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, 2008
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
	SECURITIES EXCHANGE ACT OF 1934
	For the transition period from                            to
	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  o

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

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

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

As of October 31, 2008, 30,798,572 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, 2008 and December 31, 2007		1
Unaudited Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2008 and 2007		3
Unaudited Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2008 and 2007		4
Notes to Consolidated Financial Statements (Unaudited)		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	48
Part II.	OTHER INFORMATION
Item 1A.	Risk Factors	48
Item 6.	Exhibits	50
SIGNATURES		51
Certifications of Chief Executive Officer and Chief Financial Officer

HANGER ORTHOPEDIC GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

	September 30, 2008		December 31, 2007
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	53,525	$	26,938
Investments	—		7,500
Accounts receivable, less allowance for doubtful accounts of $4,544 and $3,965 in 2008 and 2007, respectively	95,803		99,117
Inventories	85,587		82,228
Prepaid expenses, other assets and income taxes receivable	11,836		10,747
Deferred income taxes	7,939		8,571
Total current assets	254,690		235,101
PROPERTY, PLANT AND EQUIPMENT
Land	949		975
Buildings	4,922		4,881
Furniture and fixtures	13,120		12,747
Machinery and equipment	33,040		31,093
Leasehold improvements	45,511		41,520
Computer and software	61,651		56,231
Total property, plant and equipment	159,193		147,447
Less accumulated depreciation	111,910		100,133
Total property, plant and equipment	47,283		47,314
INTANGIBLE ASSETS
Excess cost over net assets acquired	467,045		459,562
Patents and other intangible assets, net	5,112		4,599
Total intangible assets, net	472,157		464,161
OTHER ASSETS
Debt issuance costs, net	7,938		9,304
Other assets	9,999		3,803
Total other assets	17,937		13,107
TOTAL ASSETS	$	792,067	$	759,683

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, 2008			December 31, 2007
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Current portion of long-term debt	$	3,507		$	5,691
Accounts payable	16,283			17,257
Accrued expenses	13,087			11,316
Accrued interest payable	6,354			1,937
Accrued compensation related costs	22,576			33,106
Total current liabilities	61,807			69,307
LONG-TERM LIABILITIES
Long-term debt, less current portion	419,250			405,201
Deferred income taxes	30,370			30,574
Other liabilities	18,753			16,409
Total liabilities	530,180			521,491
COMMITMENTS AND CONTINGENCIES (Note H)
CONVERTIBLE PREFERRED STOCK
Series A Convertible Preferred stock, liquidation preference of $1,000 per share, 50,000 shares authorized, 0 shares and 50,000 shares issued and outstanding in 2008 and 2007, respectively	—			47,654
SHAREHOLDERS’ EQUITY
Common stock, $.01 par value; 60,000,000 shares authorized, 31,970,537 shares and 24,432,518 shares issued and outstanding in 2008 and 2007, respectively	320			244
Additional paid-in capital	220,062			161,955
Accumulated other comprehensive income	(73		)	—
Retained earnings	42,234			28,995
	262,543			191,194
Treasury stock at cost (141,154 shares)	(656		)	(656		)
Total shareholders’ equity	261,887			190,538
TOTAL LIABILITIES, CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS’ EQUITY	$	792,067		$	759,683

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,
	2008		2007		2008		2007
Net sales	178,742		162,343		517,582		466,560
Cost of goods sold (exclusive of depreciation and amortization)	87,623		79,962		254,915		231,456
Selling, general and administrative	66,547		59,873		194,039		174,744
Depreciation and amortization	4,334		3,943		12,805		11,569
Income from operations	20,238		18,565		55,823		48,791
Interest expense	8,005		9,318		24,308		27,783
Income before taxes	12,233		9,247		31,515		21,008
Provision (benefit) for income taxes	4,893		3,838		12,606		8,722
Net income	7,340		5,409		18,909		12,286
Preferred stock dividend-Series A Convertible Preferred Stock	—		416		5,670		1,249
Net income applicable to common stock	$	7,340	$	4,993	$	13,239	$	11,037
Basic Per Common Share Data
Net income applicable to common stock	$	0.27	$	0.22	$	0.54	$	0.49
Shares used to compute basic per common share amounts	27,004,581		22,606,453		24,300,945		22,399,221
Diluted Per Common Share Data
Net income applicable to common stock	$	0.23	$	0.18	$	0.52	$	0.41
Shares used to compute diluted per common share amounts	31,990,924		30,353,947		25,399,721		30,069,695

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)

	2008			2007
Cash flows from operating activities:
Net income	$	18,909		$	12,286
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on disposal of assets	97			262
Provision for bad debt	11,759			11,919
Provision for deferred income taxes	1,805			3,344
Depreciation and amortization	12,805			11,569
Amortization of debt issuance costs	1,366			1,358
Compensation expense on stock options and restricted stock	3,351			2,318
Changes in assets and liabilities, net of effects of acquired companies:
Accounts receivable	(7,120		)	(9,588		)
Inventories	(3,056		)	(511		)
Prepaid expenses, other current assets, and income taxes receivable	(1,079		)	(4,791		)
Other assets	(179		)	9
Accounts payable	(1,587		)	(733		)
Accrued expenses, accrued interest payable, and income taxes payable	5,484			2,336
Accrued compensation related costs	(10,530		)	(4,852		)
Other liabilities	2,830			5,323
Net cash provided by operating activities	34,855			30,249
Cash flows from investing activities:
Purchase of property, plant and equipment (net of acquisitions)	(12,012		)	(13,410		)
Acquisitions and contingent purchase price (net of cash acquired)	(5,685		)	(12,588		)
Proceeds from sale of property, plant and equipment	20			366
Net cash used in investing activities	(17,677		)	(25,632		)
Cash flows from financing activities:
Borrowings under revolving credit agreement	15,253			—
Repayment of term loan	(3,485		)	(1,726		)
Scheduled repayment of long-term debt	(2,538		)	(1,944		)
Financing costs	—			(268		)
Proceeds from issuance of Common Stock	595			788
Preferred stock dividends paid	(416		)	(1,249		)
				—
Net cash (used in) provided by financing activities	9,409			(4,399		)
Increase in cash and cash equivalents	26,587			218
Cash and cash equivalents, at beginning of period	26,938			23,139
Cash and cash equivalents, at end of period	$	53,525		$	23,357

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, 2008 and 2007 have been prepared by Hanger Orthopedic Group, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting.  These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) 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 the Company and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2007, filed with the SEC.

NOTE B – SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Use of Estimates

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

Cash and Cash Equivalents

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

Investments

We account for our investments in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”.  Our investments are classified as short-term investments if the original maturity, from the date of purchase, is in excess of ninety days and we intend to convert them into cash as necessary to meet our liquidity requirements in the next twelve months.

5

NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Investments (continued)

Our investments consist of two auction rate securities (“ARS”) with a credit rating of either AA or AAA.  ARS are securities that are structured with short-term interest rate reset dates which generally occur every 28 days and are linked to LIBOR.  At the reset date, investors can sell or continue to hold the securities at par.  As of September 30, 2008, both investments failed at auction due to sell orders exceeding buy orders.  The funds associated with these securities will not be accessible until a successful auction occurs, a buyer is found outside of the auction process, the issuer refinances the underlying debt, or the underlying security matures.  The Company’s ARS are reported at fair value.

The Company believes there has been no marked deterioration in the credit risk of the underlying securities in our auction rate portfolio.  However, given the deterioration in liquidity of the auction rate market during 2008, we recorded an unrealized loss on our securities in the amount of $0.2 million and $0.8 million, respectively, in the three and nine months ended September 30, 2008, respectively.  That estimated decline in fair value was calculated based upon a projected cash flow of the underlying securities, which is not necessarily indicative of the actual proceeds that could be received from sale of the securities on September 30, 2008.  Despite the decline in fair value, which was a component of comprehensive income, we anticipate that we will be able to convert these investments to cash at full par value on or before their maturity dates. As it may take in excess of twelve months to convert these investments to cash, management has reclassified these amounts to other assets on the balance sheet.  Further, the current illiquidity of these investments is not expected to impact our operating and capital expenditure needs.

Fair Value

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

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

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a listing of our assets and liabilities required to be measured at fair value on a recurring basis and where they are classified within the hierarchy as of September 30, 2008:

6

NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fair Value (continued)

(in thousands)	Level 1		Level 2		Level 3		Total
Assets
Auction rate securities	—		—		6,750		6,750
Interest rate swaps	—		799		—		799
	$	—	$	799	$	6,750	$	7,549
	Level 1		Level 2		Level 3		Total
Liabilities
Interest rate swaps	—		171		—		171
	$	—	$	171	$	—	$	171

The following notes activities from assets with Level 3 inputs as of September 30, 2008:

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Auction Rate Securities
For the three months ending September 30, 2008
Balance as of June 30, 2008	6,902
Total unrealized losses
Included in other comprehensive income	(152	)
Purchases, issuances, and settlements
Transfers in and/or out of Level 3
Balance as of September 30, 2008	6,750
For the nine months ending September 30, 2008
Balance as of December 31, 2007	7,500
Total unrealized losses
Included in other comprehensive income	(750	)
Purchases, issuances, and settlements
Transfers in and/or out of Level 3	—
Balance as of September 30, 2008	6,750

Auction Rate Securities

The fair values of our ARSs were estimated through discounted cash flow models. These models consider, among other things, the timing of expected future successful auctions, collateralization of underlying security investments and the credit worthiness of the issuer. Since these inputs were not observable, they are classified as level 3 inputs. The auctions for all of the ARSs held by us were unsuccessful as of September 30, 2008, resulting in our continuing to hold them beyond their typical auction reset dates and causing the level of inputs used to determine their fair values to be unobservable (level 3 inputs). As a result of the lack of liquidity in the ARS market and not as a result of the quality of the underlying collateral, for the three and nine months ended September 30, 2008, we recorded unrealized losses on our ARSs of $0.2 million and $0.8 million, respectively, which is reflected in accumulated other comprehensive income in our consolidated balance sheet.

7

NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Interest Rate Swaps

In May 2008, the Company entered into two interest rate swap agreements under which $150.0 million of the Company’s variable rate Term Loans were converted to a fixed rate of 5.4%. The agreements, which expire April 2011, qualify as cash flow hedges in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS 133. The fair value of the interest rate swaps is an estimate of the present value of expected future cash flows the Company is to receive under the interest rate swap agreement. The valuation models used to determine the fair value of the interest rate swap are based upon forward yield curve of one month LIBOR, the hedged interest rate. There was no ineffectiveness relating to the interest rate swaps for the three months and nine months ended September 30, 2008, with the unrealized gains of $0.6 million reported in accumulated other comprehensive income, a component of shareholders’ equity. The interest rate swap asset of $0.8 million is reported in other long-term assets, while the interest rate liability of $0.2 million is reported in accrued expenses on the Company’s balance sheet as of September 30, 2008.

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) collectability 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.

8

NOTE B – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Revenue Recognition (continued)

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 collectability. In addition to the actual bad debt expense recognized during collection activities, we estimate the amount of potential bad debt expense that may occur in the future. This estimate is based upon our historical experience as well as a review of our receivable balances. On a quarterly basis, we evaluate cash collections, accounts receivable balances and write-off activity to assess the adequacy of our allowance for doubtful accounts. Additionally, a company-wide evaluation of collectability of receivable balances older than 180 days is performed at least semi-annually, the results of which are used in the next allowance analysis. In these detailed reviews, the account’s net realizable value is estimated after considering the customer’s payment history, past efforts to collect on the balance and the outstanding balance, and a specific reserve is recorded if needed. From time to time, 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.

9

NOTE B – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Inventories (continued)

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 development stage of the software 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, 2008, 4.7 million shares of common stock are authorized for issuance under the Company’s share-based compensation plans. Shares of common stock issued 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.

10

NOTE B – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Stock-Based Compensation (continued)

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. The Company recognized $1.2 million and $0.9 million in compensation expense for the three months periods ended September 30, 2008 and 2007, respectively. The Company recognized $3.4 million and $2.3 million in compensation expense for the nine months periods ended September 30, 2008 and 2007, respectively. Compensation expense primarily relates to restricted share grants, as the amount of expense related to options is immaterial in all periods presented. The Company calculates the fair value of stock options using the Black-Scholes model. The total value of the 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.

Income Taxes

The Company 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, the Company recognized a decrease of approximately $0.2 million to the January 1, 2007 retained earnings balance. As of the adoption date, the Company 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 the Company may recognize gross tax affected unrecognized tax benefits of up to $1.5 million, of which $0.2 million is expected to impact the effective tax rate, due to the pending expiration of the period of limitations for assessing tax deficiencies for certain income tax returns. As of the adoption date, the Company had accrued interest expense and penalties related to the unrecognized tax benefits of $0.4 million and $0.4 million, respectively. The Company recognizes 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, 2008 was $1.1 million, including $0.1 million in the current income tax provision for the three month period ended September 30, 2008. 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 2005 and with few exceptions is no longer subject to state and local income tax examinations by tax authorities for years before 2002.

11

NOTE B – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

New Accounting Guidance

In December 2007, the FASB issued SFAS 141(R), Business Combinations (“SFAS 141(R)”). SFAS 141(R) provides revised guidance to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141(R) revises the accounting literature previously issued under SFAS 141, Business Combinations. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact that adopting SFAS 141(R) will have on our financial statements.

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

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

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

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets (“SFAS 142-3”). SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. The intent of SFAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R), and other U.S. generally accepted accounting principles (GAAP). SFAS 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The Company is currently evaluating the impact that adopting SFAS 142-3 will have on our financial statements.

12

NOTE B – SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

New Accounting Guidance (continued)

In May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This Statement will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, The Meaning of Present Fairly in Conformity With

Generally Accepted Accounting Principles. SFAS 162 will not have a material impact on the Company’s financial statements.

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

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)	2008		2007
Cash paid during the period for:
Interest	$	19,096	$	22,830
Income taxes	11,437		8,761
Non-cash financing and investing activities:
Conversion of Series A Convertible Preferred Stock	$	52,908	$	—
Dividend on preferred stock	5,254		—
Issuance of notes in connection with acquistions	2,636		3,930
Issuance (cancellation) of restricted shares of common stock	890		14,750

13

NOTE D – ACQUISITIONS

During the three month period ended September 30, 2008, the Company acquired eight patient care centers for an aggregate purchase price of $5.0 million, consisting of $3.3 million in cash and $1.7 million in promissory notes. During the nine month period ended September 30, 2008 the Company acquired fifteen patient care centers for an aggregate purchase price of $7.4 million, consisting of $4.5 million in cash, $2.7 million in promissory notes, and a $0.2 million holdback.  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 accounts for its acquisitions using the purchase method of accounting. In conjunction with the acquisitions completed during the nine months ended September 30, 2008, the Company recorded approximately $4.6 million of goodwill and $1.2 million of customer related intangible assets.  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 pay contingent consideration if post-acquisition cash collection targets are reached that verify the value of the target negotiated at acquisition.  Contingent consideration is defined in the purchase agreement and is accrued based on attainment of these targets. In connection with these agreements, the Company made payments of $0.4 million and $0.2 million during the nine month periods ended September 30, 2008 and 2007, 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 $4.0 million related to contingent consideration provisions in future periods.

NOTE E - GOODWILL

The Company determined that it has two reporting units with goodwill, which are the same as its reportable segments: (i) patient-care centers and (ii) distribution. The Company completes its annual 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, 2008 is as follows

(In thousands)	Patient-Care Centers		Distribution		Total
Balance at December 31, 2007	$	421,174	$	38,388	$	459,562
Additions due to acquisitions	7,055		1		7,056
Additions due to earnouts	427		—		427
Balance at September 30, 2008	$	428,656	$	38,389	$	467,045

14

NOTE F – INVENTORY

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

(In thousands)	September 30, 2008		December 31, 2007
Raw materials	$	30,584	$	30,482
Work-in-process	35,968		32,641
Finished goods	19,035		19,105
	$	85,587	$	82,228

NOTE G – LONG-TERM DEBT

Long-term debt consisted of the following:

(In thousands)	September 30, 2008			December 31, 2007
Term Loan	$	223,064		$	226,550
10 1/4% Senior Notes due 2014	175,000			175,000
Revolving Credit Facility	15,253			—
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	9,440			9,342
	422,757			410,892
Less current portion	(3,507		)	(5,691		)
	$	419,250		$	405,201

Revolving Credit Facility

The $75.0 million Revolving Credit Facility matures on May 26, 2011 and bears interest, at the Company’s option, at LIBOR plus 2.75% or a Base Rate (as defined in the credit agreement) plus 1.75%. The obligations under the Revolving Credit Facility are guaranteed by the Company’s subsidiaries and are secured by a first priority perfected interest in the Company’s subsidiaries’ shares, all of the Company’s assets and all the assets of the Company’s subsidiaries. The Revolving Credit Facility requires compliance with various covenants including but not limited to a maximum total leverage ratio and a maximum annual capital expenditures limit.  As of September 30, 2008, the Company is in compliance with all such covenants. In response to the volatility in the current global credit markets, on September 26, 2008 the Company decided to validate its borrowing capacity and availability by submitting a $20.0 million borrowing request under the facility.  As anticipated Lehman Commercial Paper, Inc. (“LCPI”), a subsidiary of Lehman Brothers Holdings, Inc. (“Lehman”), failed to fund its pro-rata commitment of $4.7 million and the Company borrowed a total of $15.3 million under the facility on September 29,

15

NOTE G – LONG-TERM DEBT (CONTINUED)

Revolving Credit Facility (continued)

2008. LCPI ‘s total commitment is $17.8 million of our total $75.0 million dollar facility.  As of September 30, 2008, the Company had $38.2 million available under the revolving credit facility, net of LCPI’s $17.8 million commitment, $15.3 million already borrowed, and $3.7 million of outstanding letters of credit.  At September 30, 2008, the interest rate on the Revolving Credit Facility was 6.75%.

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 2.00% or a Base Rate (as defined in the credit agreement) plus 1.50%.  At September 30, 2008, the interest rate on the Term Loan was 5.71%. 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, and commenced 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.

16

NOTE G – LONG-TERM DEBT (CONTINUED)

Debt Covenants

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, 2008, the Company was 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, 2008, IN, Inc. had outstanding purchase commitments of approximately $0.5 million.

Contingencies

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

On June 15, 2004, the Company announced that 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 certain class actions that are no longer pending before the court.  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.

17

NOTE H – COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

Contingencies (continued)

Management believes that any billing discrepancies are likely to be primarily at the West Hempstead patient-care center.  Furthermore, management does not believe the resolution of the matters raised by the allegations will have a materially adverse effect on the Company’s financial statements.  The West Hempstead facility generated $0.4 million and $0.5 million of net sales

during the nine months ended September 30, 2008 and 2007, respectively, or less than 0.1% of the Company’s net sales for each quarter.

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.

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.

NOTE I — PREFERRED STOCK

In May 2006, the Company issued 50,000 shares of Series A Convertible Preferred Stock (“Series A Preferred”) with a stated value of $1,000 per share to Ares Corporate Opportunities Fund, L.P. (“ACOF”).  The Series A Preferred provided for cumulative dividends at a rate of 3.33% per annum, payable quarterly in arrears. In June 2008, the average closing price of our common stock exceeded the forced conversion price of the Series A Preferred by 200% for a 20-trading day period, triggering an acceleration, pursuant to the Certificate of Designations of the Series A Preferred, of the Series A Preferred dividends that were otherwise payable through May 26, 2011. The accelerated dividends were paid in the form of increased stated value of the Series A Preferred, in lieu of cash. On July 25, 2008, the Company notified the holder of the Series A Preferred of its election pursuant to the Certificate of Designations of the Series A Preferred to force the conversion of the Series A Preferred into 7,308,730 shares of common stock. The conversion of the Series A Preferred occurred on August 8, 2008.

NOTE J – NET 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.

18

NOTE J – NET INCOME PER COMMON SHARE (CONTINUED)

Net 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)	2008		2007			2008			2007
Net income (loss)	$	7,340	$	5,409		$	18,909		$	12,286
Preferred stock dividends -Series A Convertible Preferred Stock	—		(416		)	(5,670		)	(1,249		)
Net income (loss) applicable to common stock	$	7,340	$	4,993		$	13,239		$	11,037
Shares of common stock outstanding used to compute basic per common share amounts	27,004,581		22,606,453			24,300,945			22,399,221
Effect of dilutive restricted stock and options (1)	1,331,978		1,133,737			1,098,776			1,056,717
Effect of dilutive convertible preferred stock (2)	3,654,365		6,613,757			—			6,613,757
Shares used to compute dilutive per common share amounts	31,990,924		30,353,947			25,399,721			30,069,695
Basic income (loss) per share applicable to common stock	$	0.27	$	0.22		$	0.54		$	0.49
Diluted income (loss) per share applicable to common stock	0.23		0.18			0.52			0.41

(1) For the three and nine months ended September 30, 2008 and 2007, options to purchase 101,000, 881,727, 1,097,065, 1,097,065 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.

(2) For the nine months ended September 30, 2008, excludes the effect of the conversion of Preferred Stock as it is considered anti-dilutive.

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, 2008:

	September 30,
	2008		2007
Discount rate	6.25	%	5.75	%
Average rate of increase in compensation	3.00	%	3.00	%

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:

19

NOTE K – SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (CONTINUED)

	(In thousands)
Net benefit cost accrued at December 31, 2007	$	8,269
Service cost	1,665
Interest cost	389
Net benefit cost accrued at September 30, 2008	$	10,323
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.  In 2003, the 2002 Stock Option Plan was amended to permit the grant of restricted shares of common stock in addition to stock options and to change the name of the plan to the 2002 Stock Incentive Plan. In May 2006, an additional 2.7 million shares of common stock were authorized for issuance. In May 2007, the Company’s shareholders approved amendments to the 2002 Stock Incentive Plan, most notably the incorporation of the Company’s current annual incentive plan for certain executive officers into the 2002 Stock Incentive Plan.  The amendments resulted in the following changes to the 2002 Stock Incentive Plan: (i) addition of performance-based cash awards (“Incentive Awards”) and renaming the 2002 Stock Incentive Plan to be the 2002 Stock Incentive and Bonus Plan; (ii) limitation on the number of options, shares of restricted stock, annual Incentive Awards and long term Incentive Awards that an individual can receive during any calendar year; (iii) addition of a list of specific performance goals that the Company may use for the provision of awards under the 2002 Stock Incentive and Bonus Plan; (iv) limitation on the total number of shares of stock issued pursuant to the exercise of incentive stock options; and (v) addition of a provision allowing for the Company to institute a compensation recovery policy, which would allow the Compensation Committee, in appropriate circumstances, to seek reimbursement of certain compensation realized under awards granted under the 2002 Stock Incentive and Bonus Plan. In August 2007, 205,000 performance-based restricted shares were granted to certain executives.  These performance-based restricted shares are subject to the same vesting period as the service-based restricted shares for employees.  However, the quantity of restricted shares to be released under this grant is dependent on the diluted EPS for the twelve month period from July 1, 2007 through June 30, 2008.  The target EPS for this period was met, therefore, 100% of the performance-based restricted shares were released based on the four year vesting period. Note that the agreements which include these performance-based awards are expected to be renewed annually, at which time a new target performance period will be established.

20

NOTE L - STOCK-BASED COMPENSATION (CONTINUED)

Employee Plans (continued)

During the nine months ended September 30, 2008, no options and 750 restricted shares were cancelled under the 2002 Stock Incentive and Bonus Plan. During the nine months ended September 30, 2007, 4,000 options and 24,500 restricted shares were cancelled under the 2002 Stock Incentive and Bonus Plan. At September 30, 2008, 1,425,919 shares of common stock were available for issuance.

Director Plans

In 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 authorizes 500,000 shares of common stock for grant and permits the issuance of stock options and restricted shares of common stock. The 2003 Directors’ Plan also provides for the automatic annual grant of 8,500 shares of restricted shares of common stock to each director and permits the grant of additional restricted stock in the event the director elects to receive his or her annual director fee in restricted shares of common stock rather than cash.  Options may only be granted at an exercise price that is not less than the fair market value of the common stock on the date of grant and may expire no later than ten years after grant.  Vesting and expiration periods are established by the Compensation Committee of the Board of Directors, generally with vesting of three years following grant and generally with expirations of ten years after grant.  In May 2007, the Company’s shareholders 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 three and nine months ended September 30, 2008 and 2007, no restricted shares or options were cancelled under the 2003 Directors’ Plan. At September 30, 2008, 141,623 shares of common stock were available for issuance.

21

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, 2008 is as follows:

	Employee Plans				Director Plans
	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value
Nonvested at December 31, 2007	1,470,687		$	8.67	122,956		$	9.73
Granted	25,000		12.18		66,742		12.59
Vested	(450,747	)	8.47		(48,362	)	9.40
Forfeited	(28,250	)	8.84		—		—
Nonvested at September 30, 2008	1,016,690		$	8.84	141,336		$	11.19

During the three and nine month periods ended September 30, 2008, 208,185 and 499,109 restricted shares of common stock, with an intrinsic value of $2.0 million and $4.3 million, respectively, became fully vested.  As of September 30, 2008, total unrecognized compensation cost related to unvested restricted shares of common stock was approximately $9.4 million and the related weighted-average period over which it is expected to be recognized is approximately 2.4 years.  The aggregate granted shares have vesting dates through June 2012.

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, 2007	1,510,649			$	11.10	153,113			$	11.04	406,000		$	5.95
Granted	—			—		—			—		—		—
Terminated	(92,514		)	7.54		(10,000		)	18.63		—		—
Exercised	(181,982		)	3.36		(7,649		)	2.83		—		—
Outstanding at September 30, 2008	1,236,153			$	12.51	135,464			$	10.33	406,000		$	5.95
Aggregate intrinsic value at September 30, 2008	$	15,459,436				$	1,398,320				$	2,415,000
Weighted average remaining contractual term (years)	3.0					4.5					1.5

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NOTE L - STOCK-BASED COMPENSATION (CONTINUED)

Options (continued)

The intrinsic value of options exercised during the three and nine months ended September 30, 2008 was $0.3 million and $0.6 million, respectively. Options exercisable under the Company’s share-based compensation plans at September 30, 2008 were 1.8 million shares with a weighted average exercise price of $10.84, an average remaining contractual term of 2.7 years, and an aggregate intrinsic value of $19.3 million.  Cash received by the Company related to the exercise of options during the three and nine months ended September 30, 2008 amounted to $0.2 million and $0.3 million, respectively. As of September 30, 2008, there is no unrecognized compensation cost related to stock option awards.

Information concerning outstanding and exercisable options as of September 30, 2008 is as follows:

			Options Outstanding				Options Exercisable
			Number of	Weighted Average			Number of	Weighted Average
Range of Exercise Prices			Options or Awards	Remaining Life (Years)	Exercise Price		Options or Awards	Remaining Life (Years)	Exercise Price
$ 1.64	to	$ 1.65	220,822	0.8	$	1.64	220,822	0.8	$	1.64
4.63	to	6.02	450,463	1.9	5.87		450,463	1.9	5.87
8.08	to	12.10	124,605	5.9	8.72		124,605	5.9	8.72
13.50	to	16.75	880,727	3.5	14.68		880,727	3.5	14.68
22.31	to	22.50	101,000	0.2	22.31		101,000	0.2	22.31
			1,777,617	2.7	$	10.84	1,777,617	2.7	$	10.84

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 orthotic and prosthetic (“O&P”) devices and components.  The patient-care centers provide services to design and fit O&P devices to patients.  These centers also instruct patients in the use, care and maintenance of the devices.  Fabrication centers are involved in the fabrication of O&P components for both the O&P industry and the Company’s own patient-care centers.

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

Other – This segment consists of Hanger Corporate, Innovative Neurotronics, Inc (“IN, Inc.”), and Linkia. IN, Inc. specializes in bringing emerging MyoOrthotics Technologies® to the O&P market.

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NOTE M – SEGMENT AND RELATED INFORMATION (CONTINUED)

MyoOrthotics Technologies represents the merging of orthotic technologies with electrical stimulation. Linkia is a national managed-care agent for O&P services and a patient referral clearing house.

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

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

(In thousands)	Patient Care Centers			Distribution		Other			Consolidating  Adjustments			Total
Three Months Ended September 30, 2008
Net sales
Customers	$	157,217		$	20,955	570			$	—		$	178,742
Intersegments	—			35,782		343			(36,125		)	—
Depreciation and amortization	2,969			185		1,180			—			4,334
Income (loss) from operations	27,143			6,315		(13,346		)	126			20,238
Interest (income) expense	(1,634		)	1,765		7,874			—			8,005
Income (loss) before taxes	28,777			4,550		(21,220		)	126			12,233
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

(In thousands)
Nine Months Ended September 30, 2008
Net sales
Customers	$	454,538		$	60,967	$	2,077		$	—		$	517,582
Intersegments	—			102,447		2,847			(105,294		)	—
Depreciation and amortization	9,005			541		3,259			—			12,805
Income (loss) from operations	74,058			17,738		(36,625		)	652			55,823
Interest (income) expense	(4,876		)	5,320		23,864			—			24,308
Income (loss) before taxes	78,934			12,418		(60,489		)	652			31,515
Total assets	777,933			92,534		(78,400		)	—			792,067
Capital expenditures	7,552			328		4,132			—			12,012
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

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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 25% of the estimated $2.5 billion O&P patient-care market, in the United States. At September 30, 2008, we operated 677 O&P patient-care centers in 45 states and the District of Columbia and employed in excess of 1,000 revenue-generating O&P practitioners (“practitioners”). In addition, through our wholly-owned subsidiary, Southern Prosthetic Supply, Inc. (“SPS”), we are the largest distributor of branded and private label O&P devices and components in the United States, all of which are manufactured by third parties.  We also create new products, through our wholly-owned subsidiary, Innovative Neurotronics, Inc. (“IN, Inc.”) for patients who have had a loss of mobility due to strokes, multiple sclerosis or other similar conditions.  Another subsidiary, Linkia LLC (“Linkia”), develops programs to manage all aspects of O&P patient care for large private payors.

For the three and nine month periods ended September 30, 2008, our net sales were $178.7 million and $517.6 million, respectively, and we recorded net income of $7.3 million and $18.9 million, respectively.

We conduct our operations primarily in two reportable segments – patient-care centers and distribution.  For the three months ended September 30, 2008, net sales attributable to our patient-care services segment and distribution segment were $157.2 million and $20.9 million, respectively. For the nine months ended September 30, 2008, net sales attributable to our patient-care services segment and distribution segment were $454.5 million and $61.0 million, respectively. See Note M to our consolidated financial statements contained herein for further information related to our segments.

Patient Care Services

As of September 30, 2008, we provided O&P patient care services through 677 patient-care centers and over 1,000 practitioners in 45 states and the District of Columbia.  Substantially all of our practitioners are certified, or candidates for formal certification, by the O&P industry certifying boards.

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One or more practitioners closely manage each of our patient-care centers.  Our patient-care centers also employ highly trained technical personnel who assist in the provision of services to patients and who fabricate various O&P devices, as well as office administrators who schedule patient visits, obtain approvals from payors and bill and collect for services rendered.

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

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

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

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

A substantial portion of our O&P services involves the treatment of a patient in a non-hospital setting, such as our patient-care centers, a physician’s office, an out-patient clinic or other facility.  In addition, O&P services are increasingly rendered to patients in hospitals, long-term care facilities, rehabilitation centers and other alternate-site healthcare facilities.  In a hospital setting, the

practitioner works with a physician to provide either orthotic devices or temporary prosthetic devices that are later replaced by permanent prosthetic devices.

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Distribution Services

We distribute O&P components to the O&P market as a whole and to our own patient-care centers through our wholly-owned subsidiary, SPS, which is the nation’s largest O&P distributor. 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.  SPS maintains in inventory approximately 21,000 O&P related items, all of which are manufactured by other companies.  SPS maintains distribution facilities in California, Florida, Georgia, Pennsylvania, and Texas, which allows us to deliver products via ground shipment anywhere in the United States within two business days.

Our distribution business enables us to:

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

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

·access prefabricated and finished O&P products quickly;

·perform inventory quality control;

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

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

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

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 under licensing and consulting agreements, IN, Inc. advances the design and manufacturing and 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 (“WalkAide”), has received FDA approval, achieved  ISO 13485:2004 and ISO 9001:2000 certification, as well as the European CE Mark, which are widely accepted quality management standards for medical devices and related services.   In addition, in September 2007 the WalkAide earned the esteemed da Vinci Award for Adaptive Technologies from the National Multiple Sclerosis Society.  In the

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spirit of the 15th century artist and visionary Leonardo da Vinci, the da Vinci Awards honor outstanding engineering achievements in adaptive and assistive technology that provide solutions to accessibility issues for people with disabilities. The WalkAide is sold in the United States through the Company’s patient care centers and SPS. IN, Inc is also marketing the WalkAide internationally through licensed distributors.

Provider Network Management

Linkia is the first provider network management service company dedicated solely to serving the O&P market. Linkia was created by us during 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 their O&P networks, of which our patient care centers represent the majority of the participating providers. In 2004, Linkia entered into its first contract, and in September 2005, Linkia signed an agreement with CIGNA HealthCare which presently covers approximately nine million beneficiaries. We will continue to invest in and develop Linkia’s networks and capabilities, as well as market Linkia’s services to other national payors.

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 25%.  The O&P patient care services market is highly fragmented and is characterized by local, independent O&P businesses, with the majority generally having a single facility with annual revenues of less than $1.0 million.  We do not believe that any of our patient care competitors account for a market share of more than 2% of the country’s total estimated O&P patient care services revenue.

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

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

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

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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 25% 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 Company;

·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 to be brought to market through our patient practices and licensed distributors worldwide;

·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 encourage 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 69 O&P businesses since 1997,  representing over 178 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;

·Experienced and committed management team; and

·Successful Government Relations efforts including:

·Supported our patients’ efforts to pass “The Prosthetic Parity Act” in 11 states;

·Increased Medicaid reimbursement levels in several states; and

·Created the Hanger Orthopedic Political Action Committee (The Hanger PAC).

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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 monitor quality and outcomes as well as reducing 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 takeadvantage; 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;

·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;

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·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;

·selective application of new technology to improve patient care; and

·lobbying of government officials at both the state and federal level on issues important to Hanger, our patients, and the O&P industry.

Results

Net sales for the three months ended September 30, 2008 increased by $16.4 million, or 10.1%, to $178.7 million from $162.3 million in the prior year’s third quarter. The sales growth was primarily the result of a $10.5 million, or 7.3%, increase in same-center sales in our patient care business, a $2.9 million, or 15.9%, increase in sales of the Company’s distribution segment, and a $2.8 million increase related to acquired entities. Income from operations increased by $1.7 million, or 9.0%, to $20.2 million for the three months ended September 30, 2008, from $18.5 million in the same period in 2007.  Income from operations increased due principally to the increase in sales volume, and lower cost of goods, partially offset by higher selling, general and administrative costs.  Net income for the three months ended September 30, 2008 increased $2.9 million to $7.3 million, compared to net income of $5.4 million in the same period of the prior year.  The current period benefited from sales growth and lower interest costs.

Net sales for the nine months ended September 30, 2008 increased by $51.0 million, or 10.9%, to $517.6 million from $466.6 million for the same period in the prior year.  The sales growth was principally the result of a $28.6 million, or 6.9%, increase in same-center sales in our patient care business, a $9.4 million, or 21.1%, increase in sales of the Company’s distribution segment, and a $12.0 million increase related to acquired entities. Income from operations increased by $7.0 million for the nine months ended September 30, 2008, to $55.8 million, or 10.8% of net sales, from $48.8 million, or 10.5% of net sales, in the same period in 2007.  Income from operations increased due principally to the increase in sales volume allowing us to leverage our relatively fixed labor costs.  Net income for the nine months ended September 30, 2008 increased $6.6 million to $18.9 million, compared to net income of $12.3 million in the same period of the prior year.  The current period benefited from the sales volume increase and lower interest costs.

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Critical Accounting Policies and 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, 2008 and 2007 have been prepared by the Hanger Orthopedic Group, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting.  These consolidated statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) 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 the Company and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2007, 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.

·Revenue Recognition:  Revenues from the sale of orthotic and prosthetic devices and associated services to patients are recorded when the device is accepted by the patient, provided that (i) delivery has occurred or services have been rendered; (ii) persuasive evidence of an arrangement exists; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured.  Revenues from 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.

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

September 30, 2008	0-60 days		61-120 days		Over 120 days		Total
(In thousands)
Commercial and other	$	40,675	$	8,208	$	5,962	$	54,845
Private pay	3,586		1,462		1,170		6,218
Medicaid	9,881		2,632		1,731		14,244
Medicare	20,396		1,727		1,250		23,373
VA	1,440		174		52		1,666
	$	75,978	$	14,203	$	10,165	$	100,346

December 31, 2007	0-60 days		61-120 days		Over 120 days		Total
(In thousands)
Commercial and other	$	41,806	$	9,561	$	6,836	$	58,203
Private pay	3,124		1,326		1,266		$	5,716
Medicaid	8,506		2,320		2,084		$	12,910
Medicare	20,557		2,622		1,603		$	24,782
VA	1,140		196		135		$	1,471
	$	75,133	$	16,025	$	11,924	$	103,082

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

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

Certain accounts receivable may be uncollectible, even if properly pre-authorized and billed.  Regardless of the balance, accounts receivable amounts are periodically evaluated to assess collectability.  In addition to the actual bad debt expense recognized during collection activities, we estimate the amount of potential bad debt expense that may occur in the future.  This estimate is based upon our historical experience as well as a review of our receivable balances.

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On a quarterly basis, we evaluate cash collections, accounts receivable balances and write-off activity to assess the adequacy of our allowance for doubtful accounts.  Additionally, a company-wide evaluation of collectability of receivable balances older than 180 days is performed at least semi-annually, the results of which are used in the next allowance analysis.  In these detailed reviews, the account’s net realizable value is estimated after considering the customer’s payment history, past efforts to collect on the balance and the outstanding balance, and a specific reserve is recorded if needed.  From time to time, 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.

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

Level 1quoted prices in active markets for identical assets or liabilities;

Level 2quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability;

Level 3unobservable inputs, such as discounted cash flow models and valuations.

The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a listing of our assets and liabilities required to be measured at fair value on a recurring basis and where they are classified within the hierarchy as of September 30, 2008:

(in thousands)	Level 1		Level 2		Level 3		Total
Assets
Auction rate securities	—		—		6,750		6,750
Interest rate swaps	—		799		—		799
	$	—	$	799	$	6,750	$	7,549

	Level 1		Level 2		Level 3		Total
Liabilities
Interest rate swaps	—		171		—		171
	$	—	$	171	$	—	$	171

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Auction rate securities: The fair values of our ARSs were estimated through discounted cash flow models.  These models consider, among other things, the timing of expected future successful auctions, collateralization of underlying security investments and the credit worthiness of the issuer. Since these inputs were not observable, they are classified as level 3 inputs.  The auctions for all of the ARSs then held by us were unsuccessful as of September 30, 2008, resulting in our continuing to hold them beyond their typical auction reset dates and causing the level of inputs used to determine their fair values to be unobservable (level 3 inputs). As a result of the lack of liquidity in the ARS market and not as a result of the quality of the underlying collateral, for the three and nine months ended September 30, 2008, we recorded an unrealized loss on our ARSs of $0.2 million and $0.8 million, respectively, which is reflected in accumulated other comprehensive income in our consolidated balance sheet.

Interest rate swaps: In May 2008, the Company entered into two interest rate swap agreements under which $150.0 million of the Company’s variable rate Term Loans were converted to a fixed rate of 5.4%.  The agreements, which expire April 2011, qualify as cash flow hedges in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS 133. The fair value of the interest rate swaps is an estimate of the present value of expected future cash flows the Company is to receive under the interest rate swap agreement. The valuation models used to determine the fair value of the interest rate swap are based upon forward yield curve of one month LIBOR (level 2 inputs), the hedged interest rate.  There was no ineffectiveness relating to the interest rate swaps for the three and nine months ended September 30, 2008, with all of the unrealized gains of $0.6 million reported in accumulated other comprehensive income, a component of shareholders’ equity. The interest rate swap asset of $0.8 million is reported in other long-term assets, while the interest rate liability of $0.2 million is reported in accrued expenses on the Company’s balance sheet as of September 30, 2008.

·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 physical inventory and other factors, such as sales mix and purchasing trends among other factors, affecting cost of goods sold during the interim reporting periods.  Cost of goods sold during the period is adjusted when the annual physical inventory is taken.  We treat these inventory 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 development stage of the software in accordance with Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.

·Goodwill and Other Intangible Assets:  Excess cost over net assets acquired (“Goodwill”) represents the excess of purchase price over the value assigned to net identifiable assets of purchased businesses.  We assess goodwill for impairment annually on October 1, or when events or circumstances indicate that the carrying value of the reporting units may not be recoverable.  Any impairment would be recognized by a charge to operating results and a reduction in the carrying value of the intangible asset.  Our annual impairment test for goodwill primarily utilizes the income approach and considers the market approach and the cost approach in determining the value of our reporting units.

Non-compete agreements are recorded based on agreements entered into by us and are amortized, using the straight-line method, over their terms ranging from five to seven years.  Other definite-lived intangible assets are recorded at cost and are amortized, using the straight-line method, over their estimated useful lives of up to 16 years.  Whenever the facts and circumstances indicate that the carrying amounts of these intangibles may not be recoverable, management reviews and assesses the future cash flows expected to be generated from the related intangible for possible impairment.  Any impairment would be recognized as a charge to operating results and a reduction in the carrying value of the intangible asset.

·Income Taxes:  We adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), on January 1, 2007.  As a result of adoption, we recognized a decrease of approximately $0.2 million in the January 1, 2007 retained earnings balance. We recognize interest accrued and penalties related to unrecognized tax benefits as a component of income tax expense.

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We recognize deferred income tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns.  Deferred income tax liabilities and assets are determined based on the difference between the financial statement and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  We recognize a valuation allowance on the deferred tax assets if it is more likely than not that the assets will not be realized in future years.

New Accounting Guidance

In December 2007, the FASB issued SFAS 141(R), Business Combinations (“SFAS 141(R)”). SFAS 141(R) provides revised guidance to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. SFAS 141(R) revises the accounting literature previously issued under SFAS 141, Business Combinations.  SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact that adopting SFAS 141(R) will have on our financial statements.

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

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

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

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets (“SFAS 142-3”).  SFAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. The intent of SFAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R), and other U.S. generally accepted accounting principles (GAAP).

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SFAS 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008.  The Company is currently evaluating the impact that adopting SFAS 142-3 will have on our financial statements.

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

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

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,
	2008		2007		2008		2007
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of goods sold	49.0		49.3		49.2		49.6
Selling, general and administrative	37.2		36.9		37.5		37.5
Depreciation and amortization	2.4		2.4		2.5		2.5
Income from operations	11.4		11.4		10.8		10.5
Interest expense, net	4.5		5.7		4.7		6.0
Income before taxes	6.9		5.7		6.1		4.5
Provision for income taxes	2.8		2.4		2.4		1.9
Net income	4.1		3.3		3.7		2.6

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Three Months Ended September 30, 2008 Compared to the Three Months Ended September 30, 2007

Net Sales.  Net sales for the three months ended September 30, 2008 increased by $16.4 million, or 10.1%, to $178.7 million from $162.3 million in the prior year’s third quarter. The sales growth was primarily the result of a $10.5 million, or 7.3%, increase in same-center sales in our patient care business, a $2.9 million, or 15.9%, increase in sales of the Company’s distribution segment, and a $2.8 million increase related to acquired entities.

Cost of Goods Sold.  Cost of goods sold for the three months ended September 30, 2008 was $87.6 million, an increase of $7.6 million, over $80.0 million for the same period in the prior year.  The increase was the result of growth in sales.  Cost of goods sold as a percentage of net sales improved 0.3% to 49.0% for the three months ended September 30, 2008.  The improvement is primarily due to improved material costs.

Selling, General and Administrative.  Selling, general and administrative expenses for the three months ended September 30, 2008 increased by $6.7 million to $66.6 million from $59.9 million, for the three months ended September 30, 2008.  The increase was result of (i) $2.2 million of increased personnel costs, which includes approximately $0.8 million of merit increases, (ii) a $1.6 million increase in variable compensation accruals, (iii) $1.2 million of higher health care costs, (iv) a $1.0 million increase related to acquisitions, (v) a $0.6 million increase in occupancy expenses, and (vi) $0.8 million of bad debt expense, offset by a $0.7 million decrease in other overhead costs.  Selling, general, and administrative expenses as a percentage of net sales increased 0.3% from 36.9% for the three months ended September 30, 2007 to 37.2% for the three months ended September 30, 2008.  This change is primarily due to increased personnel and health insurance costs and increases in incentive compensation accruals.

Depreciation and Amortization. Depreciation and amortization for the three months ended September 30, 2008 increased $0.4 million to $4.3 million from $3.9 million for the same period in the prior year.  The increase is a result of depreciation related to investments in infrastructure and leasehold improvements as well as amortization of acquired intangible assets.

Income from Operations.  The increase in net sales resulted in income from operations increasing  $1.6 million to $20.2 million for the three months ended September 30, 2008.  Income from operations, as a percentage of net sales, was 11.4% for each of the three month periods ended September 30, 2008 and 2007.

Interest Expense.  Interest expense in the three months ended September 30, 2008 decreased $1.3 million to $8.0 million from $9.3 million in the three months ended September 30, 2007 due to a decrease in variable interest rates.

Income Taxes.  An income tax provision of $4.9 million was recognized for the three months ended September 30, 2008 compared to a provision of $3.8 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.  The effective tax rate for the three months ended September 30, 2008 was 40.0% compared to 41.5% for the three months ended September 30, 2007.  The effective tax rate for the three month periods ended September 30, 2008 and 2007 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 $7.3 million for the three months ended September 30, 2008, compared to $5.4 million for the same period in the prior year.

Nine months Ended September 30, 2008 Compared to the Nine months Ended September 30, 2007

Net Sales.  Net sales for the nine months ended September 30, 2008 increased by $51.0 million, or 10.9%, to $517.6 million from $466.6 million for the nine months ended September 30, 2007. The sales growth was principally the result of a $28.6 million, or 6.9%, increase in same-center sales in our patient care business, a $9.4 million, or 21.1%, increase in sales of the Company’s distribution segment, and a $12.0 million increase related to acquired entities.

Cost of Goods Sold.  Cost of goods sold for the nine months ended September 30, 2008 was $254.9 million, an increase of $23.4 million, or 10.1%, over $231.5 million for the same period in the prior year.  The increase was the result of growth in sales.  Cost of goods sold as a percentage of net sales improved to 49.2% in 2008 from 49.6% in 2007. The improvement is a result of leveraging the labor portion of cost of goods sold over a larger sales volume and improved material costs.

Selling, General and Administrative.  Selling, general and administrative expenses for the nine months ended September 30, 2008 increased by $19.3 million to $194.0 million from $174.7 million, for the nine months ended September 30, 2008. The increase was a result of: (i) $6.2 million of increased personnel costs, which includes approximately $2.2 of merit increases; (ii) a $4.5 million increase in variable compensation; (iii) $2.5 million of increased health costs; (iv) a $2.3 million increase related to acquisitions; (v) $2.1 million of additional investment in growth initiatives; and (vi) $1.7 million increase in general overhead, primarily comprised of rent and occupancy expenses. Selling, general, and administrative costs as a percentage of net sales remained consistent at approximately 37.5 % of net sales each period.

Depreciation and Amortization. Depreciation and amortization for the nine months ended September 30, 2008 was $12.8 million, a $1.2 million increase from $11.6 million for the nine months ended September 30, 2007.  The increase is a result of depreciation related to investment in infrastructure and leasehold improvements as well as amortization of acquired intangible assets.

Income from Operations.  Principally due to the increase in net sales, income from operations increased $7.0 million to $55.8 million for the nine months ended September 30, 2008.  Income from operations, as a percentage of net sales, improved to 10.8% for the nine months ended September 30, 2008, versus 10.5% for the prior year’s comparable period.  Income from operations as a percentage of net revenues improved due to leveraging fixed labor costs over a relatively greater sales volume.

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Interest Expense.  Interest expense in the nine months ended September 30, 2008 decreased to $24.3 million compared to $27.8 million in the nine months ended September 30, 2007 due to a decrease in variable interest rates.

Income Taxes.  An income tax provision of $12.6 million was recognized for the nine months ended September 30, 2008 compared to a provision of $8.7 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.  The effective tax rate for the nine months ended September 30, 2008 was 40.0% compared to 41.5% for the nine months ended September 30, 2007.  The effective tax rate for the nine month periods ended September 30, 2008 and 2007 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 $18.9 million for the nine months ended September 30, 2008, compared to $12.3 million for the same period in the prior year.

Financial Condition, Liquidity, and Capital Resources

Cash Flows

Our working capital at September 30, 2008 was $192.9 million compared to $165.8 million at December 31, 2007.  Working capital increased principally as a result increases in operating income and continued strong cash collections.  Cash flows provided by operations of $34.9 million for the nine months ended September 30, 2008 compared favorably to $30.2 million of cash provided by operations in the same period of the prior year, primarily due to the increase in net income during the period.   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, 2008, decreased to 50 days, compared to 57 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.

Net cash used in investing activities was $17.7 million for the nine months ended September 30, 2008, versus $25.6 million for the same period in the prior year.  Cash used in investing activities in the current period included $12.0 million related to the purchase of computer related assets, machinery and equipment and leasehold improvements and $5.7 million related to acquisitions of patient-care centers.  In conjunction with the acquisitions completed during the nine months ended September 30, 2008, the Company recorded approximately $7.0 million of goodwill.

Net cash provided by financing activities was $9.4 million for the nine months ended September 30, 2008, compared to $4.4 million used in financing activities for the nine months ended September 30, 2007.  The increase in cash provided by financing activities was primarily due to a net borrowing against our revolving credit facility of $15.3 million offset by payments against our term loan and long-term debt of approximately $6.0 million.

Investments

Our investments consist of two auction rate securities (“ARS”) with a credit rating of either AA or AAA.  ARS are securities that are structured with short-term interest rate reset dates which generally occur every 28 days and are linked to LIBOR.

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At the reset date, investors can sell or continue to hold the securities at par.  As of September 30, 2008, both investments failed at auction due to sell orders exceeding buy orders.  The funds associated with these securities will not be accessible until a successful auction occurs, a buyer is found outside of the auction process, the issuer refinances the underlying debt, or the underlying security matures.  The Company’s ARS are reported at fair value.

The Company believes there has been no market deterioration in the credit risk of the underlying securities in our auction rate portfolio.  However, given the deterioration in liquidity of the auction rate market during 2008, we recorded an unrealized loss on our securities in the amount of $0.2 million and $0.8 million, respectively, in the three and nine months ended September 30, 2008, respectively.  That estimated decline in fair value was calculated based upon a projected cash flow of the underlying securities, which is not necessarily indicative of the actual proceeds that could be received from sale of the securities on September 30, 2008.  Despite the decline in fair value., which was a component of comprehensive income, we anticipate that we will be able to convert these investments to cash at full par value on or before their maturity dates As it may take in excess of twelve months to convert these investments to cash, management has reclassified these amounts to other assets on the balance sheet.  Further, the current illiquidity of these investments is not expected to impact our operating and capital expenditure needs.

Long-Term Debt

Long-term debt consisted of the following:

(In thousands)	September 30, 2008			December 31, 2007
Term Loan	$	223,064		$	226,550
10 1/4% Senior Notes due 2014	175,000			175,000
Revolving Credit Facility	15,253			—
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	9,440			9,342
	422,757			410,892
Less current portion	(3,507		)	(5,691		)
	$	419,250		$	405,201

Revolving Credit Facility

The $75.0 million Revolving Credit Facility matures on May 26, 2011 and bears interest, at the Company’s option, at LIBOR plus 2.75% or a Base Rate (as defined in the credit agreement) plus 1.75%. The obligations under the Revolving Credit Facility are guaranteed by the Company’s subsidiaries and are secured by a first priority perfected interest in the Company’s subsidiaries’ shares, all of the Company’s assets and all the assets of the Company’s subsidiaries. The Revolving Credit Facility requires compliance with various covenants including but not limited to a maximum total leverage ratio and a maximum annual capital expenditures limit.

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As of September 30, 2008, the Company is in compliance with all such covenants. In response to the volatility in the current global credit markets, on September 26, 2008 the Company decided to validate its borrowing capacity and availability by submitting a $20.0 million borrowing request under the facility.  As anticipated Lehman Commercial Paper, Inc. (“LCPI”), a subsidiary of Lehman Brothers Holdings, Inc. (“Lehman”), failed to fund its pro-rata commitment of $4.7 million and the Company borrowed a total of $15.3 million under the facility on September 29, 2008. LCPI ‘s total commitment is $17.8 million of our total $75.0 million dollar facility.  As of September 30, 2008, the Company had $38.2 million available under the revolving credit facility, net of LCPI’s $17.8 million commitment, $15.3 million already borrowed, and $3.7 million of outstanding letters of credit.  At September 30, 2008, the interest rate on the Revolving Credit Facility was 6.75%.

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 2.00% or a Base Rate (as defined in the credit agreement) plus 1.50%. At September 30, 2008, the interest rate on the Term Loan was 5.71%. 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.

Interest Rate Swaps

In May 2008, the Company entered into two interest rate swap agreements under which $150.0 million of the Company’s variable rate Term Loans were converted to a fixed rate of 5.4%.  The agreements, which expire April 2011, qualify as cash flow hedges in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS 133. The fair value of the interest rate swaps is an estimate of the present value of expected future cash flows the Company is to receive under the interest rate swap agreement. The valuation models used to determine the fair value of the interest rate swap are based upon forward yield curve of one month LIBOR, the hedged interest rate.  There was no ineffectiveness relating to the interest rate swaps for the three months and nine months ended September 30, 2008, with the unrealized gains of $0.6 million reported in accumulated other comprehensive income, a component of shareholders’ equity. The interest rate swap asset of $0.8 million is reported in other long-term assets, while the interest rate liability of $0.2 million is reported in accrued expenses on the Company’s balance sheet as of September 30, 2008.

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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, and commenced on 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.

Debt Covenants

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, 2008, the Company was in compliance with all covenants under these debt agreements.

Preferred Stock

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

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Obligations and Commercial Commitments

The following table sets forth our contractual obligations and commercial commitments as of September 30, 2008:

	Payments Due by Period
(In thousands)	2008		2009		2010		2011		2012		Thereafter		Total
Long-term debt	$	992	$	3,006	$	4,225	$	19,489	$	4,134	$	390,911	$	422,757
Interest payments on long-term debt	12,611		32,115		31,857		31,101		30,346		30,315		168,345
Operating leases	8,145		30,565		23,840		18,180		12,700		13,675		107,105
Capital leases and other long-term obligations (1)	1,080		1,513		1,402		1,601		1,535		8,682		15,813
Total contractual cash obligations	$	22,828	$	67,199	$	61,324	$	70,371	$	48,715	$	443,583	$	714,020

(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, 2008 comprised of $3.5 million of unrecognized tax benefits, of which $1.5 million is expected to be settled in the fiscal year 2008, with the remainder expected to be settled thereafter.

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, 2008, IN, Inc. had outstanding purchase commitments of approximately $0.5 million.

Market Risk

We are exposed to the market risk that is associated with changes in interest rates.  At September 30, 2008, all our outstanding debt, with the exception of the Revolving Credit Facility and $73.0 million of the Term Loan, is subject to a fixed interest rate. (See Item 3, Quantitative and Qualitative Disclosures about Market Risk, 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.

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Please see Part II, Item 1A of this report and Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007 for additional information relating to important risks that could materially adversely affect our business, financial condition, or results of operations. 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, and Subordinated Seller Notes.  As of September 30, 2008, 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 an outstanding balance of $15.3 million at September 30, 2008, as discussed in Note G of the Notes to Consolidated Financial Statements included in this report.  The rates at which interest accrues under the entire outstanding balance are variable.

In addition, in the normal course of business, we are exposed to fluctuations in interest rates.  From time to time, we execute LIBOR contracts to fix interest rate exposure for specific periods of time.  At September 30, 2008, we had one contract outstanding which fixed LIBOR at 5.71% and expired on October 30, 2008.

In May 2008, the Company entered into two interest rate swap agreements under which $150.0 million of the Company’s variable rate Term Loans were converted to a fixed rate of 5.4%.  The agreements expire in April 2011.

Presented below is an analysis as of September 30, 2008 of our financial instruments 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 Interest Rate Swap, Term Loan, and the Revolving Credit Facility, calculated for an instantaneous parallel shift in interest rates, plus or minus 50 basis points (“BPS”), 100 BPS, and 150 BPS.

	Annual Interest Expense Given an Interest Rate Decrease of X Basis Points									No Change in			Annual Interest Expense Given an Interest Rate Increase of X Basis Points
Cash Flow Risk	(150 BPS)			(100 BPS)			(50 BPS)			Interest Rates			50 BPS			100 BPS			150 BPS
(In thousands)
Term Loan	$	9,391		$	10,506		$	11,622		$	12,737		$	13,852		$	14,968		$	16,083
Revolving Credit Facility	801			877			953			1,030			1,106			1,182			1,258
Interest Rate Swap	(679		)	(603		)	(526		)	(450		)	(374		)	(297		)	(221		)
	$	8,712		$	9,904		$	11,095		$	12,287		$	13,479		$	14,670		$	15,862

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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, 2008 to ensure that information required to be disclosed in the reports filed under 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, 2008, that has materially effected, or is reasonably likely to materially effect, the Company’s internal control over financial reporting.

Part II.  Other Information

ITEM 1A.  RISK FACTORS.

Item 1A (“Risk Factors”) of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 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 40.6% and 41.1% of our net sales for the three months ended September 30, 2008 and 2007, respectively, from reimbursements for O&P services and products from programs administered by Medicare, Medicaid and the U.S. Veterans Affairs. For the nine months ended September 30, 2008 and 2007, we derived 40.0% and 40.8%, respectively, in reimbursements from the programs administered by Medicare, Medicaid, and the U.S. Veterans Affairs. Each of these programs sets maximum reimbursement levels for O&P services and products. If these agencies reduce reimbursement levels for O&P services and products in the future, our net sales could substantially decline. In addition, the percentage of our net sales derived from these sources may increase as the portion of the U.S. population over age 65 continues to grow, making us more vulnerable to maximum reimbursement level reductions by these organizations.

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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.  In addition, the WalkAide is not currently covered by Medicare and no assurances can be given as to whether or to what extent coverage will be granted by the Centers for Medicare & Medicaid Services.

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.  The rule became effective on June 11, 2007 following its adoption by the Centers for Medicare & Medicaid Services.   We cannot now identify the impact of such adapted rule on us.

Funds associated with certain of our auction rate securities are not currently accessible and our auction rate securities may experience another than temporary decline in value, which would adversely affect our income.

Our investments are comprised two auction rate securities (“ARS”) reported at an aggregate fair value of $6.7 million and an aggregate cost of $7.5 million, as of September 30, 2008.  ARS are securities that are structured with short-term interest rate reset dates which generally occur every 28 days, but with contractual maturities that can be well in excess of ten years.  At the end of each reset period, investors can sell or continue to hold the securities at par.  The auctions for all of the ARS held by us were unsuccessful as of September 30, 2008.  Therefore, based on an analysis of other-than-temporary impairment factors, we recorded an unrealized loss within accumulated other comprehensive income, a component of shareholders’ equity, of approximately $0.8 million at September 30, 2008 related to these auction rate securities.  Although we believe that the decline in the fair market value of these securities is temporary, if the decline in value were ultimately deemed to be other than temporary, it would result in a loss being recognized in our statement of operations, which could be material.  The funds associated with these will not be accessible until a successful auction occurs, a buyer is found outside of the auction process or the underlying securities have matured.

Fluctuations in the stock market as well as general economic and market conditions may harm the market price of our common stock and you may lose all or part of your investment.

The market price of our common stock has been subject to significant fluctuation. The market price of our common stock may continue to be subject to significant fluctuations in response to operating results and other factors, including:

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·actual or anticipated quarterly fluctuations in our financial results, particularly if they differ from investors’ expectations;

·changes in financial estimates and recommendations by securities analysts;

·general economic, market, and political conditions, including war or acts of terrorism, not related to our business;

·actions of our competitors and changes in the market valuations, strategy, and capability of our competitors;

·our ability to successfully integrate acquisitions and consolidations; and

·changes in healthcare regulations and the prospects of our industry.

In addition, the stock market in recent years has experienced price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. These fluctuations may harm the market price of our common stock, regardless of our operating results.

ITEM 6.             Exhibits

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

Exhibit No.	Document
3.1	Amendment to Bylaws of the Registrant (Incorporated herein by reference to Appendix A to the Registrant’s Definitive Proxy Statement, dated April 3, 2008).
3.2	Amended and Restated Bylaws of the Registrant (Filed herewith).
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     , 2008
	Thomas F. Kirk
	President and Chief Executive Officer
	(Principal Executive Officer)
Dated: November     , 2008
	George E. McHenry
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial Officer)
Dated: November     , 2008
	Thomas C. Hofmeister
	Vice President of Finance
	(Chief Accounting Officer)

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EX-3.2

Exhibit 3.2

AMENDED AND RESTATED

BY-LAWS

OF

HANGER ORTHOPEDIC GROUP, INC.

(Hereinafter called the “Corporation”)

ARTICLE I.  OFFICES

Section 1.  Principal Office.  The principal office of the Corporation shall be at:

8200 Wisconsin Avenue

Bethesda, Maryland 20814

or such other place as the Board of Directors may designate.

Section 2.  Other Offices.  In addition to its principal office, the Corporation may have offices at such other places, within or without the State of Delaware, as the Board of Directors may from time to time appoint or as the business of the Corporation may require.

ARTICLE II.  STOCKHOLDERS

Section 1.  Annual Meeting.  The annual meeting of the stockholders of the Corporation, for the purpose of electing directors for the ensuing year and for the transaction of such other business as may properly come before the meeting, shall be held at such time as may be specified by the Board of Directors.

Section 2.  Special Meetings.  A special meeting of the stockholders may be called at any time by the Board of Directors or by the Chairman of the Board of Directors, the Chief Executive Officer, the President, or by the holders of not less than sixty percent of all the shares entitled to vote at such meeting.

Section 3.  Place of Meetings.  Each annual meeting of the stockholders shall be held at the principal office of the Corporation, or at such other place, within or without the State of Delaware, as the Board of Directors may designate in calling such meeting.

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Section 4.  Notice of Meetings.  Written notice of each annual and each special meeting of the stockholders shall be given by or at the direction of the officer or other persons calling the meeting.  Such notice shall state the purpose or purposes for which the meeting is called, the time when and the place where it is to be held, and such other information as may be required by law. Except as otherwise required by law, a copy thereof shall be delivered personally, mailed in a postage prepaid envelope or transmitted by telegraph, cable or wireless, not less than ten (10) days, except if the purpose of the meeting is to act on an amendment of the Articles of Incorporation or on a reduction of stated capital or on a plan of merger or consolidation, in which event such notice shall be mailed not less than fifteen (15) days, nor more than sixty (60) days, before such meeting to each stockholder of record entitled to vote at such meeting; and if mailed, it shall be directed to such stockholder at his address as it appears on the stock transfer books of the Corporation.  Not- withstanding the foregoing, a waiver of any notice herein or by law required, if in writing and signed by the person entitled to such notice, whether before or after the time of the event for which notice was required to be given, shall be the equivalent of the giving of such notice.  A stockholder who attends shall be deemed to have had timely and proper notice of the meeting, unless he attends for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened.  Notice of any adjourned or recessed meeting need not be given.

Section 5.  Quorum.  Except as otherwise provided by law, at any meeting of the stockholders of the Corporation, the presence in person or by proxy of the holders of a majority of the total number of issued and outstanding shares of Common Stock of the Corporation shall constitute a quorum for the transaction of business.  In the absence of a quorum, a majority in voting power of the stockholders present in person or represented by proxy and entitled to vote may adjourn the meeting from time to time and from place to place until a quorum is obtained.  At any such adjourned meeting at which a quorum is present any business may be transacted which might have been transacted at the meeting as originally called.

Section 6.  Organization.  At every meeting of the stockholders, the Chairman of the Board, or failing him the President, or, in the absence of the Chairman of the Board and the President, a person chosen by a majority vote of the stockholders present in person or by proxy and entitled to vote, shall act as Chairman of the meeting.  The Secretary, or an Assistant Secretary, or, in the discretion of the Chairman, any person designated by him, shall act as secretary of the meeting.

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Section 7.  Inspectors.  The directors, in advance of any meeting, may, but need not, appoint one or more inspectors of

election to act at the meeting or any adjournment thereof.  If an inspector or inspectors are not appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors.  In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the directors in advance of the meeting or at the meeting by the person presiding thereat.  Each inspector, if any, before entering upon discharge of his duties, shall take and sign an oath to execute faithfully the duties of inspector at such meeting with strict impartiality and according to the best of his ability.  The inspector or inspectors, if any, shall determine the number of shares of stock outstanding and the voting power of each, the shares of stock represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders.  On request of the Chairman of the meeting, the inspector or inspectors, if any, shall make a report in writing of any challenge, question or matter determined by him or them and execute a certificate of any fact found by him or them.

Section 8.  Business or Order of Business.  At each meeting of the stockholders such business may be transacted as may properly be brought before such meeting, whether or not such business is stated in the notice of meeting or in a waiver of notice thereof, except as expressly provided otherwise by law or by these By-Laws. The order of business at all meetings of stockholders shall be as follows:

1.  Call to order.

2.  Selection of secretary of the meeting.

3.  Determination of quorum.

4.  Appointment of voting inspectors.

5.  Nomination and election of directors.

6.  Other business.

Section 9.  Voting.  Except as otherwise provided by law or by the Certificate of Incorporation, holders of Common Stock of the Corporation shall be entitled to vote upon matters to be voted upon by the stockholders.  At each meeting of stockholders held for any purpose, each stockholder of record of stock entitled to vote thereat shall be entitled to vote the shares of such stock standing in his name on the books of the Corporation on the date determined in accordance with Section 11 of this Article II, each such share entitling him to one vote.

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If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the stockholders, unless the vote of a greater number is required by law or the Certificate of Incorporation.

The voting shall be by voice or by ballot as the Chairman may decide, except that such demand for a vote by ballot on any question or election, made by any stockholder or his proxy present and entitled to vote on such question or election, such vote by ballot shall immediately be taken.

Section 10.  Voting List.  The Secretary of the Corporation shall make, at least ten (10) days before each meeting of stockholders, a complete list of the stockholders entitled to vote at any such meeting of any adjournment thereof, with the address of and the number of shares held by each stockholder.  Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to inspection by any stockholder during the whole time of the meeting.  The original stock transfer books shall be prima facie evidence as to who are the stockholders entitled to examine such list or transfer books or to vote at any meeting of stockholders.

If the requirements of this Section 10 have not been substantially complied with, the meeting shall, on the demand of any stockholder in person or by proxy, be adjourned until the requirements are complied with.

Section 11.  Record Dates.  The Board of Directors may fix in advance a date which shall not be more than fifty (50) nor less than ten (10) days prior to the date of any meeting of stockholders, or the date for payment of any dividend, or the date when any change or conversion or exchange of capital stock shall go into effect, or in connection with obtaining the consent of stockholders for any purpose, as a record date for the determination of the stockholders entitled to notice of, and to vote at, any such meeting and any adjournment thereof, or entitled to receive payment of any such dividend, or to any such allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of capital stock, or to give such consent; and in such case such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such notice of, and to vote at, such meeting and any adjournment thereof, or to receive payment of such dividend or to receive such allotment of rights, or to exercise such rights, or given such consent, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after such record date fixed as aforesaid.

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If no record date is fixed for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders, or stockholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of stockholders.  When a determination of stockholders entitled to vote at any meeting of stockholders has been made as herein provided, such determination shall apply to any adjournment thereof.

Section 12.  Adjournment.  Any meeting of stockholders, annual or special, may adjourn from time to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken.  At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting.  If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.

Section 13.  Action by Stockholders Without a Meeting.  Whenever the vote of stockholders at a meeting thereof is required or permitted to be taken for or in connection with any corporate action by any provisions of the statutes or of the Certificate of Incorporation or these By-Laws, the meeting, notice of the meeting, and vote of stockholders may be dispensed with if stockholders owning stock having not less than the minimum number of votes which, by statute, the Certificate of Incorporation or these By-Laws, is required to authorize such action at a meeting at which all shares entitled to vote thereon were present and voted shall consent in writing to such corporate action being taken; provided that prompt notice of the taking of such action must be given to those stockholders who have not consented in writing.

Section 14.  Ownership of Stock.  Shares of capital stock of the Corporation may be owned either in (i) certificated form in which ownership of the shares is represented by a physical certificate; or (ii) uncertificated form pursuant to procedures adopted by the Board of Directors in which shares are held in book-entry form in a Direct Registration System (“DRS”) and no physical certificate is printed.  Every stockholder of the Corporation shall be entitled, upon request submitted to the Corporation or its transfer agent, to a certificate or certificates, certifying the number and class of shares of the stock of the Corporation owned by him.

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The Chairman of the Board of Directors, the President or any Vice-President and the Secretary or an Assistant Secretary, or any two officers of the Corporation designated by the Board of Directors, shall sign such certificates.

Section 15.  Lost Certificates.  The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed.  When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representatives, to advertise the same in such manner as it shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed.

Section 16.  Transfer of Stock.  Transfer of shares of the Corporation shall be made either (i) if in certificated form, by a transfer of the stock certificate representing the shares; or (ii) if in uncertificated form, by electronic book-entry transfer pursuant to a DRS.  Uncertificated shares may be sold or transferred through the Corporation’s transfer agent in accordance with such transfer agent’s procedures.  A shareholder may request that any or all uncertificated shares owned by such shareholder be certificated in accordance with the transfer agent’s procedures.  Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence or succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto if requested by such person, cancel the old certificate and record the transaction upon its books.

Section 17.  Proxies.  At any meeting of the stockholders, each stockholder entitled to vote thereat may vote either in person or by proxy.  Such proxy shall be in writing, subscribed by the stockholder or his duly authorized attorney, but need not be sealed, witnessed or acknowledged, and shall be filed with the Secretary at or before the meeting; provided, however, that no proxy shall be voted or acted upon after eleven months from its date, unless said proxy provides for a longer period.

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ARTICLE III.  DIRECTORS

Section 1.  General Powers.  The business and affairs of the Corporation shall be managed by the Board of Directors, and all corporate powers shall be exercised by the Board of Directors, except as otherwise expressly required by these By-Laws, by the Certificate of Incorporation, or by law.

Section 2.  Qualification, Number, Classification and Term of Office.  A director need not be a stockholder, a citizen of the United States, or a resident of the State of Delaware.  The number of directors shall be not less than one nor more than nine.  A Board of Directors shall be elected annually in the manner provided in these By-Laws, and each director shall hold office until the annual meeting next following his election and until his successor shall have been elected and qualified, or until his death, resignation or removal.  Each director shall have one vote at any directors’ meeting.

Section 3.  Election of Directors.  At each meeting of the stockholders for the election of directors, a quorum being present, as defined in Section 5 of Article II, the election shall proceed as provided in these By-Laws and under applicable Delaware law.  No election need be by written ballot.

If the election of directors shall not be held on the day designated for any annual meeting or at any adjournment of such meeting, the Board of Directors shall cause the election to be held at a special meeting of the stockholders as soon thereafter as may be convenient.

Section 4.  Removal of Directors.  Any director may be removed at any time, either with or without cause, by the affirmative vote of a majority in voting power of the stockholders of record entitled to elect a successor, and present in person or by proxy at a special meeting of such stockholders for which express notice of the intention to transact such business was given and at which a quorum shall be present.

Section 5.  Organization.  The Board of Directors, by majority vote, may from time to time appoint a Chairman of the Board who shall preside over its meetings.  The period and terms of the appointment shall be determined by the Board of Directors.  The Secretary of the Corporation, or an Assistant Secretary, or, in the discretion of the Chairman, any person appointed by him, shall act as secretary of the meeting.

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Section 6.  Place of Meeting, etc.  The Board of Directors may hold its meetings at such place or places within or without the State of Delaware as the Board of Directors may from time to time by resolution determine, or (unless contrary to resolution of the Board of Directors), at such place as shall be specified in the respective notices or waivers of notice thereof.  Unless otherwise restricted by law or by the Certificate of Incorporation, members of the Board of Directors or any committee thereof may participate in a meeting of the board of such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 6 shall constitute presence at such meeting.  The Chairman or any person appointed by him shall act as secretary of the meeting.

Section 7.  Annual Meeting.  The Board of Directors may meet, without notice of such meeting, for the purpose of organization, the election of officers and the transaction of other business, on the same day as, at the place at which, and as soon as practicable after each annual meeting of stockholders is held.  Such annual meeting of directors may be held at any other time or place specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or in a waiver of notice thereof.

Section 8.  Regular Meetings.  Regular meetings of the Board of Directors may be held at such times and places as may be fixed from time to time by action of the Board of Directors.  Unless, required by resolution of the Board of Directors, notice of any such meeting need not be given.

Section 9.  Special Meetings.  Special meetings of the Board of Directors shall be held whenever called by a Chairman of the Board of Directors or where there is none by the President, or by any three or more directors, or, at the direction of any of the foregoing, by the Secretary.  Notice of each such meeting shall be mailed to each director, addressed to him at his residence or usual place of business, not less than three (3) days before the date on which the meeting is to be held; or such notice shall be sent to each director at such place by telegraph, cable, telephone or wireless, not less than twenty-four (24) hours before the time at which the meeting is to be held.  Every such notice shall state the time and place of the meeting.  Notice of any adjourned or recessed meeting of the directors need not be given.

Section 10.  Waivers of Notice of Meetings.  Anything in these By-Laws or in any resolution adopted by the Board of Directors to the contrary notwithstanding, proper notice of any meeting of the Board of Directors shall be deemed to have been given to any director if such notice shall be waived by him in writing (including telegraph, cable or wireless) before or after the meeting.

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A director who attends a meeting shall be deemed to have had timely and proper notice thereof, unless he attends for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called.

Section 11.  Quorum and Manner of Acting.  A majority of the directors shall constitute a quorum for the transaction of business.  Except as may otherwise be expressly provided by these By-Laws, the act of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors.  In the absence of a quorum, a majority of the directors present may adjourn the meeting from time to time until a quorum be had.  The directors shall act only as a Board and the individual directors shall have no power as such.

Section 12.  Resignations.  Any director of the Corporation may resign at any time, in writing, by notifying the Chairman of the Board or, where there is none, the President or the Secretary of the Corporation.  Such resignation shall take effect at the time therein specified; and, unless otherwise specified, the acceptance of such resignation shall not be necessary to make it effective.

Section 13.  Vacancies.  Any vacancy in the Board of Directors, caused by death, resignation, removal, disqualification, or any other cause (other than an increase by more than two (2) in the number of directors), may be filled by the majority vote of the remaining directors then in office, though less than a quorum, at any regular meeting of the Board of Directors.  Any vacancy, including one created as an increase in the number of directors, may be filled at a meeting called for such purpose, by vote of the stockholders.

Section 14.  Committees.  The Board of Directors may, by resolution adopted by a vote of a majority of the number of directors at the time fixed by these By-Laws, designate a number of directors deemed appropriate in the aforesaid resolution to be a committee of limited authority.

Regular meetings of any such committee, of which no notice shall be necessary, may be held at such times and in such places as shall be fixed by a majority of the committee.  Special meetings of any such committee may be called at the request of the Chairman of the committee or any two (2) members of the committee.  Notice of each special meeting of such a committee shall be given by the persons calling the same as provided by these By-Laws for special meetings of the full Board.

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A majority of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of the committee.  Members of any such committee shall act only as a committee and the individual members shall have no power as such.

The Board of Directors shall have the power, at any time, to change the members of, fill vacancies in, and discharge any such committee, either with or without cause.  The appointment of any director to any such committee, if not sooner terminated, shall automatically terminate upon the expiration of his term as a director or upon the earlier cessation of his membership on the Board of Directors.

Section 15.  Directors’ Action Without a Meeting.  Unless otherwise provided by the Certificate of Incorporation, any action required to be taken at a meeting of the directors, or any action which may be taken at a meeting of the directors or of a committee, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed before such action by all the directors, or all the members of the committee, as the case may be.  Such consent shall have the same force and effect as an unanimous vote.

Section 16.  Compensation.  Directors, as such, shall not receive any stated compensation for their services, but by resolution of the Board of Directors a fixed sum and expenses of attendance, if any, may be allowed for attendance at each meeting of the Board.  Nothing in this Section shall be construed to preclude a Director from serving the Corporation in any other capacity and receiving compensation therefor.

ARTICLE IV.  OFFICERS

Section 1.  Officers.  The officers of the Corporation shall be a Chairman of the Board of Directors, a Chief Executive Officer and/or a President, a Treasurer and a Secretary, and where elected, one or more Vice-Presidents, and the holders of such other offices as may be established in accordance with the provisions of Section 3 of this Article.  Any two or more officers may be held by the same person; provided only, that the same person shall not hold the offices of Chairman and Secretary.

Section 2.  Election, Term of Office and Qualifications.  The officers shall be elected annually by the Board of Directors, as soon as practicable after the annual election of directors in each year.  Each officer shall hold office until his successor shall have been duly chosen and shall qualify, or until his death, resignation or removal in the manner hereinafter provided.

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Section 3.  Subordinate Officers.  The Board of Directors may from time to time establish offices in addition to those designated in Section 1 of this Article IV with such duties as are provided in these By-Laws, or as they may from time to time determine.

Section 4.  Removal.  Any officer may be removed, either with or without cause, by resolution declaring such removal to be in the best interests of the Corporation and adopted at any regular or special meeing of the Board of Directors by a majority of the directors then in office.  Any such removal shall be without prejudice to the recovery of damages for breach of contract rights, if any, of the person removed.  Election or appointment of an officer or agent shall not of itself, however, create contract rights.

Section 5.  Resignations.  Any officer may resign at any time by giving written notice to the Board of Directors or the Chairman, of the Board of Directors, the President or the Secretary of the Corporation.  Any such resignation shall take effect at the date of receipt of such notice or at any later time therein specified; and, unless otherwise specified, the acceptance of such resignation shall not be necessary to make it effective.  However, no resignation hereunder, or the acceptance thereof by the Board of Directors, shall prejudice the contract or other rights, if any, of the Corporation with respect to the person resigning.

Section 6.  Vacancies.  A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled for the unexpired portion of the term by the Board of Directors.

Section 7.  Compensation.  Salaries or other compensation of the officers may be fixed from time to time by the Board of Directors or in such manner as it shall determine.  No officer shall be prevented from receiving his salary by reason of the fact that he is also a director of the Corporation.

Section 8.  Chairman of the Board of Directors.  Where there is a Chairman of the Board of Directors he shall be an officer and a director; and he may be the Chief Executive Officer of the Corporation and as such may have general supervision of the business of the Corporation, subject, however, to the control of the Board of Directors and of any duly authorized committee of directors.  The Chairman or his designee shall have full power and authority to case any votes which the Corporation is entitled to cast as a shareholder of another corporation.  Where there is no Chairman of the Board, or he is unable to discharge his duties, the powers of the Chairman shall be vested in the Vice Chairman, or, if none exists, in the President.

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The Chairman of the Board shall preside at all meetings of stockholders and of the Board of Directors at which he is present.

Section 9.  Vice Chairman of the Board of Directors.  The Vice Chairman shall be a director and may be the Chief Executive Officer of the Corporation.  In general, he shall perform all duties incident to the office of Vice Chairman and such other duties as may from time to time be designated to him by the Board of Directors or by any duly authorized committee of directors, and shall have such other powers and authorities as are conferred upon him elsewhere in these By-Laws.  In the absence of the Chairman of the Board of Directors, the Vice Chairman shall act in his place with all the power thereof.

Section 10.  Chief Executive Officer and/or President.  The Chief Executive Officer and/or President shall be a director and may be the Chief Executive Officer, the Chief Operating Officer or the President of the Corporation.  In general, he or they shall perform all duties incident to the office of Chief Executive Officer and/or President and such other duties as may from time to time be designated to him or them by the Board of Directors or by any duly authorized committee of directors, and shall have such other powers and authorities as are conferred upon him or them elsewhere in these By-Laws.

Section 11.  The Vice-Presidents.  The Vice-Presidents shall perform such duties as from time to time may be assigned to them by the Board of Directors, or by any duly authorized committee of directors or by the President, and shall have such other powers and authorities as are conferred upon them elsewhere in these By-Laws.

Section 12.  Treasurer.  Except as may otherwise be specifically provided by the Board of Directors or any duly authorized committee thereof, the Treasurer shall have the custody of, and be responsible for, all funds and securities of the Corporation; receive and receipt for money paid to the Corporation from any source whatsoever; deposit all such monies in the name of the Corporation in such banks, trust companies, or other depositories as shall be selected in accordance with the provisions of these By-Laws; against proper vouchers, cause such funds to be disbursed by check or draft on the authorized depositories of the Corporation signed in such manner as shall be determined in accordance with the provisions of these By-Laws; regularly enter or cause to be entered in books to be kept by him or under his direction, full and adequate accounts of all money received and paid by him for account of the Corporation; in general, perform all duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Board of Directors, or by any duly authorized committee of directors, or by the Chairman, or where there is none, by the Vice Chairman or the President; and have such other powers and authorities as are conferred upon him elsewhere in these By-Laws.

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Section 13.  Secretary.  The Secretary shall act as Secretary of all meetings of the stockholders and of the Board of Directors of the Corporation; shall keep the minutes thereof in the proper books to be provided for that purpose; shall see that all notices required to be given by the Corporation are duly given and served; shall be the custodian of the seal of the Corporation and shall affix the seal or cause it to be affixed to all documents the execution of which on behalf of the Corporation under its seal is duly authorized in accordance with the provisions of these By-Laws; shall have charge of the books, records and papers of the Corporation relating to its organization and management as a corporation, and shall see that any reports or statements relating thereto, required by law or otherwise, are properly kept and filed; shall, in general, perform all the duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the Board of Directors, or by any duly authorized committee of directors or by a Chairman or, if there is none, by the Vice Chairman or the President; and shall have such other powers and authorities as are conferred upon him elsewhere in these By-Laws.

Section 14.  Assistant Treasurers and Assistant Secretaries. The Assistant Treasurers and Assistant Secretaries shall perform such duties as shall be assigned to them by the Treasurer and by the Secretary, respectively, or by the Board of Directors, or by any duly authorized committee of directors, or by the Chairman, or where there is none, by the President; and shall have such other powers and authorities as are conferred upon them elsewhere in these By-Laws.

ARTICLE V.  SHARES OF STOCK

Section 1.  Regulation.  Subject to the terms of any contract of the Corporation, the Board of Directors may make such rules and regulations as it may deem expedient concerning the issue, transfer, and registration of certificates for shares of the stock of the Corporation, including the issue of new certificates for lost, stolen or destroyed certificates and including the appointment of transfer agents and registrars.

Section 2.  Stock Certificates.  Certificates for shares of the stock of the Corporation shall be respectively numbered serially for each class of shares, or series thereof and, as they are issued, shall be impressed with the corporate seal or a facsimile thereof, and shall be signed by the Chairman of the Board, the Vice President, the President or any Vice President and by the Secretary or any Assistant Secretary, or any two officers of the Corporation designated by the Board of Directors, provided that such signatures may be facsimiles on any certificate countersigned by a transfer agent other than the Corporation or its employee or by a registrar other than the Corporation or its employee.

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Each certificate shall exhibit the name of the Corporation, the class (or series of any class) and number of shares represented thereby and the name of the holder.  Each certificate shall be otherwise in such form as may be prescribed by the Board of Directors.

ARTICLE VI.  INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 1.  The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the Corporation), by reason of the fact that he is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys’ fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.  The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and with respect to any criminal action or proceeding, the person had reasonable cause to believe that his conduct was unlawful.

Section 2.  The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue, or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper.

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Section 3.  To the extent that a director or officer of the Corporation has been successful on the merits or otherwise in defense of any action, suit, or proceeding referred to in Sections 1 and 2 of this Article VI, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith.

Section 4.  Any indemnification under Section 1 and 2 of this Article VI (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 1 and 2 of this Article VI.  Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or, (2) if such a quorum is not obtainable, or, even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders.

Section 5.  Expenses incurred by an officer or director in defending a civil or criminal action, suit, or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article VI.

Section 6.  The indemnification and advancement of expenses provided by, or granted pursuant to, the other sections of this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any statutes, By-Laws, agreements, vote of stockholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office.

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Section 7.  The Corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust, or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article VI.

Section 8.  The indemnification and advancement of expenses provided by, or granted pursuant to this Article VI shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

ARTICLE VII.  MISCELLANEOUS

Section 1.  Seal.  The corporate seal of the Corporation shall contain the name of the Corporation, the year of its creation, and the words “Corporate Seal, Delaware,” and shall be in such form as may be approved by the Board of Directors.

Section 2.  Fiscal Year.  The fiscal year of the Corporation shall be as set by the Board of Directors.

Section 3.  Loans.  Any officer or officers or agent or agents of the Corporation thereunto authorized by the Board of Directors or by any duly authorized committee of directors may effect loans or advances at any time for the Corporation, in the ordinary course of the Corporation’s business, from any bank, trust company or other institution or from any firm, corporation or individual, and for such loans and advances may make, execute and deliver promissory notes, bonds or other certificates or evidences of indebtedness of the Corporation, and when authorized to do so may pledge and hypothecate or transfer any securities or other property of the Corporation as security for any such loans or advances.  Such authority conferred by the Board of Directors or any duly authorized committee of directors may be general or confined to specific instances.

Section 4.  Checks, Drafts, Withdrawal of Securities, Safe Deposit Boxes, etc.  All checks, drafts and other orders for payment of money out of the funds of the Corporation shall be signed on behalf of the Corporation in such manner as shall from time to time be determined by resolution of the Board of Directors or of any duly authorized committee of directors.  The Corporation shall furnish to each depository, bank, custodian and entity providing safe deposit boxes, a certified copy of its resolution regarding the authorization of disbursements and the entry to safe deposit boxes or withdrawal of securities from safe keeping.

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Section 5.  Deposits.  The funds of the Corporation not otherwise employed shall be deposited from time to time to the order of the Corporation in such banks, trust companies or other depositories as the Board of Directors or any duly authorized committee of directors may from time to time select, or as may be selected by an officer or officers, or agent or agents, of the Corporation to whom such power may from time to time be delegated by the Board of Directors or any duly authorized committee of directors.

Section 6.  Contracts, etc., How Executed.  In addition to the Chairman, the Vice Chairman and the Chief Executive Officer and/or President, those officers who are designated by resolution of the Board shall be authorized to enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation, and such authority may be delegated in writing, in specific instances to such other officers, employees or agents as such authorized officers may designate.

Section 7.  Inspection of Books.  Any stockholder, in person or by attorney or other agent, upon written demand stating the purpose thereof, shall have the right to examine, in person or by agent or attorney, at any reasonable time or times, for any proper purpose, the Corporation’s books and records of accounts, minutes and record of stockholders, and to make extracts therefrom.

Section 8.  Voting of Stock or Other Securities Held.  Unless otherwise provided by resolution of the Board of Directors, the Chairman and/or the Vice Chairman of the Board of Directors and/or the Chief Executive Officer and/or President may from time to time appoint an attorney or attorneys or agent or agents of this Corporation, in the name and on behalf of this Corporation to cast the votes which this Corporation may be entitled to cast as a stockholder or otherwise in any other corporation, any of whose stock or securities may be held by this Corporation, at meetings of the holders of the stock or other securities of such other corporations, or to consent in writing to any action by any such other corporation, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed on behalf of this Corporation and under its corporate seal, or otherwise, such written proxies, consents, waivers or other instruments that they may deem necessary or proper in the premises; or the Chairman and/or the Vice Chairman of the Board of Directors and/or the Chief Executive Officer and/or President may themselves attend any meeting of the holders of stock or other securities of any such other corporation and thereat vote or exercise any or all other powers of this Corporation as the holder of such stock or other securities of such other corporation.

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Section 9.  Notices.  Whenever under the provision of the statutes or of the Certificate of Incorporation or of these By-Laws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, by depositing the same in a post office or letter box, in a post-paid sealed wrapper, or by delivery to a telegraph company, addressed to such director or stockholder at such address as appears on the books of the Corporation, or, in default of other address, to such director or stockholder at the General Post Office in the City of Bethesda, Maryland, and such notice shall be deemed to be given at the time when the same shall be thus mailed or delivered to a telegraph company.

Section 10.  Waivers of Notice.  Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation, or of these By-Laws, a waiver thereof in writing signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto.

ARTICLE VIII.  AMENDMENTS

Section 1.  By the Directors.  The Board of Directors by a majority vote thereof shall have the power to make, alter, amend or repeal the By-Laws of the Corporation at any regular or special meeting of the Board of Directors.  This power shall not be exercised by any committee of the Board of Directors.

Section 2.  By the Shareholders.  All By-Laws shall be subject to amendment, alteration or repeal by the vote of a majority of the total number of issued and outstanding shares of Common Stock of the Corporation entitled to vote at any annual or special meeting.  The stockholders, at any annual or special meeting, may provide that certain By-Laws by them adopted, approved or designated may not be amended, altered or repealed except by a certain specified percentage in interest of the stockholders or by a certain specified percentage in interest of a particular class of stockholders.

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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, Thomas F. Kirk, 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 the 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   , 2008
		Thomas F. Kirk
		President 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 the 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   , 2008
		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, 2008 (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.

Thomas F. Kirk

President and Chief Executive Officer

George E. McHenry

Executive Vice President and

Chief Financial Officer

November   , 2008