NOTE E — INVENTORIES

Patient Care—Inventories at Hanger Clinic, Dosteon and Cares, which consists of raw materials, work-in-process and finished goods, amounted to $122.3 million and $109.2 million at June 30, 2014 and December 31, 2013, respectively. Inventories in Hanger’s Clinics, which amounted to $111.9 million and $99.0 million at June 30, 2014 and December 31, 2013, respectively, consist principally of raw materials and work-in-process inventory valued based on the gross profit method, which approximates lower of cost or market using the first-in first-out method. Inventories in the Dosteon business amounted to $9.2 million and $8.9 million at June 30, 2014 and December 31, 2013, respectively, and consisted principally of raw materials. As of June 30, 2014, the Dosteon inventories were valued based on the gross profit method, which approximates lower of cost or market using the first-in first-out method. Inventories in the Cares business amounted to $1.2 million and $1.3 million as of June 30, 2014 and December 31, 2013, respectively, consisted principally of finished goods and are valued at the lower of cost or market using the first-in first-out method based on perpetual records.

Hanger Clinic and Dosteon do not maintain a perpetual inventory system. On October 31st of each year the company performs an annual physical inventory of all inventories in Hanger Clinics. Dosteon counted its inventories on December 31, 2013 and October 31, 2012. The Company values the raw materials and work-in-process inventory counted at October 31 at lower of cost or market using the first-in first-out method. Hanger Clinic work-in-process inventory consists of materials, labor and overhead which is valued based on established standards for the stage of completion of each custom order. Material, labor and overhead costs are determined at the individual clinic or groups of clinics level. Adjustments to reconcile the Hanger Clinic and Dosteon physical inventory are treated as changes in accounting estimates and are recorded in the fourth quarter. In the fourth quarter of 2013 the Company recorded a decrease to inventory of $2.3 million based on this reconciliation.

For Hanger Clinics, the October 31st inventory is subsequently adjusted at each quarterly and annual reporting period end by applying the gross profit method. As it relates to materials, the Company generally applies the gross profit method to individual clinics or groups of clinics for material costs. Labor and overhead and other aspects of the gross profit method are completed on a Hanger Clinic-wide basis. A similar approach is applied to Dosteon inventory, as applicable.

Products & Services—Inventories consisted principally of finished goods, which are stated at the lower of cost or market using the first-in, first-out method for all reporting periods and are valued based on perpetual records.

Inventories as of June 30, 2014 and December 31, 2013 are as follows:

(In thousands)	June 30, 2014		December 31, 2013

Raw materials	$	44,639	$	40,970
Work in process	76,358		66,832
Finished goods	37,960		33,716
	$	158,957	$	141,518