10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007

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	(IRS Employer Identification No.)
incorporation or organization)

Two Bethesda Metro Center, Suite 1200, Bethesda, MD  20814

(Address of principal executive offices)    (Zip Code)

Registrant’s telephone number, including area code:

(301) 986-0701

Former name, former address and former fiscal year, if changed since last report.

        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 |_|

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

        Large accelerated filer |_|        Accelerated filer |X|        Non-accelerated filer |_|

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

        As of November 2, 2007, 22,656,298 shares of common stock, $.01 par value per share were outstanding.

HANGER ORTHOPEDIC GROUP, INC.

INDEX

		Page No.
Part I.        FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (Unaudited)
Unaudited Consolidated Balance Sheets - September 30, 2007 and
December 31, 2006		1
Unaudited Consolidated Statements of Operations for the
Three and Nine Months ended September 30, 2007 and 2006		3
Unaudited Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 2007 and 2006		4
Notes to Consolidated Financial Statements (Unaudited)		5
Item 2.	Management’s Discussion and Analysis of Financial
Condition and Results of Operations		22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	41
Part II.        OTHER INFORMATION
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	42
Item 6.	Exhibits	43
SIGNATURES		44

Certifications of Chief Executive Officer and Chief Financial Officer

HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)

	September 30, 2007		December 31, 2006
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	23,357	$	23,139
Accounts receivable, less allowance for doubtful accounts
of $3,944 and $3,369 in 2007 and 2006, respectively		98,543		99,403
Inventories		76,994		75,803
Prepaid expenses, other assets and income taxes receivable		12,501		8,805
Deferred income taxes		7,247		7,962
Total current assets		218,642		215,112
PROPERTY, PLANT AND EQUIPMENT
Land		975		1,065
Buildings		4,884		5,287
Furniture and fixtures		12,635		12,283
Machinery and equipment		28,249		26,323
Leasehold improvements		39,061		33,811
Computer and software		54,945		49,750
Total property, plant and equipment		140,749		128,519
Less accumulated depreciation		96,217		86,225
Total property, plant and equipment		44,532		42,294
INTANGIBLE ASSETS
Excess cost over net assets acquired		457,811		446,371
Patents and other intangible assets, net		4,930		2,935
Total intangible assets, net		462,741		449,306
OTHER ASSETS
Debt issuance costs, net		9,763		10,853
Other assets		1,817		1,557
Total other assets		11,580		12,410
TOTAL ASSETS	$	737,495	$	719,122

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

1

HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)

	September 30, 2007			December 31, 2006
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Current portion of long-term debt	$	5,999		$	5,386
Accounts payable		18,730			19,093
Accrued expenses		9,509			10,862
Accrued interest payable		6,328			1,803
Accrued compensation related costs		15,908			20,760
Total current liabilities		56,474			57,904
LONG-TERM LIABILITIES
Long-term debt, less current portion		404,885			405,238
Deferred income taxes		34,345			30,741
Other liabilities		12,318			9,908
Total liabilities		508,022			503,791
COMMITMENTS AND CONTINGENCIES (Note H)
CONVERTIBLE PREFERRED STOCK
Series A Convertible Preferred stock, liquidation preference of $1,000
per share, 50,000 shares authorized, issued and outstanding in 2007		47,654			47,654
SHAREHOLDERS’ EQUITY
Common stock, $.01 par value; 60,000,000 shares authorized,
22,640,439 shares and 22,094,113 shares issued and
outstanding in 2007 and 2006, respectively		243			224
Additional paid-in capital		159,803			156,480
Retained earnings		22,429			11,629
		182,475			168,333
Treasury stock at cost (141,154 shares)		(656	)		(656	)
Total shareholders' equity		181,819			167,677
TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS’ EQUITY	$	737,495		$	719,122

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

2

HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30,
(Dollars in thousands, except share and per share amounts)
(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Net sales		162,343		151,549		466,560		444,849
Cost of goods sold (exclusive of depreciation and amortization)		79,962		76,229		231,456		221,790
Selling, general and administrative		59,873		54,569		174,744		167,947
Depreciation and amortization		3,943		3,630		11,569		11,077
Income from operations		18,565		17,121		48,791		44,035
Interest expense		9,318		9,852		27,783		29,266
Extinguishment of debt		--		537		--		16,953
Income (loss) before taxes		9,247		6,732		21,008		(2,184	)
Provision (benefit) for income taxes		3,838		3,274		8,722		(747	)
Net income (loss)		5,409		3,458		12,286		(1,437	)
Preferred stock dividend and accretion-7% Redeemable
Preferred Stock		--		--		--		2,752
Preferred stock dividend-Series A Convertible Preferred Stock		416		416		1,249		583
Accretion of beneficial conversion feature		--		1,544		--		3,768
Net income (loss) applicable to common stock	$	4,993	$	1,498	$	11,037	$	(8,540	)
Basic Per Common Share Data
Net income (loss) applicable to common stock	$	0.22	$	0.07	$	0.49	$	(0.39	)
Shares used to compute basic per common share amounts		22,606,453		22,030,207		22,399,221		21,937,865
Diluted Per Common Share Data
Net income (loss) applicable to common stock	$	0.18	$	0.07	$	0.41	$	(0.39	)
Shares used to compute diluted per common share amounts		30,353,947		29,331,813		30,069,695		21,937,865

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

3

HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
(Dollars in thousands)
(Unaudited)

	2007			2006
Cash flows from operating activities:
Net (loss) income	$	12,286		$	(1,437	)
Adjustments to reconcile net income to net cash provided by operating activities:
Extinguishment of debt		--			16,953
Premiums paid on early extinguishment of debt		--			(11,866	)
Gain on disposal of assets		262			72
Provision for bad debt		11,919			13,085
Provision for deferred income taxes		3,344			(1,012	)
Depreciation and amortization		11,569			11,077
Amortization of debt issuance costs		1,358			1,566
Compensation expense on stock options and restricted stock		2,318			1,472
Amortization of terminated interest rate swaps		--			(207	)
Changes in assets and liabilities, net of effects of acquired companies:
Accounts receivable		(9,588	)		(7,461	)
Inventories		(511	)		(1,628	)
Prepaid expenses, other current assets, and income taxes receivable		(4,791	)		(6,223	)
Other assets		9			86
Accounts payable		(733	)		(1,769	)
Accrued expenses, accrued interest payable, and income taxes payable		2,336			(1,722	)
Accrued compensation related costs		(4,852	)		(4,511	)
Other liabilities		5,323			1,633
Net cash provided by operating activities		30,249			8,108
Cash flows from investing activities:
Purchase of property, plant and equipment (net of acquisitions)		(13,410	)		(7,911	)
Acquisitions and contingent purchase price (net of cash acquired)		(12,588	)		(679	)
Proceeds from sale of property, plant and equipment		366			57
Net cash used in investing activities		(25,632	)		(8,533	)
Cash flows from financing activities:
Borrowings under revolving credit agreement		--			21,000
Repayments under revolving credit agreement		--			(26,000	)
Repayment of term loan		(1,726	)		(147,200	)
Repayment of senior notes		--			(200,000	)
Repayment of senior subordinated debt		--			(15,562	)
Repurchase of 7% Redeemable Preferred Stock		--			(64,693	)
Proceeds from new term loan facility		--			230,000
Proceeds from senior note issuance		--			175,000
Proceeds from issuance of Series A Convertible Preferred Stock		--			50,000
Scheduled repayment of long-term debt		(1,944	)		(1,786	)
Financing costs		(268	)		(13,578	)
Proceeds from issuance of Common Stock		788			507
Preferred stock dividends paid		(1,249	)		(583	)
Change in book overdraft		--			(667	)
Net cash (used in) provided by financing activities		(4,399	)		6,438
Increase in cash and cash equivalents		218			6,013
Cash and cash equivalents, at beginning of period		23,139			7,921
Cash and cash equivalents, at end of period	$	23,357		$	13,934

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

4

HANGER ORTHOPEDIC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A – BASIS OF PRESENTATION

The unaudited interim consolidated financial statements as of and for the three and nine months ended September 30, 2007 and 2006 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary for a fair statement for the periods presented. The year-end consolidated data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).

These consolidated financial statements should be read in conjunction with the consolidated financial statements of Hanger Orthopedic Group, Inc. (the “Company”) and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2006, filed by the Company with the SEC.

NOTE B – SIGNIFICANT ACCOUNTING PRINCIPLES

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 GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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, provided that (i) delivery has occurred or services have been rendered; (ii) persuasive evidence of an arrangement exists; (iii) the sales price is fixed or determinable; and (iv) collectibility is reasonably assured. Revenues on the sale of orthotic and prosthetic devices to customers by our distribution segment are recorded upon the shipment of products, in accordance with the terms of the invoice, net of merchandise returns received and the amount established for anticipated returns. Discounted sales are recorded at net realizable value. Deferred revenue represents prepaid tuition and fees received from students enrolled in our practitioner education program.

5

NOTE B – SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)

Revenue Recognition (continued)

Revenue at our patient-care centers segment is recorded net of all governmental adjustments, contractual adjustments and discounts. We employ a systematic process to ensure that our sales are recorded at net realizable value and that any required adjustments are recorded on a timely basis. The contracting module of our centralized, computerized billing system is designed to record revenue at net realizable value based on our contract with the patient’s insurance company. Updated billing information is received periodically from payors and is uploaded into our centralized contract module and then disseminated to all patient-care centers electronically.

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

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

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

6

NOTE B – SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)

Inventories

Inventories, which consist principally of raw materials, work-in-process and finished goods, are stated at the lower of cost or market using the first-in, first-out method. At our patient-care centers segment, we calculate cost of goods sold in accordance with the gross profit method for all reporting periods. 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, such as sales mix and purchasing trends among other factors, affecting cost of goods sold during the current reporting periods. Cost of goods sold during the period is adjusted when the annual physical inventory is taken. We treat these adjustments as changes in accounting estimates. At our distribution segment, a perpetual inventory is maintained. Management adjusts our reserve for inventory obsolescence whenever the facts and circumstances indicate that the carrying cost of certain inventory items is in excess of its market price. Shipping and handling costs are included in cost of goods sold.

Property, Plant and Equipment

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

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

We capitalize internally developed computer software costs incurred during the application development stage in accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.

Stock-Based Compensation

The Company issues options and restricted shares of common stock under two active share-based compensation plans, one for employees and the other for non-employee members of the Board of Directors. At September 30, 2007, 4.7 million shares of common stock are authorized for issuance under the Company’s share-based compensation plans. Shares of common stock issued

7

NOTE B – SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)

Stock-Based Compensation (continued)

under the share-based compensation plans are released from the Company’s authorized shares. Stock option and restricted share awards are granted at the fair market value of the Company’s common stock on the date immediately preceding the date of grant. Stock option awards vest over a period determined by the compensation plan, ranging from one to three years, and generally have a maximum term of ten years. Restricted shares of common stock vest over a period of time determined by the Compensation Committee of the Board of Directors ranging from one to four years.

The Company follows the provisions of Statement of Financial Accounting Standards 123R, Share-Based Payment (“SFAS 123R”), which requires companies to measure and recognize compensation expense for all share-based payments at fair value. For the three month periods ended September 30, 2007 and 2006, the Company recognized $0.9 million and $0.7 million in compensation expense, respectively, which primarily relates to restricted share grants. The Company recognized $2.3 million and $1.5 million in compensation expense for the nine month periods ended September 30, 2007 and 2006, respectively, which primarily relates to restricted share grants. The amount of expense related to options is deminimus in all periods presented. The Company calculates the fair value of stock options using the Black-Scholes model. The total value of the share based awards is expensed ratably over the requisite service period of the employees receiving the awards.

Segment Information

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

Restructuring

During 2001 and 2004 the Company recorded certain restructuring charges. As of September 30, 2007, the remaining liability approximates $.07 million and relates to lease termination and other exit costs to be paid through 2012.

Income Taxes

We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, on January 1, 2007. As a result of adoption, we recognized a decrease of approximately $0.2 million to the January 1, 2007 retained earnings balance. As of the adoption date, we had gross tax affected unrecognized tax benefits of $3.3 million of which $1.1 million, if recognized, would affect the effective tax rate. Over the next 12 months we may recognize gross tax affected unrecognized tax benefits of up to $1.5

8

NOTE B – SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)

Income Taxes(continued)

million, a substantial portion of which is not expected to impact the effective tax rate, due to the pending expiration of the period of limitations for assessing tax deficiencies for certain income tax returns. As of the adoption date, we had accrued interest expense and penalties related to the unrecognized tax benefits of $0.4 million and $0.4 million, respectively. We recognize interest accrued and penalties related to unrecognized tax benefits as a component of income tax expense. Total penalties and interest accrued as of September 30, 2007 was $1.0 million, including $0.2 million in the current income tax provision for the nine month period ended September 30, 2007. The Company files numerous consolidated and separate income tax returns in the United States Federal jurisdiction and in many state jurisdictions. The Company is no longer subject to US Federal income tax examinations for years before 2003 and with few exceptions is no longer subject to state and local income tax examinations by tax authorities for years before 2002.

New Accounting Guidance

In September 2006, the FASB issued SFAS 157, Fair Value Measurements (“SFAS 157”). SFAS 157 provides guidance on the application of fair value measurement objectives required in existing GAAP literature to ensure consistency and comparability. Additionally, SFAS 157 requires additional disclosures on the fair value measurements used. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact of adopting SFAS 157 on our financial statements.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities Fair Value Measurements (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. SFAS 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company believes the adoption of SFAS 159 will not have a material impact on its financial statements.

9

NOTE C — SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION

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

	Nine Months Ended September 30,
(In thousands)	2007		2006
Cash paid during the period for:
Interest	$	22,830	$	29,900
Income taxes		8,761		3,994
Non-cash financing and investing activities:
Preferred stock dividends declared	$	1,249	$	3,315
Preferred stock accretion		--		20
Issuance of notes in connection with acquistions		3,930		100
Accretion of beneficial conversion feature		--		3,768
Issuance (cancellation) of restricted shares of common stock		14,750		(78	)

NOTE D – ACQUISITIONS

During the three month period ended September 30, 2007, the Company acquired a distribution company, for which it paid an aggregate purchase price of $14.0 million, consisting of $11.0 million in cash, and a $3.0 million promissory note. During the nine month period ended September 30, 2007 the Company acquired 4 patient care centers, a distribution company, and a footwear company for an aggregate purchase price of $16.0 million, consisting of $12.0 million in cash, and $4.0 million in promissory notes. The Company acquired two patient care centers during the three and nine month periods ended September 30, 2006, for which it paid an aggregate purchase price of $0.3 million.

The Company accounts for its acquisitions using the purchase method of accounting. In conjunction with the acquisitions completed during the nine months ended September 30, 2007, the Company recorded approximately $11.3 million of goodwill and $2.6 million of customer related intangible assets. The customer related intangible assets are to be amortized over their useful life of ten years. The results of operations for these acquisitions are included in the Company’s results of operations from their date of acquisition. Pro forma results would not be materially different.

In connection with acquisitions, the Company occasionally agrees to make earnout payments if cash collection targets are reached that verify the value of the target negotiated at acquisition. Earnouts are defined in the purchase agreement and are accrued based on attainment of earnout targets. In connection with these agreements, the Company made earnout payments of $0.2 million and $0.5 million during the nine month periods ended September 30, 2007 and 2006, respectively. The Company has accounted for these amounts as additional purchase price, resulting in an increase in excess cost over net assets acquired. The Company estimates that it may pay up to a total of $4.4 million related to earnout provisions in future periods.

NOTE E — GOODWILL

The Company determined that it has two reporting units, which are the same as its reportable segments: (i) patient-care centers and (ii) distribution. The Company completes its annual

10

NOTE E - GOODWILL (CONTINUED)

goodwill impairment analysis in October. The fair value of the Company’s reporting units are primarily determined based on the income approach and considers the market and cost approach.

The activity related to goodwill for the nine month period ended September 30, 2007 is as follows:

(In thousands)	Patient-Care Center		Distribution		Total
Balance at December 31, 2006	$	417,988	$	28,383	$	446,371
Additions due to acquisitions		1,493		9,825		11,318
Additions due to earnouts		122		--		122
Balance at September 30, 2007	$	419,603	$	38,208	$	457,811

NOTE F – INVENTORY

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

	September 30, 2007		December 31, 2006
(In thousands)
Raw materials	$	29,728	$	29,032
Work-in-process		29,088		27,279
Finished goods		18,178		19,492
	$	76,994	$	75,803

NOTE G – LONG TERM DEBT

Long-term debt consists of the following:

	September 30, 2007			December 31, 2006
(In thousands)
Term Loan	$	227,125		$	228,852
10 1/4% Senior Notes due 2014		175,000			175,000
Subordinated seller notes, non-collateralized, net of unamortized discount
with principal and interest payable in either monthly, quarterly or annual
installments at effective interest rates ranging from 5.0% to 10.8%, maturing
through December 2011		8,759			6,772
		410,884			410,624
Less current portion		(5,999	)		(5,386	)
	$	404,885		$	405,238

11

NOTE G – LONG TERM DEBT (CONTINUED)

Refinancing

On May 26, 2006, the Company refinanced its debt and preferred stock with the issuance of the following instruments: (i) $175.0 million of 10 ¼% Senior Notes due 2014; (ii) a $230.0 million term loan facility; and (iii) $50.0 million of Series A Convertible Preferred Stock. The Company also established a new $75.0 million revolving credit facility, which was unused at September 30, 2007. The proceeds from these instruments were used to retire (i) $200.0 million of 10 3/8% Senior Notes; (ii) $15.6 million of 11 ¼% Senior Subordinated Notes; (iii) $146.3 million of the Term Loan; (iv) $11.0 million outstanding under the Revolving Credit facility; (v) $64.7 million of 7% Redeemable Preferred Stock; and (vi) pay $24.7 million of transaction costs. In conjunction with the refinancing, the Company incurred a $17.0 million loss on the extinguishment of debt. The extinguishment loss is comprised primarily of $11.4 million of premiums paid to debt holders, $0.3 million of fees paid to the 7% Redeemable Preferred Stock holders and $6.1 million write-off of debt issuance costs, offset by a $1.3 million gain related to the interest rate swap.

Revolving Credit Facility

The $75.0 million Revolving Credit Facility matures on May 26, 2011 and bears interest, at the Company’s option, of LIBOR plus 2.75% or a Base Rate (as defined in the credit agreement) plus 1.75%. The obligations under the Revolving Credit Facility are guaranteed by the Company’s subsidiaries and are secured by a first priority perfected interest in the Company’s subsidiaries’ shares, all of the Company’s assets and all the assets of the Company’s subsidiaries. The Revolving Credit Facility requires compliance with various covenants including but not limited to a maximum total leverage ratio and a maximum annual capital expenditures limit. As of September 30, 2007, the Company has not made draws on the Revolving Credit Facility and has $72.0 million available under that facility. Availability under the Company’s Revolving Credit Facility is net of standby letters of credit of approximately $3.0 million.

Term Loan

The $230.0 million Term Loan matures on May 26, 2013 and requires quarterly payments which commenced on September 30, 2006. From time to time, mandatory payments may be required as a result of capital stock issuances, additional debt incurrence, asset sales or other events as defined in the credit agreement. The Term Loan bears interest, at the Company’s option, at LIBOR plus 2.25% or a Base Rate (as defined in the credit agreement) plus 1.50%. At September 30, 2007, the interest rate on the Term Loan was 7.45%. The obligations under the Term Loan are guaranteed by the Company’s subsidiaries and are secured by a first priority perfected interest in the Company’s subsidiaries’ shares, all of the Company’s assets and all the assets of the Company’s subsidiaries. The Term Loan is subject to covenants that mirror those of the Revolving Credit Facility.

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NOTE G – LONG TERM DEBT (CONTINUED)

10 ¼% Senior Notes

The 10 ¼% Senior Notes mature June 1, 2014, are senior indebtedness and are guaranteed in full and unconditionally, on a senior unsecured basis by all of the Company’s current and future domestic subsidiaries as well as all the assets of the Company. The parent company has no independent assets or operations and all subsidiaries are 100% owned by the Company. Interest is payable semi-annually on June 1 and December 1, commencing December 1, 2006. On or prior to June 1, 2009, the Company may redeem up to 35% of the aggregate principal amount of the notes at a redemption price of 110.250% of the principal amount thereof, plus accrued and unpaid interest and additional interest, if any, with the net cash proceeds of an equity offering; provided that (i) at least 65% of the aggregate principal amount of the notes remains outstanding immediately after the redemption (excluding notes held by the Company and its subsidiaries); and (ii) the redemption occurs within 90 days of the date of the closing of the equity offering. Except as discussed above, the notes are not redeemable at the Company’s option prior to June 1, 2010. On or after June 1, 2010, the Company may redeem all or part of the notes upon not less than 30 days and no more than 60 days’ notice, for the twelve-month period beginning on June 1 of the following years: at (i) 105.125% during 2010; (ii) 102.563% during 2011; and (iii) 100.0% during 2012 and thereafter.

General

The terms of the Senior Notes and the Revolving Credit Facility limit the Company’s ability to, among other things, incur additional indebtedness, create liens, pay dividends on or redeem capital stock, make certain investments, make restricted payments, make certain dispositions of assets, engage in transactions with affiliates, engage in certain business activities and engage in mergers, consolidations and certain sales of assets. At September 30, 2007, the Company is in compliance with all covenants under these debt agreements.

NOTE H – COMMITMENTS AND CONTINGENT LIABILITIES

Commitments

The Company’s wholly-owned subsidiary, Innovative Neurotronics, Inc. (“IN, Inc.”), is party to a non-binding purchase agreement under which it agrees to purchase assembled WalkAide System kits. As of September 30, 2007, IN, Inc. had outstanding purchase commitments of approximately $.7 million.

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NOTE H – COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

Contingencies

Regulatory Inquiry

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

Management believes that any billing discrepancies are likely to be primarily at the West Hempstead patient-care center. Furthermore, management does not believe the resolution of the matters raised by the allegations will have a materially adverse effect on the Company’s financial statements. The West Hempstead facility generated $.5 million and $.4 million in net sales during each of the nine month periods ended September 30, 2007 and 2006, respectively, or less than .1% of the Company’s net sales, for each period. It should be noted that additional regulatory inquiries may be raised relating to the Company’s billing activities at other locations. No assurance can be given that the final results of the regulatory agencies’ inquiries will be consistent with the results to date or that any discrepancies identified during the ongoing regulatory review will not have a material adverse effect on the Company’s financial statements.

Other Proceedings

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

Guarantees and Indemnifications

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

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NOTE I — PREFERRED STOCK

In May 2006, in connection with its debt refinancing, the Company redeemed 37,881 shares of its 7% Redeemable Preferred Stock for $64.7 million and issued 50,000 shares of Series A Convertible Preferred Stock (“Series A Preferred”) with a stated value of $1,000 per share. The Company incurred $0.3 million of fees in connection with the redemption of the 7% Redeemable Preferred Stock and $2.3 million of costs to issue the Series A Preferred shares. The Series A Preferred provides for cumulative dividends at a rate of 3.33% per annum, payable quarterly in arrears. The Company may elect to defer the payment of dividends. The Series A Preferred may be converted into common shares at $7.56 per share at the option of the holders after a required holding period of 61 days which has since passed or at the option of the Company upon satisfaction of certain conditions. In addition, the initial holders of the Series A Preferred are entitled to have representation on the board of directors of the Company and are entitled to vote on all matters on which the holders of the Company’s common stock are entitled to vote.

The Company has separately accounted for the beneficial conversion feature granted to the holders of the Series A Preferred. The value of the beneficial conversion feature is $3.8 million and is comprised of $1.8 million related to the cost paid by the Company on behalf of the holders and $2.0 million related to the difference between the stated conversion price of the preferred shares and the fair market value of the common stock at the commitment date. The beneficial conversion feature has been included in the value of the Series A Preferred; and was amortized as a reduction of income available to common shareholders over the 61 day holding period.

NOTE J – NET (LOSS) INCOME PER COMMON SHARE

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

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NOTE J – NET (LOSS) INCOME PER COMMON SHARE (CONTINUED)

Net (loss) income per share is computed as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands, except share and per share data)	2007			2006			2007			2006
Net income (loss)	$	5,409		$	3,458		$	12,286		$	(1,437	)
Preferred stock dividends declared and accretion-7% Redeemable
Preferred Stock (1)		--			--			--			(2,752	)
Preferred stock dividends -Series A Convertible Preferred Stock (1)		(416	)		(416	)		(1,249	)		(583	)
Accretion of beneficial conversion feature		--			(1,544	)		--			(3,768	)
Net income (loss) applicable to common stock	$	4,993		$	1,498		$	11,037		$	(8,540	)
Shares of common stock outstanding used to compute basic
per common share amounts		22,606,453			22,030,207			22,399,221			21,937,865
Effect of dilutive restricted stock and options		1,133,737			687,849			1,056,717			--
Effect of dilutive convertible preferred stock		6,613,757			6,613,757			6,613,757			--
Shares used to compute dilutive per common share amounts (2)		30,353,947			29,331,813			30,069,695			21,937,865
Basic income (loss) per share applicable to common stock	$	0.22		$	0.07		$	0.49		$	(0.39	)
Diluted income (loss) per share applicable to common stock		0.18			0.07			0.41			(0.39	)

(1) For the three month period ended September 30, 2006, excludes the effect of the conversion of the 7% Redeemable Preferred Stock as it is considered anti-dilutive.

(2) For the three and nine months ended September 30, 2007 and 2006, options to purchase 1,097,065, 1,097,065, 1,682,565, and 1,682,565 shares of common stock, respectively, are not included in the computation of diluted income per share as these options are anti-dilutive because the exercise prices of these options were greater than the average market price of the Company's stock during the period.

NOTE K – SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

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

The following assumptions were used in the calculation of the net benefit cost and obligation at September 30, 2007:

Discount rate	5.75	%
Average rate of increase in compensation	3.00	%

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NOTE K – SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (CONTINUED)

We believe the assumptions used are appropriate, however, changes in assumptions or differences in actual experience may affect our benefit obligation and future expenses. The change in the Plan’s net benefit obligation is as follows:

	(In thousands)
Net benefit cost accrued at December 31, 2006	$	5,851
Service cost		1,562
Interest cost		252
Net benefit cost accrued at September 30, 2007	$	7,665

NOTE L — STOCK-BASED COMPENSATION

Employee Plans

Under the Company’s 2002 Stock Option Plan, 1.5 million shares of common stock were authorized for issuance. Options may only be granted at an exercise price that is not less than the fair market value of the common stock on the date of grant and may expire no later than ten years after grant. Vesting and expiration periods are established by the Compensation Committee of the Board of Directors, generally with vesting of four years following the date of grant and generally with expirations of ten years after grant. During 2003, the 2002 Stock Option Plan was amended to permit the grant of restricted shares of common stock in addition to stock options and to change the name of the plan to the 2002 Stock Incentive Plan. During May 2006, an additional 2.7 million shares of common stock were authorized for issuance. During May 2007, the Company’s shareholders approved amendments to the 2002 Stock Incentive Plan, most notably the incorporation of the Company’s current annual incentive plan for certain executive officers into the 2002 Stock Incentive Plan. The amendments resulted in the following changes to the 2002 Stock Incentive Plan: (i) addition of performance-based cash awards (“Incentive Awards”) and renaming the 2002 Stock Incentive Plan to be the 2002 Stock Incentive and Bonus Plan; (ii) limitation on the number of options, shares of restricted stock, annual Incentive Awards and long-term Incentive Awards that an individual can receive during any calendar year; (iii) addition of a list of specific performance goals that the Company may use for the provision of awards under the 2002 Stock Incentive and Bonus Plan; (iv) limitation on the total number of shares of stock issued pursuant to the exercise of incentive stock options; and (v) addition of a provision allowing for the Company to institute a compensation recovery policy, which would allow the Compensation Committee, in appropriate circumstances, to seek reimbursement of certain compensation realized under awards granted under the 2002 Stock Incentive and Bonus Plan. In August 2007, 205,000 performance-based restricted shares were granted to certain executives.  These performance-based restricted shares are subject to the same vesting period as the service-based restricted shares for employees.  However, the quantity of restricted shares to be released under this grant is dependent on the diluted EPS for the twelve month period Q3 2007 through Q2 2008.  Note that the agreements which include these performance-based awards

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NOTE L — STOCK-BASED COMPENSATION (CONTINUED)

Employee Plans (continued)

are expected to be renewed annually, at such time a new target performance period will be established.

During the nine months ended September 30, 2007, 4,000 shares were cancelled under the 2002 Stock Incentive and Bonus Plan. At September 30, 2007, 3,041,002 shares of common stock were available for issuance.

Director Plans

During April and May 2003, the Compensation Committee of the Board of Directors and the shareholders of the Company, respectively, approved the 2003 Non-Employee Directors’ Stock Incentive Plan (“2003 Directors’ Plan”) which replaced the Company’s 1993 Non-Employee Director Stock Option Plan (“Director Plan”). The 2003 Directors’ Plan authorized 500,000 shares of common stock for grant and permits the issuance of stock options and restricted shares of common stock. The 2003 Directors’ Plan also provides for the automatic annual grant of 8,500 shares of restricted shares of common stock to each director and permits the grant of an additional restricted stock in the event the director elects to receive his or her annual director fee in restricted shares of common stock rather than cash. Options may only be granted at an exercise price that is not less than the fair market value of the common stock on the date of grant and may expire no later than ten years after grant. Vesting and expiration periods are established by the Compensation Committee of the Board of Directors, generally with vesting of three years following grant and generally with expirations of ten years after grant. In May 2007, the Company’s shareholders further approved an amendment to the 2003 Directors’ Plan providing for the issuance by the Company of restricted stock units to its non-employee directors, at the option of such director. The restricted stock units effectively allow the director to elect to defer receipt of the shares of restricted stock which the director would ordinarily receive on an annual basis until (i) the January 15th of the year following the calendar year in which the director terminates service on the Board of Directors, or (ii) the fifth, tenth or fifteenth anniversary of the annual meeting date on the election form for that year. The director may elect to receive his or her annual grant of restricted stock, including shares to be received in lieu of the annual director fee, in the form of restricted stock units, with such election to take place on or prior to the date of the annual meeting of stockholders for such year. The restricted stock units are subject to the same vesting period as the shares of restricted stock issued under the 2003 Directors’ Plan. During the nine months ended September 30, 2007, no shares were cancelled under the 2003 Directors’ Plan. At September 30, 2007, 310,261 shares of common stock were available for issuance.

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NOTE L — STOCK-BASED COMPENSATION (CONTINUED)

Restricted Shares of Common Stock

A summary of the activity of restricted shares of common stock for the nine months ended September 30, 2007 is as follows:

	Employee Plans					Director Plans
	Shares			Weighted Average Grant Date Fair Value		Shares			Weighted Average Grant Date Fair Value
Nonvested at December 31, 2006		993,375		$	7.91		79,135		$	7.52
Granted		814,000			9.51		70,200			11.38
Vested		(291,438	)		8.46		(24,962	)		7.54
Forfeited		(24,500	)		8.27		--			--
Nonvested at September 30, 2007		1,491,437		$	8.67		124,373		$	9.70

During the three and nine month periods ended September 30, 2007, 41,250 and 316,400 restricted shares of common stock, with an intrinsic value of $0.56 million and $2.7 million, respectively, became fully vested. As of September 30, 2007, total unrecognized compensation cost related to unvested restricted shares of common stock was approximately $13.0 million and the related weighted-average period over which it is expected to be recognized is approximately 3.3 years. The aggregate granted shares have vesting dates through August 2011.

Options

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

	Employee Plans					Director Plans					Non-Qualified Awards
(In thousands, except per share and weighted average price amounts)	Shares			Weighted Average Price		Shares			Weighted Average Price		Shares		Weighted Average Price
Outstanding at December 31, 2006		2,388,983		$	10.70		188,411		$	10.04		406,000	$	5.95
Granted		--			--		--			--		--		--
Terminated		(474,700	)		14.60		--			--		--		--
Exercised		(171,318	)		3.43		(35,298	)		5.68		--		--
Outstanding at September 30, 2007		1,742,965		$	10.35		153,113		$	11.04		406,000	$	5.95
Aggregate intrinsic value at September 30, 2007	$	18,037,896				$	1,691,179				$	2,415,000
Weighted average remaining contractual term (years)		3.1					5.0					2.5

The intrinsic value of options exercised during the three and nine months ended September 30, 2007 was $0.06 million and $0.79 million, respectively. Options exercisable under the Company’s share-based compensation plans at September 30, 2007 were 2.3 million shares with a weighted average exercise price of $9.65, an average remaining contractual term of 3.1 years, and an aggregate intrinsic value of $22.1 million. Cash received by the Company related to the exercise

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NOTE L — STOCK-BASED COMPENSATION (CONTINUED)

Options(continued)

of options during the three and nine months ended September 30, 2007 amounted to $0.05 million and $0.25 million, respectively. As of September 30, 2007, total unrecognized compensation cost related to stock option awards was approximately $10,000 and the related weighted-average period over which it is expected to be recognized is approximately 3.1 years.

Information concerning outstanding and exercisable options as of September 30, 2007 is as follows:

	Options Outstanding						Options Exercisable
	Number of		Weighted Average				Number of		Weighted
Range of Exercise Prices	Options or Awards		Remaining Life (Years)		Exercise Price		Options or Awards		Average Exercise Price
$1.64  to  $1.65		372,821		1.7	$	1.64		372,821	$	1.64
4.63  to    6.02		732,192		1.9		5.39		718,554		5.40
8.08  to  12.10		162,105		5.4		9.32		162,105		9.32
12.96  to  18.63		929,960		4.4		14.76		929,960		14.76
22.13  to  22.50		105,000		1.2		22.31		105,000		22.31
		2,302,078		3.1	$	9.62		2,288,440	$	9.65

NOTE M – SEGMENT AND RELATED INFORMATION

The Company has identified two reportable segments in which it operates based on the products and services it provides. The Company evaluates segment performance and allocates resources based on the segments’ income from operations. The reportable segments are: (i) patient-care centers and (ii) distribution. The reportable segments are described further below:

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

Distribution – This segment distributes orthotic and prosthetic (“O&P”) products and components to both the O&P industry and the Company’s own patient-care practices.

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

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

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NOTE M – 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 distribution segment to the patient-care centers segment and were made at prices which approximate market values.

	Patient-Care Centers			Distribution		Other			Consolidating Adjustments			Total
(In thousands)
Three Months Ended September 30, 2007
Net sales
Customers	$	143,986		$	18,085		272		$	--		$	162,343
Intersegments		--			32,538		86			(32,624	)		--
Depreciation and amortization		3,054			89		800			--			3,943
Income (loss) from operations		25,462			5,572		(12,910	)		441			18,565
Interest (income) expense		(1,628	)		1,778		9,168			--			9,318
Income (loss) before taxes		27,090			3,794		(22,078	)		441			9,247
Three Months Ended September 30, 2006
Net sales
Customers	$	136,895		$	14,654	$	--		$	--		$	151,549
Intersegments		--			28,947		1,655			(30,602	)		--
Depreciation and amortization		3,006			86		538			--			3,630
Income (loss) from operations		22,832			4,439		(9,068	)		(1,082	)		17,121
Interest (income) expense		(1,593	)		1,733		9,712			--			9,852
Income (loss) before taxes		24,425			2,706		(19,317	)		(1,082	)		6,732
(In thousands)
Nine Months Ended September 30, 2007
Net sales
Customers	$	418,967		$	46,654	$	939		$	--		$	466,560
Intersegments		--			93,113		652			(93,765	)		--
Depreciation and amortization		9,105			256		2,208			--			11,569
Income (loss) from operations		68,623			13,908		(35,032	)		1,292			48,791
Interest (income) expense		(4,884	)		5,237		27,430			--			27,783
Income (loss) before taxes		73,507			8,671		(62,462	)		1,292			21,008
Total assets		726,941			78,875		(68,321	)		--			737,495
Capital expenditures		7,271			865		5,274			--			13,410
Nine Months Ended September 30, 2006
Net sales
Customers	$	402,451		$	42,398	$	--		$	--		$	444,849
Intersegments		--			80,928		3,117			(84,045	)		--
Depreciation and amortization		9,247			238		1,592			--			11,077
Income (loss) from operations		59,710			14,021		(28,141	)		(1,555	)		44,035
Interest (income) expense		(4,754	)		5,187		28,833			--			29,266
Income (loss) before taxes		64,465			8,834		(73,928	)		(1,555	)		(2,184	)
Total assets		614,628			90,386		9,410			--			714,424
Capital expenditures		5,746			244		1,921			--			7,911

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

Overview

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

Business Overview

General

We are the largest owner and operator of orthotic and prosthetic (“O&P”) patient-care centers (“patient-care centers”), accounting for approximately 22% of the $2.5 billion O&P patient-care market, in the United States. In addition, through our wholly-owned subsidiary, Southern Prosthetic Supply, Inc. (“SPS”), we are the largest distributor of branded and private label O&P devices and components in the United States, all of which are manufactured by third parties. We also create products, through our wholly-owned subsidiary, Innovative Neurotronics, Inc. (“IN, Inc.”), for sale in our patient-care centers and through a sales force, to patients who have had a loss of mobility due to strokes, multiple sclerosis or other similar conditions. Another subsidiary, Linkia, LLC (“Linkia”), develops programs to manage all aspects of O&P patient care for large private payors.

For the three and nine month periods ended September 30, 2007, our net sales were $162.3 million and $466.6 million, respectively, and we recorded net income of $5.4 million and $12.3 million, respectively.

We conduct our operations primarily in two reportable segments – patient-care centers and distribution. For the three months ended September 30, 2007, net sales attributable to our patient-care services segment and distribution segment were $144.0 million and $18.1 million, respectively. For the nine months ended September 30, 2007, net sales attributable to our patient-care services segment and distribution segment were $419.0 million and $46.7 million, respectively. See Note M to our consolidated financial statements contained herein for further information related to our segments.

Patient Care Centers

At September 30, 2007, we operated 629 O&P patient-care centers in 45 states and the District of Columbia and employed in excess of 1,000 revenue-generating O&P practitioners (“practitioners”).

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Patient Care Centers (continued)

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 one or more limbs as a result of traumatic injuries, vascular diseases, diabetes, cancer or congenital disorders. O&P devices are increasingly technologically advanced and are custom-designed to add functionality and comfort to patients’ lives, shorten the rehabilitation process and lower the cost of rehabilitation.

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

Our practitioners are also responsible for managing and operating our patient-care centers and are compensated, in part, based on their success in managing costs and collecting accounts receivable. We provide centralized administrative, marketing and materials management services to take advantage of economies of scale and to increase the time practitioners have to provide patient care. In areas where we have multiple patient-care centers, we also utilize shared fabrication facilities where technicians fabricate devices for practitioners in that region.

Distribution

Our distribution segment, SPS, is the largest distributor in the O&P market with a dedicated sales force and four distribution sites in the United States. SPS purchases and distributes O&P products to our patient-care centers as well as independent O&P providers. In July 2007, SPS acquired certain assets of SureFit, LLC, a leading manufacturer and distributor of therapeutic footwear for diabetic patients in the podiatric market.

Product Development

In 2004, we formed a new subsidiary, IN, Inc. Specializing in the field of functional electrical stimulation, IN, Inc. identifies emerging MyoOrthotics Technologies® developed at research centers and universities throughout the world that use neuromuscular stimulation to improve the functionality of an impaired limb. MyoOrthotics Technologies represents the merging of orthotic technologies with electrical stimulation. Working with the inventors, IN, Inc. advances the design and manufacturing, the regulatory and clinical aspects of the technology and then introduces the devices to the marketplace through a variety of distribution channels. IN, Inc.‘s first product, the WalkAide System, has received U.S. Food and Drug Administration (“FDA”) approval and was released for sale through our patient-care centers on May 1, 2006. In November 2006, we received ISO 13485 certification as well as the European CE Mark which are widely accepted quality management standards for medical devices and related services. In July 2007, the Company

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announced its international distribution agreement with Teijin Pharma Limited in Japan. We anticipate continued development of additional channels, both internationally and within the United States, for the WalkAide product.

Provider Network Management

Linkia is the first provider network management service company dedicated solely to serving the O&P market. Linkia was created in 2003 and is dedicated to managing the O&P services of national insurance companies. Linkia partners with healthcare insurance companies by securing national and regional contracts to manage the O&P networks. In 2004, Linkia entered into its first contract and in September 2005, Linkia signed an agreement with CIGNA HealthCare that covers over nine million beneficiaries. We will continue the deployment of the Linkia network and although it is too early to assess the overall success of this effort, we expect the Linkia contracts to positively impact patient-care center sales, as the CIGNA contract is phased in.

Industry Overview

We estimate that the O&P patient care market in the United States is approximately $2.5 billion, of which we account for approximately 22%. The O&P patient care services market is highly fragmented and is characterized by local, independent O&P businesses, with the majority generally having a single facility with annual revenues of less than $1.0 million. We do not believe that any of our patient care competitors account for a market share of more than 2% of the country’s total estimated O&P patient care services revenue.

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

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

Aging U.S. Population. The growth rate of the over-65 age group is nearly triple that of the under-65 age group. There is a direct correlation between age and the onset of diabetes and vascular disease, which 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 increasingly seek orthopedic rehabilitation services and products.

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

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

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

Competitive Strengths

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

• Leading market position, with an approximate 22% share of total industry revenues and operations in 45 states and the District of Columbia, in an otherwise fragmented industry;

• 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;

- identify, test and deploy emerging technology; and

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

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• 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;

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

- expand the non-Hanger client base of our distribution segment;

• Development of leading-edge technology for sale in our practices and through distributors;

• Full O&P product offering, with a balanced mix between orthotics services and products and prosthetics services and products;

• Practitioner compensation plans that financially reward practitioners for their efficient management of accounts receivable collections, labor, materials, and other costs, and encourages cooperation among our practitioners within the same local market area;

• Proven ability to rapidly incorporate technological advances in the fitting and fabrication of O&P devices;

• History of successful integration of small and medium-sized O&P business acquisitions, including 57 O&P businesses since 1997, representing over 155 patient-care centers;

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

• Experienced and committed management team.

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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:

• Improve our performance by:

- developing and deploying new processes to improve the productivity of our practitioners;

- continuing periodic patient evaluations to gauge patients’ device and service satisfaction;

- improving the utilization and efficiency of administrative and corporate support services;

- enhancing margins through continued consolidation of vendors and product offering; and

- leveraging our market share to increase sales and enter into more competitive payor contracts;

• Increase our market share and net sales by:

- continued marketing of Linkia to regional and national providers and contracting with national and regional managed care providers who we believe select us as a preferred O&P 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 our “People in Motion” program which introduces potential patients to the latest O&P technology;

- expanding the breadth of products being offered out of our patient-care centers; and

- increasing the number of practitioners through our residency program;

• Develop businesses that provide services and products to the broader rehabilitation and post-surgical healthcare areas as demonstrated by our emerging venture called TotalCare;

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• Continue to create, license or patent and market devices based on new cutting edge technology. We anticipate bringing new technology to the market through our IN, Inc. product line. The first new product, the WalkAide System, was released for sale on May 1, 2006;

• 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

• Provide our practitioners with:

- the training necessary to utilize existing technology for different patient service facets, such as the use of our Insignia scanning system for burns and cranial helmets;

- career development and increased compensation opportunities;

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

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

- selective application of new technology to improve patient care.

Results and Outlook

Net sales for the three months ended September 30, 2007 increased by $10.8 million, or 7.1%, to $162.3 million from $151.5 million in the prior year’s third quarter. The sales increase was principally the result of a $6.9 million, or 5.1%, increase in same-center sales in our patient care business and an increase of $3.4 million in external sales of our distribution segment, which includes $1.8 million related to an acquisition which closed on July 1, 2007. Income from operations increased by $1.5 million for the three months ended September 30, 2007, to $18.6 million, or 11.4% of net revenues, from $17.1 million, or 11.3% of net revenues, in the same period of the prior year due principally to the sales increase. Income from operations increased due to increased sales volume and favorable cost of goods sold, offset by an increase in selling, general, and administrative costs. Net income applicable to common stock for the three months ended September 30, 2007 increased $3.5 million to $5.0 million, compared to income of $1.5 million in the same period of the prior year. The prior year’s results include a $0.5 million charge related to the extinguishment of debt. The current period benefited from the increased sales volume and lower interest costs, which resulted from the Company’s refinancing efforts which were completed in the prior year.

Net sales for the nine months ended September 30, 2007 increased by $21.8 million, or 4.9%, to $466.6 million from $444.8 million in the same period of the prior year. The sales increase was principally the result of a $16.0 million, or 4.0%, increase in same-center sales in our patient care business, and a $4.3 million increase in external sales of our distribution segment, which includes $1.8 million related to an acquisition which closed on July 1, 2007. Income from operations increased by $4.8 million for the nine months ended September 30, 2007, to $48.8 million from $44.0 million in the same period of the prior year due principally to the sales increase. Income from operations as a percentage of net revenues increased 0.6% due to improvements in selling, general and administrative costs, which are generally fixed, combined with a slight decrease in cost of goods sold. Net income applicable to common stock for the nine months ended September, 2007 increased $19.5 million to $11.0 million, from a loss of $8.5 million in the same period of the prior year. The prior year net loss includes a $17.0 million charge related to the extinguishment of debt. The current period benefited from the increased sales volume and lower interest costs, which resulted from the Company’s refinancing efforts which were completed in the prior year.

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We continue to improve upon our cash collections. Day’s sales outstanding (“DSO”), which is the number of days between the billing for our O&P services and the date of our receipt of payment, was 57 days as of September 30, 2007, compared to 61 days at December 31, 2006. The decrease in DSO is due to continued efforts at the patient-care centers to target collections as well as other work flow enhancements.

We expect to continue to see an increase in our sales volume over the next year with continued focus on same store sales initiatives, continued roll out of Linkia national contracts, sales from IN, Inc.‘s WalkAide and growth from our distribution segment. We will also continue our efforts to counter the cyclical trends and challenges present in our market by undertaking several specific initiatives:

• continued marketing of the Linkia model to national and large regional insurance carriers;

• the utilization of our centralized billing system, OPS, to analyze related O&P procedures in an effort to provide comprehensive services;

• the introduction of new products by entering into exclusive distribution contracts with O&P product manufacturers; and

• continuing discussions with rehabilitation providers to enable us to provide more comprehensive O&P services.

Critical Accounting Policies & Estimates

Our analysis and discussion of our financial condition and results of operations are based upon our Consolidated Financial Statements. The unaudited interim consolidated financial statements as of and for the three and nine months ended September 30, 2007 and 2006 have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary for a fair statement for the periods presented. The year-end consolidated data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).

These consolidated financial statements should be read in conjunction with the consolidated financial statements of Hanger Orthopedic Group, Inc. (the “Company”) and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2006, filed by the Company with the SEC. We believe 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.

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• 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, provided that (i) delivery has occurred or services have been rendered; (ii) persuasive evidence of an arrangement exists; (iii) the sales price is fixed or determinable; and (iv) collectibility is reasonably assured. Revenues on the sale of orthotic and prosthetic devices to customers by our distribution segment are recorded upon the shipment of products, in accordance with the terms of the invoice, net of merchandise returns received and the amount established for anticipated returns. Discounted sales are recorded at net realizable value. Deferred revenue represents prepaid tuition and fees received from students enrolled in our practitioner education program.

Revenue at our patient-care centers segment is recorded net of all governmental adjustments, contractual adjustments and discounts. We employ a systematic process to ensure that our sales are recorded at net realizable value and that any required adjustments are recorded on a timely basis. The contracting module of our centralized, computerized billing system is designed to record revenue at net realizable value based on our contract with the patient’s insurance company. Updated billing information is received periodically from payors and is uploaded into our centralized contract module and then disseminated to all patient-care centers electronically.

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

September 30, 2007
(In thousands)	0-60 days		61-120 days		Over 120 days		Total
Commercial and other	$	36,459	$	7,767	$	6,196	$	50,422
Private pay		2,986		1,285		1,384		5,655
Medicaid		8,081		2,028		1,461		11,570
Medicare		19,326		2,374		1,907		23,607
VA		982		154		93		1,229
	$	67,834	$	13,608	$	11,041	$	92,483
December 31, 2006
(In thousands)	0-60 days		61-120 days		Over 120 days		Total
Commercial and other	$	27,957	$	15,730	$	9,866	$	53,553
Private pay		3,111		1,310		1,222		5,643
Medicaid		4,639		3,686		2,778		11,103
Medicare		13,796		5,908		2,978		22,682
VA		833		435		177		1,445
	$	50,336	$	27,069	$	17,021	$	94,426

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

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

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

• Inventories: Inventories, which consist principally of raw materials, work-in-process and finished goods, are stated at the lower of cost or market using the first-in, first-out method. At our patient-care centers segment, we calculate cost of goods sold in accordance with the gross profit method for all reporting periods. 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, such as sales mix and purchasing trends among other factors, affecting cost of goods sold during the current reporting periods. Cost of goods sold during the period is adjusted when the annual physical inventory is taken. We treat these adjustments as changes in accounting estimates. At our distribution segment, a perpetual inventory is maintained. Management adjusts our reserve for inventory obsolescence whenever the facts and circumstances indicate that the carrying cost of certain inventory items is in excess of its market price. Shipping and handling costs are included in cost of goods sold.

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

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

We capitalize internally developed computer software costs incurred during the application development stage in accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.

• Income Taxes: We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, on January 1, 2007. As a result of adoption, we recognized a decrease of approximately $0.2 million to the January 1, 2007 retained earnings balance. As of the adoption date, we had gross tax affected unrecognized tax benefits of $3.3 million of which $1.1 million, if recognized, would affect the effective tax rate. Over the next 12 months we may recognize gross tax affected unrecognized tax benefits of up to $1.5 million, a substantial portion of which is not expected to impact the effective tax rate, due to the pending expiration of the period of limitations for assessing tax deficiencies for certain income tax returns. As of the adoption date, we had accrued interest expense and penalties related to the unrecognized tax benefits of $0.4 million and $0.4 million, respectively. We recognize interest accrued and penalties related to unrecognized tax benefits as a component of income tax expense. Total penalties and interest accrued as of September 30, 2007 was $1.0 million, including $0.2 million in the current income tax provision for the nine month period ended September 30, 2007. The Company files numerous consolidated and separate income tax returns in the United States Federal jurisdiction and in many state jurisdictions. The Company is no longer subject to US Federal income tax examinations for years before 2003 and with few exceptions is no longer subject to state and local income tax examinations by tax authorities for years before 2002.

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New Accounting Guidance

In September 2006, the FASB issued SFAS 157, Fair Value Measurements (“SFAS 157”). SFAS 157 provides guidance on the application of fair value measurement objectives required in existing GAAP literature to ensure consistency and comparability. Additionally, SFAS 157 requires additional disclosures on the fair value measurements used. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of adopting SFAS 157 on our financial statements.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities Fair Value Measurements (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 does not affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company believes the adoption of SFAS 159 will not have a material impact on its financial statements.

Results of Operations

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		49.3			50.3			49.6			49.8
Selling, general and administrative		36.9			36.0			37.4			37.8
Depreciation and amortization		2.4			2.4			2.5			2.5
Income from operations		11.4			11.3			10.5			9.9
Interest expense, net		5.7			6.5			6.0			6.6
Extinguishment of debt		--			0.3			--			3.8
(Loss) income before taxes		5.7			4.5			4.5			(0.5	)
(Benefit) provision for income taxes		2.4			2.2			1.9			(0.2	)
Net (loss) income		3.3			2.3			2.6			(0.3	)

Three Months Ended September 30, 2007 Compared to the Three Months Ended September 30, 2006

Net Sales. Net sales for the three months ended September 30, 2007 were $162.3 million, an increase of $ 10.8 million, or 7.1%, versus net sales of $151.5 million for the three months ended September 30, 2006. The sales growth was primarily the result of a $6.9 million, or 5.1%, same-center sales growth and a $3.4 million increase in external sales of our distribution segment, which includes $1.8 million related to an acquisition which closed on July 1, 2007.

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Cost of Goods Sold. Cost of goods sold for the three months ended September 30, 2007 was $80.0 million, an increase of $3.8 million, or 5.0%, over $76.2 million for the same period in the prior year. The increase was the result of the increased sales volume at our patient-care centers and distribution segments. Cost of goods sold as a percentage of net sales decreased to 49.3% in 2007 from 50.3% in 2006. The decrease is primarily a result of the labor portion of cost of goods sold, which is generally fixed. Therefore, as sales increase, labor as a percentage of net sales decreases.

Selling, General and Administrative. Selling, general and administrative expenses for the three months ended September 30, 2007 increased by $5.3 million to $59.9 million, or 36.9% of net sales, from $54.6 million, or 36.0% of net sales, for the three months ended September 30, 2006. The increase was principally due to an increase of $2.6 million in personnel costs, $0.8 million increase in the investments in the Company’s growth initiatives, $0.5 million from acquired entities, and a $2.1 million increase in general overhead, all of which was offset by a $0.7 million decrease in bad debt expense.

Depreciation and Amortization. Depreciation and amortization for the three months ended September 30, 2007 was $3.9 million versus $3.6 million for the three months ended September 30, 2006.

Income from Operations. Principally due to the increase in net sales, income from operations increased $1.5 million to $18.6 million for the three months ended September 30, 2007. Income from operations, as a percentage of net sales, increased to 11.4% for the three months ended September 30, 2007 versus 11.3% for the prior year’s comparable period. Income from operations as a percentage of net revenues increased 0.1% due to improvements in costs of sales, offset by increased selling, general and administrative costs.

Interest Expense, Net. Interest expense in the three months ended September 30, 2007 decreased to $9.3 million compared to $9.9 million in the three months ended September 30, 2006. In May 2006, the Company refinanced all of its existing debt and preferred stock, which resulted in more favorable interest costs.

Extinguishment of Debt. During the three months ended September 30, 2006, we recognized $0.5 million in additional costs related to our refinancing of substantially all our outstanding debt and preferred stock.

Income Taxes. Income tax provision of $3.8 million was recognized for the three months ended September 30, 2007 compared to $3.3 million for the same period of the prior year. The change in the income tax provision was primarily the result of higher income from operations and the prior year charge for the extinguishment of debt related to the debt refinancing. The effective tax rate for the three months ended September 30, 2007 was 41.5% compared to 48.6% for the three months ended September 30, 2006. The effective tax rate for the three month periods ended September 30, 2007 and 2006 consists principally of the federal statutory tax rate of 35.0% and state income taxes.

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Net Income. As a result of the above, we recorded net income of $5.4 million for the three months ended September 30, 2007, compared to $3.5 million for the same period in the prior year. The increase is primarily due to the increase in current year’s net sales and the refinancing of certain debt instruments in the prior year.

Nine Months Ended September 30, 2007 Compared to the Nine Months Ended September 30, 2006

Net Sales. Net sales for the nine months ended September 30, 2007 were $466.6 million, an increase of $21.8 million, or 4.9%, compared to net sales of $444.8 million for the nine months ended September 30, 2006. The sales growth was primarily the result of a $16.0 million, or 4.0%, same-center sales growth and a $4.3 million increase in external sales of our distribution segment, which includes $1.8 million from an acquired entity.

Cost of Goods Sold. Cost of goods sold for the nine months ended September 30, 2007 was $231.5 million, an increase of $9.7 million over the $221.8 million in the prior year. The increase was the result of the increased sales volume at our patient-care centers and distribution segments. Cost of goods sold as a percentage of net sales decreased to 49.6% in 2007 from 49.8% in 2006. The decrease is primarily a result of the labor portion of cost of goods sold, which is generally fixed. Therefore, as sales increase, labor as a percentage of net sales decreases.

Selling, General and Administrative. Selling, general and administrative expenses for the nine months ended September 30, 2007 increased by $6.8 million to $174.7 million, or 37.4% of net sales, from $167.9 million, or 37.8% of net sales, for the nine months ended September 30, 2006. The increase was principally due to a $3.9 million increase in personnel costs related principally to merit increases, $1.9 million increase in the investment in the Company’s growth initiatives, $0.5 million from acquired entities, and a $1.7 million increase in general overhead all offset by a $1.2 million reduction in bad debt expense. The decrease of the percentage of net sales from 37.8% to 37.4% is due to leveraging fixed cost over increased sales volume.

Depreciation and Amortization. Depreciation and amortization for the nine months ended September 30, 2007 was $11.6 million versus $11.1 million for the nine months ended September 30, 2006.

Income from Operations. As a result of the above, income from operations for the nine months ended September 30, 2007 was $48.8 million compared to $44.0 million for the nine months ended September 30, 2006. Income from operations, as a percentage of net sales, increased to 10.5% for the nine months ended September 30, 2007 versus 9.9% for the prior year’s comparable period primarily as a result of the increase in net sales and the labor component of cost of goods sold. Income from operations as a percentage of net sales increased 0.6% due to improvements in selling, general and administrative costs, which are generally fixed.

Interest Expense, Net. Interest expense in the nine months ended September 30, 2007 decreased to $27.8 million compared to $29.3 million in the nine months ended September 30, 2006. In May 2006, the Company refinanced all of its existing debt and preferred stock, which resulted in more favorable interest costs.

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Extinguishment of Debt. In May 2006, we completed a refinancing of substantially all of our outstanding debt and preferred stock. In conjunction with this transaction, a $17.0 million loss on extinguishment of debt was recorded.

Income Taxes. Income tax provision of $8.7 million was recognized for the nine months ended September 30, 2007 compared to a benefit of $0.7 million for the same period of the prior year. The change in the income tax provision was primarily the result of higher income from operations and the prior year charge for the extinguishment of debt related to the debt refinancing. The effective tax rate for the nine months ended September 30, 2007 was 41.5% compared to a benefit of 34.2% for the nine months ended September 30, 2006. The effective tax rate for the nine month periods ended September, 2007 and 2006 consists principally of the federal statutory tax rate of 35.0% and state income taxes.

Net Income. As a result of the above, we recorded net income of $12.3 million for the nine months ended September 30, 2007, compared to net loss of $1.4 million for the same period in the prior year. The increase is primarily due to the increase in current year’s net sales and the refinancing of certain debt instruments in the prior year.

Financial Condition, Liquidity, and Capital Resources

Cash Flows

Our working capital at September 30, 2007 was $162.2 million compared to $157.2 million at December 31, 2006. Working capital increased principally as a result of continued strong cash collections as evidenced by the decrease in accounts receivable. Operating cash flows of $30.2 million for the nine months ended September 30, 2007 compared favorably to $8.1 million of cash provided by operations in the prior year primarily due to prior year’s extinguishment of debt and the payment of premiums related to the refinancing of certain debt instruments. Days sales outstanding (“DSO”), which is the number of days between the billing for our O&P services and the date of our receipt of payment thereof, for the nine months ended September 30, 2007, decreased to 57 days, compared to 59 days for the same period last year. The decrease in DSO is due to a continued effort at our patient-care centers to target collections. At September 30, 2007 the company’s availability under its Revolving Credit Facility was $72.0 million, net of $3.0 million of standby letters of credit.

Net cash used in investing activities was $25.6 million for the nine months ended September 30, 2007, versus $8.5 million for the same period in the prior year. Cash used in investing activities in the current period included $13.4 million related to the purchase of computer related assets, machinery and equipment and leasehold improvements and $12.6 million related to acquisitions, primarily the purchase of certain assets of SureFit, LLC, a leading manufacturer and distributor of therapeutic footwear for diabetic patients. In conjunction with the acquisitions completed during the nine months ended September 30, 2007, the Company recorded approximately $11.4 million of goodwill and $2.5 million of customer related intangible assets.

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Net cash used in financing activities was $4.4 million for the nine months ended September 30, 2007, compared to $6.4 million of net cash provided by financing activities for the nine months ended September 30, 2006. The decrease in cash provided by financing activities was primarily due to the debt refinancing in May 2006.

Long-term debt consists of the following:

	September 30, 2007			December 31, 2006
(In thousands)
Term Loan	$	227,125		$	228,852
10 1/4% Senior Notes due 2014		175,000			175,000
Subordinated seller notes, non-collateralized, net of unamortized discount
with principal and interest payable in either monthly, quarterly or annual
installments at effective interest rates ranging from 5.0% to 10.8%, maturing
through December 2011		8,759			6,772
		410,884			410,624
Less current portion		(5,999	)		(5,386	)
	$	404,885		$	405,238

Refinancing

On May 26, 2006, the Company refinanced its debt and preferred stock with the issuance of the following instruments: (i) $175.0 million of 10 ¼% Senior Notes due 2014; (ii) a $230.0 million term loan facility; and (iii) $50.0 million of Series A Convertible Preferred Stock. The Company also established a new $75.0 million revolving credit facility, which was unused at September 30, 2007. The proceeds from these instruments were used to retire (i) $200.0 million of 10 3/8% Senior Notes; (ii) $15.6 million of 11 ¼% Senior Subordinated Notes; (iii) $146.3 million of the Term Loan; (iv) $11.0 million outstanding under the Revolving Credit facility; (v) $64.7 million of 7% Redeemable Preferred Stock; and (vi) pay $24.7 million of transaction costs. In conjunction with the refinancing, the Company incurred a $17.0 million loss on the extinguishment of debt. The extinguishment loss is comprised primarily of $11.4 million of premiums paid to debt holders, $0.3 million of fees paid to the 7% Redeemable Preferred Stock holders and $6.1 million write-off of debt issuance costs, offset by a $1.3 million gain related to the interest rate swap.

Revolving Credit Facility

The $75.0 million Revolving Credit Facility matures on May 26, 2011 and bears interest, at the Company’s option, of LIBOR plus 2.75% or a Base Rate (as defined in the credit agreement) plus 1.75%. The obligations under the Revolving Credit Facility are guaranteed by the Company’s subsidiaries and are secured by a first priority perfected interest in the Company’s subsidiaries’ shares, all of the Company’s assets and all the assets of the Company’s subsidiaries. The Revolving Credit Facility requires compliance with various covenants including but not limited to a maximum total leverage ratio and a maximum annual capital expenditures limit. As of September 30, 2007, the Company has not made draws on the Revolving Credit Facility and has $72.0 million available under that facility. Availability under the Company’s Revolving Credit Facility is net of standby letters of credit of approximately $3.0 million.

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Term Loan

The $230.0 million Term Loan matures on May 26, 2013 and requires quarterly payments which commenced on September 30, 2006. From time to time, mandatory payments may be required as a result of capital stock issuances, additional debt incurrence, asset sales or other events as defined in the credit agreement. The Term Loan bears interest, at the Company’s option, at LIBOR plus 2.25% or a Base Rate (as defined in the credit agreement) plus 1.50%. At September 30, 2007, the interest rate on the Term Loan was 7.45%. The obligations under the Term Loan are guaranteed by the Company’s subsidiaries and are secured by a first priority perfected interest in the Company’s subsidiaries’ shares, all of the Company’s assets and all the assets of the Company’s subsidiaries. The Term Loan is subject to covenants that mirror those of the Revolving Credit Facility.

10 ¼% Senior Notes

The 10 ¼% Senior Notes mature June 1, 2014, are senior indebtedness and are guaranteed in full and unconditionally, on a senior unsecured basis by all of the Company’s current and future domestic subsidiaries as well as all the assets of the Company. The parent company has no independent assets or operations and all subsidiaries are 100% owned by the Company. Interest is payable semi-annually on June 1 and December 1, commencing December 1, 2006. On or prior to June 1, 2009, the Company may redeem up to 35% of the aggregate principal amount of the notes at a redemption price of 110.250% of the principal amount thereof, plus accrued and unpaid interest and additional interest, if any, with the net cash proceeds of an equity offering; provided that (i) at least 65% of the aggregate principal amount of the notes remains outstanding immediately after the redemption (excluding notes held by the Company and its subsidiaries); and (ii) the redemption occurs within 90 days of the date of the closing of the equity offering. Except as discussed above, the notes are not redeemable at the Company’s option prior to June 1, 2010. On or after June 1, 2010, the Company may redeem all or part of the notes upon not less than 30 days and no more than 60 days’ notice, for the twelve-month period beginning on June 1 of the following years: at (i) 105.125% during 2010; (ii) 102.563% during 2011; and (iii) 100.0% during 2012 and thereafter.

General

The terms of the Senior Notes and the Revolving Credit Facility limit the Company’s ability to, among other things, incur additional indebtedness, create liens, pay dividends on or redeem capital stock, make certain investments, make restricted payments, make certain dispositions of assets, engage in transactions with affiliates, engage in certain business activities and engage in mergers, consolidations and certain sales of assets. At September 30, 2007, the Company is in compliance with all covenants under these debt agreements.

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Obligations and Commercial Commitments

The following table sets forth our contractual obligations and commercial commitments as of September 30, 2007:

	Payments Due by Period
	2007		2008		2009		2010		2011		Thereafter		Total
(In thousands)
Long-term debt	$	1,815	$	5,338	$	3,889	$	3,294	$	3,314	$	393,234	$	410,884
Interest payments on long-term debt		8,925		35,325		35,022		34,801		34,602		66,365		215,040
Operating leases		29,937		28,111		21,665		14,069		8,945		15,527		118,254
Capital leases and other long-term obligations		907		482		421		16,686		1,843		780		21,119
Total contractual cash obligations	$	41,584	$	69,256	$	60,997	$	68,850	$	48,704	$	475,906	$	765,297

(1) Other long-term obligations consist primarily of amounts related to our Supplemental Executive Retirement Plan, earnout payments and payments under the restructuring plans.

In addition to the table above, the Company has certain other tax liabilities as of September 30, 2007 comprised of $3.3 million of unrecognized tax benefits, of which $0.3 million is expected to be settled in the fiscal year 2007, with the remainder thereafter.

Dividends

The Series A Convertible Preferred Stock is entitled to cumulative dividends, accruing at an annual rate of 3.33%, or $1.7 million, payable quarterly in arrears. We have elected to pay the dividend; however, we may elect to defer the future payments of dividends otherwise payable on a dividend payment date. In such event, the amount of deferred dividends will be added to the stated value. Accrued but unpaid dividends will be payable upon our liquidation in cash and upon a Holder Conversion (as defined in the Amended and Restated Preferred Stock Purchase Agreement), at the option of the Holder, either in cash (to the extent permitted under applicable law and the terms of our indebtedness) or in additional shares of our common stock. Immediately prior to the occurrence of an acceleration event prior to the fifth anniversary of the original issue date, the stated value of each share of Series A Convertible Preferred Stock will be increased by an amount per share equal to all dividends that would otherwise be payable on a share of Series A Convertible Preferred Stock on each dividend payment date on and after the occurrence of such acceleration event and prior to and including the fifth anniversary of the original issuance date.

Off-Balance Sheet Arrangements

The Company’s wholly-owned subsidiary, Innovative Neurotronics, Inc. (“IN, Inc.”), is party to a non-binding purchase agreement under which it agrees to purchase assembled WalkAide System kits. As of September 30, 2007, IN, Inc. had outstanding purchase commitments of approximately $.7 million.

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Market Risk

We are exposed to the market risk that is associated with changes in interest rates. At September 30, 2007, all our outstanding debt, with the exception of the Revolving Credit Facility and the Term Loan, is subject to a fixed interest rate. (See Item 3 below.)

Forward Looking Statements

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

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

We have existing obligations relating to our 10 ¼ % Senior Notes, Term Loan, Subordinated Seller Notes, and Series A Convertible Preferred Stock. As of September 30, 2007, we have cash flow exposure to the changing interest rate on the Term Loan and Revolving Credit Facility. The other obligations have fixed interest or dividend rates.

We have a $75.0 million revolving credit facility, with no outstanding balance at September 30, 2007, as discussed in Note G to our Condensed Consolidated Financial Statements. The rates at which interest accrues under the entire outstanding balance are variable.

In addition, in the normal course of business, we are exposed to fluctuations in interest rates. From time to time, we execute LIBOR contracts to fix interest rate exposure for specific periods of time. At September 30, 2007, we had one contract outstanding which fixed LIBOR at 7.45% and expires on December 28, 2007.

Presented below is an analysis of our financial instruments as of September 30, 2007 that are sensitive to changes in interest rates. The table demonstrates the change in estimated annual cash flow related to the outstanding balance under the Term Loan and the Revolving Credit Facility (the Revolving Credit Facility did not have an outstanding balance at September 30, 2007), calculated for an instantaneous parallel shift in interest rates, plus or minus 50 basis points (“BPS”), 100 BPS, and 150 BPS.

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Cash Flow Risk	Annual Interest Expense Given an Interest Rate Decrease of X Basis Points						No Change in Interest Rates		Annual Interest Expense Given an Interest Rate Increase of X Basis Points
(In thousands)	(150 BPS)		(100 BPS)		(50 BPS)				50 BPS		100 BPS		150 BPS
Term Loan	$	13,514	$	14,650	$	15,785	$	16,921	$	18,056	$	19,192	$	20,328
Revolving Credit Facility		--		--		--		--		--		--		--
	$	13,514	$	14,650	$	15,785	$	16,921	$	18,056	$	19,192	$	20,328

ITEM 4. Controls and Procedures

Disclosure Controls and Procedures

The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by it in its periodic reports filed with the Securities and Exchange Commission is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Based on an evaluation of the Company’s disclosure controls and procedures conducted by the Company’s Chief Executive Officer and Chief Financial Officer, such officers concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2007 to ensure that information required to be disclosed in the reports filed with the Exchange Act was accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

Change in Internal Control Over Financial Reporting

In accordance with Rule 13a-15(d) under the Securities Exchange Act of 1934, management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, determined that there was no change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2007, that has materially effected, or is reasonably likely to materially effect, the Company’s internal control over financial reporting.

Part II. Other Information

ITEM 1. Legal Proceedings

For a description of certain legal proceedings, refer to the disclosure set forth in Note H (“Commitments and Contingent Liabilities”) in Part I, Item 1 (“Condensed Consolidated Financial Statements”).

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

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ITEM 1A. Risk Factors

Item 1A (“Risk Factors”) of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 sets forth information relating to important risks and uncertainties that could materially adversely affect the Company’s business, financial condition or operating results. Those risk factors continue to be relevant to an understanding of the Company’s business, financial condition and operating results. Certain of those risk factors have been updated in this Form 10-Q to provide updated information, as set forth below. References to “we,” “our” and “us” in these risk factors refer to the Company.

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

We derived 41.1% and 41.3% of our net sales for the three months ended September 30, 2007 and 2006, respectively, from reimbursements for O&P services and products from programs administered by Medicare, Medicaid and the U.S. Veterans Administration. For the nine month periods ended September 30, 2007 and 2006, we derived 40.8% and 41.4%, respectively, in reimbursements from the 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 fee schedules of certain third-party payors are indexed to Medicare. Furthermore, the healthcare industry is experiencing a trend towards cost containment as government and other third-party payors seek to impose lower reimbursement rates and negotiate reduced contract rates with service providers. This trend could adversely affect our net sales. Medicare provides for reimbursement for O&P products and services based on prices set forth in fee schedules for ten regional service areas. If the U.S. Congress were to legislate additional modifications to the Medicare fee schedules, our net sales from Medicare and other payors could be adversely and materially affected. We cannot predict whether any such modifications to the fee schedules will be enacted or what the final form of any modifications might be.

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

If we cannot collect our accounts receivable and effectively manage our inventory, our business, results of operations, financial condition and ability to satisfy our obligations under our indebtedness could be adversely affected.

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As of September 30, 2007 and December 31, 2006, our accounts receivable over 120 days represented approximately 14.3% and 16.3% of total accounts receivable outstanding in each period, respectively. If we cannot collect our accounts receivable, our business, results of operations, financial condition and ability to satisfy our obligations under our indebtedness could be adversely affected. 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. In conjunction with our physical inventory performed on October 1, 2006, we recorded a $4.4 million decrease to inventory. Adjustments to inventory during interim periods following our physical inventory could adversely affect our results of operations and financial condition.

ITEM 6. Exhibits

(a) Exhibits. The following exhibits are filed herewith:

Exhibit No.	Document
10.1	Fourth Amended and Restated Employment Agreement, effective as of the 1st day of January,
	2005, by and between Hanger Prosthetics & Orthotics, Inc. and Ivan R. Sabel.
10.2	Third Amended and Restated Employment Agreement, effective as of the 1st day of January,
	2005, by and between Hanger Prosthetics & Orthotics, Inc. and George E. McHenry.
10.3	Fourth Amended and Restated Employment Agreement, effective as of the 1st day of January,
	2005, by and between Hanger Prosthetics & Orthotics, Inc. and Thomas F. Kirk.
10.4	Third Amended and Restated Employment Agreement, effective as of the 1st day of January,
	2005, by and between Hanger Prosthetics & Orthotics, Inc. and Richmond L. Taylor.
31.1	Written Statement of the Chief Executive Officer Pursuant to Section 302 of the
	Sarbanes-Oxley Act of 2002.
31.2	Written Statement of the Chief Financial Officer Pursuant to Section 302 of the
	Sarbanes-Oxley Act of 2002.
32	Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to
	18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HANGER ORTHOPEDIC GROUP, INC.
Dated:  November 7, 2007	/s/ Ivan R. Sabel
	Ivan R. Sabel, CPO
	Chairman and Chief Executive Officer
	(Principal Executive Officer)
Dated:  November 7, 2007	/s/ George E. McHenry
	George E. McHenry
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial Officer)
Dated:  November 7, 2007	/s/ Thomas C. Hofmeister
	Thomas C. Hofmeister
	Vice President of Finance
	(Chief Accounting Officer)

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EX-10.1

FOURTH AMENDED AND RESTATED EMPLOYMENT AGREEMENT

        FOURTH AMENDED AND RESTATED EMPLOYMENT AGREEMENT effective as of the 1st day of January, 2005 (“Agreement”), by and between HANGER PROSTHETICS & ORTHOTICS, INC., a Delaware corporation (the “Company”), and IVAN R. SABEL (the “Executive”).

        WHEREAS, the Executive and Hanger Orthopedic Group, Inc. (“Hanger”) executed an initial Employment Agreement on April 29, 1999 (“Original Agreement”), which Original Agreement was amended by the Amended and Restated Employment Agreement, dated April 22, 2003, and the Second Amended and Restated Employment Agreement, effective as of January 1, 2005 (“Second Amended Agreement”);

        WHEREAS, the Second Amended Agreement was assigned from Hanger to the Company pursuant to the Assignment of Employment Agreement, effective as of January 1, 2007, between the Executive, the Company and Hanger;

        WHEREAS, the Second Amended Agreement was amended by the Third Amended and Restated Employment Agreement, by and between the Executive and the Company, effective as of January 1, 2005 (“Third Amended Agreement”);

        WHEREAS, the parties hereto desire to amend the Third Amended Agreement as set forth in this Agreement, with such amendments to be retroactively effective to January 1, 2005; and

        WHEREAS, the Company desires to employ the Executive and to incentivize the Executive to remain in the employ of 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 effective date of the Original Agreement and shall terminate on the fifth anniversary of the effective date thereof, unless extended or sooner terminated in accordance with this Agreement. In the event the Executive continues to be employed by the Company following the fifth anniversary of the effective date of the Original Agreement, this Agreement shall automatically renew for successive one (1) year terms, unless terminated pursuant to Section 1.3, Section 6 or Section 7 of this Agreement.

            1.3    Automatic Extension. As of the fifth anniversary date of the Original Agreement, and as of each anniversary subsequent thereto (“Automatic Renewal Date”), unless either party shall have given thirty (30) days’ prior written 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. In the event that the Company gives written notice of non-extension, such notice shall be considered a Termination without Cause under the provisions of Section 6.4, unless otherwise mutually agreed between the Parties.

            1.4    Termination Date.For purposes of this Agreement, the term “Termination Date” shall mean (i) if the Executive’s employment is terminated by the Company for any reason whatsoever, other than death or Disability, the Executive’s last day of work; (ii) if the Executive’s employment is terminated by reason of death or Disability, the date of death of the Executive or the effective date of the Disability, as the case may be; and (iii) if the Executive’s employment is terminated by the Executive, the expiration date of the applicable notice period that is required pursuant to this Agreement. Notwithstanding the foregoing, no Termination Date shall be earlier than the date as of which the Executive has incurred a “separation from service” within the meaning of Internal Revenue Code (“Code”) Section 409A, as determined by applying the default rules thereof.

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

2. Position, Duties.

        The Executive shall serve the Company in the position of Chairman and Hanger in the position of Chairman and Chief Executive Officer. The Executive shall faithfully and diligently perform the duties appropriate to said position, which, in addition to those responsibilities assigned to him from time to time by the Board of Directors of Hanger (the “Board of Directors”), shall include, among other things, responsibility for the overall performance of Hanger and all of Hanger’s subsidiaries. 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. During the term of this Agreement, the Company shall pay to the Executive a minimum base salary at the rate of Five Hundred Twenty Thousand Dollars ($520,000.00) per annum, payable in accordance with the standard payroll practices of the Company (the “Base Salary”). The Base Salary shall be increased to Five Hundred Forty-Five Thousand Dollars ($545,000.00) effective January 1, 2006 and shall be increased to Five Hundred Sixty-Three Thousand Dollars ($563,000.00) effective January 1, 2007. 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 in its sole discretion, taking account of the performance of Hanger, the Company and the Executive, and other factors generally considered relevant to the salaries of executives holding similar positions with enterprises comparable to Hanger.

            3.2    Bonus.

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                (a)     In addition to the Base Salary, the Executive shall participate in Hanger’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 during the term of this Agreement. The Executive’s target bonus is seventy-five percent (75%) of the Base Salary (the “Target Bonus”) and is contingent on the Executive meeting certain performance criteria and Hanger achieving certain year-end financial criteria, and up to one hundred fifty percent (150%) of the Base Salary (the “Maximum Bonus”) if the Employee exceeds certain performance criteria and Hanger exceeds certain year-end financial criteria all as determined in the reasonable discretion of the Board of Directors and its Compensation Committee. Effective January 1, 2006, the Target Bonus shall be increased to eighty percent (80%) of the Base Salary and the Maximum Bonus shall be increased to one hundred sixty percent (160%) of the Base Salary. The Executive shall be entitled to such increases in the “Target Bonus” and the “Maximum Bonus” during the term hereof as shall be determined and approved by the Compensation Committee of the Board of Directors in its sole discretion, taking account of the performance of Hanger and the Executive, and other factors generally considered relevant to the salaries of executives holding similar positions with enterprises comparable to Hanger.

                (b)     The bonus shall be payable between January 1 and March 15 (inclusive) of the calendar year following the calendar year for which the bonus is determined in accordance with the Company’s normal practices. In the event that the Executive is employed for less than the full calendar year in the year in which his Termination Date occurs (“Termination Year”), the bonus payable to the Executive shall be subject to Sections 6 and 7 of this Agreement and calculated based on the Executive meeting certain performance criteria and Hanger achieving certain year-end financial criteria, all as determined by the Compensation Committee of the Board of Directors, in its sole discretion. Such bonus shall be pro-rated for the portion of the Termination Year during which the Executive was employed by the Company. With respect to the bonus for the Termination Year, any bonus payable pursuant to this Section 3.2(b) shall be payable to the Executive between January 1 and March 15 (inclusive) of the calendar year following the calendar year for which the bonus is determined in accordance with the Company’s normal practices.

            3.3    Stock Options &Restricted Stock.

                (a)     As an incentive for the Executive’s future performance in improving shareholder value, the Company shall grant to the Executive options to purchase one hundred fifty thousand (150,000) shares of Hanger’s common stock, $0.01 par value per share (the “Stock”), with such options being valued at the closing price of the Stock on the effective date of the Original Agreement. The Company shall also grant to the Executive options to purchase a minimum of one hundred thousand (100,000) shares of Stock on each of the first, second, and third anniversaries of the Original Agreement. The Executive may participate in future awards of options to purchase Stock or restricted shares in a manner consistent with any stock option plan or restricted share plan adopted by Hanger for its senior corporate officers. Option or restricted share grants subsequent to the foregoing initial three year period shall be based upon targets adopted annually by the Board of Directors, which targets may be derived from budgets generated by Hanger’s management, and the determination as to the amount of such options or restricted shares, if any, shall be at the sole discretion of the Board of Directors.

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                (b)     The options or restricted shares provided in subparagraph (a) of this Section 3.3 shall be evidenced by a stock option agreement or restricted share grant agreement (“Stock Agreement”) between the Executive and Hanger, which Stock Agreement shall provide for a vesting schedule of four (4) years, in equal parts, of the options or restricted shares granted thereunder. Notwithstanding any provisions now or hereafter existing under any stock incentive plan of Hanger, all options or restricted shares granted to the Executive shall vest in full immediately upon the Termination Date except for termination of employment pursuant to Section 6.3 or Section 6.5(a) hereof, and the Executive (or his estate or legal representative, if applicable) shall thereafter have twelve (12) months from such Termination Date to exercise such options, if applicable.

                (c)     Notwithstanding any provisions now or hereafter existing under any stock option plan or restricted share plan of Hanger, in the event of a Change in Control (as hereinafter defined), all options or restricted shares provided to the Executive pursuant to Section 3.3(a) of the Original Agreement or any Stock Agreement shall be granted and shall immediately fully vest as of the date of such Change in Control with such options or restricted shares being valued at the closing price of Hanger’s common stock on the day prior to the day of the Change of 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 Hanger 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 Hanger having a right to vote in elections of directors; or

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

(iii) Hanger disposes of all or substantially all of the business of Hanger to a party or parties other than a subsidiary or other affiliate of Hanger pursuant to a partial or complete liquidation of Hanger, sale of assets (including stock of a subsidiary of Hanger) or otherwise; or

(iv) the Board of Directors approves Hanger’s consolidation or merger with or into any other person (other than a wholly-owned subsidiary of Hanger), or any other person’s consolidation or merger with or into Hanger, which results in all or part of the outstanding shares of Stock being changed in any way or converted into or exchanged for stock or other securities or cash or any other property.

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                (e)     For purposes of this Agreement, the term “Continuing Director” shall mean a member of the Board of Directors who either was a member of the Board of Directors on the date hereof or who subsequently became a Director of Hanger and whose election, or nomination for election, was approved by a vote of at least two-thirds (2/3) of the Continuing Directors then in office.

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

            3.5    Car Allowance and Parking. The Executive shall be provided with (a) a luxury-class 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, and (b) a reserved parking space at the Company’s headquarters. Upon termination of the Executive’s employment under this Agreement for any reason, the Company may, at its option, demand the prompt return of the automobile, or, upon the mutual agreement of the Executive and the Company, the Executive may assume the lease for the automobile.

            3.6    Parachute Penalties. For all payments made or required to be made pursuant to the terms of this Agreement, including any payments made with respect to the Executive’s termination of employment for any reason, the Company shall determine and pay the Executive, as soon as practicable, an amount sufficient to cover the gross-up of any excise, income and other taxes resulting from the imposition of the parachute penalties of the Code or applicable state tax laws. Such determination and payment by the Company shall be made six (6) months and one (1) day after the Executive’s Termination Date or, if later, before the end of the calendar year following the calendar year in which the Executive paid any such excise tax.

            3.7    Other. The Company agrees to: (a) provide the Executive with a desktop and/or laptop computer for his use while working at the Company’s headquarters and the Executive’s local residence, (b) reimburse the Executive for up to Three Thousand Dollars ($3,000) per year for out-of-pocket expenses incurred by the Executive for financial and tax planning, (c) provide or reimburse the Executive’s costs for a life insurance policy for the Executive in a minimum amount of two times the Base Salary in addition to the one times the Base Salary provided in the base benefit package, payable to a beneficiary of the Executive’s choosing, (d) provide or reimburse the Executive’s costs for a long-term care insurance policy covering Executive and Executive’s spouse and (e) provide or reimburse the Executive’s costs for a supplemental long term disability insurance policy.

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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; 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), medical, dental, life, and disability plans of Hanger) offered by Hanger 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. The Executive shall be reimbursed for all deductibles, co-payments and other out-of-pocket expenses, excluding premium payments, related to all medical, dental, prescription and vision benefits offered by Hanger.

            5.2    Vacation. The Executive shall be entitled to five (5) weeks vacation per year.

6. Termination of Employment.

            6.1    Death.

                (a)     The Executive’s employment shall be terminated by the Executive’s death. In the event of the death of the Executive, the Company shall pay to the estate or other legal representative of the Executive the Base Salary and vacation as accrued through the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable).

                (b)     In addition to the payments described in Section 6.1(a), the Company shall pay a death benefit of an additional twenty-four (24) months of Base Salary and an additional bonus payment (“Additional Bonus Payment”) equal to two (2) times the Target Bonus for the Termination Year. Such payment shall be made in one (1) lump sum payment, with such payment to be made to the estate or other legal representative of the Executive within forty-five (45) days after receipt by the Company of notice of Executive’s death. The Executive’s estate or legal representative shall have no right to designate the taxable year of payment. Rights and benefits of the estate or other legal representative of the Executive under the benefit plans and programs of Hanger shall be determined in accordance with the provisions of such plans and programs.

            6.2    Disability.

                (a)     “Disability” means, for purposes of this Agreement, that the Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months.

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                (b)     If the Executive shall incur a Disability, the employment of the Executive shall be terminated. In the event of such termination, the Company shall pay to the Executive the Base Salary and vacation accrued through the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable).

            (c)     In addition to the payments described in Section 6.2(a), the Company shall pay to the Executive, for a period of six (6) months following such termination, a monthly severance benefit consisting of: (i) the difference between the Executive’s monthly Base Salary at the Termination Date and the monthly disability pay benefits received by the Executive and (ii) an amount equal to one-twenty-fourth (1/24th) of the Additional Bonus Payment; provided, however, that the Company reserves the right to pay such amounts according to its normal payroll practices. Any portion of this severance benefit that is in excess of the lesser of two (2) times (i) the Executive’s annualized rate of compensation for the preceding taxable year (adjusted for certain increases that would have been received in the normal course of employment) or (ii) the Code Section 401(a)(17) compensation limit for qualified plan purposes as in effect for the Termination Year shall not be paid as a monthly severance benefit but shall be paid to the Executive six (6) months and one day after the Termination Date. On the day following the six (6) month anniversary of the Termination Date, Executive shall receive an amount equal to (i) eighteen (18) months of the Executive’s monthly Base Salary at the Termination Date, less the amount of monthly disability pay benefits to which Executive will be entitled over the eighteen (18) month period immediately following the six month anniversary of the Termination Date and (ii) three-quarters (3/4) of the Additional Bonus Payment. Notwithstanding the foregoing, in the event that Hanger is no longer a publicly-traded entity as of the Termination Date, or ceases to be a publicly-traded entity within the six (6) month period immediately following the Termination Date, then the Company shall pay to Executive the payments set forth in this Section 6.2(c), or any unpaid portion thereof, as applicable, within forty-five (45) days from the later of (i) the Termination Date or (ii) the date Hanger ceased to be a publicly-traded entity. Rights and benefits of the Executive under the other benefit plans and programs of Hanger shall be determined in accordance with the terms and provisions of such plans and programs. Notwithstanding the foregoing, in the event that the death of the Executive occurs within six (6) months following the Termination Date, the Company shall pay to the Executive’s estate any unpaid portion of the amounts due to be paid to the Executive pursuant to this Section 6.2(c) within forty-five (45) days following receipt by the Company of notice of Executive’s death. Notwithstanding anything in this Agreement to the contrary, Executive shall not be entitled to any payments under this Section 6.2(c) unless Executive has first duly executed the form of agreement and general release attached hereto as Exhibit A (“Release”) on or immediately following the Termination Date; provided, however, that, in the event of any change in any applicable law (or interpretation thereof), the Release shall be subject to reasonable modification by the parties so as to preserve the intent of the parties with respect to such Release.

            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 (at the annual rate then in effect) and vacation accrued through the Termination Date and not theretofore paid to the Executive. Rights and benefits of the Executive or his transferee under the benefit plans and programs of Hanger 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.

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            6.4    Termination by the Company Without Cause.

                (a)     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); 6.5 (Voluntary Termination); or 6.6 (Retirement), the Company shall pay to the Executive the Base Salary and vacation accrued through the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable).

                (b)     In addition to the payments described in Section 6.4(a), the Company shall pay to the Executive, within forty-five (45) days following the Termination Date, a severance payment in an amount equal to two (2) years of the Base Salary (at the annual rate in effect immediately prior to termination) and the Additional Bonus Payment. Any portion of this severance benefit that is in excess of the lesser of two (2) times (i) the Executive’s annualized rate of compensation for the preceding taxable year (adjusted for certain increases that would have been received in the normal course of employment) or (ii) the Code Section 401(a)(17) compensation limit for qualified plan purposes as in effect for the year in which the Termination Date occurs, shall not be paid as a severance benefit but shall be paid to the Executive in a single lump sum six (6) months and one day after the Termination Date. For eighteen (18) months following termination pursuant to this Section 6.4(b), the Company shall (i) reimburse the Executive for his reasonable costs of medical and dental coverage as provided under COBRA, (ii) reimburse the Executive for his reasonable costs incurred in maintaining his life and disability coverage, and (iii) reimburse the Executive for all other benefits granted to the Executive in Sections 3.4, 3.6, 3.7 and 5.1, each at levels substantially equivalent to those provided by the Company to the Executive immediately prior to the termination of his employment (including 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 eighteen (18) month payment period), on the same basis, including the Company’s payment of premiums and contributions, as such benefits are provided to other senior corporate officers of the Company or were provided to the Executive prior to the termination. Reimbursements of expenses which provide for nonqualified deferred compensation under Code Section 409A, if any, shall not be paid before six (6) months and one day after the Executive’s Termination Date. The amount of expenses eligible for reimbursement, or in-kind benefits provided, during a taxable year of the Executive may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided in any other taxable year. Reimbursements shall be paid on or before the last day of the Executive’s taxable year following the taxable year in which the expense was incurred. The right to reimbursement hereunder is not subject to liquidation or exchange for another benefit.

        In addition, for the period ending on December 31 of the second calendar year following the calendar year in which the Executive’s Termination Date occurs, the Executive will be provided with outplacement services 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 Hanger shall be determined in accordance with the provisions of such plans and programs.

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                (c)     Notwithstanding the foregoing, in the event that Hanger is no longer a publicly-traded entity as of the Termination Date, or ceases to be a publicly-traded entity within the six (6) month period immediately following the Termination Date, then the Company shall pay to Executive the payments set forth in Section 6.4(b), or any unpaid portion thereof, as applicable, within forty-five (45) days from the later of (i) the Termination Date or (ii) the date Hanger ceased to be a publicly-traded entity. Notwithstanding the foregoing, in the event that the death of the Executive occurs within six (6) months following the Termination Date, the Company shall pay to the Executive’s estate any unpaid portion of the amounts due to be paid to the Executive pursuant to Section 6.4(b) within forty-five (45) days following receipt by the Company of notice of Executive’s death.

                (d)     Notwithstanding anything in this Agreement to the contrary, Executive shall not be entitled to any payments under Section 6.4(b) unless Executive has first duly executed the Release on or immediately following the Termination Date; provided, however, that, in the event of any change in any applicable law (or interpretation thereof), the Release shall be subject to reasonable modification by the parties so as to preserve the intent of the parties with respect to such Release.

            6.5    Voluntary Termination.

                (a)     The Executive may terminate his employment with the Company at any time upon sixty (60) days’ prior written notice to the Company and the Company shall pay to the Executive the Base Salary and vacation accrued through the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable). Except as otherwise provided in this Agreement, rights and benefits of the Executive or his transferee under the benefit plans and programs of Hanger shall be determined in accordance with provisions of such plans and programs.

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                (b)     In the event that the Company or the Board of Directors alters the scope of the Executive’s position and duties as described in Section 2 without the consent of the Executive, or the Executive experiences any reduction of the Base Salary, Bonus Plan targets (as distinguished from the payments received thereunder) or other benefits as described in Sections 3 and 5 of this Agreement, the Executive may terminate his employment with the Company upon sixty (60) days’ prior written notice to the Company. If the Company does not permit the Executive to continue actively working during such notice period, the Executive shall be deemed to be on a bona fide leave of absence until the last day of such notice period. In the event of a termination of the Executive’s employment under this Section 6.5(b), the Company shall pay to the Executive the Base Salary and vacation accrued through the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable). In addition, the Company shall pay to the Executive six (6) months and one day after the Termination Date an amount equal to two (2) years of the Base Salary (at the annual rate in effect immediately prior to termination) and the Additional Bonus Payment. In addition, the Company shall, for eighteen (18) months following the Termination Date, (i) reimburse the Executive for his reasonable costs of medical and dental coverage as provided under COBRA, (ii) reimburse the Executive for his reasonable costs incurred in maintaining his life and disability coverage, and (iii) reimburse the Executive for all other benefits granted to the Executive in Sections 3.4, 3.6, 3.7 and 5.1, each at levels substantially equivalent to those provided by the Company to the Executive immediately prior to the termination of his employment (including 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 eighteen (18) month payment period), on the same basis, including the Company’s payment of premiums and contributions, as such benefits are provided to other senior corporate officers of the Company or were provided to the Executive prior to the termination. Reimbursements of expenses which provide for nonqualified deferred compensation under Code Section 409A, if any, shall not be paid before six (6) months and one day after the Executive’s Termination Date. The amount of expenses eligible for reimbursement, or in-kind benefits provided, during a taxable year of the Executive may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided in any other taxable year. Reimbursements shall be paid on or before the last day of the Executive’s taxable year following the taxable year in which the expense was incurred. The right to reimbursement hereunder is not subject to liquidation or exchange for another benefit.

        In addition, for the period ending on December 31 of the second calendar year following the calendar year in which the Executive’s Termination Date occurs, the Executive will be provided with outplacement services 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 Hanger shall be determined in accordance with the provisions of such plans and programs.

                (c)     Notwithstanding the foregoing, in the event that Hanger is no longer a publicly-traded entity as of the Termination Date, or ceases to be a publicly-traded entity within the six (6) month period immediately following the Termination Date, then the Company shall pay to Executive the payments set forth in Section 6.5(b), or any unpaid portion thereof, as applicable, within forty-five (45) days from the later of (i) the Termination Date or (ii) the date Hanger ceased to be a publicly-traded entity. Notwithstanding the foregoing, in the event that the death of the Executive occurs within six (6) months following the Termination Date, the Company shall pay to the Executive’s estate any unpaid portion of the amounts due to be paid to the Executive pursuant to Section 6.5(b) within forty-five (45) days following receipt by the Company of notice of Executive’s death.

                (d)     Notwithstanding anything contained in this Agreement to the contrary, Executive shall not be entitled to any payments under this Section 6.5 unless Executive has first duly executed the Release on or immediately following the Termination Date; provided, however, that, in the event of any change in any applicable law (or interpretation thereof), the Release shall be subject to reasonable modification by the parties so as to preserve the intent of the parties with respect to such Release.

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            6.6    Retirement.

                (a)     In the event of the Executive’s Retirement (as defined in Section 6.6(b)), the Company shall pay to the Executive the Base Salary and vacation accrued through the date of Retirement (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable). Except as otherwise provided in this Agreement, rights and benefits of the Executive or his transferee under the benefit plans and programs of Hanger shall be determined in accordance with provisions of such plans and programs.

                (b)     “Retirement” shall mean the Executive’s voluntary termination of employment at or after age sixty-five (65), provided the Executive has given the Company written notice of the Executive’s intent to retire no less than one (1) year prior to the scheduled Termination Date and the Executive has, as of the scheduled Termination Date, been continuously employed with Hanger, including any of its direct or indirect subsidiaries, for a period of no less than eight (8) years.

7. Change In Control and Termination Provisions.

        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), 6.5 (Voluntary Termination) or 6.6 (Retirement) of this Agreement);

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

                (c)     any reduction in the Base Salary or Bonus Plan targets (as distinguished from the payments received thereunder), as compared to such Base Salary or such targets as of the date immediately prior to the Change in Control;

                (d)     any failure to provide the Executive with benefits: (1) at least as favorable as those enjoyed by similarly-situated senior corporate officers of the Company under Hanger’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 or (2) granted to the Executive by this Agreement;

                (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; or

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

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then, at the option of the Executive, exercisable by the Executive within ninety (90) days after the occurrence of any of the foregoing events, the Executive may resign his employment with the Company (or, if involuntarily terminated, give notice of his intention to collect benefits under this Agreement) by delivering a notice in writing (the “Notice of Termination”) to the Company, and the Executive shall be entitled to receive the Base Salary and vacation accrued to the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable). In addition, the Company shall pay to the Executive six (6) months and one day after the Termination Date an amount equal to two (2) years of the Base Salary (at the annual rate in effect immediately prior to termination) and the Additional Bonus Payment. In addition, the Company shall, for eighteen (18) months following the Termination Date, (i) reimburse the Executive for his reasonable costs of medical and dental coverage as provided under COBRA, (ii) reimburse the Executive for his reasonable costs incurred in maintaining his life and disability coverage, and (iii) reimburse the Executive for all other benefits granted to the Executive in Sections 3.4, 3.6, 3.7 and 5.1, each at levels substantially equivalent to those provided by the Company to the Executive immediately prior to the termination of his employment (including 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 eighteen (18) month payment period), on the same basis, including the Company’s payment of premiums and contributions, as such benefits are provided to other senior corporate officers of the Company or were provided to the Executive prior to the termination. Reimbursements of expenses which provide for nonqualified deferred compensation under Code Section 409A, if any, shall not be paid before six (6) months and one day after the Executive’s Termination Date. The amount of expenses eligible for reimbursement, or in-kind benefits provided, during a taxable year of the Executive may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided in any other taxable year. Reimbursements shall be paid on or before the last day of the Executive’s taxable year following the taxable year in which the expense was incurred. The right to reimbursement hereunder is not subject to liquidation or exchange for another benefit.

        In addition, for the period ending on December 31 of the second calendar year following the calendar year in which the Executive’s Termination Date occurs, the Executive will be provided with outplacement services 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 Hanger shall be determined in accordance with the provisions of such plans and programs.

                (g)     Notwithstanding the foregoing, in the event that Hanger is no longer a publicly-traded entity as of the Termination Date, or ceases to be a publicly-traded entity within the six (6) month period immediately following the Termination Date, then the Company shall pay to Executive the payments set forth in this Section 7, or any unpaid portion thereof, as applicable, within forty-five (45) days from the later of (i) the Termination Date or (ii) the date Hanger ceased to be a publicly-traded entity. Notwithstanding the foregoing, in the event that the death of the Executive occurs within six (6) months following the Termination Date, the Company shall pay to the Executive’s estate any unpaid portion of the amounts due to be paid to the Executive pursuant to this Section 7 within forty-five (45) days following receipt by the Company of notice of Executive’s death.

                (h)     Notwithstanding anything contained in this Agreement to the contrary, Executive shall not be entitled to any payments under this Section 7 unless Executive has first duly executed the Release on or immediately following the Termination Date; provided, however, that, in the event of any change in any applicable law (or interpretation thereof), the Release shall be subject to reasonable modification by the parties so as to preserve the intent of the parties with respect to such Release.

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8. Confidential Information.

            8.1    Nondisclosure. Unless the Executive secures the Company’s written consent, the Executive will not, for a period of two (2) years after the Termination Date, disclose, use, disseminate, lecture upon, or publish Confidential Information, whether or not such Confidential Information was developed by him.

            8.2    Confidential Information Defined. “Confidential Information” means information disclosed to the Executive or known by him as a result of his employment with the Company, not generally known in the industry, about the Company’s and/or Hanger’s (including any direct or indirect subsidiary of Hanger) services, products, or customers, including, but not limited to, clinical programs, procedures and protocols, research, operating manuals, business methods, financial strategic planning, client retention, customer and supplier lists, data processing, insurance plans, risk management, marketing, contracting, selling and employees.

9. Interference With the Company.

        The Executive will not, during the Executive’s term of employment and for a period of two (2) years after the Termination Date, 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 that is competitive with the business of the Company and/or Hanger (including any direct or indirect subsidiary of Hanger) on the Termination Date, (ii) solicit or entice or endeavor to solicit or entice away from the Company and/or Hanger (including any direct or indirect subsidiary of Hanger) any director, officer, employee, agent or consultant of the Company and/or Hanger (including any direct or indirect subsidiary of Hanger), either on his own account or for any person, firm, corporation or other organization, regardless of whether 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 and/or Hanger (including any direct or indirect subsidiary of Hanger) as of the Termination Date for the purpose of competing with the business of the Company and/or Hanger (including any direct or indirect subsidiary of Hanger), either on his own account or for any other person, firm, corporation or organization; (iv) employ or otherwise utilize (whether as a consultant, advisor or otherwise) any person who was a director, officer, or employee of the Company and/or Hanger (including any direct or indirect subsidiary of Hanger) at any time during the two years preceding the Termination Date, unless such person’s employment was terminated by the Company and/or Hanger (including any direct or indirect subsidiary of Hanger); or (v) employ or otherwise utilize (whether as a consultant, advisor or otherwise) any person who is or may be likely to be in possession of any Confidential Information. 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.

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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; 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. 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 within 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.

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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. Notwithstanding anything in this Agreement to the contrary, the Company shall unilaterally have the right to amend this Agreement to comply with Section 409A of the Code.

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 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 be designated by like notice:

If to the Company:

c/o Hanger Orthopedic Group, Inc.
2 Bethesda Metro Center, Suite 1200
Bethesda, MD 20814
Attention: Chief Operating Officer

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If to the Executive:

Ivan R. Sabel
4819 Quebec Street, N.W.
Washington, D.C. 20016

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.

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.

[The next page is the signature page.]

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        IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the 25th day of October, 2007.

HANGER PROSTHETICS & ORTHOTICS, INC.

By:  /s/ Brian Wheeler

        Brian Wheeler, Vice President

/s/ Ivan R. Sabel

Ivan R. Sabel

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EXHIBIT A

AGREEMENT AND GENERAL RELEASE

[Attached.]

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EX-10.2

THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT

        THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT effective as of the 1st day of January, 2005 (“Agreement”), by and between HANGER PROSTHETICS & ORTHOTICS, INC., a Delaware corporation (the “Company”), and GEORGE E. McHENRY (the “Executive”).

        WHEREAS, the Executive and Hanger Orthopedic Group, Inc. (“Hanger”) executed an initial Employment Agreement on August 1, 2001 (“Original Agreement”), which Original Agreement was amended by the Amended and Restated Employment Agreement, dated April 18, 2003, and the Second Amended and Restated Employment Agreement, effective January 1, 2005 (“Second Amended Agreement”);

        WHEREAS, the Second Amended Agreement was assigned from Hanger to the Company pursuant to the Assignment of Employment Agreement, effective as of January 1, 2007, between the Executive, the Company and Hanger;

        WHEREAS, the parties hereto desire to amend the Second Amended Agreement as set forth in this Agreement, with such amendments to be retroactively effective to January 1, 2005; and

        WHEREAS, the Company desires to employ the Executive and to incentivize the Executive to remain in the employ of 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 effective date of the Original Agreement and shall terminate on the fifth anniversary of the effective date thereof, unless extended or sooner terminated in accordance with this Agreement. In the event the Executive continues to be employed by the Company following the fifth anniversary of the effective date of the Original Agreement, this Agreement shall automatically renew for successive one (1) year terms, unless terminated pursuant to Section 1.3, Section 6 or Section 7 of this Agreement.

        1.3     Automatic Extension. As of the fifth anniversary date of the Original Agreement, and as of each anniversary subsequent thereto (“Automatic Renewal Date”), unless either party shall have given thirty (30) days’ prior written 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. In the event that the Company gives written notice of non-extension, such notice shall be considered a Termination without Cause under the provisions of Section 6.4, unless otherwise mutually agreed between the Parties.

        1.4    Termination Date. For purposes of this Agreement, the term “Termination Date” shall mean (i) if the Executive’s employment is terminated by the Company for any reason whatsoever, other than death or Disability, the Executive’s last day of work; (ii) if the Executive’s employment is terminated by reason of death or Disability, the date of death of the Executive or the effective date of the Disability, as the case may be; and (iii) if the Executive’s employment is terminated by the Executive, the expiration date of the applicable notice period that is required pursuant to this Agreement. Notwithstanding the foregoing, no Termination Date shall be earlier than the date as of which the Executive has incurred a “separation from service” within the meaning of Internal Revenue Code (“Code”) Section 409A, as determined by applying the default rules thereof.

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

2. Position, Duties.

        The Executive shall serve the Company in the positions of Treasurer and Secretary and Hanger in the positions of Executive Vice President and Chief Financial Officer. The Executive shall faithfully and diligently perform the duties appropriate to said positions, which, in addition to those responsibilities assigned to him from time to time by the Chief Executive Officer and the Board of Directors of Hanger (the “Board of Directors”), shall include, among other things, responsibility for the financial, accounting, financial reporting, treasury, tax and audit functions of Hanger and its subsidiaries. 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 term of this Agreement, the Company shall pay to the Executive a minimum 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 of the Company (the “Base Salary”). The Base Salary shall be increased to Two Hundred Eighty-Three Thousand Two Hundred Fifty Dollars ($283,250.00) effective January 1, 2006 and shall be increased to Two Hundred Ninety-Two Thousand Dollars ($292,000.00) effective January 1, 2007. 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 in its sole discretion, taking account of the performance of Hanger and the Executive, and other factors generally considered relevant to the salaries of executives holding similar positions with enterprises comparable to Hanger.

      3.2     Bonus.

        (a)     In addition to the Base Salary, the Executive shall participate in Hanger’s current bonus plan for senior corporate officers (the “Bonus Plan”) beginning January 1, 2002, as approved by the Compensation Committee of the Board of Directors in each calendar year during the term of this Agreement. The Executive’s target bonus is fifty percent (50%) of the Base Salary (the “Target Bonus”) and is contingent on the Executive meeting certain performance criteria and Hanger achieving certain year-end financial criteria, and up to one hundred percent (100%) of the Base Salary (the “Maximum Bonus”) if the Employee exceeds certain performance criteria and Hanger exceeds certain year-end financial criteria all as determined in the reasonable discretion of the Board of Directors and its Compensation Committee. The Executive shall be entitled to such increases in the “Target Bonus” and the “Maximum Bonus” during the term hereof as shall be determined and approved by the Compensation Committee of the Board of Directors in its sole discretion, taking account of the performance of Hanger, the Company and the Executive, and other factors generally considered relevant to the salaries of executives holding similar positions with enterprises comparable to Hanger.

        (b)     The bonus shall be payable between January 1 and March 15 (inclusive) of the calendar year following the calendar year for which the bonus is determined in accordance with the Company’s normal practices. In the event that the Executive is employed for less than the full calendar year in the year in which his Termination Date occurs (“Termination Year”), the bonus payable to the Executive shall be subject to Sections 6 and 7 of this Agreement and calculated based on the Executive meeting certain performance criteria and Hanger achieving certain year-end financial criteria, all as determined by the Compensation Committee of the Board of Directors, in its sole discretion. Such bonus shall be pro-rated for the portion of the Termination Year during which the Executive was employed by the Company. With respect to the bonus for the Termination Year, any bonus payable pursuant to this Section 3.2(b) shall be payable to the Executive between January 1 and March 15 (inclusive) of the calendar year following the calendar year for which the bonus is determined in accordance with the Company’s normal practices.

        3.3    Stock Options & Restricted Stock.

        (a)     As an incentive for the Executive’s future performance in improving shareholder value, the Company shall grant to the Executive options to purchase seventy-five thousand (75,000) shares of Hanger’s common stock, $0.01 par value per share (the “Stock”), with such options being valued at the closing price of the Stock on the first day of Executive’s employment. The Company shall also grant to the Executive options to purchase seventy-five thousand (75,000) shares of Stock on the first anniversary of Executive’s commencement date of employment. The Executive may participate in future awards of options to purchase Stock or restricted shares in a manner consistent with any stock option plan or restricted share plan adopted by Hanger for its senior corporate officers. Option or restricted share grants subsequent to the foregoing initial one-year period shall be based upon targets adopted annually by the Board of Directors, which targets may be derived from budgets generated by Hanger’s management, and the determination as to the amount of such options or restricted shares, if any, shall be at the sole discretion of the Board of Directors.

        (b)     The options or restricted shares provided in subparagraph (a) of this Section 3.3 shall be evidenced by a stock option agreement or restricted share agreement (“Stock Agreement”) between the Executive and Hanger, which Stock Agreement shall provide for a vesting schedule of four (4) years, in equal parts, of the options or restricted shares granted thereunder. Notwithstanding any provisions now or hereafter existing under any stock incentive plan of Hanger, all options or restricted shares granted to the Executive shall vest in full immediately upon the Termination Date except for termination of employment pursuant to Section 6.3 or Section 6.5 hereof, and the Executive (or his estate or legal representative, if applicable) shall thereafter have twelve (12) months from such Termination Date to exercise such options, if applicable.

        (c)     Notwithstanding any provisions now or hereafter existing under any stock option plan or restricted share plan of Hanger, in the event of a Change in Control (as hereinafter defined), all options or restricted shares provided to the Executive pursuant to Section 3.3(a) of the Original Agreement or any Stock Agreement shall be granted and shall immediately fully vest as of the date of such Change in Control with such options or restricted shares being valued at the closing price of Hanger’s common stock on the day prior to the day of the 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 Hanger 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 Hanger having a right to vote in elections of directors; or

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

(iii) Hanger disposes of all or substantially all of the business of Hanger to a party or parties other than a subsidiary or other affiliate of Hanger pursuant to a partial or complete liquidation of Hanger, sale of assets (including stock of a subsidiary of Hanger) or otherwise; or

(iv) the Board of Directors approves Hanger’s consolidation or merger with or into any other person (other than a wholly-owned subsidiary of Hanger), or any other person’s consolidation or merger with or into Hanger, which results in all or part of the outstanding shares of Stock being 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 who either was a member of the Board of Directors on the date hereof or who subsequently became a Director of Hanger and whose election, or nomination for election, was approved by a vote of at least two-thirds (2/3) of the Continuing Directors then in office.

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

        3.5     Car Allowance and Parking. The Executive shall be provided with (a) a luxury-class 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 and (b) a paid parking space at the Company’s headquarters. Upon termination of the Executive’s employment under this Agreement for any reason, the Company may, at its option, demand the prompt return of the automobile, or, upon the mutual agreement of the Executive and the Company, the Executive may assume the lease for the automobile.

        3.6     Parachute Penalties. For all payments made or required to be made pursuant to the terms of this Agreement, including any payments made with respect to the Executive’s termination of employment for any reason, the Company shall determine and pay the Executive, as soon as practicable, an amount sufficient to cover the gross-up of any excise, income and other taxes resulting from the imposition of the parachute penalties of the Code or applicable state tax laws. Such determination and payment by the Company shall be made six (6) months and one (1) day after the Executive’s Termination Date or, if later, before the end of the calendar year following the calendar year in which the Executive paid any such excise tax.

        3.7     Relocation. The Company agrees to provide the following relocation benefits and the Executive agrees to execute 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 termination of the employment of the Executive pursuant to Section 6.3 (Due Cause) or Section 6.5 (Voluntary Termination) of the Original Agreement within the first twenty-four months after commencement of the term of the Original 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 District of Columbia (collectively called the “Washington D.C. Metropolitan Area”) as a result of his employment hereunder;

        (b)     reimbursement of reasonable costs incurred by 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 Herron Court, Medford, NJ 08055;

        (d)     Payment of all closing costs (excluding points), 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 the Original Agreement, for purposes of the Executive performing his duties at the Company’s headquarters office located in Bethesda, MD while the Executive is still residing in his current residence at 10 Blue Herron Court, Medford, NJ 08055; and

        (f)     payment to the Executive of five thousand dollars ($5,000) upon 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 3.7(b), (c), (d) and/or (e) will be paid to executive in an amount equal to (i) such payment as maybe actually due pursuant to such Sections 3.7 (b), (c), (d) and/or (e), plus (ii) any federal and state income tax imposed on Executive as a result of such payment.

        Section 3.8    Other. The Company agrees to (a) provide or reimburse the Executive’s costs for a supplemental long-term disability insurance policy and (b) provide or reimburse the Executive’s costs for a life insurance policy for the Executive in a minimum amount of two times the Base Salary in addition to the one times the Base Salary provided in the base benefit package, payable to a beneficiary of the Executive’s choosing.

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; 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), medical, dental, life, and disability plans of Hanger) 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.

        5.2    Vacation. The Executive shall be entitled to four (4) weeks vacation per year.

6. Termination of Employment.

        6.1    Death.

        (a)     The Executive’s employment shall be terminated by the Executive’s death. In the event of the death of the Executive, the Company shall pay to the estate or other legal representative of the Executive the Base Salary and vacation as accrued through the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable).

        (b)     In addition to the payments described in Section 6.1(a), the Company shall pay a death benefit of an additional eighteen (18) months of Base Salary and an additional bonus payment (“Additional Bonus Payment”) equal to one and one-half (1.5) times the Target Bonus for the Termination Year. Such payment shall be made in one (1) lump sum payment, with such payment to be made to the estate or other legal representative of the Executive within forty-five (45) days after receipt by the Company of notice of Executive’s death. The Executive’s estate or legal representative shall have no right to designate the taxable year of payment. Rights and benefits of the estate or other legal representative of the Executive under the benefit plans and programs of Hanger shall be determined in accordance with the provisions of such plans and programs.

        6.2    Disability.

        (a)     “Disability” means, for purposes of this Agreement, that the Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months.

        (b)     If the Executive shall incur a Disability, the employment of the Executive shall be terminated. In the event of such termination, the Company shall pay to the Executive the Base Salary and vacation accrued through the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable).

        (c)     In addition to the payments described in Section 6.2(a), the Company shall pay to the Executive, for a period of six (6) months following such termination, a monthly severance benefit consisting of: (i) the difference between the Executive’s monthly Base Salary at the Termination Date and the monthly disability pay benefits received by the Executive and (ii) an amount equal to one-eighteenth (1/18th) of the Additional Bonus Payment; provided, however, that the Company reserves the right to pay such amounts according to its normal payroll practices. Any portion of this severance benefit that is in excess of the lesser of two (2) times (i) the Executive’s annualized rate of compensation for the preceding taxable year (adjusted for certain increases that would have been received in the normal course of employment) or (ii) the Code Section 401(a)(17) compensation limit for qualified plan purposes as in effect for the Termination Year shall not be paid as a monthly severance benefit but shall be paid to the Executive six (6) months and one day after the Termination Date. On the day following the six (6) month anniversary of the Termination Date, Executive shall receive an amount equal to (i) twelve (12) months of the Executive’s monthly Base Salary at the Termination Date, less the amount of monthly disability pay benefits to which Executive will be entitled over the twelve (12) month period immediately following the six month anniversary of the Termination Date and (ii) two-thirds (2/3) of the Additional Bonus Payment. Notwithstanding the foregoing, in the event that Hanger is no longer a publicly-traded entity as of the Termination Date, or ceases to be a publicly-traded entity within the six (6) month period immediately following the Termination Date, then the Company shall pay to Executive the payments set forth in this Section 6.2(c), or any unpaid portion thereof, as applicable, within forty-five (45) days from the later of (i) the Termination Date or (ii) the date Hanger ceased to be a publicly-traded entity. Rights and benefits of the Executive under the other benefit plans and programs of Hanger shall be determined in accordance with the terms and provisions of such plans and programs. Notwithstanding the foregoing, in the event that the death of the Executive occurs within six (6) months following the Termination Date, the Company shall pay to the Executive’s estate any unpaid portion of the amounts due to be paid to the Executive pursuant to this Section 6.2(c) within forty-five (45) days following receipt by the Company of notice of Executive’s death. Notwithstanding anything in this Agreement to the contrary, Executive shall not be entitled to any payments under this Section 6.2(c) unless Executive has first duly executed the form of agreement and general release attached hereto as Exhibit B (“Release”) on or immediately following the Termination Date; provided, however, that, in the event of any change in any applicable law (or interpretation thereof), the Release shall be subject to reasonable modification by the parties so as to preserve the intent of the parties with respect to such Release.

        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 (at the annual rate then in effect) and vacation accrued through the Termination Date and not theretofore paid to the Executive. Rights and benefits of the Executive or his transferee under the benefit plans and programs of Hanger 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.

        (a)     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); 6.5 (Voluntary Termination); or 6.6 (Retirement), the Company shall pay to the Executive the Base Salary and vacation accrued through the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable).

        (b)     In addition to the payments described in Section 6.4(a), the Company shall pay to the Executive, within forty-five (45) days following the Termination Date, a severance payment in an amount equal to eighteen (18) months of the Base Salary (at the annual rate in effect immediately prior to termination) and the Additional Bonus Payment. Any portion of this severance benefit that is in excess of the lesser of two (2) times (i) the Executive’s annualized rate of compensation for the preceding taxable year (adjusted for certain increases that would have been received in the normal course of employment) or (ii) the Code Section 401(a)(17) compensation limit for qualified plan purposes as in effect for the year in which the Termination Date occurs, shall not be paid as a severance benefit but shall be paid to the Executive in a single lump sum six (6) months and one day after the Termination Date. For eighteen (18) months following termination pursuant to this Section 6.4(b), the Company shall (i) reimburse the Executive for his reasonable costs of medical and dental coverage as provided under COBRA, (ii) reimburse the Executive for his reasonable costs incurred in maintaining his life and disability coverage, and (iii) reimburse the Executive for all other benefits granted to the Executive in Sections 3.4, 3.6, 3.8 and 5.1, each at levels substantially equivalent to those provided by the Company to the Executive immediately prior to the termination of his employment (including 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 eighteen (18) month payment period), on the same basis, including the Company’s payment of premiums and contributions, as such benefits are provided to other senior corporate officers of the Company or were provided to the Executive prior to the termination. Reimbursements of expenses which provide for nonqualified deferred compensation under Code Section 409A, if any, shall not be paid before six (6) months and one day after the Executive’s Termination Date. The amount of expenses eligible for reimbursement, or in-kind benefits provided, during a taxable year of the Executive may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided in any other taxable year. Reimbursements shall be paid on or before the last day of the Executive’s taxable year following the taxable year in which the expense was incurred. The right to reimbursement hereunder is not subject to liquidation or exchange for another benefit.

        In addition, for a period of eighteen (18) months immediately following the Executive’s Termination Date, the Executive will be provided with outplacement services 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 Hanger shall be determined in accordance with the provisions of such plans and programs.

        (c)     Notwithstanding the foregoing, in the event that Hanger is no longer a publicly-traded entity as of the Termination Date, or ceases to be a publicly-traded entity within the six (6) month period immediately following the Termination Date, then the Company shall pay to Executive the payments set forth in Section 6.4(b), or any unpaid portion thereof, as applicable, within forty-five (45) days from the later of (i) the Termination Date or (ii) the date Hanger ceased to be a publicly-traded entity. Notwithstanding the foregoing, in the event that the death of the Executive occurs within six (6) months following the Termination Date, the Company shall pay to the Executive’s estate any unpaid portion of the amounts due to be paid to the Executive pursuant to Section 6.4(b) within forty-five (45) days following receipt by the Company of notice of Executive’s death.

        (d)     Notwithstanding anything in this Agreement to the contrary, Executive shall not be entitled to any payments under Section 6.4(b) unless Executive has first duly executed the Release on or immediately following the Termination Date; provided, however, that, in the event of any change in any applicable law (or interpretation thereof), the Release shall be subject to reasonable modification by the parties so as to preserve the intent of the parties with respect to such Release.

        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 and the Company shall pay to the Executive the Base Salary and vacation accrued through the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable). Except as otherwise provided in this Agreement, rights and benefits of the Executive or his transferee under the benefit plans and programs of Hanger shall be determined in accordance with provisions of such plans and programs.

      6.6     Retirement.

        (a)     In the event of the Executive’s Retirement (as defined in Section 6.6(b)), the Company shall pay to the Executive the Base Salary and vacation accrued through the date of Retirement (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable). Except as otherwise provided in this Agreement, rights and benefits of the Executive or his transferee under the benefit plans and programs of Hanger shall be determined in accordance with provisions of such plans and programs.

        (b)     “Retirement” shall mean the Executive’s voluntary termination of employment at or after age sixty-five (65), provided the Executive has given the Company written notice of the Executive’s intent to retire no less than one (1) year prior to the scheduled Termination Date and the Executive has, as of the scheduled Termination Date, been continuously employed with Hanger, including any of its direct or indirect subsidiaries, for a period of no less than ten (10) years.

7. Change In Control and Termination Provisions.

        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), 6.5 (Voluntary Termination) or 6.6 (Retirement) of this Agreement);

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

        (c)     any reduction in the Base Salary or Bonus Plan targets (as distinguished from the payments received thereunder), as compared to such Base Salary or such targets as of the date immediately prior to the Change in Control;

        (d)     any failure to provide the Executive with benefits: (1) at least as favorable as those enjoyed by similarly-situated senior corporate officers of the Company under Hanger’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 or (2) granted to the Executive by this Agreement;

        (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; or

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

then, at the option of the Executive, exercisable by the Executive within ninety (90) days after the occurrence of any of the foregoing events, the Executive may resign his employment with the Company (or, if involuntarily terminated, give notice of his intention to collect benefits under this Agreement) by delivering a notice in writing (the “Notice of Termination”) to the Company, and the Executive shall be entitled to receive the Base Salary and vacation accrued to the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable). In addition, the Company shall pay to the Executive six (6) months and one day after the Termination Date an amount equal to eighteen (18) months of the Base Salary (at the annual rate in effect immediately prior to termination) and the Additional Bonus Payment. In addition, the Company shall, for eighteen (18) months following the Termination Date, (i) reimburse the Executive for his reasonable costs of medical and dental coverage as provided under COBRA, (ii) reimburse the Executive for his reasonable costs incurred in maintaining his life and disability coverage, and (iii) reimburse the Executive for all other benefits granted to the Executive in Sections 3.4, 3.6, 3.8 and 5.1, each at levels substantially equivalent to those provided by the Company to the Executive immediately prior to the termination of his employment (including 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 eighteen (18) month payment period), on the same basis, including the Company’s payment of premiums and contributions, as such benefits are provided to other senior corporate officers of the Company or were provided to the Executive prior to the termination. Reimbursements of expenses which provide for nonqualified deferred compensation under Code Section 409A, if any, shall not be paid before six (6) months and one day after the Executive’s Termination Date. The amount of expenses eligible for reimbursement, or in-kind benefits provided, during a taxable year of the Executive may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided in any other taxable year. Reimbursements shall be paid on or before the last day of the Executive’s taxable year following the taxable year in which the expense was incurred. The right to reimbursement hereunder is not subject to liquidation or exchange for another benefit.

        In addition, for a period of eighteen (18) months immediately following the Executive’s Termination Date, the Executive will be provided with outplacement services 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 Hanger shall be determined in accordance with the provisions of such plans and programs.

        (g)     Notwithstanding the foregoing, in the event that Hanger is no longer a publicly-traded entity as of the Termination Date, or ceases to be a publicly-traded entity within the six (6) month period immediately following the Termination Date, then the Company shall pay to Executive the payments set forth in this Section 7, or any unpaid portion thereof, as applicable, within forty-five (45) days from the later of (i) the Termination Date or (ii) the date Hanger ceased to be a publicly-traded entity. Notwithstanding the foregoing, in the event that the death of the Executive occurs within six (6) months following the Termination Date, the Company shall pay to the Executive’s estate any unpaid portion of the amounts due to be paid to the Executive pursuant to this Section 7 within forty-five (45) days following receipt by the Company of notice of Executive’s death.

        (h)     Notwithstanding anything contained in this Agreement to the contrary, Executive shall not be entitled to any payments under this Section 7 unless Executive has first duly executed the Release on or immediately following the Termination Date; provided, however, that, in the event of any change in any applicable law (or interpretation thereof), the Release shall be subject to reasonable modification by the parties so as to preserve the intent of the parties with respect to such Release.

8. Confidential Information.

        8.1     Nondisclosure. Unless the Executive secures the Company’s written consent, the Executive will not, for a period of two (2) years after the Termination Date, disclose, use, disseminate, lecture upon, or publish Confidential Information, whether or not such Confidential Information was developed by him.

        8.2     Confidential Information Defined. “Confidential Information” means information disclosed to the Executive or known by him as a result of his employment with the Company, not generally known in the industry, about the Company’s and/or Hanger’s (including any direct or indirect subsidiary of Hanger) services, products, or customers, including, but not limited to, clinical programs, procedures and protocols, research, operating manuals, business methods, financial strategic planning, client retention, customer and supplier lists, data processing, insurance plans, risk management, marketing, contracting, selling and employees.

9. Interference With the Company.

        The Executive will not, during the Executive’s term of employment and for a period of two (2) years after the Termination Date, 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 that is competitive with the business of the Company and/or Hanger (including any direct or indirect subsidiary of Hanger) on the Termination Date, (ii) solicit or entice or endeavor to solicit or entice away from the Company and/or Hanger (including any direct or indirect subsidiary of Hanger) any director, officer, employee, agent or consultant of the Company and/or Hanger (including any direct or indirect subsidiary of Hanger), either on his own account or for any person, firm, corporation or other organization, regardless of whether 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 and/or Hanger (including any direct or indirect subsidiary of Hanger) as of the Termination Date for the purpose of competing with the business of the Company and/or Hanger (including any direct or indirect subsidiary of Hanger), either on his own account or for any other person, firm, corporation or organization; (iv) employ or otherwise utilize (whether as a consultant, advisor or otherwise) any person who was a director, officer, or employee of the Company and/or Hanger (including any direct or indirect subsidiary of Hanger) at any time during the two years preceding the Termination Date, unless such person’s employment was terminated by the Company and/or Hanger (including any direct or indirect subsidiary of Hanger); or (v) employ or otherwise utilize (whether as a consultant, advisor or otherwise) any person who is or may be likely to be in possession of any Confidential Information. 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; 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. 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 within 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. Notwithstanding anything in this Agreement to the contrary, the Company shall unilaterally have the right to amend this Agreement to comply with Section 409A of the Code.

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 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 be designated by like notice:

If to the Company:

c/o Hanger Orthopedic Group, Inc.
2 Bethesda Metro Center, Suite 1200
Bethesda, MD 20814
Attention: Chief Executive Officer

If to the Executive:

George E. McHenry
25205 Bonny Brook Lane
Gaithersburg, MD 20882

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.

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.

[ The next page is the signature page. ]

        IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the 14th day of October, 2007.

HANGER PROSTHETICS & ORTHOTICS, INC.

By:  /s/ Brian Wheeler

        Brian Wheeler, Vice President

/s/ George E. McHenry

George E. McHenry

EXHIBIT B

AGREEMENT AND GENERAL RELEASE

[Attached.]

EX-10.3

FOURTH AMENDED AND RESTATED EMPLOYMENT AGREEMENT

        FOURTH AMENDED AND RESTATED EMPLOYMENT AGREEMENT effective as of the 1^st day of January, 2005 (“Agreement”), by and between HANGER PROSTHETICS & ORTHOTICS, INC., a Delaware corporation (the “Company”), and THOMAS F. KIRK (the “Executive”).

        WHEREAS, the Executive and Hanger Orthopedic Group, Inc. (“Hanger”) executed an initial Employment Agreement on January 2, 2002 (“Original Agreement”), which Original Agreement was amended by the Amended and Restated Employment Agreement, dated April 22, 2003, and the Second Amended and Restated Employment Agreement, effective as of January 1, 2005 (“Second Amended Agreement”);

        WHEREAS, the Second Amended Agreement was assigned from Hanger to the Company pursuant to the Assignment of Employment Agreement, effective as of January 1, 2007, between the Executive, the Company and Hanger;

        WHEREAS, the Second Amended Agreement was amended by the Third Amended and Restated Employment Agreement, by and between the Executive and the Company, effective as of January 1, 2005 (“Third Amended Agreement”);

        WHEREAS, the parties hereto desire to amend the Third Amended Agreement as set forth in this Agreement, with such amendments to be retroactively effective to January 1, 2005; and

        WHEREAS, the Company desires to employ the Executive and to incentivize the Executive to remain in the employ of 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 effective date of the Original Agreement and shall terminate on the fifth anniversary of the effective date thereof, unless extended or sooner terminated in accordance with this Agreement. In the event the Executive continues to be employed by the Company following the fifth anniversary of the effective date of the Original Agreement, this Agreement shall automatically renew for successive one (1) year terms, unless terminated pursuant to Section 1.3, Section 6 or Section 7 of this Agreement.

        1.3     Automatic Extension. As of the fifth anniversary date of the Original Agreement, and as of each anniversary subsequent thereto (“Automatic Renewal Date”), unless either party shall have given thirty (30) days’ prior written 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. In the event that the Company gives written notice of non-extension, such notice shall be considered a Termination without Cause under the provisions of Section 6.4, unless otherwise mutually agreed between the Parties.

        1.4    Termination Date. For purposes of this Agreement, the term “Termination Date” shall mean (i) if the Executive’s employment is terminated by the Company for any reason whatsoever, other than death or Disability, the Executive’s last day of work; (ii) if the Executive’s employment is terminated by reason of death or Disability, the date of death of the Executive or the effective date of the Disability, as the case may be; and (iii) if the Executive’s employment is terminated by the Executive, the expiration date of the applicable notice period that is required pursuant to this Agreement. Notwithstanding the foregoing, no Termination Date shall be earlier than the date as of which the Executive has incurred a “separation from service” within the meaning of Internal Revenue Code (“Code”) Section 409A, as determined by applying the default rules thereof.

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

2. Position, Duties.

        The Executive shall serve the Company in the position of Vice President and Hanger in the positions of President and Chief Operating Officer and shall be recommended by the Company to the Nominating Committee of the Board of Directors to be the next person nominated to be a member of the Board of Directors as soon as possible, but no later than March 15, 2003. The Executive shall faithfully and diligently perform the duties appropriate to said position, which, in addition to those responsibilities assigned to him from time to time by the Chief Executive Officer and the Board of Directors of Hanger (the “Board of Directors”), shall include, among other things, responsibility for all of Hanger’s operating units, divisions, partially or wholly-owned subsidiaries, and corporate staff units, including, but not limited to, information technology, human resources, materials management and purchasing, real estate, legal, regulatory, compliance, and strategic planning/corporate development. 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. During the term of this Agreement, the Company shall pay to the Executive a minimum base salary at the rate of Four Hundred Fifty Thousand Dollars ($450,000.00) per annum, payable in accordance with the standard payroll practices of the Company (the “Base Salary”). The Base Salary shall be increased to Four Hundred Sixty-Three Thousand Five Hundred Dollars ($463,500.00) effective January 1, 2006 and shall be increased to Four Hundred Seventy-Nine Thousand Dollars ($479,000.00) effective January 1, 2007. 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 in its sole discretion, taking account of the performance of Hanger, the Company and the Executive, and other factors generally considered relevant to the salaries of executives holding similar positions with enterprises comparable to Hanger.

        3.2    Bonus.

        (a)     In addition to the Base Salary, the Executive shall participate in Hanger’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 during the term of this Agreement. The Executive’s target bonus is seventy-five percent (75%) of the Base Salary (the “Target Bonus”) and is contingent on the Executive meeting certain performance criteria and Hanger achieving certain year-end financial criteria, and up to one hundred fifty percent (150%) of the Base Salary (the “Maximum Bonus”) if the Employee exceeds certain performance criteria and Hanger exceeds certain year-end financial criteria all as determined in the reasonable discretion of the Board of Directors and its Compensation Committee. The Executive shall be entitled to such increases in the “Target Bonus” and the “Maximum Bonus” during the term hereof as shall be determined and approved by the Compensation Committee of the Board of Directors in its sole discretion, taking account of the performance of Hanger, the Company and the Executive, and other factors generally considered relevant to the salaries of executives holding similar positions with enterprises comparable to Hanger.

        (b)     The bonus shall be payable between January 1 and March 15 (inclusive) of the calendar year following the calendar year for which the bonus is determined in accordance with the Company’s normal practices. In the event that the Executive is employed for less than the full calendar year in the year in which his Termination Date occurs (“Termination Year”), the bonus payable to the Executive shall be subject to Sections 6 and 7 of this Agreement and calculated based on the Executive meeting certain performance criteria and Hanger achieving certain year-end financial criteria, all as determined by the Compensation Committee of the Board of Directors, in its sole discretion. Such bonus shall be pro-rated for the portion of the Termination Year during which the Executive was employed by the Company. With respect to the bonus for the Termination Year, any bonus payable pursuant to this Section 3.2(b) shall be payable to the Executive between January 1 and March 15 (inclusive) of the calendar year following the calendar year for which the bonus is determined in accordance with the Company’s normal practices.

        3.3    Stock Options & Restricted Stock.

        (a)     As an incentive for the Executive’s future performance in improving shareholder value, the Company shall grant to the Executive options to purchase three hundred fifty thousand (350,000) shares of Hanger’s common stock, $0.01 par value per share (the “Stock”), with such options being valued at the closing price of the Stock on the effective date of the Original Agreement. The Company shall also grant to the Executive options to purchase a minimum of one hundred thousand (100,000) shares of Stock on each of the first, second, and third anniversaries of the Original Agreement. The Executive may participate in future awards of options to purchase Stock or restricted shares in a manner consistent with any stock option plan or restricted share plan adopted by Hanger for its senior corporate officers. Option or restricted share grants subsequent to the foregoing initial three year period shall be based upon targets adopted annually by the Board of Directors, which targets may be derived from budgets generated by Hanger’s management, and the determination as to the amount of such options or restricted shares, if any, shall be at the sole discretion of the Board of Directors.

        (b)     The options or restricted shares provided in subparagraph (a) of this Section 3.3 shall be evidenced by a stock option agreement or restricted share grant agreement (“Stock Agreement”) between the Executive and Hanger, which Stock Agreement shall provide for a vesting schedule of four (4) years, in equal parts, of the options or restricted shares granted thereunder. Notwithstanding any provisions now or hereafter existing under any stock incentive plan of Hanger, all options or restricted shares granted to the Executive shall vest in full immediately upon the Termination Date except for termination of employment pursuant to Section 6.3 or Section 6.5(a) hereof, and the Executive (or his estate or legal representative, if applicable) shall thereafter have twelve (12) months from such Termination Date to exercise such options, if applicable.

        (c)     Notwithstanding any provisions now or hereafter existing under any stock option plan or restricted share plan of Hanger, in the event of a Change in Control (as hereinafter defined), all options or restricted shares provided to the Executive pursuant to Section 3.3(a) of the Original Agreement or any Stock Agreement shall be granted and shall immediately fully vest as of the date of such Change in Control with such options or restricted shares being valued at the closing price of Hanger’s common stock on the day prior to the day of the 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 Hanger 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 Hanger having a right to vote in elections of directors; or

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

(iii) Hanger disposes of all or substantially all of the business of Hanger to a party or parties other than a subsidiary or other affiliate of Hanger pursuant to a partial or complete liquidation of Hanger, sale of assets (including stock of a subsidiary of Hanger) or otherwise; or

(iv) the Board of Directors approves Hanger’s consolidation or merger with or into any other person (other than a wholly-owned subsidiary of Hanger), or any other person’s consolidation or merger with or into Hanger, which results in all or part of the outstanding shares of Stock being 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 who either was a member of the Board of Directors on the date hereof or who subsequently became a Director of Hanger and whose election, or nomination for election, was approved by a vote of at least two-thirds (2/3) of the Continuing Directors then in office.

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

        3.5     Car Allowance and Parking. The Executive shall be provided with (a) a luxury-class 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, and (b) a reserved parking space at the Company’s headquarters. Upon termination of the Executive’s employment under this Agreement for any reason, the Company may, at its option, demand the prompt return of the automobile, or, upon the mutual agreement of the Executive and the Company, the Executive may assume the lease for the automobile.

        3.6     Parachute Penalties. For all payments made or required to be made pursuant to the terms of this Agreement, including any payments made with respect to the Executive’s termination of employment for any reason, the Company shall determine and pay the Executive, as soon as practicable, an amount sufficient to cover the gross-up of any excise, income and other taxes resulting from the imposition of the parachute penalties of the Code or applicable state tax laws. Such determination and payment by the Company shall be made six (6) months and one (1) day after the Executive’s Termination Date or, if later, before the end of the calendar year following the calendar year in which the Executive paid any such excise tax.

        3.7     Local Residence. During the term of this Agreement and for thirty (30) days following the Termination Date, the Company agrees to provide (a) the Executive with a leased, furnished residence of the Executive’s choosing of not less than two thousand (2,000) square feet located within a three mile radius of the Company’s headquarters, and (b) all of the Executive’s utilities (excluding telephone fees and charges), fees, maintenance costs, insurance premiums and garage charges incurred in connection with the Executive’s occupancy of such residence.

        3.8     Other. The Company agrees to: (a) provide the Executive with a desktop and/or laptop computer for his use while working at the Company’s headquarters and the Executive’s local residence, (b) reimburse the Executive for up to Three Thousand Dollars ($3,000) per year for out-of-pocket expenses incurred by the Executive for financial and tax planning, (c) provide or reimburse the Executive’s costs for a life insurance policy for the Executive in a minimum amount of two times the Base Salary in addition to the one times the Base Salary provided in the base benefit package, payable to a beneficiary of the Executive’s choosing, (d) reimburse the Executive’s travel costs between Bethesda, Maryland and the Executive’s primary residence until such time as the local residence described in Section 3.7 is occupied by the Executive and (e) provide or reimburse the Executive’s costs for a supplemental long term disability insurance policy.

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; 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), medical, dental, life, and disability plans of Hanger) 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. The Executive shall be reimbursed for all deductibles, co-payments and other out-of-pocket expenses, excluding premium payments, related to all medical, dental, prescription and vision benefits offered by Hanger.

        5.2    Vacation. The Executive shall be entitled to five (5) weeks vacation per year.

6. Termination of Employment.

        6.1    Death.

        (a)     The Executive’s employment shall be terminated by the Executive’s death. In the event of the death of the Executive, the Company shall pay to the estate or other legal representative of the Executive the Base Salary and vacation as accrued through the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable).

        (b)     In addition to the payments described in Section 6.1(a), the Company shall pay a death benefit of an additional twenty-four (24) months of Base Salary and an additional bonus payment (“Additional Bonus Payment”) equal to two (2) times the Target Bonus for the Termination Year. Such payment shall be made in one (1) lump sum payment, with such payment to be made to the estate or other legal representative of the Executive within forty-five (45) days after receipt by the Company of notice of Executive’s death. The Executive’s estate or legal representative shall have no right to designate the taxable year of payment. Rights and benefits of the estate or other legal representative of the Executive under the benefit plans and programs of Hanger shall be determined in accordance with the provisions of such plans and programs.

        6.2    Disability.

        (a)     “Disability” means, for purposes of this Agreement, that the Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months.

        (b)     If the Executive shall incur a Disability, the employment of the Executive shall be terminated. In the event of such termination, the Company shall pay to the Executive the Base Salary and vacation accrued through the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable).

        (c)     In addition to the payments described in Section 6.2(a), the Company shall pay to the Executive, for a period of six (6) months following such termination, a monthly severance benefit consisting of: (i) the difference between the Executive’s monthly Base Salary at the Termination Date and the monthly disability pay benefits received by the Executive and (ii) an amount equal to one-twenty-fourth (1/24th) of the Additional Bonus Payment; provided, however, that the Company reserves the right to pay such amounts according to its normal payroll practices. Any portion of this severance benefit that is in excess of the lesser of two (2) times (i) the Executive’s annualized rate of compensation for the preceding taxable year (adjusted for certain increases that would have been received in the normal course of employment) or (ii) the Code Section 401(a)(17) compensation limit for qualified plan purposes as in effect for the Termination Year shall not be paid as a monthly severance benefit but shall be paid to the Executive six (6) months and one day after the Termination Date. On the day following the six (6) month anniversary of the Termination Date, Executive shall receive an amount equal to (i) eighteen (18) months of the Executive’s monthly Base Salary at the Termination Date, less the amount of monthly disability pay benefits to which Executive will be entitled over the eighteen (18) month period immediately following the six month anniversary of the Termination Date and (ii) three-quarters (3/4) of the Additional Bonus Payment. Notwithstanding the foregoing, in the event that Hanger is no longer a publicly-traded entity as of the Termination Date, or ceases to be a publicly-traded entity within the six (6) month period immediately following the Termination Date, then the Company shall pay to Executive the payments set forth in this Section 6.2(c), or any unpaid portion thereof, as applicable, within forty-five (45) days from the later of (i) the Termination Date or (ii) the date Hanger ceased to be a publicly-traded entity. Rights and benefits of the Executive under the other benefit plans and programs of Hanger shall be determined in accordance with the terms and provisions of such plans and programs. Notwithstanding the foregoing, in the event that the death of the Executive occurs within six (6) months following the Termination Date, the Company shall pay to the Executive’s estate any unpaid portion of the amounts due to be paid to the Executive pursuant to this Section 6.2(c) within forty-five (45) days following receipt by the Company of notice of Executive’s death. Notwithstanding anything in this Agreement to the contrary, Executive shall not be entitled to any payments under this Section 6.2(c) unless Executive has first duly executed the form of agreement and general release attached hereto as Exhibit A (“Release”) on or immediately following the Termination Date; provided, however, that, in the event of any change in any applicable law (or interpretation thereof), the Release shall be subject to reasonable modification by the parties so as to preserve the intent of the parties with respect to such Release.

        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 (at the annual rate then in effect) and vacation accrued through the Termination Date and not theretofore paid to the Executive. Rights and benefits of the Executive or his transferee under the benefit plans and programs of Hanger 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.

        (a)     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); 6.5 (Voluntary Termination); or 6.6 (Retirement), the Company shall pay to the Executive the Base Salary and vacation accrued through the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable).

        (b)     In addition to the payments described in Section 6.4(a), the Company shall pay to the Executive, within forty-five (45) days following the Termination Date, a severance payment in an amount equal to two (2) years of the Base Salary (at the annual rate in effect immediately prior to termination) and the Additional Bonus Payment. Any portion of this severance benefit that is in excess of the lesser of two (2) times (i) the Executive’s annualized rate of compensation for the preceding taxable year (adjusted for certain increases that would have been received in the normal course of employment) or (ii) the Code Section 401(a)(17) compensation limit for qualified plan purposes as in effect for the year in which the Termination Date occurs, shall not be paid as a severance benefit but shall be paid to the Executive in a single lump sum six (6) months and one day after the Termination Date. For eighteen (18) months following termination pursuant to this Section 6.4(b), the Company shall (i) reimburse the Executive for his reasonable costs of medical and dental coverage as provided under COBRA, (ii) reimburse the Executive for his reasonable costs incurred in maintaining his life and disability coverage, and (iii) reimburse the Executive for all other benefits granted to the Executive in Sections 3.4, 3.6, 3.8 and 5.1, each at levels substantially equivalent to those provided by the Company to the Executive immediately prior to the termination of his employment (including 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 eighteen (18) month payment period), on the same basis, including the Company’s payment of premiums and contributions, as such benefits are provided to other senior corporate officers of the Company or were provided to the Executive prior to the termination. Reimbursements of expenses which provide for nonqualified deferred compensation under Code Section 409A, if any, shall not be paid before six (6) months and one day after the Executive’s Termination Date. The amount of expenses eligible for reimbursement, or in-kind benefits provided, during a taxable year of the Executive may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided in any other taxable year. Reimbursements shall be paid on or before the last day of the Executive’s taxable year following the taxable year in which the expense was incurred. The right to reimbursement hereunder is not subject to liquidation or exchange for another benefit.

        In addition, for the period ending on December 31 of the second calendar year following the calendar year in which the Executive’s Termination Date occurs, the Executive will be provided with outplacement services 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 Hanger shall be determined in accordance with the provisions of such plans and programs.

        (c)     Notwithstanding the foregoing, in the event that Hanger is no longer a publicly-traded entity as of the Termination Date, or ceases to be a publicly-traded entity within the six (6) month period immediately following the Termination Date, then the Company shall pay to Executive the payments set forth in Section 6.4(b), or any unpaid portion thereof, as applicable, within forty-five (45) days from the later of (i) the Termination Date or (ii) the date Hanger ceased to be a publicly-traded entity. Notwithstanding the foregoing, in the event that the death of the Executive occurs within six (6) months following the Termination Date, the Company shall pay to the Executive’s estate any unpaid portion of the amounts due to be paid to the Executive pursuant to Section 6.4(b) within forty-five (45) days following receipt by the Company of notice of Executive’s death.

        (d)     Notwithstanding anything in this Agreement to the contrary, Executive shall not be entitled to any payments under Section 6.4(b) unless Executive has first duly executed the Release on or immediately following the Termination Date; provided, however, that, in the event of any change in any applicable law (or interpretation thereof), the Release shall be subject to reasonable modification by the parties so as to preserve the intent of the parties with respect to such Release.

        6.5    Voluntary Termination.

        (a)     The Executive may terminate his employment with the Company at any time upon sixty (60) days’ prior written notice to the Company and the Company shall pay to the Executive the Base Salary and vacation accrued through the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable). Except as otherwise provided in this Agreement, rights and benefits of the Executive or his transferee under the benefit plans and programs of Hanger shall be determined in accordance with provisions of such plans and programs.

        (b)     In the event that the Company or the Board of Directors alters the scope of the Executive’s position and duties as described in Section 2 without the consent of the Executive, or the Executive experiences any reduction of the Base Salary, Bonus Plan targets (as distinguished from the payments received thereunder) or other benefits as described in Sections 3 and 5 of this Agreement, the Executive may terminate his employment with the Company upon sixty (60) days’ prior written notice to the Company. If the Company does not permit the Executive to continue actively working during such notice period, the Executive shall be deemed to be on a bona fide leave of absence until the last day of such notice period. In the event of a termination of the Executive’s employment under this Section 6.5(b), the Company shall pay to the Executive the Base Salary and vacation accrued through the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable). In addition, the Company shall pay to the Executive six (6) months and one day after the Termination Date an amount equal to two (2) years of the Base Salary (at the annual rate in effect immediately prior to termination) and the Additional Bonus Payment. In addition, the Company shall, for eighteen (18) months following the Termination Date, (i) reimburse the Executive for his reasonable costs of medical and dental coverage as provided under COBRA, (ii) reimburse the Executive for his reasonable costs incurred in maintaining his life and disability coverage, and (iii) reimburse the Executive for all other benefits granted to the Executive in Sections 3.4, 3.6, 3.8 and 5.1, each at levels substantially equivalent to those provided by the Company to the Executive immediately prior to the termination of his employment (including 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 eighteen (18) month payment period), on the same basis, including the Company’s payment of premiums and contributions, as such benefits are provided to other senior corporate officers of the Company or were provided to the Executive prior to the termination. Reimbursements of expenses which provide for nonqualified deferred compensation under Code Section 409A, if any, shall not be paid before six (6) months and one day after the Executive’s Termination Date. The amount of expenses eligible for reimbursement, or in-kind benefits provided, during a taxable year of the Executive may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided in any other taxable year. Reimbursements shall be paid on or before the last day of the Executive’s taxable year following the taxable year in which the expense was incurred. The right to reimbursement hereunder is not subject to liquidation or exchange for another benefit.

        In addition, for the period ending on December 31 of the second calendar year following the calendar year in which the Executive’s Termination Date occurs, the Executive will be provided with outplacement services 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 Hanger shall be determined in accordance with the provisions of such plans and programs.

        (c)     Notwithstanding the foregoing, in the event that Hanger is no longer a publicly-traded entity as of the Termination Date, or ceases to be a publicly-traded entity within the six (6) month period immediately following the Termination Date, then the Company shall pay to Executive the payments set forth in Section 6.5(b), or any unpaid portion thereof, as applicable, within forty-five (45) days from the later of (i) the Termination Date or (ii) the date Hanger ceased to be a publicly-traded entity. Notwithstanding the foregoing, in the event that the death of the Executive occurs within six (6) months following the Termination Date, the Company shall pay to the Executive’s estate any unpaid portion of the amounts due to be paid to the Executive pursuant to Section 6.5(b) within forty-five (45) days following receipt by the Company of notice of Executive’s death.

        (d)     Notwithstanding anything contained in this Agreement to the contrary, Executive shall not be entitled to any payments under this Section 6.5 unless Executive has first duly executed the Release on or immediately following the Termination Date; provided, however, that, in the event of any change in any applicable law (or interpretation thereof), the Release shall be subject to reasonable modification by the parties so as to preserve the intent of the parties with respect to such Release.

        6.6    Retirement.

        (a)     In the event of the Executive’s Retirement (as defined in Section 6.6(b)), the Company shall pay to the Executive the Base Salary and vacation accrued through the date of Retirement (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable). Except as otherwise provided in this Agreement, rights and benefits of the Executive or his transferee under the benefit plans and programs of Hanger shall be determined in accordance with provisions of such plans and programs.

        (b)     “Retirement” shall mean the Executive’s voluntary termination of employment at or after age sixty-five (65), provided the Executive has given the Company written notice of the Executive’s intent to retire no less than one (1) year prior to the scheduled Termination Date and the Executive has, as of the scheduled Termination Date, been continuously employed with Hanger, including any of its direct or indirect subsidiaries, for a period of no less than eight (8) years.

7. Change In Control and Termination Provisions.

        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), 6.5 (Voluntary Termination) or 6.6 (Retirement) of this Agreement);

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

        (c)     any reduction in the Base Salary or Bonus Plan targets (as distinguished from the payments received thereunder), as compared to such Base Salary or such targets as of the date immediately prior to the Change in Control;

        (d)     any failure to provide the Executive with benefits: (1) at least as favorable as those enjoyed by similarly-situated senior corporate officers of the Company under Hanger’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 or (2) granted to the Executive by this Agreement;

        (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; or

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

then, at the option of the Executive, exercisable by the Executive within ninety (90) days after the occurrence of any of the foregoing events, the Executive may resign his employment with the Company (or, if involuntarily terminated, give notice of his intention to collect benefits under this Agreement) by delivering a notice in writing (the “Notice of Termination”) to the Company, and the Executive shall be entitled to receive the Base Salary and vacation accrued to the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable). In addition, the Company shall pay to the Executive six (6) months and one day after the Termination Date an amount equal to two (2) years of the Base Salary (at the annual rate in effect immediately prior to termination) and the Additional Bonus Payment. In addition, the Company shall, for eighteen (18) months following the Termination Date, (i) reimburse the Executive for his reasonable costs of medical and dental coverage as provided under COBRA, (ii) reimburse the Executive for his reasonable costs incurred in maintaining his life and disability coverage, and (iii) reimburse the Executive for all other benefits granted to the Executive in Sections 3.4, 3.6, 3.8 and 5.1, each at levels substantially equivalent to those provided by the Company to the Executive immediately prior to the termination of his employment (including 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 eighteen (18) month payment period), on the same basis, including the Company’s payment of premiums and contributions, as such benefits are provided to other senior corporate officers of the Company or were provided to the Executive prior to the termination. Reimbursements of expenses which provide for nonqualified deferred compensation under Code Section 409A, if any, shall not be paid before six (6) months and one day after the Executive’s Termination Date. The amount of expenses eligible for reimbursement, or in-kind benefits provided, during a taxable year of the Executive may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided in any other taxable year. Reimbursements shall be paid on or before the last day of the Executive’s taxable year following the taxable year in which the expense was incurred. The right to reimbursement hereunder is not subject to liquidation or exchange for another benefit.

        In addition, for the period ending on December 31 of the second calendar year following the calendar year in which the Executive’s Termination Date occurs, the Executive will be provided with outplacement services 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 Hanger shall be determined in accordance with the provisions of such plans and programs.

        (g)     Notwithstanding the foregoing, in the event that Hanger is no longer a publicly-traded entity as of the Termination Date, or ceases to be a publicly-traded entity within the six (6) month period immediately following the Termination Date, then the Company shall pay to Executive the payments set forth in this Section 7, or any unpaid portion thereof, as applicable, within forty-five (45) days from the later of (i) the Termination Date or (ii) the date Hanger ceased to be a publicly-traded entity. Notwithstanding the foregoing, in the event that the death of the Executive occurs within six (6) months following the Termination Date, the Company shall pay to the Executive’s estate any unpaid portion of the amounts due to be paid to the Executive pursuant to this Section 7 within forty-five (45) days following receipt by the Company of notice of Executive’s death.

        (h)     Notwithstanding anything contained in this Agreement to the contrary, Executive shall not be entitled to any payments under this Section 7 unless Executive has first duly executed the Release on or immediately following the Termination Date; provided, however, that, in the event of any change in any applicable law (or interpretation thereof), the Release shall be subject to reasonable modification by the parties so as to preserve the intent of the parties with respect to such Release.

8. Confidential Information.

        8.1     Nondisclosure. Unless the Executive secures the Company’s written consent, the Executive will not, for a period of two (2) years after the Termination Date, disclose, use, disseminate, lecture upon, or publish Confidential Information, whether or not such Confidential Information was developed by him.

        8.2     Confidential Information Defined. “Confidential Information” means information disclosed to the Executive or known by him as a result of his employment with the Company, not generally known in the industry, about the Company’s and/or Hanger’s (including any direct or indirect subsidiary of Hanger) services, products, or customers, including, but not limited to, clinical programs, procedures and protocols, research, operating manuals, business methods, financial strategic planning, client retention, customer and supplier lists, data processing, insurance plans, risk management, marketing, contracting, selling and employees.

9. Interference With the Company.

        The Executive will not, during the Executive’s term of employment and for a period of two (2) years after the Termination Date, 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 that is competitive with the business of the Company and/or Hanger (including any direct or indirect subsidiary of Hanger) on the Termination Date, (ii) solicit or entice or endeavor to solicit or entice away from the Company and/or Hanger (including any direct or indirect subsidiary of Hanger) any director, officer, employee, agent or consultant of the Company and/or Hanger (including any direct or indirect subsidiary of Hanger), either on his own account or for any person, firm, corporation or other organization, regardless of whether 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 and/or Hanger (including any direct or indirect subsidiary of Hanger) as of the Termination Date for the purpose of competing with the business of the Company and/or Hanger (including any direct or indirect subsidiary of Hanger), either on his own account or for any other person, firm, corporation or organization; (iv) employ or otherwise utilize (whether as a consultant, advisor or otherwise) any person who was a director, officer, or employee of the Company and/or Hanger (including any direct or indirect subsidiary of Hanger) at any time during the two years preceding the Termination Date, unless such person’s employment was terminated by the Company and/or Hanger (including any direct or indirect subsidiary of Hanger); or (v) employ or otherwise utilize (whether as a consultant, advisor or otherwise) any person who is or may be likely to be in possession of any Confidential Information. 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; 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. 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 within 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. Notwithstanding anything in this Agreement to the contrary, the Company shall unilaterally have the right to amend this Agreement to comply with Section 409A of the Code.

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 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 be designated by like notice:

If to the Company:

c/o Hanger Orthopedic Group, Inc.
2 Bethesda Metro Center, Suite 1200
Bethesda, MD 20814
Attention: Chief Executive Officer

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.

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.

[ The next page is the signature page. ]

        IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the 6th day of November, 2007.

HANGER PROSTHETICS & ORTHOTICS, INC.

By:  /s/ Brian Wheeler

        Brian Wheeler, Vice President

/s/ Thomas F. Kirk

Thomas F. Kirk

EXHIBIT A

AGREEMENT AND GENERAL RELEASE

[Attached.]

EX-10.4

THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT

        THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT effective as of the 1st day of January, 2005 (“Agreement”), by and between HANGER PROSTHETICS & ORTHOTICS, INC., a Delaware corporation (the “Company”), and RICHMOND L. TAYLOR (the “Executive”).

        WHEREAS, the Executive and Hanger Orthopedic Group, Inc. (“Hanger”) executed an initial Employment Agreement on May 17, 1999 (“Original Agreement”), which Original Agreement was amended by the Amended and Restated Employment Agreement, dated April 17, 2003 (“First Amended Agreement”), and the Second Amended and Restated Employment Agreement, effective as of January 1, 2005 (“Second Amended Agreement”);

        WHEREAS, the Second Amended Agreement was assigned from Hanger to the Company pursuant to the Assignment of Employment Agreement, effective as of January 1, 2007, between the Executive, the Company and Hanger;

        WHEREAS, the parties hereto desire to amend the Second Amended Agreement as set forth in this Agreement, with such amendments to be retroactively effective to January 1, 2005; and

        WHEREAS, the Company desires to employ the Executive and to incentivize the Executive to remain in the employ of 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 effective date of the First Amended Agreement and shall terminate on the fifth anniversary of the effective date thereof, unless extended or sooner terminated in accordance with this Agreement. In the event the Executive continues to be employed by the Company following the fifth anniversary of the effective date of the Original Agreement, this Agreement shall automatically renew for successive one (1) year terms, unless terminated pursuant to Section 1.3, Section 6 or Section 7 of this Agreement.

        1.3     Automatic Extension. As of the fifth anniversary date of the Original Agreement, and as of each anniversary subsequent thereto (“Automatic Renewal Date”), unless either party shall have given thirty (30) days’ prior written 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. In the event that the Company gives written notice of non-extension, such notice shall be considered a Termination without Cause under the provisions of Section 6.4, unless otherwise mutually agreed between the Parties.

        1.4    Termination Date. For purposes of this Agreement, the term “Termination Date” shall mean (i) if the Executive’s employment is terminated by the Company for any reason whatsoever, other than death or Disability, the Executive’s last day of work; (ii) if the Executive’s employment is terminated by reason of death or Disability, the date of death of the Executive or the effective date of the Disability, as the case may be; and (iii) if the Executive’s employment is terminated by the Executive, the expiration date of the applicable notice period that is required pursuant to this Agreement. Notwithstanding the foregoing, no Termination Date shall be earlier than the date as of which the Executive has incurred a “separation from service” within the meaning of Internal Revenue Code (“Code”) Section 409A, as determined by applying the default rules thereof.

        1.5    Office. The Executive’s principal office will be located in Orange County, California, which office shall not be changed without Executive’s consent.

2. Position, Duties.

        The Executive shall serve the Company in the positions of President and Chief Operating Officer and Hanger in the position of Executive Vice President. The Executive shall faithfully and diligently perform the duties appropriate to said positions, which, in addition to those responsibilities assigned to him from time to time by the Chief Executive Officer, the Chief Operating Officer and the Board of Directors of Hanger (the “Board of Directors”), shall include, among other things, responsibility for the overall performance, including the sales and profits, of Hanger’s Patient Care Division. 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. During the term of this Agreement, the Company shall pay to the Executive a minimum base salary at the rate of Three Hundred Forty-Five Thousand Dollars ($345,000.00) per annum, payable in accordance with the standard payroll practices of the Company (the “Base Salary”). The Base Salary shall be increased to Three Hundred Fifty-Two Thousand Dollars ($352,000.00) effective January 1, 2006 and shall be increased to Three Hundred Sixty-Three Thousand Five Hundred Dollars ($363,500.00) effective January 1, 2007. 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 in its sole discretion, taking account of the performance of Hanger and the Executive, and other factors generally considered relevant to the salaries of executives holding similar positions with enterprises comparable to Hanger.

        3.2    Bonus.

        (a)     In addition to the Base Salary, the Executive shall participate in Hanger’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 during the term of this Agreement. The Executive’s target bonus is sixty percent (60%) of the Base Salary (the “Target Bonus”) and is contingent on the Executive meeting certain performance criteria and Hanger achieving certain year-end financial criteria, and up to one hundred twenty-five percent (125%) of the Base Salary (the “Maximum Bonus”) if the Employee exceeds certain performance criteria and Hanger exceeds certain year-end financial criteria all as determined in the reasonable discretion of the Board of Directors and its Compensation Committee. The Executive shall be entitled to such increases in the “Target Bonus” and the “Maximum Bonus” during the term hereof as shall be determined and approved by the Compensation Committee of the Board of Directors in its sole discretion, taking account of the performance of Hanger, the Company and the Executive, and other factors generally considered relevant to the salaries of executives holding similar positions with enterprises comparable to Hanger.

        (b)     The bonus shall be payable between January 1 and March 15 (inclusive) of the calendar year following the calendar year for which the bonus is determined in accordance with the Company’s normal practices. In the event that the Executive is employed for less than the full calendar year in the year in which his Termination Date occurs (“Termination Year”), the bonus payable to the Executive shall be subject to Sections 6 and 7 of this Agreement and calculated based on the Executive meeting certain performance criteria and Hanger achieving certain year-end financial criteria, all as determined by the Compensation Committee of the Board of Directors, in its sole discretion. Such bonus shall be pro-rated for the portion of the Termination Year during which the Executive was employed by the Company. With respect to the bonus for the Termination Year, any bonus payable pursuant to this Section 3.2(b) shall be payable to the Executive between January 1 and March 15 (inclusive) of the calendar year following the calendar year for which the bonus is determined in accordance with the Company’s normal practices.

        3.3    Stock Options & Restricted Stock.

        (a)     As an incentive for the Executive’s future performance in improving shareholder value, the Company shall grant to the Executive options to purchase one hundred fifty thousand (150,000) shares of Hanger’s common stock, $0.01 par value per share (the “Stock”), with such options being valued at the closing price of the Stock on the effective date of the Original Agreement. The Company shall also grant to the Executive options to purchase a minimum of forty-six thousand six hundred sixty-seven (46,667) shares of Stock on each of the first, second, and third anniversaries of the Original Agreement. The Executive may participate in future awards of options to purchase Stock or restricted shares in a manner consistent with any stock option plan or restricted share plan adopted by Hanger for its senior corporate officers. Option or restricted share grants subsequent to the foregoing initial three-year period shall be based upon targets adopted annually by the Board of Directors, which targets may be derived from budgets generated by Hanger’s management, and the determination as to the amount of such options or restricted shares, if any, shall be at the sole discretion of the Board of Directors.

        (b)     The options or restricted shares provided in subparagraph (a) of this Section 3.3 shall be evidenced by a stock option agreement or restricted share agreement (“Stock Agreement”) between the Executive and Hanger, which Stock Agreement shall provide for a vesting schedule of four (4) years, in equal parts, of the options or restricted shares granted thereunder. Notwithstanding any provisions now or hereafter existing under any stock incentive plan of Hanger, all options or restricted shares granted to the Executive shall vest in full immediately upon the Termination Date except for termination of employment pursuant to Section 6.3 or Section 6.5 hereof, and the Executive (or his estate or legal representative, if applicable) shall thereafter have twelve (12) months from such Termination Date to exercise such options, if applicable.

        (c)     Notwithstanding any provisions now or hereafter existing under any stock option plan or restricted share plan of Hanger, in the event of a Change in Control (as hereinafter defined), all options or restricted shares provided to the Executive pursuant to Section 3.3(a) of the Original Agreement or any Stock Agreement shall be granted and shall immediately fully vest as of the date of such Change in Control with such options or restricted shares being valued at the closing price of Hanger’s common stock on the day prior to the day of the 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 Hanger 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 Hanger having a right to vote in elections of directors; or

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

(iii) Hanger disposes of all or substantially all of the business of Hanger to a party or parties other than a subsidiary or other affiliate of Hanger pursuant to a partial or complete liquidation of Hanger, sale of assets (including stock of a subsidiary of Hanger) or otherwise; or

(iv) the Board of Directors approves Hanger’s consolidation or merger with or into any other person (other than a wholly-owned subsidiary of Hanger), or any other person’s consolidation or merger with or into Hanger, which results in all or part of the outstanding shares of Stock being 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 who either was a member of the Board of Directors on the date hereof or who subsequently became a Director of Hanger and whose election, or nomination for election, was approved by a vote of at least two-thirds (2/3) of the Continuing Directors then in office.

        3.4     Senior Corporate Officer Benefits. The Executive shall be entitled to participate in benefit plans now existing or hereinafter adopted by the Board of Directors for the senior corporate officers of the Company. Upon a Change in Control, any interest of the Executive in any future Supplemental Executive Retirement Plan or deferred compensation plan shall immediately vest. In the event that service with the Company is a relevant factor in determining eligibility for or the amount of any benefit, the parties agree that Executive’s service date shall be January 31, 1989.

        3.5     Car Allowance and Parking. The Executive shall be provided with a luxury-class 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. Upon termination of the Executive’s employment under this Agreement for any reason, the Company may, at its option, demand the prompt return of the automobile, or, upon the mutual agreement of the Executive and the Company, the Executive may assume the lease for the automobile.

        3.6     Parachute Penalties. For all payments made or required to be made pursuant to the terms of this Agreement, including any payments made with respect to the Executive’s termination of employment for any reason, the Company shall determine and pay the Executive, as soon as practicable, an amount sufficient to cover the gross-up of any excise, income and other taxes resulting from the imposition of the parachute penalties of the Code or applicable state tax laws. Such determination and payment by the Company shall be made six (6) months and one (1) day after the Executive’s Termination Date or, if later, before the end of the calendar year following the calendar year in which the Executive paid any such excise tax.

        3.7     Other. The Company agrees to (i) provide or reimburse the Executive’s costs for a supplemental long term disability insurance policy and (ii) provide or reimburse the Executive’s costs for a life insurance policy for the Executive in a minimum amount of two times the Base Salary in addition to the one times the Base Salary provided in the base benefit package, payable to a beneficiary of the Executive’s choosing.

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; 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), medical, dental, life, and disability plans of Hanger) 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. In the event that service with the Company is a relevant factor in determining eligibility for or the amount of any benefit, the parties agree that Executive’s service date shall be January 31, 1989.

        5.2    Vacation. The Executive shall be entitled to five (5) weeks vacation per year.

6. Termination of Employment.

        6.1    Death.

        (a)     The Executive’s employment shall be terminated by the Executive’s death. In the event of the death of the Executive, the Company shall pay to the estate or other legal representative of the Executive the Base Salary and vacation as accrued through the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable).

        (b)     In addition to the payments described in Section 6.1(a), the Company shall pay a death benefit of an additional eighteen (18) months of Base Salary and an additional bonus payment (“Additional Bonus Payment”) equal to one and one-half (1.5) times the Target Bonus for the Termination Year. Such payment shall be made in one (1) lump sum payment, with such payment to be made to the estate or other legal representative of the Executive within forty-five (45) days after receipt by the Company of notice of Executive’s death. The Executive’s estate or legal representative shall have no right to designate the taxable year of payment. Rights and benefits of the estate or other legal representative of the Executive under the benefit plans and programs of Hanger shall be determined in accordance with the provisions of such plans and programs.

        6.2    Disability.

        (a)     “Disability” means, for purposes of this Agreement, that the Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months.

        (b)     If the Executive shall incur a Disability, the employment of the Executive shall be terminated. In the event of such termination, the Company shall pay to the Executive the Base Salary and vacation accrued through the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable).

        (c)     In addition to the payments described in Section 6.2(a), the Company shall pay to the Executive, for a period of six (6) months following such termination, a monthly severance benefit consisting of: (i) the difference between the Executive’s monthly Base Salary at the Termination Date and the monthly disability pay benefits received by the Executive and (ii) an amount equal to one-eighteenth (1/18th) of the Additional Bonus Payment; provided, however, that the Company reserves the right to pay such amounts according to its normal payroll practices. Any portion of this severance benefit that is in excess of the lesser of two (2) times (i) the Executive’s annualized rate of compensation for the preceding taxable year (adjusted for certain increases that would have been received in the normal course of employment) or (ii) the Code Section 401(a)(17) compensation limit for qualified plan purposes as in effect for the Termination Year shall not be paid as a monthly severance benefit but shall be paid to the Executive six (6) months and one day after the Termination Date. On the day following the six (6) month anniversary of the Termination Date, Executive shall receive an amount equal to (i) twelve (12) months of the Executive’s monthly Base Salary at the Termination Date, less the amount of monthly disability pay benefits to which Executive will be entitled over the twelve (12) month period immediately following the six month anniversary of the Termination Date and (ii) two-thirds (2/3) of the Additional Bonus Payment. Notwithstanding the foregoing, in the event that Hanger is no longer a publicly-traded entity as of the Termination Date, or ceases to be a publicly-traded entity within the six (6) month period immediately following the Termination Date, then the Company shall pay to Executive the payments set forth in this Section 6.2(c), or any unpaid portion thereof, as applicable, within forty-five (45) days from the later of (i) the Termination Date or (ii) the date Hanger ceased to be a publicly-traded entity. Rights and benefits of the Executive under the other benefit plans and programs of Hanger shall be determined in accordance with the terms and provisions of such plans and programs. Notwithstanding the foregoing, in the event that the death of the Executive occurs within six (6) months following the Termination Date, the Company shall pay to the Executive’s estate any unpaid portion of the amounts due to be paid to the Executive pursuant to this Section 6.2(c) within forty-five (45) days following receipt by the Company of notice of Executive’s death. Notwithstanding anything in this Agreement to the contrary, Executive shall not be entitled to any payments under this Section 6.2(c), unless Executive has first duly executed the form of agreement and general release attached hereto as Exhibit A (“Release”) on or immediately following the Termination Date; provided, however, that, in the event of any change in any applicable law (or interpretation thereof), the Release shall be subject to reasonable modification by the parties so as to preserve the intent of the parties with respect to such Release.

        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 (at the annual rate then in effect) and vacation accrued through the Termination Date and not theretofore paid to the Executive. Rights and benefits of the Executive or his transferee under the benefit plans and programs of Hanger 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.

        (a)     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); 6.5 (Voluntary Termination); or 6.6 (Retirement), the Company shall pay to the Executive the Base Salary and vacation accrued through the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable).

        (b)     In addition to the payments described in Section 6.4(a), the Company shall pay to the Executive, within forty-five (45) days following the Termination Date, a severance payment in an amount equal to eighteen (18) months of the Base Salary (at the annual rate in effect immediately prior to termination) and the Additional Bonus Payment. Any portion of this severance benefit that is in excess of the lesser of two (2) times (i) the Executive’s annualized rate of compensation for the preceding taxable year (adjusted for certain increases that would have been received in the normal course of employment) or (ii) the Code Section 401(a)(17) compensation limit for qualified plan purposes as in effect for the year in which the Termination Date occurs, shall not be paid as a severance benefit but shall be paid to the Executive in a single lump sum six (6) months and one day after the Termination Date. For eighteen (18) months following termination pursuant to this Section 6.4(b), the Company shall (i) reimburse the Executive for his reasonable costs of medical and dental coverage as provided under COBRA, (ii) reimburse the Executive for his reasonable costs incurred in maintaining his life and disability coverage, and (iii) reimburse the Executive for all other benefits granted to the Executive in Sections 3.4, 3.6, 3.7 and 5.1, each at levels substantially equivalent to those provided by the Company to the Executive immediately prior to the termination of his employment (including 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 eighteen (18) month payment period), on the same basis, including the Company’s payment of premiums and contributions, as such benefits are provided to other senior corporate officers of the Company or were provided to the Executive prior to the termination. Reimbursements of expenses which provide for nonqualified deferred compensation under Code Section 409A, if any, shall not be paid before six (6) months and one day after the Executive’s Termination Date. The amount of expenses eligible for reimbursement, or in-kind benefits provided, during a taxable year of the Executive may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided in any other taxable year. Reimbursements shall be paid on or before the last day of the Executive’s taxable year following the taxable year in which the expense was incurred. The right to reimbursement hereunder is not subject to liquidation or exchange for another benefit.

        In addition, for a period of eighteen (18) months immediately following the Executive’s Termination Date, the Executive will be provided with outplacement services 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 Hanger shall be determined in accordance with the provisions of such plans and programs.

        (c)     Notwithstanding the foregoing, in the event that Hanger is no longer a publicly-traded entity as of the Termination Date, or ceases to be a publicly-traded entity within the six (6) month period immediately following the Termination Date, then the Company shall pay to Executive the payments set forth in Section 6.4(b), or any unpaid portion thereof, as applicable, within forty-five (45) days from the later of (i) the Termination Date or (ii) the date Hanger ceased to be a publicly-traded entity. Notwithstanding the foregoing, in the event that the death of the Executive occurs within six (6) months following the Termination Date, the Company shall pay to the Executive’s estate any unpaid portion of the amounts due to be paid to the Executive pursuant to Section 6.4(b) within forty-five (45) days following receipt by the Company of notice of Executive’s death.

        (d)     Notwithstanding anything in this Agreement to the contrary, Executive shall not be entitled to any payments under Section 6.4(b) unless Executive has first duly executed the Release on or immediately following the Termination Date; provided, however, that, in the event of any change in any applicable law (or interpretation thereof), the Release shall be subject to reasonable modification by the parties so as to preserve the intent of the parties with respect to such Release.

        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 and the Company shall pay to the Executive the Base Salary and vacation accrued through the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable). Except as otherwise provided in this Agreement, rights and benefits of the Executive or his transferee under the benefit plans and programs of Hanger shall be determined in accordance with provisions of such plans and programs.

        6.6    Retirement.

        (a)     In the event of the Executive’s Retirement (as defined in Section 6.6(b)), the Company shall pay to the Executive the Base Salary and vacation accrued through the date of Retirement (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable). Except as otherwise provided in this Agreement, rights and benefits of the Executive or his transferee under the benefit plans and programs of Hanger shall be determined in accordance with provisions of such plans and programs.

        (b)     “Retirement” shall mean the Executive’s voluntary termination of employment at or after age sixty-five (65), provided the Executive has given the Company written notice of the Executive’s intent to retire no less than one (1) year prior to the scheduled Termination Date and the Executive has, as of the scheduled Termination Date, been continuously employed with Hanger, including any of its direct or indirect subsidiaries, for a period of no less than ten (10) years.

7. Change In Control and Termination Provisions.

        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), 6.5 (Voluntary Termination) or 6.6 (Retirement) of this Agreement);

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

        (c)     any reduction in the Base Salary or Bonus Plan targets (as distinguished from the payments received thereunder), as compared to such Base Salary or such targets as of the date immediately prior to the Change in Control;

        (d)     any failure to provide the Executive with benefits: (1) at least as favorable as those enjoyed by similarly-situated senior corporate officers of the Company under Hanger’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 or (2) granted to the Executive by this Agreement;

        (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; or

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

then, at the option of the Executive, exercisable by the Executive within ninety (90) days after the occurrence of any of the foregoing events, the Executive may resign his employment with the Company (or, if involuntarily terminated, give notice of his intention to collect benefits under this Agreement) by delivering a notice in writing (the “Notice of Termination”) to the Company, and the Executive shall be entitled to receive the Base Salary and vacation accrued to the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable). In addition, the Company shall pay to the Executive six (6) months and one day after the Termination Date an amount equal to eighteen (18) months of the Base Salary (at the annual rate in effect immediately prior to termination) and the Additional Bonus Payment. In addition, the Company shall, for eighteen (18) months following the Termination Date, (i) reimburse the Executive for his reasonable costs of medical and dental coverage as provided under COBRA, (ii) reimburse the Executive for his reasonable costs incurred in maintaining his life and disability coverage, and (iii) reimburse the Executive for all other benefits granted to the Executive in Sections 3.4, 3.6, 3.7 and 5.1, each at levels substantially equivalent to those provided by the Company to the Executive immediately prior to the termination of his employment (including 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 eighteen (18) month payment period), on the same basis, including the Company’s payment of premiums and contributions, as such benefits are provided to other senior corporate officers of the Company or were provided to the Executive prior to the termination. Reimbursements of expenses which provide for nonqualified deferred compensation under Code Section 409A, if any, shall not be paid before six (6) months and one day after the Executive’s Termination Date. The amount of expenses eligible for reimbursement, or in-kind benefits provided, during a taxable year of the Executive may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided in any other taxable year. Reimbursements shall be paid on or before the last day of the Executive’s taxable year following the taxable year in which the expense was incurred. The right to reimbursement hereunder is not subject to liquidation or exchange for another benefit.

        In addition, for a period of eighteen (18) months immediately following the Executive’s Termination Date, the Executive will be provided with outplacement services 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 Hanger shall be determined in accordance with the provisions of such plans and programs.

        (g)     Notwithstanding the foregoing, in the event that Hanger is no longer a publicly-traded entity as of the Termination Date, or ceases to be a publicly-traded entity within the six (6) month period immediately following the Termination Date, then the Company shall pay to Executive the payments set forth in this Section 7, or any unpaid portion thereof, as applicable, within forty-five (45) days from the later of (i) the Termination Date or (ii) the date Hanger ceased to be a publicly-traded entity. Notwithstanding the foregoing, in the event that the death of the Executive occurs within six (6) months following the Termination Date, the Company shall pay to the Executive’s estate any unpaid portion of the amounts due to be paid to the Executive pursuant to this Section 7 within forty-five (45) days following receipt by the Company of notice of Executive’s death.

        (h)     Notwithstanding anything contained in this Agreement to the contrary, Executive shall not be entitled to any payments under this Section 7 unless Executive has first duly executed the Release on or immediately following the Termination Date; provided, however, that, in the event of any change in any applicable law (or interpretation thereof), the Release shall be subject to reasonable modification by the parties so as to preserve the intent of the parties with respect to such Release.

8. Confidential Information.

        8.1     Nondisclosure. Unless the Executive secures the Company’s written consent, the Executive will not, for a period of eighteen (18) months after the Termination Date, disclose, use, disseminate, lecture upon, or publish Confidential Information, whether or not such Confidential Information was developed by him.

        8.2     Confidential Information Defined. “Confidential Information” means information disclosed to the Executive or known by him as a result of his employment with the Company, not generally known in the industry, about the Company’s and/or Hanger’s (including any direct or indirect subsidiary of Hanger) services, products, or customers, including, but not limited to, clinical programs, procedures and protocols, research, operating manuals, business methods, financial strategic planning, client retention, customer and supplier lists, data processing, insurance plans, risk management, marketing, contracting, selling and employees.

9. Interference With the Company.

        The Executive will not, during the Executive’s term of employment and for a period of eighteen (18) months after the Termination Date, 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 that is competitive with the business of the Company and/or Hanger (including any direct or indirect subsidiary of Hanger) on the Termination Date, (ii) solicit or entice or endeavor to solicit or entice away from the Company and/or Hanger (including any direct or indirect subsidiary of Hanger) any director, officer, employee, agent or consultant of the Company and/or Hanger (including any direct or indirect subsidiary of Hanger), either on his own account or for any person, firm, corporation or other organization, regardless of whether 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 and/or Hanger (including any direct or indirect subsidiary of Hanger) as of the Termination Date for the purpose of competing with the business of the Company and/or Hanger (including any direct or indirect subsidiary of Hanger), either on his own account or for any other person, firm, corporation or organization; (iv) employ or otherwise utilize (whether as a consultant, advisor or otherwise) any person who was a director, officer, or employee of the Company and/or Hanger (including any direct or indirect subsidiary of Hanger) at any time during the two years preceding the Termination Date, unless such person’s employment was terminated by the Company and/or Hanger (including any direct or indirect subsidiary of Hanger); or (v) employ or otherwise utilize (whether as a consultant, advisor or otherwise) any person who is or may be likely to be in possession of any Confidential Information. 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; 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. 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 within 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. Notwithstanding anything in this Agreement to the contrary, the Company shall unilaterally have the right to amend this Agreement to comply with Section 409A of the Code.

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 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 be designated by like notice:

If to the Company:

c/o Hanger Orthopedic Group, Inc.
2 Bethesda Metro Center, Suite 1200
Bethesda, MD 20814
Attention: Chief Executive Officer

If to the Executive:

Richmond L. Taylor
23848 Skyline
Mission Viejo, California 92692

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.

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.

[ The next page is the signature page. ]

        IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the 7th day of November, 2007.

HANGER PROSTHETICS & ORTHOTICS, INC.

By:  /s/ Brian Wheeler

        Brian Wheeler, Vice President

/s/ Richmond L. Taylor

Richmond L. Taylor

EXHIBIT A

AGREEMENT AND GENERAL RELEASE

[Attached.]

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a)
or 15d-14(a) under the Securities Exchange Act of 1934

I, Ivan R. Sabel, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Hanger Orthopedic Group, Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)     designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)     designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)     evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation, and

d)     disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)     all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 7, 2007	/s/ Ivan R. Sabel
	Ivan R. Sabel, CPO
	Chairman and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a)
or 15d-14(a) under the Securities Exchange Act of 1934

I, George E. McHenry, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Hanger Orthopedic Group, Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)     designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)     designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)     evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation, and

d)     disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)     all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 7, 2007	/s/ George E. McHenry
	George E. McHenry
	Executive Vice President and
	Chief Financial Officer

EX-32

Exhibit 32

Written Statement of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Solely for the purposes of complying with 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned Chief Executive Officer and Chief Financial Officer of Hanger Orthopedic Group, Inc. (the “Company”), hereby certify, based on our knowledge, that the Quarterly Report on Form 10-Q of the Company for the three months ended September 30, 2007 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Ivan R. Sabel
Ivan R. Sabel
Chairman and Chief Executive Officer

/s/ George E. McHenry
George E. McHenry
Executive Vice President and
Chief Financial Officer

November 7, 2007