10-K

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934.

For the fiscal year ended December 31, 2001
                          -----------------
                                       OR
[ ]      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 ORTHOPEDIC GROUP, INC.
- --------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter.)

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

   Two Bethesda Metro Center (Suite 1200), Bethesda, MD                20814
- --------------------------------------------------------------------------------
(Address of principal executive offices)                            (Zip Code)

Registrant's phone number, including area code:           (301) 986-0701
                                                   ---------------------------

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

                     Common Stock, par value $0.01 per share
                     ---------------------------------------
                                (Title of Class)

Securities registered pursuant to Section 12(g) of the Act: None.

         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
                                              -------------     ----------

         The aggregate market value of the registrant's Common Stock, par value
$0.01 per share, held as of March 19, 2002 by non-affiliates of the registrant
was $168,912,907 based on the $9.46 closing sale price per share of the Common
Stock on the New York Stock Exchange on such date.

         As of March 19, 2002, the registrant had 19,156,712 shares of its
Common Stock issued and outstanding.

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


                       DOCUMENTS INCORPORATED BY REFERENCE

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


ITEM 1.  BUSINESS.

Business Overview

         We are the largest owner and operator of orthotic and prosthetic
("O&P") patient-care centers in the United States. In our orthotics business, we
design, fabricate, fit and maintain a wide range of standard and custom-made
braces and other devices (such as spinal, knee and sports-medicine braces) that
provide external support to patients suffering from musculoskeletal disorders,
such as ailments of the back, extremities or joints and injuries from sports or
other activities. In our prosthetics business, we design, fabricate, fit and
maintain custom-made artificial limbs for patients who are without limbs as a
result of traumatic injuries, vascular diseases, diabetes, cancer or congenital
disorders. O&P devices are increasingly technologically advanced and are
custom-designed to add functionality and comfort to patients' lives, shorten the
rehabilitation process and lower the cost of rehabilitation. We are also a
leading distributor of branded and private label O&P devices and components in
the United States, all of which are manufactured by third parties.

         At December 31, 2001, we operated 597 O&P patient-care centers in 44
states and the District of Columbia and employed 867 certified O&P
practitioners. Patients are referred to our local patient-care centers directly
by physicians as a result of our relationships with them or through our
agreements with managed care providers. Our patient-care centers are staffed by
certified O&P practitioners and technicians. Our practitioners generally design
and fit patients with, and the technicians fabricate, O&P devices as prescribed
by the referring physician. Following the initial design, fabrication and
fitting of our O&P devices, our technicians conduct regular, periodic
maintenance of O&P devices as needed. Our practitioners are also responsible for
managing and operating our patient-care centers and are compensated, in part,
based on their success in managing costs and collecting accounts receivable. We
provide centralized administrative, marketing and materials management services
to take advantage of economies of scale and to increase the time practitioners
have to provide patient care. In areas where we have multiple patient-care
centers, we also utilize shared fabrication facilities where technicians
fabricate devices for practitioners in that area.

         We have increased our net sales through acquisitions, by opening new
patient-care centers and through same-center net sales growth, the latter being
achieved primarily through physician referral marketing and branding
initiatives. We strive to improve our local market position to enhance operating
efficiencies and generate economies of scale by implementing our disciplined
growth strategy. We generally acquire small and medium-sized O&P patient-care
businesses and open new patient-care centers to achieve greater density in our
existing markets.

         We acquired NovaCare Orthotics and Prosthetics, Inc. ("NovaCare O&P")
in July 1999, which more than doubled our number of O&P patient-care centers and
certified O&P practitioners and made us the largest operator of O&P patient-care
centers in the United States. Our acquisition of NovaCare O&P also significantly
expanded our presence in the western United States and allowed us to achieve a
greater density of operations in the eastern United States.

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Industry Overview

         We estimate the O&P patient-care market in the United States
represented approximately $2.1 billion in revenues in 2001, of which we
accounted for approximately 25%. The O&P patient-care services market is highly
fragmented and is characterized by local, independent O&P businesses, with the
majority generally having annual revenues of less than $1.0 million and a single
facility. According to the most recent American Orthotic and Prosthetic
Association study, which was conducted in 1999, there are an estimated 3,300
certified prosthestists and/or orthotists and approximately 2,850 O&P
patient-care centers in the United States. We do not believe that any of our
competitors account for a market share of more than 2% of the country's total
estimated O&P patient-care services revenue.

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

         The O&P industry is characterized by stable, recurring revenues,
primarily resulting from the need for periodic replacement and modification of
O&P devices. Based on our experience, the average replacement time for orthotic
devices is one to three years, while the average replacement time for prosthetic
devices is three to five years. There is also an attendant need for continuing
patient-care services. In addition to the inherent need for periodic replacement
and modification of O&P devices and continuing care, we expect the demand for
O&P services will continue to grow as a result of several key trends, including:

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

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

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

         Advancing Technology. The range and effectiveness of treatment options
for patients requiring O&P services have increased in connection with the
technological sophistication of O&P devices. Advances in design technology and
lighter, stronger and more cosmetically acceptable materials have enabled
patients to replace older O&P devices with new O&P products that provide greater
comfort, protection and patient

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acceptability. As a result, treatment can be more effective and of shorter
duration, giving the patient greater mobility and a more active lifestyle.
Advancing technology has also increased the prevalence and visibility of O&P
devices in many sports, including skiing, running and tennis.

Competitive Strengths

         We believe that the combination of the following competitive strengths
will enable us to continue to increase our net sales, EBITDA and market share:

       o      Leading market position, with an approximate 25% share of total
              industry revenues, in a fragmented industry;

       o      National scale of operations, which has better enabled us to:

              -      establish our brand name and generate economies of scale;

              -      implement best practices throughout the country;

              -      utilize shared fabrication facilities;

              -      contract with national and regional managed care entities;

              -      train O&P practitioners to utilize leading O&P device
                     technology; and

              -      increase our influence on, and input into, regulatory
                     trends;

       o      Distribution of, and purchasing power for, O&P components and
              finished O&P products, which enables us to:

              -      negotiate greater purchasing discounts from manufacturers
                     and freight providers;

              -      reduce patient-care center inventory levels and improve
                     inventory turns through centralized purchasing control;

              -      quickly access prefabricated and finished O&P products;

              -      promote the usage by our patient-care centers of clinically
                     appropriate products that also enhance our profit margins;
                     and

              -      engage in co-marketing and O&P product development programs
                     with suppliers;

       o      Full O&P product offering, with a balanced mix between orthotics
              services and products, which represented 44.5% of our patient-care
              net sales, and prosthetics services and products, which
              represented 50.0% of our patient-care net sales during the year
              ended December 31, 2001. (Other services and products represented
              5.5% of our patient-care net sales.)



                                       3


       o      Practitioner bonus plan that financially rewards practitioners for
              their efficient management of accounts receivable collections,
              labor, materials, and other costs, and that encourages cooperation
              among our practitioners within the same local market area;

       o      Proven ability to rapidly incorporate technological advances in
              O&P devices;

       o      History of successful integration of small and medium-sized O&P
              business acquisitions, including 66 O&P businesses since 1992,
              excluding our acquisition of NovaCare O&P, with purchase prices
              ranging from less than $100,000 to $50 million and representing
              over 230 patient-care centers;

       o      Highly trained O&P practitioners, whom we provide with the highest
              level of continuing education and training through programs
              designed to inform our O&P practitioners of the latest
              technological developments in the O&P industry, and our
              certification program located at the University of Connecticut;
              and

       o      Experienced and committed management team.

Business Strategy

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

       o      Continue to implement initiatives under our performance
              improvement plan designed to:

              -      achieve cost savings through improved utilization and
                     efficiency of administrative and corporate support
                     services;

              -      enhance margins through consolidation of our purchasing,
                     distribution and inventory management; and

              -      use more efficient billing and collection procedures;

       o      Increase our market share and net sales by:

              -      contracting with national and regional managed care
                     providers, who we believe select us as a preferred provider
                     because of our reputation, national reach, density of our
                     patient-care centers in certain markets and our ability to
                     help reduce administrative expenses;

              -      increasing our volume of business through enhanced
                     comprehensive marketing programs aimed at referring
                     physicians and patients, such as our Patient Evaluation
                     Clinics program, which reminds patients to have their
                     devices serviced or replaced and informs them of
                     technological improvements of which they can take
                     advantage; and

              -      improving billing for services provided by our O&P
                     patient-care centers through the implementation of
                     standardized billing procedures, which will improve the
                     accuracy and timeliness of invoices for services we render
                     to our customers;

                                       4


       o      Selectively acquire small and medium-sized O&P patient-care
              service businesses and open satellite patient-care centers
              primarily to expand our presence within an existing market and
              secondarily to enter into new markets; and

       o      Provide our O&P practitioners with:

              -      training and continuing education;

              -      career development and increased compensation
                     opportunities;

              -      a wide array of O&P products from which to choose; and

              -      administrative and corporate support services that enable
                     them to focus their time on providing superior patient
                     care.

Business Description

Patient-Care Services

       As of December 31, 2001, we provided O&P patient-care services through
597 O&P patient-care centers and 867 patient-care practitioners in 44 states and
the District of Columbia. Substantially all of our practitioners are certified
practitioners or candidates for formal certification by the O&P industry
certifying boards. Each of our patient-care centers is closely supervised by one
or more certified practitioners. Our patient-care centers also employ highly
trained technical personnel who assist in the provision of services to patients
and fabricate various O&P devices.

       A patient in need of O&P patient-care services is referred to one of our
patient-care centers via a prescription upon a determination by the attending
physician of a course of treatment. One of our practitioners then, using the
prescription, consults with both the referring physicians and the patient with a
view toward assisting in the formulation of the prescription for, and design of,
an orthotic or prosthetic device to meet the patient's need.

       The fitting process involves several stages in order to successfully
achieve desired functional and cosmetic results. The practitioner creates a cast
and takes detailed measurements of the patient to ensure an anatomically correct
fit. All of the prosthetic devices are custom fabricated and fit by skilled
practitioners. Of the orthotic devices provided by us, a majority are custom
designed, fabricated and fit and the balance are prefabricated but custom fit.

       Custom devices are fabricated by our skilled technicians using the
castings, measurements and designs made by our practitioners. 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 several central fabrication facilities.
After final adjustments to the device by the practitioner, the patient is
instructed in the use, care and maintenance of the device. A program or
scheduled follow-up and maintenance visits is used to provide post-fitting
treatment, including adjustments or replacements as the patient's physical
condition and lifestyle change.

                                       5


       To provide timely service to our patients, we employ technical personnel
and maintain laboratories at most 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 shorten the rehabilitation process. The
quality of our products and the success of our technological advances have
generated broad media coverage, enhancing our brand equity among payors,
patients, and referring physicians.

       We offer technically advanced O&P products. The products include: (i) the
Otto Bock C-LegTM, an advanced computerized prosthetic knee system that allows
patients to walk and to ascend or descend stairs with a normal stride; (ii)
Comfort-FlexTM socket technology, which are flexible sockets that are more
comfortable for patients to wear; and (iii) a myo-electric upper extremity
prosthesis, which is a neuromuscular-activated upper extremity prosthesis.

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

Patient-Care Center Administration

       We provide all senior management, accounting, accounts payable, payroll,
sales and marketing, management information systems and human resources services
for our patient-care centers on either a centralized or out-sourced basis. As a
result, we are able provide these services more efficiently and cost-effectively
than if these services had to be generated at each center. Moreover, the
centralization or out-sourcing of these services permits our certified
practitioners to allocate a greater portion of their time to patient-care
activities by reducing their administrative responsibilities. Each individual
patient-care center is responsible for its own billing and collections of
accounts receivable, which are also monitored centrally. On a case by case
basis, we assume responsibility for collecting past due receivables, either by
pursuing collections ourselves or outsourcing collections to a third party.

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



                                       6


Distribution Services

       We distribute O&P components and finished patient-care products to the
O&P market as a whole and to our own patient-care centers through our
wholly-owned subsidiary, Southern Prosthetic Supply, Inc., which is one of the
nation's leading O&P distributors. For the year ended December 31, 2001, 35.5%
or approximately $29.3 million of Southern Prosthetic Supply's distribution
sales were to third-party O&P services providers. The balance of Southern
Prosthetic Supply's distribution sales amounted to approximately $53.2 million
for the year ended December 31, 2001 and represented internal sales to our
patient-care centers. Southern Prosthetic Supply inventories over 20,000 items,
substantially all of which are manufactured by other companies and distributed
by us through Southern Prosthetic Supply. Southern Prosthetic Supply maintains
distribution facilities in California, Georgia, and Texas, which allows us to
deliver components and finished products via ground shipment to anywhere in the
United States within two business days.

       Our distribution business enables us to:

       o      lower our material costs by negotiating purchasing discounts from
              manufacturers;

       o      reduce out patient-care center inventory levels and improve
              inventory turns through centralized purchasing control;

       o      quickly access prefabricated and finished O&P products;

       o      perform inventory quality control; and

       o      promote the usage by our centers of clinically appropriate
              products that enhance our profit margins.

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

       Marketing of our distribution services is conducted on a national basis
through a dedicated sales force, catalogues and exhibits at industry and medical
meetings and conventions. We direct specialized catalogues to segments of the
healthcare industry, such as orthopedic surgeons and physical and occupational
therapists. We own certain patents and trademarks relating to our O&P products
and services. Among them are the Comfort-FlexTM Socket, which is a patented
design that we own and presently is only available at our patient-care centers.
A socket is the connecting point between a prosthetic device and the body of the
patient. The Comfort-FlexTM Socket is a highly contoured flexible socket which
has revolutionized both above-knee and below-knee prosthetic devices. It
features anatomically designed channels to accommodate various muscle, bone,
tendon, vascular and nerve areas. This unique approach to socket design is
generally accepted as superior to previous socket systems. We also hold
exclusive rights to the Charleston Bending BraceTM, a custom-designed and fitted
brace used to correct spinal curvatures in young children.

Satellite Center Development

         In addition to acquired patient-care centers, we have historically
developed new satellite patient-care centers in existing markets with
underserved demand for O&P services. These satellite centers require less
capital to develop than complete O&P patient-care centers because the satellite
centers usually consist of only a waiting room and patient fitting rooms, but
without a fabrication laboratory for creating O&P devices. An


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O&P practitioner will spend one or two days each week in a satellite center
treating those patients who find it inconvenient to visit the O&P practitioner's
primary patient-care center.

       These satellite centers also tend to receive new patient referrals from
hospitals and physicians located near the newly developed satellite center,
increase new patient growth and satellite center revenue. While a partial
revenue shift occurs from the O&P practitioner's main patient-care center to the
satellite center because the O&P practitioner is now seeing some of the same
patients out of a new satellite center, the additional patient volume in the
satellite center increases the O&P practitioner's overall revenue. If demand for
O&P services at a satellite center increases beyond the ability of the O&P
practitioner to service it one or two days a week, we will staff the satellite
office on a full-time basis.

Sources of Payment

       The principal reimbursement sources for our O&P services are:

       o      private payor/third-party insurer sources, which consist of
              individuals, private insurance companies, HMOs, PPOs, hospitals,
              vocational rehabilitation, workers' compensation and similar
              sources;

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

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

       o      the Veterans Administration, with which we have entered into
              contracts to provide O&P services and products.

       We estimate that Medicare, Medicaid and the U.S. Veterans Administration
accounted for approximately 41.0%, 38.4% and 40.5% of our net sales in 1999,
2000, and 2001, respectively. These payors have set maximum reimbursement levels
for O&P services and products. The healthcare policies and programs of these
agencies have been subject to changes in payment methodologies during the past
several years. There can be no assurance that future changes will not reduce
reimbursements for O&P services and products from these sources.

       We provide O&P services and products to eligible veterans pursuant to
several contracts with the U.S. Veterans Administration. The U.S. Veterans
Administration establishes its reimbursement rates for itemized services and
products on a competitive bidding basis. The contracts, awarded on a
non-exclusive basis, establish the amount of reimbursement to the eligible
veteran if the veteran should choose to use our services and products. We have
been awarded U.S. Veterans Administration contracts in the past and expect that
we will obtain additional contracts when our present agreements expire.

       In addition to referrals from physicians, 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.


                                       8


These contracts typically have a stated term of one year and automatically renew
annually. 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.

Suppliers

       We purchase prefabricated O&P devices, components and materials that our
technicians use to fabricate O&P products from approximately 1,400 suppliers
across the country. These devices, components and materials are used in
approximately 800 products that we offer in our patient-care centers throughout
the country. Currently, only four of our suppliers account for more than 5% of
our total patient-care purchases.

Sales and Marketing

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

       As part of our performance improvement initiatives, we are developing a
centralized marketing department that will by led by a new Vice President of
Marketing. We believe that having a centralized marketing department will remove
the bulk of the sales and marketing responsibilities from the individual
practitioner, enabling the practitioner to focus his or her efforts on
patient-care. We expect that our marketing organization will include the
following major areas of focus:

       o      Marketing and public relations. We intend to increase the
              visibility of the "Hanger" name by building relationships with
              major referral sources through activities such as co-sponsorship
              of sporting events and co-branding of products. We also intend to
              explore creating alliances with certain of our vendors to market
              products and services on a nationwide basis.

       o      Business Development. We intend to have dedicated personnel in
              each of our regions of operation who will be responsible for
              arranging seminars, clinics and forums to increase the individual
              communities' awareness of the "Hanger" name. These personnel would
              also be responsible for training the O&P practitioners in the
              individual patient-care centers in that community on certain
              limited marketing techniques.

       o      Contracting. We intend to have sales and marketing personnel who
              will be dedicated to increasing the number of nationwide and local
              contracts that we have with referral sources. These personnel will
              also evaluate our current contracts and determine whether we
              should explore the renegotiation of any of their terms.



                                       9


       We believe that this new marketing initiative will enable us to attract
new referral sources and thereby increase both our same-store and new
patient-care center net sales.

Competition

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

       We also compete for the retention and recruitment of qualified O&P
practitioners. In certain markets, the demand for O&P practitioners exceeds the
supply of qualified personnel. If the availability of these practitioners begins
to decline in our markets it may be more difficult for us to attract qualified
practitioners to staff our patient-care centers or to expand our operations.

Special Note On Forward-Looking Statements

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

       o      our indebtedness and the impact of increases in interest rates on
              such indebtedness;

       o      the demand for our orthotic and prosthetic services and products;

       o      our ability to integrate effectively the operations of businesses
              that we plan to acquire in the future;

       o      our ability to successfully implement our performance improvement
              plan and realize and maintain its benefits;

       o      our ability to attract and retain qualified orthotic and
              prosthetic practitioners;

       o      changes in federal Medicare reimbursement levels and other
              governmental policies affecting orthotic and prosthetic
              operations;

       o      changes in prevailing interest rates and the availability of
              favorable terms of equity and debt financing to fund the
              anticipated growth of our business;

       o      changes in, or failure to comply with, federal, state and/or local
              governmental regulations; and

       o      liability relating to orthotic and prosthetic services and
              products and other claims asserted against us.



                                       10


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

Risk Factors

We have a recent history of net losses and may incur net losses in the future.
As a result, we may be unable to pay amounts due under the notes.

From time to time, we have historically incurred net losses. We incurred net
losses of $14.0 million for the year ended December 31, 2000 and $8.9 million
for the year ended December 31, 2001. We cannot assure that we will not incur
net losses in the future. To the extent that we incur net losses in the future,
we may be unable to meet our obligations to make payments under the notes. We
have financed our operating cash requirements, as well as our capital needs,
with the proceeds of financing activities, including the issuance of preferred
stock and additional borrowings. We cannot assure that we will generate
sufficient operating cash flow in the future to pay our debt service obligations
on the notes or that we will be able to obtain sufficient additional financing
to meet our debt service requirements on terms acceptable to us, or at all.

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

We estimate that we derived 41.0%, 38.4% and 40.5% of our net sales for the
years ended December 31, 1999, 2000 and 2001, respectively, from reimbursements
for O&P services and products from programs administered by Medicare, Medicaid
and the U.S. Veterans Administration. Each of these programs sets maximum
reimbursement levels for O&P services and products. If these agencies reduce
reimbursement levels for O&P services and products in the future, our net sales
could substantially decline. In addition, the percentage of our net sales
derived from these sources may increase as the portion of the U.S. population
over age 65 continues to grow, making us more vulnerable to maximum
reimbursement level reductions by these organizations. Reduced government
reimbursement levels could result in reduced private payor reimbursement levels
because of indexing of Medicare fee schedules by certain third party payors.
Furthermore, the healthcare industry is experiencing a trend towards cost
containment as government and other third-party payors seek to impose lower
reimbursement rates and negotiate reduced contract rates with service providers.
This trend could adversely affect our net sales. Medicare provides for
reimbursement for O&P products and services based on prices set forth in fee
schedules for ten regional service areas. Additionally, if the U.S. Congress
were to enact into law modifications to the Medicare fee schedules to include
upper limits based on national median prices, our net sales from Medicare
reimbursements and other payors could be adversely affected, which could have a
material adverse effect on us. We cannot predict whether any such modifications
to the fee schedules will be enacted or what the final form of any modifications
might be. See "Sources of Payment" and "Government Regulation."

We have not yet fully implemented our performance improvement plan and may be
unable to achieve the future operating efficiencies and results that we desire.



                                       11


We expect by the end of 2002 to have substantially implemented the major
performance improvement initiatives that we commenced last year. We initially
targeted $45.0 million in cash flow improvements over two years, which included
$30.0 million in annualized recurring operating and general and administrative
expense improvements and $15.0 million in one-time working capital improvements
over two years. While we have made substantial progress, we have not yet fully
completed those performance improvement initiatives, and we are unable to
represent that we will fully achieve or maintain the planned operating
efficiencies and results that we desire. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".

If we cannot continue to improve our controls and procedures for managing our
accounts receivable and inventory, our business, results of operations,
financial condition and ability to satisfy our obligations under our
indebtedness could be adversely affected.

Members of our senior management team have spent a significant amount of time
improving systems and controls relating to our collection of accounts
receivable. As of December 31, 2000 and 2001, our accounts receivable over 120
days represented approximately 33% and 30% of total accounts receivable
outstanding in each period, respectively. In order to adequately provide for
doubtful accounts, we recorded an increase in the allowance of $9.0 million in
the fourth quarter of December 31, 2000. If our efforts do not improve our
controls and procedures for managing accounts receivable, we may be unable to
collect certain accounts receivable, which could adversely affect our business,
results of operations, financial condition and ability to satisfy our
obligations under our indebtedness. In addition, our principal means of control
with respect to accounting for inventory and costs of goods sold is a physical
inventory conducted on an annual basis. This accepted method of accounting
controls and procedures may result in an understatement or overstatement, as the
case may be, of inventory between our annual physical inventories. For example,
in conjunction with the physical inventory performed on September 30, 2000, we
recorded a $9.6 million inventory write down. Conversely, in conjunction with
our physical inventory performed on December 31, 2001, we recorded a $4.2
million increase in inventory. Because our gross profit percentage is based on
our inventory levels, adjustments to inventory following physical inventory
could adversely affect our results of operations and financial condition.

If we are unable to maintain good relations with our suppliers, our existing
purchasing discounts may be jeopardized, which could adversely affect our net
sales.

We currently enjoy significant purchasing discounts with most of our suppliers,
and our ability to sustain our gross margins has been, and will continue to be,
dependent, in part, on our ability to continue to obtain favorable discount
terms from our suppliers. These terms may be subject to changes in suppliers'
strategies, from time to time, which could adversely affect our gross margins
over time. The profitability of our business depends, in part, upon our ability
to maintain good relations with these suppliers.

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



                                       12


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

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

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

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

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

       o      refunding of amounts we have been paid pursuant to our government
              contracts;
       o      imposition of fines, penalties and other sanctions on us;
       o      loss of our right to participate in various federal programs; or
       o      damage to our reputation in various markets.

We may be unable to successfully integrate and operate other O&P businesses that
we acquire in the future.

Part of our business strategy involves the acquisition and integration of small
and medium-sized O&P businesses. We may not be able to successfully consummate
and/or integrate future acquisitions. We continuously review acquisition
prospects that would complement our existing operations, increase our size and
expand into geographic scope of operations or otherwise offer growth
opportunities. The financing for these acquisitions could significantly dilute
our investors or result in an increase in our indebtedness. While we have no
current agreements or negotiations with respect to any such acquisitions, we may
acquire or make investments in businesses or products in the future.
Acquisitions may entail numerous integration risks and impose costs on us,
including:

                                       13


       o      difficulties in assimilating acquired operations or products,
              including the loss of key employees from acquired businesses;
       o      diversion of management's attention from our core business
              concerns;
       o      adverse effects on existing business relationships with suppliers
              and customers;
       o      risks of entering markets in which we have no or limited
              experience;
       o      dilutive issuances of equity securities; o incurrence of
              substantial debt;
       o      assumption of contingent liabilities; and
       o      incurrence of significant immediate write-offs.

Our failure to successfully complete the integration of future acquisitions
could have a material adverse effect on our results of operations, business and
financial condition.


Government Regulation

       We are subject to a variety of governmental regulations. We make every
effort to comply with all applicable regulations through compliance programs,
manuals and personnel training. Despite these efforts, we cannot guarantee that
we will be in absolute compliance with all regulations at all times. Failure to
comply with applicable governmental regulations may result in significant
penalties, including exclusion from the Medicare and Medicaid programs, which
could have a material adverse effect on our business.

       Medical Device Regulation. We distribute products that are subject to
regulation as medical devices by the U.S. Food and Drug Administration under the
Federal Food, Drug and Cosmetic Act and accompanying regulations. We believe
that the products we distribute, including O&P devices, accessories and
components, are exempt from the FDA's regulations for pre-market clearance of
approval requirements and from requirements relating to quality system
regulation (except for certain recordkeeping and complaint handling
requirements). We are required to adhere to regulations regarding adverse event
reporting, and are subject to inspection by the FDA for compliance with all
applicable requirements. Labeling and promotional materials also are subject to
scrutiny by the FDA and, in certain circumstances, by the Federal Trade
Commission. Although we have never been challenged by the FDA for noncompliance
with FDA requirements, we cannot assure that we would be found to be or to have
been in compliance at all times. Noncompliance could result in a variety of
civil and/or criminal enforcement actions, which could have a material adverse
effect on our business and results or operations.

       Fraud and Abuse. Violations of fraud and abuse laws are punishable by
criminal and/or civil sanctions, including, in some instances, imprisonment and
exclusion from participation in federal healthcare programs, including Medicare,
Medicaid, U.S. Veterans Administration health programs and the Department of
Defense's TRICARE program, formerly known as CHAMPUS. These laws, which include
but are not limited to, antikickback laws, false claims laws, physician
self-referral laws, and federal criminal healthcare fraud laws, are discussed in
further detail below. We believe our billing practices, operations, and
compensation and financial arrangements with referral sources and others
materially comply with applicable federal and state requirements. However, we
cannot assure that such requirements will not be interpreted by a governmental
authority in a manner inconsistent with our interpretation and application. The
failure to comply, even if inadvertent, with any of these requirements could
require us to alter our operations and/or


                                       14


refund payments to the government. Such refunds could be significant and could
also lead to the imposition of significant penalties. Even if we successfully
defend against any action against us for violation of these laws or regulations,
we would likely be forced to incur significant legal expenses and divert our
management's attention from the operation of our business. Any of these actions,
individually or in the aggregate, could have a material adverse effect on our
business and financial results.

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

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

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

       HIPAA Violations. The Health Insurance Portability and Accountability Act
("HIPAA") provides for criminal penalties for, among other offenses, healthcare
fraud, theft or embezzlement in connection with healthcare, false statements
related to healthcare matters, and obstruction of criminal investigation of
healthcare offenses. Unlike the federal antikickback laws, these offenses are
not limited to federal healthcare programs.

       In addition, HIPAA authorizes the imposition of civil monetary penalties
where a person offers or pays remuneration to any individual eligible for
benefits under a federal healthcare program that such person knows or should
know is likely to influence the individual to order or receive covered items or
services from


                                       15


a particular provider, practitioner or supplier. Excluded from the definition of
"remuneration" are incentives given to individuals to promote the delivery of
preventive care (excluding cash or cash equivalents), incentives of nominal
value and certain differentials in or waivers of coinsurance and deductible
amounts.

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

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

       Physician Self-Referral Laws. We are also subject to federal and state
physician self-referral laws. With certain exceptions, the federal
Medicare/Medicaid physician self-referral law (the "Stark II" law) (Section 1877
of the Social Security Act) prohibits a physician from referring Medicare and
Medicaid beneficiaries to an entity for "designated health services" - including
prosthetics, orthotics and prosthetic devices and supplies - if the physician or
the physician's immediate family member has a financial relationship with the
entity. A financial relationship includes both ownership or investment interests
and compensation arrangements. A violation occurs when any person presents or
causes to be presented to the Medicare or Medicaid program a claim for payment
in violation of Stark II.

       With respect to ownership/investment interests, there is an exception
under Stark II for referrals made to a publicly traded entity in which the
physician has an investment interest if the entity's shares are traded on
certain exchanges, including the New York Stock Exchange, and had shareholders'
equity exceeding $75.0 million for its most recent fiscal year, or an average
during the three previous fiscal years. We meet these tests and, therefore,
believe that referrals from physicians that have ownership interests in our
business should not trigger liability under Stark II.

       With respect to compensation arrangements, there are exceptions under
Stark II that permit physicians to maintain certain business arrangements, such
as personal service contracts and equipment or space leases, with healthcare
entities to which they refer. We believe that our compensation arrangements
comply with Stark II, either because the physician's relationship fits within a
regulatory exception or does not generate prohibited referrals. Because we have
financial arrangements with physicians and possibly their immediate family
members, and because we may not be aware of all those financial arrangements, we
must rely on physicians and their immediate family members to avoid making
referrals to us in violation of Stark II or similar state laws. If, however, we
receive a prohibited referral without knowing that the referral was


                                       16


prohibited, our submission of a bill for services rendered pursuant to a
referral could subject as to sanctions under Stark II and applicable state laws.

       Certification and Licensure. Most states do not require separate
licensure for O&P practitioners. However, several states currently require O&P
practitioners to be certified by an organization such as the American Board for
Certification.

       The American Board for Certification conducts a certification program for
practitioners and an accreditation program for patient-care centers. The minimum
requirements for a certified practitioner are a college degree, completion of an
accredited academic program, one to four years of residency at a patient-care
center under the supervision of a certified practitioner and successful
completion of certain examinations. Minimum requirements for an accredited
patient-care center include the presence of a certified practitioner and
specific plant and equipment requirements. While we endeavor to comply with all
state licensure requirements, we cannot assure that we will be in compliance at
all times with these requirements. Failure to comply with state licensure
requirements could result in civil penalties, termination of our Medicare
agreements, and repayment of amounts received from Medicare for services and
supplies furnished by an unlicensed individual or entity.

       Confidentiality and Privacy Laws. The Administrative Simplification
Provisions of HIPAA, and their implementing regulations, set forth privacy
standards and implementation specifications concerning the use and disclosure of
individually identifiable health information (referred to as "protected health
information") by health plans, healthcare clearinghouses and healthcare
providers that transmit health information electronically in connection with
certain standard transactions ("Covered Entities"). HIPAA further requires
Covered Entities to protect the confidentiality of health information by meeting
certain security standards and implementation specifications. In addition, under
HIPAA, Covered Entities that electronically transmit certain administrative and
financial transactions must utilize standardized formats and data elements ("the
transactions/code sets standards"). HIPAA imposes civil monetary penalties for
non-compliance, and, with respect to knowing violations of the privacy
standards, or violations of such standards committed under false pretenses or
with the intent to sell, transfer or use individually identifiable health
information for commercial advantage, criminal penalties. Subject to certain
limitations and exceptions, Covered Entities must comply with the privacy
standards by no later than April 2003, with the transactions/code sets standards
by no later than October 16, 2003, and with the security standards by a date yet
to be finalized. We believe that we are subject to the Administrative
Simplification Provisions of HIPAA and are taking steps to meet applicable
standards and implementation specifications. We expect the new requirements to
have a significant effect on the manner in which we handle health data and
communicate with payers. At this time, we have not projected the financial
impact of compliance, but it could be significant.

       In addition, state confidentiality and privacy laws may impose civil
and/or criminal penalties for certain unauthorized or other uses or disclosures
of individually identifiable health information. We are also subject to these
laws. While we endeavor to assure that our operations comply with applicable
laws governing the confidentiality and privacy of health information, we could
face liability in the event of a use or disclosure of health information in
violation of one or more of these laws.



                                       17


Personnel and Training

       None of our employees are subject to a collective-bargaining agreement.
We believe that we have satisfactory relationships with our employees and strive
to maintain these relationships by offering competitive benefit packages,
training programs and opportunities for advancement. The following table
summarizes our employees as of December 31, 2001:



                                            Certified O&P
                                             Practitioners        Technicians        Administrative    Distribution
                                                                                  
Hanger Prosthetics & Orthotics, Inc.              867                  584                 795             --
Southern Prosthetic Supply, Inc.                   --                   --                  --             94
Other                                              --                   --                  94             --


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

       We also provide a series of ongoing training programs to improve the
professional knowledge of our practitioners. For example, we have an annual
Education Fair which is attended by over 800 of our O&P practitioners and
consists of lectures and seminars covering topics such as the latest technology
and process improvements, basic accounting and business courses and other
courses which allow the practitioners to fulfill their ongoing continuing
education requirements.

Insurance

       We currently maintain insurance of the type and in the amount customary
in the O&P rehabilitation industry, including coverage for malpractice
liability, product liability, workers' compensation and property damage. Our
general liability insurance coverage is $500,000 per incident, with a $25.0
million umbrella insurance policy. Based on our experience and prevailing
industry practices, we believe our coverage is adequate as to risks and amount.
We have not incurred a material amount of expenses in the past as a result of
uninsured O&P claims.

ITEM 2.  PROPERTIES.

       As of December 31, 2001, Hanger operated 597 patient-care centers and
facilities in 44 states and the District of Columbia. Of these, 25 centers are
owned by Hanger. There are an additional four centers owned but not in use in
Georgia, New York, Pennsylvania and West Virginia. The remaining centers are
occupied under leases expiring between the years of 2002 and 2014. Hanger
believes its leased or owned centers are adequate for carrying on its current
O&P operations at its existing locations, as well as its anticipated future
needs at those locations. Hanger believes it will be able to renew such leases
as they expire or find comparable or additional space on commercially suitable
terms.



                                       18


       The following table sets forth the number of our patient-care centers
located in each state:


                       Patent-Care                   Patent-Care                      Patent-Care
       State             Centers         State         Centers          State           Centers
- --------------------- -------------- --------------- ------------- ----------------- --------------
                                                                                 
Alabama                       13     Louisiana              11     North Carolina               14
Arizona                       17     Maine                   3     North Dakota                  1
Arkansas                       5     Maryland                7     Ohio                         30
California                    67     Massachusetts           8     Oklahoma                     11
Colorado                      10     Michigan                7     Oregon                       16
Connecticut                   13     Minnesota               9     Pennsylvania                 33
Delaware                       1     Mississippi            11     South Carolina               12
District of Columbia           1     Missouri               15     South Dakota                  2
Florida                       38     Montana                 6     Tennessee                    16
Georgia                       25     Nebraska               11     Texas                        22
Illinois                      29     Nevada                  5     Virginia                     10
Indiana                       13     New Hampshire           2     West Virginia                 8
Iowa                          12     New Jersey             13     Washington                    9
Kansas                         9     New Mexico              8     Wisconsin                     5
Kentucky                       9     New York               28     Wyoming                       2


       Hanger also owns two distribution facilities in Georgia and Texas, and
leases one distribution facility in California. The Company leases its corporate
headquarters in Bethesda, Maryland. Substantially all of Hanger's properties are
pledged to collateralize bank indebtedness. See Note H to Hanger's Consolidated
Financial Statements.

ITEM 3.  LEGAL PROCEEDINGS.

       On November 28, 2000, a class action complaint (Norman Ottmann v. Hanger
Orthopedic Group, Inc., Ivan R. Sabel and Richard A. Stein; Civil Action No.
00CV3508) was filed against us in the United States District Court for the
District of Maryland on behalf of all purchasers of our common stock from
November 8, 1999 through and including January 6, 2000. The complaint also names
as defendants Ivan R. Sabel, our Chairman of the Board, President and Chief
Executive Officer, and Richard A. Stein, our former Chief Financial Officer,
Secretary and Treasurer.

       The complaint alleges that during the above period of time, the
defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of
1934 by, among other things, knowingly or recklessly making material
misrepresentations concerning our financial results for the quarter ended
September 30, 1999, and the progress of our efforts to integrate the
recently-acquired operations of NovaCare O&P. The complaint further alleges that
by making those material misrepresentations, the defendants artificially
inflated the price of our common stock. The plaintiff seeks to recover damages
on behalf of all of the class members.

       We believe that the allegations have no merit and are vigorously
defending the lawsuit.

       We are party to various legal actions that are ordinary and incidental to
our business. While the outcome of legal actions cannot be predicted with
certainty, our management believes the outcome of these proceedings will not
have a material adverse effect on our financial condition or results of
operations.


                                       19


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

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

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.

       The following table sets forth information regarding our current
executive officers and certain of our subsidiaries:

Name                       Age          Office with the Company

Ivan R. Sabel, CPO         56           Chairman of the Board, Chief Executive
                                        Officer and Director

Thomas F. Kirk             56           President and Chief Operating Officer

Richmond L. Taylor         53           Executive Vice President; Chief
                                        Operating Officer of Hanger Prosthetics
                                        & Orthotics, Inc.

George E. McHenry          49           Executive Vice President and Chief
                                        Financial Officer

Jason P. Owen              28           Treasurer

Glenn M. Lohrmann          47           Vice President, Secretary and Controller

Ron N. May                 55           President and Chief Operating Officer of
                                        Southern Prosthetic Supply, Inc.
                                        (Distribution)

- -----------------

       Ivan R. Sabel, CPO has been our Chairman of the Board of Directors and
Chief Executive Officer since August 1995 and was our President from November
1987 to January 2, 2002. Mr. Sabel also served as the Chief Operating Officer
from November 1987 until August 1995. Prior to that time, Mr. Sabel had been
Vice President-Corporate Development from September 1986 to November 1987. Mr.
Sabel was the founder, owner and President of Capital Orthopedics, Inc. from
1968 until that company was acquired by us in 1986. Mr. Sabel is a Certified
Prosthetist and Orthotist ("CPO"), a clinical instructor in orthopedics at the
Georgetown University Medical School in Washington, D.C., a member of the Board
of Directors of the American Orthotic and Prosthetic Association ("AOPA"), a
former Chairman of the National Commission for Health Certifying Agencies, a
former member of the Strategic Planning Committee, a current member of the U.S.
Veterans Administration Affairs Committee of AOPA and a former President of the
American Board for Certification in Orthotics and Prosthetics. Mr. Sabel also
serves on the Board of Directors of Mid-Atlantic Medical Services, Inc., a
company engaged in the healthcare management services business, and a member of
the Medical Advisory Board of DJ Orthopedics, Inc., a manufacturer of knee
braces. Mr. Sabel has been a director since 1986.

       Thomas F. Kirk is our President and Chief Operating Officer. Mr. Kirk has
been the President and Chief Operating Officer of Hanger since January 2, 2002.
From September 1998 to January 1, 2002, Mr. Kirk


                                       20


was a principal with Jay Alix & Associates, the management consulting company
retained by Hanger to facilitate its reengineering process. From May 1997 to
August 1998, Mr. Kirk served as Vice President, Planning, Development and
Quality for FPL Group, a full service energy provider located in Florida. From
April 1996 to April 1997, he served as Vice President and Chief Financial
Officer for Quaker Chemical Corporation in Pennsylvania. From December 1987 to
March 1996, he served as Senior Vice President and Chief Financial Officer for
Rhone-Poulenc, S.A. in Princeton, New Jersey and Paris, France. From March 1977
to November 1988, he was employed by St. Joe Minerals Corp., a division of Fluor
Corporation. Prior to this he held positions in sales, commercial development,
and engineering with Koppers Co., Inc. Mr. Kirk holds a Ph.D. degree in
strategic planning/marketing, and an M.B.A. degree in finance, from the
University of Pittsburgh. He also holds a Bachelor of Science degree in
mechanical engineering from Carnegie Mellon University. He is a registered
professional engineer and a member of the Financial Executives Institute.

       George E. McHenry has been our Executive Vice President and Chief
Financial Officer since October 15, 2001. From 1987 until he joined us in
October 2001, Mr. McHenry served as Executive Vice President, Chief Financial
Officer and Secretary of U.S. Vision, Inc., an optical company with 600
locations in 47 states. Prior to joining U.S. Vision, Inc., he was employed as a
Senior Manager by the firms of Touche Ross & Co. (now Deloitte & Touche) and
Main Hurdman (now KPMG Peat Marwick) from 1974 to 1987. Mr. McHenry is a
Certified Public Accountant and received a Bachelor of Science degree in
accounting from St. Joseph's University.

       Richmond L. Taylor is our Executive Vice President and the President and
Chief Operating Officer of each of Hanger Prosthetics & Orthotics, Inc. and HPO,
Inc. (formerly NovaCare O&P), our two wholly-owned subsidiaries which operate
all of our patient-care centers. Previously, Mr. Taylor served as the Chief
Operating Officer of NovaCare O&P from June 1996 until July 1, 1999, and held
the positions of Region Vice-President and Region President of NovaCare O&P for
the West Region from 1989 to June 1996. Prior to joining NovaCare O&P, Mr.
Taylor spent 20 years in the healthcare industry in a variety of management
positions including Regional Manager at American Hospital Supply Corporation,
Vice President of Operations at Medtech, Vice President of Sales at Foster
Medical Corporation and Vice President of Sales at Integrated Medical Systems.

       Jason P. Owen has been our Treasurer since August 2001. Previously, Mr.
Owen served as our Vice President of Strategic Planning from 2000 to 2001. Mr.
Owen also served as our Director of Business Development from 1998 to 1999,
during which time he was jointly responsible for our small to medium-sized
acquisitions. Prior to joining us, Mr. Owen spent five years in the banking
industry with GE Capital and SunTrust Bank, during which time he held positions
responsible for portfolio management, origination, capital markets and treasury
management services. Mr. Owen holds an M.B.A. degree in finance from Georgia
State University. He also holds a Bachelor of Business Administration degree in
finance from Georgia Southern University.

       Glenn M. Lohrmann has been our Vice President, Secretary and Controller
since July 2001, and is the Vice President, Secretary and Treasurer of each of
Hanger Prosthetics & Orthotics, Inc., OPNET, Inc., Southern Prosthetic Supply,
Inc. and HPO, Inc. (formerly NovaCare O&P). From August 1985 to July 2001, Mr.
Lohrmann served in senior financial positions with a large medical faculty
practice, various teaching hospitals, an HMO, and the corporate office of Inova
Health System. Mr. Lohrmann also worked for Ernst & Young from January 1978 to
August 1985, including service at their National Health Care Office.



                                       21


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



                                       22


PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS.

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


         Year Ended December 31, 2000                  High           Low
                                                       ----           ---
               First Quarter                         $10.3125       $3.7500
               Second Quarter                          5.5000        3.7500
               Third Quarter                           4.8750        3.2500
               Fourth Quarter                          4.1875        0.9375

         Year Ended December 31, 2001                  High           Low
                                                       ----           ---
               First Quarter                         $2.2500        $0.9800
               Second Quarter                         2.7000         1.0600
               Third Quarter                          4.2500         2.4000
               Fourth Quarter                         6.8000         3.3000

       At March 19, 2002, there were approximately 424 holders of record of the
Company's Common Stock.

Dividend Policy

       We have never paid cash dividends on our common stock and intend to
continue this policy for the foreseeable future. We plan to retain earnings for
use in our business. The terms of our agreements with our financing sources and
certain other agreements prohibit the payment of dividends on our common stock
and preferred stock and such agreements will continue to prohibit the payment of
dividends in the future. Any future determination to pay cash dividends will be
at the discretion of our Board of Directors and will be dependent on our results
of operations, financial condition, contractual and legal restrictions and any
other factors deemed to be relevant.

Unregistered Sales of Securities.

       During the year ended December 31, 2001, we issued no securities without
registration under the Securities Act of 1933 ("Securities Act").

       On February 15, 2002, we sold $200.0 million principal amount of 10 3/8%
Senior Notes due 2009 ("Senior Notes") to four institutional investors in
connection with an offering of the Senior Notes to qualified institutional
buyers in reliance on Rule 144A under the Securities Act and to other persons
outside the U.S. in reliance on Regulation S under the Securities Act. Issuance
of the Senior Notes to the four initial purchasers was exempt from registration
under Section 4(2) of the Securities Act. The four initial purchasers were
Lehman Brothers Inc., J. P. Morgan Securities Inc., Salomon Smith Barney Inc.
and BNP Paribas Securities Corp. The Senior Notes were sold for cash to the
initial purchasers at 97% of


                                       23


the principal amount thereof. The approximately $194.0 million net proceeds from
the sale of the Senior Notes, along with approximately $36.9 million borrowed
under our new credit facility, were used to pay related fees and expenses and to
retire the approximately $228.4 million outstanding indebtedness under our
previously existing credit facility as of February 15, 2002.

       In connection with the aforementioned sale of the Senior Notes, the
Company entered into a Registration Rights Agreement that will require the
Company to file with the SEC an Exchange Offering Registration Statement with
respect to the Senior Notes within ninety days of closing the sale.



                                       24


ITEM 6.  SELECTED CONSOLIDATED FINANCIAL INFORMATION.

       The selected consolidated financial data presented below is derived from
the audited Consolidated Financial Statements and Notes thereto included
elsewhere in this report.


                                       SELECTED FINANCIAL DATA
                                (In thousands, except per share data)


                                                                                  Year Ended December 31,
                                                          ------------------------------------------------------------------------
Statement of Operations Data:                                     1997          1998           1999          2000          2001
                                                          ------------------------------------------------------------------------
                                                                                                         
Net sales                                                      $ 145,598     $ 187,870      $ 346,826     $ 486,031     $ 508,053
                                                          ------------------------------------------------------------------------
Gross profit                                                      72,065        94,967        177,750       234,663       267,185
Selling, general and administrative                               49,285        63,827        113,995       177,392       182,972
Depreciation and amortization                                      2,871         3,294          6,538        11,178        12,488
Amortization of excess cost over net assets acquired               1,810         2,488          7,520        12,150        12,198
Unusual charges (1)                                                    -             -          6,340         2,364        24,438
                                                          ------------------------------------------------------------------------
Income from operations                                            18,099        25,358         43,357        31,579        35,089
Interest expense, net                                             (4,933)       (1,902)       (22,177)      (47,072)      (43,065)
                                                          ------------------------------------------------------------------------
Income (loss) before taxes, extraordinary item                    13,166        23,456         21,180       (15,493)       (7,976)
Provision (benefit) for income taxes                               5,526         9,616         10,194        (1,497)          907
                                                          ------------------------------------------------------------------------
Income (loss) before extraordinary item                            7,640        13,840         10,986       (13,996)       (8,883)
Extraordinary loss on early extinguishment of debt                (2,694)            -              -             -             -
                                                          ------------------------------------------------------------------------
Net income (loss)                                                $ 4,946      $ 13,840       $ 10,986     $ (13,996)     $ (8,883)
                                                          ========================================================================
Net income (loss) applicable to common stock                     $ 7,614      $ 13,818        $ 8,831     $ (18,534)    $ (13,741)
                                                          ========================================================================

Basic Per Common Share Data
Income (loss) before extraordinary item                           $ 0.65        $ 0.82         $ 0.47       $ (0.98)      $ (0.73)
Extraordinary loss on early extinguishment of debt                 (0.23)            -              -             -             -
                                                          ------------------------------------------------------------------------
Net income (loss)                                                 $ 0.42        $ 0.82         $ 0.47       $ (0.98)      $ (0.73)
                                                          ========================================================================
Shares used to compute basic per common
   share amounts                                                  11,793        16,813         18,855        18,910        18,920
                                                          ========================================================================

Diluted Per Common Share Data (2)
Income (loss) before extraordinary item                           $ 0.58        $ 0.75         $ 0.44       $ (0.98)      $ (0.73)
Extraordinary loss on early extinguishment of debt                 (0.21)            -              -             -             -
                                                          ------------------------------------------------------------------------
Net income (loss)                                                 $ 0.37        $ 0.75         $ 0.44       $ (0.98)      $ (0.73)
                                                          ========================================================================
Shares used to compute diluted per common
   share amounts                                                  13,138        18,516         20,005        18,910        18,920
                                                          ========================================================================


Balance Sheet Data:                                                         December 31,
                                                ---------------------------------------------------------------------------
                                                    1997            1998           1999            2000            2001
                                                --------------  --------------  -------------  ------------  --------------
                                                                                              
Cash and cash equivalents                       $        6,557  $        9,683  $       5,735  $     20,669  $       10,043

Working capital                                         39,031          49,678        118,428       133,690         109,216

Total assets                                           157,983         205,948        750,081       761,818         699,907

Long-term debt                                          23,237          11,154        426,211       422,838         367,315

Redeemable convertible preferred stock                       -               -         61,343        65,881          70,739

Shareholders' equity                            $      106,320  $      162,553  $     172,914  $    154,380  $      145,674


                                       25

- -------------

(1)    The 1999 and 2000 results include integration and restructuring costs of
       $6.3 million and $2.4 million, respectively, incurred in connection with
       the purchase of NovaCare O&P. The 2001 results include impairment,
       restructuring, and improvement costs of $24.4 million, comprised of: (i)
       a non-cash charge of approximately $4.8 million related to stock
       compensation to Jay Alix & Associates for services rendered; (ii)
       restructuring charges of $3.7 million recorded in the second quarter of
       2001 principally related to severance and lease termination expenses;
       (iii) an asset impairment loss of approximately $8.1 million incurred in
       connection with the October 9, 2001 sale of substantially all of the
       manufacturing assets of Seattle Orthopedic Group, Inc.; and (iv)
       approximately $7.8 million of other charges primarily comprised of fees
       paid to Jay Alix & Associates in connection with development of the
       Company's performance improvement plan.

(2)    Excludes the effect of the conversion of the 7% Redeemable Convertible
       Preferred Stock into Common Stock as it is considered anti-dilutive. For
       2000 and 2001, excludes the effect of all dilutive options and warrants
       as a result of the Company's net loss for the years ended December 31,
       2000 and 2001.

                                                  Quarter Ended

2000                              March 31     June 30    Sept. 30     Dec. 31
- ----                             ----------   ---------   ---------   ----------
Net Sales                        $ 114,868    $ 125,872   $ 125,252   $ 120,039
Gross Profit                        57,684       65,562      64,430      46,987
Net Income (Loss) (2)                 (279)       2,407       1,596     (17,720)
Diluted per Common Share
 Data Net Income (Loss) (1)      $   (0.07)   $    0.06   $    0.02   $   (0.99)


                                                  Quarter Ended

2001                              March 31     June 30    Sept. 30     Dec. 31
- ----                             ----------   ---------   ---------   ----------
Net Sales                        $ 120,573    $ 129,187   $ 129,605   $ 128,688
Gross Profit                        57,599       65,753      67,999      75,834
Net Income (Loss) (2)                  132       (4,741)        (17)     (4,257)
Diluted per Common Share
 Data Net Income (Loss) (1)      $   (0.06)   $   (0.31)  $   (0.07)  $   (0.29)

- ---------------------

(1)  Excludes the effect of the conversion of the 7% Redeemable Convertible
     Preferred Stock into Common Stock as it is considered anti-dilutive. For
     2000 and 2001, excludes the effect of all dilutive options and warrants as
     a result of the Company's net loss for the years ended December 31, 2000
     and 2001.

(2)  During the fourth quarter of 2000 and 2001, the Company recorded a charge
     of approximately $9.6 million and a credit of approximately $4.2 million,
     respectively, related to the book to physical adjustment of inventory. In
     addition, during the fourth quarter of 2000, the Company recorded charges
     of approximately $9.0 million related an increase in the allowance for
     doubtful accounts. Management considers these charges to be changes in
     estimates in accordance with the provisions of Accounting Principles Board
     Opinion No. 20.

                                       26


Other Financial Data

                                          Year Ended December 31,
                          -----------------------------------------------------
Other Financial Data:       1997       1998        1999       2000      2001
                          ---------  ---------  ----------  --------  ---------
Capital expenditures      $  2,581   $  2,859   $  12,598   $ 9,845   $  6,697
Gross margin                  49.5%      50.5%       51.3%     48.3%      52.6%
Net cash provided by
 (used in):
  Operating activities    $  8,112   $ 18,531   $    (224)  $ 3,607   $ 51,166
  Investing activities    $(18,726)  $(33,650)  $(444,995)  $ 4,624   $  1,105
  Financing activities    $ 10,599   $ 18,245   $ 441,271   $ 6,703   $(62,897)
EBITDA (1)                $ 22,780   $ 31,140   $  63,755   $57,271   $ 84,213
EBITDA margin (1)             15.6%      16.6%       18.4%     11.8%      16.6%

- --------------------

(1)  "EBITDA" is not a measure of performance under GAAP. While EBITDA should
     not be considered in isolation or as a substitute for net income, cash
     flows from operating activities and other income or cash flow statement
     data prepared in accordance with GAAP, or as a measure of profitability or
     liquidity, we understand that EBITDA is customarily used by financial and
     credit analysts as a criteria in evaluating healthcare companies. Moreover,
     substantially all of our financing arrangements contain covenants in which
     EBITDA is used as a measure of financial performance. Our definition of
     EBITDA may not be comparable to the definition of EBITDA used by other
     companies. EBITDA margin is defined as EBITDA as a percent of net sales.

     The following table reconciles net income (loss) to EBITDA:

                                           Year Ended December 31,
                            ----------------------------------------------------
                                1997      1998      1999       2000       2001
                            ----------------------------------------------------
Net income (loss)             $ 4,946   $13,840   $10,986   $(13,996)   $(8,883)
Extraordinary loss
 on early extinguishment
 of debt                        2,694         -         -          -          -
Provision (benefit) for
 income taxes                   5,526     9,616    10,194     (1,497)       907
Interest expense, net           4,933     1,902    22,177     47,072     43,065
Unusual charges                     -         -     6,340      2,364     24,438
Depreciation and
 amortization                   2,871     3,294     6,538     11,178     12,488
Amortization of excess
 costs over net assets
 acquired                       1,810     2,488     7,520     12,150     12,198
                            ----------------------------------------------------
EBITDA                        $22,780   $31,140   $63,755   $ 57,271    $84,213
                            ====================================================

                                       27


ITEM 7.  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
position 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
certain assumptions that we consider reasonable. Our actual results may differ
materially from those indicated forward looking statements.

We are the largest operator and developer of orthotic and prosthetic ("O&P")
patient-care centers in the United States. Orthotics is the design, fabrication,
fitting and device maintenance of custom-made braces and other devices (such as
spinal, knee and sports-medicine braces) that provide external support to treat
musculoskeletal disorders. Musculoskeletal disorders are ailments of the back,
extremities or joints caused by traumatic injuries, chronic conditions,
diseases, congenital disorders or injuries resulting from sports or other
activities. Prosthetics is the design, fabrication and fitting of custom-made
artificial limbs for patients who have lost limbs as a result of traumatic
injuries, vascular diseases, diabetes, cancer or congenital disorders. We have
two segments, the O&P patient-care services segment, which generated
approximately 93.3% of our sales in 2001, and the distribution of O&P components
segment, which accounted for 5.8% of our sales. The manufacture of finished O&P
products segment, which was sold on October 9, 2001, accounted for the remaining
0.9% of our sales. Our operations are located in 44 states and the District of
Columbia, with a substantial presence in California, Florida, Georgia, Illinois,
New York, Ohio, Pennsylvania and Texas.

We generate net sales primarily from patient-care services related to the
fabrication, fitting and maintenance of O&P devices. During 2001, we increased
same-center sales by 6.8% over 2000. Our sales growth in 2000 was also
principally driven by 6.0% same-center sales growth in our existing practices.
Prior to calendar 2000 our growth in net sales resulted primarily from an
aggressive program of acquiring and developing O&P patient-care centers and
secondarily from same-center sales. Similarly, growth in our O&P distribution
business was attributable primarily to acquisitions. At December 31, 2001, we
operated 597 patient-care centers and three distribution facilities, down from
620 and six, respectively, as of December 31, 2000, due to reductions relating
to our performance improvement initiatives in 2001.

We calculate cost of goods sold in accordance with the gross profit method. We
base the estimates used in applying the gross profit method on the actual
results of the most recently completed fiscal year and other factors affecting
cost of goods sold. Estimated cost of goods sold is adjusted when the annual
physical inventory is taken and compiled, generally in the fourth quarter, and a
new accrual rate is established.

Our revenues and results of operations are affected by seasonal considerations.
The adverse weather conditions often experienced in certain geographical areas
of the United States during the first quarter of each year, together with a
greater degree of patients' sole responsibility for their insurance deductible
payment obligations during the beginning of each calendar year, have contributed
to lower net sales during that quarter. Our fourth quarter is also adversely
affected by weather and a significant number of holidays, the impact of which is
somewhat offset by patients' desire to use up insurance.

                                       28


We believe that the expansion of our business through a combination of continued
same-center sales growth, which has averaged 7.9% over the last five years, the
addition of new facilities and a program of selective acquisitions is critical
to the continued improvement in our profitability.

Results of Operations

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


                                                   1999       2000        2001
                                                   -----      -----       ----
Net sales                                          100.0%     100.0%     100.0%
Cost of products and services sold                  48.7       51.7       47.4
Gross profit                                        51.3       48.3       52.6
Selling, general and administrative                 32.9       36.5       36.0
Depreciation and amortization                        1.9        2.3        2.5
Amortization of excess cost over
 net assets acquired                                 2.2        2.5        2.4
Unusual charges                                      1.8        0.5        4.8
Income from operations                              12.5        6.5        6.9
Interest expense, net                               (6.4)      (9.7)      (8.5)
Income (loss) before taxes                           6.1       (3.2)      (1.6)
Provision (benefit) for income taxes                 2.9       (0.3)       0.1
Net income (loss)                                    3.2       (2.9)      (1.7)
Net income (loss) applicable to common stock         2.5       (3.8)      (2.7)


Year ended December 31, 2001 compared with the year ended December 31, 2000

Net Sales. Net sales for the year ended December 31, 2001 reached $508.1
million, an increase of $22.1 million or 4.5%, over the prior year's net sales
of $486.0 million. The increase in net sales was primarily due to a 6.8%
increase in same center sales in the Company's O&P practices offset by a
reduction in net sales due to the sale of Seattle Orthopedic Group, Inc.

Gross Profit. Gross profit for the year ended December 31, 2001 improved by
$32.5 million, or 4.3 percentage points as a percentage of sales, to $267.2
million, or 52.6% of net sales, compared to $234.7 million, or 48.3% of net
sales, in the prior year. The gross margin was favorably impacted by the
increase in net sales along with a reduction in the costs of materials and labor
resulting from the impact of various performance improvement initiatives
implemented during 2001.

Selling, General and Administrative. Selling, general and administrative
expenses for the year ended December 31, 2001 was $183.0 million, an increase of
$5.6 million, or 3.2%, compared to $177.4 million for the year ended December
31, 2000. The increase in selling, general and administrative expenses in
dollars was primarily the result of an increase of $14.0 million in performance
based bonus program costs and an increase in legal fees of $1.2 million offset
by (i) a decrease of $6.8 million in labor expense, (ii) a decrease of $1.7
million in bad debt expense, and (iii) a reduction in travel expenses of $1.1
million. Selling, general and administrative expenses as a percentage of net
sales decreased to 36.0% for the year ended December 31, 2001, as compared to
36.5% for the year ended December 31, 2000. The decrease in selling, general and

                                       29


administrative expenses as a percentage of sales was primarily the result of the
aforementioned increase in net sales.

Depreciation and Amortization. Depreciation and amortization for the year ended
December 31, 2001 amounted to $12.5 million, a 11.6% increase in such costs over
the prior year ended December 31, 2000. The increase is attributable to the
Company's purchases of fixed assets. Amortization of goodwill for the year ended
December 31, 2001 increased by 0.4% to $12.2 million, compared to the year ended
December 31, 2000. As discussed below under "New Accounting Standards", we will
discontinue amortization related to goodwill and other indefinite lived
intangible assets commencing January 1, 2002 pursuant to recently issued
Statement of Financial Accounting Standards No. 142.

Unusual Charges. Unusual charges for the year ended December 31, 2001 amounted
to $24.4 million, which consisted of the following one-time costs: (i) a
non-cash charge of $4.8 million related to stock compensation to Jay Alix &
Associates for services rendered; (ii) restructuring charges of $3.7 million
recorded in the second quarter of 2001 principally related to severance and
lease termination expenses; (iii) an $8.1 million loss on the disposal of
substantially all the manufacturing assets of SOGI; and (iv) $7.8 million in
other charges primarily related to fees paid to Jay Alix & Associates in
connection with development of the Company's performance improvement plan.
During the year ended December 31, 2000, we recognized $1.7 million of
integration costs in connection with the acquisition of NovaCare O&P and $0.7
million of restructuring costs. Additional information relating to these costs
is set forth below under "Unusual Charges".

Income from Operations. Principally as a result of the above, income from
operations for the year ended December 31, 2001 was $35.1 million, an increase
of $3.5 million, or 11.1%, from the year ended December 31, 2000. Income from
operations as a percentage of net sales increased to 6.9% in the year ended
December 31, 2001 from 6.5% in the year ended December 31, 2000.

Interest Expense, Net. Net interest expense for the year ended December 31, 2001
was $43.1 million, a decrease of $4.0 million from $47.1 million incurred in the
year ended December 31, 2000. Interest expense as a percentage of net sales
decreased to 8.5% for the year ended December 31, 2001 from 9.7% for the year
ended December 31, 2000. The decrease in interest expense as a percentage of net
sales was primarily attributable to the net sales increase, a decrease of $26.9
million in average borrowings and a reduction in LIBOR.

Income Taxes. The provision for income taxes for the year ended December 31,
2001 was $0.9 million compared to a benefit from income taxes of $1.5 million
for the year ended December 31, 2000. We recorded a provision for income taxes
in 2001 due to the impact of nondeductible amortization on low levels of pre-tax
loss.

Net Loss. As a result of the above, we recorded a net loss of $8.9 million for
the year ended December 31, 2001, compared to a net loss of $14.0 million in the
prior year, an improvement of $5.1 million. We recorded a net loss applicable to
common stock of $13.7 million, or $0.73 per dilutive common share, for the year
ended December 31, 2001, compared to net loss applicable to common stock of
$18.5 million, or $0.98 per dilutive common share, for the year ended December
31, 2000.

                                       30


Year ended December 31, 2000 compared with the year ended December 31, 1999

Net Sales. Net sales for the year ended December 31, 2000, were $486.0 million,
an increase of $139.2 million, or 40.1%, over net sales of $346.8 million for
the year ended December 31, 1999. The increase was principally attributable to
the acquisition of NovaCare O&P on July 1, 1999.

Gross Profit. Gross profit in the year ended December 31, 2000 was $234.7
million, an increase of $56.9 million, or 32.0%, from gross profit of $177.8
million for the year ended December 31, 1999. Gross profit as a percentage of
net sales decreased to 48.3% in 2000 from 51.3% in 1999. This decrease in the
gross profit margin was primarily attributable to higher materials costs and
changes in product mix.

Selling, General and Administrative. Selling, general and administrative
expenses in the year ended December 31, 2000 increased by $63.4 million, or
55.6%, compared to the year ended December 31, 1999. Selling, general and
administrative expenses as a percentage of net sales increased to 36.5% in 2000
as compared to 32.9% in 1999. The increase in selling, general and
administrative expenses was primarily due to the NovaCare O&P acquisition on
July 1, 1999 and primarily occurred in payroll, rent and bad debt expenses.

Depreciation and Amortization. Depreciation and amortization for the year ended
December 31, 2000 amounted to $11.2 million, a 72.3% increase over the prior
year. Amortization of excess cost over net assets acquired amounted to $12.2
million in 2000, a 62.7% increase over 1999. Both increases were primarily
attributable to our acquisition of NovaCare O&P on July 1, 1999, which impacted
the full year 2000 and only the latter half of 1999.

Unusual Charges. During the year ended December 31, 2000, we recognized $2.4
million of integration and restructuring costs in connection with our
acquisition on July 1, 1999 of NovaCare O&P, a substantial decrease from $6.3
million of integration and restructuring costs recognized in the prior year.
Additional information relating to these costs is set forth below under
"--Unusual Charges".

Income from Operations. Principally as a result of the above, income from
operations in 2000 was $31.6 million, a decrease of $11.8 million, or 27.2%,
from the prior year. Income from operations as a percentage of net sales
decreased to 6.5% in 2000 from 12.5% for the prior year.

Interest Expense, Net. Net interest expense for the year ended December 31, 2000
was $47.1 million, an increase of $24.9 million over $22.2 million incurred in
1999. Interest expense as a percentage of net sales in 2000 increased to 9.7%
from 6.4% for 1999. The increase in interest expense was primarily attributable
to $255.0 million borrowed under our existing credit facility and $150.0 million
in senior subordinated notes issued to acquire NovaCare O&P, as well as an
increase in variable borrowing rates.

Income Taxes. As a result of the loss, the Company recorded a benefit from
income taxes for the year ended December 31, 2000 of $1.5 million compared to a
provision for income taxes of $10.2 million for the year ended December 31,
1999.

Net Loss. As a result of the above, we recorded a net loss of $14.0 million for
the year ended December 31, 2000, compared to net income of $11.0 million in the
prior year. We recorded a net loss applicable to common stock of $18.5 million,
or $0.98 per dilutive common share, for the year ended December 31, 2000,
compared to net income applicable to common stock of $8.8 million, or $0.44 per
dilutive common share, for the year ended December 31, 1999.

                                       31


Unusual Charges

Restructuring and Integration Costs

In connection with the acquisition of NovaCare O&P on July 1, 1999, we
implemented a restructuring plan. The 1999 plan contemplated lease termination
and severance costs associated with the closure of certain patient-care centers
and corporate functions made redundant after the NovaCare O&P acquisition. The
costs associated with the former NovaCare O&P centers were recorded in
connection with the purchase price allocation of that acquisition on July 1,
1999. The costs associated with our existing patient-care centers were charged
to operations during the third quarter of 1999. As of December 31, 2000, the
planned reduction in work force had been completed and we closed all
patient-care centers that were identified for closure in 1999. Lease payments on
these closed patient-care centers are expected to be paid through 2003. During
the year ended December 31, 2001, management reversed $0.8 million of the lease
termination restructuring reserve as a result of favorable lease buyouts and
subleasing activity.

In December 2000, our management and the Board of Directors determined that
additional performance improvement initiatives needed to be adopted. In December
2000, we retained Jay Alix & Associates to do an assessment of the opportunities
available for improved financial and operating performance. The first phase of
their plan called for the termination of 234 employees, for which we recorded
$0.7 million in severance costs during 2000.

We then began, in January 2001, to develop, with the assistance of Jay Alix &
Associates, a comprehensive performance improvement program consisting of 14
performance improvement initiatives aimed at improving cash collections,
reducing working capital requirements and improving operating performance. In
connection with the implementation of these initiatives, we recorded in the
second quarter of 2001 $3.7 million in restructuring and asset impairment costs
($4.5 million expense offset by the above-mentioned approximate $0.8 million
benefit). These initiatives call for the closure of 37 additional patient-care
centers and the termination of 135 additional employees. In the fourth quarter
of 2001, the lease restructuring component of the plan was amended as seven
additional properties, which were originally contemplated but not finalized,
were added to the list of restructured facilities. As of December 31, 2001, all
properties, except the seven in the amendment, had been vacated and all of the
employees had been terminated. All payments under the severance initiative are
expected to be made during the first quarter of 2002. All properties in the
lease initiative are expected to be vacated by the end of the second quarter of
2002. All payments under these initiatives for lease and severance costs are
expected to be paid by December 31, 2004.
Performance Improvement Costs

In 2001, the Company paid or accrued $7.8 million in fees and costs associated
with the various performance improvement initiatives. Included in that total, in
connection with their contract, Jay Alix & Associates was paid $6.3 million,
comprised of $5.2 million based on that firm's hourly rates and $1.1 million in
success fees. The Company also recorded a $4.8 million non-cash charge related
to stock compensation paid for that firm's services.

Impairment Loss on Assets Held for Sale

In connection with the analysis of our continuing business, we determined that
the manufacture of orthotic and prosthetic components and devices was not one of
our core businesses as it represented only 0.9% of our


                                       32


net sales for the year ended December 31, 2001 and 1.7% for the year ended
December 31, 2000. In July 2001, we agreed to the general terms of a sale of
substantially all of the manufacturing assets of Seattle Orthopedic Group, Inc.
to United States Manufacturing Company for $20.0 million. The sale resulted in
our recording, in the second quarter of 2001, an asset impairment loss of $8.1
million, as the net book value of the assets was $26.2 million, while net
proceeds from the sale of the assets were $18.1 million.

Performance Improvement Plan

     In January 2001, we developed, with the assistance of our consultant, Jay
Alix & Associates, a performance improvement plan which contained many
initiatives that were designed to effect further cost savings through improved
utilization and efficiency of support services, enhanced purchasing and
inventory management, improved collection methods and consolidation of
distribution services. In addition, we are seeking to enhance net sales through
improved marketing and branding initiatives and more efficient billing
procedures.

     During 2001, we accomplished the following under our performance
improvement plan:

     o    improved our cash flow by accelerating the collection of our accounts
          receivable;

     o    reduced our inventory carrying levels and improved the rate at which
          we turn our inventory levels through more centralized inventory
          management;

     o    consolidated our distribution facilities from six to three, thereby
          reducing our materials handling, lease and freight expenses and
          staffing levels;

     o    reduced our overhead expense by eliminating and consolidating
          corporate expenses;

     o    increased the use of our shared fabrication facilities and decreased
          the use of more expensive third parties to fabricate products for us;

     o    instituted our Best Value program, in which our practitioners are
          given the information to select the most appropriate and
          cost-effective materials, component parts and finished products,
          which, in conjunction with our negotiation of discounts from our
          preferred vendors, reduced our costs of materials, component parts and
          finished products;

     o    developed a plan to transition to a common systems platform for
          billing, collections and application of cash in our patient-care
          centers; and

     o    developed a new marketing and sales organization plan for 2002,
          designed to initiate programs to continue to enhance our net sales.

Financial Condition, Liquidity And Capital Resources

Our working capital at December 31, 2001 was approximately $109.2 million
compared to $133.7 million at December 31, 2000. Our cash and cash equivalents
amounted to $10.0 million at December 31, 2001 and $20.7 million at December 31,
2000. The ratio of current assets to current liabilities was 2.3 to 1 at
December 31, 2001, compared to 2.5 to 1 at December 31, 2000.

                                       33


Net cash provided by operating activities in the year ended December 31, 2001
increased to $51.2 million, from $3.6 million in the year ended December 31,
2000. The $47.6 million improvement resulted from improvements in operations and
working capital management resulting from our performance improvement
initiatives.

Net cash provided by investing activities was $1.1 million for the year ended
December 31, 2001. The funds were generated primarily from the $15.1 million
from the sale of substantially all of the manufacturing related assets of
Seattle Orthopedic Group, Inc. Of these funds, the company used $6.7 million to
purchase fixed assets and $8.3 million for the payment of contingent purchase
price called for by earnout agreements from prior acquisitions of patient-care
practices.

Net cash used in financing activities was $62.9 million for the year ended
December 31, 2001, resulting from: (i) scheduled principal payments of our
existing long-term debt of $38.2 million, (ii) a paydown of $9.9 million of our
revolving line of credit, and (iii) repayment of existing long-term debt of
$13.9 million from the proceeds of the sale of the manufacturing assets.

On February 15, 2002, we issued $200.0 million aggregate principal amount of 10
3/8% Senior Notes due 2009 ("Senior Notes") in a private placement exempt from
registration under the Securities Act of 1933, as amended. We also closed,
concurrent with the Senior Notes, a new $75.0 million senior secured revolving
line of credit ("New Revolving Credit Facility"). The proceeds from these
transactions were used to retire the existing revolving line of credit, Tranche
A & B term loans, and for fees related to the transaction.

The Senior Notes mature on February 15, 2009 and do not require any prepayments
of principal prior to maturity. Interest on the Senior Notes accrued from
February 15, 2002, and is payable semi-annually on February 15 and August 15 of
each year, commencing August 15, 2002. Payment of principal and interest on the
Senior Notes is guaranteed on a senior unsecured basis by all of our current and
future domestic subsidiaries. On and after February 15, 2006, we may redeem all
or part of the Senior Notes at 105.188% of principal amount during the 12 month
period commencing on February 15, 2006, at 102.594% of principal amount if
redeemed during the 12-month period commencing on February 15, 2007, and at 100%
of principal amount if redeemed on or after February 15, 2008. Before February
15, 2002, we may redeem up to 35% of the aggregate principal amount of the
Senior Notes with the cash proceeds of certain equity offerings, provided that
at least 65% of the aggregate principal amount of Senior Notes remains
outstanding after the redemption. Upon the occurrence of certain specified
change of control events, unless we have exercised our option to redeem all the
Senior Notes as described above, each holder of a Senior Note will have the
right to require us to repurchase all or a portion of such holder's Senior Notes
at a purchase price in cash equal to 101% of the principal amount, plus accrued
and unpaid interest, if any, to the date of repurchase. The Senior Notes were
issued under an indenture, dated as of February 15, 2002, with Wilmington Trust
Company, as trustee. The indenture limits our 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.

The New Revolving Credit Facility, which was provided by a syndicate of banks
and other financial institutions led by BNP Paribas, is a senior secured
revolving credit facility providing for loans of up to $75.0 million and will
terminate on February 15, 2007. Borrowings under the New Revolving Credit
Facility will bear interest, at our option, at an annual rate equal to LIBOR
plus 3.50% or the Base Rate (as defined in the

                                       34


New Revolving Credit Facility) plus 2.50% in each case, subject to adjustments
based on financial performance. Our obligations under the New Revolving Credit
Facility are guaranteed by our subsidiaries and are secured by a first priority
perfected security interest in our subsidiaries' shares, all of our assets and
all of the assets of our subsidiaries. Borrowings under the New Revolving Credit
Facility are prepayable at any time without premium or penalty. The New
Revolving Credit Facility requires compliance with various financial covenants,
including a minimum consolidated interest coverage ratio, minimum consolidated
EBITDA, a maximum total leverage ratio, a maximum senior secured leverage ratio
and a minimum fixed charge coverage ratio, as well as other covenants.

The New Revolving Credit Facility contains customary events of default and is
subject to various mandatory prepayments and commitment reductions.

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 New Revolving Credit
Facility, will be sufficient for the foreseeable future to fund anticipated
capital expenditures and make required payments of principal and interest on our
debt, including payments due on the Senior Notes and obligations under the New
Revolving Credit Facility. In addition, we continually evaluate potential
acquisitions and expect to fund such acquisitions from our available sources of
liquidity, as discussed above.

Contractual Obligations and Commercial Commitments

The following table sets forth the contractual obligations and commercial
commitments of the Company as of December 31, 2001:



                                                                 Payments Due by Period (000s)
                                          --------------------------------------------------------------------------
                                            Total      2002      2003       2004      2005      2006     Thereafter
                                          --------------------------------------------------------------------------
                                                                                      
Long-term debt                             397,827    30,512    24,066     95,494    38,968    57,825      150,962
Redeemable preferred stock                 128,726         -         -          -         -         -      128,726
Operating leases                            72,546    20,176    16,826     12,928     9,160     5,628        7,828
Unconditional purchase commitments          42,900     7,500     8,500      9,500     8,700     8,700            -
Other long-term obligations                  8,893     5,487     2,160        534       186       154          372
                                          --------------------------------------------------------------------------
Total contractual cash obligations        $650,892   $63,675   $51,552   $118,456   $57,014   $72,307     $287,888
                                          ==========================================================================


The following table sets forth the pro forma contractual obligations and
commercial commitments of the Company as of December 31, 2001 to reflect the
effect of the issuance of new Senior Notes and the new Revolving Credit Facility
that closed on February 15, 2002:

                                       35




                                                                 Payments Due by Period (000s)
                                          --------------------------------------------------------------------------
                                            Total      2002      2003       2004      2005      2006     Thereafter
                                          --------------------------------------------------------------------------
                                                                                      
Long-term debt                             397,827    11,313     4,867      1,496       571       230      379,350
Redeemable preferred stock                 128,726         -         -          -         -         -      128,726
Operating leases                            72,546    20,176    16,826     12,928     9,160     5,628        7,828
Unconditional purchase commitments          42,900     7,500     8,500      9,500     8,700     8,700            -
Other long-term obligations                  8,893     5,487     2,160        534       186       154          372
                                          --------------------------------------------------------------------------
Total contractual cash obligations        $650,892   $44,476   $32,353    $24,458   $18,617   $14,712     $516,276
                                          ==========================================================================


Selected Operating Data

The following table sets forth selected operating data for the periods
indicated:

                                      1997     1998     1999    2000    2001
                                      ---------------------------------------
Patient care centers                   213      256     617     620     597
Certified practitioners                249      321     962     888     867
Number of states (including D.C.)       30       31      42      45      45
Same-center net sales growth (1)      11.7%    11.1%    4.1%    6.0%    6.8%

- ------------
(1)  Net sales contributed by those patient-care centers that we owned and
     operated during the entire year as well as the entire prior year.

Market Risk

We are exposed to the market risk that is associated with changes in interest
rates. To manage that risk, in March 2002, we entered into interest rate swaps
to modify our exposure to interest rate movements and reduce borrowing costs. We
entered into $100.0 million fixed-to-floating interest rate swaps, consisting of
floating rate instruments benchmarked to LIBOR. We are exposed to potential
losses in the event of nonperformance by the counterparties to the swap
agreements.

Critical Accounting Estimates

The Company's analysis and discussion of its financial condition and results of
operations are based upon its consolidated financial statements that have been
prepared in accordance with generally accepted accounting principles in the
United States ("U.S. GAAP"). The preparation of financial statements in
conformity with U.S. 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. U.S.
GAAP provides the framework from which to make these estimates, assumptions and
disclosures. The Company chooses accounting policies within U.S. GAAP that
management believes are appropriate to accurately and fairly report the
Company's operating results and financial position in a consistent manner.
Management regularly assesses these policies in light of current and forecasted
economic conditions. The Company's accounting policies are stated in Note B to
the consolidated financial statements as presented elsewhere in this Annual
Report on Form 10-K. The Company believes the following accounting policies are
critical to understanding the results of operations and affect the more
significant judgments and estimates used in the preparation of the consolidated
financial statements.

                                       36


     o    Revenue Recognition: Revenues on the sale of orthotic and prosthetic
          devices and associated services to patients are recorded when the
          device is accepted by the patient. Revenues on the sale of orthotic
          and prosthetic devices to customers by our distribution segment are
          recorded upon the shipment of products, in accordance with the terms
          of the invoice. Deferred revenue represents deposits made prior to the
          final fitting and acceptance by the patient and unearned service
          contract revenue. Revenue is recorded at its net realizable value
          taking into consideration all governmental and contractual adjustments
          and discounts. Management regularly assesses the recoverability of the
          related amounts of receivable from the vendors that participate in the
          related cooperative advertising programs.

     o    Inventories: Inventories, which consist principally of purchased parts
          and work in process, are stated at the lower of cost or market using
          the first-in, first-out (FIFO) method. The Company calculates cost of
          goods sold in accordance with the gross profit method. The Company
          bases the estimates used in applying the gross profit method on the
          actual results of the most recently completed fiscal year and other
          factors affecting cost of goods sold during the current reporting
          periods. Estimated cost of goods sold during the period is adjusted
          when the annual physical inventory is taken. Management adjusts its
          reserve for inventory obsolescence whenever the facts and
          circumstances indicate that the carrying cost of certain inventory
          items are in excess of its market price.

     o    Intangible Assets: Excess cost over net assets acquired represents the
          excess of purchase price over the value assigned to net identifiable
          assets of purchased businesses and is amortized using the
          straight-line method over 40 years. Non-compete agreements are
          recorded based on agreements entered into by the Company and are
          amortized over their estimated useful lives ranging from 5 to 7 years
          using the straight-line method. The remainder of the intangible assets
          are recorded at cost and are amortized over their estimated useful
          lives of up to 16 years using the straight-line method. Whenever the
          facts and circumstances indicate that the carrying amounts of these
          intangibles may not be recoverable, management reviews and assesses
          the future cash flows expected to be generated from the related
          intangible for possible impairment. Impairment is recognized by a
          charge to operating results and a reduction in the carrying value of
          the intangible asset.

New Accounting Standards

On June 29, 2001, the FASB unanimously approved its proposed Statements of
Financial Accounting Standards No. 141 (SFAS 141), Business Combinations, and
No. 142 (SFAS 142), Goodwill and Other Intangible Assets.

     SFAS 141 supercedes Accounting Principles Board (APB) Opinion No. 16,
Business Combinations. The most significant changes made by SFAS 141 are: (1)
requiring that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, (2) establishing specific criteria
for the recognition of intangible assets separately from goodwill, and (3)
requiring unallocated negative goodwill to be written of immediately as an
extraordinary gain rather than being deferred and amortized. The Company did not
have a material impact from the adoption of SFAS 141 on its financial statements
as no acquisitions were made subsequent to June 30, 2001.

                                       37


     SFAS 142 supercedes APB 17, Intangible Assets. SFAS 142 primarily addresses
accounting for goodwill and intangible assets subsequent to their acquisition
(i.e., the post-acquisition accounting). The provisions of SFAS 142 will be
effective for fiscal years beginning after December 15, 2001. SFAS 142 must be
adopted at the beginning of a fiscal year. The most significant changes made by
SFAS 142 are: (1) goodwill and indefinite lived intangible assets will no longer
be amortized, (2) goodwill will be tested for impairment at least annually at
the reporting unit level, (3) intangible assets deemed to have an indefinite
life will be tested for impairment at least annually, and (4) the amortization
period of intangible assets with finite lives will no longer be limited to forty
years.

     The Company adopted SFAS 142 effective January 1, 2002. Due to the
application of the nonamortization provisions of SFAS 142, annual amortization
in the amount of $12.8 million will no longer be recorded. In addition, the
Company will reclassify an assembled workforce intangible asset with an
unamortized balance of $4.8 million (along with a deferred tax liability of $2.0
million) to goodwill at the date of adoption.

     The Company will test goodwill for impairment using a two-step process
prescribed in SFAS 142. The first step is to identify or screen for potential
impairment, while the second step is to measure the amount of the impairment, if
any. The Company expects to perform the first of the required impairment tests
of goodwill and indefinite lived intangible assets as of January 1, 2002 in the
first quarter of 2002. Any impairment charge resulting from these transitional
impairment tests will be reflected as the cumulative effect of a change in
accounting principle in the first quarter of 2002. The Company is in the process
of making the determinations as to what its reporting units are and what amounts
of goodwill, intangible assets, other assets, and liabilities should be
allocated to those reporting units. The Company has not yet determined what the
effect of these tests, if any, will be on the earnings and financial position of
the Company.

     In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 provides guidance on the
accounting for the impairment or disposal of long-lived assets, and applies to
all long-lived assets (including discontinued operations) and consequently
amends APB Opinion No. 30, "Reporting Results of Operations - Reporting the
Effects of Disposal of Segment of a Business." SFAS No. 144 develops one
accounting model (based on the model in SFAS No. 121) for long-lived assts that
are to be disposed of by sale, as well as addresses the principal implementation
issues. SFAS No. 144 requires that long-lived assets that are to be disposed of
by sale be measured at the lower of book value or fair value less cost to sell.
The Company does not expect SFAS No. 144 to have a material effect on its
financial statements.

Other

Inflation has not had a significant effect on our operations, as increased costs
to us generally have been offset by increased prices of products and services
sold.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
         -----------------------------------------------------------

     In the normal course of business, we are exposed to fluctuations in
interest rates. We address this risk by using interest rate swaps from time to
time. At December 31, 2001 there were no interest rate swaps outstanding. In
March 2002, the Company entered into two fixed-to-floating interest rate swaps
with an


                                       38


aggregate notional amount of $100 million, as discussed in Note H to Hanger's
Consolidated Financial Statements.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
          -------------------------------------------

     The consolidated financial statements and schedules required hereunder and
contained herein are listed under Item 14(a) below.

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

     None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
          --------------------------------------------------

     Pursuant to General Instruction G(3) of Form 10-K, the information called
for by this item regarding directors is hereby incorporated by reference from
our definitive proxy statement or amendment hereto to be filed pursuant to
Regulation 14A not later than 120 days after the end of the fiscal year covered
by this report. Information regarding our executive officers is set forth under
Item 4A of this Form 10-K.

ITEM 11.  EXECUTIVE COMPENSATION.
          ----------------------

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

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
          --------------------------------------------------------------

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

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
          ----------------------------------------------

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

                                       39


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

          (a)  Financial Statements and Financial Statement Schedule:

               (1)  Financial Statements:

Hanger Orthopedic Group, Inc.
- -----------------------------

Report of Independent Accountants

Consolidated Balance Sheets as of December 31, 2000
 and 2001

Consolidated Statements of Operations for the years
 ended December 31, 1999, 2000 and 2001

Consolidated Statements of Changes in Shareholders'
 Equity for the years ended December 31, 1999, 2000
 and 2001

Consolidated Statements of Cash Flows for the years
  ended December 31, 1999, 2000 and 2001

Notes to Consolidated Financial Statements

               (2)  Financial Statements Schedule:

Report of Independent Accountants

Schedule II - Valuation and qualifying accounts

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


          (b)  Reports on Form 8-K:

               The Company filed a Current Report on Form 8-K on October 9, 2001
               to report under Item 5 its sale of certain manufacturing assets
               of its wholly-owned subsidiary, Seattle Orthopedic Group, Inc. to
               United States Manufacturing Company, LLC.

               The Company also filed a Current Report on Form 8-K on February
               19, 2002, reporting pursuant to Item 5 the sale on February 15,
               2002 of $200 million principal amount of 10 ?% Senior Notes due
               2009 and the establishment of a new revolving credit facility.

                                       40


          (c)  Exhibits:  The following exhibits are filed herewith or
               incorporated herein by reference:

Exhibit No.                Document

   3(a)        Certificate of Incorporation, as amended, of the Registrant.
               (Incorporated herein by reference to Exhibit 3.1 to the
               Registrant's Annual Report on Form 10-K for the fiscal year ended
               September 30, 1988.)

   3(b)        Certificate of Amendment of the Registrant's Certificate of
               Incorporation (which, among other things, changed the
               Registrant's corporate name from Sequel Corporation to Hanger
               Orthopedic Group, Inc.), as filed on August 11, 1989 with the
               Office of the Secretary of State of Delaware. (Incorporated
               herein by reference to Exhibit 3(b) to the Registrant's Current
               Report on Form 10-K dated February 13, 1990.)

   3(c)        Certificate of Agreement of Merger of Sequel Corporation and
               Delaware Sequel Corporation. (Incorporated herein by reference to
               Exhibit 3.1(a) to the Registrant's Annual Report on Form 10-K for
               the fiscal year ended September 30, 1988.)

   3(d)        Certificate of Ownership and Merger of Hanger Acquisition
               Corporation and J. E. Hanger, Inc. as filed with the Office of
               the Secretary of the State of Delaware on April 11, 1989.
               (Incorporated herein by reference to Exhibit 2(f) to the
               Registrant's Current Report on Form 8-K dated May 15, 1989.)

   3(e)        Certificate of Designation, Preferences and Rights of Preferred
               Stock of the Registrant as filed on February 12, 1990 with the
               Office of the Secretary of State of Delaware. (Incorporated
               herein by reference to Exhibit 3(a) to the Registrant's Current
               Report on Form 8-K dated February 13, 1990.)

   3(f)        Certificate of Amendment to Certificate of Incorporation of the
               Registrant, as filed with the Secretary of State of Delaware on
               September 16, 1999. (Incorporated herein by reference to Exhibit
               3 to the Registrant's Quarterly Report on Form 10-Q for the
               quarter ended September 30, 1999.)

   3(g)        Certificate of Designation, Rights and Preferences of 7%
               Redeemable Preferred Stock as filed with the Office of the
               Secretary of State of Delaware on June 28, 1999. (Incorporated
               herein by reference to Exhibit 2(b) to the Registrant's Current
               Report of Form 8-K dated July 1, 1999.)

   3(h)        Certificate of Elimination of Class A, B, C, D, E and F Preferred
               Stock of the Registrant as filed with the Office of the Secretary
               of State of Delaware on June 18, 1999. (Incorporated herein by
               reference to Exhibit 2(c) to the Registrant's Current Report on
               Form 8-K dated July 1, 1999.)

   3(i)        By-Laws of the Registrant, as amended. (Incorporated herein by
               reference to Exhibit 3 to the Registrant's Current Report on Form
               8-K dated May 15, 1989.)

                                       41


   10(a)       Registration Agreement, dated May 15, 1989, between Sequel
               Corporation, First Pennsylvania Bank, N.A., Gerald E. Bisbee,
               Jr., Ivan R. Sabel, Richard A. Stein, Ronald J. Manganiello,
               Joseph M. Cestaro and Chemical Venture Capital Associates.
               (Incorporated herein by reference to Exhibit 10(l) to the
               Registrant's Current Report on Form 8-K dated May 15, 1989.)

   10(b)       First Amendment dated as of February 12, 1990, to the
               Registration Agreement, dated as of May 15, 1989, by and among
               Hanger Orthopedic Group, Inc., First Pennsylvania Bank, N.A.,
               Ivan R. Sabel, Richard A. Stein, Ronald J. Manganiello, Joseph M.
               Cestaro and Chemical Venture Capital Associates. (Incorporated
               herein by reference to Exhibit 10(m) to the Registrant's Current
               Report on Form 8-K dated February 13, 1990.)

   10(c)       Fifth Amendment, dated as of November 8, 1990, to the Stock and
               Note Purchase Agreement, dated as of February 28, 1989 and as
               amended on May 9, 1989, May 15, 1989, February 12, 1990, and June
               19, 1990 by and among J. E. Hanger, Inc., as successor to Hanger
               Acquisition Corporation, Ronald J. Manganiello, Joseph M.
               Cestaro, Chemical Venture Capital Associates and Chemical Equity
               Associates. (Incorporated herein by reference to Exhibit 10(f) to
               the Registrant's Current Report on Form 8-K filed on November 21,
               1990.)

   10(d)       Form of Stock Option Agreements, dated as of August 13, 1990,
               between Hanger Orthopedic Group, Inc. and Thomas P. Cooper, James
               G. Hellmuth, Walter F. Abendschein, Jr., Norman Berger, Bruce B.
               Grynbaum and Joseph S. Torg. (Incorporated herein by reference to
               Exhibit 10(rrr) to the Registrant's Registration Statement on
               Form S-2, File No. 33-37594.) *

   10(e)       Warrants to purchase Common Stock of Hanger Orthopedic Group,
               Inc. issued November 1, 1996. (Incorporated herein by reference
               to Exhibit 10(c) to the Registrant's Current Report on Form 8-K
               filed on November 12, 1996.)

   10(f)       1991 Stock Option Plan of the Registrant, as amended through
               September 16, 1999. (Incorporated herein by reference to Exhibit
               4(a) to the Registrant's Proxy Statement, dated July 28, 1999,
               relating to the Registrant's Annual Meeting of Stockholders held
               on September 8, 1999.)*

   10(g)       1993 Non-Employee Directors Stock Option Plan of the Registrant.
               (Incorporated herein by reference to Exhibit 4(b) to the
               Registrant's Registration Statement on Form S-8 (File No.
               33-63191).)*

   10(h)       Employment and Non-Compete Agreement, dated as of November 1,
               1996, and Amendment No. 1 thereto, dated January 1, 1997, between
               the Registrant and H.E. Thranhardt. (Incorporated herein by
               reference to Exhibit 10(p) to the Registrant's Annual Report on
               Form 10-K for the year ended December 31, 1997.)*

- -----------------------------
*  Management contract or compensatory plan

                                       42


   10(i)       Employment and Non-Compete Agreement, dated as of November 1,
               1996, between the Registrant and John McNeill. (Incorporated
               herein by reference to Exhibit 10(q) to the Registrant's Annual
               Report on Form 10-K for the year ended December 31, 1997.)*

   10(j)       Asset Purchase Agreement, dated as of March 26, 1997, by and
               between Hanger Prosthetics & Orthotics, Inc., Acor Orthopaedic,
               Inc., and Jeff Alaimo, Greg Alaimo and Mead Alaimo. (Incorporated
               by reference to Exhibit 2 to the Current Report on Form 8-K filed
               by the Registrant on April 15, 1997.)

   10(k)       Asset purchase Agreement, dated as of May 8, 1997, by and between
               Hanger Prosthetics & Orthotics, Inc., Fort Walton Orthopedic,
               Inc., Mobile Limb and Brace, Inc. and Frank Deckert, Ronald
               Deckert, Thomas Deckert, Robert Deckert and Charles Lee.
               (Incorporated by reference to Exhibit 2 to the Current Report on
               Form 8-K filed by the Registrant on June 5, 1997.)

   10(l)       Asset Purchase Agreement, dated as of November 3, 1997, by and
               between Hanger Prosthetics & Orthotics, Inc., Morgan
               Prosthetic-Orthotics, Inc. and Dan Morgan. (Incorporated herein
               by reference to Exhibit 10(v) to the Registrant's Annual Report
               on Form 10-K for the year ended December 31, 1997.)

- -----------------------------
*  Management contract or compensatory plan


                                       43


   10(m)       Asset Purchase Agreement, dated as of December 23, 1997, by and
               between Hanger Prosthetics & Orthotics, Inc., Harshberger
               Prosthetic & Orthotic Center, Inc., Harshberger Prosthetic &
               Orthotic Center of Mobile, Inc., Harshberger Prosthetic &
               Orthotic Center of Florence, Inc., FAB-CAM, Inc. and Jerald J.
               Harshberger. (Incorporated herein by reference to Exhibit 10(w)
               to the Registrant's Annual Report on Form 10-K for the year ended
               December 31, 1997.)

   10(n)       Stock Purchase Agreement, dated as of April 2, 1999, by and among
               NovaCare, Inc., NC Resources, Inc., the Registrant and HPO
               Acquisition Corporation, Amendment No. 1 thereto, dated as of May
               19, 1999, and Amendment No. 2 thereto, dated as of June 30, 1999.
               (Incorporated herein by reference to Exhibit 2(a) to the
               Registrant's Current Report on Form 8-K dated July 15, 1999.)

   10(o)       Indenture, dated as of June 16, 1999, among the Registrant, its
               subsidiaries and U.S. Bank Trust National Association, as
               Trustee. (Incorporated herein by reference to Exhibit 10(a) to
               the Registrant's Current Report on Form 8-K dated July 1, 1999.)

   10(p)       Form of First Supplemental Indenture, dated as of August 12,
               1999, to Indenture, dated as of June 16, 1999, among the
               Registrant, its subsidiaries and U.S. Bank Trust National
               Association, as Trustee. (Filed with original Registration
               Statement on Form S-4 on August 12, 1999.)

   10(q)       Credit Agreement, dated as of June 16, 1999, among the
               Registrant, various bank lenders, and The Chase Manhattan Bank,
               as administrative agent, collateral agent and issuing bank, Chase
               Securities Inc., as lead arranger and book manager, Bankers Trust
               Company, as syndication agent, and Paribas, as documentation
               agent. (Incorporated herein by reference to Exhibit 10(a) to the
               Registrant's Current Report on Form 8-K dated July 1, 1999.)

   10(r)       Senior Subordinated Note Purchase Agreement, dated as of June 9,
               1999, relating to 11.25% Senior Subordinated Notes due 2009,
               among the Registrant, Deutsche Banc Securities Inc., Chase
               Securities Inc. and Paribas Corporation. (Incorporated herein by
               reference to Exhibit 10(b) to the Registrant's Current Report on
               Form 8-K dated July 1, 1999.)

   10(s)       Registration Rights Agreement, dated as of June 16, 1999, by and
               among the Registrant, Deutsche Banc Securities, Inc., Chase
               Securities Inc. and Paribas Corporation, relating to the 11.25%
               Senior Subordinated Notes due 2009. (Incorporated herein by
               reference to Exhibit 10(d) to the Registrant's Current Report on
               Form 8-K dated July 1, 1999.)

   10(t)       Securities Purchase Agreement, dated as of June 16, 1999,
               Relating to 7% Redeemable Preferred Stock, among the Registrant,
               Chase Equity Associates, L.P. and Paribas North America, Inc.
               (Incorporated herein by reference to Exhibit 10(e) to the
               Registrant's Current Report on Form 8-K dated July 1, 1999.)

                                       44


   10(u)       Investor Rights Agreement, dated July 1, 1999, among the
               Registrant, Chase Equity Associates, L.P. and Paribas North
               America, Inc. (Incorporated herein by reference to Exhibit 10(f)
               to the Registrant's Current Report on Form 8-K dated July 1,
               1999.)

   10(v)       Purchase Agreement, dated as of February 8, 2002, among Hanger
               Orthopedic Group, Inc., the guarantors signatory thereto, Lehman
               Brothers Inc., J.P. Morgan Securities Inc., Salomon Smith Barney
               Inc. and BNP Paribas Securities Corp. (Incorporated herein by
               reference to Exhibit 1 to the Registrant's Current Report on Form
               8-K dated February 15, 2002.)

   10(w)       Indenture, dated as of February 15, 2002, among Hanger Orthopedic
               Group, Inc., the Subsidiary Guarantors and Wilmington Trust
               Company as trustee, relating to the 10 ?% Senior Notes due 2009.
               (Incorporated herein by reference to Exhibit 4(a) to the
               Registrant's Current Report on Form 8-K dated February 15, 2002.)

   10(x)       Registration Rights Agreement, dated as of February 15, 2002,
               among Hanger Orthopedic Group, Inc., the guarantors signatory
               thereto, Lehman Brothers Inc., J.P. Morgan Securities Inc.,
               Salomon Smith Barney Inc. and BNP Paribas Securities Corp.
               (Incorporated herein by reference to Exhibit 4(b) to the
               Registrant's Current Report on Form 8-K dated February 15, 2002.)

   10(y)       Credit Agreement, dated as of February 15, 2002, among Hanger
               Orthopedic Group, Inc., BNP Paribas Securities Corp. as
               administrative agent, and various other lenders. (Incorporated
               herein by reference to Exhibit 10 to the Registrant's Current
               Report on Form 8-K dated February 15, 2002.)

   10(z)       Employment Agreement, dated as of April 29, 1999, between the
               Registrant and Ivan R. Sabel. (Incorporated herein by reference
               to Exhibit 10(r) to the Registrant's Registration Statement on
               Form S-4 (File No. 333-85045).)*

   10(aa)      Employment Agreement, dated as of July 1, 1999, between the
               Registrant and Rick Taylor. (Incorporated herein by reference to
               Exhibit 10(u) to the Registrant's Registration Statement on Form
               S-4 (File No. 333-85045).)*

   10(bb)      Employment Agreement, dated as of November 1, 1996, between the
               Registrant and Ron May. (Incorporated herein by reference to
               Exhibit 10(w) to the Registrant's Registration Statement on Form
               S-4 (File No. 333-85045).)*

   10(cc)      Employment Agreement, dated as of August 29, 2001, between the
               Registrant and George McHenry. (Filed herewith.)*

   10(dd)      Employment Agreement, dated as of January 2, 2002, between the
               Registrant and Thomas Kirk. (Filed herewith.)*

- -----------------------------
*  Management contract or compensatory plan


                                       45



   21          List of Subsidiaries of the Registrant. (Filed herewith.)

   23          Consent of PricewaterhouseCoopers LLP. (Filed herewith.)




                                       46




                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

                                       HANGER ORTHOPEDIC GROUP, INC.



Dated:  March 29, 2002                 By:  /s/ Ivan R. Sabel
                                          --------------------------------------
                                            Ivan R. Sabel, CPO
                                            Chairman and Chief Executive Officer
                                            (Principal Executive Officer)


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



Dated:   March 29, 2002                     /s/ Ivan R. Sabel
                                            ------------------------------------
                                            Ivan R. Sabel, CPO
                                            Chairman, Chief Executive Officer
                                            and Director (Principal
                                            Executive Officer)



Dated:   March 29, 2002                     /s/ George E. McHenry
                                            ------------------------------------
                                            George E. McHenry
                                            Chief Financial Officer
                                            (Principal Financial Officer)



Dated:   March 29, 2002                     /s/ Glenn M. Lohrmann
                                            ------------------------------------
                                            Glenn M. Lohrmann
                                            Controller
                                            (Chief Accounting Officer)


                                       47



Dated:   March 28, 2002                     /s/ Mitchell J. Blutt
                                            ------------------------------------
                                            Mitchell J. Blutt, M.D.
                                            Director


Dated:  March 27, 2002                      /s/ Edmond E. Charrette
                                            ------------------------------------
                                            Edmond E. Charrette, M.D.
                                            Director


Dated: March 29, 2002                       /s/ Thomas P. Cooper
                                            ------------------------------------
                                            Thomas P. Cooper, M.D.
                                            Director


Dated:   March ____, 2002
                                            ------------------------------------
                                            Robert J. Glaser, M.D.
                                            Director


Dated:  March ____, 2002
                                            ------------------------------------
                                            Eric Green
                                            Director


Dated:  March 29, 2002                      /s/ C. Raymond Larkin, Jr.
                                            -----------------------------------
                                            C. Raymond Larkin, Jr.
                                            Director


Dated:  March 29, 2002                      /s/ Risa J. Lavizzo-Mourey
                                            -----------------------------------
                                            Risa J. Lavizzo-Mourey, M.D.
                                            Director


Dated:   March 29, 2002                     /s/ H.E. Thranhardt
                                            ------------------------------------
                                            H.E. Thranhardt, CPO
                                            Director


                                       48



                          INDEX TO FINANCIAL STATEMENTS

Hanger Orthopedic Group, Inc.

Report of Independent Accountants                                            F-1

Consolidated balance sheets as of December 31, 2000
 and 2001                                                                    F-2

Consolidated statements of operations for the years
  ended December 31, 1999, 2000 and 2001                                     F-4

Consolidated statements of changes in shareholders'
  equity for the years ended December 31, 1999,
  2000 and 2001                                                              F-5

Consolidated statements of cash flows for the years
  ended December 31, 1999, 2000 and 2001                                     F-6

Notes to Consolidated Financial Statements                                   F-7

Financial Statement Schedule

Schedule II - Valuation and Qualifying Accounts                              S-1


                                       49

                        REPORT OF INDEPENDENT ACCOUNTANTS





To the Board of Directors and
Shareholders of Hanger Orthopedic Group, Inc.:


In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 40 present fairly, in all material
respects, the financial position of Hanger Orthopedic Group, Inc. and its
subsidiaries at December 31, 2000 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001, in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 14(a)(2) on page 40 presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.




PRICEWATERHOUSECOOPERS LLP



McLean, Virginia
March 12, 2002


                                      F-1


                          HANGER ORTHOPEDIC GROUP, INC.
                           CONSOLIDATED BALANCE SHEETS

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

                                                                                     December 31,
                                                                        ---------------------------------------
                                                                               2000                2001
                                                                        -------------------  ------------------
                                ASSETS

CURRENT ASSETS
                                                                                                
     Cash and cash equivalents                                                    $ 20,669            $ 10,043
     Accounts receivable, less allowances for doubtful accounts
         of $23,005 and $17,625 in 2000 and 2001, respectively                     111,210             104,040
     Inventories                                                                    61,223              55,946
     Prepaid expenses and other assets                                               4,262               3,868
     Income taxes receivable                                                         6,325               1,033
     Deferred income taxes                                                          20,038              20,957
                                                                        -------------------  ------------------
         Total current assets                                                      223,727             195,887
                                                                        -------------------  ------------------

PROPERTY, PLANT AND EQUIPMENT
     Land                                                                            4,177               4,078
     Buildings                                                                       8,876               8,629
     Machinery and equipment                                                        31,393              28,675
     Furniture and fixtures                                                          9,968               9,967
     Leasehold improvements                                                         16,925              18,027
                                                                        -------------------  ------------------
                                                                                    71,339              69,376
     Less accumulated depreciation and amortization                                 24,345              31,598
                                                                        -------------------  ------------------
                                                                                    46,994              37,778
                                                                        -------------------  ------------------

INTANGIBLE ASSETS
     Excess cost over net assets acquired                                          490,724             477,601
     Non-compete agreements                                                          1,426                 899
     Patents                                                                         9,924               8,100
     Assembled work force                                                            7,000               7,000
     Other intangible assets                                                         1,165               1,125
                                                                        -------------------  ------------------
                                                                                   510,239             494,725
     Less accumulated amortization                                                  33,037              42,345
                                                                        -------------------  ------------------
                                                                                   477,202             452,380
                                                                        -------------------  ------------------

OTHER ASSETS
     Debt issuance costs, net                                                       12,421              10,846
     Other assets                                                                    1,474               3,016
                                                                        -------------------  ------------------
         Total other assets                                                         13,895              13,862
                                                                        -------------------  ------------------

TOTAL ASSETS                                                                     $ 761,818           $ 699,907
                                                                        ===================  ==================


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

                                      F-2




                                         HANGER ORTHOPEDIC GROUP, INC.
                                          CONSOLIDATED BALANCE SHEETS
                           (Dollars in thousands, except share and per share amounts)

                                                                                       December 31,
                                                                            ------------------------------------
                                                                                  2000                 2001
                                                                            ---------------      ---------------
                  LIABILITIES, REDEEMABLE PREFERRED STOCK
                           SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
                                                                                                 
     Current portion of long-term debt                                            $ 37,595             $ 30,512
     Accounts payable                                                               17,809               16,901
     Accrued expenses                                                                9,689                8,196
     Accrued interest payable                                                        7,559                2,017
     Accrued compensation related cost                                              17,385               29,045
                                                                            ---------------      ---------------
        Total current liabilities                                                   90,037               86,671

Long-term debt, less current portion                                               422,838              367,315
Deferred income taxes                                                               26,026               26,495
Other liabilities                                                                    2,656                3,013
                                                                            ---------------      ---------------
        Total liabilities                                                          541,557              483,494
                                                                            ---------------      ---------------

7% Redeemable Convertible Preferred stock, liquidation preference
        $1,000 per share                                                            65,881               70,739
                                                                            ---------------      ---------------

Commitments and contingent liabilities (See Notes K and L)

SHAREHOLDERS' EQUITY
     Common stock, $.01 par value; 60,000,000 shares authorized,
        18,910,002 shares and 19,057,876 shares issued and
        outstanding in 2000 and 2001, respectively                                     190                  191
     Additional paid-in capital                                                    146,498              146,674
     Retained earnings (accumulated deficit)                                         8,348                 (535)
                                                                            ---------------      ---------------
                                                                                   155,036              146,330
     Treasury stock, cost -- (133,495 shares)                                         (656)                (656)
                                                                            ---------------      ---------------
                                                                                   154,380              145,674
                                                                            ---------------      ---------------

TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK
    AND SHAREHOLDERS' EQUITY                                                     $ 761,818             $699,907
                                                                            ===============      ===============


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

                                      F-3



                                     HANGER ORTHOPEDIC GROUP, INC.
                                 CONSOLIDATED STATEMENTS OF OPERATIONS
                                    For the Years Ended December 31,
                       (Dollars in thousands, except share and per share amounts)

                                                                         1999              2000                2001
                                                                   ---------------     --------------     ---------------
                                                                                                      
Net sales                                                               $ 346,826          $ 486,031           $ 508,053
Cost of goods sold                                                        169,076            251,368             240,868
                                                                   ---------------     --------------     ---------------
Gross profit                                                              177,750            234,663             267,185

Selling, general and administrative                                       113,995            177,392             182,972
Depreciation and amortization                                               6,538             11,178              12,488
Amortization of excess cost over net assets acquired                        7,520             12,150              12,198
Unusual charges                                                             6,340              2,364              24,438
                                                                   ---------------     --------------     ---------------
Income from operations                                                     43,357             31,579              35,089

Interest expense, net                                                     (22,177)           (47,072)            (43,065)
                                                                   ---------------     --------------     ---------------
Income (loss) before taxes                                                 21,180            (15,493)             (7,976)

Provision (benefit) for income taxes                                       10,194             (1,497)                907
                                                                   ---------------     --------------     ---------------
Net income (loss)                                                        $ 10,986          $ (13,996)           $ (8,883)
                                                                   ===============     ==============     ===============
Net income (loss) applicable to common stock                              $ 8,831          $ (18,534)          $ (13,741)
                                                                   ===============     ==============     ===============

Basic Per Common Share Data
Net income (loss) applicable to common stock                               $ 0.47            $ (0.98)            $ (0.73)
                                                                   ===============     ==============     ===============

Shares used to compute basic per common share amounts                  18,854,751         18,910,002          18,920,094
                                                                   ===============     ==============     ===============

Diluted Per Common Share Data
Net income (loss) applicable to common stock                               $ 0.44            $ (0.98)            $ (0.73)
                                                                   ===============     ==============     ===============

Shares used to compute diluted per common share amounts                20,005,282         18,910,002          18,920,094
                                                                   ===============     ==============     ===============


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

                                      F-4



                                         HANGER ORTHOPEDIC GROUP, INC
                          CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                             For the Years Ended December 31, 1999, 2000 and 2001
                                                (In thousands)

                                                                     Retained
                                                       Additional    Earnings
                                Common      Common      Paid in     (Accumulated   Treasury
                                Shares       Stock      Capital       Deficit)       Stock         Total
                               --------   ---------    ----------    ---------     ----------    ---------
                                                                               
Balance, December 31,
  1998                          18,692    $     188    $ 144,970     $  18,051     $    (656)    $ 162,553
Preferred dividends
  declared                        --           --           --          (2,118)         --          (2,118)
Accretion of Preferred
  Stock                           --           --           --             (37)         --             (37)
Net Income                        --           --           --          10,986          --          10,986
Issuance of Common
  Stock in connection
  with the exercise
  of stock options                 184            2          861          --            --             863
Issuance of Common Stock
  in connection with
  acquisitions                      23         --            500          --            --             500
Conversion of Seller
  Notes into shares of
  Common Stock                      11         --            167          --            --             167
                             ---------    ---------    ---------     ---------     ---------     ---------
Balance, December 31,
  1999                          18,910          190      146,498        26,882          (656)      172,914
                             ---------    ---------    ---------     ---------     ---------     ---------
Preferred dividends
  declared                        --           --           --          (4,464)         --          (4,464)
Accretion of Preferred
  Stock                           --           --           --             (74)         --             (74)
Net Loss                          --           --           --         (13,996)         --         (13,996)
                             ---------    ---------    ---------     ---------     ---------     ---------
Balance, December 31,
  2000                          18,910          190      146,498         8,348          (656)      154,380
                             ---------    ---------    ---------     ---------     ---------     ---------
Preferred dividends
  declared                        --           --         (4,784)         --            --          (4,784)
Accretion of Preferred
  Stock                           --           --            (74)         --            --             (74)
Net Loss                          --           --           --          (8,883)         --          (8,883)
Issuance of Common Stock
  in connection with the
  exercise of stock
  options                           77         --            250          --            --             250
Issuance of stock options
  in connection with
  Performance Improvement
  Plan                            --           --          4,785          --            --           4,785
Issuance of Common Stock
  in connection with the
  exercise of warrants              71            1           (1)         --            --            --
                             ---------    ---------    ---------     ---------     ---------     ---------
Balance, December 31,
  2001                          19,058    $     191    $ 146,674     $    (535)    $    (656)    $ 145,674
                             =========    =========    =========     =========     =========     =========


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

                                      F-5



                                 HANGER ORTHOPEDIC GROUP, INC.
                             CONSOLIDATED STATEMENTS OF CASH FLOWS
                                For the Years Ended December 31,
                                    (Dollars in thousands)
                                                                                 1999               2000              2001
                                                                             --------------    ---------------   ---------------
                                                                                                              
Cash flows from operating activities:
     Net income (loss)                                                            $ 10,986          $ (13,996)         $ (8,883)
Adjustments to reconcile net income (loss) to net
     cash provided by (used in)
     operating activities:
     Loss on disposal of assets                                                         37                  -             7,997
     Provision for bad debts                                                        15,046             23,740            21,961
     Depreciation and amortization                                                   6,538             11,178            12,488
     Amortization of excess cost over net assets acquired                            7,520             12,150            12,198
     Amortization of debt discount and debt issue costs                              1,059              2,436             2,747
     Deferred income taxes (benefit)                                                   662             (3,200)             (328)
     Restructuring costs                                                             1,305                654             3,688
     Stock-based compensation in connection with performance
       improvement plan                                                                  -                  -             4,785
     Changes in assets and liabilities, net of effects from
       acquired companies:
        Accounts receivable                                                        (19,367)           (31,089)          (15,851)
        Inventories                                                                (10,372)            (1,113)            2,043
        Prepaid, other assets, and income taxes receivable                          (2,493)               259             6,543
        Other assets                                                                 1,156                273               417
        Accounts payable                                                             2,896                982              (462)
        Accrued expenses and interest                                               (4,638)             5,103           (10,333)
        Accrued compensation related costs                                          (6,127)            (1,287)           11,798
        Other liabilities                                                           (4,432)            (2,483)              358
                                                                             --------------    ---------------   ---------------
Net cash provided by (used in) operating activities                                   (224)             3,607            51,166
                                                                             --------------    ---------------   ---------------

Cash flows from investing activities:
     Purchase of fixed assets                                                      (12,598)            (9,845)           (6,697)
     Acquisitions, net of cash acquired                                           (432,291)            (9,958)           (8,277)
     Cash received pursuant to purchase price adjustment                                 -             24,700                 -
     Proceeds from sale of certain assets, net of cash                                 397                  -            16,079
     Purchase of other intangible assets                                              (503)              (273)                -
                                                                             --------------    ---------------   ---------------
Net cash provided by (used in) investing activities                               (444,995)             4,624             1,105
                                                                             --------------    ---------------   ---------------
Cash flows from financing activities:
     Net borrowings (repayments) under revolving
       credit agreement                                                             55,000             29,700            (9,900)
     Repayment of term loans                                                             -             (8,250)          (38,163)
     Proceeds from long-term debt                                                  350,000                  -                 -
     Repayment of long-term debt                                                    (9,089)           (13,521)          (13,912)
     Increase in financing costs                                                   (14,691)            (1,226)           (1,172)
     Proceeds from issuance of Preferred Stock, net                                 59,188                  -                 -
     Proceeds from issuance of Common Stock                                            863                  -               250
                                                                             --------------    ---------------   ---------------
Net cash provided by (used in) financing activities                                441,271              6,703           (62,897)
                                                                             --------------    ---------------   ---------------
Increase (decrease) in cash and cash equivalents                                    (3,948)            14,934           (10,626)
Cash and cash equivalents at beginning of year                                       9,683              5,735            20,669
                                                                             --------------    ---------------   ---------------
Cash and cash equivalents at end of year                                           $ 5,735           $ 20,669          $ 10,043
                                                                             ==============    ===============   ===============


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

                                      F-6


                          HANGER ORTHOPEDIC GROUP, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - THE COMPANY

       Hanger Orthopedic Group, Inc. is the nation's largest owner and operator
of orthotic & prosthetic ("O&P") patient care centers. In addition to providing
O&P patient-care services through its operating subsidiaries, the Company also
distributes components and finished patient-care products to the O&P industry
primarily in the United States. Hanger's subsidiary, Hanger Prosthetics &
Orthotics, Inc. formerly known as J.E. Hanger, Inc., was founded in 1861 by a
Civil War amputee and is the oldest company in the O&P industry in the United
States. Orthotics is the design, fabrication, fitting and supervised use of
custom-made braces and other devices that provide external support to treat
musculoskeletal disorders. Prosthetics is the design, fabrication and fitting of
custom-made artificial limbs.

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.

       Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the 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 FDIC limits.

       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 its senior
subordinated notes, approximates fair value based on using rates currently
available to the Company for debt with similar terms and remaining maturities.
The fair value of the senior subordinated notes, as of December 31, 2001, was
$139.5, as compared the carrying value of $150.0 million at that date. The fair
value of the senior subordinated notes was based on quoted market prices at
December 31, 2001.


                                      F-7


NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

       Inventories: Inventories, which consist principally of purchased parts
and work in process, are stated at the lower of cost or market using the
first-in, first-out (FIFO) method. The Company calculates cost of goods sold in
accordance with the gross profit method. The Company bases the estimates used in
applying the gross profit method on the actual results of the most recently
completed fiscal year and other factors affecting cost of goods sold during the
current reporting periods. Estimated cost of goods sold during the period is
adjusted when the annual physical inventory is taken. In the fourth quarter of
2000 and 2001, the Company recorded a book-to-physical adjustment loss of $9.6
million and income of $4.2 million, respectively. The Company treated this
adjustment as a change in accounting estimate in accordance with the provisions
of Accounting Principles Board Opinion No. 20.

       Long-Lived Asset Impairment: The Company reviews its long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable through future cash flows
such as: a significant decrease in the market value of the Company's assets; or
a significant adverse change in legal factors or in the business climate that
could affect the value of an asset or an adverse action or assessment by a
regulator; or a significant adverse change in third-party reimbursement
requirements. If it is determined that an impairment loss has occurred based on
expected cash flows undiscounted, before interest and taxes, then the extent of
the impairment is calculated, based on discounted cash flows and the loss is
recognized in the statement of operations.

       Property, Plant and Equipment: Property, plant and equipment are recorded
at cost. The cost and related accumulated depreciation of assets sold, retired
or otherwise disposed of are removed from the respective accounts, and any
resulting gains or losses are included in the statement of operations.
Depreciation is computed for financial reporting purposes using the
straight-line method over the estimated useful lives of the related assets as
follows: machinery and equipment and furniture and fixtures - 5 years; leasehold
improvements - shorter of the asset life or term of lease; and buildings - 10-20
years. Depreciation expense was approximately $5.3 million, $9.0 million and
$10.4 million for the years ended December 31, 1999, 2000 and 2001,
respectively.

       Intangible Assets: Excess cost over net assets acquired represents the
excess of purchase price over the value assigned to net identifiable assets of
purchased businesses and is amortized using the straight-line method over 40
years. Non-compete agreements are recorded based on agreements entered into by
the Company and are amortized over their estimated useful lives ranging from 5
to 7 years using the straight-line method. Remainder of the intangible assets
are recorded at cost and are amortized over their estimated useful lives of up
to 16 years using the straight-line method. See also New Accounting Standards
below for expected changes in amortization of intangibles.

       Debt Issue Costs: Debt issue costs incurred in connection with the
Company's long-term debt are being amortized through the maturity of the related
debt instrument. Amortization of these costs are included in interest expense in
the consolidated statement of operations.


                                      F-8

NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

       Revenue Recognition: Revenues on the sale of orthotic and prosthetic
devices and associated services to patients are recorded when the device is
accepted by the patient. Revenues on the sale of orthotic and prosthetic devices
to customers by our distribution segment are recorded upon the shipment of
products, in accordance with the terms of the invoice. Deferred revenue
represents deposits made prior to the final fitting and acceptance by the
patient and unearned service contract revenue. Revenue is recorded at its net
realizable value taking into consideration all governmental and contractual
adjustments and discounts.

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

       Income Taxes: Income taxes are determined in accordance with Statement of
Financial Accounting Standards ("SFAS") 109, which requires recognition of
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. Under this method, deferred income tax liabilities and assets are
determined based on the difference between financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse. SFAS 109 also provides for the
recognition of deferred tax assets if it is more likely than not that the assets
will be realized in future years.

       Stock-Based Compensation: Compensation costs attributable to stock option
and similar plans are recognized based on any difference between the quoted
market price of the stock on the date of the grant over the amount the employee
is required to pay to acquire the stock (the intrinsic value method under
Accounting Principles Board Opinion 25). SFAS 123, "Accounting for Stock-Based
Compensation," requires companies electing to continue to use the intrinsic
value method to make pro forma disclosures of net income and earnings per share
as if the fair value based method of accounting had been applied. The Company
has adopted the disclosure only provisions of SFAS 123.

       Segment Information: SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" 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 source of the Company's reportable segments.
SFAS 131 also requires disclosure about products and services, geographic areas
and major customers. The description of the Company's reportable segments and
the disclosure of segment information pursuant to SFAS 131 are presented in Note
P.

       Reclassifications: Certain amounts in the prior years financial
statements have been reclassified to conform to the current year presentation.


                                      F-9


NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

       New Accounting Standards: On June 29, 2001, the FASB unanimously approved
its proposed Statements of Financial Accounting Standards No. 141 (SFAS 141),
Business Combinations, and No. 142 (SFAS 142), Goodwill and Other Intangible
Assets.

       SFAS 141 supercedes Accounting Principles Board (APB) Opinion No. 16,
Business Combinations. The most significant changes made by SFAS 141 are: (1)
requiring that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, (2) establishing specific criteria
for the recognition of intangible assets separately from goodwill, and (3)
requiring unallocated negative goodwill to be written of immediately as an
extraordinary gain rather than being deferred and amortized. The Company did not
have a material impact from the adoption of SFAS 141 on its financial statements
as no acquisitions were made subsequent to June 30, 2001.

       SFAS 142 supercedes APB 17, Intangible Assets. SFAS 142 primarily
addresses accounting for goodwill and intangible assets subsequent to their
acquisition (i.e., the post-acquisition accounting). The provisions of SFAS 142
will be effective for fiscal years beginning after December 15, 2001. SFAS 142
must be adopted at the beginning of a fiscal year. The most significant changes
made by SFAS 142 are: (1) goodwill and indefinite lived intangible assets will
no longer be amortized, (2) goodwill will be tested for impairment at least
annually at the reporting unit level, (3) intangible assets deemed to have an
indefinite life will be tested for impairment at least annually, and (4) the
amortization period of intangible assets with finite lives will no longer be
limited to forty years.

       The Company adopted SFAS 142 effective January 1, 2002. Due to the
application of the nonamortization provisions of SFAS 142, annual amortization
in the amount of $12.8 million will no longer be recorded. In addition, the
Company will reclassify an assembled workforce intangible asset with an
unamortized balance of $4.8 million (along with a deferred tax liability of $2.0
million) to goodwill at the date of adoption.

       The Company will test goodwill for impairment using a two-step process
prescribed in SFAS 142. The first step is to identify or screen for potential
impairment, while the second step is to measure the amount of the impairment, if
any. The Company expects to perform the first of the required impairment tests
of goodwill and indefinite lived intangible assets as of January 1, 2002 in the
first quarter of 2002. Any impairment charge resulting from these transitional
impairment tests will be reflected as the cumulative effect of a change in
accounting principle in the first quarter of 2002. The Company is in the process
of making the determinations as to what its reporting units are and what amounts
of goodwill, intangible assets, other assets, and liabilities should be
allocated to those reporting units. The Company has not yet determined what the
effect of these tests, if any, will be on the earnings and financial position of
the Company.


                                      F-10


NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

       In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 provides guidance on
the accounting for the impairment or disposal of long-lived assets, and applies
to all long-lived assets (including discontinued operations) and consequently
amends APB Opinion No. 30, "Reporting Results of Operations - Reporting the
Effects of Disposal of Segment of a Business." SFAS No. 144 develops one
accounting model (based on the model in SFAS No. 121) for long-lived assts that
are to be disposed of by sale, as well as addresses the principal implementation
issues. SFAS No. 144 requires that long-lived assets that are to be disposed of
by sale be measured at the lower of book value or fair value less cost to sell.
The Company does not expect SFAS No. 144 to have a material effect on its
financial statements.


NOTE C - SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION

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



                                                                    1999         2000        2001
                                                                    ----         ----        ----
                                                                            (in thousands)
Cash paid during the period for:
                                                                                   
Interest                                                         $ 18,261     $  42,645     $ 47,382
Income taxes                                                     $ 12,400     $   2,666     $  1,822

Non-cash financing and investing activities:
Preferred stock dividends declared and accretion                 $   2,155    $   4,538     $  4,858
Issuance of notes in connection with acquisitions                $   3,006    $   2,874     $      -
Issuance of Common Stock in connection with acquisitions         $     500    $       -     $      -
Conversion of seller notes into shares of Common Stock           $     167    $       -     $      -


NOTE D - ACQUISITIONS

       On July 1, 1999, the Company completed the acquisition of NovaCare O&P,
which has been accounted for as a business combination in accordance with the
purchase method. The results of operations for this acquisition have been
included in the Company's results since July 1, 1999. Hanger required
approximately $430.2 million in cash to close the acquisition of NovaCare O&P,
to pay approximately $20.0 million of related fees and expenses, including debt
issue costs of approximately $16.0 million, and to refinance existing debt of
approximately $2.5 million. The funds were raised by Hanger through (i)
borrowing approximately $230.0 million of revolving credit and term loans under
a new bank facility; (ii) selling $150.0 million principal amount of 11.25%
Senior Subordinated Notes due 2009; and (iii) selling $60.0 million of 7%
Redeemable Preferred Stock. The bank credit facility consisted of a $100.0
million revolving credit facility, of which $30.0 was drawn on in connection
with the acquisition of NovaCare O&P, a Tranche A term facility and a Tranche B
term facility.


                                      F-11


NOTE D - ACQUISITIONS (CONTINUED)

       Following the acquisition of NovaCare O&P in 1999, the Company and
NovaCare disagreed regarding the determination of the amount of NovaCare O&P
adjusted working capital. On February 25, 2000, the Company and NovaCare
submitted the matter to the independent arbitrator in accordance with the
dispute resolution arbitration mechanism provided under the Stock Purchase
Agreement. On May 22, 2000, an independent arbitrator issued its report
concluding that the Company was entitled to the working capital deficiency of
approximately $25.1 million, representing the required decrease in the purchase
price previously paid by the Company for NovaCare O&P. On May 25, 2000, the
escrow agent released $15.0 million of escrowed funds to the Company. Pursuant
to the Stock Purchase Agreement, the Company was entitled to receive the
approximately $10.1 million balance of the working capital deficiency on or
before June 21, 2000.

       On June 5, 2000, NovaCare (the name of which was changed to NAHC, Inc.)
filed a Complaint contesting the arbitrator's decision. On June 30, 2000, the
Company entered into a Settlement Agreement with NovaCare providing for
dismissal of the litigation and execution of a mutual release relating to
currently unknown matters arising from the acquisition. In addition, the
Settlement Agreement provided that of the $10.1 owed by NovaCare to the Company,
$6.0 million would be paid immediately by NovaCare and NovaCare would execute a
collateralized promissory note in the principal amount of $3.7 million, plus 7%
annual interest, payable monthly over the following six months. All payments
required by the settlement were paid when due.

       During 1999, the Company acquired five other orthotic and prosthetic
companies. The aggregate purchase price, excluding potential earn-out
provisions, was $12.1 million, comprised of $8.6 million, in cash, $2.9 million
in promissory notes and 23,000 shares of Common Stock of the Company valued at
$0.5 million. The notes are payable over five years with interest rates ranging
from 6% to 8%. The cash portion of the purchase price for these acquisitions was
borrowed under the Company's revolving credit facility.

       During 2000, the Company acquired five orthotic and prosthetic companies.
The aggregate purchase price, excluding potential earn-out provisions, was $4.5
million, comprised of $2.4 million in cash and $2.1 million in promissory notes.
The notes are payable over two to five years with interest rates ranging from 6%
to 8%. The cash portion of the purchase price for these acquisitions was
borrowed under the Company's revolving credit facility.

       The Company did not acquire any companies during 2001.

       All of the above acquisitions have been accounted for as business
combinations in accordance with the purchase method. The results of operations
for these acquisitions are included in the Company's results of operations from
their date of acquisition.


                                      F-12


NOTE D - ACQUISITIONS (CONTINUED)

       In connection with the acquisition of NovaCare, the Company assumed
responsibility for payments of earnouts and working capital provisions related
to acquisitions made prior to July 1, 1999. In connection with these agreements
and the Company's acquisitions prior to 2001, the Company paid $10.0 million,
$8.4 million and $8.3 million in 1999, 2000, and 2001, respectively. The Company
has accounted for these amounts as additional purchase price, resulting in an
increase in goodwill. The Company estimates that it may pay an additional $5.2
million related to earnout provisions in future periods.

NOTE E - UNUSUAL CHARGES

Summary

       Unusual charges for the years ended December 31, 1999, 2000, and 2001
consist of the following costs, which are explained below:

                                              1999        2000         2001
                                              ----        ----         ----
                                                    (in thousands)

Integration costs                          $    5,035   $    1,710   $        -
Restructuring and asset impairment costs        1,305          654        3,688
Performance improvement costs                       -            -        7,892
Stock based compensation in connection
  with performance improvement plan                 -            -        4,785
Impairment loss on assets held for sale             -            -        8,073
                                          --------------------------------------
Unusual charges                            $    6,340   $    2,364   $   24,438
                                          ======================================

Integration Costs

       During the year ended December 31, 1999, in relation to the acquisition
of NovaCare O&P, the Company recorded integration costs of approximately $5.0
million, including costs of changing patient care center names, payroll and
related benefits, conversion, stay-bonuses and related benefits for transitional
employees and certain other costs related to the acquisition. These costs were
expensed as incurred and recorded against operations. Additionally, during the
year ended December 31, 2000, the Company recorded approximately $1.7 million in
integration expenses.


                                      F-13


NOTE E - UNUSUAL CHARGES (CONTINUED)

Restructuring and Asset Impairment Costs

       Components of the restructuring reserves, spending during the periods,
and remaining reserve balances are as follows:



                                                                     Lease
                                                      Employee     Termination        Total
                                                     Severance      and other     Restructuring
                                                       Costs        Exit Costs       Reserve
- ------------------------------------------------------------------------------------------------
                                                                 (in thousands)
                                                                            
1999 & 2000 Restructuring Reserve
Balance at December 31, 1998                            $  --         $  --          $  --
Provision for existing Hanger Business                      223         1,082          1,305
Provision for existing NovaCare O&P Business              3,145         2,570          5,715
Spending                                                 (1,768)         (660)        (2,428)
                                                        -------       -------        -------
Balance at December 31, 1999                              1,600         2,992          4,592
Provision                                                 1,035          --            1,035
Spending                                                 (1,942)         (913)        (2,855)
Amendment to Plan                                          --            (672)          (672)
                                                        -------       -------        -------
Balance at December 31, 2000                                693         1,407          2,100
Spending                                                   (693)         (307)        (1,000)
Amendment - favorable buyout and sublease activity         --            (771)          (771)
                                                        -------       -------        -------
Balance at December 31, 2001                               --             329            329
                                                        -------       -------        -------

2001 Restructuring Reserve
Balance at December 31, 2000                               --            --             --
Provision                                                 1,208         3,251  *       4,459
Spending                                                 (1,158)       (1,365)        (2,523)
Favorable buyout and sublease activity                     --            (739)          (739)
Amendment to plan for seven additional properties          --             739            739
                                                        -------       -------        -------
Balance at December 31, 2001                                 50         1,886          1,936
                                                        -------       -------        -------

1999, 2000, and 2001 Restructuring Reserves
                                                        -------       -------        -------
Balance at December 31, 2001                            $    50       $ 2,215        $ 2,265
                                                        =======       =======        =======

*      Includes $0.5 million of asset impairment for impaired leasehold
       improvements at branches to be vacated.


       During 1999, the Company accrued approximately $1.3 million for the costs
associated with the restructuring of the existing Hanger operations in
conjunction with the NovaCare O&P acquisition and the Company has recorded such
charges in the statement of operations as an unusual charge. The Company also
recorded approximately $5.7 million in restructuring liabilities for the costs
associated with the restructuring of the NovaCare O&P operations and allocated
such costs to the purchase price of NovaCare O&P in accordance with purchase
accounting requirements, resulting in an increase to goodwill with no immediate
impact to the statement of operations.

                                      F-14


NOTE E - UNUSUAL CHARGES (CONTINUED)

Restructuring and Asset Impairment Costs (Continued)

       The 1999 restructuring costs primarily included severance pay benefits
and lease termination costs. The cost of providing severance pay and benefits
for the reduction of approximately 225 employees was estimated at approximately
$3.4 million. Lease termination costs, for patient care centers closed, were
estimated at $3.5 million, are cash expenses and are expected to be paid through
2003. During 1999, 54 patient care centers were identified for closure. As of
December 31, 2000, all of the reduction in force had been completed. Management
decided to amend the original restructuring plan which called for the closure of
54 patient care centers. As of December 31, 2000, 44 of the patient care centers
were closed and management reversed approximately $0.7 million of the
restructuring reserve providing an approximate restructuring benefit during the
fourth quarter 2000 of $0.4 million and a reduction of goodwill of approximately
$0.3 million.

       During the fourth quarter of 2000, management implemented a plan to sever
234 employees in an effort to reduce general and administrative expenses. The
Company recorded approximately $1.0 million in restructuring expense (this
amount is offset by approximately $0.4 million restructuring benefit described
above). Those expenses were paid in January of 2001, thus completing the plan of
restructuring.

       During 2001, management amended the lease restructuring component of the
2000 plan. The amendment of $0.8 million occurred in the second quarter of 2001
and resulted from favorable lease buyouts and sublease activity.

       In connection with the implementation of the Jay Alix & Associates
("JA&A") initiatives, the Company recorded in the second quarter of 2001
approximately $3.7 million in restructuring and asset impairment costs ($4.5
million expense for the 2001 restructuring reserve offset by the above mentioned
$0.8 million benefit). The plan called for the closure of 37 facilities and the
termination of approximately 135 additional employees. In the fourth quarter of
2001, the lease restructuring component of the plan was amended as seven
additional properties, which were originally contemplated but not finalized,
were added to the list of restructured facilities. An amended restructuring
reserve of $0.7 million was recorded for these properties. Favorable buyouts and
sublease activity related to the original 37 facilities resulted in a favorable
reversal of the restructuring reserve of $0.7 million. As of December 2001, all
properties except for the seven in the amendment had been vacated and 133 of the
employees had been terminated. All payments under the severance initiative are
expected to be made during the first quarter of 2002. All properties in the
lease initiative are expected to be vacated by the end of the second quarter of
2002. All payments under the plan for lease and severance costs are expected to
be paid by December 31, 2004.


                                      F-15


NOTE E - UNUSUAL CHARGES (CONTINUED)

Performance Improvement Costs

       In December of 2000, management and the Board of Directors determined
that major performance improvement initiatives needed to be adopted. As such, on
December 11, 2000, the Company retained the services of JA&A to assist in
identifying areas for cash generation and profit improvement. Subsequent to the
completion of this diagnostic phase, the Company modified and extended the
retention agreement on January 23, 2001 to include the implementation of
certain, aforementioned restructuring activities. Among the targeted plans were
spending reductions, improvements in the utilization and effectiveness of
support services, including claims processing, the refinement of materials
purchasing and inventory management and the consolidation of distribution
services. In addition, the Company planned to enhance revenues and cash
collections through improved marketing efforts and more efficient billing
procedures.

       The terms of the engagement provided for payment of JA&A's normal hourly
fees plus a success fee if certain defined benefits were achieved. Management
elected, at the time the agreement was signed, to pay one-half of any earned
success fee in cash, with the remaining one-half of the success fee to be paid
through a grant of options to purchase the Company's common stock. All the
options were to be granted with an exercise price of $1.40 per share, which was
the average closing price of the Company's common stock for all trading days
during the period from December 23, 2000 through January 23, 2001. The number of
options was to be determined by multiplying the non-cash half of each success
fee invoice of JA&A by 1.5 and dividing the product by $1.40. The options were
to be granted within 30 days of each invoice, were to be exercisable beginning
with the sixth month following each award and were to expire five years from the
termination of JA&A's engagement.

       JA&A's work was substantially complete on December 31, 2001. As of
December 31, 2001, the total hourly cash fees and expenses paid to JA&A were
$4.6 million. During the fourth quarter of 2001, JA&A invoiced the Company for
the success fees upon the accomplishment of benefits defined in the engagement
letter. The Company paid half of the success fee in cash totaling $1.1 million
and the remaining half with approximately options for 1.2 million shares, as
determined above, with an estimated fair value of $4.8 million. The fair value
of these options was estimated at the date of grant using a Black-Scholes option
pricing model.

Impairment Loss on Assets Held for Sale

       On October 9, 2001, the Company completed the sale of substantially all
of the manufacturing assets of Seattle Orthopedic Group, Inc., ("SOGI") to
United States Manufacturing Company ("USMC"). The purchase price was $20.0
million, of which $3.0 million was placed in an escrow account for a period of
up to three years. During the escrow period, the escrowed funds will be released
to the Company in amounts and at times that will be determined on the basis of
the amounts of purchases made by Hanger from USMC under the terms of a separate
supply agreement entered into among the parties (see Note K). The Company
incurred an impairment loss of ($8.1) million on the disposal of SOGI's
manufacturing assets, which has been reflected in the Company's statement of
operations.


                                      F-16


NOTE E - UNUSUAL CHARGES (CONTINUED)

Impairment Loss on Assets Held for Sale (Continued)

       For the year ended December 31, 2001, the results of operations of SOGI's
manufacturing activities, including intercompany transactions during that same
period were:


                                                             (in thousands)
Net sales                                                     $       8,633
Cost of products and services sold                                    5,891
                                                             --------------
Gross profit                                                          2,742
Selling, general and administrative                                   2,989
Depreciation and amortization                                           918
Amortization of excess cost over net assets acquired                    412
Unusual charges                                                          91
                                                             --------------
Loss from operations                                          $      (1,668)
                                                             ==============


Reconciliation of Loss from SOGI Transaction                 (in thousands)
Accounts receivable                                           $       1,060
Inventory                                                             3,234
Net fixed assets                                                      4,611
Net intangibles                                                      18,584
Other                                                                    61
Liabilities assumed                                                  (1,399)
                                                             --------------
Net book value                                                       26,151
Net proceeds from assets held for sale                               18,078
                                                             --------------
Loss on sale of assets                                        $       8,073
                                                             ==============

NOTE F - 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, stock warrants, redeemable
convertible preferred stock and convertible notes payable and are calculated
using the treasury stock method.


                                      F-17

NOTE F - NET INCOME PER COMMON SHARE (CONTINUED)

         Earnings per share are computed as follows:


                                                                            1999              2000               2001
                                                                            ----              ----               ----
                                                                            (in thousands, except share and per share)

                                                                                                    
Net income (loss)                                                      $     10,986       $    (13,996)      $     (8,883)
Less preferred stock dividends declared and accretion                        (2,155)            (4,538)            (4,858)
                                                                       ------------       ------------       ------------
Income (loss) available to common
    stockholders used to compute basic per
    common share amounts                                                      8,831            (18,534)           (13,741)

Add back interest expense on convertible note payable, net of tax                51               --                 --
                                                                       ------------       ------------       ------------
Income (loss) available to common stockholders plus assumed
    conversions to compute diluted per common share amounts            $      8,882       $    (18,534)      $    (13,741)
                                                                       ============       ============       ============

Shares of common stock outstanding used to compute basic per
    per common share amounts                                             18,854,751         18,910,002         18,920,094
Effect of convertible note payable                                           92,573               --                 --
Effect of dilutive options                                                  541,834               --                 --
Effect of dilutive warrants                                                 516,124               --                 --
                                                                       ------------       ------------       ------------
Shares used to compute dilutive per common share amounts (1)             20,005,282         18,910,002         18,920,094
                                                                       ============       ============       ============

Basic income per common share                                          $       0.47       $      (0.98)      $      (0.73)
Diluted income per common share                                        $       0.44       $      (0.98)      $      (0.73)


(1)    Excludes the effect of the conversion of the 7% Redeemable Convertible
       Preferred Stock into Common Stock as it is considered anti-dilutive. For
       2000 and 2001, excludes the effect of all dilutive options and warrants
       as a result of the Company's net loss for the years ended December 31,
       2000 and 2001.


       Options to purchase 3,345,693 and 5,552,217 shares of common stock and
warrants to purchase 830,650 and 360,001 shares of common stock were outstanding
at December 31, 2000 and 2001, respectively, and are not included in the
computation of diluted income per share due to the Company's net loss for the
years ended December 31, 2000 and 2001.

       Options to purchase 665,333 shares of common stock were outstanding at
December 31, 1999, but were not included in the computation of diluted income
per share for 1999 because the options' prices were greater than the average
market price of the common shares.


                                      F-18


NOTE G - INVENTORY

         Inventories at December 31, 2000 and 2001 consist of the following:

                          2000             2001
                     -------------------------------
                              (in thousands)

Raw materials        $       29,482   $       27,224
Work in-process              19,885           19,908
Finished goods               11,856            8,814
                    --------------------------------
                     $       61,223   $       55,946
                    ================================


NOTE H - LONG-TERM DEBT

         Long-term debt consists of the following at December 31, 2000 and 2001:



                                                                     2000           2001
                                                                 -----------------------------
                                                                        (in thousands)

                                                                          
Revolving credit facility                                         $   84,700    $   74,800
A Term Loan Commitment                                                92,500        63,995
B Term Loan Commitment                                                99,250        89,592
Senior subordinated notes                                            150,000       150,000
Subordinated seller notes, non-collateralized net of
   unamortized discount of $0.1 million at December 31,
   2000 and 2001 with  principal and interest payable in
   either monthly, quarterly or annual installments at
   effective interest rates ranging from 6% to 12.287%,
   maturing through December 2011.                                    33,983        19,440
                                                                 -----------------------------
                                                                     460,433       397,827
Less current portion                                                 (37,595)      (30,512)
                                                                 -----------------------------
                                                                  $  422,838     $ 367,315
                                                                 =============================


       As stated in the Amended Credit Facility, the Revolving Credit Facility
carried an interest rate of LIBOR plus 3.50%, or ABR plus 2.50%, and matures on
July 1, 2005. The Tranche A Term Facility carried an interest rate of LIBOR plus
3.50%, or ABR plus 2.50% and matures on July 1, 2005. At December 31, 2001, the
Tranche A Term Facility required quarterly principal payments of $4.6 million.
The Tranche B Term Facility carried an interest rate of LIBOR plus 4.50%, or ABR
plus 3.50% and matures on January 1, 2007. At December 31, 2001, the Tranche B
Term Facility required quarterly principal payments of $0.2 million through July
1, 2005 and of $14.4 million through January 1, 2007.

       These credit facilities were prepaid in full and the agreements were
terminated on February 15, 2002 when the Company issued $200.0 million in new
Senior Notes and closed on a new $75.0 million Revolving Credit Facility, as
discussed below.


                                      F-19


NOTE H - LONG-TERM DEBT (CONTINUED)

       In February 2002, the Company sold $200.0 million principal amount of its
10 3/8% Senior Notes due 2009. The notes mature in February 15, 2009, are senior
indebtedness and are guaranteed by all of Hanger's domestic subsidiaries.
Interest is payable on February 15 and August 15. In addition, in February 2002,
the Company closed on a new $75.0 million Revolving Credit Facility. The new
Revolving Credit Facility carries an interest rate of LIBOR plus 3.50% and
matures on February 15, 2007. Hanger used the $194.0 million net proceeds from
the sale of the senior notes, along with approximately $36.9 million it borrowed
under the new $75.0 million bank revolving credit facility, to retire
approximately $228.4 million of indebtedness, plus related fees and expenses,
outstanding under Hanger's previously existing revolving credit and term loan
facilities. As a result of retiring the previously existing indebtedness, the
Company wrote-off, in February 2002, $4.6 million in unamortized debt issuance
costs that had previously been included in other assets.

       Before February 15, 2005, the Company may redeem up to 35% of the
aggregate principal amount of the Senior Notes at a redemption price of 110.375%
of the principal amount thereof, plus interest, with the proceeds of certain
equity offerings, provided at least 65% of the aggregate principal amount of the
Senior Notes remains outstanding after redemption.

       Beginning February 15, 2006 through the date of maturity, the Company may
redeem all or part of the Senior Notes, at redemption price as a percentage of
the principal amount, plus accrued and unpaid interest, if any. For the
twelve-month period commencing on February 15, 2006 and 2007, the percentage
would be 105.188% and 102.594%, respectively. Commencing on February 15, 2008
through the date of maturity, the percentage would be 100%.

       In March 2002, the Company entered into two fixed-to-floating interest
rate swaps with an aggregate notional amount of $100.0 million. The Company
entered into the swaps in connection with the sale of the above notes and in
order to mitigate its interest rate risk. Under the interest rate swap
agreement, the Company will receive amounts based on a fixed interest rate of 10
3/8% per annum. In return, the Company will pay amounts based on a variable
interest rate based on the six-month LIBOR plus a spread between 492 and 497
basis points. The Company will receive and pay these amounts semiannually
through the maturity date of February 15, 2009. The terms of this agreement are
identical to the Senior Notes.

       The Credit Facility with the Banks is collateralized by substantially all
the assets of the Company, restricts the payment of dividends, and contains
certain affirmative and negative covenants customary in an agreement of this
nature.

       The $150.0 million in Senior Subordinated Notes bears interest at 11.25%,
and matures on June 15, 2009. Interest is payable on June 15 and December 15.
Before June 15, 2002, the Company may choose to buy back up to 33% of the
outstanding notes with money the Company might raise in a public equity
offering, as long as: (i) the Company pays 111.25% of the face amount of the
notes, plus interest; (ii) the Company buys the notes back within 30 days of
completing the public equity offering; and (iii) at least 67% of the sum of the
aggregate principal amount of notes issued under the indenture remain
outstanding immediately after redemption.


                                      F-20


NOTE H - LONG-TERM DEBT (CONTINUED)

       Beginning June 15, 2004 through the date of maturity, the Company may
redeem all or part of the Senior Notes, at redemption price as a percentage of
the principal amount, plus accrued and unpaid interest, if any. For the
twelve-month period commencing on June 15, 2004, 2005, 2006 and 2007, the
percentage would be 105.625%, 104.219%, 102.813% and 101.406%, respectively.
Commencing on June 15, 2008 through the date of maturity, the percentage would
be 100%.

       Maturities of long-term debt at December 31, 2001 are as follows:

                 Retired Facilities      Pro Forma *
               ---------------------------------------
                              (in thousands)

2002                    $ 30,512             $ 11,313
2003                      24,065                4,867
2004                      95,494                1,496
2005                      38,968                  571
2006                      57,825                  230
Thereafter               150,963              379,350
              ----------------------------------------
                       $ 397,827            $ 397,827
              ========================================

   *   Pro forma maturities reflect the effect of the issuance of new
       Senior Notes and new Revolving Credit Facility that closed on
       February 15, 2002

       As of December 31, 2001, the Company had available borrowings of $25.2
million under the Revolving Credit Facility that was retired on February 15,
2002. On February 15, 2002, the Company had available borrowings of $38.1
million under the new Revolving Credit Facility.

NOTE I- INCOME TAXES

       The provisions (benefit) for income taxes for the years ended December
31, 1999, 2000 and 2001 consisted of the following:



                                                            1999             2000              2001
                                                            ----             ----              ----
                                                                (in thousands)
Current:
                                                                                 
Federal                                                $       7,844    $        (194)    $          383
State                                                          1,688            1,897                852
                                                       -------------    -------------     --------------
Total                                                          9,532            1,703              1,235
Deferred:
Federal and State                                                662           (3,200)              (328)
                                                       -------------    -------------     --------------
Provision (benefit) for income taxes                   $      10,194    $      (1,497)    $          907
                                                       =============    =============     ==============



                                      F-21


NOTE I- INCOME TAXES (CONTINUED)

       A reconciliation of the federal statutory tax rate to the effective tax
rate for the years ended December 31, 1999, 2000 and 2001 is as follows:



                                                                     1999                  2000                    2001
                                                                     ----                  ----                    ----
                                                                                                          
Federal statutory tax rate (benefit)                                     35.0 %             (35.0) %               (35.0) %
Increase in taxes resulting from:
State income taxes (net of federal effect)                                5.6                 6.8                    8.1
Amortization of the excess cost over net assets acquired                  8.2                16.0                   32.3
Other, net                                                               (0.7)                2.5                    6.0
                                                                  -----------         -----------           ------------
Provision (benefit) for income taxes                                     48.1 %              (9.7) %                11.4 %
                                                                  ===========         ===========           ============


       Temporary differences and carryforwards which give rise to deferred tax
assets and liabilities as of December 31, 2000 and 2001 are as follows:

                                            2000            2001
                                            ----            ----
                                                (in thousands)
Deferred Tax Liabilities:
Book basis in excess of tax                $    903       $    958
Depreciation and amortization                24,685         22,541
Debt issue costs                                640            548
Acquisiton cots                                --            2,448
                                           --------       --------
                                             26,228         26,495
                                           --------       --------
Deferred Tax Assets:
Net operating loss                            1,979          3,678
Accrued expenses                              7,370          8,020
Reserve for bad debts                         9,098          7,519
Other                                          (300)            52
Inventory capitalization and reserves         2,093          1,688
                                           --------       --------
                                             20,240         20,957
                                           --------       --------
Net deferred tax liabilities               $ (5,988)      $ (5,538)
                                           ========       ========

       For Federal tax purposes at December 31, 2001, the Company has available
approximately $9.6 million of net operating loss carryforwards expiring during
2020 and 2021.

                                      F-22


NOTE J - DEFERRED COMPENSATION

       In conjunction with the acquisition of J.E. Hanger, Inc. of Georgia
("JEH") in 1996, the Company assumed the unfunded deferred compensation plan
that had been established for certain key JEH officers. The plan accrues
benefits ratably over the period of active employment from the time the contract
is entered into to the time the participant retires. Participation had been
determined by JEH's Board of Directors. The Company has purchased individual
life insurance contracts with respect to each employee covered by this plan. The
Company is the owner and beneficiary of the insurance contracts. The accrual
related to the deferred compensation arrangements amounted to approximately $2.0
million and $1.1 million at December 31, 2000 and 2001, respectively.

NOTE K - COMMITMENTS AND CONTINGENT LIABILITIES

Commitments

       In October 2001, the Company entered into a Supply Agreement with USMC,
under which it agreed to purchase certain products and components for use solely
by Hanger's patient care centers during a five-year period following the date of
the Agreement. Hanger is obligated to purchase from USMC at least $7.5 million
of products and components during the first year following the date of the
Agreement, $8.5 million of products and components during the second year
following the Agreement, and $9.5 million of products and components during the
third year following the date of the Agreement, subject to certain adjustments.
However, in the event purchases during each of the fourth and fifth years are
less than $8.7 million, the Company shall pay USMC an amount equal to $0.1
million multiplied by the number of $1.0 million units by which actual purchases
during each of the fourth and fifth years are less than $8.7 million.


Contingencies

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

       On November 28, 2000, a class action complaint (Norman Ottmann v. Hanger
Orthopedic Group, Inc., Ivan R. Sabel and Richard A. Stein; Civil Action No.
00CV3508) was filed against the Company in the United States District Court for
the District of Maryland on behalf of all purchasers of our common stock from
November 8, 1999 through and including January 6, 2000. The complaint also names
as defendants Ivan R. Sabel, the Company's Chairman of the Board and Chief
Executive Officer of the Company, and Richard A. Stein, the Company's former
Chief Financial Officer, Secretary and Treasurer.


                                      F-23


NOTE K - COMMITMENTS AND CONTINGENT LIABILITIES

Contingencies (Continued)

       The complaint alleges that during the above period of time, the
defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of
1934 by, among other things, knowingly or recklessly making material
misrepresentations concerning the Company's financial results for the quarter
ended September 30, 1999, and the progress of the Company's efforts to integrate
the recently-acquired operations of NovaCare O&P. The complaint further alleges
that by making those material misrepresentations, the defendants artificially
inflated the price of the Company's common stock. The plaintiff seeks to recover
damages on behalf of all of the class members.

       The Company believes that the allegations have no merit and is vigorously
defending the lawsuit.

NOTE L - OPERATING LEASES

       The Company leases office space under noncancellable operating leases.
Future minimum rental payments, by year and in the aggregate, under operating
leases with terms of one year or more consist of the following at December 31,
2001:

                                          (in thousands)

                    2002                        $ 20,176
                    2003                          16,826
                    2004                          12,928
                    2005                           9,160
                    2006                           5,628
                    Thereafter                     7,828
                                       -----------------
                                                $ 72,546
                                       =================

       Rent expense was approximately $14.8 million, $23.7 million and $23.9
million for the years ended December 31, 1999, 2000 and 2001 respectively.

NOTE M - PENSION AND PROFIT SHARING PLANS

       The Company maintains a 401(k) Savings and Retirement plan to cover all
of the employees of the Company. The Company may make discretionary
contributions. Under this 401(k) plan, employees may defer such amounts of their
compensation up to the levels permitted by the Internal Revenue Service. During
1999, 2000, and 2001, the Company recorded contributions of $0.9 million, $1.4
million, and $1.2 million under this plan, respectively.


                                      F-24


NOTE N - REDEEMABLE PREFERRED STOCK

       The Company has 10.0 million authorized shares of preferred stock, par
value $0.01 per share, which may be issued in various classes with different
characteristics.

       The Company issued $60.0 million of 7% Redeemable Preferred Stock on July
1, 1999 in connection with its acquisition of NovaCare O&P. The 60,000
outstanding shares of 7% Redeemable Preferred Stock are convertible into shares
of our non-voting common stock at a price of $16.50 per share, subject to
adjustment. The Company is entitled to require that the 7% Redeemable Preferred
Stock be converted into non-voting common stock on and after July 2, 2002, if
the average closing price of the common stock for 20 consecutive trading days is
equal to or greater than 175% of the conversion price. The 7% Redeemable
Preferred Stock will be mandatorily redeemable on July 1, 2010 at a redemption
price equal to the liquidation preference plus all accrued and unpaid dividends.
In the event of a change in control of the Company, the Company must offer to
redeem all of the outstanding 7% Redeemable Preferred Stock at a redemption
price equal to 101% of the sum of the per share liquidation preference thereof
plus all accrued and unpaid dividends through the date of payment. The 7%
Redeemable Preferred Stock accrues annual dividends, compounded quarterly, equal
to 7%, is subject to put rights and will not require principal payments prior to
maturity on July 1, 2010. As of December 31, 2001, the shares of 7% Redeemable
Preferred Stock have an aggregate redemption balance of $71.4 million.

NOTE O - WARRANTS AND OPTIONS

Warrants

       Prior to 1999, the Company issued warrants to purchase shares of its
common stock to the holders of certain notes. At December 31, 2000, warrants to
purchase 830,650 shares at prices ranging from $2.44 to $7.65 per share were
outstanding. As of December 31, 2000, the warrants had a weighted average
exercise price of $5.55 and a weighted average remaining contractual life of
3.10 years.

       During 2001, the Company issued 70,575 shares of its common stock in
connection with a cashless exercise of warrants to purchase 225,914 shares. At
December 31, 2001, warrants to purchase 360,001 shares at prices ranging from
$4.01 to $6.38 per share were outstanding and exercisable. The warrants have a
weighted average exercise price of $5.00 and a weighted average remaining
contractual life of 4.84 years.

Options

       Under the Company's 1991 Stock Option Plan ("SOP"), 8.0 million shares of
Common Stock were authorized for issuance under options that may have been
granted to employees. No shares were available for grant at December 31, 2001 as
the SOP expired during 2001. Under the SOP, options were granted at an exercise
price not less than the fair market value of the Common Stock on the date of
grant. Vesting and expiration periods were established by the Compensation
Committee of the Board of Directors, generally vested from three to four years
following grant and generally expired eight to ten years after grant.


                                      F-25


NOTE O - WARRANTS AND OPTIONS (CONTINUED)

Options (Continued)

       Under the Company's 1993 Non-Employee Director Stock Option Plan
("Director Plan"), 250,000 shares of Common Stock are authorized for issuance to
directors of the Company who are not employed by the Company or any affiliate of
the Company. Under this plan, an option to purchase 5,000 shares of Common Stock
is granted automatically on an annual basis to each eligible director on the
third business day following the date of each Annual Meeting of Stockholders of
the Company at which the eligible director is elected. The exercise price of
each option is equal to 100% of the fair market value of the Common Stock on the
date of grant. Each option vests at the rate of 25% each year for the first four
years after the date of grant of the option and each such option expires ten
years from the date of grant; provided, however, that in the event of
termination of a director's service other than by reason of total and permanent
disability or death, then the outstanding options of such holder expire three
months after such termination. Outstanding options remain exercisable for one
year after termination of service by reason of total and permanent disability or
death. The number of shares that remain available for grant at December 31, 2000
and 2001 were 62,500 and 32,500, respectively.

       In addition to the SOP, non-qualified options may be granted with
exercise prices that are less than the current market value. Accordingly,
compensation expense for the difference between current market value and
exercise price is recorded over the vesting period.

       The following is a summary of option transactions and exercise prices:



                                      Stock Option Plan                              Non-Employee Director Stock Option Plan
                          ----------------------------------------------------------------------------------------------------------
                                                                       Weighted                                             Weighted
                                Shares           Price per Share       Average         Shares         Price per Share       Average
                          ----------------       ----------------      -------      -----------       ----------------      --------
                                                                                                          
Outstanding at
  December 31, 1998              1,455,233       $ 2.75 to $22.50      $  9.88          168,875       $ 3.00 to $18.63      $  8.38
Granted                          1,225,000       $10.25 to $20.81      $ 14.72           35,000       $10.25 to $20.81      $ 14.70
Terminated                         (28,424)      $ 4.13 to $22.50      $ 13.01          (42,500)      $ 3.00 to $18.63      $  6.92
Exercised                         (229,621)      $ 2.75 to $13.25      $  6.94             (625)           $6.52            $  6.52
                          -----------------                                         -----------
Outstanding at
  December 31, 1999              2,422,188       $ 2.75 to $22.50      $ 12.57          160,750       $ 3.00 to $20.81      $ 10.00
Granted                          1,304,497       $ 4.63 to $ 5.19      $  4.63           35,000            $5.19            $  5.19
Terminated                        (568,492)      $ 4.13 to $22.50      $  8.26           (8,250)           $6.00            $  6.00
                          -----------------                                         -----------
Outstanding at
  December 31, 2000              3,158,193       $ 2.75 to $22.00      $  9.54          187,500       $ 3.00 to $18.63      $  9.40
Granted                          1,238,297       $ 1.64 to $ 4.03      $  1.67           30,000            $1.65            $  1.65
Terminated                        (267,910)      $ 1.64 to $22.50      $  7.66                -              $ -                $ -
Exercised                          (77,299)      $ 2.75 to $ 4.63      $  3.23                -              $ -                $ -
                          -----------------                                         -----------
Outstanding at
  December 31, 2001              4,051,281       $ 1.64 to $22.50      $  7.12          217,500       $ 1.65 to $18.63      $  8.38
                          =================                                         ===========


       As of December 31, 1999, options for 976,590 and 85,750 shares were
vested under the SOP and the Director Plan, respectively. As of December 31,
2000, options for 1,188,951 and 105,000 shares were vested under the SOP and the
Director Plan, respectively. As of December 31, 2001, options for 1,727,873 and
136,250 shares were vested under the SOP and the Director Plan, respectively.


                                      F-26


NOTE O - WARRANTS AND OPTIONS (CONTINUED)

Options (Continued)

       Had compensation expense for the Company's stock-based compensation plans
been determined based on the fair value method, the Company's net income (loss)
and earnings (loss) per share would have been as follows:



                                                      1999            2000              2001
                                                      ----            ----              ----
Net income (loss):
                                                                             
   As reported                                      $ 10,986       $ (13,996)         $  (8,883)
   Pro forma                                        $  7,731       $ (19,558)         $ (13,145)
Diluted income (loss) per common share:
   As reported                                      $   0.44       $   (0.98)         $   (0.73)
   Pro forma                                        $   0.28       $   (1.27)         $   (0.95)


       The fair value for these options was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted average
assumptions for 1999, 2000 and 2001:

                                 1999               2000              2001
                                 ----               ----              ----
Expected term                        5                  5                 5
Volatility factor                   46  %              58  %             72  %
Risk free interest rate            5.7  %             6.7  %            5.9  %
Dividend yield                       0  %               0  %              0  %
Fair value                      $ 7.00             $ 2.64            $ 1.21


       Under the agreement with JA&A discussed in Note E, in December 2001, the
Company issued to JA&A a non-qualified option to purchase 1.2 million shares of
its common stock at an exercise price of $1.40 per share. The option is
exercisable beginning with the sixth month following each award and will expire
five years from the termination of JA&A's engagement. As of December 31, 2001,
the option is outstanding.

       Under an employment agreement, in October 2001, the Company issued to its
Chief Financial Officer a non-qualified option to purchase 75,000 shares of its
common stock at an exercise price of $5.50 per share. The option becomes
exercisable at a rate of 25% per year beginning upon the first anniversary of
the date of grant. The option will expire ten years from the date of grant. As
of December 31, 2001, the option is outstanding. Upon the occurrence of certain
specified events, the option may become fully vested and expires one year after
the occurrence of the event.


                                      F-27


NOTE O - WARRANTS AND OPTIONS (CONTINUED)

Options (Continued)

       The following table summarizes information concerning outstanding and
exercisable options as of December 31, 2001:



                                            Options Outstanding                         Options Exercisable
                                    --------------------------------------------    ----------------------------
                                     Number of            Weighted Average                            Weighted
           Range of                   Options        Remaining         Exercise         Options        Average
        Exercise Prices              or Awards     Life (Years)         Price          or Awards    Exercies Price
- ------------------------------------------------------------------------------------------------------------------
                                                                                       
      $ 1.400 to $ 1.400            1,208,436             4.96           $  1.40               -      $    -
      $ 1.640 to $ 1.650            1,252,197             7.47           $  1.64               -      $    -
      $ 2.810 to $ 4.030               99,908             4.71           $  3.42          66,158      $  3.26
      $ 4.125 to $ 4.375               44,255             2.37           $  4.18          44,255      $  4.18
      $ 4.625 to $ 4.625              993,053             6.14           $  4.63         304,975      $  4.63
      $ 5.188 to $ 6.000              208,094             6.31           $  5.67         106,844      $  5.91
      $ 6.125 to $ 6.250              393,772             4.81           $  6.13         393,772      $  6.13
      $ 8.500 to $ 8.750               28,334             5.19           $  8.72          28,334      $  8.72
      $11.313 to $12.500              227,622             4.48           $ 11.32         227,622      $ 11.32
      $13.250 to $14.000              151,875             5.80           $ 13.49         134,375      $ 13.42
      $14.188 to $14.750              575,000             6.23           $ 14.41         287,504      $ 14.41
      $16.500 to $17.375              172,171             5.50           $ 16.58         122,200      $ 16.61
      $18.625 to $22.500              197,500             6.78           $ 21.68         148,084      $ 21.70
- -------------------------------------------------------------------------------------------------------------
      $ 1.400 to $22.500            5,552,217             5.97           $ 5.90        1,864,123      $ 10.12
=============================================================================================================



NOTE P - 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' EBITDA. EBITDA is
defined as net income (loss) before interest, taxes, depreciation and
amortization, and unusual charges consisting of impairment loss on assets held
for sale, and integration, impairment, restructuring, and performance
improvement costs. EBITDA is not a measure of performance under Generally
Accepted Accounting Principles ("GAAP"). While EBITDA should not be considered
in isolation or as a substitute for net income, cash flows from operating
activities and other income or cash flow statement data prepared in accordance
with GAAP, or as a measure of profitability or liquidity, management understands
that EBITDA is customarily used as a criteria in evaluating heath care
companies. Moreover, substantially all of the Company's financing agreements
contain covenants in which EBITDA is used as a measure of financial performance.
Our definition of EBITDA may not be comparable to the definition of EBITDA used
by other companies.


                                      F-28


NOTE P - SEGMENT AND RELATED INFORMATION

       The reportable segments are: (i) practice management and patient-care
centers; (ii) manufacturing (discontinued October 9, 2001 upon sale of
substantially all of the manufacturing assets of Seattle Orthopedic Group,
Inc.); and (iii) distribution. On June 1, 2001, in anticipation of the sale of
the manufacturing segment, the Company transferred the Sea-Fab operations from
the manufacturing to the practice management and patient-care centers segment.
Accordingly, all prior periods have been recast to be consistent with 2001
reporting. The reportable segments are described further below:

Practice Management and Patient-Care Centers - This segment consists of the
Company's owned and operated O&P patient-care centers, fabrication centers of
O&P components and OPNET. The patient-care centers provide services to design
and fit orthotic and prosthetic devices to patients. These centers also instruct
patients in the use, care and maintenance of the devices. Fabrication centers
are involved in the fabrication of O&P components for both the O&P industry and
the Company's own patient-care practices. OPNET is a national managed care agent
for O&P services and a patient referral clearing house.

Manufacturing - This segment consists of the manufacture of finished
patient-care products for both the O&P industry and the Company's own
patient-care practices.

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

The accounting policies of the segments are the same as those described in the
summary of "Significant Accounting Policies."


                                      F-29


NOTE P - SEGMENT AND RELATED INFORMATION (CONTINUED)

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 manufacturing and distribution segments to the practice
management and patient-care centers segment and were made at prices which
approximate market values.



                          Practice
                          Management
                          and Patient
                          Care Centers     Manufacturing     Distribution         Other            Total
                          ------------     -------------     ------------         -----            -----
                                                            (in thousands)
2001
Net sales
                                                                                   
   Customers                $ 473,877        $   4,884         $  29,292        $    --           $ 508,053
   Intersegments                 --              3,749            53,202          (56,951)             --
EBITDA                         98,029             (247)            5,899          (19,468)           84,213
Total assets                  512,379             --              25,838          161,690           699,907
Capital expenditures            4,669              383               271            1,374             6,697

2000
Net sales
   Customers                $ 448,852        $   8,180         $  28,999        $    --           $ 486,031
   Intersegments                9,226            5,877            51,427          (66,530)             --
EBITDA                         71,179              938             6,677          (21,523)           57,271
Total assets                  495,942            8,731            20,823          236,322           761,818
Capital expenditures            6,486              765               114            2,480             9,845

1999
Net sales
   Customers                $ 307,477        $  10,263         $  29,086        $    --           $ 346,826
   Intersegments                 --              6,050            37,416          (43,466)             --
EBITDA                         65,095              397             8,008           (9,745)           63,755
Total assets                  142,462           15,689            16,296          575,634           750,081
Capital expenditures            7,312            1,573               423            3,290            12,598



                                      F-30


NOTE P - SEGMENT AND RELATED INFORMATION (CONTINUED)

The following table reconciles each reportable segment's EBITDA to consolidated
net income (loss):



                                            Practice
                                           Management
                                           and Patient
                                          Care Centers     Manufacturing     Distribution         Other            Total
                                          ------------     -------------     ------------         -----            -----
                                                                            (in thousands)
2001
                                                                                                
EBITDA                                      $ 98,029         $   (247)        $  5,899        $(19,468)        $ 84,213
Depreciation and amortization                 21,244            1,330              451           1,661           24,686
Unusual charges                                4,578            8,164              226          11,470           24,438
Interest expense, net                         50,466               51             --            (7,452)          43,065
Provision (benefit) for income taxes            --               --               --               907              907
                                            --------         --------         --------        --------         --------
Net income (loss)                           $ 21,741         $ (9,792)        $  5,222        $(26,054)        $ (8,883)
                                            ========         ========         ========        ========         ========

2000
EBITDA                                      $ 71,179         $    938         $  6,677        $(21,523)        $ 57,271
Depreciation and amortization                 20,305            1,628              300           1,095           23,328
Unusual charges                                1,047               13                6           1,298            2,364
Interest expense, net                         50,423               28             --            (3,379)          47,072
Provision (benefit) for income taxes            --               --               --            (1,497)          (1,497)
                                            --------         --------         --------        --------         --------
Net income (loss)                           $   (596)        $   (731)        $  6,371        $(19,040)        $(13,996)
                                            ========         ========         ========        ========         ========

1999
EBITDA                                      $ 65,095         $    397         $  8,008        $ (9,745)        $ 63,755
Depreciation and amortization                 11,925            1,640              187             306           14,058
Unusual charges                                5,763              430               60              87            6,340
Interest expense, net                          2,003               17                2          20,155           22,177
Provision (benefit) for income taxes            --               --               --            10,194           10,194
                                            --------         --------         --------        --------         --------
Net income (loss)                           $ 45,404         $ (1,690)        $  7,759        $(40,487)        $ 10,986
                                            ========         ========         ========        ========         ========


The following table presents the details of "Other" EBITDA for the years ended
December 31:

                                     1999          2000           2001
                                -----------------------------------------
Corporate general and
 administrative expenses             $ 9,666       $ 21,523      $ 19,468
Other                                     79              -             -
                                ------------------------------------------
                                     $ 9,745       $ 21,523      $ 19,468
                                ==========================================

                                      F-31


NOTE P - SEGMENT AND RELATED INFORMATION (CONTINUED)

The following table presents the details of "Other" total assets at December 31:



                                                                  1999                    2000                   2001
                                                            -------------------------------------------------------------
Corporate intercompany receivable from:
                                                                                                      
   Practice Management and Patient-Care Centers segment          $ 533,978              $ 159,416              $ 133,195
   Manufacturing segment                                            16,277                 21,926                      -
   Distribution segment                                              1,469                   (588)               (11,428)
Other                                                               23,910                 55,568                 41,276
                                                            -------------------------------------------------------------
                                                                 $ 575,634              $ 236,322              $ 163,043
                                                            =============================================================


 "Other" total assets presented in the preceding table primarily consist of
corporate cash and deferred taxes not specifically identifiable to the
reportable segments.

The Company's foreign and export sales and assets located outside of the United
States are not significant. Additionally, no single customer accounted for more
than 10% of revenues in 1999, 2000 or 2001.

NOTE Q - CONSOLIDATING FINANCIAL INFORMATION

       The Company's Senior Subordinated Notes are guaranteed fully, jointly and
severally, and unconditionally by all of the Company's current and future
domestic subsidiaries. The following is summarized condensed consolidating
financial information, as of and for the year ended December 31, 2001, of the
Company, segregating the parent company (Hanger Orthopedic Group) and its
guarantor subsidiaries, as each of the Company's subsidiaries is wholly-owned.


                                      F-32


NOTE Q - CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)



                                                            Hanger
                                                          Orthopedic
                                                             Group
                                                           (Parent        Guarantor        Consolidating     Consolidated
                                                            Company)     Subsidiaries       Adjustments          Totals
                                                            --------     ------------       -----------          ------
BALANCE SHEET - December 31, 2000                                                (in thousands)
ASSETS
                                                                                                   
Cash and cash equivalents                                $  10,829         $   9,840         $    --           $  20,669
Accounts receivable                                           --             111,210              --             111,210
Inventories                                                   --              61,223              --              61,223
Prepaid expenses and other assets                              902             3,360              --               4,262
Income taxes receivable                                      6,325              --                --               6,325
Intercompany receivable                                    180,753          (180,753)             --                --
Deferred income taxes                                       20,038              --                --              20,038
                                                         ---------         ---------         ---------         ---------
   Total current assets                                    218,847             4,880              --             223,727

Property, plant and equipment, net                           5,064            41,930              --              46,994
Intangible assets, net                                        (160)          477,362           477,202
Other assets                                               419,271             1,324          (406,700)           13,895
                                                         ---------         ---------         ---------         ---------
   Total assets                                          $ 643,022         $ 525,496         $(406,700)        $ 761,818
                                                         =========         =========         =========         =========

LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND SHAREHOLDERS' EQUITY
Current portion of long-term debt                        $  23,750         $  13,845         $    --           $  37,595
Accounts payable                                               896            16,913              --              17,809
Accrued expenses                                             3,413             6,276              --               9,689
Accrued interest payable                                     6,860               699              --               7,559
Accrued compensation related cost                            2,508            14,877              --              17,385
                                                         ---------         ---------         ---------         ---------
   Total current liabilities                                37,427            52,610              --              90,037

Long-term debt, less current portion                       402,700           426,838          (406,700)          422,838
Deferred income taxes                                       26,026              --                --              26,026
Other liabilities                                              111             2,545              --               2,656
                                                         ---------         ---------         ---------         ---------
   Total liabilities                                       466,264           481,993          (406,700)          541,557
                                                         ---------         ---------         ---------         ---------

Redeemable preferred stock                                  65,881              --                --              65,881
                                                         ---------         ---------         ---------         ---------

Common stock                                                   190                35               (35)              190
Additional paid-in capital                                 139,003             7,460                35           146,498
Retained earnings                                          (28,200)           36,548             8,348
Treasury stock                                                (116)             (540)             --                (656)
                                                         ---------         ---------         ---------         ---------
   Total shareholders' equity                              110,877            43,503              --             154,380
                                                         ---------         ---------         ---------         ---------

   Total liabilities, redeemable preferred stock,
      and shareholders' equity                           $ 643,022         $ 525,496         $(406,700)        $ 761,818
                                                         =========         =========         =========         =========



                                      F-33


NOTE Q - CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)



                                                            Hanger
                                                          Orthopedic
                                                             Group
                                                           (Parent        Guarantor        Consolidating     Consolidated
                                                            Company)     Subsidiaries       Adjustments          Totals
                                                            -------     ------------       -----------          ------
BALANCE SHEET - December 31, 2001                                               (in thousands)
ASSETS
                                                                                                   
Cash and cash equivalents                                $    (212)        $  10,255         $    --           $  10,043
Accounts receivable                                           --             104,040              --             104,040
Inventories                                                   --              55,946              --              55,946
Prepaid expenses and other assets                              868             3,000              --               3,868
Income taxes receivable                                       (277)            1,310              --               1,033
Intercompany receivable                                    126,124          (126,124)             --                --
Deferred income taxes                                       20,957              --                --              20,957
                                                         ---------         ---------         ---------         ---------
   Total current assets                                    147,460            48,427              --             195,887

Property, plant and equipment, net                           4,767            33,011              --              37,778
Intangible assets, net                                        (156)          452,536              --             452,380
Other assets                                               417,672             2,890          (406,700)           13,862
                                                         ---------         ---------         ---------         ---------
   Total assets                                          $ 569,743         $ 536,864         $(406,700)        $ 699,907
                                                         =========         =========         =========         =========


LIABILITIES, REDEEMABLE PREFERRED STOCK,
AND SHAREHOLDERS' EQUITY
Current portion of long-term debt                        $  19,199         $  11,313         $    --           $  30,512
Accounts payable                                               520            16,381              --              16,901
Accrued expenses                                             4,586             3,610              --               8,196
Accrued interest payable                                     1,577               440              --               2,017
Accrued compensation related cost                            2,438            26,607              --              29,045
                                                         ---------         ---------         ---------         ---------
   Total current liabilities                                28,320            58,351              --              86,671

Long-term debt, less current portion                       359,188           414,827          (406,700)          367,315
Deferred income taxes                                       26,495              --                --              26,495
Other liabilities                                             --               3,013              --               3,013
                                                         ---------         ---------         ---------         ---------
   Total liabilities                                       414,003           476,191          (406,700)          483,494
                                                         ---------         ---------         ---------         ---------

Redeemable preferred stock                                  70,739              --                --              70,739
                                                         ---------         ---------         ---------         ---------

Common stock                                                   191                35               (35)              191
Additional paid-in capital                                 139,178             7,461                35           146,674
Accumulated deficit                                        (54,252)           53,717              --                (535)
Treasury stock                                                (116)             (540)             --                (656)
                                                         ---------         ---------         ---------         ---------
   Total shareholders' equity                               85,001            60,673              --             145,674
                                                         ---------         ---------         ---------         ---------
   Total liabilities, redeemable preferred stock,
      and shareholders' equity                           $ 569,743         $ 536,864         $(406,700)        $ 699,907
                                                         =========         =========         =========         =========



                                      F-34


NOTE Q - CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)



                                                                 Hanger
                                                               Orthopedic
                                                                  Group
                                                                (Parent        Guarantor        Consolidating     Consolidated
                                                                Company)      Subsidiaries       Adjustments         Totals
                                                                 -------      ------------       -----------         ------
STATEMENT OF OPERATIONS
Year ended December 31, 1999
                                                                                                         
Net sales                                                      $    --           $ 390,292         $ (43,466)        $ 346,826
Cost of goods sold                                                  --             212,542           (43,466)          169,076
                                                               ---------         ---------         ---------         ---------
   Gross profit                                                     --             177,750              --             177,750

Selling, general and administrative                                9,745           104,250              --             113,995
Depreciation and amortization                                        312             6,226              --               6,538
Amortization of excess cost over net assets acquired                  (6)            7,526              --               7,520
Unusual charges                                                       87             6,253              --               6,340
                                                               ---------         ---------         ---------         ---------
   Income (loss) from operations                                 (10,138)           53,495              --              43,357

Interest income (expense), net                                   (20,155)           (2,022)             --             (22,177)
                                                               ---------         ---------         ---------         ---------
Income (loss) before taxes                                       (30,293)           51,473              --              21,180

Provision for income taxes                                        10,194              --                --              10,194
                                                               ---------         ---------         ---------         ---------
Net income (loss)                                              $ (40,487)        $  51,473         $    --           $  10,986
                                                               =========         =========         =========         =========

STATEMENT OF CASH FLOWS
Year ended December 31, 1999

Cash flows provided by (used in) operating activities          $(107,172)        $ 106,948         $    --           $    (224)
Cash flows provided by (used in) investing activities             (3,290)         (441,705)             --            (444,995)
Cash flows provided by (used in) financing activities            100,360           340,911              --             441,271
                                                               ---------         ---------         ---------         ---------
   Net increase (decrease) in cash and cash equivalents          (10,102)            6,154              --              (3,948)

Cash and cash equivalents, beginning of year                       5,027             4,656              --               9,683
                                                               ---------         ---------         ---------         ---------
Cash and cash equivalents, end of year                         $  (5,075)        $  10,810         $    --           $   5,735
                                                               =========         =========         =========         =========


                                      F-35



NOTE Q - CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)



                                                                 Hanger
                                                               Orthopedic
                                                                  Group
                                                                (Parent        Guarantor         Consolidating     Consolidated
                                                                Company)      Subsidiaries        Adjustments         Totals
                                                                 -------      ------------        -----------         ------
STATEMENT OF OPERATIONS
Year ended December 31, 2000
                                                                                                         
Net sales                                                      $    --           $ 552,561         $ (66,530)        $ 486,031
Cost of goods sold                                                  --             317,898           (66,530)          251,368
                                                               ---------         ---------         ---------         ---------
   Gross profit                                                     --             234,663              --             234,663

Selling, general and administrative                               21,523           155,869              --             177,392
Depreciation and amortization                                      1,100            10,078              --              11,178
Amortization of excess cost over net assets acquired                  (5)           12,155              --              12,150
Unusual charges                                                    1,298             1,066              --               2,364
                                                               ---------         ---------         ---------         ---------
   Income (loss) from operations                                 (23,916)           55,495              --              31,579

Interest income (expense), net                                     3,379           (50,451)             --             (47,072)
                                                               ---------         ---------         ---------         ---------
Income (loss) before taxes                                       (20,537)            5,044              --             (15,493)

Benefit for income taxes                                          (1,497)             --                --              (1,497)
                                                               ---------         ---------         ---------         ---------
Net income (loss)                                              $ (19,040)        $   5,044         $    --           $ (13,996)
                                                               =========         =========         =========         =========

STATEMENT OF CASH FLOWS
Year ended December 31, 2000

Cash flows provided by (used in) operating activities          $  (1,840)        $   5,447         $    --           $   3,607
Cash flows provided by (used in) investing activities             (2,480)            7,104              --               4,624
Cash flows provided by (used in) financing activities             20,224           (13,521)             --               6,703
                                                               ---------         ---------         ---------         ---------
   Net increase (decrease) in cash and cash equivalents           15,904              (970)             --              14,934

Cash and cash equivalents, beginning of year                      (5,075)           10,810              --               5,735
                                                               ---------         ---------         ---------         ---------
Cash and cash equivalents, end of year                         $  10,829         $   9,840         $    --           $  20,669
                                                               =========         =========         =========         =========



                                      F-36



NOTE Q - CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)



                                                                 Hanger
                                                               Orthopedic
                                                                  Group
                                                                (Parent        Guarantor         Consolidating     Consolidated
                                                                Company)      Subsidiaries        Adjustments         Totals
                                                                 -------      ------------        -----------         ------
STATEMENT OF OPERATIONS                                                                (in thousands)
Year ended December 31, 2001
                                                                                                         
Net sales                                                      $    --           $ 565,004         $ (56,951)        $ 508,053
Cost of goods sold                                                  --             297,819           (56,951)          240,868
                                                               ---------         ---------         ---------         ---------
   Gross profit                                                     --             267,185              --             267,185

Selling, general and administrative                               19,468           163,504              --             182,972
Depreciation and amortization                                      1,666            10,822              --              12,488
Amortization of excess cost over net assets acquired                  (5)           12,203              --              12,198
Unusual charges                                                   11,470            12,968              --              24,438
                                                               ---------         ---------         ---------         ---------
   Income (loss) from operations                                 (32,599)           67,688              --              35,089

Interest income (expense), net                                     7,452           (50,517)             --             (43,065)
                                                               ---------         ---------         ---------         ---------
Loss before taxes                                                (25,147)           17,171              --              (7,976)

Provision for income taxes                                           907              --                --                 907
                                                               ---------         ---------         ---------         ---------
Net income (loss)                                              $ (26,054)        $  17,171         $    --           $  (8,883)
                                                               =========         =========         =========         =========

STATEMENT OF CASH FLOWS
Year ended December 31, 2001
Cash flows provided by (used in) operating activities          $  39,318         $  11,848         $    --           $  51,166
Cash flows provided by (used in) investing activities             (1,374)            2,479              --               1,105
Cash flows provided by (used in) financing activities            (48,985)          (13,912)             --             (62,897)
                                                               ---------         ---------         ---------         ---------
   Net increase (decrease) in cash and cash equivalents          (11,041)              415              --             (10,626)

Cash and cash equivalents, beginning of year                      10,829             9,840              --              20,669
                                                               ---------         ---------         ---------         ---------
Cash and cash equivalents, end of year                         $    (212)        $  10,255         $    --           $  10,043
                                                               =========         =========         =========         =========



NOTE R - SUBSEQUENT EVENTS

         In February 2002, the Company sold $200.0 million principal amount of
its 10 3/8% Senior Notes due 2009. In addition, in March 2002, the Company
entered into two fixed-to-floating interest rate swaps with an aggregate
notional amount of $100.0 million. These transactions are discussed further in
Note H.


                                      F-37



                          HANGER ORTHOPEDIC GROUP, INC.
                  SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS

                                                               ADDITIONS
                                                BALANCE AT     CHARGED TO    IMPACT OF
                                                BEGINNING      COSTS AND      ACQUIRED                      BALANCE AT END
 YEAR           CLASSIFICATION                   OF YEAR        EXPENSES     COMPANIES       DEDUCTIONS        OF YEAR
 ----           --------------                   -------        --------     ---------       ----------        -------
                                                         (in thousands)
                                                                                                
 2001     Allowance for doubtful accounts        $ 23,005       $ 21,961       $     -        $ 27,341         $ 17,625
          Inventory reserves                     $  2,398       $      -       $     -        $  2,269 *       $    129

 2000     Allowance for doubtful accounts        $ 17,866       $ 23,620       $   114        $ 18,595         $ 23,005
          Inventory reserves                     $  2,281       $    120       $    73        $     76         $  2,398

 1999     Allowance for doubtful accounts        $  8,022       $ 15,046       $ 8,811        $ 14,013         $ 17,866
          Inventory reserves                     $  4,849       $      -       $   528        $  3,096         $  2,281


- ---------------------------

* The decrease in the inventory reserves during 2001 was due to the Company's efforts to utilize and dispose of its excess
  inventory.






                                      S-1

EX-10.(CC)

                              EMPLOYMENT AGREEMENT

         THIS EMPLOYMENT AGREEMENT (this "Agreement") is dated as of August ___,
2001, by and between HANGER ORTHOPEDIC GROUP, INC., a Delaware corporation (the
"Company"), and GEORGE McHENRY, an individual residing at 10 Blue Heron Court,
Medford, New Jersey 08055 (the "Executive").

                                   WITNESSETH:

         WHEREAS, the Company desires to employ the Executive and the Executive
desires to accept such employment by the Company, subject to the terms and
conditions set forth in this Agreement.

         NOW, THEREFORE, in consideration of the promises and the mutual
agreements set forth below, the parties agree as follows:

         1.       Employment, Term.

         1.1 Employment. The Company agrees to employ the Executive in the
position and with the responsibilities, duties and authority set forth in
Section 2.

         1.2 Term. The term of the Executive's employment under this Agreement
shall commence as of October 15, 2001 and shall terminate on the fifth
anniversary of the date hereof, unless extended or sooner terminated in
accordance with this Agreement.

         1.3 Office. The Executive's principal office will be in Bethesda,
Maryland.

         2.       Position, Duties.

         The Executive shall serve the Company in the position of Chief
Financial Officer. The Executive shall perform, faithfully and diligently, such
duties, and shall have such responsibilities, appropriate to said position, as
shall be assigned to him from time to time by the Chief Executive Officer and
the Board of Directors of the Company. The Executive shall devote his full
business time and attention to the performance of his duties and
responsibilities hereunder.

         3.       Salary, Incentive Bonus, Stock Options, Other Benefits.

         3.1 Salary. Commencing after the Executive reports for full-time duty
with the Company on or about October 15, 2001 and continuing during the
remainder of the term of this Agreement, the Company shall pay to the Executive
a base salary at the rate of two hundred seventy-five thousand dollars
($275,000.00) per annum, payable in accordance with the standard payroll
practices

                                       1


of the Company. The Executive shall be entitled to such increases in base salary
during the term hereof, as shall be determined and approved by the Compensation
Committee of the Board of Directors of the Company in their sole discretion,
taking account of the performance of the Company and the Executive, and other
factors generally considered relevant to the salaries of executives holding
similar positions with enterprises comparable to the Company.

         3.2 Bonus. (a) Commencing on January 1, 2002, in addition to the base
salary provided for in Section 3.1, the Executive shall participate in the
Company's bonus plan for senior corporate officers (the "Bonus Plan"), as
approved by the Compensation Committee of the Board of Directors, in each
calendar year that this Agreement is effective. The target bonus for the
Executive will be at least 50% of base salary if performance goals are met, and
up to 100% of base salary on a pro rata basis for performance which exceeds
goals. The bonus shall be payable upon or within a reasonable period of time
after the receipt of the Company's audited financial statements for the
applicable calendar year in accordance with the Company's normal practices.

         (b) In the event of the termination of employment of the Executive
pursuant to Section 6.1 (Death), Section 6.2 (Disability), Section 6.4 (Without
Cause) or Section 7 (Change of Control) of this Agreement, and provided that all
of the terms and conditions of the Bonus Plan are satisfied including, but not
limited to, the attainment of stated performance goals, the Executive (or his
estate or other legal representative) shall be entitled to receive a pro-rated
bonus for the calendar year in which such termination occurs in an amount equal
to the product of (i) the bonus for such calendar year determined pursuant to
Section 3.2, multiplied by (ii) a fraction, the numerator of which is the number
of days from the beginning of such calendar year to the date of termination, and
the denominator of which is 365. In the event of the termination of employment
of the Executive pursuant to Section 6.3 (Due Cause) of this Agreement, the
Executive shall not be entitled to a bonus from the Company for the calendar
year in which such termination occurs.

         3.3 Stock Options. (a) The Company shall grant to the Executive options
to purchase seventy-five thousand (75,000) shares of Company common stock, par
value $.01 per share (the "Stock"), pursuant to the terms of the Company's 1991
Stock Option Plan, as amended, upon the commencement of the Executive's
employment on or about October 15, 2001 pursuant to Section 1.2 of this
Agreement (the "Initial Option Grant"). The Company shall also grant to the
Executive options to purchase an additional seventy-five thousand (75,000)
shares of Stock on the second anniversary of the commencement of his employment
with the Company (the "Second Option Grant"). Grants of options to purchase
Stock following the Initial Option Grant and the Second Option Grant shall be
based upon minimum net sales and net income targets adopted annually by the
Board of Directors, which are derived from management-generated budgets.

         (b) The options granted under each of the Initial Option Grant and the
Second Option Grant shall be evidenced by separate stock option agreements
("Option Agreements") entered into between the Executive and the Company. The
Option Agreements shall provide for a vesting schedule of


                                       2


four years, in equal parts, of the options. Notwithstanding any provisions now
or hereafter existing under the Company's 1991 Stock Option Plan, as amended,
all options granted pursuant to this Agreement shall fully vest immediately
after the date of grant in the event of the subsequent termination of employment
of the Executive pursuant to Section 6.1 (Death), Section 6.2 (Disability),
Section 6.4 (Without Cause), or Section 7 (Change of Control) of this Agreement.

         (c) Notwithstanding any provisions now or hereafter existing under the
Company's 1991 Stock Option Plan, as amended, in the event of a Change in
Control (hereinafter defined) occurring after the grant of any stock options to
the Executive, all options granted to the Executive to purchase shares of Stock
shall become fully vested as of the date of such Change in Control occurring
after October 15, 2001, unless the employment of the Executive has been
terminated pursuant to either Section 6.3 (Due Cause) or Section 6.5 (Voluntary
Termination) prior to the date of a Change in Control, in which event, no such
change shall be made in the vesting schedule of any stock options granted to the
Executive.

         (d) For purposes of this Agreement, a "Change in Control" shall be
deemed to exist if:

                  (i) a person, as defined in Sections 13(d) and 14(d) of the
                  Securities Exchange Act of 1934 (other than the Executive or a
                  group including the Executive), either (A) acquires twenty
                  percent (20%) or more of the combined voting power of the
                  outstanding securities of the Company having the right to vote
                  in elections of directors and such acquisition shall not have
                  been approved within sixty (60) days following such
                  acquisition by a majority of the Continuing Directors (as
                  hereinafter defined) then in office or (B) acquires fifty
                  percent (50%) or more of the combined voting power of the
                  outstanding securities of the Company having a right to vote
                  in elections or directors; or

                  (ii) Continuing Directors shall for any reason cease to
                  constitute a majority of the Board of Directors of the
                  Company; or

                  (iii) all or substantially all of the business and/or assets
                  of the Company are disposed of by the Company to a party or
                  parties other than a subsidiary or other affiliate of the
                  Company, pursuant to a partial or complete liquidation of the
                  Company, sale of assets (including stock of a subsidiary of
                  the Company) or otherwise; or

                  (iv) the Company consolidates with, or merges with or into,
                  any other person (other than a wholly owned subsidiary of the
                  Company), or any other person consolidates with, or merges
                  with or into, the Company, and, in connection therewith, all
                  or part of the outstanding shares of common stock of the
                  Company shall be


                                       3


                  changed in any way or converted into or exchanged for stock or
                  other securities or cash or any other property.

         (e) For purposes of this Agreement, the term "Continuing Director"
shall mean a member of the Board of Directors of the Company who either was a
member of the Board of Directors on the date hereof or who subsequently became a
director and whose election, or nomination for election, was approved by a vote
of at least two-thirds of the Continuing Directors then in office.

         (f) The Executive may participate in future awards of options to
purchase Stock in a manner consistent with any stock option plan adopted by the
Company for its senior corporate officers. The determination as to the amount of
options, if any, shall be at the sole discretion of the Board of Directors of
the Company.

         3.4 Senior Corporate Officer Benefits. The Executive shall be entitled
to participate in all applicable benefits plans now existing or hereafter
adopted by the Company's Board of Directors for all the senior corporate
officers of the Company, as well as such other benefits as may be granted from
time to time to the Executive by the Company's Chairman/Chief Executive Officer.
Upon a Change in Control occurring after the Executive has commenced his
employment with the Company on or about October 15, 2001, any interest which the
Executive has in any future retirement plan or deferred compensation plan shall
immediately vest if so permitted under the terms of each such plan.

         3.5 Parachute penalties. The Company agrees to provide the Executive
with payment sufficient to cover any tax resulting from the imposition of any
parachute penalties under the Internal Revenue Code or applicable state tax laws
imposed on the Executive in the event of the grant of certain benefits to the
Executive by the Company upon the termination of the Executive's employment
after he has commenced his employment with the Company on or about October 15,
2001.

         3.6 Relocation. The Company agrees to perform the following obligations
so long as the Executive has commenced his employment with the Company on or
prior to October 15, 2001 and the Executive has further executed a promissory
note, in the form attached hereto as Exhibit "A," payable to the Company
relating hereto which will require the Executive to reimburse the Company for
portions of the following amounts in the event of the termination of the
employment of the Executive pursuant to Section 6.3 (Due Cause) or Section 6.5
(Voluntary Termination) of this Agreement within the first twenty-four (24)
months after the commencement of the term of this Agreement on October 15, 2001:

         (a) reimbursement of all costs incurred by the Executive in connection
with the packing, insuring, transporting and unpacking of his household items
which are moved from his current residence to his new residence in the State of
Maryland, the Commonwealth of Virginia or the


                                       4


District of Columbia (collectively, the "Washington, D.C. Metropolitan Area") as
a result of his employment hereunder;

         (b) reimbursement of reasonable costs incurred by the Executive,
including transportation, room, and food expenses, for up to two house-hunting
trips from his current state of residence to the Washington, D.C. Metropolitan
Area (each house-hunting trip shall consist of a maximum period of five
consecutive calendar days);

         (c) payment of all closing costs (excluding points), reasonable fees
and commissions to be paid in connection with the sale of the Executive's
current residence at 10 Blue Heron Court, Medford, New Jersey 08055;

         (d) payment of all closing costs (excluding points) and reasonable fees
and expenses directly related to the Executive's purchase of a new residence in
the Washington, D.C. Metropolitan Area;

         (e) reimbursement of travel costs, lodging and meals incurred by the
Executive during the first six (6) months immediately following the date of this
Agreement, for purposes of the Executive performing his duties at the Company's
headquarters office located in Bethesda, Maryland while the Executive is still
residing in his current residence at 10 Blue Heron Court, Medford, New Jersey
08055; and

         (f) payment to the Executive of five thousand dollars ($5,000) upon the
closing of the purchase of the Executive's new residence in the Washington, D.C.
Metropolitan Area to help to offset the expenses incurred by the Executive in
his preparation of his new residence in the Washington, D.C. Metropolitan Area
for occupancy by the Executive.

         Any non-deductible portions of any payments made pursuant to Sections
3.6 (b), (c),(d) and (e) will be paid to Executive in an amount equal to (i)
such payment as may be actually due pursuant to such Sections 3.6(b), (c), (d)
and/or (e), plus (ii) any federal and state income tax imposed on Executive as a
result of such payment.

         4.       Expense Reimbursement.

         During the term of this Agreement, the Company shall reimburse the
Executive for all reasonable and necessary out-of-pocket expenses incurred by
him in connection with the performance of his duties hereunder, upon the
presentation of proper receipts or other evidence thereof in accordance with the
Company's policies and practices for senior corporate officers.



                                       5


         5.       Benefits Plans and Vacation.

         5.1 Benefit Plans. During the term of this Agreement which commences on
October 15, 2001, the Executive will be eligible to participate in all employee
benefit plans and programs (including, without limitation, the 401(k) Plan,
medical, dental, life, and disability plans) offered by the Company from time to
time to its senior corporate officers, subject to the provisions of such plans
and programs as may be in effect from time to time.

         5.2 Vacation. The Executive shall be entitled to four (4) weeks
vacation per each full year of service by Executive to the Company, subject to
the Company's policies regarding vacation time for senior corporate officers.

         6.       Termination of Employment.

         6.1 Death. In the event of the death of the Executive after his
commencement of employment with the Company on or about October 15, 2001, the
Company shall pay to the estate or other legal representative of the Executive
any accrued but unpaid portion of the base salary provided for in Section 3.1
(at the annual rate then in effect) and any bonus accrued to the date of the
Executive's death and not theretofore paid to the Executive. In the event of the
death of the Executive after his commencement of employment with the Company on
or about October 15, 2001 from a cause unknown to the Executive and the Company
as of the date of this Agreement, the Company shall also pay to the estate or
other legal representative of the Executive an additional twelve (12) months of
salary payments as a death benefit; provided, however, that in the event the
Executive commences his full-time employment with the Company on or about
October 15, 2001 and continues to be employed on a full-time basis by the
Company from that time through October 15, 2002, then from and after October 15,
2002, the aforementioned death benefit shall be increased to an amount equal to
eighteen (18) months of salary payments then applicable to the Executive. At the
election of the estate or other legal representative of the Executive, such
death benefit payments may be made in a lump sum within ninety (90) days of
election, or as continued monthly payments to be paid at the same times that
salary payments are normally paid within the Company.

         6.2 Disability. If the Executive shall become incapacitated by reason
of sickness, accident or other physical or mental disability and shall be
entitled to payment of benefits under the Company's long term disability plan,
the employment of the Executive may be terminated by the Company or the
Executive. In the event of such termination of employment, the Company shall pay
to the Executive on a monthly basis for a period of twelve (12) months following
such termination the difference between the Executive's monthly base salary
amount at the time of termination and the monthly disability pay benefits
received by the Executive during that time period; provided, however, that in
the event such termination occurs after October 15, 2002, so long as the
Executive commenced his full-time employment with the Company on or about
October 15, 2001, then in such event the Company shall pay to the Executive on a
monthly basis for a period of eighteen (18) months following such termination
the difference between the Executive's monthly base salary


                                       6


amount at the time of termination and the monthly disability pay benefits
received by the Executive during the time period.

         6.3 Due Cause. The employment of the Executive may be terminated by the
Company at any time for Due Cause (as hereinafter defined). In the event of such
termination, the Company shall pay to the Executive only the base salary
provided for in Section 3.1 (at the annual rate then in effect) accrued to the
date of such termination and not theretofore paid to the Executive. All rights
and benefits of the Executive under the benefit plans and programs of the
Company shall be determined in accordance with the provisions of such plans and
programs. For the purposes of this Agreement, "Due Cause" shall be defined as
(a) the Executive's willful and continuing failure to perform his duties and
responsibilities under this Agreement, after being given notice in writing and
an opportunity to cure, (b) any material act of dishonesty involving the
Company, or (c) any conviction of a felony.

         6.4 Termination by the Company Without Cause. The Company may terminate
the Executive's employment at any time for whatever reason it deems appropriate
or without reason; provided, however, that in the event that such termination is
not pursuant to Section 6.1 (Death), 6.2 (Disability), 6.3 (Due Cause), Section
6.5 (Voluntary Termination), or Section 7 (Change of Control), the Company shall
pay to the Executive severance pay in the form of salary continuation for a
period of twelve (12) months, commencing on the date of termination, at a rate
equal to the base salary provided for in Section 3.1 (at the annual rate then in
effect); provided, however, that from and after October 15, 2002 and continuing
during the term of this Agreement, the salary continuation period shall be equal
to a period of eighteen (18) months. In addition, the Company shall pay to the
Executive any bonus provided for in Section 3.2. At the Executive's election,
the Company shall accelerate full payment of the severance pay in a lump sum,
payable within ninety (90) days of the Executive's election. During the
severance pay period, the Company shall continue to provide life, disability,
medical, and dental coverage for the Executive at the levels which were being
provided to the Executive immediately prior to the termination of his employment
(or such other benefits as shall be provided to senior corporate officers of the
Company in lieu of such benefits from time to time during the severance pay
period) on the same basis, including the Company payment of premiums and the
Company contributions, as such benefits are provided to other senior corporate
officers of the Company. In addition, the Company shall provide the Executive
with out-placement benefits commensurate with those provided to other senior
corporate officers of the Company through a vendor selected by the Company. All
rights and benefits of the Executive under the other benefit plans and programs
of the Company shall be determined in accordance with the provisions of such
plans and programs.

         6.5 Voluntary Termination. The Executive may terminate his employment
with the Company at any time upon sixty (60) days' prior written notice to the
Company. Except as otherwise provided in this Agreement, in the event of such
termination the Company shall pay to the Executive only the base salary provided
for in Section 3.1 (at the annual rate then in effect) accrued to the date


                                       7


of such termination and not theretofore paid to the Executive, and all rights
and benefits of the Executive under the benefit plans and programs of the
Company shall be determined in accordance with the provisions of such plans and
programs.

         6.6 Death Benefits. Notwithstanding anything contained in this
Agreement to the contrary, no death benefits shall be payable to the Executive
under this Agreement unless and until the Executive has passed a physical
examination with a medical doctor acceptable to the Company with no pre-existing
conditions being identified at that time nor with the Executive having been
otherwise treated prior to October 15, 2001 for any such pre-existing condition.

         6.7 Stock Options and Termination. In the event that the Executive's
employment is terminated pursuant to Sections 6.1 (Death), 6.2 (Disability), 6.4
(Without Cause), or Section 7 (Change of Control), all outstanding options
granted to the Executive shall immediately vest, and the Executive (or his
estate or other legal representative, if applicable) shall have one year from
such termination in which to exercise such options.

         7.       Change in Control and Termination Provisions.

         7.1 Termination Upon Change In Control If within a two (2) year period
following any Change in Control there occurs:

         (a) any termination of the Executive (other than as set forth in
Section 6.1 (Death), 6.2 (Disability), 6.3 (Due Cause) or 6.5 (Voluntary
Termination) of this Agreement);

         (b) a material diminution of the Executive's responsibilities, as
compared with the Executive's responsibilities immediately prior to the Change
in Control;

         (c) any reduction in the sum of the Executive's annual base salary and
bonus under this Agreement as of the date immediately prior to the Change in
Control;

         (d) any failure to provide the Executive with benefits at least as
favorable as those enjoyed by similarly situated senior corporate officers at
the Company under the Company's pension, life insurance, medical, health and
accident, disability or other written employee plans under which the form and/or
amounts of benefits are prescribed in applicable documents;

         (e) any relocation of the Executive's principal site of employment to a
location more than 25 miles from the Executive's principal site of employment as
of the date immediately prior to the Change in Control;

         (f) any material breach of this Agreement on the part of the Company;



                                       8


then, at the option of the Executive, exercisable by the Executive within thirty
(30) days after the occurrence of any of the foregoing events, the Executive may
resign from employment with the Company (or, if involuntarily terminated, give
notice of intention to collect benefits under this Agreement) by delivering a
notice in writing (the "Notice of Termination") to the Company. Following
delivery of the Notice of Termination, the Executive shall be entitled to the
severance pay and benefit continuation provisions of Section 6.4 in their
entirety, provided, however, that the severance pay shall be the total of twelve
(12) months of the base pay then in effect and any bonus actually earned prior
to that time pursuant to Section 3.2, payable, at the Executive's option, either
as salary continuation for twelve (12) months, or in a lump sum, payable within
ninety (90) days of the Executive's election.

         8.       Confidential Information.

         8.1 Nondisclosure. Unless the Executive secures the Company's written
consent, the Executive will not disclose, use, disseminate, lecture upon or
publish Confidential Information (defined hereafter) of which he becomes
informed during his employment, whether or not developed by him.

         8.2 Confidential Information Defined. For the purposes of this
Agreement, "Confidential Information" shall mean information disclosed to the
Executive or known by him as a result of his employment by the Company, not
generally known in the industry, about the Company's services, products or
customers, including, but not limited to, clinical programs, procedures and
protocols, research, operating models, finance, strategic planning, client
retention, data processing, insurance plans, risk management, marketing,
contracting and selling, and employees.

         9.       Interference with the Company.

         (a) The Executive will not, (a) for a period of twelve (12) months
after termination of his employment with the Company if such termination occurs
during the first twelve (12) months of this Agreement or for a period of
eighteen (18) months if such termination occurs at any time after the first
twelve (12) months of this Agreement (the "Restrictive Period"), directly or
indirectly, (i) engage, whether as principal, agent, investor, representative,
stockholder (other than as the holder of not more than five percent (5%) of the
stock or equity of any corporation the capital stock of which is publicly
traded), employee, consultant, volunteer or otherwise, with or without pay, in
any activity or business venture, anywhere within the continental United States,
which is competitive with the business of the Company on the date of
termination, (ii) solicit or entice or endeavor to solicit or entice away from
the Company any director, officer, employee, agent or consultant of the Company,
either on his own account or for any person, firm, corporation or other
organization, whether or not the person solicited would commit any breach of
such person's contract of employment by reason of leaving the Company's service,
(iii) solicit or entice or endeavor to solicit or entice away any of the clients
or customers of the Company, either on his own account or for any


                                       9


other person, firm, corporation or organization, or (iv) employ any person who
was a director, officer or employee of the Company, at any time during the two
(2) years preceding termination of his employment with the Company, unless such
person's employment was terminated by the Company, or any person who is or may
be likely to be in possession of any Confidential Information.

         (b) If, at the time of enforcement of any provision of Section 9(a)
above, a court or arbitrator holds that the restrictions stated therein are
unreasonable under circumstances then existing, the Company and the Executive
agree that the maximum period, scope, or geographical area reasonable under such
circumstances will be substituted for the stated period, scope or area.

         (c) Since a material purpose of this Agreement is to protect the
Company's investment in the Executive and to secure the benefits of the
Executive's background and general experience in the industry, the parties
hereto agree and acknowledge that money damages may not be an adequate remedy
for any breach of the provisions of this Section 9. Therefore, in the event of a
breach by the Executive of any of the provisions of this Section 9, the Company
or its successors or assigns may, in addition to other rights and remedies
existing in its favor, apply to any court of law or equity of competent
jurisdiction for specific performance and/or injunctive or other relief in order
to enforce or prevent any violations of the provisions of this Agreement.

         10.      Injunctive Relief.

         In the event that the Company seeks an injunction or similar equitable
relief for the breach or threatened breach of the provisions of Section 8 or 9
of this Agreement, the Executive agrees that the Executive shall not use the
availability of arbitration in Section 15 hereof as grounds for the dismissal of
any such injunctive action.

         11.      Successors and Assigns.

         11.1 Assignment by the Company. The Company shall require any
successors (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform if no such
succession had taken place. As used in this Section, the "Company" shall mean
the Company as hereinbefore defined and any successor to its business and/or
assets as aforesaid which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law and this Agreement shall be
binding upon, and inure to the benefit of, the Company, as so defined. The
Company and the Executive agree that the Company may not assign this Agreement
without the express, written consent of the Executive.

         11.2 Assignment by the Executive. The Executive may not assign this
Agreement or any part thereof without the prior written consent of a majority of
the Board of Directors of the


                                       10


Company; provided, however, that nothing herein shall preclude one or more
beneficiaries of the Executive from receiving any amount that may be payable
following the occurrence of his legal incompetency or his death and shall not
preclude the legal representative of his estate from receiving such amount or
from assigning any right hereunder to the person or persons entitled thereto
under his will or, in the case of intestacy, to the person or persons entitled
thereto under the laws of intestacy applicable to his estate. The term
"beneficiaries", as used in this Agreement, shall mean a beneficiary or
beneficiaries so designated to receive any such amount or, if no beneficiary has
been so designated, the legal representative of the Executive (in the event of
his incompetency) or the Executive's estate.

         12.      Governing Law.

         This Agreement shall be deemed a contract made under, and for all
purposes shall be construed in accordance with, the laws of the State of
Delaware applicable to contracts to be performed entirely within such state;
provided, however, that the parties agree to jurisdiction and venue in any court
of competent jurisdiction located in the State of Maryland for purposes of any
dispute under this Agreement. In the event that a court of any jurisdiction
shall hold any of the provisions of this Agreement to be wholly or partially
unenforceable for any reason, such determination shall not bar or in any way
affect the Company's right to relief as provided for herein in the courts of any
other jurisdiction. Such provisions, as they relate to each jurisdiction, are,
for this purpose, severable into diverse and independent covenants. Service of
process on the parties hereto at the addresses set forth herein shall be deemed
adequate service of such process.

         13.      Entire Agreement.

         This Agreement contains all the understandings and representations
between the parties pertaining to the subject matter hereof and supersedes all
undertakings and agreements, whether oral or in writing, previously entered into
by them.

         14.      Amendment, Modification, Waiver.

         No provision of this Agreement may be amended or modified unless such
amendment or modification is agreed to in writing and signed by the Executive
and by a duly authorized representative of the Company other than the Executive.
Except as otherwise specifically provided in this Agreement, no waiver by either
party of any breach by the other party of any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of a
similar or dissimilar provision or condition at the same or any prior or
subsequent time, nor shall the failure of or delay by either party in exercising
any right, power or privilege hereunder operate as a waiver thereof to preclude
any other or further exercise thereof or the exercise of any other such right,
power or privilege.



                                       11


         15.      Arbitration.

         The Company and the Executive will attempt amicably to resolve
disagreements and disputes hereunder or in connection with the employment of the
Executive by negotiation. If the matter is not amicably resolved through
negotiation, within thirty (30) days after written notice from either party, any
controversy, dispute or disagreement arising out of or relating to this
Agreement, or the breach thereof, will be subject to exclusive, final and
binding arbitration, which will be conducted in Washington, DC in accordance
with the Labor Arbitration Rules of Procedure of the American Arbitration
Association. Either party may bring a court action to compel arbitration under
this Agreement or to enforce an arbitration award. Notwithstanding anything
contained in this Agreement to the contrary, the Company may seek immediate
legal action in a court of competent jurisdiction without any need for
arbitration under this Agreement in the event of any claim of breach by the
Executive of Sections 8, 9 and/or 10 of this Agreement.

         16.      Notices.

         Any notice to be given hereunder shall be in writing and delivered
personally or sent by certified mail, postage prepaid, return receipt requested,
or by overnight delivery services (e.g., Federal Express), addressed to the
party concerned at the address indicated below or at such other address as such
party may subsequently designate in writing by like notice:

         If to the Company:
                                    Hanger Orthopedic Group, Inc.
                                    Two Bethesda Metro Center, Suite 1200
                                    Bethesda, Maryland 20814
                                    Attention: Secretary

         If to the Executive:
                                    George McHenry
                                    10 Blue Heron Court
                                    Medford, New Jersey  08055

         17.      Severability.

         Should any provision of this Agreement be held by a court or
arbitration panel of competent jurisdiction to be enforceable only if modified,
such holding shall not affect the validity of the remainder of this Agreement,
the balance of which shall continue to be binding upon the parties with any such
modification to become a part hereof and treated as though originally set forth
in this Agreement. The parties further agree that any such court or arbitration
panel is expressly authorized to modify any such unenforceable provision of this
Agreement in lieu of severing such unenforceable provision from this Agreement
in its entirety, whether by rewriting the offending provision, deleting


                                       12


any or all of the offending provision, adding additional language to this
Agreement, or by making such other modifications as it deems warranted to carry
out the intent and agreement of the parties as embodied herein to the maximum
extent permitted by law. The parties expressly agree that this Agreement as so
modified by the court or arbitration panel shall be binding upon and enforceable
against each of them. In any event, should one or more of the provisions of this
Agreement be held to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other provisions
hereof, and if such provision or provisions are not modified as provided above,
this Agreement shall be construed as if such invalid, illegal or unenforceable
provisions had never been set forth herein.

         18.      Withholding.

         Anything to the contrary notwithstanding, all payments required to be
made by the Company hereunder to the Executive or his beneficiaries, including
his estate, shall be subject to withholding of such amounts relating to taxes as
the Company may reasonably determine it should withhold pursuant to any
applicable law or regulation. In lieu of withholding such amounts, in whole or
in part, the Company, may, in its sole discretion, accept other provision for
payment of taxes as permitted by law, provided it is satisfied in its sole
discretion that all requirements of law affecting its responsibilities to
withhold such taxes have been satisfied.

         19.      Survivorship.

         The respective rights and obligations of the parties hereunder shall
survive any termination of this Agreement to the extent necessary to the
intended preservation of such rights and obligations.


            [The remainder of this page is intentionally left blank]





                                       13


         IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.


HANGER ORTHOPEDIC GROUP, INC.



By: /s/ Ivan R. Sabel                             /s/ George McHenry
   ---------------------------------              ---------------------------
        Ivan R. Sabel                                 George McHenry
        Chairman, President and
        Chief Executive Officer

                                       14


                                                                     EXHIBIT "A"


                    [ATTACH FORM OF 24-MONTH PROMISSORY NOTE]



                                       15

EX-10.(DD)

                              EMPLOYMENT AGREEMENT


         AGREEMENT dated as of the 2nd day of January 2002, by and between
HANGER ORTHOPEDIC GROUP, INC., a Delaware corporation (the "Company"), and
THOMAS F. KIRK (the "Executive").

         WHEREAS, the Executive desires to be employed by the Company pursuant
to a five-year Employment Agreement that expires on December 31, 2006; and

         WHEREAS, the Company desires to employ the Executive and the Executive
desires to continue to accept such employment by the Company, subject to the
terms and conditions set forth below.

         NOW, THEREFORE, in consideration of the promises and mutual agreements
set forth below, both parties agree as follows:

         1. Employment, Term.

         1.1 Employment. The Company agrees to employ the Executive in the
position and with the responsibilities, duties, and authority set forth in
Section 2.

         1.2 Term. The term of the Executive's employment under this Agreement
shall commence as of the date hereof, and shall terminate on the fifth
anniversary of the date hereof, unless extended or sooner terminated in
accordance with this Agreement.

         1.3 Automatic Extension. As of the first anniversary date hereof, and
as of each subsequent anniversary ("Automatic Renewal Date"), unless either
party shall have given notice of non-extension prior to such Automatic Renewal
Date, the term of this Agreement shall be extended automatically for a period of
one year.

         1.4 Office. The Executive's principal office will be in Bethesda, MD.

         2. Position, Duties.

         The Executive shall serve the Company in the position of President and
Chief Operating Officer, and shall be duly appointed a member of the Board of
Directors. The Executive shall perform, faithfully and diligently, the duties
appropriate to said position, which shall include responsibility for all of the
Company's operating units, divisions, and partially or wholly-owned
subsidiaries, and corporate staff units such as: information technology, human
resources, materials management and purchasing, real estate, legal, regulatory,
compliance, and strategic planning/corporate development, as well as those
responsibilities that shall be assigned to him from time to time by the Chief
Executive Officer and the Board of Directors of the Company. The Executive shall
devote his full business time and attention to the performance of his duties and
responsibilities hereunder.



                                       1


         3. Salary, Incentive Bonus, Stock Options, Other Benefits.

         3.1 Salary. During the term of the Agreement, the Company shall pay to
the Executive a minimum base salary at the rate of $450,000 per annum, payable
in accordance with the standard payroll practices of the Company. The Executive
shall be entitled to such increases in base salary during the term hereof, as
shall be determined and approved by the Compensation Committee of the Board of
Directors of the Company in their sole discretion, taking account of the
performance of the Company and the Executive, and other factors generally
considered relevant to the salaries of executives holding similar positions with
enterprises comparable to the Company.

         3.2 Bonus. (a) In addition to the base salary provided for in Section
3.1, the Executive shall participate in the Company's current bonus plan for
senior corporate officers (the "Bonus Plan"), as approved by the Compensation
Committee of the Board of Directors, in each calendar year of the Company
falling during the term of this Agreement. The target bonus for Executive will
be at least 75% of base salary if performance goals are met, and up to 150% of
salary if performance goals are exceeded. The bonus shall be payable upon or
within a reasonable period of time after the receipt of the Company's audited
financial statements for the applicable calendar year in accordance with the
Company's normal practices.

         (b) In the event of termination of employment of the Executive pursuant
to Section 6.1 (Death), Section 6.2 (Disability), Section 6.4 (Without Cause),
Section 6.5 (Voluntary Termination) or Section 7 of this Agreement, and provided
that all of terms and conditions of the Plan are satisfied including, but not
limited to, the attainment of stated objectives, the Executive (or his estate or
other legal representative) shall be entitled to a pro-rated bonus in years
subsequent to 2003 for the calendar year in which such termination takes place
in amount equal to the product of (i) the bonus for such calendar year
determined pursuant to Section 3.2 (at a minimum amount of 100% of targeted
bonus), multiplied by (ii) a fraction, the numerator of which is the number of
days from the beginning of such calendar year to the date of termination, and
the denominator of which is 365. In the event of the termination of employment
of the Executive pursuant to Section 6.3 (Due Cause) of this Agreement, the
Executive shall not be entitled to a bonus for the calendar year of the Company
in which such termination takes place.

         3.3 Stock Options. (a) In recognition of the Executive's efforts during
2001 to improve shareholder value and as an incentive to have Executive join the
Company, the Company shall grant to Executive options to purchase three hundred
fifty thousand (350,000) shares of common stock, $.01 par value per share (the
"Stock"), pursuant to the terms of the 1991 Stock Option Plan, as amended, of
the Company, upon execution of this agreement, pursuant to Section 1.2 of this
agreement. Such options shall be valued at the closing price of the Company's
common stock on the day of execution of this agreement. The Company shall also
grant to Executive options to purchase a minimum of one hundred thousand
(100,000) shares of Stock, on each of the first, second, and


                                       2


third anniversaries of this Agreement. Options grants subsequent to this initial
three year period shall be based upon targets adopted annually by the Board of
Directors, which are derived from management generated budgets.

         (b) The options provided in subparagraph (a) shall be evidenced by a
stock option agreement ("Option Agreement") entered into between the Executive
and the Company, which agreement shall provide for a vesting schedule of four
years, in equal parts, of the Options. Notwithstanding any provisions now or
hereafter existing under the 1991 Stock Option Plan, as amended, all options
granted pursuant to this Agreement shall vest in full in the event of the
termination of employment of the Executive pursuant to Section 6.1 (Death),
Section 6.2 (Disability), Section 6.4 (Without Cause), Section 6.5 (Voluntary
Termination), or Section 7 of this Agreement.

         (c) Notwithstanding any provisions now or hereafter existing under the
1991 Stock Option Plan, as amended, in the event of a Change in Control
(hereinafter defined), all options to purchase shares of Stock awarded to the
Executive shall become fully vested as of the date of such Change in Control.

         (d) For purposes of this Agreement, a Change in Control shall be deemed
to exist if:

         (i) a person, as defined in Sections 13(d) and 14(d) of the Securities
         Exchange Act of 1934 (other than the Executive or a group including the
         Executive), either (A) acquires twenty percent (20%) or more of the
         combined voting power of the outstanding securities of the Company
         having the right to vote in elections of directors and such acquisition
         shall not have been approved within sixty (60) days following such
         acquisition by a majority of the Continuing Directors (as hereinafter
         defined) then in office or (B) acquires fifty percent (50%) or more of
         the combined voting power of the outstanding securities of the Company
         having a right to vote in elections or directors; or

         (ii) Continuing Directors shall for any reason cease to constitute a
         majority of the Board of Directors of the Company; or

         (iii) all or substantially all of the business and/or the Company are
         disposed of by the Company to a party or parties other than a
         subsidiary or other affiliate of the Company, pursuant to a partial or
         complete liquidation of the Company, sale of assets (including stock of
         a subsidiary of the Company) or otherwise; or

         (iv) the Board of Directors approves any of the following: the Company
         consolidates with, or merges with or into, any other person (other than
         a wholly owned subsidiary of the Company), or any other person
         consolidates with, or merges with or into, the Company, and, in
         connection therewith, all or part of the outstanding shares of common
         stock shall be changed in any


                                       3


         way or converted into or exchanged for stock or other securities or
         cash or any other property.

         (e) For purposes of this Agreement, the term "Continuing Director"
shall mean a member of the Board of Directors of the Company who either was a
member of the Board of Directors on the date hereof or who subsequently became a
Director and whose election, or nomination for election, was approved by a vote
of at least two-thirds of the Continuing Directors then in office.

         (f) Executive may participate in future awards of options to purchase
Stock in a manner consistent with any stock option plan adopted by the Company
for its senior corporate officers. The determination as to the amount of
options, if any, shall be at the sole discretion of the Board of Directors of
the Company, pursuant to Section 3.3.

         3.4 Senior Corporate Officer Benefits. The Executive shall be entitled
to participate in whatever benefit plans are now existing or hereinafter adopted
by the Company's Board of Directors for the senior corporate officers of the
Company. Upon a Change in Control, any interest, which the Executive has, in any
future Supplement Executive Retirement Plan or deferred compensation plan shall
immediately vest.

         3.5 Car Allowance and Parking. The Executive shall receive a luxury
automobile leased by the Company, under the same terms and conditions as enjoyed
by other senior corporate officers of the Company, which terms shall include
reimbursement for all fuel, toll, maintenance, insurance, and upkeep costs
associated with the vehicle. A reserved parking space shall be provided as part
of the Company's allocated parking spaces.

         3.6 Parachute Penalties. The Company agrees to provide Executive with
payment sufficient to provide a gross-up of any excise, income, and other taxes
resulting from the imposition of the parachute penalties of the Internal Revenue
Code or applicable sales tax laws.

         3.7 Local Residence. The Company agrees to provide Executive with a
leased, furnished residence, of Executive's choosing, of not less than 2,000
square feet, including all utilities, fees, and garage charges, excluding
telephones, within a three (3) mile radius of the corporate headquarters.

         3.8 Other. The Company agrees to provide Executive with a desktop and
laptop computer for his use while in the office and the local residence. In
addition, the Company shall reimburse the Executive up to $3,000 per year for
out-of-pocket expenses for financial and tax planning, and provide life
insurance payable to the Executive's beneficiary of not less than two (2) times
the Executive's base salary. The Company agrees to reimburse Executive's travel
costs between Bethesda, Maryland and the Executive's primary residence, until
the Executive occupies the local residence described in Section 3.7.


                                       4


         4.       Expense Reimbursement.

         During the term of this Agreement, the Company shall reimburse the
Executive for all reasonable and necessary out-of-pocket expenses incurred by
him in connection with the performance of his duties hereunder, upon
presentation of proper accounts in accordance with the Company's policies and
practices for senior corporate officers.

         5. Pension and Welfare Benefits, and Vacation.

         5.1 Benefit Plans. During the term of this Agreement, the Executive
will be eligible to participate in all employee benefit plans and programs
(including, without limitation, 401 (k) Plan, medical, dental, life, and
disability plans of the Company) offered by the Company from time to time to its
senior corporate officers, subject to the provisions of such plans and programs
as in effect from time to time. Executive shall receive first dollar coverage of
all medical, dental, prescription, and vision benefits.

         5.2 Vacation. The Executive shall be entitled to five (5) weeks
vacation per annum, beginning in 2002.

         6. Termination of Employment.

         6.1 Death. In the event of death of the Executive, the Company shall
pay to the estate, or other legal representative of the Executive, the base
salary provided for in Section 3.1 and the Bonus provided for in Section 3.2 (at
the annual rate then in effect) accrued to the date of the Executive's death and
not theretofore paid to the Executive, and an additional twenty-four (24) months
of salary and bonus payments as a death benefit. At the election of the estate
or other legal representative, such payments may be made in a lump sum within
ninety (90) days of election, or as continued salary and bonus payments. The
additional bonus payments shall be calculated by reference to the average annual
bonus received by the Executive in the five years prior to termination in which
Executive received a bonus. In the event five (5) years are not available, the
additional bonus payments shall be calculated by reference to the average annual
bonus for the years received prior to the death of the Executive. Rights and
benefits of the estate or other legal representative of the Executive under the
benefit plans and programs of the Company shall be determined in accordance with
the provisions of such plans and programs.

         6.2 Disability. If the Executive shall become incapacitated by reason
of sickness, accident, or other physical or mental disability and shall be
entitled to payment of benefits under the Company's long term disability plan,
the employment of the Executive may be terminated by the Company or the
Executive. In the event of such termination, the Company shall pay to the
Executive, on a monthly basis, for a period of twenty-four (24) months following
termination, the difference between the Executive's monthly base salary at the
time of termination and the monthly disability pay benefits received by the
Executive. Executive shall also be entitled to annual bonus payments for a
period of twenty-four (24) months following termination, calculated by reference
to the average


                                       5


annual bonus received by the Executive in the five (5) years prior to such
termination in which Executive received a bonus. In the event five (5) years are
not available, the additional bonus payments shall be calculated by reference to
the average annual bonus for the years received prior to the death of the
Executive. At the election of the Executive or his legal representative, such
payments may be made in a lump sum within ninety (90) days of election, or as
continued salary and bonus payments. Rights and benefits of the Executive under
the other benefit plans and programs of the Company shall be determined in
accordance with the terms and provisions of such plans and programs.

         6.3 Due Cause. The employment of Executive hereunder may be terminated
by the Company at any time for Due Cause (as hereinafter defined). In the event
of such termination, the Company shall pay to the Executive the base salary
provided for in Section 3.1 (at the annual rate then in effect) accrued to the
date of termination and not theretofore paid to the Executive. Rights and
benefits of the Executive or his transferee under the benefit plans and programs
of the Company, shall be determined in accordance with the provisions of such
plans and programs. For purposes hereof, "Due Cause" shall be defined as (a) the
Executive's willful and continuing failure to discharge duties and
responsibilities under this Agreement, after having been given notice in writing
and opportunity to cure, (b) any material act of dishonesty involving the
Company, or (c) conviction of a felony.

         6.4 Termination by the Company Without Cause. The Company may terminate
the Executive's employment at any time, for whatever reason it deems appropriate
or without reason; provided however, that in the event that such termination is
not pursuant to Section 6.1 (Death); 6.2 (Disability); 6.3 (Due Cause); or 6.5
(Voluntary Termination), the Company shall pay to the Executive severance pay in
the form of salary continuation for a period of twenty-four (24) months,
commencing on the date of termination, at a rate equal to the base salary
provided for in Section 3.1 (at the annual rate then in effect) and one-half the
bonus provided for in Section 3.2 (at the bonus level for the calendar year
preceding such termination); provided, however, that the bonus payment shall be
no less than fifty (50) percent of the targeted bonus for the calendar year
preceding such termination. At Executive's election, the Company shall
accelerate full payment of the severance pay in a lump sum, payable within
ninety (90) days of Executive's election. During the severance pay period, the
Company shall continue to provide life, disability, medical, and dental coverage
for the Executive at the levels which were being provided to the Executive
immediately prior to the termination of his employment (or such other benefits
as shall be provided to senior corporate officers of the Company in lieu of such
benefits from time to time during the severance pay period) on the same basis,
including Company payment of premiums and Company contributions, as such
benefits are provided to other senior corporate officers of the Company and were
provided to the Executive prior to the termination. In addition, the Executive
will be provided with outplacement benefits commensurate with those provided to
other senior corporate officers of the Company through a vendor selected by the
Company. Rights and benefits of the Executive or transferee under the benefit
plans and programs of the Company shall be determined in accordance with the
provisions of such plans and programs.



                                       6


         6.5 Voluntary Termination. Executive may terminate his employment with
the Company at any time upon sixty (60) days' prior written notice to the
Company. Except as otherwise provided in this Agreement, rights and benefits of
the Executive or his transferee under the benefit plans and programs of the
Company shall be determined in accordance with provisions of such plans and
programs.

         In the event that Company or the Board of Directors alters the scope of
Employee's position and duties as described in Section 2, without the consent of
the Employee, or Employee experiences any diminution of his base salary,
incentive bonus, stock options, or other benefits as described in Sections 3 and
5 of this Agreement, Employee may terminate his employment with the Company upon
sixty (60) days' prior written notice to the Company, and the Company shall make
payments to the Executive as described in Section 6.4, including severance pay,
all benefits, and outplacement services.

         6.6 Stock Options and Termination. In the event that Executive
terminates employment under Sections 6.1 (Death), 6.2 (Disability), 6.4 (Without
Cause), 6.5 (Voluntary Termination), or Section 7, all outstanding options
granted to Executive shall immediately vest, and Executive (or his estate or
other legal representative, if applicable) shall have one year from termination
in which to exercise such options.

         7. Change In Control and Termination Provisions.

         7.1 Termination Upon Change In Control. If within a two year period
following any Change in Control there occurs:

         (a) any termination of the Executive (other than as set forth in
Section 6.1 (Death), 6.2 (Disability), 6.3 (Due Cause), or 6.5 (Voluntary
Termination) of this Agreement;

         (b) a material diminution of the Executive's responsibilities as
described in Section 2;

         (c) any reduction in the sum of Executive's annual base salary and
bonus under the Company's Bonus Plan as of the date immediately prior to the
Change in Control;

         (d) any failure to provide the Executive with benefits at least as
favorable as those enjoyed by similarly situated senior corporate officers at
the Company under the Company's pension, life insurance, medical, health and
accident, disability or other written employee plans under which the form and/or
amounts of benefits are prescribed in applicable documents.



                                       7


         (e) any relocation of the Executive's principal site of employment to a
location more than twenty-five (25) miles from the Executive's principal place
of employment as of the date immediately prior to the Change in Control;

         (f) any material breach of this Agreement on the part of the Company;

then, at the option of the Executive, exercisable by the Executive within thirty
(30) days after the occurrence of any of the foregoing events, the Executive may
resign from employment with the Company (or, if involuntarily terminated, give
notice of intention to collect benefits under this Agreement) by delivering a
notice in writing (the "Notice of Termination") to the Company, and shall be
entitled to the severance pay and benefit continuation provisions of Section 6.4
in their entirety, provided, however, that the severance pay shall be the total
of eighteen (18) months of the base pay then in effect and 150% of the targeted
bonus for the calendar year preceding such Notice of Termination, payable, at
Executive's option, either as salary continuation for eighteen (18) months, or
in a lump sum, payable within ninety (90) days of Executive's election.

         8. Confidential Information.

         8.1 Nondisclosure. Unless the Executive secures the Company's written
consent, the Executive will not disclose, use, disseminate, lecture upon, or
publish Confidential Information which he becomes informed of during his
employment, whether or not developed for him for a period of two (2) years after
termination of his employment by the Company.

         8.2 Confidential Information Defined. "Confidential Information" means
information disclosed to the Executive or known by him as a result of his
employment by the Company, not generally known in the industry, about the
Company's services, products, or customers, including, but not limited to,
clinical programs, procedures and protocols, research, operating manuals,
finance strategic planning, client retention, data processing, insurance plans,
risk management, marketing, contracting and selling and employees.

         9.       Interference With the Company.

         The Executive will not, (a) for a period of two (2) years after
termination of his employment by the Company, directly or indirectly (i) engage,
whether as principal, agent, investor, representative, stockholder (other than
as the holder of not more than five (5) percent of the stock or equity of any
corporation the capital stock of which is publicly traded), employee,
consultant, volunteer or otherwise, with or without pay, in any activity or
business venture, anywhere within the continental United States, which is
competitive with the business of the Company on the date of termination, (ii)
solicit or entice or endeavor to solicit or entice way from the Company any
director, officer, employee, agent or consultant of the Company, either on his
own account or for any person, firm, corporation or other organization, whether
or not the person solicited would commit any breach of such person's contract of
employment by reason of leaving the Company's service; (iii) solicit or entice
or endeavor to solicit or entice away any of the clients or Customers of the
Company with the purpose of competing with the business of the Company on the
date of termination, either on his own account or for any other person, firm,

                                       8


corporation or organization; or (iv) employ any person who was a director,
officer, or employer of the Company, at any time during the two years preceding
termination of his employment with the Company, unless such person's employment
was terminated by the Company, or any person who is or may be likely to be in
possession of any Confidential Information not generally known in the industry.

         The parties hereto agree that if, in any proceeding, the Court or other
authority shall refuse to enforce covenants set forth in this Section 9, because
such covenants cover too extensive a geographic area or too long a period of
time, any such covenant shall be deemed appropriately amended and modified in
keeping with the intention of the parties to the maximum extent permitted by
law.

         10.      Injunctive Relief.

         In the event that the Company seeks an injunction or similar equitable
relief for the breach or threatened breach of the provisions of Sections 8 or 9
of this Agreement, the Executive agrees that the Executive shall not use the
availability of arbitration in Section 15 hereof as grounds for the dismissal of
any such injunctive action.

         11.      Successors and Assigns.

         11.1 Assignment by the Company. The Company shall require any
successors (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to assume and agree to perform this Agreement in the same manner and to
the same extent that the Company would be required to perform if no such
succession had taken place. As used in this Section, the "Company" shall mean
the Company as hereinbefore defined and any successor to its business and/or
assets as aforesaid which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law and this Agreement shall be
binding upon and inure to the benefit of, the Company, as so defined. The
Company and the Executive agree that the Company may not assign this Agreement
without the express, written consent of the Executive.

         11.2 Assignment by the Executive. The Executive may not assign this
Agreement or any part thereof without the prior written consent of a majority of
the Board of Directors of the Company; provided, however, that nothing herein
shall preclude one or more beneficiaries of the Executive from receiving any
amount that may be payable following the occurrence of his legal incompetency or
his death and shall not preclude the legal representative of his estate from
receiving such amount or from assigning any right hereunder to the person or
persons entitled thereto under his will or, in the case of intestacy, to the
person or persons entitled thereto under the laws of


                                       9


intestacy applicable to his estate. The term "beneficiaries", as used in this
Agreement, shall mean a beneficiary or beneficiaries so designated to receive
any such amount or, if no beneficiary has been so designated, the legal
representative of the Executive (in the event of his incompetency) or the
Executive's estate.

         12. Governing Law.

         This Agreement shall be deemed a contract made under, and for all
purposes shall be construed in accordance with, the laws of the State of
Delaware applicable to contracts to performed entirely within such state. In the
event that a court of any jurisdiction shall hold any of the provisions of this
Agreement to be wholly or partially unenforceable for any reason, such
determination shall not bar or in any way affect the Company's right to relief
as provided for herein thin the courts of any other jurisdiction. Such
provisions, as they relate to each jurisdiction, are, for this purpose,
severable into diverse and independent covenants. Service of process on the
parties hereto at the addresses set forth herein shall be deemed adequate
service of process.

         13. Entire Agreement.

         This Agreement contains all the understandings and representations
between the parties pertaining to the subject matter hereof and supersedes all
undertakings and agreements, whether oral or in writing, previously entered into
by them.

         14. Amendment, Modification, Waiver.

         No provision of this Agreement may be amended or modified unless such
amendment or modification is agreed to in writing and signed by the Executive
and by a duly authorized representative of the Company other than the Executive.
Except as otherwise specifically provided for in this Agreement, no waiver by
either party of any breach by the other party of any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of a
similar or dissimilar provision or condition at the same or any prior or
subsequent time, nor shall the failure of or delay by either party in exercising
any right, power, or privilege hereunder operate as a waiver thereof to preclude
any other or further exercise thereof, or exercise of any other such right,
power, or privilege.

         15. Arbitration.

         The Company and the Executive will attempt amicably to resolve
disagreements and disputes hereunder or in connection with the employment of
Executive by negotiation. If the matter is not amicably resolved through
negotiation, within thirty (30) days after written notice from either party, any
controversy, dispute or disagreement arising out of or relating to this
Agreement, or the branch thereof, will be subject to exclusive, final, and
binding arbitration, which will be conducted in Washington, DC in accordance
with the Labor Arbitration Rules of Procedure of the American Arbitration

                                       10


Association. Either party may bring a court action to compel arbitration under
this Agreement or to enforce an arbitration award.

         16. Notices.

         Any notice to be given hereunder shall be in writing and delivered
personally or sent by certified mail, postage prepaid, return receipt requested,
addressed to the party concerned at the address indicated below or at such other
address as such party may subsequently designated by like notice:

         If to the Company:

         Hanger Orthopedic Group, Inc.
         2 Bethesda Metro Center, Suite 1200
         Bethesda, MD 20814

         If to the Executive:

         Thomas F.Kirk
         2616 Lighthouse Bend Drive
         Ponte Vedra Beach, FL 32082

         17. Severability

         Should any provision of this Agreement be held by a court or
arbitration panel of competent jurisdiction to be enforceable only if modified,
such holding shall not affect the validity of the remainder of this Agreement,
the balance of which shall continue to be binding upon the parties with any such
modification to become a part hereof and treated as though originally set forth
in this Agreement. The parties further agree that any such court or arbitration
panel is expressly authorized to modify any such unenforceable provision of this
Agreement in lieu of severing such unenforceable provision from this Agreement
in its entirety, whether by rewriting the offending provision, deleting any or
all of the offending provision, adding additional language to this Agreement, or
by making such other modifications as it deems warranted to carry out the intent
and agreement of the parties as embodied herein to the maximum extent permitted
by law. The parties expressly agree that this Agreement as so modified by the
court or arbitration panel shall be binding upon and enforceable against each of
them. In any event, should one or more of the provisions of this Agreement be
held to be invalid, illegal, or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provisions hereof, and
if such provision or provisions are not modified as provided above, this
Agreement shall be construed as if such invalid, illegal, or unenforceable
provisions had never been set forth herein.


                                       11


         18. Withholding.

         Anything to the contrary notwithstanding, all payments required to be
made by the Company hereunder to the Executive or his beneficiaries, including
his estate, shall be subject to withholding of such amounts relating to taxes as
the Company may reasonably determine it should withhold pursuant to any
applicable law or regulation. In lieu of withholding such amounts, in whole or
in part, the Company may, in its sole discretion, accept other provisions for
payment of taxes as permitted by law, provided it is satisfied in its sole
discretion that all requirements of law affecting its responsibilities to
withhold such taxes have been satisfied.

         19. Survivorship.

         The respective rights and obligations of the parties hereunder shall
survive any termination of this Agreement to the extent necessary to the
intended preservation of such rights and obligations.

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.

                                  HANGER ORTHOPEDIC GROUP, INC.


                                  By: /s/ Ivan R. Sabel
                                      ------------------------------------------
                                        Ivan R. Sabel, Chairman and Chief
                                        Executive Officer


                                        /s/ Thomas F. Kirk
                                        --------------------------------------
                                        Thomas F. Kirk



                                       12

EX-21

                                                                      EXHIBIT 21

                  SUBSIDIARIES OF HANGER ORTHOPEDIC GROUP, INC.

       Each of the subsidiaries in the following list is a wholly-owned
subsidiary of Hanger Orthopedic Group, Inc., unless otherwise indicated below:

Name                                                           State/Country of
                                                                  Incorporation
Hanger Prosthetics & Orthotics, Inc.                                   Delaware
Southern Prosthetic Supply, Inc.                                        Georgia
DOBI-Symplex, Inc.                                                     Delaware
OPNET, Inc.                                                              Nevada
Hanger Europe, N.V.*                                                    Belgium

       The following are wholly-owned subsidiaries of Hanger Prosthetics &
Orthotics, Inc.

Eugene Teufel & Son Orthotics & Prosthetics, Inc.                   Pennsylvania
HPO, Inc.                                                               Delaware

       The following are wholly-owned subsidiaries of HPO, Inc.

Advanced Orthopedic Technologies, Inc.                                    Nevada
Hanger Prosthetics & Orthotics Holdings, Inc.                           Delaware

       The following are wholly-owned subsidiaries of Hanger Prosthetics &
Orthotics Holdings, Inc.

Hanger Prosthetics & Orthotics West, Inc.                             California
Hanger Prosthetics & Orthotics East, Inc.                               Delaware

       The following is a wholly-owned subsidiary of Advanced Orthopedic
Technologies, Inc.

Advanced Orthopedic Technologies (Clayton), Inc.                      New Jersey

       The following are wholly-owned subsidiaries of Hanger Prosthetics &
Orthotics West, Inc.

AD Craig Company                                                      California
Progressive Orthopedic                                                California

       The following are wholly-owned subsidiaries of Hanger Prosthetics &
Orthotics East, Inc.

E.A. Warnick-Pomeroy Co., Inc.                                      Pennsylvania
Frank J. Malone & Son, Inc.                                         Pennsylvania
Meadowbrook Orthopedics, Inc.                                           Michigan
Medical Arts O&P Services, Inc.                                        Wisconsin
Orthotic & Prosthetic Rehabilitation Technologies, Inc.                  Florida
University Orthotic & Prosthetic Consultants, Ltd.                  Pennsylvania

*      Hanger Orthopedic Group, Inc. owns 60% of Hanger Europe, N.V., a Belgian
       limited liability company.

EX-23

                                                                      Exhibit 23


                       Consent of Independent Accountants

         We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 33-63191) of Hanger Orthopedic Group, Inc. and
Subsidiaries of our report dated March 12, 2002 relating to the financial
statements and financial statement schedule, which appears in this Form 10-K.




PRICEWATERHOUSECOOPERS LLP



McLean, Virginia
March 28, 2002