UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q/A

Amendment No. 1

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2012
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to           

Commission file number 1-10670

HANGER, INC.

(Exact name of registrant as specified in its charter)

Delaware	84-0904275
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)

10910 Domain Drive, Suite 300, Austin, TX	78758
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (512) 777-3800

Formerly, Hanger Orthopedic Group, Inc.

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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes x No o

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

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o	Smaller reporting company o

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

As of April 27, 2012 34,117,244 shares of common stock, $.01 par value per share, were outstanding.

EXPLANATORY NOTE

We are filing this Amendment No. 1 on Form 10-Q/A (the “Amended Filing”) to our Quarterly Report on Form 10-Q for the period ended March 31, 2012 originally filed with the Securities and Exchange Commission (“SEC”) on May 4, 2012 (the “Original Filing”) to present a correction of an error related to calculating the value of work-in-process inventory (“WIP”), which results in a $0.03 and a $0.02 increase in earnings per diluted share, a $0.03 and $0.01 increase in basic earnings per share, and a $1.1 million and a $.5 million increase in net income for the first quarter of 2012 and 2011, respectively.  Corresponding adjustments to material costs, personnel costs, other operating expense, inventories, and the associated tax impacts have also been corrected herein.

In accordance with applicable SEC rules, this Amended Filing includes certifications from our Chief Executive Officer and Chief Financial Officer dated as of the date of this filing.

Except for the items noted above, the information included in Item 4 of Part I regarding the material weakness in our internal control over financial reporting and clarification of our inventory policy, no other information included in the Original Filing is being amended by this Amended Filing. The Amended Filing continues to speak as of the date of the Original Filing and we have not updated the Original Filing to reflect events occurring subsequent to the date of the Original Filing, including but not limited to our June 8, 2012 name change from Hanger Orthopedic Group, Inc. to Hanger, Inc. Accordingly, this Amended Filing should be read in conjunction with our filings made with the SEC subsequent to the date of the Original Filing. Refer to Note B — Significant Accounting Policies - Restatement and Revision of Previously Reported Consolidated Financial Information.

HANGER ORTHOPEDIC GROUP, INC.

INDEX

		Page No.
Part I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (unaudited)
	Consolidated Balance Sheets — March 31, 2012 and December 31, 2011	1
	Consolidated Statements of Income and Comprehensive Income for the Three Months ended March 31, 2012 and 2011	3
	Consolidated Statements of Cash Flows for the Three Months ended March 31, 2012 and 2011	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	30
Part II.	OTHER INFORMATION
Item 1A.	Risk Factors	31
Item 6.	Exhibits	33
SIGNATURES		34

HANGER ORTHOPEDIC GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

	March 31,		December 31,
	2012		2011
			As Revised
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	32,248	$	42,896
Restricted cash	3,120		—
Accounts receivable, less allowance for doubtful accounts of $22,022 and $22,028 in 2012 and 2011, respectively	133,308		138,826
Inventories	120,485		112,305
Prepaid expenses, other assets, and income taxes receivable	20,106		17,015
Deferred income taxes	20,652		20,648
Total current assets	329,919		331,690
PROPERTY, PLANT AND EQUIPMENT
Land	794		794
Buildings	7,294		4,400
Furniture and fixtures	17,464		17,281
Machinery and equipment	57,314		56,137
Equipment leased to third parties under operating leases	34,186		33,830
Leasehold improvements	66,410		65,245
Computer and software	84,216		81,775
Total property, plant and equipment, gross	267,678		259,462
Less accumulated depreciation	161,538		154,690
Total property, plant and equipment, net	106,140		104,772
INTANGIBLE ASSETS
Goodwill	611,147		609,484
Patents and other intangible assets, net	53,958		54,894
Total intangible assets, net	665,105		664,378
OTHER ASSETS
Debt issuance costs, net	16,622		17,485
Other assets	8,661		8,394
Total other assets	25,283		25,879
TOTAL ASSETS	$	1,126,447	$	1,126,719

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

1

HANGER ORTHOPEDIC GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

	March 31,			December 31,
	2012			2011
				As Revised
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Current portion of long-term debt	$	7,927		$	8,065
Accounts payable	26,105			26,561
Accrued expenses	19,325			17,547
Accrued interest payable	6,615			3,040
Accrued compensation related costs	19,031			35,829
Total current liabilities	79,003			91,042
LONG-TERM LIABILITIES
Long-term debt, less current portion	498,168			499,968
Deferred income taxes	74,257			74,309
Other liabilities	35,183			32,818
Total liabilities	686,611			698,137
COMMITMENTS AND CONTINGENCIES (Note H)
SHAREHOLDERS’ EQUITY
Common stock, $.01 par value; 60,000,000 shares authorized, 35,588,485 and 35,127,230 shares issued and outstanding at 2012 and 2011, respectively	356			351
Additional paid-in capital	271,149			268,535
Accumulated other comprehensive loss	(1,185		)	(1,185		)
Retained earnings	170,172			161,537
	440,492			429,238
Treasury stock at cost (141,154 shares)	(656		)	(656		)
Total shareholders’ equity	439,836			428,582
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,126,447		$	1,126,719

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

2

HANGER ORTHOPEDIC GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

For the Three Months Ended March 31,

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

(Unaudited)

	Three Months Ended
	March 31,
	2012		2011
	As Restated		As Restated
Net sales	$	218,091	$	200,439
Material costs	66,697		59,111
Personnel costs	81,153		78,267
Other operating expenses	40,219		36,100
Relocation expenses	—		376
Depreciation and amortization	8,285		7,292
Income from operations	21,737		19,293
Interest expense	7,777		8,379
Income before taxes	13,960		10,914
Provision for income taxes	5,324		4,162
Net income	$	8,636	$	6,752
Other comprehensive income	—		—
Comprehensive income		8,636		6,752
Basic Per Common Share Data
Net income	$	0.25	$	0.20
Shares used to compute basic per common share amounts	34,036,539		33,360,840
Diluted Per Common Share Data
Net income	$	0.25	$	0.20
Shares used to compute diluted per common share amounts	34,639,660		34,134,067

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

3

HANGER ORTHOPEDIC GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31,

(Dollars in thousands)

(Unaudited)

	2012			2011
	As Restated			As Restated
Cash flows from operating activities:
Net income	$	8,636		$	6,752
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Loss on disposal of assets	—			5
Reduction of seller notes and earnouts	(177		)	(257		)
Provision for bad debts	4,723			4,078
Provision for deferred income taxes	—			(343		)
Depreciation and amortization	8,285			7,292
Amortization of debt issuance costs	863			748
Compensation expense on restricted stock	1,971			1,658
Excess tax benefit from stock-based compensation	(209		)	(816		)
Changes in operating assets and liabilities, net of effects of acquired companies:
Accounts receivable	851			5,483
Inventories	(7,868		)	(2,277		)
Prepaid expenses, other current assets, and income taxes	(2,234		)	(3,010		)
Accounts payable	(522		)	(6,339		)
Accrued expenses and accrued interest payable	4,294			2,040
Accrued compensation related costs	(17,504		)	(25,531		)
Other	183			(1,794		)
Net cash provided by (used in) operating activities	1,292			(12,311		)
Cash flows from investing activities:
Purchase of property, plant and equipment (net of acquisitions)	(4,777		)	(5,437		)
Purchase of equipment leased to third parties under operating leases	(539		)	—
Acquisitions and contingent purchase price (net of cash acquired)	(2,402		)	(4,941		)
Proceeds from sale of property, plant and equipment	—			3
Restricted cash	(3,120		)	—
Net cash used in investing activities	(10,838		)	(10,375		)
Cash flows from financing activities:
Borrowings under revolving credit agreement	—			10,000
Repayment of term loan	(1,450		)	(750		)
Scheduled repayment of seller’s notes	(488		)	(406		)
Deferred financing costs	—			(4,189		)
Excess tax benefit from stock-based compensation	209			816
Proceeds from issuance of common stock	627			573
Net cash (used in) provided by financing activities	(1,102		)	6,044
Decrease in cash and cash equivalents	(10,648		)	(16,642		)
Cash and cash equivalents, at beginning of period	42,896			36,308
Cash and cash equivalents, at end of period	$	32,248		$	19,666

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

4

HANGER ORTHOPEDIC GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A — BASIS OF PRESENTATION

The unaudited interim consolidated financial statements as of and for the three months ended March 31, 2012 and 2011 have been prepared by Hanger Orthopedic Group, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair statement of the Company’s financial position, results of operations and cash flows for such periods. The year-end consolidated data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the full fiscal year.

These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2011, filed by the Company with the SEC.

NOTE B — SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Restatement and Revision of Previously Reported Consolidated Financial Information

During the fourth quarter of 2012, the Company identified adjustments necessary to correct prior periods for the overstatement of the value of work-in-process inventory at December 31, 2011 and 2010. The Company assessed the materiality of the errors on previously reported periods and concluded the impact was not material to any prior annual consolidated financial statements. Management, however, deemed the impact of this error on the consolidated financial statements for the three months ended March 31, 2012 and 2011 to be material and has restated the first quarter 2012 and 2011 financial results in this restated Quarterly Report on Form 10-Q/A (the “Amended Filing”). These errors had no impact on operating cash flows for any of the periods.  The impact of the error on the Consolidated Balance Sheet as of December 31, 2011 and Statements of Income and Comprehensive Income for the three months ended March 31, 2012 and 2011 is shown in the table below (in 000’s). The impact of the errors is included in the results of the Patient-Care Services segment in Note L. The error did not have an impact on the Consolidated Balance Sheets as of March 31, 2012.

	As of December 31, 2011
(in thousands)	As Previously Reported		As Revised
Inventories	$	114,086	$	112,305
Accrued expenses	$	18,247	$	17,547

	Three Months Ended March 31, 2012				Three Months Ended March 31, 2011
(in thousands, except per share amounts)	As Previously Reported		As Restated		As Previously Reported		As Restated
Material costs	$	64,098	$	66,697	$	58,108	$	59,111
Personnel costs	$	83,619	$	81,153	$	78,889	$	78,267
Other operating expenses	$	42,133	$	40,219	$	37,390	$	36,100
Income from operations	$	19,956	$	21,737	$	18,384	$	19,293
Income before taxes	$	12,179	$	13,960	$	10,005	$	10,914
Provision for income taxes	$	4,624	$	5,324	$	3,792	$	4,162
Net income	$	7,555	$	8,636	$	6,213	$	6,752
Basic earnings per share	$	0.22	$	0.25	$	0.19	$	0.20
Diluted earnings per share	$	0.22	$	0.25	$	0.18	$	0.20

Revision of Previously Reported Statement of Cash Flow Information

During the second quarter of 2011, the Company identified a misclassification within the consolidated statements of cash flows, resulting in the overstatement of the net cash provided by operating activities in prior periods. The offsetting understatement was to net cash provided by financing activities. The misclassification had no impact on total reported decrease in cash and cash equivalents for any period, and therefore had no impact on operating or net income. The Company assessed the materiality of this item on previously reported periods and concluded the misclassification was not material. Accordingly, the three month period ended March 31, 2011 has been revised.

The impact of the reclassification on the statement of cash flows for the three month period ended March 31, 2011 is shown in the table below:

	As Previously
(in thousands)	Reported			Adjustment		As Revised
Net cash used in operating activities	$	(11,495	)	(816	)	$	(12,311	)
Net cash (used in) provided by financing activities	$	5,228		816		$	6,044

5

NOTE B — SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Use of Estimates

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, 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.

Cash and Cash Equivalents

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.

Restricted Cash

Restricted cash has statutory or contractual restrictions that prevent it from being used in the Company’s operations.  The Company agreed to restrict $3.1 million of cash to eliminate letters of credit obligations used as collateral under the revolving credit facility.

Inventories

Inventories in the Patient-Care Services segment consisting principally of raw materials and work-in-process are valued based on the gross profit method which approximates lower of cost or market using the first-in first-out method. The Company applies the gross profit method on a patient care clinic basis in this segment’s inventory to determine ending inventory at the end of each interim period except on October 31st, which is the date of our Physical inventory. The annual physical inventory for this segment values the inventory at lower of cost or market using the first-in first-out method and includes work-in-process consisting of materials, labor and overhead which is valued based on established standards for the stage of completion of each custom order. Adjustments to reconcile the physical inventory to our books are treated as changes in accounting estimates and are recorded in the fourth quarter. The Company recorded fourth quarter adjustments of an increase of $2.3 million and a decrease of $1.0 million to inventory as of October 31, 2011 and 2010, respectively. The October 31st inventory is subsequently adjusted during interim periods to apply the gross profit method described above.

Inventories in the Distribution and Therapeutic Solutions segments consist principally of finished goods which are stated at the lower of cost or market using the first-in, first-out method for all reporting periods and are valued based on perpetual records.

Fair Value of Financial Instruments

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 (level 2). The fair value of the Senior Notes, based on quoted market prices (level 1), as of March 31, 2012 was $210.5 million, as compared to the carrying value of $200.0 million as of that date.

Revenue Recognition

Revenues in the Company’s patient-care centers are derived from the sale of O&P devices and the maintenance and repair of existing devices and are recorded net of all contractual adjustments and discounts. The sale of O&P devices includes the design, fabrication, assembly, fitting and delivery of a wide range of braces, limbs and other devices. Revenues from the sale of these devices are recorded when (i) acceptance by and delivery to the patient has occurred; (ii) persuasive evidence of an arrangement exists and there are no further obligations to the patient; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured. Revenues from maintenance and repairs are recognized when the service is provided. Revenues on the sale of O&P 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.

6

NOTE B — SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Discounted sales are recorded at net realizable value. Revenues in the Therapeutic Solutions segment are primarily derived from leasing rehabilitation technology combined with clinical therapy programs and education and training. The revenue is recorded on a monthly basis according to terms of the contracts with our customers.

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 collectability. In addition to the actual bad debt expense recognized during collection activities, the Company estimates the amount of potential bad debt expense that may occur in the future. This estimate is based upon historical experience as well as a review of the receivable balances.

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 collectability 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.

Income Taxes

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. Significant accounting judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. The Company believes that its tax positions are consistent with applicable tax law, but certain positions may be challenged by taxing authorities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. In addition, the Company is subject to periodic audits and examinations by the Internal Revenue Service and other state and local taxing authorities. Although the Company believes that its estimates are reasonable, actual results could differ from these estimates.

Segment Information

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 L.

New Accounting Guidance

In May 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which amends ASC 820, “Fair Value Measurement.” The amended guidance changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements.

7

NOTE B — SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Additionally, the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. The guidance provided in ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The Company adopted the amendments of this ASU effective January 1, 2012, and the initial adoption of the amendments in this ASU did not have a material impact on our condensed consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220),” which changes the presentation of comprehensive income. The amended guidance gives companies the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance provided in ASU No. 2011-05 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The Company adopted the amendments of this ASU effective January 1, 2012, and the initial adoption of the amendments in this ASU did not have a material impact on our condensed consolidated financial statements.

In July 2011, the FASB issued ASU No. 2011-07 “Presentation and Disclosures of Patient Service Revenue, Provision for Bad Debts and the Allowance for Doubtful Accounts for Certain Health Care Entities.”  The objective of this update is to provide financial statement users with greater transparency about a health care entity’s net patient service revenue and the related allowance for doubtful accounts. This update provides information to assist financial statement users in assessing an entity’s sources of net patient service revenue and related changes in its allowance for doubtful accounts. The amendments require health care entities that recognize significant amounts of patient service revenue at the time the services are rendered even though they do not assess the patient’s ability to pay to present the provision for bad debts related to patient service revenue as a deduction from patient service revenue (net of contractual allowances and discounts) on their statement of operations. The amendments in this update require certain health care entities to change the presentation of their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, those health care entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts. The amendments also require disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. The guidance provided in ASU No. 2011-07 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The Company has determined that ASU No. 2011-07 has no impact on its financial statements.

In September 2011, FASB issued ASU 2011-08, “Intangibles — Goodwill and Other (Topic 350):  Testing Goodwill for Impairment”, which provides entities the option to perform a qualitative assessment in order to determine whether additional quantitative impairment testing is necessary. This amendment is effective for reporting periods beginning after December 15, 2011. This amendment does not impact the quantitative testing methodology, should it be necessary. The Company adopted this standard on January 1, 2012 and the initial adoption of the amendments in this ASU did not have a material impact on our condensed consolidated financial statements.

8

NOTE C - SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION

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

	Three Months Ended
	March 31,
(In thousands)	2012		2011
	(Unaudited)		(Unaudited)
Cash paid during the period for:
Interest	$	3,278	$	3,789
Income taxes (net of refunds)	1,566		1,030
Non-cash financing and investing activities:
Non-cash property, plant and equipment purchases	1,028		2,628
Earnouts payable on acquisitions	—		321
Issuance of notes in connection with acquistions	—		693
Issuance of restricted shares of common stock	8,419		11,566

NOTE D - GOODWILL

The Company determined that it has three reporting units with goodwill to be evaluated, which are the same as its reportable segments: (i) Patient-Care Services; (ii) Distribution; and (iii) Therapeutic Solutions. The Company completes its annual goodwill impairment analysis in October of each year. The fair value of the Company’s reporting units is primarily determined based on the income approach and considers the market and cost approach.

The activity related to goodwill for the three months ended March 31, 2012 and 2011 is as follows:

	Patient-Care Services							Distribution		Therapeutic Solutions
(In thousands)	Goodwill		Accumulated Impairment Loss			Net		Goodwill		Goodwill		Total
Balance at December 31, 2011	$	519,974	$	(45,808	)	$	474,166	$	38,388	$	96,930	$	609,484
Additions due to acquisitions	1,536		—			1,536		—		—		1,536
Additions due to contingent considerations	127		—			127		—		—		127
Balance at March 31, 2012 (unaudited)	$	521,637	$	(45,808	)	$	475,829	$	38,388	$	96,930	$	611,147

	Patient-Care Services							Distribution		Therapeutic Solutions
(In thousands)	Goodwill		Accumulated Impairment Loss			Net		Goodwill		Goodwill		Total
Balance at December 31, 2010	$	502,040	$	(45,808	)	$	456,232	$	38,388	$	96,079	$	590,699
Additions due to acquisitions	3,552		—			3,552		—		423		3,975
Additions due to contingent considerations	341		—			341		—		—		341
Balance at March 31, 2011 (unaudited)	$	505,933	$	(45,808	)	$	460,125	$	38,388	$	96,502	$	595,015

NOTE E — INVENTORIES

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

	March 31,		December 31,
(In thousands)	2012		2011
	(Unaudited)		(Revised)
Raw materials	$	39,488	$	39,121
Work-in-process	52,970		43,954
Finished goods	28,027		29,230
	$	120,485	$	112,305

9

NOTE F — ACQUISITIONS

During the three months ended March 31, 2012, the Company acquired one O&P company, operating a total of 2 patient-care centers. The aggregate purchase price for this O&P business was $2.0 million paid in cash. The Company recorded approximately $1.3 million of goodwill related to this acquisition, and the expenses incurred related to this acquisition were insignificant and are included in other operating expenses. During the three months ended March 31, 2011, the Company acquired one O&P company, operating a total of one patient care center. The aggregate purchase price for this O&P business was $5.8 million. Of this aggregate purchase price, $0.7 million consisted of promissory notes and $0.6 million is made up of contingent consideration payable within the next two years. Contingent consideration is reported as other liabilities on the Company’s consolidated balance sheet. The Company recorded approximately $3.6 million of goodwill related to this acquisition and the expenses incurred related to this acquisition were insignificant and are included in other operating expenses. The results of operations for these acquisitions are included in the Company’s results of operations from the date of acquisition. Pro forma results would not be materially different. The Company intends to make an election to treat this acquisition as an asset acquisition for tax purposes which will result in the goodwill being amortizable for tax purposes.

In connection with contingent consideration agreements with acquisitions completed prior to adoption of the revised authoritative guidance effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, the Company made payments of $0.1 million and $0.4 million during the three months ended March 31, 2012 and 2011, respectively. The Company has accounted for these amounts as additional purchase price, resulting in an increase in goodwill. In connection with contingent consideration agreements with acquisitions completed subsequent to adoption of revised authoritative guidance, the Company made payments of $0.4 million in the first three months of 2012 and $0.1 million in the same period 2011. The Company estimates that it may pay up to a total of $6.6 million related to contingent consideration provisions of acquisitions in future periods.

NOTE G — LONG TERM DEBT

Long-term debt consists of the following:

	March 31,			December 31,
(In thousands)	2012			2011
	(Unaudited)
Revolving Credit Facility	$	—		$	—
Term Loan	295,550			297,000
7 1/8% Senior Notes due 2018	200,000			200,000
Subordinated seller notes, non-collateralized, net of unamortized discount with principal and interest payable in either monthly, quarterly or annual installments at effective interest rates ranging from 3.00% to 7.00%, maturing through November 2016	10,545			11,033
	506,095			508,033
Less current portion	(7,927		)	(8,065		)
	$	498,168		$	499,968

Amendment to Credit Agreement

On March 11, 2011, the Company entered into an amendment to its Credit Agreement dated as of December 1, 2010 (as amended, the “Credit Agreement”). The amendment (i) reduced the interest rate margin applicable to the Term Loans under the Credit Agreement by 0.75% to 3.0% and (ii) reduced the LIBOR floor applicable to the Term Loans under the Credit Agreement from 1.5% to 1.0%. The Company incurred $4.1 million of fees related to this amendment, which will be amortized into interest expense over the remaining term of the debt.

10

NOTE G — LONG TERM DEBT (CONTINUED)

Revolving Credit Facility

The $100.0 million Revolving Credit Facility matures on December 1, 2015 and bears interest at LIBOR plus 3.75%, or the applicable rate (as defined in the Credit Agreement). The Revolving Credit Facility requires compliance with various covenants including but not limited to (i) minimum consolidated interest coverage ratio of 3.25:1.00 from October 1, 2011 to September 30, 2012, and 3.50:1.00 thereafter until maturity; (ii) maximum total leverage ratio of 5.00:1.00 until December 31, 2011, 4.50:1.00 from January 1, 2012 to September 30, 2012, and 4.00:1.00 from October 1, 2012 thereafter until maturity; and (iii) maximum annual capital expenditures of 7.5% of consolidated net revenues of the preceding fiscal year with an additional maximum rollover of $15.0 million from the prior year’s allowance if not expended in the fiscal year for which it is permitted. As of March 31, 2012, the Company had $99.5 million available under the Revolving Credit Facility. Availability under the Revolving Credit Facility as of March 31, 2012 was net of standby letters of credit of approximately $0.5 million. As of March 31, 2012, the Company had no funds drawn on the Revolving Credit Facility. The obligations under the Revolving Credit Facility are senior obligations, 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.

Term Loan

The $300.0 million Term Loan Facility matures on December 1, 2016 and requires quarterly principal payments which commenced March 31, 2011. From time to time, mandatory prepayments may be required as a result of excess free cash flow as defined in the Credit Agreement, certain additional debt incurrences,  certain asset sales, or other events as defined in the Credit Agreement. The Term Loan Facility bears interest at LIBOR plus 3.0%, or applicable rate (as defined in the Credit Agreement), and includes a 1.0% LIBOR floor. There were no mandatory prepayments required during the first three months of 2012 or 2011. As of March 31, 2012, the interest rate on the Term Loan Facility was 4.0%. The obligations under the Term Loan Facility are senior obligations, 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.

71/8% Senior Notes

The 71/8% Senior Notes mature November 15, 2018 and are senior indebtness which is guaranteed on a senior unsecured basis by all of the Company’s current and future subsidiaries. Interest is payable semi-annually on May 15 and November 15 of each year, commencing May 15, 2011.

On or prior to November 15, 2013, the Company may redeem up to 35% of the aggregate principal amount of the notes at a redemption price of 107.125% of the principal amount thereof, plus accrued and unpaid interest and additional interest to the redemption date with the proceeds of a public offering of its equity securities. On or after November 15, 2014, the Company may redeem all or from time to time a part of the notes, upon not less than 30 days and not more than 60 days’ notice, for the twelve month period beginning on November 15, of the indicated years at (i) 103.563% during 2014; (ii) 101.781% during 2015; and (iii) 100.00% during 2016 and thereafter through November 15, 2018.

11

NOTE G — LONG TERM DEBT (CONTINUED)

Subsidiary Guarantees

The Revolving and Term Loan Facilities and the 71/8% Senior Notes are guaranteed by all of the Company’s subsidiaries. Separate condensed consolidating information is not included as the Company does not have independent assets or operations. The Guarantees are full and unconditional and joint and several, and any subsidiaries of the Company other than the Guarantor Subsidiaries are minor. There are no restrictions on the ability of our subsidiaries to transfer cash to the Company or to co-guarantors. All consolidated amounts in the Company’s financial statements are representative of the combined guarantors.

Debt Covenants

The terms of the Senior Notes, the Revolving Credit Facility, and the Term Loan Facility 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 March 31, 2012, the Company was in compliance with all covenants under these debt agreements.

NOTE H — COMMITMENTS AND CONTINGENT LIABILITIES

Contingencies

The Company is subject to legal proceedings and claims which arise from time to time 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.

The Company is in a highly regulated industry and receives regulatory agency inquiries from time to time in the ordinary course of its business, including inquiries relating to the Company’s billing activities. To date these inquiries have not resulted in material liabilities, but no assurance can be given that future regulatory agencies’ inquiries will be consistent with the results to date or that any discrepancies identified during a regulatory review will not have a material adverse effect on the Company’s consolidated financial statements.

Guarantees and Indemnifications

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 is material to the Company’s operations.

NOTE I — NET INCOME PER COMMON SHARE

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.

12

NOTE I — NET INCOME PER COMMON SHARE (CONTINUED)

Net income per share is computed as follows:

	Three Months Ended
	March 31,
(In thousands, except share and per share data)	2012		2011
	(Unaudited)		(Unaudited)
	(Restated)		(Restated)
Net income	$	8,636	$	6,752
Shares of common stock outstanding used to compute basic per common share amounts	34,036,539		33,360,840
Effect of dilutive restricted stock and options (1)	603,121		773,227
Shares used to compute dilutive per common share amounts	34,639,660		34,134,067
Basic income per share	$	0.25	$	0.20
Diluted income per share	$	0.25	$	0.20

(1) There were no anti-dilutive options for the three months ended March 31, 2012 and 2011.

NOTE J — SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

The Company’s unfunded noncontributory defined benefit plan (the “Plan”) covers certain senior executives, is administered by the Company and calls for annual payments upon retirement based on years of service and final average salary. Benefit costs and liabilities balances are calculated based on certain assumptions including benefits earned, discount rates, interest costs, mortality rates and other factors. Actual results that differ from the assumptions are accumulated and amortized over future periods, affecting the recorded obligation and expense in future periods.

The following assumptions were used in the calculation of the net benefit cost and obligation at March 31, 2012:

Discount rate	3.90	%
Average rate of increase in compensation	3.00	%

The Company believes the assumptions used are appropriate; however, changes in assumptions or differences in actual experience may affect our benefit obligation and future expenses. The change in the Plan’s net benefit obligation for the three months ended March 31, 2012 and 2011 is as follows:

	(in thousands)
Net benefit cost accrued at December 31, 2011	$	20,230
Service cost	230
Interest cost	190
Payments	(525		)
Net benefit cost accrued at March 31, 2012 (unaudited)	$	20,125

	(in thousands)
Net benefit cost accrued at December 31, 2010	$	17,510
Service cost	247
Interest cost	202
Net benefit cost accrued at March 31, 2011 (unaudited)	$	17,959

13

NOTE K - STOCK-BASED COMPENSATION

The Company utilizes the authoritative guidance using the modified prospective method. Compensation expense for all awards granted is calculated according to the provisions of such guidance.

On May 13, 2010, the stockholders of the Company approved the 2010 Omnibus Incentive Plan (the “2010 Plan”) and terminated the Amended and Restated 2002 Stock Incentive and Bonus Plan (the “2002 Plan”) and the 2003 Non-Employee Directors’ Stock Incentive Plan (the “2003 Plan”). No new awards will be granted under the 2002 Plan or the 2003 Plan; however, awards granted under either the 2002 Plan or the 2003 Plan that were outstanding on May 13, 2010 remain outstanding and continue to be subject to all of the terms and conditions of the 2002 Plan or the 2003 Plan, as applicable.

The 2010 Plan provides that 2.5 million shares of Common Stock are reserved for issuance, subject to adjustment as set forth in the 2010 Plan; provided, however, that only 1.5 million shares may be issued pursuant to the exercise of incentive stock options. Of these 2.5 million shares, 2.0 million are shares that are newly authorized for issuance under the 2010 Plan and 0.5 million are unissued shares not subject to awards that have been carried over from the shares previously authorized for issuance under the terms of the 2002 Plan and the 2003 Plan. Unless earlier terminated by the Board of Directors, the 2010 Plan will remain in effect until the earlier of (i) the date that is ten years from the date the plan is approved by the Company’s stockholders, which is the effective date for the 2010 plan, namely May 13, 2020, or (ii) the date all shares reserved for issuance have been issued.

As of March 31, 2012, of the 2.5 million shares of common stock authorized for issuance under the Company’s 2010 Plan, approximately 1,061,000 shares have been issued. During the first three months of 2012, the Company issued approximately 448,000 shares of restricted stock under the 2010 Plan. The total fair value of these grants is $9.0 million. Total unrecognized share-based compensation cost related to unvested restricted stock awards was approximately $19.1 million as of March 31, 2012 and is expected to be expensed as compensation expense over approximately four years.

During the three months ended March 31, 2012 and 2011, no options were cancelled under either the 2002 Plan or the 2003 Plan.

For the three months ended March 31, 2012 and 2011, the Company has included approximately $2.0 million and $1.7 million, respectively, for share-based compensation cost in the accompanying condensed consolidated statements of income for the 2002, 2003 and 2010 Plans. Compensation expense relates to restricted share grants. 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 had no unrecognized expense related to its stock option grants for the periods ended March 31, 2012 and 2011.

NOTE L — SEGMENT AND RELATED INFORMATION

The Company has identified three 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 (ii) Distribution, and (iii) Therapeutic solutions. The reportable segments are described further below:

Patient-Care Services—This segment consists of the Company’s owned and operated patient-care centers. The patient-care centers provide services to design and fit O&P devices to patients.

14

NOTE L — SEGMENT AND RELATED INFORMATION (CONTINUED)

These centers also instruct patients in the use, care and maintenance of the devices. The principal reimbursement sources for the Company’s services are:

·Commercial and other, which consist of individuals, rehabilitation providers, private insurance companies, HMOs, PPOs, hospitals, vocational rehabilitation, workers’ compensation programs and similar sources;

·Medicare, a federally funded health insurance program providing health insurance coverage for persons aged 65 or older and certain disabled persons, which provides reimbursement for O&P products and services based on prices set forth in fee schedules for 10 regional service areas;

·Medicaid, a health insurance program jointly funded by federal and state governments providing health insurance coverage for certain persons in financial need, regardless of age, which may supplement Medicare benefits for financially needy persons aged 65 or older; and

·U.S. Department of Veterans Affairs.

The Company estimates that government reimbursement, comprised of Medicare, Medicaid and the U.S. Department of Veterans Affairs, in the aggregate, accounted for approximately 41.2% and 40.4%, of the Company’s net sales for the three months ended March 31, 2012 and 2011, respectively.

Distribution—This segment distributes O&P products and components to both the O&P industry and the Company’s own patient-care practices. This segment also includes the Company’s Fabrication centers which are involved in the fabrication of O&P components for both the O&P industry and the Company’s own patient-care centers.

Therapeutic Solutions—This segment consists of the leasing of rehabilitation equipment from, and the provision of clinical program by, ACP as well the operations of IN, Inc. ACP is a developer of specialized rehabilitation technologies and provides evidence-based clinical programs for post-acute rehabilitation. IN, Inc. specializes in bringing emerging neuromuscular technologies to the O&P market.

Other—This consists of Hanger corporate and Linkia. 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 Services segment and were made at prices which approximate market values. The Patient-Care Services segment results below are restated as described in footnote B.

15

NOTE L — SEGMENT AND RELATED INFORMATION (CONTINUED)

(In thousands)	Patient-Care Services		Distribution		Therapeutic Solutions			Other			Consolidating Adjustments			Total
	(Unaudited)		(Unaudited)		(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Three Months Ended March 31, 2012
Net sales
Customers	$	176,369	$	26,241	$	15,333		$	148		$	—		$	218,091
Intersegments	—		47,569		844			—			(48,413		)	—
Depreciation and amortization	3,417		324		2,673			1,871			—			8,285
Income (loss) from operations	26,651		8,542		268			(13,447		)	(277		)	21,737
Interest (income) expense	7,582		832		1,440			(2,077		)	—			7,777
Income (loss) before taxes	19,069		7,710		(1,172		)	(11,370		)	(277		)	13,960
Capital Expenditures	2,541		90		624			2,061			—			5,316
Three Months Ended March 31, 2011
Net sales
Customers	$	160,551	$	23,461	$	16,257		$	170		$	—		$	200,439
Intersegments	—		41,627		745			—			(42,372		)	—
Depreciation and amortization	2,961		284		2,474			1,573			—			7,292
Income (loss) from operations	23,282		6,887		751			(11,728		)	101			19,293
Interest (income) expense	7,116		849		1,440			(1,026		)	—			8,379
Income (loss) before taxes	16,166		6,038		(689		)	(10,702		)	101			10,914
Capital Expenditures	3,082		168		90			2,047			—			5,387
Total Assets
March 31, 2012	1,292,294		178,481		134,733			(479,061		)	—			1,126,447
December 31, 2011	1,277,700		170,077		135,781			(456,839		)	—			1,126,719

NOTE M — CORPORATE OFFICE RELOCATION

The Company moved its corporate headquarters from Bethesda, Maryland to Austin, Texas in 2010. As of 1/1/2012 the relocation of the corporate office was complete. The following is a summary of the costs of the relocation incurred and to be paid in future periods:

(in thousands)	Employee Separation			Other Relocation		Lease Termination			Total
Balance as of December 31, 2011	$	226		$	—	$	3,085		$	3,311
Expenses incurred	—			—		—			—
Amounts paid	(35		)	—		(104		)	(139		)
Balance as of March 31, 2012	$	191		$	—	$	2,981		$	3,172

	Employee Separation			Other Relocation			Lease Termination			Total
Balance as of December 31, 2010	$	1,895		$	—		$	5,206		$	7,101
Expenses incurred	36			340			—			376
Amounts paid	(926		)	(340		)	(641		)	(1,907		)
Balance as of March 31, 2011	$	1,005		$	—		$	4,565		$	5,570

16

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

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 the Consolidated Financial Statements included in this report. 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. Refer to risk factors disclosed in Part II, Item 1A of this filing as well as the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 for further discussion of risks and uncertainties. Our actual results and the timing of certain events may differ materially from those indicated in the forward looking statements.

Business Overview

General

The goal of Hanger Orthopedic Group, Inc. (the “Company”) is to be the world’s premier provider of services and products that enhance human physical capabilities. We provide orthotic and prosthetic patient-care services, distribute O&P devices and components, manage O&P networks, and provide therapeutic solutions to the broader post acute market. We are the largest owner and operator of orthotic and prosthetic patient-care centers in the United States and, through our distribution subsidiary, Southern Prosthetic Supply, Inc. (“SPS”), the largest dedicated distributor of O&P products in the United States. We operate in excess of 700 O&P patient-care centers located in 45 states and the District of Columbia and six strategically located distribution facilities. In addition to providing O&P services and products we, through our subsidiary, Linkia LLC (“Linkia”), manage an O&P provider network and develop programs to manage all aspects of O&P patient care for insurance companies. We also provide therapeutic solutions through our subsidiaries Innovative Neurotronics (“IN, Inc.”) and Accelerated Care Plus Corp (“ACP”). IN, Inc. introduces emerging neuromuscular technologies developed through independent research in a collaborative effort with industry suppliers worldwide. ACP is a developer of specialized rehabilitation technologies and a leading provider of evidence-based clinical programs for post-acute rehabilitation serving more than 4,200 long-term care facilities and other sub-acute rehabilitation providers throughout the U.S.

For the three months ended March 31, 2012, our net sales were $218.1 million and we recorded net income of $7.6 million. For the three months ended March 31, 2011, our net sales were $200.4 million and we recorded net income of $6.2 million.

We have three segments—Patient-Care Services, Distribution and Therapeutic Solutions. For the three months ended March 31, 2012, net sales attributable to our Patient-Care Services, Distribution and Therapeutic Solutions segments were $176.5 million, $26.3 million and $15.3 million, respectively.  See Note L to our consolidated financial statements contained herein for further information related to our segments.

Industry Overview

We provide goods and services to the O&P, post-acute, and other rehabilitation markets. We estimate that the O&P patient-care market in the United States is approximately $2.6 billion, of which we account for approximately 29%, and the post-acute rehabilitation and other rehabilitation markets, combined, are approximately $1.3 billion, of which we account for 5%. We commissioned a study in the past which identified additional opportunities to leverage our expertise beyond the traditional O&P market, and we believe these additional opportunities could potentially expand our available O&P market by an additional $1.4 billion to $4.0 billion.

17

The O&P patient-care services market is highly fragmented and is characterized by local, independent O&P businesses, with the majority of these businesses generally having a single facility with annual revenues of less than $1.0 million. We do not believe that any single competitor accounts for more than 2% of the country’s total estimated O&P patient-care services revenue.

The O&P services industry is characterized by stable, recurring revenues, primarily resulting from new patients as well as 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 to continue to grow as a result of several key trends, including the aging of the U.S. population, resulting in an increase in incidence of disease, and the demands for new and advanced devices.

We estimate the post-acute rehabilitation market to include approximately 15,000 skilled nursing facilities (“SNFs”) and to have a market potential of approximately $200 million. We provide technologically advanced rehabilitation equipment and clinical programs to approximately 31% of the post-acute market. We estimate the broader rehabilitation markets, which include independent rehabilitation providers and providers in other post-acute settings, to be approximately $1.1 billion. We currently provide goods and services to very few customers in this portion of the market, however, we believe this market would benefit from our products and services.

Business Description

Patient-Care Services

As of March 31, 2012, we provided O&P patient-care services through over 700 patient-care centers and over 1,180 clinicians in 45 states and the District of Columbia. Substantially all of our clinicians are certified, or are candidates for formal certification, by the O&P industry certifying boards. A clinician manages 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.

In our orthotics business, we design, fabricate, fit and maintain a wide range of 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 Hanger by an attending physician who determines a patient’s treatment and writes a prescription. Our clinicians then consult with both the referring physician and the patient with a view toward assisting in the design of an orthotic or prosthetic device to meet the patient’s needs.

The fitting process often involves several stages in order to successfully achieve desired functional and cosmetic results. The clinician creates a cast and takes detailed measurements, frequently using our digital imaging system (Insignia), of the patient’s residual limb to ensure an anatomically correct fit.

18

Prosthetic devices are custom fabricated and fit by skilled clinicians. 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 plaster castings, measurements and designs made by our clinicians and by utilization of our proprietary Insignia system. The Insignia system replaces plaster casting of a patient’s residual limb with a computer generated 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.

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 services and the success of our technological advances have generated broad media coverage, building our brand equity among payors, patients and referring physicians.

The principal reimbursement sources for our services are:

·Commercial and other, which consist of individuals, rehabilitation providers, private insurance companies, HMOs, PPOs, hospitals, vocational rehabilitation, workers’ compensation programs and similar sources;

·Medicare, a federally funded health insurance program providing health insurance coverage for persons aged 65 or older and certain disabled persons, which provides reimbursement for O&P products and services based on prices set forth in fee schedules for 10 regional service areas;

·Medicaid, a health insurance program jointly funded by federal and state governments providing health insurance coverage for certain persons in financial need, regardless of age, which may supplement Medicare benefits for financially needy persons aged 65 or older; and

·U.S. Department of Veterans Affairs.

We estimate that government reimbursement, comprised of Medicare, Medicaid and the U.S. Department of Veterans Affairs, in the aggregate, accounted for approximately 41.2% and 40.4% of our net sales for the three months ended March 31, 2012 and 2011, 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 (decreases)/increases for 2012, 2011, 2010, 2009, and 2008 were 2.4%, (0.1%), 0.0%, 5.0%, and 2.7%, respectively. 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.

19

Through the normal course of business, we receive patient deposits on devices not yet delivered. At March 31, 2012 and 2011, we held $1.1 million and $1.3 million of deposits, respectively, from our patients.

Provider Network Management

Linkia is the only provider network management 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 includes approximately 1,030 O&P provider locations, including approximately 350 independent providers. As of March 31, 2012, Linkia had 52 contracts with national and regional providers.

Distribution Services

We distribute O&P components to independent customers and to our own patient-care centers through our wholly-owned subsidiary, SPS, which is the nation’s largest dedicated O&P distributor. We are also a leading manufacturer and distributor of therapeutic footwear for diabetic patients in the podiatric market. SPS maintains in inventory approximately 29,000 individual SKUs manufactured by more than 300 different companies. SPS operates distribution facilities in California, Florida, Georgia, Illinois, Pennsylvania, and Texas, which allows us to deliver products via ground shipment anywhere in the contiguous United States typically within two business days.

Our Distribution business enables us to:

·centralize our purchasing and thus lower our material costs by negotiating purchasing discounts from manufacturers;

·reduce our patient-care center inventory levels and improve inventory turns;

·perform inventory quality control;

·encourage our patient-care centers to use clinically appropriate products that enhance our profit margins; and

·coordinate new product development efforts with key vendor “partners”.

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.

Therapeutic Solutions

We provide therapeutic solutions to the O&P market and post-acute rehabilitation market through our subsidiaries IN, Inc. and ACP. ACP is the nation’s leading provider of rehabilitation technologies and integrated clinical programs to rehabilitation providers. ACP’s unique value proposition is to provide its customers with a full-service “total solutions” approach encompassing proven medical technology, evidence based clinical programs, and continuous onsite therapist education and training. ACP’s services support increasingly advanced treatment options for a broader patient population and more medically complex conditions. ACP has contracts to serve more than 4,200 skilled nursing facilities nationwide, including 21 of the 25 largest national providers. ACP’s contracts contain negotiated pricing and service levels with terms ranging from one to five years.

20

ACP generally bills its customers monthly and revenue is recognized based upon the contractual terms of the agreements.

IN, Inc. specializes in the product development and commercialization of emerging products in the Orthotic Prosthetic and Rehabilitation markets. Working with 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. currently has two commercial products: the WalkAide System which benefits patients with a condition referred to as drop foot and the V-Hold which is active vacuum technology used in lower extremity prosthetic devices. The V-Hold is primarily sold through our patient care centers. The WalkAide System is currently reimbursable for Medicare beneficiaries with foot drop due to incomplete spinal cord injuries. IN, Inc. is currently conducting clinical trials in an effort to gain additional coverage for stroke patients with foot drop, which represents the largest potential foot drop patient population. These trials are now fully enrolled with submission of data to CMS anticipated in 2013. In addition to reimbursement with Medicare, IN, Inc. has been working with commercial insurance companies and has had limited success in receiving coverage for the WalkAide. The WalkAide is sold in the United States through our patient-care centers and SPS. IN, Inc. is also marketing the WalkAide internationally through a network of distributors in Europe, the Middle East/Africa, Latin America, Canada, and Asia.

Critical Accounting Policies and Estimates

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 report.  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.

·Revenue Recognition:  Revenues in our Patient-Care Services segment are derived from the sale of O&P devices and the maintenance and repair of existing devices and are recorded net of all contractual adjustments and discounts. The sale of O&P devices includes the design, fabrication, assembly, fitting and delivery of a wide range of braces, limbs and other devices. Revenues from the sale of these devices are recorded when (i) acceptance by and delivery to the patient has occurred; (ii) persuasive evidence of an arrangement exists and there are no further obligations to the patient; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured. Revenues from maintenance and repairs are recognized when the service is provided. Revenues on the sale of O&P 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. Revenues in our Therapeutic Solutions are primarily derived from leasing rehabilitation technology combined with clinical therapy programs and education and training. The revenue is recorded on a monthly basis according to terms of the contracts with our customers.

21

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 collectability. 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 collectability 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, we may outsource the collection of such accounts to collection agencies after internal collection efforts are exhausted. In cases where valid accounts receivable cannot be collected, the uncollectible account is written off to bad debt expense.

The following represents the composition of our accounts receivable balance by type of payor:

March 31, 2012
(In thousands)	0-60 days		61-120 days		Over 120 days		Total
Patient Care Services
Commercial insurance	$	40,808	$	10,377	$	12,789	$	63,974
Private pay	4,453		3,513		9,216		17,182
Medicaid	11,262		3,255		4,411		18,928
Medicare	25,111		3,608		5,275		33,994
VA	1,974		370		263		2,607
Distribution & Therapeutic Solutions Trade accounts receivable	11,688		3,011		3,946		18,645
	$	95,296	$	24,134	$	35,900	$	155,330

December 31, 2011
(In thousands)	0-60 days		61-120 days		Over 120 days		Total
Patient Care Services
Commercial insurance	$	50,136	$	9,594	$	11,759	$	71,489
Private pay	3,936		3,791		9,219		16,946
Medicaid	12,018		3,678		4,173		19,869
Medicare	25,438		3,489		4,433		33,360
VA	1,428		373		159		1,960
Distribution & Therapeutic Solutions Trade accounts receivable	11,367		2,663		3,200		17,230
	$	104,323	$	23,588	$	32,943	$	160,854

·Inventories:  Inventories in the Patient-Care Services segment consisting principally of raw materials and work-in-process respectively, are valued based on the gross profit method which approximates lower of cost or market using the first-in first-out method. We apply the gross profit method on a patient care clinic basis in this segment’s inventory to determine ending inventory at the end of each interim period except on October 31st, which is the date of our physical inventory. The annual physical inventory for this segment values the inventory at lower of cost or market using the first-in first-out method and includes work-in-process consisting of materials, labor and overhead which is valued based on established standards for the stage of completion of each custom order. Adjustments to reconcile the physical inventory to our books are treated as changes in accounting estimates and are recorded in the fourth quarter. We recorded fourth quarter adjustments of an increase of $2.3 million and a decrease of $1.0 million to inventory as of October 31, 2011 and 2010, respectively. The October 31st inventory is subsequently adjusted during interim periods to apply the gross profit method described above.

Inventories in the Distribution and Therapeutic Solutions segments consist principally of finished goods which are stated at the lower of cost or market using the first-in, first-out method for all reporting periods and are valued based on perpetual records.

·Goodwill and Other Intangible Assets:  Goodwill represents the excess of purchase price over the fair value of net identifiable assets of purchased businesses. We assess goodwill for impairment annually on October 1, or when events or circumstances indicate that the carrying value of the reporting units may not be recoverable.

22

Any impairment would be recognized by a charge to operating results and a reduction in the carrying value of the intangible asset. Our annual impairment test for goodwill primarily utilizes the income approach and considers the market approach and the cost approach in determining the value of our reporting units. Non-compete agreements are recorded based on agreements entered into by us and are amortized, using the straight-line method, over their terms 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 17 years. Whenever the facts and circumstances indicate that the carrying amounts of these intangibles may not be recoverable, we review and assess the future cash flows expected to be generated from the related intangible for possible impairment. Any impairment would be recognized as a charge to operating results and a reduction in the carrying value of the intangible asset. As of October 1, 2011, there were no indicators of impairment as the fair value of the reporting units is substantially in excess of their carrying value.

·Income taxes:  We are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax liability together with assessing temporary differences in recognition of income (loss) for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in the Consolidated Balance Sheet. We then assess the likelihood that the deferred tax assets will be recovered from future taxable income and, to the extent that we believe that recovery is not likely, we establish a valuation allowance against the deferred tax asset.

We recognize liabilities for uncertain tax positions based on a two-step process. The first step requires us to determine if the weight of available evidence indicates that the tax position has met the threshold for recognition; therefore, we must evaluate whether it is more likely than not that the position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step requires us to measure the tax benefit of the tax position taken, or expected to be taken, in an income tax return as the largest amount that is more than 50% likely of being realized upon ultimate settlement. This measurement step is inherently complex and requires subjective estimations of such amounts to determine the probability of various possible outcomes. We re-evaluate the uncertain tax positions each quarter based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, expirations of statutes of limitation, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

Although we believe the measurement of our liabilities for uncertain tax positions is reasonable, no assurance can be given that the final outcome of these matters will not be different than what is reflected in the historical income tax provisions and accruals. If additional taxes are assessed as a result of an audit or litigation, it could have a material effect on the income tax provision and net income in the period or periods for which that determination is made. We operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues which may require an extended period of time to resolve and could result in additional assessments of income tax. We believe adequate provisions for income taxes have been made for all periods.

23

New Accounting Guidance

In May 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which amends ASC 820, “Fair Value Measurement.” The amended guidance changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements. The guidance provided in ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The provisions are effective for the Company’s year ended December 31, 2012. The Company adopted the amendments of this ASU effective January 1, 2012, and the initial adoption of the amendments in this ASU did not have a material impact on our condensed consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220),” which changes the presentation of comprehensive income. The amended guidance gives companies the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance provided in ASU No. 2011-05 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The provisions are effective for the Company’s year ended December 31, 2012. The Company adopted the amendments of this ASU effective January 1, 2012, and the initial adoption of the amendments in this ASU did not have a material impact on our condensed consolidated financial statements.

In July 2011, the FASB issued ASU No. 2011-07 “Presentation and Disclosures of Patient Service Revenue, Provision for Bad Debts and the Allowance for Doubtful Accounts for Certain Health Care Entities.”  The objective of this update is to provide financial statement users with greater transparency about a health care entity’s net patient service revenue and the related allowance for doubtful accounts. This update provides information to assist financial statement users in assessing an entity’s sources of net patient service revenue and related changes in its allowance for doubtful accounts. The amendments require health care entities that recognize significant amounts of patient service revenue at the time the services are rendered even though they do not assess the patient’s ability to pay to present the provision for bad debts related to patient service revenue as a deduction from patient service revenue (net of contractual allowances and discounts) on their statement of operations. The amendments in this update require certain health care entities to change the presentation of their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue (net of contractual allowances and discounts). Additionally, those health care entities are required to provide enhanced disclosure about their policies for recognizing revenue and assessing bad debts. The amendments also require disclosures of patient service revenue (net of contractual allowances and discounts) as well as qualitative and quantitative information about changes in the allowance for doubtful accounts. The guidance provided in ASU No. 2011-07 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The provisions are effective for the Company’s year ended December 31, 2012. The Company has determined that ASU No. 2011-07 has no impact on its financial statements.

In September 2011, FASB issued ASU 2011-08, “Intangibles — Goodwill and Other (Topic 350):  Testing Goodwill for Impairment”, which provides entities the option to perform a qualitative assessment in order to determine whether additional quantitative impairment testing is necessary. This amendment is effective for reporting periods beginning after December 15, 2011. This amendment does not impact the quantitative testing methodology, should it be necessary. The Company adopted this standard on January 1, 2012 and the initial adoption of the amendments in this ASU did not have a material impact on our condensed consolidated financial statements.

Guidance and Outlook

The Company expects full year 2012 revenues of between $970 million and $990 million resulting from comparable store sales growth in our Patient Care Services and Distribution segments of 3% to 5%. We expect flat to slightly higher revenues in our Therapeutic Services segment for the year, with sales in the first half of the year down then trending up in the second half as the rate of new contracts accelerates. The Company anticipates diluted earnings per share of between $1.67 and $1.74, which includes approximately $0.05 for one-time training costs related to the implementation of our new patient management system.

24

As in past years, the Company’s goal is to increase operating margins by twenty to forty basis points. The Company anticipates generating cash flow from operations between $70 million and $80 million in 2012 and investing a total of $40 million to $50 million in capital additions. During 2012 the Company will continue its acquisition program with a goal of closing acquisitions that total approximately $20 million in annualized revenues.

Results of Operations

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

	Three Months Ended
	March 31,
	2012		2011
	(Unaudited)		(Unaudited)
	(Restated)		(Restated)
Net sales	100.0	%	100.0	%
Material costs	30.6		29.5
Personnel costs	37.2		39.0
Other operating expenses	18.4		18.0
Relocation expenses	—		0.2
Depreciation and amortization	3.8		3.6
Income from operations	10.0		9.7
Interest expense	3.6		4.2
Income before taxes	6.4		5.5
Provision for income taxes	2.4		2.1
Net income	4.0	%	3.4	%

Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011

Net Sales.  Net sales for the three months ended March 31, 2012 increased $17.7 million, or 8.8%, to $218.1 million from $200.4 million for the three months ended March 31, 2011. The increase was the result of a $11.4 million, or 7.1%, increase in same-center sales in the Patient-Care Services segment; a $4.4 million increase from acquired entities; a $2.8 million, or 11.9%, increase in sales in the Distribution segment; and a $0.9 million decrease from the Therapeutic Solutions segment.

Material Costs.  Material costs for the three months ended March 31, 2012 was $66.7 million, an increase of $7.6 million, or 12.9%, over $59.1 million for the three months ended March 31, 2011. The increase was the result of growth in sales.  Material costs as a percentage of net sales increased 110 basis points due to mix of revenue.

Personnel Costs.  Personnel costs for the three months ended March 31, 2012 increased by $2.9 million to $81.2 million from $78.3 million for the three months ended March 31, 2011. The increase was due to costs from acquired entities and increased employee benefit costs, staffing and merit increases. As a percentage of net sales, personnel costs decreased 1.8% to 37.2% in 2012 from 39.0% in 2011 due to leveraging existing resources over increased sales volume.

Other Operating Expenses.  Other operating expenses for the three months ended March 31, 2012 increased $4.1 million, to $40.2 million, from $36.1 million for the three months ended March 31, 2011. The increase was primarily due to: (i) the addition of $1.0 million in operating expenses from acquired entities; (ii) $1.2 million in increased expenses related bad debt; (iii) $0.8 million in increased incentive compensation; and (iv) $0.6 million related to Instride trials.  Other operating expenses as a percentage of net revenues increased 0.4% to 18.4% in 2012 from 18.0% in the prior year.

25

Relocation Expenses.  As of January 1, 2012, we had completed the relocation of our corporate office from Bethesda, Maryland to Austin, Texas.  During the three months ended March 31, 2011, we incurred $0.4 million of employee relocation costs.

Depreciation and Amortization. Depreciation and amortization for the three months ended March 31, 2012 increased $1.0 million, to $8.3 million, compared to $7.3 million in the first quarter of 2011. The increase was primarily due to operating assets purchased over the last 12 months.

Income from Operations.  Income from operations increased $2.4 million, to $21.7 million, for the three months ended March 31, 2012 compared to $19.3 million for the three months ended March 31, 2011 due to increased sales volume.

Interest Expense.  Interest expense decreased $0.6 million for the three months ended March 31, 2012, to $7.8 million, compared to $8.4 million, for the three months ended March 31, 2011,  primarily due to lower interest rates resulting from the amendment to our credit facilities in March of 2011.

Provision for Income Taxes.  The provision for income taxes for the three months ended March 31, 2012 was $5.3 million, or 38.1% of pre-tax income, compared to $4.2 million, or 38.1% of pre-tax income, for the three months ended March 31, 2011. The effective tax rate consists principally of the 35% federal statutory tax rate and state income taxes, less permanent tax differences.

Net Income.  Net income increased $1.9 million, to $8.6 million, for three months ended March 31, 2012, from $6.7 million for the three months ended March 31, 2011, due primarily to increased sales volume.

Financial Condition, Liquidity and Capital Resources

Cash Flows

Our working capital at March 31, 2012 was $250.9 million, compared to $194.1 million at March 31, 2011. The increase in working capital is primarily due to increases in cash, inventory, and accounts receivable. Days sales outstanding (“DSO”), which is the number of days between the billing date of O&P services and the date of receipt of payment thereof, for the three months ended March 31, 2012 increased to 51 days from 47 days for the same period last year. Net cash provided by operating activities was $1.3 million for the quarter ended March 31, 2012 compared to $12.3 million used in operating activities in the prior year. The increase in cash provided by operating activities in the current year resulted primarily from increased net sales, and a decrease in incentive compensation payments in 2012.

Net cash used in investing activities was $10.8 million for the quarter ended March 31, 2012, compared to $10.4 million in the prior year. In 2012, we acquired one O&P company operating 2 patient-care centers at an aggregate purchase price of $2.0 million.  During the same period in 2011, we acquired one O&P company operating one patient-care center for an aggregate purchase price of $5.8 million. Additionally, in 2012, we invested $5.3 million in capital assets, compared to $5.4 million for the same period in 2011. Capital assets acquired in 2012 related to the development of the Company’s new patient management system and machinery and equipment purchases. During the first quarter of 2012 we restricted $3.1 million of cash in order to eliminate letters of credit obligations.

Net cash (used in)/provided by financing activities was $(1.1) million and $6.0 million for the quarters ended March 31, 2012 and 2011, respectively. During the first quarter of 2012 we: (i) repaid $1.4 million related to term loan borrowings under our credit facilities (“Term Loans”); (ii) made $0.5 million of required repayments of promissory notes issued in connection with acquisitions (“Seller Notes”); and (iii) received $0.6 million of proceeds from issuance of stock under employee stock compensation plans. During the first quarter of 2011 we: (i) borrowed $10.0 million under our revolving credit facility; (ii) repaid $0.8 million related to Term Loans; (iii) made $0.4 million of required repayments of Seller Notes; (iv) incurred $4.2 million of financing costs related to the repricing of our debt in the first quarter of 2011; and (v) received $0.6 million of proceeds from issuance of stock under employee stock compensation plans.

26

Debt

Long-term debt consisted of the following:

	March 31,			December 31,
(In thousands)	2012			2011
	(Unaudited)
Revolving Credit Facility	$	—		$	—
Term Loan	295,550			297,000
7 1/8% Senior Notes due 2018	200,000			200,000
Subordinated seller notes, non-collateralized, net of unamortized discount with principal and interest payable in either monthly, quarterly or annual installments at effective interest rates ranging from 3.00% to 7.00%, maturing through November 2016	10,545			11,033
	506,095			508,033
Less current portion	(7,927		)	(8,065		)
	$	498,168		$	499,968

Amendment to Credit Agreement

On March 11, 2011, the Company entered into an amendment to its Credit Agreement dated as of December 1, 2010 (as amended, the “Credit Agreement”). The amendment (i) reduced the interest rate margin applicable to the Term Loans under the Credit Agreement by 0.75% to 3.0% and (ii) reduced the LIBOR floor applicable to the Term Loans under the Credit Agreement from 1.5% to 1.0%. The Company incurred $4.1 million of fees related to this amendment, which will be amortized into interest expense over the remaining term of the debt.

Revolving Credit Facility

The $100.0 million Revolving Credit Facility matures on December 1, 2015 and bears interest at LIBOR plus 3.75%, or the applicable rate (as defined in the Credit Agreement). The Revolving Credit Facility requires compliance with various covenants including but not limited to (i) minimum consolidated interest coverage ratio of 3.25:1.00 from October 1, 2011 to September 30, 2012, and 3.50:1.00 thereafter until maturity; (ii) maximum total leverage ratio of 5.00:1.00 until December 31, 2011, 4.50:1.00 from January 1, 2012 to September 30, 2012, and 4.00:1.00 from October 1, 2012 thereafter until maturity; and (iii) maximum annual capital expenditures of 7.5% of consolidated net revenues of the preceding fiscal year with an additional maximum rollover of $15.0 million from the prior year’s allowance if not expended in the fiscal year for which it is permitted. As of March 31, 2012, the Company had $99.5 million available under the Revolving Credit Facility. Availability under the Revolving Credit Facility as of March 31, 2012 was net of standby letters of credit of approximately $0.5 million. As of March 31, 2012, the Company had no funds drawn on the Revolving Credit Facility. The obligations under the Revolving Credit Facility are senior obligations, 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.

Term Loan

The $300.0 million Term Loan Facility matures on December 1, 2016 and requires quarterly principal payments which commenced March 31, 2011.

27

From time to time, mandatory prepayments may be required as a result of excess free cash flow as defined in the Credit Agreement, certain additional debt incurrences,  certain asset sales, or other events as defined in the Credit Agreement. The Term Loan Facility bears interest at LIBOR plus 3.0%, or applicable rate (as defined in the Credit Agreement), and includes a 1.0% LIBOR floor. There were no mandatory prepayments required during the first three months of 2012 or 2011. As of March 31, 2012, the interest rate on the Term Loan Facility was 4.0%. The obligations under the Term Loan Facility are senior obligations, 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.

71/8% Senior Notes

The 71/8% Senior Notes mature November 15, 2018 and are senior indebtness which is guaranteed on a senior unsecured basis by all of the Company’s current and future subsidiaries. Interest is payable semi-annually on May 15 and November 15 of each year, commencing May 15, 2011.

On or prior to November 15, 2013, the Company may redeem up to 35% of the aggregate principal amount of the notes at a redemption price of 107.125% of the principal amount thereof, plus accrued and unpaid interest and additional interest to the redemption date with the proceeds of a public offering of its equity securities. On or after November 15, 2014, the Company may redeem all or from time to time a part of the notes, upon not less than 30 days and not more than 60 days’ notice, for the twelve month period beginning on November 15, of the indicated years at (i) 103.563% during 2014; (ii) 101.781% during 2015; and (iii) 100.00% during 2016 and thereafter through November 15, 2018.

Subsidiary Guarantees

The Revolving and Term Loan Facilities and the 71/8% Senior Notes are guaranteed by all of the Company’s subsidiaries. Separate condensed consolidating information is not included as the Company does not have independent assets or operations. The Guarantees are full and unconditional and joint and several, and any subsidiaries of the Company other than the Guarantor Subsidiaries are minor. There are no restrictions on the ability of our subsidiaries to transfer cash to the Company or to co-guarantors. All consolidated amounts in the Company’s financial statements are representative of the combined guarantors.

Debt Covenants

The terms of the Senior Notes, the Revolving Credit Facility, and the Term Loan Facility 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 March 31, 2012, the Company was in compliance with all covenants under these debt agreements.

General

As of March 31, 2012, $295.6 million, or 58.4%, of our total debt of $506.1 million was subject to variable interest rates. 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 the next twelve months to fund anticipated capital expenditures, to fund our acquisition plans and make required payments of principal and interest on our debt, including payments due on our outstanding debt.

28

Obligations and Commercial Commitments

The following table sets forth our contractual obligations and commercial commitments as of March 31, 2012 (unaudited):

	Payments Due by Period
(In thousands)	Remainder of 2012		2013		2014		2015		2016		Thereafter		Total
Long-term debt	$	6,763	$	5,448	$	4,415	$	4,222	$	285,247	$	200,000	$	506,095
Interest payments on long-term debt	23,400		26,098		25,885		25,723		24,165		26,719		$	151,990
Operating leases	32,302		35,286		28,261		18,780		12,927		30,791		$	158,347
Capital leases and other long-term obligations (1)	12,960		14,027		11,347		8,570		3,369		12,357		$	62,630
Total contractual cash obligations	$	75,425	$	80,859	$	69,908	$	57,295	$	325,708	$	269,867	$	879,062

(1) Other long-term obligations include commitments under our SERP plan. Refer to Note K of the Company’s Annual Report on Form 10-K for additional disclosure.

The carrying value of our 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 (level 2). The fair value of the Senior Notes, as of March 31, 2012, was $210.5 million, as compared to the carrying value of $200.0 million at that date. The fair values of the Senior Notes were based on the quoted market price as of March 31, 2012 (level 1).

Market Risk

We are exposed to the market risk that is associated with changes in interest rates.  As of March 31, 2012, all our outstanding debt, with the exception of the $295.6 million borrowed under the Term Loan Facility, was subject to fixed interest rates (see Item 3 below).

Forward Looking Statements

This report contains forward-looking statements setting forth our beliefs or expectations relating to future revenues, contracts and operations, as well as the results of an internal investigation and certain legal proceedings. Actual results may differ materially from projected or expected results due to changes in the demand for our O&P products and services, uncertainties relating to the results of operations or recently acquired O&P patient-care centers, our ability to enter into and derive benefits from managed-care contracts, our ability to successfully attract and retain qualified O&P clinicians, federal laws governing the health-care industry, uncertainties inherent in incomplete investigations and legal proceedings, governmental policies affecting O&P operations and other risks and uncertainties generally affecting the health-care industry. Readers are cautioned not to put undue reliance on forward-looking statements.  Refer to risk factors disclosed in Part II, Item 1A of this filing as well as the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011 for discussion of risks and uncertainties. We disclaim any intent or obligation to publicly update these forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

We have existing obligations relating to our 71/8% Senior Notes, Term Loan Facility, Revolver and Subordinated Seller Notes. As of March 31, 2012, we had cash flow exposure to the changing interest rates on the $295.6 million borrowed under the Term Loan Facility. The other obligations have fixed interest rates.

Presented below is an analysis of our financial instruments as of March 31, 2012 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 Facility, calculated for an instantaneous parallel shift in interest rates, plus or minus 50 basis points (“BPS”), 100 BPS and 150 BPS. The LIBOR floor and applicable rate pursuant to the Term Loans under the Credit Agreement prevents the rate from dropping below 4.0%.

29

As of March 31, 2012, the current LIBOR and applicable rate, is 4.0%; therefore, a 76 BPS increase or decrease in LIBOR would not reduce or increase estimated annual cash flows related to the outstanding balance on the Term Loan Facility.

Cash Flow Risk	Annual Interest Expense Given an Interest Rate Decrease of X Basis Points						No Change in Interest Rates		Annual Interest Expense Given an Interest Rate Increase of X Basis Points
(In thousands)	(150 BPS)		(100 BPS)		(50 BPS)				50 BPS		100 BPS		150 BPS
Term Loan	$	11,822	$	11,822	$	11,822	$	11,822	$	11,822	$	12,531	$	14,009

ITEM 4.  Controls and Procedures

Management’s Consideration of Restatement of Previously Issued Financial Statements

As discussed in Item 4.02 (a) of the Company’s Current Report on Form 8-K, dated March 18, 2013, management of the Company has restated previously issued consolidated financial statements included in the Company’s Quarterly Report on Form 10-Q for the quarters ended March 31, 2012 and 2011 in this Amended Filing. The determination to restate these consolidated financial statements was made as a result of the Company’s identification of certain accounting errors as discussed in footnote B of the consolidated financial statements included in this Amended Filing.

Disclosure Controls and Procedures

Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in our reports filed or submitted to the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.  At the time that our Quarterly Report on Form 10-Q for the three month period ended March 31, 2012 was filed on May 4, 2012, our CEO and CFO concluded that our disclosure controls and procedures were effective as of March 31, 2012. Subsequent to that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were not effective as of March 31, 2012 because of the material weakness in our internal control over financial reporting discussed below. Notwithstanding the material weakness described below, management, based upon the substantial work performed during the restatement process, has concluded that the Company’s consolidated financial statements for the periods covered by and included in this Quarterly Report on Form 10-Q/A are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States of America for each of the periods presented herein.

Material Weakness

We did not maintain effective controls over the valuation of work-in-process inventory. Specifically, the Company did not appropriately account for the effect of sales volume changes on the determination of the valuation of the Company's work-in-process inventory resulting in misstatements of inventory, material costs, personnel costs, other operating expenses and income taxes as of and for the periods ended December 31, 2011 and 2010 and the three months ended March 31, 2012 and 2011 and resulted in an audit adjustment for the year and three month period ended December 31, 2012. This control deficiency could result in further misstatement to the aforementioned account balances or disclosures that would result in material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has concluded that this control deficiency constitutes a material weakness.

Change in Internal Control Over Financial Reporting

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 three months ended March 31, 2012, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Remediation of Material Weakness

In an effort to remediate the material weakness discussed in Management’s Annual Report on Internal Control Over Financial Reporting in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, management will implement additional annual and quarterly reviews, analyses and calculations related to the valuation of work-in-process inventory. We believe the remediation measures described above will remediate this material weakness going forward.  Management will also continue to evaluate our controls and procedures, and may implement additional measures in the future or modify certain of the remediation measures described above.

30

Part II.  Other Information

ITEM 1A.  RISK FACTORS.

Part I, Item 1A (“Risk Factors”) of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 sets forth information relating to important risks and uncertainties that could materially adversely affect the Company’s business, financial condition or operating results. Those risk factors continue to be relevant to an understanding of the Company’s business, financial condition and operating results.  Certain of those risk factors have been updated in this Form 10-Q/A to provide updated information, as set forth below. References to “we,” “our” and “us” in these risk factors refer to the Company.

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

We derived 41.2% and 40.4% of our net sales for the three months ended March 31, 2012 and 2011, 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 set 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. For example, a number of states have reduced their Medicaid reimbursement rates for O&P services and products, or have reduced Medicaid eligibility, and others are in the process of reviewing Medicaid reimbursement policies generally, including for prosthetic and orthotic devices. Additionally, 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 (decreases)/increases for 2012, 2011, 2010, 2009, and 2008 were 2.4%, (0.1%), 0.0%, 5.0%, and 2.7% respectively. The Patient Protection and Affordable Care Act, Pub. L. No. 111-148, March 23, 2010 (“PPACA”) changed the Medicare inflation factors applicable to O&P (and other) suppliers. The annual updates for years subsequent to 2011 are based on the percentage increase in the CPI-U for the 12-month period ending with June of the previous year. Section 3401(m) of PPACA required that for 2011 and each subsequent year, the fee schedule update factor based on the CPI-U for the 12-month period ending with June of the previous year is to be adjusted by the annual economy-wide private nonfarm business multifactory productivity (“the MFP Adjustment”). The MFP Adjustment may result in that percentage increase being less than zero for a year and may result in payment rates for a year being less than such payment rates for the preceding year. CMS has not yet issued a final rule implementing these adjustments for years beyond 2011, but has indicated in a proposed rule that it will do so as part of the annual program instructions to the O&P fee schedule updates. See 75 Fed. Reg. 40040, 40122, et seq. (July 13, 2010). 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.

31

Our substantial indebtedness could impair our financial condition and our ability to fulfill our obligations under our indebtedness.

We have substantial debt. As of March 31, 2012, we had approximately $506.1 million of total indebtedness and $99.5 million available under our Revolving Credit Facility.

The level of our indebtedness could have important consequences to us.  For example, our substantial indebtedness could:

·make it more difficult for us to satisfy our obligations;

·increase our vulnerability to adverse general economic and industry conditions;

·require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate requirements;

·limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

·place us at a competitive disadvantage compared to our competitors that have proportionately less debt;

·make it more difficult for us to borrow money for working capital, capital expenditures, acquisitions or other purposes;

·limit our ability to refinance indebtedness, or the associated costs may increase; and

·expose us to the risk of increased interest rates with respect to that portion of our debt that has a variable rate of interest.

32

ITEM 6.	Exhibits
	(a)	Exhibits.  The following exhibits are filed herewith:
	Exhibit No.		Document
	3.1		Amended and Restated By-Laws of Hanger Orthopedic Group, Inc., as amended effective February 2, 2012. (Incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the Registrant on February 2, 1012).
	10.1		Fifth Amended and Restated Employment Agreement, effective as of January 1, 2012, by and between Thomas F. Kirk and the Company. (Incorporated herein by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on January 26, 2012).
	10.2		Amended and Restated Employment Agreement, effective as of January 1, 2012, by and between Vinit Asar and the Company. (Incorporated herein by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Registrant on January 26, 2012).
	10.3		Fourth Amended and Restated Employment Agreement, effective as of January 1, 2012, by and between George E. McHenry and the Company. (Incorporated herein by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the Registrant on January 26, 2012).
	10.4		Fourth Amended and Restated Employment Agreement, effective as of January 1, 2012, by and between Richmond L. Taylor and the Company. (Incorporated herein by reference to Exhibit 10.4 to the Current Report on Form 8-K filed by the Registrant on January 26, 2012).
	31.1		Written Statement of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2		Written Statement of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	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.
	101		The following financial information from the Company’s Quarterly Report on Form 10-Q/A, for the period ended March 31 2012, formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Cash Flows, (iv) Notes to Consolidated Financial Statements (1)

(1)      Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

33

SIGNATURES

Pursuant to the requirements 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.

	HANGER, INC.
Dated: March 22, 2013		/s/Vinit K. Asar
		Vinit K. Asar
		Chief Executive Officer
		(Principal Executive Officer)
Dated: March 22, 2013		/s/George E. McHenry
		George E. McHenry
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

34