Vested		(117,500	)		9.32		(28,571	)		5.18
Forfeited		(19,375	)		7.86		(12,877	)		7.54

Nonvested at December 31, 2006		993,375		$	7.91		79,135		$	7.52
Granted		814,000			9.51		70,200			11.38
Vested		(295,188	)		8.48		(26,379	)		7.52
Forfeited		(41,500	)		8.27		—			—
Nonvested at December 31, 2007		1,470,687		$	8.67		122,956		$	9.73
Granted		567,850			16.18		66,742			12.59
Vested		(453,247	)		8.46		(49,778	)		9.34
Forfeited		(28,250	)		8.84		—			—

Nonvested at December 31, 2008		1,557,040		$	11.47		139,920		$	11.23

During the years ended December 31, 2008 and 2007, 503,026 and 321,567 restricted shares of common stock with an intrinsic value of $4.3 million and $2.7 million, respectively, became fully vested. As of December 31, 2008 and 2007, total unrecognized compensation cost related to restricted shares of common stock was approximately $16.9 million and $11.8 million and the related weighted-average period over which it is expected to be recognized is approximately 3 years. The aggregate granted shares have vesting dates through December 2012. The 2008 and 2007 grants were $10.0 million and $8.5 million at the date of grant which is amortized to expense ratably over the vesting period of each group of granted shares.

The summary of option activity and weighted average exercise prices are as follows:

	Employee Plans					Director Plans					Non-Qualified Awards

	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding at December 31, 2005		2,576,050		$	10.25		198,411		$	9.83		406,000	$	5.95
Granted		—			—		—			—		—		—
Terminated		(35,791	)		8.41		—			—		—		—
Exercised		(151,276	)		3.55		(10,000	)		5.88		—		—

Outstanding at December 31, 2006		2,388,983		$	10.70		188,411		$	10.04		406,000	$	5.95
Granted		—			—		—			—		—		—
Terminated		(514,250	)		14.31		—			—		—		—
Exercised		(364,084	)		3.91		(35,298	)		5.68		—		—

Outstanding at December 31, 2007		1,510,649		$	11.10		153,113		$	11.04		406,000	$	5.95

Granted		—			—		—			—		—		—
Terminated		(193,914	)		15.24		(10,000	)		18.63		—		—
Exercised		(222,785	)		3.04		(7,649	)		2.83		—		—

Outstanding at December 31, 2008		1,093,950		$	12.01		135,464		$	10.33		406,000	$	5.95

Aggregate intrinsic value at December 31, 2008	$	13,138,113				$	1,398,320				$	2,415,000
Weighted average remaining contractual term (years)		3.0					4.2					1.3

The intrinsic value of options exercised during the years ended December 31, 2008 and 2007 was $0.7 million and $1.6 million, respectively. Options exercisable under the Company's share-based compensation plans at December 31, 2008 and 2007 were 1.6 million and 2.1 million shares, respectively, with a weighted average exercise price of $12.76 and $13.67, an average remaining contractual term of 2.7 and 3.1 years, and an aggregate intrinsic value of $17.0 million and $20.8 million as of December 31, 2008 and 2007. Cash received by the Company related to the exercise of options during the years ended December 31, 2008 and 2007 amounted to $0.3 million and $1.0 million. As of December 31, 2008, there is no unrecognized compensation cost related to stock option awards. There was approximately $0.1 million of unrecognized compensation cost related to stock option awards for the year ending December 31, 2007.

Information concerning outstanding and exercisable options as of December 31, 2008 is as follows:

The Company leases office space under non-cancellable operating leases, the majority of which contain escalation clauses. The Company recognizes rent expense on a straight-line basis for leases with escalation clauses. Certain of these leases also contain renewal options. Rent expense was approximately $35.4 million, $ 33.1 million, and $31.3 million, for the years ended December 31, 2008, 2007, and 2006, respectively. Sublease rental income of $0.4 million, $0.4 million, and $0.3 million, for the years ended December 31, 2008, 2007, and 2006, respectively, was netted against rent expense. The Company estimates it will receive approximately $0.3 million of sublease rent income in the future.

Future minimum rental payments, by year and in the aggregate, under operating leases with terms of one year or more at December 31, 2008 are as follows:

The firm of Foley & Lardner LLP serves as the Company's outside general counsel. The Company's Chairman is the brother-in-law of the partner in charge of the relationship. Total fees paid by the Company to Foley & Lardner LLP were $3.0 million, $3.0 million, and $3.7 million for the years ended 2008, 2007 and 2006, respectively, which amounted to less than two-thirds of one percent of that firm's annual revenues for each such year. At December 31, 2008 and 2007, the Company had $0.4 and $0.0 million payable to Foley & Lardner LLP, respectively.

The Company has identified two reportable segments in which it operates based on the products and services it provides. The Company evaluates segment performance and allocates resources based on the segments' income from operations.

The reportable segments are: (i) patient-care services and (ii) distribution. The reportable segments are described further below:

Patient-Care Services—This segment consists of the Company's owned and operated patient-care centers and fabrication centers of O&P components. The patient-care centers provide services to design and fit O&P devices to patients. These centers also instruct patients in the use, care and maintenance of the devices. Fabrication centers are involved in the fabrication of O&P components for both the O&P industry and the Company's own patient-care centers.

Distribution—This segment distributes O&P products and components to both the O&P industry and the Company's own patient-care practices.

Other—This segment consists of Hanger corporate, IN, Inc. and Linkia. IN, Inc. specializes in bringing emerging MyoOrthotics Technologies® to the O&P market. MyoOrthotics Technologies represents the merging of orthotic technologies with electrical stimulation. Linkia is a national managed-care agent for O&P services and a patient referral clearing house.

The accounting policies of the segments are the same as those described in the summary of "Significant Accounting Policies" in Note B to the consolidated financial statements.

Summarized financial information concerning the Company's reportable segments is shown in the following table. Intersegment sales mainly include sales of O&P components from the distribution segment to the patient-care centers segment and were made at prices which approximate market values.

		Patient-Care Centers			Distribution		Other			Consolidating Adjustments			Total

(In thousands)
2008
Net sales
	Customers	$	619,977		$	80,707	$	2,445		$	—		$	703,129
	Intersegments		—			136,679		3,264			(139,943	)		—
Depreciation and amortization			11,855			735		4,593			—			17,183
Income from operations			103,957			23,423		(50,427	)		775			77,728
Interest (income) expense			(6,484	)		7,086		31,947			—			32,549
Income (loss) before taxes and extraordinary items			110,441			16,337		(83,112	)		775			44,441
Total assets			707,635			91,948		14,167			—			813,750
Capital expenditures			11,175			505		7,650			—			19,330
2007
Net sales
	Customers	$	571,676		$	64,440	$	1,234		$	—		$	637,350
	Intersegments		—			124,757		783			(125,540	)		—
Depreciation and amortization			12,138			490		3,248			—			15,876
Income from operations			97,404			19,235		(50,593	)		1,934			67,980
Interest (income) expense			(6,526	)		7,001		36,512			—			36,987
Income before taxes and extraordinary items			103,930			12,234		(87,105	)		1,934			30,993
Total assets			729,904			75,087		(45,308	)		—			759,683
Capital expenditures			10,972			918		8,239			—			20,129
2006
Net sales
	Customers	$	543,166		$	55,394		206		$	—		$	598,766
	Intersegments		—			111,530		4,852			(116,382	)		—
Depreciation and amortization			12,180			315		2,175			—			14,670
Income from operations			86,802			17,724		(38,775	)		(3,312	)		62,439
Interest (income) expense			(6,363	)		6,919		38,087			—			38,643
Income before taxes and extraordinary items			93,165			10,805		(93,815	)		(3,312	)		6,843
Total assets			587,879			89,780		41,463			—			719,122
Capital expenditures			7,387			337		5,103			—			12,827

The Company's foreign and export sales and assets located outside of the United States of America are not significant. Additionally, no single customer accounted for more than 10% of revenues in 2008, 2007, or 2006.

Exhibit No.		Document

3(a)		Certificate of Incorporation, as amended, of the Registrant. (Incorporated herein by reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1988).
3(b)		Certificate of Amendment of the Registrant's Certificate of Incorporation (which, among other things, changed the Registrant's corporate name from Sequel Corporation to Hanger Orthopedic Group, Inc.), as filed on August 11, 1989 with the Office of the Secretary of State of Delaware. (Incorporated herein by reference to Exhibit 3(b) to the Registrant's Current Report on Form 8-K dated February 13, 1990).
3(c)		Certificate of Agreement of Merger of Sequel Corporation and Delaware Sequel Corporation. (Incorporated herein by reference to Exhibit 3.1(a) to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1988).
3(d)		Certificate of Ownership and Merger of Hanger Acquisition Corporation and J. E. Hanger, Inc. as filed with the Office of the Secretary of the State of Delaware on April 11, 1989. (Incorporated herein by reference to Exhibit 2(f) to the Registrant's Current Report on Form 8-K dated May 15, 1989).
3(e)		Certificate of Designation, Preferences and Rights of Preferred Stock of the Registrant as filed on February 12, 1990 with the Office of the Secretary of State of Delaware. (Incorporated herein by reference to Exhibit 3(a) to the Registrant's Current Report on Form 8-K dated February 13, 1990).
3(f)		Certificate of Amendment to Certificate of Incorporation of the Registrant, as filed with the Secretary of State of Delaware on September 16, 1999. (Incorporated herein by reference to Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).
3(g)		Certificate of Designation, Rights and Preferences of 7% Redeemable Preferred Stock as filed with the Office of the Secretary of State of Delaware on June 28, 1999. (Incorporated herein by reference to Exhibit 2(b) to the Registrant's Current Report on Form 8-K dated July 1, 1999).
3(h)		Certificate of Elimination of Class A, B, C, D, E and F Preferred Stock of the Registrant as filed with the Office of the Secretary of State of Delaware on June 18, 1999. (Incorporated herein by reference to Exhibit 2(c) to the Registrant's Current Report on Form 8-K dated July 1, 1999).
3(i)		Amended and Restated By-Laws of the Registrant. (Incorporated herein by reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008).
3(j)		Certificate of Designations of Series A Convertible Preferred Stock as filed by the Registrant with the Delaware Secretary of State on May 26, 2006 (Incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the Registrant on May 30, 2006).
10(a)		1991 Stock Option Plan of the Registrant, as amended through September 16, 1999. (Incorporated herein by reference to Exhibit 4(a) to the Registrant's Proxy Statement, dated July 28, 1999, relating to the Registrant's Annual Meeting of Stockholders held on September 8, 1999).*
10(b)		1993 Non-Employee Directors Stock Option Plan of the Registrant. (Incorporated herein by reference to Exhibit 4(b) to the Registrant's Registration Statement on Form S-8 (File No. 33-63191)).*

Exhibit No.		Document

10(c)		Asset Purchase Agreement, dated as of March 26, 1997, by and between Hanger Prosthetics & Orthotics, Inc., Acor Orthopedic, Inc., and Jeff Alaimo, Greg Alaimo and Mead Alaimo. (Incorporated by reference to Exhibit 2 to the Current Report on Form 8-K filed by the Registrant on April 15, 1997).
10(d)		Asset Purchase Agreement, dated as of May 8, 1997, by and between Hanger Prosthetics & Orthotics, Inc., Fort Walton Orthopedic, Inc., Mobile Limb and Brace, Inc. and Frank Deckert, Ronald Deckert, Thomas Deckert, Robert Deckert and Charles Lee. (Incorporated by reference to Exhibit 2 to the Current Report on Form 8-K filed by the Registrant on June 5, 1997).
10(e)		Asset Purchase Agreement, dated as of November 3, 1997, by and between Hanger Prosthetics & Orthotics, Inc., Morgan Prosthetic-Orthotics, Inc. and Dan Morgan. (Incorporated herein by reference to Exhibit 10(v) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997).
10(f)		Asset Purchase Agreement, dated as of December 23, 1997, by and between Hanger Prosthetics & Orthotics, Inc., Harshberger Prosthetic & Orthotic Center, Inc., Harshberger Prosthetic & Orthotic Center of Mobile, Inc., Harshberger Prosthetic & Orthotic Center of Florence, Inc., FAB-CAM, Inc. and Jerald J. Harshberger. (Incorporated herein by reference to Exhibit 10(w) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997).
10(g)		Stock Purchase Agreement, dated as of April 2, 1999, by and among NovaCare, Inc., NC Resources, Inc., the Registrant and HPO Acquisition Corporation, Amendment No. 1 thereto, dated as of May 19, 1999, and Amendment No. 2 thereto, dated as of June 30, 1999. (Incorporated herein by reference to Exhibit 2(a) to the Registrant's Current Report on Form 8-K dated July 15, 1999.)
10(h)		Amended and Restated 2002 Stock Incentive Plan, as amended through May 10, 2007. (Incorporated herein by reference to Appendix 1 to the Registrant's Proxy Statement, dated April 10, 2007, relating to the Registrant's Annual Meeting of Stockholders held on May 10, 2007).*
10(i)		Amended and Restated 2003 Non-Employee Directors' Stock Incentive Plan, as amended through May 10, 2007. (Incorporated herein by reference to Appendix 2 to the Registrant's Proxy Statement, dated April 10, 2007, relating to the Registrant's Annual Meeting of Stockholders held on May 10, 2007).*
10(j)		Master Amendment, dated as of October 9, 2004, between the Registrant, Seattle Systems, Inc.(formerly known as USMC Corp., the successor in interest to United States Manufacturing Company, LLC, and which merged with and into OPMC Acquisition Corp. on December 26, 2001), Southern Prosthetic Supply, Inc., and DOBI-Symplex, Inc. (formerly known as Seattle Orthopedic Group, Inc.) (Incorporated herein by reference to Exhibit 10(ee) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2004).
10(k)		Third Amendment to Amended and Restated Credit Agreement and Waiver, dated as of September 2, 2004, among the Registrant, the lenders' signatory thereto and General Electric Capital Corporation, as Administrative Agent. (Incorporated herein by reference to Exhibit 10 to the Registrant's Form 8-K dated September 2, 2004).
10(l)		Form of Stock Option Agreement (Non-Executive Employees), Stock Option Agreement (Executive Employees), Restricted Stock Agreement (Non-Executive Employees) and Restricted Stock Agreement (Executive Employees). (Incorporated herein by reference to Exhibits 10.1, 10.2, 10.3 and 10.4, respectively, to the Registrant's Current Report on Form 8-K filed on February 24, 2005).

Exhibit No.		Document

10(m)		Supplemental Executive Retirement Plan, dated January 1, 2005 (Incorporated herein by reference to Exhibit 10(dd) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2005).*
10(n)		Fourth Amendment to Amended and Restated Credit Agreement, dated as of August 26, 2005, among the Registrant, the lenders' signatory thereto and General Electric Capital Corporation, as Administrative Agent. (Incorporated herein by reference to Exhibit 10 to the Registrant's Form 8-K filed on August 30, 2005).
10(o)		Employment and Non-Compete Agreement, commencing as of April 1, 2006, between the Registrant and John Rush, M.D. (Incorporated herein by reference to Exhibit 10(ff) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2005).*
10(p)		Second Amended and Restated Employment Agreement, effective as of January 1, 2005, by and between Richmond L. Taylor and the Registrant. (Incorporated herein by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006).*
10(q)		Second Amended and Restated Employment Agreement, effective as of January 1, 2005, by and between George E. McHenry and the Registrant. (Incorporated herein by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006).*
10(r)		Purchase Agreement, dated as of May 23, 2006, between the Registrant and the Initial Purchasers named in Schedule I thereto relating to the Registrant's 10¹/4% Senior Notes due 2014. (Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on May 30, 2006).
10(s)		Indenture, dated as of May 26, 2006, among the Registrant, the Registrant's subsidiaries signatory thereto and Wilmington Trust Company, as trustee, relating to the Registrant's 10¹/4% Senior Notes due 2014. (Incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Registrant on May 30, 2006).
10(t)		Registration Rights Agreement, dated as of May 26, 2006, among the Registrant, the Registrant's subsidiaries signatory thereto and the initial purchasers named therein relating to the Registrant's 10¹/4% Senior Notes due 2014. (Incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the Registrant on May 30, 2006).
10(u)		Amended and Restated Preferred Stock Purchase Agreement, dated as of May 25, 2006, by and among the Registrant, Ares Corporate Opportunities Fund, L.P. and the Initial Purchasers identified therein. (Incorporated herein by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
10(v)		Registration Rights Agreement, dated as of May 26, 2006, among the Registrant and Ares Corporate Opportunities Fund, L.P. (Incorporated herein by reference to Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
10(w)		Letter Agreements, dated May 26, 2006, between the Registrant and Ares Corporate Opportunities Fund, L.P. regarding board and management rights. (Incorporated herein by reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).

Exhibit No.		Document

10(x)		Credit Agreement, dated as of May 26, 2006, among the Registrant, the Several Lenders identified therein, Lehman Brothers Inc. and Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint Book-Runners, Citicorp North America, Inc., as Administrative Agent, Lehman Commercial Paper Inc., as Syndication Agent, and LaSalle Bank National Association and General Electric Capital Corporation, as Co-Documentation Agents. (Incorporated herein by reference to Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
10(y)		Guarantee and Collateral Agreement, dated as of May 26, 2006, made by the Registrant, as Borrower, and certain of its subsidiaries, in favor of Citicorp North America, Inc., as Administrative Agent. (Incorporated herein by reference to Exhibit 10.8 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
10(z)		Amended and Restated Employment and Non-Compete Agreement, dated as of January 1, 2003, between the Registrant and Ron May. (Incorporated herein by reference to Exhibit 10(z) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2006).*
10(aa)		Third Amended and Restated Employment Agreement, effective as of January 1, 2005, by and between Ivan R. Sabel and the Company. (Incorporated herein by reference to Exhibit 10(aa) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2006).*
10(bb)		Third Amended and Restated Employment Agreement, effective as of January 1, 2005, by and between Thomas F. Kirk and the Company. (Incorporated herein by reference to Exhibit 10(bb) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2006).*
10(cc)		First Amendment to Credit Agreement, by and among the Registrant, the Lenders party thereto and Citicorp North America, Inc., dated as of March 12, 2007. (Incorporated herein by reference to Exhibit 10 (cc) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2006).
10(dd)		Fourth Amended and Restated Employment Agreement, effective as of January 1, 2005, by and between and Ivan R. Sabel and the Registrant. (Incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007).*
10(ee)		Third Amended and Restated Employment Agreement, effective as of January 1, 2005, by and between George E. McHenry and the Registrant. (Incorporated herein by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007).*
10(ff)		Fourth Amended and Restated Employment Agreement, effective as of January 1, 2005, by and between Thomas F. Kirk and the Registrant. (Incorporated herein by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007).*
10(gg)		Third Amended and Restated Employment Agreement, effective as of January 1, 2005, by and between Richmond L. Taylor and the Registrant. (Incorporated herein by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007).*
10(hh)		Second Amended and Restated Employment Agreement, effective as of September 13, 2007, by and between Ronald N. May and the Registrant. (Incorporated herein by reference to Exhibit 10 to the Current Report on Form 8-K filed by the Registrant on November 13, 2007).*

Exhibit No.		Document

10(ii)		Amendment to Fourth Amended and Restated Employment Agreement, dated as of February 5, 2008, by and between Ivan R. Sabel and the Registrant. (Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on February 6, 2008).*
10(jj)		Amendment to Fourth Amended and Restated Employment Agreement, dated as of February 5, 2008, by and between Thomas F. Kirk and the Registrant. (Incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Registrant on February 6, 2008).*
21		List of Subsidiaries of the Registrant. (Filed herewith).
23.1		Consent of PricewaterhouseCoopers LLP. (Filed herewith).
31.1		Written Statement of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith).
31.2		Written Statement of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith).
32		Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Furnished herewith).


ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2008
OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to .


Delaware (State or other jurisdiction of incorporation or organization)		84-0904275 (I.R.S. Employer Identification No.)
Two Bethesda Metro Center (Suite 1200), Bethesda, MD (Address of principal executive offices)		20814 (Zip Code)

Title of class		Name of exchange on which registered

Common Stock, par value $0.01 per share		New York Stock Exchange


Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o


Part I
	Item 1.	Business	3
	Item 1A.	Risk Factors	16
	Item 1B.	Unresolved Staff Comments	18
	Item 2.	Properties	19
	Item 3.	Legal Proceedings	19
	Item 4.	Submission of Matters to a Vote of Security Holders	20
		Executive Officers of the Registrant	20
Part II
	Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	23
	Item 6.	Selected Financial Data	26
	Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28
	Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	44
	Item 8.	Financial Statements and Supplementary Data	45
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	45
	Item 9A.	Controls and Procedures	46
	Item 9B.	Other Information	46
Part III
	Item 10.	Directors, Executive Officers and Corporate Governance	46
	Item 11.	Executive Compensation	46
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	47
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	47
	Item 14.	Principal Accountant Fees and Services	47
Part IV
	Item 15.	Exhibits and Financial Statement Schedules	47
Signatures			53



Hanger Prosthetics & Orthotics, Inc.	1,022	83	502	1,116	—	—
Southern Prosthetic Supply, Inc.	—	—	—	—	189	—
Hanger Orthopedic Group, Inc.	—	—	—	—	—	299

State	Patient-Care Centers	State	Patient-Care Centers	State	Patient-Care Centers

Alabama	11	Louisiana	14	North Carolina	13
Arizona	39	Maine	4	North Dakota	2
Arkansas	5	Maryland	10	Ohio	36
California	76	Massachusetts	9	Oklahoma	11
Colorado	22	Michigan	6	Oregon	13
Connecticut	10	Minnesota	6	Pennsylvania	29
Delaware	1	Mississippi	11	South Carolina	13
District of Columbia	1	Missouri	22	South Dakota	1
Florida	53	Montana	5	Tennessee	15
Georgia	32	Nebraska	8	Texas	28
Illinois	24	Nevada	7	Utah	2
Indiana	12	New Hampshire	2	Virginia	8
Iowa	8	New Jersey	8	Washington	15
Kansas	13	New Mexico	7	West Virginia	7
Kentucky	10	New York	25	Wisconsin	12
				Wyoming	2

Name		Office with the Company

Ivan R. Sabel, CPO	63	Chairman of the Board
Thomas F. Kirk	63	President and Chief Executive Officer
Richmond L. Taylor	60	Executive Vice President, President and Chief Operating Officer of Hanger Prosthetics & Orthotics, Inc. and HPO, Inc.
George E. McHenry	56	Executive Vice President and Chief Financial Officer
Vinit K. Asar	42	Executive Vice President and Chief Growth Officer
Ron N. May	62	President and Chief Operating Officer of Southern Prosthetic Supply, Inc.
Thomas C. Hofmeister	42	Vice President and Chief Accounting Officer
Kenneth J. Abod	44	Vice President and Treasurer
Marion L. Mullauer	56	Vice President and Chief Information Officer
Brian A. Wheeler	48	Vice President, Human Resources

Year Ended December 31, 2008	High		Low

First Quarter	$	11.92	$	9.27
Second Quarter		16.49		10.00
Third Quarter		19.76		15.06
Fourth Quarter		17.64		12.26

Year Ended December 31, 2007	High		Low

First Quarter	$	11.89	$	7.33
Second Quarter		12.23		10.43
Third Quarter		11.73		9.00
Fourth Quarter		13.00		9.99

Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance (excluding securities reflected in column(a))

		(a)		(b)		(c)
Equity Compensation Plans:
	approved by security holders		1,229,414	$	11.82		1,024,692
	not approved by security holders		406,000		5.95		N/A

Total			1,635,414				1,024,692

	2003		2004		2005		2006		2007		2008

Hanger Orthopedic Group, Inc.	$	100.00	$	52.02	$	36.67	$	48.36	$	70.71	$	93.19
S & P 500	$	100.00	$	108.99	$	112.26	$	127.55	$	132.06	$	81.23
S&P SmallCap 600	$	100.00	$	121.59	$	129.68	$	147.93	$	146.12	$	99.38
RUSSELL 2000	$	100.00	$	117.00	$	120.88	$	141.43	$	137.55	$	89.68
Peer Group Only	$	100.00	$	155.87	$	135.43	$	131.97	$	137.90	$	83.72

	Year Ended December 31,

Balance Sheet Data:	2008		2007		2006		2005		2004
(In thousands)
Cash and cash equivalents	$	58,413	$	26,938	$	23,139	$	7,921	$	8,351
Working capital		200,248		165,794		157,208		135,551		126,273
Total assets		813,750		759,683		719,122		704,467		703,306
Total debt		422,324		410,892		410,624		378,431		393,111
Redeemable convertible preferred stock		—		47,654		47,654		61,942		56,050
Shareholders' equity		266,866		190,538		167,677		165,242		152,016

		Year Ended December 31,

Other Financial Data:		2008			2007			2006			2005			2004
(In thousands)
Capital expenditures		$	19,330		$	20,129		$	12,827		$	8,759		$	19,454
Net cash provided by (used in):
	Operating activities	$	53,220		$	51,687		$	24,037		$	25,741		$	49,094
	Investing activities		(30,168	)		(42,096	)		(13,212	)		(11,247	)		(35,949	)
	Financing activities		8,423			(5,792	)		4,393			(14,924	)		(20,157	)

December 31, 2008 (In thousands)	0-60 days		61-120 days		Over 120 days		Total

Commercial and other	$	44,206	$	8,212	$	5,904	$	58,322
Private pay		3,478		2,324		1,161		6,963
Medicaid		9,660		3,068		1,507		14,235
Medicare		21,728		2,112		1,324		25,164
VA		1,021		200		55		1,276

	$	80,093	$	15,916	$	9,951	$	105,960

December 31, 2007 (In thousands)	0-60 days		61-120 days		Over 120 days		Total

Commercial and other	$	41,806	$	9,561	$	6,836	$	58,203
Private pay		3,124		1,326		1,266		5,716
Medicaid		8,506		2,320		2,084		12,910
Medicare		20,557		2,622		1,603		24,782
VA		1,140		196		135		1,471

	$	75,133	$	16,025	$	11,924	$	103,082

(In thousands)	2009		2010		2011		2012		2013		Thereafter		Total

Long-term debt	$	3,794	$	4,312	$	19,648	$	4,302	$	215,268	$	175,000	$	422,324
Interest payments on long-term debt		24,477		24,289		23,860		23,431		20,084		8,969		125,110
Operating leases		32,648		25,885		20,133		14,271		8,334		7,983		109,254
Capital leases		236		178		104		37		—		—		555
Other long-term obligations(1)		1,767		1,471		1,779		1,630		1,521		8,736		16,904

Total contractual cash obligations	$	62,922	$	56,135	$	65,524	$	43,671	$	245,207	$	200,688	$	674,147



Patient-care centers	668		636		618		624		619
Revenue-generating O&P practitioners	1,070		1,060		1,034		1,021		1,020
Number of states (including D.C.)	46		46		46		46		45
Same-center net sales growth (decline)(1)	7.3	%	5.0	%	2.2	%	0.2	%	(1.7	)%

	Annual Interest Expense Given an Interest Rate Decrease of X Basis Points								Annual Interest Expense Given an Interest Rate Increase of X Basis Points

							No Change in Interest Rates
Cash Flow Risk	(150 BPS)		(100 BPS)		(50 BPS)		No Change in Interest Rates		50 BPS		100 BPS		150 BPS
(In thousands)	(150 BPS)		(100 BPS)		(50 BPS)				50 BPS		100 BPS		150 BPS
Term Loan	$	2,186	$	3,301	$	4,417	$	5,532	$	6,647	$	7,763	$	8,878
Revolving Credit Facility		262		339		415		491		567		644		720
Interest Rate Swap		4,624		4,548		4,471		4,395		4,319		4,242		4,166

	$	6,810	$	7,849	$	8,888	$	9,927	$	10,966	$	12,005	$	13,044


Level 1		quoted prices in active markets for identical assets or liabilities;
Level 2		quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability;
Level 3		unobservable inputs, such as discounted cash flow models and valuations.



Discount rate	6.25	%	6.25	%
Average rate of increase in compensation	3.25	%	3.00	%

	(In thousands)

2009		—
2010		—
2011		1,038
2012		1,213
2013		1,213
Thereafter		8,100

	$	11,564

	Quarter Ended (Unaudited)

2008	Mar 31		Jun 30		Sep 30		Dec 31(1)
(Dollars in thousands, except per share amounts)	Mar 31		Jun 30		Sep 30		Dec 31(1)
Net Sales	$	157,656	$	181,184	$	178,742	$	185,547
Income from Operations		14,199		21,387		20,238		21,904
Net Income		3,565		8,005		7,340		7,836
Basic per Common Share Net Income	$	0.14	$	0.12	$	0.27	$	0.25
Diluted per Common Share Net Income	$	0.12	$	0.11	$	0.23	$	0.24


	HANGER ORTHOPEDIC GROUP, INC.
Dated: February , 2009	By:	/s/ THOMAS F. KIRK Thomas F. Kirk President and Chief Executive Officer (Principal Executive Officer)


Dated: February , 2009				/s/ THOMAS P. COOPER, M.D. Thomas P. Cooper, M.D. Director
Dated: February , 2009				/s/ CYNTHIA L. FELDMANN Cynthia L. Feldmann Director
Dated: February , 2009				/s/ ERIC GREEN Eric Green Director
Dated: February , 2009				/s/ ISAAC KAUFMAN Isaac Kaufman Director
Dated: February , 2009				/s/ H.E. THRANHARDT H.E. Thranhardt, CPO Director
Dated: February , 2009				/s/ BENNETT ROSENTHAL Bennett Rosenthal Director


Hanger Orthopedic Group, Inc.
Management's Annual Report on Internal Control over Financial Reporting		F-2
Report of Independent Registered Public Accounting Firm		F-3
Consolidated Balance Sheets as of December 31, 2008 and 2007		F-4
Consolidated Statements of Operations for the Three Years Ended December 31, 2008		F-6
Consolidated Statements of Changes in Shareholders' Equity for the Three Years Ended December 31, 2008		F-7
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2008		F-8
Notes to Consolidated Financial Statements		F-9
Financial Statement Schedule
Schedule II—Valuation and Qualifying Accounts		S-1

(in thousands)			Level 1		Level 2		Level 3		Total

Assets
	Current Assets
		Marketable Securities		53,962		—		—		53,962
		Auction Rate Securities		—		—		3,962		3,962
		Rights on auction rate securities		—		—		1,006		1,006
	Long Term Assets
		Auction rate securities		—		—		1,503		1,503

			$	53,962	$	—	$	6,471	$	60,433

			Level 1		Level 2		Level 3		Total

Liabilities
	Current Liabilities
		Interest rate swaps		—		3,711		—		3,711
	Long Term Liabilities
		Interest rate swaps		—		3,526		—		3,526

			$	—	$	7,237	$	—	$	7,237

			Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

			Auction Rate Securities			Rights		Total
For the twelve months ending December 31, 2008
Balance as of December 31, 2007			$	7,500		$	—	$	7,500
	Total unrealized losses
		Included in earnings		(1,038	)		1,006		(32	)
		Included in other comprehensive income		(997	)		—		(997	)
	Purchases, issuances, and settlements			—			—		—
	Transfers in and/or out of Level 3			—			—		—

Balance as of December 31, 2008			$	5,465		$	1,006	$	6,471


Furniture and fixtures		5 years
Machinery and equipment		5 years
Computers and software		5 years
Buildings		10 to 40 years
Assets under capital leases		Shorter of 10 years or term of lease
Leasehold improvements		Shorter of 10 years or term of lease

(In thousands)		Patient-Care Centers		Distribution		Total

Balance at December 31, 2006		$	417,988	$	28,383	$	446,371
	Additions due to acquisitions		2,819		10,005		12,824
	Additions due to earn-outs		367		—		367

Balance at December 31, 2007		$	421,174	$	38,388	$	459,562
	Additions due to acquisitions		9,477		—		9,477
	Additions due to earn-outs		1,372		—		1,372

Balance at December 31, 2008		$	432,023	$	38,388	$	470,411

	2008		2007

(In thousands)
Raw materials	$	31,021	$	30,482
Work in process		35,808		32,641
Finished goods		19,131		19,105

	$	85,960	$	82,228

		2008			2007

(In thousands)
Unrecognized tax benefits, at beginning of the year			5,749			5,861
	Additions for tax positions for the current year		—			—
	Additions for tax positions of prior years		—			—
	Reductions for tax positions of prior years		—			—
	Settlements		—			(112	)
	Reduction for lapse of applicable statute of limitations		(3,960	)		—

Unrecognized tax benefits, at end of the year		$	1,789		$	5,749

		2008		2007			2006

(In thousands)
Current:
	Federal	$	14,124	$	10,371		$	2,294
	State		3,115		2,131			2,123

			17,239		12,502			4,417

Deferred:
	Federal and State		456		(776	)		(1,008	)

Provision for income taxes		$	17,695	$	11,726		$	3,409

		2008			2007

(In thousands)
State net operating losses, at beginning of year		$	237,283		$	259,271
	Net operating losses generated		4,890			11,821

Total net operating losses available			242,173			271,092
	Expired net operating losses		(2,818	)		(6,866	)
	Net operating losses utilized		(9,464	)		(26,943	)

State net operating losses, at end of year		$	229,891		$	237,283

		2008			2007

(In thousands)
Beginning of year		$	189,623		$	186,775
	Net operating loss utilized		(1,343	)		(1,329	)
	Valuation allowance increase (reduction)		3,846			4,177

End of year		$	192,126		$	189,623



December 31,
	2008	1,093,950	135,464	406,000
	2007	1,510,649	139,475	406,000
	2006	2,388,983	152,181	406,000

		Options Outstanding						Options Exercisable

				Weighted Average
Range of Exercise Prices		Number of Options or Awards		Remaining Life (Years)		Exercise Price		Number of Options or Awards		Weighted Average Exercise Price
	$ 1.64 to $ 1.65		179,619		0.5	$	1.64		179,619	$	1.64
	4.63 to 6.02		450,463		1.6		5.87		450,463		5.87
	8.08 to 12.10		124,605		5.7		8.72		124,605		8.72
	13.50 to 16.75		880,727		3.3		14.68		880,727		14.68

			1,635,414		2.7	$	10.37		1,635,414	$	10.37

Year		Classification	Balance at beginning of year		Additions Charged to Costs and Expenses		Write-offs		Balance at end of year

(In thousands)
	2008	Allowance for doubtful accounts	$	3,965	$	15,906	$	13,772	$	6,099
		Inventory reserves		165		241		123		283
	2007	Allowance for doubtful accounts	$	3,369	$	15,774	$	15,178	$	3,965
		Inventory reserves		123		94		52		165
	2006	Allowance for doubtful accounts	$	4,582	$	16,174	$	17,387	$	3,369
		Inventory reserves		188		144		209		123