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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.For the fiscal year ended December 31, 2012ORo

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


Commission File Number 1-10670

HANGER, INC.(Exact name of registrant as specified in its charter.)

Delaware(State or other jurisdiction of
incorporation or organization)

84-0904275(I.R.S. Employer
Identification No.)10910 Domain Drive, Suite 300, Austin, TX(Address of principal executive offices)

78758(Zip Code)


Registrant's
phone number, including area code:(512) 777-3800

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

Title of class

Name of exchange on which registeredCommon Stock, par value $0.01 per share

New York Stock Exchange


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

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act Yes ý    No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

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 ý    No o

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o (Do not check if a
smaller reporting company)

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 ý

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter.
$910,325,124

As
of March 14, 2013 the registrant had 34,513,913 shares of its Common Stock issued and outstanding.

DOCUMENTS
INCORPORATED BY REFERENCE

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





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INDEX



Hanger, Inc.Part IItem 1. Business

1Item 1A. Risk Factors

13Item 1B. Unresolved Staff Comments

16Item 2. Properties

17Item 3. Legal Proceedings

17Executive Officers of the Registrant

18Item 4. Mine Safety Disclosures

20Part IIItem 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities

20Item 6. Selected Financial Data

23Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

25Item 7A. Quantitative and Qualitative Disclosures about Market Risk

40Item 8. Financial Statements and Supplementary Data

40Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

41Item 9A. Controls and Procedures

41Item 9B. Other Information

42Part IIIItem 10. Directors, Executive Officers and Corporate Governance

43Item 11. Executive Compensation

43Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

43Item 13. Certain Relationships and Related Transactions, and Director Independence

43Item 14. Principal Accountant Fees and Services

43Part IVItem 15. Exhibits and Financial Statement Schedules

44Signatures

48Exhibits, including certifications of CEO and CFO


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PART I

ITEM 1.BUSINESS

Business Overview

General

The goal of Hanger, Inc. (the "Company") is to be the world's premier provider of services and products that enhance human physical
capabilities. Built on the legacy of James Edward Hanger, the first amputee of the American Civil War, Hanger is steeped in 150 years of clinical excellence and innovation. We provide orthotic
and prosthetic patient care services, distribute O&P devices and components, manage O&P networks, and provide therapeutic solutions to the broader post-acute market. Through our
subsidiary, Hanger Prosthetics & Orthotics, Inc., which we refer to as "Hanger Clinic," we are the largest owner and operator of orthotic and prosthetic patient care clinics in the
United States and, through our distribution subsidiary, Southern Prosthetic Supply, Inc. ("SPS"), we are one of the largest distributors of O&P products in the United States. We operate in
excess of 740 O&P patient care clinics located in 45 states and the District of Columbia and six strategically located distribution facilities. In addition to providing O&P services and products, we
manage an O&P provider network and develop programs to manage all aspects of O&P patient care for insurance companies through our subsidiary, Linkia LLC ("Linkia"). We also provide therapeutic
solutions through our subsidiaries Innovative Neurotronics ("IN, Inc.") and Accelerated Care Plus Corp. ("ACP"). IN, Inc. introduces emerging neuromuscular technologies developed through
independent research in a collaborative effort with industry suppliers worldwide. ACP is a developer of specialized rehabilitation technologies and a leading provider of evidence-based clinical
programs for post-acute rehabilitation serving more than 4,550 long-term care facilities and other sub-acute rehabilitation providers throughout the U.S.

For
the years ended December 31, 2012, 2011, and 2010, our net sales were $985.6 million, $918.5 million, and $817.4 million, respectively. We recorded net income of
$63.7 million, $54.5 million, and $20.9 million, for the years ended December 31, 2012, 2011, and 2010, respectively.

We
have three segmentsPatient Care, Distribution, and Therapeutic Solutions. The following table summarizes the percentage of total revenue derived from each segment:

For the year ended
December 31,2012

2011

2010Patient Care


82.5
%

82.1
%

87.5
%Distribution


10.9
%

10.9
%

11.7
%Therapeutic Solutions


6.6
%

7.0
%

0.8
%


See
Note O to our Consolidated Financial Statements contained herein elsewhere in this Annual Report on Form 10-K for financial information about our segments.

Industry Overview

We estimate that approximately $4.3 billion is spent in the United States each year for orthotic and prosthetic products and services, of
which Hanger Clinic currently accounts for approximately 19%. Hanger Clinic provides a unique portfolio of orthotic, prosthetic, post-operative and physical therapeutic solutions to
patients in the acute, post-acute, and patient care clinic settings.

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

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The
traditional O&P patient care clinic industry is characterized by stable, recurring revenues, primarily resulting from new patients as well as the need for periodic replacement and modification of
O&P devices. Based on our experience, the average replacement time for orthotic devices is one to three years, while the average replacement time for prosthetic devices is three to five years. There
is also an attendant need for continuing O&P patient care services. In addition to the inherent need for periodic replacement and modification of O&P devices and continuing care, we expect the demand
for O&P services to continue to grow as a result of several key trends, including the aging of the U.S. population, resulting in an increase in the prevalence of disease associated disability, and the
demand for new and advanced devices.

We
estimate that approximately $2.1 billion is spent in the United States each year for O&P products, components, devices and supplies. SPS distributes O&P products, components, devices and
supplies to independent customers and to Hanger Clinic's patient care clinics, and accounts for approximately 5% of the $2.1 billion market.

We
estimate the market for rehabilitation technologies and clinical programs in post-acute rehabilitation to include approximately 15,700 skilled nursing facilities (SNF) with an annual
sales potential of approximately $240 million. We currently provide technologically advanced rehabilitation equipment and clinical programs to approximately 29% of these SNFs. We estimate the
market for rehabilitation technologies and clinical programs in broader post-acute rehabilitation to be approximately $600 million. We currently provide goods and services to very
few customers in this portion of the market; however, we believe this market would benefit from our products and services.

Business Strategy

Our goal is to be the provider of choice for products and services that enhance human physical capabilities. We focus on disciplined diversification
of our revenue streams both within our traditional orthotic and prosthetics market and in complimentary and adjacent markets that expand our continuum of care. In addition, we continue to focus on
gaining operational
efficiencies and expanding the market share of our core businesses. We have implemented a strategy of disciplined diversification through internal efforts by developing businesses such as
IN, Inc., Linkia, Dosteon, and CARES in the O&P market, and in adjacent markets through the acquisition of SureFit and ACP.

Our
internal efforts focus on leveraging the resources and expertise of our core O&P patient care services business in order to provide additional products and services to our patients.
IN, Inc. was created to bring innovative applications and product technologies to the O&P marketplace. IN, Inc. manufactures and markets two highly sophisticated products focused on
improving people's mobility and independence, the WalkAide system and the V-Hold system. Our knowledge of the O&P market place enabled us to create Linkia, which is the only O&P provider
network management service company. Linkia functions as a liaison between O&P providers and third party health insurance companies. Linkia provides insurance payors with data and administrative
services that allow these payors to provide higher quality, more efficient O&P care to its insured; in return this solidifies our relationship with payors and allows us to negotiate favorable national
or regional contracts.

We
continually assess market opportunities to identify additional opportunities to leverage our footprint and expertise beyond the traditional O&P patient care clinic market channel. We have developed
two new channels of revenue in recent years: CARES and Dosteon. CARES is a program that works with hospital emergency rooms to provide a wide variety of orthotic and durable medical equipment ("DME")
products to patients, while Dosteon partners with physicians' offices, such as orthopedic and vascular surgeons to provide for the postoperative orthotic and DME needs of their patients. These
businesses, along with their dedicated sales personnel, help us expand in markets not previously served by our traditional brick and mortar facilities. We are encouraged by the progress of these
businesses and their contribution to the growth of our patient care business.

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We
continually look to diversify our revenue streams outside of our core O&P business. We have executed this through the acquisition of SureFit and ACP. SureFit, which is a part of our Distribution
business, expanded our continuum of care into the podiatry market by providing custom shoe inserts and shoes. ACP, when combined with IN, Inc., comprises our Therapeutic Solutions segment.
Therapeutic Solutions provides the platform to expand into the post-acute and other rehabilitation markets by providing technologically advanced therapeutic equipment and related clinical
protocols which enhance the productivity and outcomes of rehabilitative care. We also look to leverage the relationships we have with the rehabilitation providers in order to provide our traditional
O&P offerings to their patients.

It
is also our goal to continue to provide superior patient care and to be the most cost-efficient national distributor of O&P products, components, devices, and supplies. The key elements
of our strategy to achieve this goal are to:



Business Description

Patient Care

As of December 31, 2012, Hanger Clinic provided O&P patient care services through over 740 patient care clinics and over 1,300 clinicians in
45 states and the District of
Columbia. Substantially all of our clinicians are certified, or are candidates for formal certification, by the O&P industry certifying boards.

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A
clinician manages each of our patient care clinics. Our patient care clinics also employ highly trained technical personnel who assist in the provision of services to patients and who fabricate
various O&P devices, as well as office administrators who schedule patient visits, obtain approvals from payors and bill and collect for services rendered.

In
our orthotics business, we design, fabricate, fit and maintain a wide range of custom-made braces and other devices (such as spinal, knee and sports-medicine braces) that provide
external support to patients suffering from musculoskeletal disorders, such as ailments of the back, extremities or joints and injuries from sports or other activities. In our prosthetics business, we
design, fabricate, fit and maintain custom-made artificial limbs for patients who are without limbs as a result of traumatic injuries, vascular diseases, diabetes, cancer or congenital
disorders. O&P devices are increasingly technologically advanced and are custom-designed to add functionality and comfort to patients' lives, shorten the rehabilitation process and lower the cost of
rehabilitation. Patients are typically referred to Hanger Clinic by an attending physician who determines a patient's treatment and writes a prescription. Our clinicians then consult with both the
referring physician and the patient with a view toward assisting in the design of an orthotic or prosthetic device to meet the patient's needs.

The
fitting process often involves several stages in order to successfully achieve desired functional and cosmetic results. Custom devices are fabricated and fit by our skilled technicians using
plaster castings, measurements and designs made by our clinicians. Frequently our proprietary Insignia scanning system is used to measure and design devices. The Insignia system scans the patient and
produces a very accurate computer generated image of the patient's residual limb, resulting in a faster turnaround for the patient's device and a more professional overall experience. In order to
provide timely service to our patients, we employ technical personnel and maintain laboratories at many of our patient care clinics. We have earned a strong reputation within the O&P industry for the
development and use of innovative technology in our products, which has increased patient comfort and capability, and can significantly enhance the rehabilitation process. The quality of our services
and the success of our technological advances have generated broad media coverage, building our brand equity among payors, patients and referring physicians.

The
principal reimbursement sources for our services are:



Government
reimbursement, comprised of Medicare, Medicaid and the U.S. Department of Veterans Affairs, in the aggregate, accounted for approximately 40.4%, 40.0%, and 40.4% of our net sales in 2012,
2011, and 2010, respectively. These payors have set maximum reimbursement levels for O&P services and products. Medicare prices are adjusted each year based on the Consumer Price Index-Urban ("CPIU")
unless Congress acts to change or eliminate the adjustment. The Medicare price increases/(decrease) for 2013, 2012, 2011, 2010, and 2009 were 0.8%, 2.4%, (0.1%), 0.0%, and 5.0%, respectively. There
can be no assurance that future changes will not reduce reimbursements for O&P services and products from these sources.

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We
enter into contracts with third-party payors that allow us to perform O&P services for a referred patient and be paid under the contract with the third-party payor. These contracts typically have a
stated term of one to three years. These contracts generally may be terminated without cause by either party on 60 to 90 days' notice or on 30 days' notice if we have not complied with
certain licensing, certification, program standards, Medicare or Medicaid requirements or other regulatory requirements. Reimbursement for services is typically based on a fee schedule negotiated with
the third-party payor that reflects various factors, including geographic area and number of persons covered.

Through
the normal course of business, we receive patient deposits on devices not yet delivered. At December 31, 2012 and 2011, we held $1.1 million and $0.6 million of deposits,
respectively, from our patients.

Provider Network Management

Linkia is the only provider network management company dedicated solely to serving the O&P market. Linkia is dedicated to managing the O&P services
of national and regional insurance companies. Linkia partners with healthcare insurance companies by securing a national or regional contract either as a preferred provider or to manage their O&P
network of providers. Linkia's network now includes approximately 1,120 O&P provider locations, including approximately 390 independent providers. As of December 31, 2012, Linkia had 55
contracts with national and regional insurance companies.

Distribution

We estimate that approximately $2.1 billion is spent in the United States each year for O&P products, components, devices and supplies, of
which our wholly-owned subsidiary SPS accounts for approximately 5%. SPS distributes O&P products, components, devices and supplies to independent customers and to our own patient care clinics in the
O&P and post-acute rehabilitation industry. SPS is also a leading fabricator and distributor of therapeutic footwear for diabetic patients in the podiatric market. SPS maintains in
inventory approximately 33,000 individual SKUs manufactured by more than 390 different companies. SPS operates distribution facilities in California, Florida, Georgia, Illinois, Pennsylvania, and
Texas, which allows us to deliver products via ground shipment anywhere in the contiguous United States typically within two business days.

Our
Distribution business enables us to:



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 therapists, occupational therapists and podiatrists.

Therapeutic Solutions

We provide therapeutic solutions to the O&P market and post-acute rehabilitation market through our subsidiaries IN, Inc. and ACP.
On December 1, 2010 we acquired ACP, which is the nation's leading

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provider
of rehabilitation technologies and integrated clinical programs to rehabilitation providers. ACP's unique value proposition is to provide its customers with a full-service "total
solutions" approach encompassing proven medical technology, evidence-based clinical programs, and continuous onsite therapist education and training. ACP's services support increasingly advanced
treatment options for a broader patient population and more medically complex conditions. ACP has
contracts to serve more than 4,550 skilled nursing facilities nationwide, including 21 of the 25 largest national providers. ACP's contracts contain negotiated pricing and service levels with terms
ranging from one to five years. ACP generally bills its customers monthly and revenue is recognized based upon the contractual terms of the agreements.

IN, Inc.
specializes in product development and commercialization of emerging products in the O&P and Rehabilitation markets. Working with inventors under licensing and consulting agreements,
IN, Inc. commercializes the design, obtains regulatory approvals, develops clinical protocols for the technology, and then introduces the devices to the marketplace through a variety of
distribution channels. IN, Inc. currently has two commercial products: the WalkAide system, which benefits patients with a condition referred to as foot drop, and the V-Hold, which
is active vacuum technology used in lower extremity prosthetic devices. The V-Hold is primarily sold through our patient care clinics. The WalkAide system is currently reimbursable for
Medicare beneficiaries with foot drop due to incomplete spinal cord injuries. IN, Inc. is currently conducting randomized clinical trials in an effort to gain additional coverage for stroke
patients with foot drop, which represents the largest potential patient population. IN, Inc. fully enrolled the clinical trial in the second quarter of 2012 and completed the active phase of
the clinical trial in the fourth quarter of 2012. IN, Inc. is currently analyzing the data, which it expects to publish and later submit to CMS in late 2013. In addition to reimbursement by
Medicare, IN, Inc. has been working with commercial insurance companies and has had limited success in receiving coverage for the WalkAide. The WalkAide is sold in the United States through our
patient care clinics and SPS. IN, Inc. is also marketing the WalkAide internationally through a network of distributors in Europe, the Middle East/Africa, Latin America, Canada, and Asia.

Competitive Strengths

We believe the combination of the following competitive strengths will help us to grow our businesses by increasing our net sales, net income and
market share:



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Suppliers

In our O&P patient care businesses, we purchase prefabricated O&P devices, components and materials from in excess of 390 suppliers across the
country that our technicians use to fabricate O&P products. These devices, components and materials are used in the products we offer in our patient care clinics throughout the country. As of
December 31, 2012 only four of our third-party suppliers accounted for more than 5% of our total annual purchases. Our Therapeutic Solutions businesses purchase goods from a variety of
suppliers, none of which accounted more than 5% of our total purchases.

Sales and Marketing

In our O&P patient care businesses, individual clinicians in local patient care clinics historically have conducted our sales and marketing efforts.
Due primarily to the fragmented nature of the O&P industry, the success of a particular patient care clinic has been largely a function of its local reputation for quality of care, responsiveness and
length of service in the local communities. In our Distribution and Therapeutic Solutions businesses, we employ dedicated sales professionals that generally are responsible for a geographic region or
specific product line.

In
addition, we have developed a centralized marketing department the goal of which is to augment the efforts of the business segment personnel. In the case of our O&P businesses, this enables the
clinician

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to
focus more of his or her efforts on patient care. Our sales and marketing effort targets the following:



Acquisitions

In 2012, we acquired eighteen O&P companies, operating a total of 59 patient care clinics located in Michigan, Montana, Washington, Alabama,
Colorado, Tennessee, Texas, Oregon, Mississippi, Ohio, South Carolina, Maryland, Indiana, Georgia, Louisiana, North Carolina, and California. The aggregate purchase price for these O&P businesses was
$83.1 million, including $60.1 million in cash and $23.0 million in unsecured notes and contingent earn-out payments to be paid over the next five years. We have
preliminarily allocated the purchase price for 2012 acquisitions to the individual assets acquired and liabilities assumed. Our valuations are subject to adjustment as additional information is
obtained; however, these adjustments are not expected to be material. The excess of purchase price over the aggregate fair values was recorded as goodwill. We incurred $1.2 million of
one-time legal costs and other related acquisition expenses. In 2011, we acquired eight O&P companies, operating a total of 21 patient care clinics located in California, Illinois, Iowa,
New York, Texas, Virginia and Washington. The aggregate purchase price for these O&P businesses was $24.9 million, including $14.1 million in cash and $10.8 million in unsecured
notes and contingent earn-out payments to be paid over the next four years. We incurred $0.8 million of one-time legal costs and other related acquisition expenses.
Acquisition related expenses are included in other operating expenses in the period incurred.

Competition

The O&P services industry is highly fragmented, consisting mainly of local O&P patient care clinics. The business of providing O&P patient care
services is highly competitive in the markets in which we operate. We compete with numerous small independent O&P providers for referrals from physicians, therapists, employers, HMOs, PPOs, hospitals,
rehabilitation centers, out-patient clinics and insurance companies on both a local and regional basis. We compete with other patient care service providers, including device manufacturers
that have independent sales forces, on the basis of quality and timeliness of patient care, location of patient care clinics and pricing for services.

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We
also compete with independent O&P providers for the retention and recruitment of qualified clinicians. In certain markets, the demand for clinicians exceeds the supply of qualified personnel.

Our
distribution business competes with other distributors, as well as manufactures who sell their products directly. Some of our distributor competitors are also dedicated to the O&P industry, but
many others are large medical product distributors who also distribute O&P products, particularly orthotic products.

Our
Therapeutic business competes with other device manufacturers, product distributors, and providers of equipment and services on a regional and national basis that have similar sales forces and
products. We strive to differentiate our products with additional services such as clinical protocols and continuing education.

Government Regulation

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

Medical Device Regulation.We distribute products that are subject to regulation as medical devices by the U.S. Food and Drug Administration ("FDA") under the
Federal Food, Drug and Cosmetic Act ("FDCA") and accompanying regulations. With the exception of two products which have been cleared for marketing as prescription medical devices under
section 510(k) of the FDCA, we believe that the products we distribute, including O&P medical devices, accessories and components, are exempt from the FDA's regulations for
pre-market clearance or approval requirements and from requirements relating to quality system regulation (except for certain recordkeeping and complaint handling requirements). We are
required to adhere to regulations regarding adverse event reporting, establishment registration, and product listing; and we are subject to inspection by the FDA for compliance with all applicable
requirements. Labeling and promotional materials also are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. Our medical device operations are subject to
inspection by the FDA for compliance with applicable FDA requirements, and the FDA has raised compliance concerns in connection with these investigations. We believe we have addressed these concerns
and are in compliance with applicable FDA requirements, but we cannot assure that we will be found to be in compliance at all times. Non-compliance could result in a variety of civil
and/or criminal enforcement actions, which could have a material adverse effect on our business and results of operations.

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

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likely
be forced to incur significant legal expenses and divert our management's attention from the operation of our business. Any of these actions, individually or in the aggregate, could have a
material adverse effect on our business and financial results.

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

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

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

HIPAA Violations.The Health Insurance Portability and Accountability Act ("HIPAA") provides criminal penalties for, among other offenses: health care fraud; theft
or embezzlement with respect to a health care benefit program; false statements in connection with the delivery of or payment for health care benefits, items or services; and obstruction of criminal
investigation of health care offenses. Unlike other federal laws, these offenses are not limited to Federal health care programs.

In
addition, HIPAA authorizes the imposition of civil monetary penalties where a person offers or pays remuneration to any individual eligible for benefits under a federal healthcare program that such
person knows or should know is likely to influence the individual to order or receive covered items or services from a particular provider, clinician or supplier. Excluded from the definition of
"remuneration" are incentives given to individuals to promote the delivery of preventive care (excluding cash or cash equivalents), incentives of nominal value and certain differentials in or waivers
of coinsurance and deductible amounts.

These
laws may apply to certain of our operations. As noted above, we have established various types of discount programs and other financial arrangements with individuals and entities. We also bill
third-party payors and other entities for items and services provided at our patient care clinics. While we endeavor to ensure that our discount programs and other financial arrangements, and billing
practices

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comply
with applicable laws, such programs, arrangements and billing practices could be subject to scrutiny and challenge under HIPAA.

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

Physician Self-Referral Laws.We are also subject to federal and state physician self-referral laws. With certain exceptions, the federal
Medicare physician self-referral law (the "Stark Law") (Section 1877 of the Social Security Act) prohibits a physician from referring Medicare beneficiaries to an entity for
"designated health services"including prosthetic and orthotic devices and suppliesif the physician or the physician's immediate family member has a financial relationship
with the entity. A financial relationship includes both ownership or investment interests and compensation arrangements. An entity that furnishes designated health services pursuant to a prohibited
referral may not present or cause to be presented a claim or bill for such designated health services. Penalties for violating the Stark Law include denial of payment for the service, an obligation to
refund any payments received, civil monetary penalties, and the possibility of being excluded from the Medicare or Medicaid programs.

With
respect to ownership/investment interests, there is an exception under the Stark Law for referrals made to a publicly traded entity in which the physician or the physician's immediate family
member has an investment interest if the entity's shares are generally available to the public at the time of the designated health service referral, and are traded on certain exchanges, including the
New York Stock Exchange, and the entity had shareholders' equity exceeding $75.0 million for its most recent fiscal year or as an average during the three previous fiscal years. We meet these
tests and, therefore, believe that referrals from physicians who have ownership interests in our stock, or whose immediate family members have ownership interests in our stock, should not result in
liability under the Stark Law.

With
respect to compensation arrangements, there are exceptions under the Stark Law that permit physicians to maintain certain business arrangements, such as personal service contracts and equipment
or space leases, with healthcare entities to which they refer patients for designated health services. Unlike the Antikickback Statute, all of the elements of a Stark Law exception must be met in
order for the exception to apply. We believe that our compensation arrangements with physicians comply with the Stark Law, either because the physician's relationship fits fully within a Stark Law
exception or because the physician does not generate prohibited referrals. If, however, we receive a prohibited referral, our submission of a bill for services rendered pursuant to such a referral
could subject us to sanctions under the Stark Law and applicable state self-referral laws. State self-referral laws may extend the prohibitions of the Stark Law to Medicaid
beneficiaries.

Certification and Licensure.Our clinicians and/or certain operating units may be subject to certification or licensure requirements under the laws of some states.
Most states do not require separate licensure for clinicians. However, several states currently require clinicians to be certified by an organization such as the American Board for Certification. The
American Board for Certification conducts a certification program for clinicians and an accreditation program for patient care clinics. The minimum requirements for a certified clinician are a college
degree, completion of an accredited academic program, one to four years of residency at a patient care clinic under the supervision of a certified clinician and successful completion of certain
examinations. Minimum requirements for an accredited

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patient
care clinic include the presence of a certified clinician and specific plant and equipment requirements.

Some
states may require licensure or registration of facilities that dispense or distribute prescription medical devices within or from outside of the state. In addition, some states may require a
license or registration to provide services such as those offered by Linkia. We are in the process of meeting these requirements.

While
we endeavor to comply with all state licensure requirements, we cannot assure that we will be in compliance at all times with these requirements. Failure to comply with state licensure
requirements could result in suspension or termination of licensure, civil penalties, termination of our Medicare and Medicaid agreements, and repayment of amounts received from Medicare and Medicaid
for services and supplies furnished by an unlicensed individual or entity.

Confidentiality and Privacy Laws.The Administrative Simplification Provisions of HIPAA, and their implementing regulations, set forth privacy standards and
implementation specifications concerning the use and disclosure of individually identifiable health information (referred to as "protected health information") by health plans, healthcare
clearinghouses and healthcare providers that transmit health information electronically in connection with certain standard transactions ("Covered Entities"). HIPAA further requires Covered Entities
to protect the confidentiality of health information by meeting certain security standards and implementation specifications. In addition, under HIPAA, Covered Entities that electronically transmit
certain administrative and financial transactions must utilize standardized formats and data elements ("the transactions/code sets standards"). HIPAA imposes civil monetary penalties for
non-compliance, and, with respect to knowing violations of the privacy standards, or violations of such standards committed under false pretenses or
with the intent to sell, transfer or use individually identifiable health information for commercial advantage, criminal penalties. We believe that we are subject to the Administrative Simplification
Provisions of HIPAA and are taking steps to meet applicable standards and implementation specifications. The new requirements have had a significant effect on the manner in which we handle health data
and communicate with payors. Our billing system, OPS, was designed to meet these requirements.

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

Personnel and Training

None of our employees are subject to a collective-bargaining agreement. We believe that we have satisfactory relationships with our employees and
strive to maintain these relationships by offering competitive benefit packages, training programs and opportunities for advancement. During the year ended December 31, 2012, we had an average
of 4,700 employees.

We
provide a series of ongoing training programs to improve the professional knowledge of our clinicians. For example, we have an annual Education Fair that is attended by over 750 of our clinicians
and consists of lectures and seminars covering many clinical topics including the latest technology and process improvements, basic accounting and business courses and other courses that allow the
clinicians to fulfill their ongoing continuing education requirements.

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Insurance

We currently maintain insurance coverage for professional liability, product liability, workers' compensation, executive protection and property
damage. Our general liability insurance coverage is $1.0 million per incident, with a $50.0 million umbrella insurance policy. The coverage for professional liability, product liability
and workers' compensation is self-insured with both individual specific claim and aggregate stop-loss policies to protect us from either significant individual claims or
dramatic changes in our loss experience. Based on our experience and prevailing industry practices, we believe our coverage is adequate as to risks and amount. We have not incurred a material amount
of expenses in the past as a result of uninsured O&P claims.

Special Note On Forward-Looking Statements

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



For
a discussion of important risk factors affecting our business, including factors that could cause actual results to differ materially from results referred to in the forward-looking statements,
see "Item 1ARisk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" below. We do not have any obligation to publicly update any
forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 1A.RISK FACTORS

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

We derived 40.4%, 40.0%, and 40.4% of our net sales for the years ended December 31, 2012, 2011 and 2010, respectively, from reimbursements
for O&P services and products from programs administered by Medicare, Medicaid and the U.S. Department of Veterans Affairs. Each of these

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programs
set maximum reimbursement levels for O&P services and products. If these agencies reduce reimbursement levels for O&P services and products in the future, our net sales could substantially
decline. In addition, the percentage of our net sales derived from these sources may increase as the portion of the U.S. population over age 65 continues to grow, making us more vulnerable to maximum
reimbursement level reductions by these organizations. Reduced government reimbursement levels could result in reduced private payor reimbursement levels because fee schedules of certain third-party
payors are indexed to Medicare. Furthermore, the healthcare industry is experiencing a trend towards cost containment as government and other third-party payors seek to impose lower reimbursement
rates and negotiate reduced contract rates with service providers. This trend could adversely affect our net sales. For example, a number of states have reduced their Medicaid reimbursement rates for
O&P services and products, or have reduced Medicaid eligibility, and others are in the process of reviewing Medicaid reimbursement policies generally, including for prosthetic and orthotic devices.
Additionally, Medicare provides for reimbursement for O&P products and services based on prices set forth in fee schedules for ten regional service areas. Medicare prices are adjusted each year based
on the Consumer Price IndexUrban ("CPIU") unless Congress acts to change or eliminate the adjustment. The Medicare price increases/(decrease) for 2013, 2012, 2011, 2010, and 2009 were
0.8%, 2.4%, (0.1%), 0.0%, and 5.0%, respectively. The Patient Protection and Affordable Care Act, Pub. L. No. 111-148, March 23, 2010 ("PPACA") changed the Medicare inflation
factors applicable to O&P (and other) suppliers. The annual updates for years subsequent to 2011 are based on the percentage increase in the CPI-U for the 12-month period
ending with June of the previous year. Section 3401(m) of PPACA required that for 2011 and each subsequent year, the fee schedule update factor based on the CPI-U for the
12-month period ending with June of the previous year is to be adjusted by the annual economy-wide private nonfarm business multifactory productivity ("the MFP Adjustment").
The MFP Adjustment may result in that percentage increase being less than zero for a year, and may result in payment rates for a year being less than such payment rates for the preceding year. CMS has
not yet issued a final rule implementing these adjustments for years beyond 2011, but has indicated in a proposed rule that it will do so as part of the annual program instructions to the O&P fee
schedule updates. See 75 Fed. Reg. 40040, 40122, et seq. (July 13, 2010). If the U.S. Congress were to legislate additional modifications to the Medicare fee schedules, our net sales from
Medicare and other payors could be adversely and materially affected.

In
addition to the risks to our Patient Care segment businesses discussed above, changes in government reimbursement levels could also adversely affect the net sales, cash flows and profitability of
our Therapeutic Services segment business. In particular, a significant majority of ACP's sales involve devices and related services provided to skilled nursing facilities (SNFs) and similar
businesses. Reductions in government reimbursement levels to SNFs could cause such SNFs to reduce or cancel their use of ACP's devices and modalities, negatively impacting net sales, cash flows and
profitability. For example in July 2011 CMS announced an across the board reduction of approximately 10% in SNF reimbursement levels, negatively impacting the demand for ACP's devices and treatment
modalities. We cannot predict whether any other modifications to reimbursement levels will be implemented, or if implemented what form any modifications might take.

Changes in payor reimbursements could negatively affect our net sales volume.

Recent years have seen a consolidation of healthcare companies coupled with certain payors terminating contracts, imposing caps or reducing
reimbursement for O&P products. Additionally, employers are increasingly pushing healthcare costs down to their employees. These trends could result in decreased O&P revenue.

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Healthcare reform in the United States may adversely affect our net sales, cash flows and profitability.

Various healthcare reform measures have been enacted into law in recent years, including the Patient Protection and Affordable Care Act adopted in
March of 2010 ("PPACA"). These reforms are significant and over time could significantly change the way healthcare, including O&P services and products, are obtained and paid for in the United States.
These changes are designed to increase access to and reduce the cost of healthcare through, among other things: expanded access to Medicaid; incentives to encourage shared savings programs, such as
accountable care organizations; other alternative payment methodologies for Medicare reimbursement; and mandated private insurance for most non-indigent individuals under the age of 65.
The reforms also include stronger enforcement tools and increased penalties. These changes could have a dramatic impact on the healthcare market generally, including the O&P services and products
markets. It remains unclear, however, the ultimate impact the reforms will have since they will not be fully implemented for a number of years, and the reforms could be further modified, delayed or
repealed prior to full implementation. Nevertheless, the reforms, when implemented, may have an adverse affect our net sales, cash flows and profitability.

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

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



We are subject to numerous federal, state and local governmental regulations, noncompliance with which could result in significant penalties that could have a material
adverse effect on our business.

A failure by us to comply with the numerous federal, state and/or local healthcare and other governmental regulations to which we are subject,
including the regulations discussed under "Government Regulation" in Item 1 above, could result in significant penalties and adverse consequences, including exclusion from the Medicare and
Medicaid programs, which could have a material adverse effect on our business.

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

We generally enter into employment agreements with our executive officers and a significant number of our clinicians which contain
non-compete and other provisions. The laws of each state differ concerning the enforceability of non-competition agreements. State courts will examine all of the facts and
circumstances at the time a party seeks to enforce a non-compete covenant. We cannot predict with certainty whether or not a court will enforce a non-compete covenant in any
given situation based on the facts and circumstances at that time. If one or more of our key executive officers and/or a significant number of our clinicians were to leave us and the courts refused to
enforce the non-compete

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covenant,
we might be subject to increased competition, which could materially and adversely affect our business, financial condition and results of operations.

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

We have substantial debt. As of December 31, 2012, we have approximately $520.6 million of total indebtedness and $99.5 million
available on our Revolving Credit Facility.

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



Our Website

Our website is http://www.hanger.com. We make available free of charge, on or through our website, our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Section 16 filings (i.e. Forms 3, 4 and 5), proxy statements, and other
documents as required by applicable law and regulations as soon as
reasonably practicable after electronically filing such reports with the Securities and Exchange Commission at http://www.sec.gov. The public may read and copy any materials that we file with the SEC
at the SEC's Public Reference Room at 100 F Street N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330 (1-800-732-0330). The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers that file electronically with the SEC. Our website also contains the charters of the Audit Committee, Corporate Governance and
Nominating Committee, Compensation Committee and Quality and Technology Committee of our Board of Directors; our Code of Business Conduct and Ethics for Directors and Employees, which includes our
principal executive, financial and accounting officers; as well as our Corporate Governance Guidelines. Information contained on our website is not part of this report.

ITEM 1B.UNRESOLVED STAFF COMMENTS

None.

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ITEM 2.PROPERTIES

As of December 31, 2012, we operated over 740 patient care clinics and facilities in 45 states and the District of Columbia. We own 14
buildings that house a patient care clinic. The remaining clinics are occupied under leases expiring between 2013 and 2023. We believe our leased and owned facilities are adequate for carrying out our
current and anticipated future O&P operations. We believe we will be able to renew such leases as they expire or find comparable or alternative space on commercially suitable terms.

The
following table sets forth the number of our patient care clinics located in each state as of December 31, 2012:

State

Patient
Care
Clinics

State

Patient
Care
Clinics

State

Patient
Care
ClinicsAlabama


15

Louisiana


16

North Carolina


22Arizona


41

Maine


5

North Dakota


2Arkansas


6

Maryland


13

Ohio


37California


71

Massachusetts


8

Oklahoma


12Colorado


23

Michigan


8

Oregon


15Connecticut


10

Minnesota


6

Pennsylvania


31Delaware


1

Mississippi


15

South Carolina


21District of Columbia


1

Missouri


22

South Dakota


1Florida


55

Montana


5

Tennessee


16Georgia


35

Nebraska


10

Texas


43Illinois


26

Nevada


5

Utah


4Indiana


13

New Hampshire


2

Virginia


11Iowa


14

New Jersey


8

Washington


19Kansas


13

New Mexico


8

West Virginia


6Kentucky


10

New York


29

Wisconsin


11Wyoming


3


We
also lease distribution facilities in Texas, California, Georgia, Florida, Illinois, and Pennsylvania. In January 2010, we signed a lease agreement and relocated our corporate headquarters to
Austin, TX in August 2010. Substantially all of our owned properties are pledged to collateralize bank indebtedness. See Note G to our Consolidated Financial Statements.

ITEM 3.LEGAL PROCEEDINGS

We are 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 our operations.

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

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EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth information regarding current executive officers of the Company and certain of its subsidiaries:

Name

Age

Office with the CompanyVinit K. Asar


47

President and Chief Executive OfficerRichmond L. Taylor


64

Executive Vice President, President and Chief Operating Officer of Hanger Prosthetics & Orthotics, Inc.George E. McHenry


60

Executive Vice President, Secretary, and Chief Financial OfficerThomas E. Hartman


50

Vice President and General CounselWalt A. Meffert, Jr.


48

Vice President and Chief Information OfficerRussell G. Allen


42

Vice President and TreasurerAndrew C. Morton


47

Vice President, Human ResourcesKenneth W. Wilson


50

President and Chief Operating Officer of Southern Prosthetic Supply, Inc.Rebecca J. Hast


62

President of Linkia, LLC


Vinit K. Asarhas been our Chief Executive Officer and President since May 2012, and served as our President and Chief Operating Officer from September
2011 to May 2012. Mr. Asar also served as our Executive Vice President and Chief Growth Officer from December 2008 to September 2011. Mr. Asar came to Hanger from the Medical
Device & Diagnostic sector at Johnson and Johnson, having worked at the Ethicon, Ethicon-Endo-Surgery, Cordis and Biosense Webster franchises. During his 18 year
career at Johnson and Johnson, Mr. Asar held various roles of increasing responsibility in Finance, Product Development, Manufacturing, and Marketing and Sales in the US and in Europe. Prior to
joining Hanger, Mr. Asar was the Worldwide Vice-President at Biosense Webster, the Electrophysiology division of Johnson and Johnson, responsible for the Worldwide Sales, Marketing
and Services organizations. Mr. Asar has a B.S.B.A from Aquinas College and an M.B.A. from Lehigh University.

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

George E. McHenryhas been our Executive Vice President and Chief Financial Officer since October 2001 and our Secretary since 2004. From 1987 until he
joined us in October 2001, Mr. McHenry served as Executive Vice President, Chief Financial Officer and Secretary of U.S. Vision, Inc., an optical company with 600 locations in 47 states.
Prior to joining U.S. Vision, Inc., he was employed principally as a Senior Manager by the firms of Touche Ross & Co. (now Deloitte & Touche) and Main Hurdman
(now KPMG LLP) from 1974 to 1987. Mr. McHenry is a Certified Public Accountant and received a Bachelor of Science degree in accounting from St. Joseph's University.

Thomas E. Hartmanhas been our Vice President & General Counsel since June 2009. Mr. Hartman joined Hanger from Foley &
Lardner, LLP where he was a partner in Foley's Business Law

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Department.
Mr. Hartman's practice at Foley was focused on securities transactions, securities law compliance, mergers and acquisitions, and corporate governance. Prior to joining Foley in
1995, Mr. Hartman was a business law associate at Jones Day. Mr. Hartman received his J.D. from the University of Wisconsin in Madison, and a Bachelor of Science in Engineering
(Industrial & Operations Engineering) from the University of Michigan in Ann Arbor.

Walt A. Meffert, Jr.joined Hanger as Vice President and Chief Information Officer in April 2010. Mr. Meffert was previously the Senior Vice
President & Chief Technology Officer for Apria Healthcare from December 2008. Concurrently Mr. Meffert also served as Senior Vice President & Chief Information Officer for
Coram, Inc. since November 2005. As the CTO/CIO at Apria Healthcare and Coram, Inc. he directed all production infrastructures and business applications supporting over
700 branches and five main business lines in addition to providing IT oversight and alignment for Apria's Global IT service delivery. Before joining Apria Healthcare/Coram Inc.,
Mr. Meffert Served as Senior Vice President & Chief Information Officer for NeighborCare. Mr. Meffert served as Chief Technology Officer for Register.com, a leading provider of
global domain name registration and Internet services from November 2001 to April 2004; Vice President of Enterprise Application Engineering at the creative software development company, Macromedia
from October 1999 to November 2001; Director of Electronic CommerceInternet Center at Bell Atlantic from January 1998 to October 1999; various leadership positions at The General Electric
Company including the leading of the Internet Consulting and Systems Integration teams from 1990 to 1998. Mr. Meffert is a graduate of the renowned GE Edison Engineer program.
Mr. Meffert holds a Bachelor of Science degree in Computer Science from the University of Maryland, Baltimore County and a Master of Science in Computer Science degree from John Hopkins
University.

Russell G. Allenjoined us in March of 2011 as our Vice President and Treasurer. Mr. Allen joined Hanger from Lance, Inc., a publicly
traded consumer products company located in Charlotte, North Carolina, where he served in a variety of positions from 2003 to 2011, including Vice President of Treasury and Planning, and Director of
Financial Planning & Analysis and Investor Relations. From 1995 to 2002 Mr. Allen worked at Ford Motor Company in Dearborn, Michigan, where he held various roles of increasing
responsibility as part of Ford's Finance Management Development Program. Mr. Allen is a Certified Public Accountant and received a Bachelor of Business Administration from Southern Arkansas
University and a Masters of Business Administration from The University of Illinois.

Andrew C. Mortonjoined us as our Vice President Human Resources in June 2010. Prior to joining Hanger, Mr. Morton worked for Freescale
Semiconductor since 2006 in two capacities; first as Vice President Talent and Corporate Services, and then Vice President Human Resources Supply Chain. From 1992 to 2006 Mr. Morton worked at
IBM and held various global field and corporate HR executive roles of increasing responsibility across its software, hardware and sales businesses. Mr. Morton has a B.S. degree in Finance from
the University of Colorado at Boulder, and an MBA from Syracuse University. In between degrees he worked for Baxter Healthcare in Finance roles from 1988 to 1989.

Kenneth W. Wilsonhas been President and Chief Operating Officer of Southern Prosthetic Supply (SPS) since September 2011. Mr. Wilson was
previously employed by Cardinal Health Inc., the largest distributor of pharmaceuticals and medical products in the United States, for 22 years, serving as Senior Vice President/General
Manager of its Ambulatory Care business from 2008 until September 2011, as Vice President/General Manager of its Onsite business from 2006 to 2008, and as Senior Vice PresidentGroup
Purchasing Accounts from 2004 to 2006. Prior to joining Cardinal Health, he worked at Allegiance Healthcare Corporation, a manufacturer of medical products, including surgical apparel and drapes,
surgical instruments and respiratory care products. Allegiance Healthcare was a 1997 spin-off of Baxter Healthcare Corporation that was acquired by Cardinal Health in 1999.
Mr. Wilson served Allegiance Healthcare as Head of Allegiance National Account and Health Systems from 2002

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to
2004, and as Vice PresidentHealth Systems from 1997-2002. From 1988 to 1997, Mr. Wilson was with Baxter Healthcare, a manufacturer of a wide variety of medical
products across three divisions, including drugs and vaccines, dialysis equipment and intravenous (IV) supplies. Mr. Wilson left Baxter in 1997 as a Regional Director in Encinitas,
California. Prior to joining Baxter, he also worked for PepsiCo, USA and Proctor & Gamble in a variety of sales roles. Mr. Wilson received his Bachelor of Science degree in Economics and
Social Science from Davidson College in 1984. He has been married to wife Candace since 1989 and has 5 children.

Rebecca J. Hasthas been President of Linkia, LLC since November 2005. Prior to joining Linkia, Ms. Hast was with United Healthgroup
Incorporated, a healthcare company that offers a broad spectrum of products and services through two distinct platforms: UnitedHealthcare, which provides health care coverage and benefits services;
and Optum, which provides information and technologyenabled health services. Ms. Hast held a variety of positions from 1999 to 2004, leaving United Healthgroup as Senior Vice President, Account
Development for the Dental Benefit Providers, a wholly owned subsidiary of United Healthgroup's Specialty Services Division (now Optum). Prior to joining United Healthgroup, Ms. Hast held
management and leadership positions with Magellan Health Services, Inc., a specialty healthcare management company, and other healthcare insurance and services providers. Ms. Hast holds
a Bachelor of Science degree from University of Pittsburgh.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY  SECURITIES

Market Information

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

Year Ended December 31, 2012

High

LowFirst Quarter

$
22.93

$
18.13Second Quarter


25.64


20.64Third Quarter


29.13


23.81Fourth Quarter


28.83


22.74




Year Ended December 31, 2011

High

LowFirst Quarter

$
27.87

$
20.55Second Quarter


27.97


23.46Third Quarter


26.17


16.58Fourth Quarter


22.01


14.58


Holders

At March 14, 2013 there were approximately 233 holders of record of our 34,513,913 shares of outstanding common stock.

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Dividend Policy

We have never paid cash dividends on our common stock and intend to continue this policy for the foreseeable future. We plan to retain earnings for
use in our business. The terms of our credit agreements and certain other agreements limit the payment of dividends on our common stock and such agreements are expected to continue to limit the
payment of dividends in the future.

Any
future determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent on our results of operations, financial condition, contractual and legal
restrictions and any other factors deemed to be relevant.

Equity Compensation Plans

The following table sets forth information as of December 31, 2012 regarding our equity compensation plans:

Plan Category

Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights

Weighted average exercise
price of outstanding
options, warrants and
rights

Number of securities remaining
available for future issuance
(excluding securities reflected in
column (a)(a)

(b)

(c)Equity Compensation Plans:Approved by security holders


221,855

$
11.72


1,487,797Not approved by security holders








N/ATotal


221,855





1,487,797


Sales of Unregistered Securities

During the year ended December 31, 2012, we sold no securities that were unregistered under the Securities Act of 1933, as amended.

Issuer Purchases of Equity Securities

During the year ended December 31, 2012, we made no repurchases of treasury stock.

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STOCK PERFORMANCE CHART

The annual changes in the cumulative total shareholder return on Hanger's common stock for the five-year period shown in the graph shown
below are based on the assumption that $100 had been invested in Hanger common stock, the Russell 2000 Stock Index, the Standard & Poor's 500 Stock Index, the Standard & Poor's Small Cap
600 Stock Index, the Standard & Poor's 500 Health Care Services Index and the Standard & Poor's 500 Health Care Facilities Index on December 31, 2007, and that all quarterly
dividends were reinvested at the average of the closing stock prices at the beginning and end of the quarter. The total cumulative dollar returns shown on the graph represent returns that such
investments would have had on December 31, 2012.

The
following information in this Item 5 of this Annual Report on Form 10-K is not deemed to be "soliciting material" or to be "filed" with the SEC or subject to
Regulation 14A or 14C under the Securities Exchange Act of 1934 (the "Exchange Act") or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent we specifically incorporate it by reference into such a filing.

Comparison of 5 Year Cumulative Total Return  Assumes Initial Investment of $100  December 2012

GRAPHIC

December 31,2007

2008

2009

2010

2011

2012Hanger, Inc.

$
100.00

$
131.79

$
125.61

$
192.46

$
169.78

$
248.54S & P 500

$
100.00

$
63.01

$
79.68

$
91.68

$
93.62

$
108.61S&P SmallCap 600

$
100.00

$
68.93

$
86.55

$
109.32

$
110.43

$
128.46RUSSELL 2000

$
100.00

$
66.21

$
84.20

$
106.81

$
102.33

$
119.06S&P 500 Health Care Services Index

$
100.00

$
83.10

$
116.93

$
126.44

$
116.65

$
140.41S&P 500 Health Care Facilities Index

$
100.00

$
22.64

$
106.11

$
131.69

$
100.99

$
159.80


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ITEM 6.SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes,
"Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial data included elsewhere in this annual report on Form 10-K. The
Consolidated Statement of Income and Comprehensive Income and Balance Sheet data for all periods presented is derived from the audited consolidated financial statements included elsewhere in this
annual report on Form 10-K or in annual reports on Form 10-K for prior years on file with the Commission.

Year Ended December 31,Consolidated Statements of Income
and Comprehensive Income:

2012

2011

2010

2009

2008(In thousands, except per share amounts)Net sales

$
985,550

$
918,539

$
817,379

$
760,070

$
703,129Material costs


296,193


270,210


248,667


228,295


210,323Personnel costs


335,328


321,529


282,417


264,581


248,234Other operating expenses


188,868


177,910


165,158


160,355


149,661Relocation expenses(1)





1,185


16,444





Acquisition expenses(2)


1,171


781


5,414





Depreciation and amortization


34,652


30,969


18,809


16,319


17,183Income from operations


129,338


115,955


80,470


90,520


77,728Interest expense, net


31,169


31,821


30,340


30,693


32,549Loss (gain) from interest rate swap(3)








1,610


(167
)

738Extinguishment of debt








13,985





Income before taxes


98,169


84,134


34,535


59,994


44,441Provision for income taxes


34,477


29,657


13,639


23,901


17,695Net income


63,692


54,477


20,896


36,093


26,746Other comprehensive income (loss)


(734
)

(906
)

2,777


1,441


(4,497
)Comprehensive income

$
62,958

$
53,571

$
23,673

$
37,534

$
22,249Preferred stock dividends and accretion(4)














5,670Net income applicable to common stock

$
63,692

$
54,477

$
20,896

$
36,093

$
21,076Basic Per Common Share DataNet income

$
1.86

$
1.62

$
0.65

$
1.15

$
0.81Shares used to compute basic per common share amounts


34,283


33,545


32,238


31,384


25,930Diluted Per Common Share DataNet income

$
1.83

$
1.59

$
0.64

$
1.13

$
0.78Shares used to compute diluted per common share amounts


34,833


34,220


32,888


32,068


27,091


(1)During
2011 and 2010, the Company relocated its corporate headquarters from Bethesda, Maryland to Austin, Texas. The cost incurred included employee
separation, relocation costs, and lease termination costs.(2)During
2012 the company purchased eighteen O&P companies for an aggregate purchase price of $83.1 million and incurred $1.2 million in
acquisition costs. During 2011, the Company acquired


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eight
O&P companies for an aggregate purchase price of $24.9 million and incurred $0.8 million in acquisition costs. During 2010, the Company completed the acquisition of ACP for
$157.8 million and incurred $5.4 million in legal, professional, and other deal-related expenses. (3)During
2009 and 2008, the (gain) loss from interest rate swap results from the ineffective portions of the swap that occurred during the year. In 2010, the
Company was required to terminate its interest rate swaps in conjunction with refinancing of the debt, resulting in a $1.6 million charge to interest expense.(4)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 of $5.3 million 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.


Year Ended December 31,Balance Sheet Data:

2012

2011

2010

2009

2008(In thousands)Cash and cash equivalents

$
19,211

$
42,896

$
36,308

$
84,558

$
58,413Working capital


251,465


240,648


185,260


216,664


200,248Total assets


1,237,327


1,126,719


1,060,570


875,036


813,750Total debt


520,646


508,033


508,684


410,472


422,324Shareholders' equity


503,094


428,582


364,427


315,893


266,866




Year Ended December 31,Other Financial Data:

2012

2011

2010

2009

2008(In thousands)Capital expenditures

$
33,163

$
28,674

$
30,593

$
21,270

$
19,330Net cash provided by (used in):Operating activities

$
81,319

$
61,804

$
54,200

$
71,824

$
51,750Investing activities


(99,051
)

(46,870
)

(185,975
)

(34,152
)

(30,168
)Financing activities


(5,953
)

(8,346
)

83,525


(11,527
)

9,893


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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 our consolidated financial statements included elsewhere in this Form 10-K. Our discussion of our results of operations and financial
condition includes various forward-looking statements about, among other things, 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.

Overview

The goal of Hanger, Inc. (the "Company") is to be the world's premier provider of services and products that enhance human physical
capabilities. We provide orthotic and prosthetic patient care services, distribute O&P devices and components, manage O&P networks, and provide therapeutic solutions to the broader
post-acute market. Through our subsidiary, Hanger Prosthetics and Orthotics, Inc., which we refer to as "Hanger Clinic," we are the largest owner and operator of orthotic and
prosthetic patient care clinics in the United States. We are also one of the largest distributors of O&P products in the United States through our distribution subsidiary, Southern Prosthetic Supply,
Inc. ("SPS"). We operate in excess of 740 O&P patient care clinics located in 45 states and the District of Columbia and six strategically located distribution facilities. In addition to providing O&P
services and products we, through our subsidiary, Linkia LLC ("Linkia"), manage an O&P network and develop programs to manage all aspects of O&P patient care for insurance companies. We provide
therapeutic solutions through our subsidiaries Innovative Neurotronics and
Accelerated Care Plus Corp. Innovative Neurotronics ("IN, Inc.") introduces emerging neuromuscular technologies developed through independent research in a collaborative effort with industry
suppliers worldwide. Accelerated Care Plus Corp. ("ACP") is a developer of specialized rehabilitation technologies and a leading provider of evidence-based clinical programs for post-acute
rehabilitation serving more than 4,550 long-term care facilities and other sub-acute rehabilitation providers throughout the U.S.

We
have increased our net sales during the past two years through organic growth, acquisitions and opening of new patient care clinics, increased distribution revenues though targeted sales efforts
and increased product offerings, and continued growth in revenue associated with the Linkia contracts. Our operations include three reportable segmentsPatient Care, Distribution, and
Therapeutic Solutions.

We
are analyzing the current reporting structure and assessing whether we may change the way information is reported and analyzed internally. If we were to realign the way we report information and
analyze our business internally, we will realign our business segments accordingly.

Patient Care

As of December 31, 2012, we provided O&P patient care services through over 740 patient care clinics and over 1,300 clinicians in 45 states
and the District of Columbia. For the years ended December 31, 2012 and 2011, net sales attributable to our patient care services were $813.6 million and $753.4 million,
respectively.

Patients
are referred to our local patient care clinics directly by physicians as a result of our reputation or through our agreements with managed care providers. In our orthotics business, we
design, fabricate, fit and maintain a wide range of standard and custom-made braces and other devices (such as spinal, knee and sports-medicine braces) that provide external support to
patients suffering from musculoskeletal disorders, such as ailments of the back, extremities or joints and injuries from sports or other activities. In our prosthetics business, we design, fabricate,
fit and maintain custom-made artificial limbs for patients who are without limbs as a result of traumatic injuries, vascular diseases, diabetes,

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cancer
or congenital disorders. O&P devices are increasingly technologically advanced and are custom-designed to add functionality and comfort to patients' lives, shorten the rehabilitation process
and lower the cost of rehabilitation.

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

Distribution

We distribute O&P products, components, devices and supplies to our customers and to our own patient care clinics through our wholly-owned
subsidiary, SPS. We are also a leading fabricator and distributor of therapeutic footwear for diabetic patients in the podiatric market. For the year ended December 31, 2012, 35.9% or
approximately $107.3 million of SPS distribution sales were to third-party O&P services providers, and the balance of approximately $191.2 million represented intercompany sales to
Hanger Clinic's patient care clinics. SPS maintains in inventory approximately 33,000 individual SKUs manufactured by more than 390 different companies. SPS maintains distribution facilities in
California, Florida, Georgia, Illinois, Pennsylvania, and Texas, which allows us to deliver products via ground shipment anywhere in the contiguous United States typically within two business days.

Our
Distribution business enables us to:



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

Therapeutic Solutions

We provide therapeutic solutions to the O&P market and post-acute rehabilitation market through our subsidiaries IN, Inc. and ACP.
ACP is the nation's leading provider of rehabilitation technologies and integrated clinical programs to rehabilitation providers. ACP's unique value proposition is to provide its customers with a
full-service "total solutions" approach encompassing proven medical technology, evidence based clinical programs, and continuous onsite therapist education and training. ACP's services
support increasingly advanced treatment options for a broader patient population and more medically complex conditions. ACP has contracts to serve more than 4,550 skilled nursing facilities
nationwide, including 21 of the 25 largest national providers. ACP's contracts contain negotiated pricing and service levels with terms ranging from one to five years. ACP generally bills its
customers monthly and revenue is recognized based upon the contractual terms of the agreements.

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IN, Inc. specializes in product development and commercialization of emerging products. Working with the inventors under licensing and consulting agreements,
IN, Inc. commercializes the design, obtains regulatory approvals, develops clinical protocols for the technology, and then introduces the devices to the marketplace through a variety of
distribution channels. IN, Inc. currently has two commercial products; the WalkAide system which benefits patients with a condition referred to as foot drop and the V-Hold which is
active suction technology used in lower extremity prosthetic devices. The WalkAide system is currently reimbursable from Medicare beneficiaries with foot drop due to incomplete spinal cord injuries.
IN, Inc. is currently conducting randomized clinical trials in an effort to gain additional coverage for stroke patients with foot drop, which represents the largest potential patient
population. IN, Inc. fully enrolled the clinical trial in the second quarter of 2012 and completed the active phase of the clinical trial in the fourth quarter of 2012. IN, Inc. is
currently analyzing the data, which it expects to publish and later submit to CMS in late 2013. In addition to reimbursement from Medicare and Medicaid, IN, Inc. has been working with
commercial insurance companies and has had limited success in receiving coverage for the WalkAide. The WalkAide and V-Hold are sold in the United States through our patient care clinics
and SPS. IN, Inc. is also marketing the WalkAide internationally through licensed distributors.

Results and Outlook

Net sales for the year ended December 31, 2012 increased by $67.1 million, or 7.3%, to $985.6 million from $918.5 million
for the year ended December 31, 2011. The sales increase was principally the result of a $30.1 million, or 4.0%, increase in same center sales; a $30.2 million increase from
acquired entities; and a $6.8 million, or 6.8%, increase in sales in the Distribution segment.

Income
from operations and net income were $129.3 million and $63.7 million, respectively, in 2012 compared to $116.0 million and $54.5 million, respectively, in the prior
year. Our cash flow from operations increased $19.5 million to $81.3 million in 2012, from $61.8 million in 2011, primarily due to normal changes in working capital. As of
December 31, 2012, $293.3 million, or 56.3%, of our total debt of $520.6 million was subject to variable interest rates. We had total liquidity of $118.7 million, comprised
of $19.2 million of cash and $99.5 million available under our Revolving Credit Facility, net of $0.5 million in letters of credit at December 31, 2012. We believe that we
have sufficient liquidity to conduct our normal operations and fund our acquisition plans through 2013.

We
expect 2013 revenues to increase to between $1.06 billion and $1.08 billion, resulting from 3% to 5% same center sales growth in its Patient Care segment, along with 3% to 5% growth
in both its Distribution and Therapeutic Solutions segments. We anticipate 2013 adjusted diluted earnings per share of between $2.02 and $2.09 for the year, excluding approximately $0.05 for training
costs related to the implementation of Janus, our new clinic management system. Our goal is to increase adjusted operating margins by 30 to 50 basis points. We anticipate generating cash flow from
operations of between $80 million and $100 million in 2013, and investing a total of $40 million to $50 million in capital additions.

Significant Accounting Policies and Estimates

Our analysis and discussion of our financial condition and results of operations is based upon our Consolidated Financial Statements that have been
prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. GAAP provides the framework from which to make these estimates, assumptions and disclosures. We have chosen accounting policies within
GAAP that management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent

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manner.
Management regularly assesses these policies in light of current and forecasted economic conditions. Our accounting policies are stated in Note B to the Consolidated Financial
Statements included elsewhere in this Annual Report on Form 10-K. We believe the following accounting policies are critical to understanding our results of operations and the more
significant judgments and estimates used in the preparation of our Consolidated Financial Statements.





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

December 31, 2012

0-60 days

61-120 days

Over 120 days

Total(In thousands)Patient CareCommercial insurance

$
56,326

$
11,413

$
13,355

$
81,094Private pay


5,928


4,955


10,524


21,407Medicaid


12,879


3,468


3,519


19,866Medicare


29,910


6,118


5,625


41,653VA


2,270


608


353


3,231Distribution & Therapeutic Solutions Trade accounts receivable


12,556


3,149


4,091


19,796$
119,869

$
29,711

$
37,467

$
187,047


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December 31, 2011

0-60 days

61-120 days

Over 120 days

Total(In thousands)Patient CareCommercial insurance

$
50,136

$
9,594

$
11,759

$
71,489Private pay


3,936


3,791


9,219


16,946Medicaid


12,018


3,678


4,173


19,869Medicare


25,438


3,489


4,433


33,360VA


1,428


373


159


1,960Distribution & Therapeutic Solutions Trade accounts receivable


11,367


2,663


3,200


17,230$
104,323

$
23,588

$
32,943

$
160,854






Level 1

unadjusted quoted prices for identical assets or liabilities in active markets accessible by the CompanyLevel 2

inputs that are observable in the marketplace other than those inputs classified as Level 1Level 3

inputs that are unobservable in the marketplace and significant to the valuation




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2012

2011Discount rate


3.25
%

3.90
%Average rate of increase in compensation


3.00
%

3.00
%




Recently Issued Accounting Guidance

In July 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, an amendment to FASB ASC Topic 350.
The update provides an entity with the option to first assess qualitative factors in determining whether it is more likely than not that the indefinite-lived intangible asset is impaired. After
assessing the qualitative factors, if an entity determines that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further
action. If an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test. The ASU is effective
for the Company for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption was permitted. The Company did not early adopt the
provisions of this ASU; however, the Company does not expect the impact of adopting this ASU to be material to the Company's financial position, results of operations or cash flows.

In
February 2013, the FASB issued Accounting Standards Update ("ASU") 2013-02,Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive
Income, an amendment to FASB ASC Topic 220. The update requires disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, an
entity is required to present either on the face of the statement of operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line
items of net income but only if the amount reclassified is
required to be reclassified to net income in its entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to other
disclosures

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that
provide additional detail about those amounts. This ASU is effective prospectively for the Company fiscal years, and interim periods within those years beginning after December 15, 2012.
The Company will comply with the disclosure requirements of this ASU for the quarter ending March 31, 2013. The Company does not expect the impact of adopting this ASU to be material to the
Company's financial position, results of operations or cash flows.

Results of Operations

The following table sets forth, for the periods indicated, certain items from our consolidated statements of income and comprehensive income as a
percentage of our net sales:

For the Year Ended
December 31,2012

2011

2010Net sales


100.0
%

100.0
%

100.0
%Material costs


30.1


29.4


30.4Personnel costs


34.0


35.0


34.6Other operating expenses


19.2


19.4


20.2Relocation expenses





0.1


2.0Acquisition expenses


0.1


0.1


0.7Depreciation and amortization


3.5


3.4


2.3Income from operations


13.1


12.6


9.8Interest expense, net


3.2


3.5


3.7Extinguishment of debt








1.7Loss from interest rate swap








0.2Income before taxes


9.9


9.1


4.2Provision for income taxes


3.5


3.2


1.7Net income


6.4


5.9


2.5


Year ended December 31, 2012 compared with the year ended December 31, 2011

Net Sales.Net sales for the year ended December 31, 2012 increased by $67.1 million, or 7.3%, to $985.6 million from $918.5 million
last year. The sales increase was principally the result of a $30.1 million, or 4.0%, increase in same center sales; a $30.2 million increase from acquired entities; and a
$6.8 million, or 6.8%, increase in sales of the Distribution segment.

Material Costs.Material costs for the year ended December 31, 2012 were $296.2 million, an increase of $26.0 million, or 9.6%, over
$270.2 million for the same period in the prior year. The increase was the result of the growth in sales and change of product mix. Material costs as a percentage of net sales increased to
30.1% in 2012 from 29.4% in 2011.

Personnel Costs.Personnel costs for the year ended December 31, 2012 increased by $13.8 million to $335.3 million from $321.5 million
for the year ended December 31, 2011. The increase from prior year was primarily due to $10.2 million of personnel costs associated with acquired patient care clinics, and other
increases in salary expense, commissions and benefits.

Other Operating Expenses.Other operating expenses, which are comprised primarily of professional, office, bad debt, incentive compensation and reimbursable
employee expenses, increased $11.0 million in 2012 to $188.9 million from $177.9 million for the year ended December 31, 2011. The increase was attributable to
$4.2 million related to acquisitions, $3.3 million in incentive compensation and $2.2 million in professional fees, respectively. The remainder is attributable to other operating
expenses. Other operating expenses as a percentage of net sales decreased slightly to 19.2%.

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Relocation Expenses.During 2011, we completed the relocation of our corporate office from Bethesda, Maryland to Austin, Texas, which began in 2010. During the
year ended December 31, 2012, we incurred no relocation costs compared to $1.2 million incurred in 2011.

Acquisition Expenses.During 2012, we acquired eighteen companies, consisting of 59 patient care clinics, and incurred $1.2 million of
non-recurring costs related to these acquisitions, an increase of $0.4 million compared to the $0.8 million of acquisition related costs we incurred in 2011 to acquire eight
companies that consisted of 21 patient care clinics.

Depreciation and Amortization.Depreciation and amortization for the year ended December 31, 2012 was $34.7 million versus $31.0 million for
the year ended December 31, 2011. The increase was commensurate with the increase in capital expenditures in 2012.

Income from Operations.Income from operations increased $13.3 million to $129.3 million for the year ended December 31, 2012 compared to
$116.0 million in the year ended December 31, 2011. The increase was primarily due to the Patient Care segment as fixed costs were leveraged over increased sales. The remaining increase
was due to $5.9 million of additional operating income in the Distribution segment resulting from an increase in sales prices, implementation of cost management strategies and changes in sales
mix. As a percentage of sales, income from operations in 2012 increased 0.5% from 12.6% to 13.1%.

Interest Expense.Interest expense for the year ended December 31, 2012 decreased slightly to $31.2 million, compared to $31.8 million for the
year ended December 31, 2011, primarily due to a lower average term loan balance resulting from scheduled repayments, offset by increases in seller notes resulting from the 2012 acquisitions.

Provision for Income Taxes.An income tax provision of $34.5 million was recognized for the year ended December 31, 2012, compared to
$29.7 million for the same period of the prior year. The increase in the income tax provision was primarily due to higher pre-tax earnings. Our effective tax rate was 35.1% and
35.3% for 2012 and 2011, respectively. The 2012 effective tax rate benefited 2.3% from prior period federal research and development credit claims filed in 2012, certain deferred tax asset rate
changes, the release of a portion of our valuation allowance, and other nonrecurring discrete items. The 2011 effective tax rate benefited 2.5% from the realization of certain state tax benefits and
other nonrecurring discrete items.

Net Income.Net income for the year ended December 31, 2012 increased to $63.7 million, or $1.83 per
diluted share, compared to net income of $54.5 million, or $1.59 per diluted share, for the year ended December 31, 2011, primarily due to increased net sales and leveraged costs in
2012.

Year ended December 31, 2011 compared with the year ended December 31, 2010

Net Sales.Net sales for the year ended December 31, 2011 increased by $101.2 million, or 12.4%, to $918.5 million from $817.4 million
in 2010. The sales increase was principally the result of a $18.4 million, or 2.6%, increase in same center sales in our Patient Care segment, a $4.9 million, or 5.1%, increase in sales
of our Distribution segment, $57.4 million in increased sales from our Therapeutic Solutions segment, resulting primarily from the December 2010 acquisition of ACP, and a $20.5 million
increase related to sales from acquired patient care entities.

Material Costs.Material costs for the year ended December 31, 2011 were $270.2 million, an increase of $21.5 million, or 8.6%, over
$248.7 million for 2010. The increase was the result of the growth in sales. Material costs as a percentage of net sales decreased to 29.4% in 2011 from 30.4% in 2010. The decrease in material
costs as a percentage of sales resulted from the inclusion of a full year of results from ACP, which has a lower of material costs as a percentage of sales.

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Personnel Costs.Personnel costs for the year ended December 31, 2011 increased by $39.1 million to $321.5 million, from $282.4 million
for the year ended December 31, 2010. The increase from the prior year was due primarily to $4.3 million related to merit increases and other compensation, $21.7 million from ACP,
$9.5 million from acquired patient care clinics, and a $1.3 million increase in sales commissions. As a percentage of net sales, personnel costs increased by 40 basis points in 2011
compared to the same period in 2010 as a result of the acquisition of ACP, which is more labor intensive.

Other Operating Expenses.Other operating expenses for the year ended December 31, 2011 increased by $12.7 million to $177.9 million, from
$165.2 million for the year ended December 31, 2010. The increase was due primarily to $12.2 million in expenses related to the acquisition of ACP and the patient care clinics,
$4.0 million related to additional bad debt expense related to pilot programs in our Patient Care segment, and a $1.9 million increase in telephone and data expense, which was partially
offset by a decrease of $4.0 million in incentive compensation expense and a $1.9 million change in expenses included in work in process compared to 2010. Other operating expenses as a
percentage of net sales decreased 80 basis points to 19.4% compared to the same period in the prior year, as fixed costs were leveraged over increased sales.

Relocation Expenses.In 2011, we completed the relocation of our corporate office from Bethesda, Maryland to Austin, Texas which began in 2010. During the year
ended December 31, 2011, we incurred $1.2 million in relocation costs, compared to $16.4 million in 2010. Of the $1.2 million in 2011, $1.0 million was from employee
relocation and separation costs.

Acquisition Expenses.During 2011, we acquired eight companies, consisting of 21 patient care clinics, and incurred $0.8 million of legal and other costs
related to these acquisitions. In December 2010, we acquired ACP and incurred acquisition costs of $5.4 million related to the transaction, consisting of $3.3 million in legal and
advisor fees and $2.1 million of non-cash stock-based compensation expense.

Depreciation and Amortization.Depreciation and amortization for the year ended December 31, 2011 was $31.0 million, versus $18.8 million for
the year ended December 31, 2010. The increase was commensurate with the increase in fixed asset purchases in 2011and the acquisition of ACP.

Income from Operations.Income from operations increased $35.5 million to $116.0 million for the year ended December 31, 2011, compared to
$80.5 million for the year ended December 31, 2010. The increase was due to a reduction of $19.9 million in relocation and acquisition costs, $9.1 million of additional
operating income related to the Therapeutic Services segment, and the remainder of the increase is attributable to the Patient Care segment. As a percentage of sales, income from operations increased
to 12.6%, a 2.8% increase from 9.8% in 2010, primarily due to lower acquisition and relocation costs in 2011 and the acquisition of ACP in 2010.

Interest Expense.Interest expense for the year ended December 31, 2011 increased slightly to $31.8 million compared to $30.3 million for the
year ended December 31, 2010, primarily due to higher debt balance in 2011 that resulted from the acquisition of ACP in the fourth quarter of 2010.

Extinguishment of Debt.In November and December 2010, we completed the refinancing of substantially all our outstanding debt. In conjunction with this
transaction, a $14.0 million loss on extinguishment of debt was recorded during the fourth quarter of 2010.

Loss on Interest Rate Swaps.During 2010, we incurred a $1.6 million charge to terminate interest rate swaps. We were required to terminate the swaps in
conjunction with refinancing our credit facilities.

Provision for Income Taxes.An income tax provision of $29.7 million was recognized for the year ended December 31, 2011, compared to
$13.6 million in 2010. The increase in the income tax provision was primarily due to higher pre-tax earnings in 2011. Our effective tax rate was 35.3% and 39.5% for

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2011
and 2010, respectively. The 2011 effective tax rate benefited 2.5% from the realization of certain state tax benefits and other nonrecurring discrete items.

Net Income.Net income for year ended December 31, 2011 increased to $54.5 million, or $1.59 per diluted share, compared to net income of
$20.9 million, or $0.64 per diluted share, for the year ended December 31, 2010. 2011 net income increased over 2010 net income primarily due to increased net sales in 2011, and the
absence of the following in 2011 that were incurred in 2010: corporate office relocation expenses, costs to acquire ACP, the extinguishment of debt, and the loss on the termination of the interest
rate swaps, that were incurred in 2010.

Financial Condition, Liquidity and Capital Resources

Cash Flows

Our working capital at December 31, 2012 was $251.5 million, compared to $240.6 million and $185.3 million for the years
ended December 31, 2011 and 2010, respectively. The increase in working capital was primarily due to an increase in cash, inventory, and accounts receivable. Days sales outstanding ("DSO"),
which is the number of days between the billing for our O&P products and services and the date of our receipt of payment thereof, for the year ended December 31, 2012 increased to
58 days, compared to 54 days in 2011 and 52 days in 2010 for the same period. The increase in DSO was primarily due to the increase in fourth quarter sales and an increase in
accounts receivable related to fourth quarter acquisitions. Net cash provided by operating activities was $81.3 million for the year ended December 31, 2012, compared to
$61.8 million in 2011 or $54.2 million in 2010. The increase in cash provided by operating activities in the current year resulted primarily from increased net income and a decrease in
incentive compensation payments in 2012.

Net
cash used in investing activities was $99.1 million, $46.9 million, and $186.0 million for the years ended December 31, 2012, 2011, and 2010 respectively. In 2012,
2011, and 2010, we invested $33.2 million, $28.7 million, and $30.6 million, respectively, in improvements to our patient care clinics, upgrades to our computer hardware and
software, and purchases of equipment leased to third parties by our Therapeutic Solutions segment. In 2012, we acquired eighteen O&P companies, operating a total of 59 patient care clinics, at an
aggregate purchase price of $83.1 million. In 2011, we acquired eight O&P companies, operating a total of 21 patient care clinics, at an aggregate purchase price of $24.9 million. In
2010, we acquired five O&P companies, operating a total of six patient care clinics, at an aggregate purchase price of $10.6 million along with the acquisition of ACP for a purchase price of
approximately $157.8 million. The ACP acquisition was funded using cash on hand and a portion of the proceeds from the new debt facility discussed below. Additionally, in 2012 we invested
$2.0 million in company-owned life insurance policies that cover senior executives and certain management of the Company; the Company is the beneficiary under these policies. Additionally, in
2012, we restricted $3.1 million of cash in order to eliminate letters of credit obligations under our revolving credit agreement.

Net
cash (used in)/provided by financing activities was $(6.0) million, $(8.3) million, and $83.5 million for the years ended December 31, 2012, 2011 and 2010, respectively. During 2012
we: (i) repaid $3.7 million related to term loan borrowings under our credit facilities ("Term Loans") (ii) made $5.3 million of scheduled repayments of promissory notes we
issued in connection with acquisitions ("Seller Notes"); (iii) made $0.7 million of scheduled payments of capital lease obligations; (iv) received $1.5 million in tax
benefits associated with stock-based compensation; and (iv) received $2.2 million of proceeds from employee stock compensation plans. During 2011 we: (i) borrowed and repaid
$10.0 million under our revolving credit facility; (ii) made $4.2 million of scheduled repayments of Seller Notes; (iii) repaid $3.0 million related to Term Loans;
incurred $4.2 million of financing costs related to the repricing of our debt in the first quarter of 2011; and (iv) received $0.6 million of proceeds from employee stock
compensation plans. During 2010 we: (i) entered into new Credit

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Facilities
(see further description below under the heading "Debt"); (ii) sold 0.4 million shares of common stock with proceeds of $7.4 million to executives of ACP in connection
with the closing of the ACP acquisition; (iii) paid off the $3.6 million line of credit related to the auction rate securities; and (iv) made scheduled repayments of Seller Notes
of $3.8 million; and (v) $5.0 million of proceeds from issuance of stock under employee stock compensation plans.

Debt

The following summarizes our debt balance at December 31:

(In thousands)

2012

2011Revolving Credit Facility

$


$
Term Loan


293,300


297,00071/8% Senior Notes due 2018


200,000


200,000Subordinated 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 2.00% to 6.5%, maturing through November 2018


27,346


11,033520,646


508,033Less current portion


(11,082
)

(8,065
)$
509,564

$
499,968


Refinancing and Amendment

During the fourth quarter of 2010, we refinanced our senior debt through the issuance of $200.0 million of 71/8% Senior Notes
due 2018, a new $300.0 million Term Loan Facility which matures in 2016, and the establishment of a $100.0 million Revolving Credit Facility. We recorded
a $14.0 million charge related to the early extinguishment of the senior debt, comprised primarily of $9.8 million of premiums paid to debt holders and a $4.2 million
write-off of debt issuance costs and other fees. The proceeds of the refinancing were used for the following: (i) $184.8 million to retire our outstanding
101/4% Senior Notes due 2014 and related premiums and fees; (ii) $220.3 million to retire the outstanding balance under our existing Term Loan Facility;
(iii) $16.9 million to pay debt issuance costs; and (iv) $78.2 million to partially fund the purchase price for the acquisition of ACP.

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

Revolving Credit Facility

The $100.0 million Revolving Credit Facility matures on December 1, 2015 and bears interest at LIBOR plus 3.25%, or the applicable rate
(as defined in the Credit Agreement). The Revolving Credit Facility requires compliance with various covenants including but not limited to (i) minimum consolidated interest coverage ratio of
3.50:1.00; (ii) maximum consolidated leverage ratio of 4.00:1.00; and (iii) maximum annual capital expenditures of 7.5% of consolidated net revenues of the preceding fiscal year with an
additional rollover up to $15.0 million from the prior year's allowance if not expended in the fiscal year for which it is permitted. As of December 31, 2012, we were in compliance with
these covenants. As of December 31, 2012, we had $99.5 million available under this facility. This

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availability
as of December 31, 2012 was net of standby letters of credit of approximately $0.5 million. On April 28, 2011, the Company paid back a $10.0 million draw on
the Revolving Credit Facility. As of December 31, 2012 the Company had no funds drawn on the Revolving Credit Facility. The obligations under the Revolving Credit Facility are senior
obligations, are guaranteed by our subsidiaries, and are secured by a first priority perfected interest in our subsidiaries' shares, all of our assets, and all the assets of our subsidiaries.

Term Loan

The $300.0 million Term Loan Facility matures on December 1, 2016 and requires quarterly principal payments. From time to time,
mandatory prepayments may be required as a result of excess free cash flow as defined in the Credit Agreement, certain additional debt incurrences and asset sales, or other events as defined in the
Credit Agreement. During 2012, the Company made a mandatory prepayment on its Term Loan Facility of $700,000. The Term Loan Facility bears interest at LIBOR plus 3.0%, or the applicable rate (as
defined in the Credit Agreement), and includes a 1.0% LIBOR floor. As of December 31, 2012, the interest rate on the Term Loan Facility was 4.0%. The obligations under the Term Loan Facility
are senior obligations, are guaranteed by the Company's subsidiaries, and are secured by a first priority perfected interest in the equity interests of Company's subsidiaries, all of the Company's
assets, and all the assets of the Company's subsidiaries.

71/8% Senior Notes

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

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

Subsidiary Guarantees

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

Debt Covenants

The terms of the Senior Notes, the Revolving Credit Facility, and the Term Loan Facility limit our ability to, among other things, incur additional
indebtedness, create liens, pay dividends on or redeem capital stock, make certain investments, make restricted payments, make certain dispositions of assets, engage in transactions with affiliates,
engage in certain business activities and engage in mergers, consolidations and certain sales of assets. As of December 31, 2012, we were in compliance with all covenants under these debt
agreements.

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Table of Contents

General

We believe that, based on current levels of operations and anticipated growth, cash generated from operations, together with other available sources
of liquidity, including borrowings available under the Revolving Credit Facility, will be sufficient for at least the next twelve months to fund anticipated capital expenditures and make required
payments of principal and interest on our debt, including payments due on our outstanding debt. As of December 31, 2012, $293.3 million, or 56.3%, of our total debt of
$520.6 million was subject to variable interest rates. We had access to funds totaling $118.7 million, comprised of $19.2 million of cash and $99.5 million available under
the Revolving Credit Facility, at December 31, 2012. Availability under the Revolving Credit Facility is net of $0.5 million of outstanding letters of credit. We believe that we have
sufficient liquidity to conduct our normal operations and fund our acquisition plan in 2013.

Obligations and Commercial Commitments

The following table sets forth our contractual obligations and commercial commitments as of December 31, 2012:

(In thousands)

2013

2014

2015

2016

2017

Thereafter

TotalLong-term debt(1)

$
11,082

$
10,942

$
10,473

$
287,574

$
200,575




$
520,646Interest payments on long-term debt


26,665


26,323


25,958


24,245


14,266





117,457Operating leases


44,154


35,833


25,552


18,734


13,413


27,727


165,413Capital leases


927


750


701


663


618


2,287


5,946Other long-term obligations(2)


11,429


7,744


4,689


2,909


2,909


16,492


46,172Total contractual cash obligations

$
94,257

$
81,592

$
67,373

$
334,125

$
231,781

$
46,506

$
855,634


(1)Interest
projections were based on the assumptions that the future rate will remain at the current rate of 4%, which is the Company's estimate for such
period based on current and projected LIBOR rates.(2)Other
long-term obligations include commitments under our SERP plan in addition to IT and telephone contracts. Refer to Note K to our
Consolidated Financial Statements contained herein elsewhere in this Annual Report on Form 10-K for additional disclosure on the SERP plan.


The
carrying value of the Company's long-term debt, excluding the Senior Notes, approximates fair value based on rates currently available to the Company for debt with similar terms and
remaining maturities. The fair value of the Senior Notes, at December 31, 2012, was $211.5 million, as compared to the carrying value of $200.0 million at that date. The fair
values of the Senior Notes were based on the quoted market price at December 31, 2012.

Off-Balance Sheet Arrangements

Our wholly-owned subsidiary, IN, Inc., is party to a non-binding purchase agreement under which it purchases assembled WalkAide
system kits. As of December 31, 2012, IN, Inc. had outstanding purchase commitments of approximately $0.5 million, which we expect to be fulfilled over the next three months.

Dividends

We have never paid cash dividends on our common stock and intend to continue this policy for the foreseeable future. We plan to retain earnings for
use in our business. The terms of our credit agreements and certain other agreements limit the payment of dividends on our common stock and such agreements are expected to continue to limit the
payment of dividends in the future.

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Table of Contents

Supplemental Executive Retirement Plan

In 2004, we implemented an unfunded noncontributory defined benefit plan that covers certain of our senior executives. We have engaged an actuary to
calculate the benefit obligation and net benefits cost as of December 31, 2012, and 2011 and have utilized such to establish our benefit obligation liability.

The
following weighted average assumptions were used to determine the benefit obligation and net benefit cost at December 31:

2012

2011Discount rate


3.25
%

3.90
%Average rate of increase in compensation


3.00
%

3.00
%


The
discount rate at December 31, 2012 of 3.25% decreased 65 basis points compared to the discount rate used at December 31, 2011 due to changes in the pension discount curve rate
available on the open market at December 31, 2012. The average rate of increase in compensation was 3.00% at December 31, 2012 and 2011.

Future
payments under the supplemental executive retirement plan as of December 31, 2012 are as follows:

(In thousands)2013

$
1,2472014


1,5782015


1,5782016


1,5782017


1,578Thereafter


14,818$
22,377


Selected Operating Data

The following table sets forth selected operating data as of the end of the years indicated:

2012

2011

2010

2009

2008Patient care clinics


748


701


678


677


668Revenue generating O&P clinicians


1,269


1,191


1,156


1,127


1,070Number of states (including D.C.)


46


46


46


46


46Same center net sales growth(1)


4.0
%

2.6
%

4.6
%

4.9
%

7.3
%


(1)Represents
the aggregate increase or decrease of our patient care clinics' sales in the current year compared to the preceding year. Patient care clinics
that have been owned by the Company for at least one full year are included in the computation.


Market Risk

We are exposed to the market risk that is associated with changes in interest rates. $293.3 million of our $520.6 million total debt
outstanding as of December 31, 2012 is subject to variable interest rates (see Item 7A below).

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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 clinics, our ability to enter into and derive benefits from managed-care
contracts, our ability to successfully attract and retain qualified O&P clinicians, federal laws governing the health-care industry, uncertainties inherent in investigations and legal
proceedings, governmental policies affecting O&P operations and other risks and uncertainties generally affecting the health-care industry. Readers are cautioned not to put undue reliance
on forward-looking statements. Refer to risk factors disclosed in Part I, Item 1A of this filing for discussion of risks and uncertainties. We disclaim any intent or obligation to
publicly update these forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have existing obligations relating to our 71/8% Senior Notes, Term Loan Facility, and Seller Notes. As of December 31, 2012,
we have cash flow exposure to the changing interest rates on $293.3 million of the Term Loan Facility. The other obligations have fixed interest rates.

Presented
below is an analysis of our financial instruments as of December 31, 2012 that is sensitive to changes in interest rates. The table demonstrates the changes in estimated annual cash
flow related to the outstanding balance under the Term Loan Facility, calculated for an instantaneous parallel shift in interest rates, plus or minus 50 basis points ("BPS"), 100 BPS, and 150 BPS. The
LIBOR floor pursuant to the Term Loans under the Credit Agreement prevents the rate from dropping below 4.0%. As of December 31, 2012, the current LIBOR rate is below the LIBOR floor;
therefore, our interest rate on this loan is fixed until Libor rises above the 1% floor. Any further changes in the LIBOR rate would not change annual cash flows related to the outstanding balance on
the Term Loan Facility until LIBOR rises above the 1% floor.

Annual Interest Expense
Given an Interest Rate Decrease
of X Basis Points

No Change in
Interest
Rates

Annual Interest Expense
Given an Interest Rate Increase
of X Basis PointsCash Flow Risk

(150 BPS)

(100 BPS)

(50 BPS)



50 BPS

100 BPS

150 BPS(In thousands)Term Loan

$
11,732

$
11,732

$
11,732

$
11,732

$
11,732

$
12,348

$
13,814


ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements and schedules required hereunder and contained herein are listed under Item 15(a) below and included
beginning at page F-4 of this Annual Report on Form 10-K.

Quarterly Financial Data

Quarter Ended (Unaudited)2012

Mar 31

Jun 30

Sep 30

Dec 31(Dollars in thousands, except per share amounts)Net Sales

$
218,091

$
251,754

$
243,503

$
272,202Income from operations

$
21,737

$
35,726

$
35,373

$
36,502Net Income

$
8,636

$
17,386

$
17,344

$
20,326Basic per Common Share Net Income

$
0.25

$
0.51

$
0.50

$
0.59Diluted per Common Share Net Income

$
0.25

$
0.50

$
0.50

$
0.58


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Quarter Ended (Unaudited)2011

Mar 31

Jun 30

Sep 30

Dec 31(Dollars in thousands, except per share amounts)Net Sales

$
200,439

$
234,751

$
235,261

$
248,088Income from operations

$
19,293

$
32,882

$
31,242

$
32,537Net Income

$
6,752

$
15,431

$
15,412

$
16,882Basic per Common Share Net Income

$
0.20

$
0.46

$
0.46

$
0.50Diluted per Common Share Net Income

$
0.20

$
0.45

$
0.45

$
0.49


The
following table summarizes our unaudited quarterly operating results for each of 2012 and 2011. For a discussion of the restatement and the correction of errors, see Revision of Previously
Reported Consolidated Income Statements in Note B of the financial statements. The impact of the error on the Consolidated Statements of Income and Comprehensive Income for the quarters is
shown in the table below:

(Dollars in thousands, except per share amounts)

Three months ended
March 31, 2012

Three months ended
March 31, 2011

Three months ended
December 31, 2011Increase/(decrease)

As
Reported

Adjustment

As
Restated

As
Reported

Adjustment

As
Restated

As
Reported

Adjustment

As
RevisedIncome from operations


19,956


1,781


21,737


18,384


909


19,293


34,318


(1,781
)

32,537Net income


7,555


1,081


8,636


6,213


539


6,752


17,963


(1,081
)

16,882Diluted Earnings per share

$
0.22

$
0.03

$
0.25

$
0.18

$
0.02

$
0.20

$
0.52

$
(0.03
)
$
0.49


For
a discussion of material events affecting performance in each quarter, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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

None.

ITEM 9A.CONTROLS AND PROCEDURES

Management's Restatement of Previously Issued Financial Statements

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

Disclosure Controls and Procedures

Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in our reports
filed or submitted to the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is
accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure. Based on an evaluation of the Company's disclosure controls and procedures conducted by our Chief Executive Officer and Chief

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Table of Contents

Financial
Officer, such officers concluded that our disclosure controls and procedures were not effective as of December 31, 2012 because of the material weakness described in "Management's
Report on Internal Control Over Financial Reporting" in Item 8.

Internal Control Over Financial Reporting

(a)Management's Annual Report on Internal Control Over Financial Reporting

In
accordance with Item 308(a) of the Commission's Regulation S-K, the report of management on our internal control over financial reporting is set forth immediately
preceding our financial statements included in this Annual Report on Form 10-K.

(b)Report of the Registrant's Independent Registered Public Accounting Firm

The
effectiveness of our internal control over financial reporting as of December 31, 2012 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting
firm, as stated in their report included in this Annual Report on Form 10-K.

(c)Changes 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 our Chief Executive Officer and Chief Financial Officer,
determined that there was no change in our internal control over financial reporting that occurred during the fourth quarter ended December 31, 2012, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.

Plan for Remediation of Material Weakness

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

ITEM 9B.OTHER INFORMATION

None.

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Table of Contents

PART III

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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

ITEM 11.EXECUTIVE COMPENSATION

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

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

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

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

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

ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES

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

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Table of Contents

PART IV

ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULE

(a)Financial Statements and Financial Statement Schedule:



Hanger, Inc.Management's Annual Report on Internal Control over Financial ReportingReport of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2012 and 2011Consolidated Statements of Income and Comprehensive Income for the Three Years Ended December 31, 2012Consolidated Statements of Changes in Shareholders' Equity for the Three Years Ended December 31, 2012Consolidated Statements of Cash Flows for the Three Years Ended December 31, 2012Notes to Consolidated Financial Statements




Schedule IIValuation and Qualifying AccountsAll other schedules are omitted either because they are not applicable or required, or because the required information is included in the financial statements or notes thereto.




See
Part (b) of this Item 15.

EXHIBIT INDEX

Exhibit No.

Document3.1

Restated Certificate of Incorporation of Hanger, Inc., dated August 27, 2012. (Incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the Registrant on
August 27, 2012).3.2

Amended and Restated By-Laws of Hanger Orthopedic Group, Inc., as amended effective February 2, 2012. (Incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the
Registrant on February 6, 2012).4.1

Indenture, dated November 2, 2010, by and among the Hanger Orthopedic Group, Inc., each of the Subsidiary Guarantors party thereto and Wilmington Trust Company, as trustee. (Incorporated herein by reference
to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed on October 29, 2010).4.2

First Supplemental Indenture, dated December 13, 2010, by and among the Hanger Orthopedic Group, Inc., each of the Subsidiary Guarantors party thereto and Wilmington Trust Company, as trustee. (Incorporated
herein by reference to Exhibit 4.3 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2010).


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Table of Contents

Exhibit No.

Document4.3

Second Supplemental Indenture, dated February 15, 2011, by and among the Hanger Orthopedic Group, Inc., Accelerated Care Plus Corp., ACP Medical Supply Corporation, Liberty Health Services, LLC and
Wilmington Trust Company, as trustee. (Incorporated herein by reference to Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011).10.1

Amended and Restated 2002 Stock Incentive Plan, as amended through May 10, 2007. (Incorporated herein by reference to Appendix 1 to the Registrant's Proxy Statement, dated April 10, 2007, relating to
the Registrant's Annual Meeting of Stockholders held on May 10, 2007).*10.2

Amended and Restated 2003 Non-Employee Directors' Stock Incentive Plan, as amended through May 10, 2007. (Incorporated herein by reference to Appendix 2 to the Registrant's Proxy Statement, dated
April 10, 2007, relating to the Registrant's Annual Meeting of Stockholders held on May 10, 2007).10.3

Form of Stock Option Agreement (Non-Executive Employees), Stock Option Agreement (Executive Employees), Restricted Stock Agreement (Non-Executive Employees) and Restricted Stock Agreement (Executive Employees).
(Incorporated herein by reference to Exhibits 10.1, 10.2, 10.3 and 10.4, respectively, to the Registrant's Current Report on Form 8-K filed on February 24, 2005).*10.4

Supplemental Executive Retirement Plan, as amended and restated effective January 1, 2011 (Incorporated herein by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2010).*10.8

Credit Agreement, dated as of December 1, 2010, among the Company and the lenders and agents party thereto. (Incorporated herein by reference to Exhibit 4.1 to the Registrant's Current Report on
Form 8-K filed on December 1, 2010).10.9

Guarantee and Collateral Agreement, dated as of December 1, 2010, made by the Registrant, as Borrower, and certain of its subsidiaries, in favor of Bank of America, N/A., as Administrative Agent. (Incorporated
herein by reference to Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2010).10.10

Amendment No. 1, dated as of March 11, 2011, to the Credit Agreement, dated as of December 1, 2010, among the Company and the lenders and gents party hereto. (Incorporated by reference to
Exhibit 4.1 to the Current Report on Form 8-K filed by the Registrant on March 11, 2011).10.11

Fourth Amended and Restated Employment Agreement, effective as of January 1, 2012, by and between George E. McHenry and the Company. (Incorporated herein by reference to Exhibit 10.3 to the Registrant's
Current Report on Form 8-K filed on January 27, 2012).*10.12

Fourth Amended and Restated Employment Agreement, effective as of January 1, 2012, by and between Richmond L. Taylor and the Company. (Incorporated herein by reference to Exhibit 10.4 to the Registrant's
Current Report on Form 8-K filed on January 27, 2012).*10.13

Hanger Orthopedic Group, Inc. 2010 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
2010).*10.14

Form of Restricted Stock Agreement for Non-Employee Directors (incorporated herein by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
2010).*


45

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Table of Contents

Exhibit No.

Document10.15

Form of Restricted Stock Agreement for Executives (incorporated herein by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2010).*10.16

Form of Restricted Stock Agreement for Employees Executives (incorporated herein by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
2010).*10.17

Form of Non-Employee Director Non-Qualified Stock Option Agreement (incorporated herein by reference to Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
2010).*10.18

Form of Executive Non-Qualified Stock Option Agreement (incorporated herein by reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
2010).*10.19

Form of Non-Qualified Stock Option Agreement (incorporated herein by reference to Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2010).*10.20

Securities Purchase and Lock-Up Agreement, dated October 18, 2010, by and between Hanger Orthopedic Group, Inc. and John B. Breach and Schedule of Substantially Identical Securities Purchase and Lock-Up
Agreements Omitted Pursuant to Instruction 2 to Item 601 of Regulation S-K (Incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on October 18, 2010).10.21

Amended and Restated Employment Agreement, as of January 1, 2012 by and between Vinit K. Asar and the Company. (Incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on
Form 8-K filed on January 27, 2012).*10.22

Amended and Restated Employment Agreement, dated as of March 30, 2012, between Thomas E. Hartman and Hanger Prosthetics & Orthotics, Inc. (Filed herewith).*10.23

Second Amended and Restated Employment Agreement, dated August 27, 2012, by and between Vinit K. Asar and Hanger, Inc. (Incorporated herein by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed by the Registrant on August 27, 2012).*10.24

Amended and Restated Employment Agreement, dated as of February 25, 2013, by and between Kenneth W. Wilson and Southern Prosthetic Supply, Inc. (Filed herewith).*21

List of Subsidiaries of the Registrant. (Filed herewith).23.1

Consent of PricewaterhouseCoopers LLP. (Filed herewith).31.1

Written Statement of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith).31.2

Written Statement of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith).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. (Filed
herewith).


46

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Table of Contents

Exhibit No.

Document101

The following financial information from the Company's Annual Report on Form 10-K, for the period ended December 31, 2012, formatted in eXtensible Business Reporting Language: (i) Consolidated Balance
Sheets, (ii) Consolidated Statements of Income and Comprehensive Income, (iii) Consolidated Statements of Shareholders' Equity, (iv) Consolidated Statements of Cash Flows, (v) Notes to Consolidated Financial Statements(1)


*Management
contract or compensatory plan


47

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Table of Contents

SIGNATURES

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

HANGER, INC.Dated: March 18, 2013

By:

/s/ VINIT K. ASAR Vinit K. Asar Chief Executive Officer


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

Dated: March 18, 2013

/s/ VINIT K. ASAR Vinit K. Asar
Chief Executive Officer and Director
(Principal Executive Officer)Dated: March 18, 2013

/s/ GEORGE E. MCHENRY George E. McHenry
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)Dated: March 18, 2013

/s/ IVAN R. SABEL, CPO Ivan R. Sabel, CPO
DirectorDated: March 18, 2013

/s/ THOMAS P. COOPER, M.D. Thomas P. Cooper, M.D.
DirectorDated: March 18, 2013

/s/ CYNTHIA L. FELDMANN Cynthia L. Feldmann
DirectorDated: March 18, 2013

/s/ ERIC GREEN Eric Green
Director


48

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Table of Contents

Dated: March 18, 2013

/s/ STEPHEN HARE Stephen Hare
DirectorDated: March 18, 2013

/s/ ISAAC KAUFMAN Isaac Kaufman
DirectorDated: March 18, 2013

/s/ THOMAS F. KIRK Thomas F. Kirk
DirectorDated: March 18, 2013

/s/ PETER NEFF Peter Neff
DirectorDated: March 18, 2013

/s/ PATRICIA B. SHRADER Patricia B. Shrader
Director


49

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Table of Contents



Hanger, Inc.Management's Annual Report on Internal Control over Financial Reporting

F-1INDEX TO FINANCIAL STATEMENTSReport of Independent Registered Public Accounting Firm

F-2Consolidated Balance Sheets as of December 31, 2012 and 2011

F-4Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31,
2012

F-6Consolidated Statements of Changes in Shareholders' Equity for the Three Years Ended December 31,
2012

F-7Consolidated Statements of Cash Flows for the Years Ended December 31, 2012

F-8Notes to Consolidated Financial Statements

F-9Financial Statement ScheduleSchedule IIValuation and Qualifying Accounts

S-1


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Table of Contents



Management's Annual Report on Internal Control Over Financial Reporting

The following sets forth Item 308(a) of the Securities and Exchange Commission's Regulation S-K, the annual
report of management of Hanger, Inc. (the "Company") on the Company's internal control over financial reporting.

1.     Management
of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Rule 13a-15(f) of the
Securities Exchange Act of 1934, as amended defined internal control over financial reporting as a process designed by, or under the supervision of, the Company's Chief Executive Officer and Chief
Financial Officer, and effected by the Company's Board of Directors, management and other personnel, 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 and includes those policies and procedures
that:



2.     Management
of the Company, in accordance with Rule 13a-15(c) under the Securities Exchange Act of 1934 and with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's internal control over financial reporting as of December 31, 2012. The framework on which
management's evaluation of the Company's internal control over financial reporting is based on the "Internal ControlIntegrated Framework" by the Committee of Sponsoring Organizations
("COSO") of the Treadway Commission. Based on the evaluation performed, we identified the material weakness described below in the Company's internal control over financial reporting as of
December 31, 2012. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a
material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

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

4.     Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

5.     The
effectiveness of our internal control over financial reporting as of December 31, 2012 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which appears herein.

F-1

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Table of Contents

Report of Independent Registered Public Accounting Firm

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

In
our opinion, the consolidated statements listed in the index appearing under Item 15(a)(1), present fairly, in all material respects, the financial position of
Hanger, Inc. and its subsidiaries at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2), presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in
our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because a
material weakness in internal control over financial reporting related to the valuation of work-in-process inventory existed as of that date. A material weakness is a
deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial
statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in the accompanying Management's Annual Report on Internal Control Over Financial
Reporting. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the 2012 consolidated financial statements, and
our opinion regarding the effectiveness of the Company's internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company's management is
responsible for these financial statements and Financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in management's report referred to above. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on
the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.

A
company's internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

F-2

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Table of Contents

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/PricewaterhouseCoopers LLP
Austin, Texas
March 18, 2013

F-3

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Table of Contents



HANGER, INC.

CONSOLIDATED BALANCE SHEETS

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

December 31,2012

2011ASSETSCURRENT ASSETSCash and cash equivalents

$
19,211

$
42,896Restricted Cash


3,120


Accounts receivable, less allowance for doubtful accounts of $21,379 and $22,028 in 2012 and 2011, respectively


165,668


138,826Inventories


127,295


112,305Prepaid expenses, other current assets and income taxes receivable


15,673


17,015Deferred income taxes


27,685


20,648Total current assets


358,652


331,690PROPERTY, PLANT AND EQUIPMENTLand


794


794Buildings


8,896


4,400Furniture and fixtures


19,582


17,281Machinery and equipment


60,364


56,137Equipment leased to third parties under operating leases


34,827


33,830Leasehold improvements


74,615


65,245Computer and software


98,186


81,775Total property, plant and equipment, gross


297,264


259,462Less accumulated depreciation and amortization


182,803


154,690Total property, plant and equipment, net


114,461


104,772INTANGIBLE ASSETSGoodwill


674,774


609,484Patents and other intangible assets, less accumulated amortization of $20,643 and $15,160 in 2012 and 2011, respectively


64,281


54,894Total intangible assets, net


739,055


664,378OTHER ASSETSDebt issuance costs, net


14,033


17,485Other assets


11,126


8,394Total other assets


25,159


25,879TOTAL ASSETS

$
1,237,327

$
1,126,719




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

F-4

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Table of Contents

HANGER, INC.

CONSOLIDATED BALANCE SHEETS (Continued)

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

December 31,2012

2011LIABILITIES AND SHAREHOLDERS' EQUITYCURRENT LIABILITIESCurrent portion of long-term debt

$
11,082

$
8,065Accounts payable


28,923


26,561Accrued expenses


22,357


17,547Accrued interest payable


3,041


3,040Accrued compensation related costs


41,784


35,829Total current liabilities


107,187


91,042LONG-TERM LIABILITIESLong-term debt, less current portion


509,564


499,968Deferred income taxes


77,730


74,309Other liabilities


39,752


32,818Total liabilities


734,233


698,137COMMITMENTS AND CONTINGENCIES (Note H)SHAREHOLDERS' EQUITYCommon stock, $.01 par value; 60,000,000 shares authorized, 35,617,884 shares and 35,127,230 shares issued and outstanding in 2012 and 2011,
respectively


356


351Additional paid-in capital


280,084


268,535Accumulated other comprehensive loss


(1,919
)

(1,185
)Retained earnings


225,229


161,537503,750


429,238Treasury stock at cost (141,154 shares)


(656
)

(656
)Total shareholders' equity


503,094


428,582TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$
1,237,327

$
1,126,719




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

F-5

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Table of Contents



HANGER, INC.        CONSOLIDATED STATEMENTS OF INCOME        AND COMPREHENSIVE INCOME        For the Years Ended December 31,    
(Dollars in thousands, except share and per share amounts)

2012

2011

2010Net sales

$
985,550

$
918,539

$
817,379Material costs


296,193


270,210


248,667Personnel costs


335,328


321,529


282,417Other operating expenses


188,868


177,910


165,158Relocation expenses





1,185


16,444Acquisition expenses


1,171


781


5,414Depreciation and amortization


34,652


30,969


18,809Income from operations


129,338


115,955


80,470Interest expense, net


31,169


31,821


30,340Extinguishment of debt








13,985Loss from interest rate swap








1,610Income before taxes


98,169


84,134


34,535Provision for income taxes


34,477


29,657


13,639Net income

$
63,692

$
54,477

$
20,896Other comprehensive income (loss):Unrealized gain on interest rate swaps, net of taxes of $1,912

$


$


$
2,868Reclassification of net losses on auction rate securities from OCI to net income, net of taxes of $125








188Unrealized loss on Retirement Plan, net of taxes of $440, $546 and $177 for 2012, 2011 and 2010, respectively


(734
)

(906
)

(279
)Total other comprehensive income (loss)


(734
)

(906
)

2,777Comprehensive income

$
62,958

$
53,571

$
23,673Basic Per Common Share DataNet income

$
1.86

$
1.62

$
0.65Shares used to compute basic per common share amounts


34,282,591


33,544,813


32,238,401Diluted Per Common Share DataNet income

$
1.83

$
1.59

$
0.64Shares used to compute diluted per common share amounts


34,832,830


34,220,256


32,888,305




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

F-6

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Table of Contents



HANGER, INC.        CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY        For the Three Years Ended December 31, 2012        (Dollars
in thousands, except share and per share amounts)

Common
Shares

Common
Stock

Additional
Paid in
Capital

Accumulated
Other
Comprehensive
Loss

Retained
Earnings

Treasury
Stock

TotalBalance, December 31, 2009


32,992

$
330

$
233,111

$
(3,056
)
$
86,164

$
(656
)
$
315,893Net income














20,896





20,896Other comprehensive income











2,777








2,777Issuance of Common Stock in connection with the exercise of stock options


374


4


5,023











5,027Proceeds from sale of stock


488


5


7,351











7,356Forfeiture of restricted stock units


(33
)
















Issuance of restricted stock units


531


5


(5
)










Stock-based compensation expense








9,597











9,597Tax benefit associated with vesting of restricted stock units








2,342











2,342Balance, December 31, 2010


34,352


344


257,419


(279
)

107,060


(656
)

363,888Net income














54,477





54,477Other comprehensive loss











(906
)







(906
)Issuance of Common Stock in connection with the exercise of stock options


417


4


2,676











2,680Forfeiture of restricted stock units


(63
)

(1
)

1











Issuance of restricted stock units


548


5


(5
)










Purchase and retirement of common stock


(127
)

(1
)

(2,106
)










(2,107
)Stock-based compensation expense








8,088











8,088Tax benefit associated with vesting of restricted stock units








2,462











2,462Balance, December 31, 2011


35,127


351


268,535


(1,185
)

161,537


(656
)

428,582Net income














63,692





63,692Other comprehensive loss











(734
)







(734
)Issuance of Common Stock in connection with the exercise of stock options


239


3


3,557











3,560Forfeiture of restricted stock units


(231
)

(2
)

2











Issuance of restricted stock units


532


5


(5
)










Purchase and retirement of common stock


(49
)

(1
)

(1,349
)










(1,350
)Stock-based compensation expense








8,061











8,061Tax benefit associated with vesting of restricted stock units








1,283











1,283Balance, December 31, 2012


35,618

$
356

$
280,084

$
(1,919
)
$
225,229

$
(656
)
$
503,094




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

F-7

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HANGER, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS        For the Years Ended December 31,        (Dollars in thousands)

2012

2011

2010Cash flows from operating activities:Net income

$
63,692

$
54,477

$
20,896Adjustments to reconcile net income to net cash provided by operating activities:Extinguishment of debt








13,985Loss (gain) on interest rate swap and disposal of auction rate securities








1,798Loss on disposals of assets


64


7


828Reduction of seller notes and earnouts


(993
)

(541
)

Provision for doubtful accounts


19,773


24,837


20,276Provision (benefit) for deferred income taxes


(4,303
)

8,439


752Depreciation and amortization


34,652


30,969


18,809Amortization of debt issuance costs


3,452


3,334


1,893Compensation expense on stock options and restricted stock


8,061


8,088


9,596Changes in operating assets and liabilities, net of effects of acquired companies:Accounts receivable


(40,443
)

(42,024
)

(31,041
)Inventories


(12,827
)

(14,072
)

(4,522
)Prepaid expenses, other current assets, and income taxes


3,867


796


(9,590
)Accounts payable


(2,114
)

(5,902
)

(190
)Accrued expenses, accrued interest payable


3,501


(1,424
)

5,299Accrued compensation related costs


4,348


(7,404
)

5,599Other


589


2,224


(188
)Net cash provided by operating activities


81,319


61,804


54,200Cash flows from investing activities:Purchase of property, plant and equipment (net of acquisitions)


(29,492
)

(25,300
)

(30,593
)Purchase of equipment leased to third parties under operating leases


(3,671
)

(3,374
)

Acquisitions and contingent considerations (net of cash acquired)


(62,500
)

(14,842
)

(162,250
)Restricted cash


(3,120
)




Proceeds from sale of marketable securities








6,495Purchase of company-owned life insurance investment


(2,000
)

(4,000
)

Proceeds from sale of property, plant and equipment


1,732


646


373Net cash used in investing activities


(99,051
)

(46,870
)

(185,975
)Cash flows from financing activities:Borrowings under revolving credit agreement





10,000


Repayments under revolving credit agreement





(10,000
)

Repayment of term loan


(3,700
)

(3,000
)

(221,956
)Scheduled repayment of seller's notes


(5,255
)

(4,151
)

(3,810
)Repayment of capital lease obligations


(713
)




Repayment of senior notes due 2014








(184,831
)Proceeds on senior notes due 2018








200,000Proceeds on term loan








300,000Deferred financing costs





(4,230
)

(16,976
)Repayment of line of credit








(3,628
)Excess tax benefit from stock-based compensation


1,505


2,462


2,342Proceeds from issuance of common stock


3,560


2,680


12,384Purchase and retirement of common stock


(1,350
)

(2,107
)

Net cash (used in) provided by financing activities


(5,953
)

(8,346
)

83,525Increase (decrease) in cash and cash equivalents


(23,685
)

6,588


(48,250
)Cash and cash equivalents, at beginning of year


42,896


36,308


84,558Cash and cash equivalents, at end of year

$
19,211

$
42,896

$
36,308


F-8

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HANGER, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE ATHE COMPANY

The goal of Hanger, Inc. (the "Company") is to be the world's premier provider of services and products that enhance human physical capabilities. The Company provides orthotic and prosthetic
("O&P") patient care services, distributes O&P devices and components, manages O&P networks, and provides therapeutic solutions to the broader post-acute market. Through its subsidiary,
Hanger Prosthetics and Orthotics, Inc., which the Company refers to as "Hanger Clinic," the Company is the largest owner and operator of orthotic and prosthetic patient care clinics in the
United States and, through its distribution subsidiary, Southern Prosthetic Supply ("SPS"), one of the largest distributors of O&P products in the United States. The Company operates in excess of 740
O&P patient care clinics located in 45 states and the District of Columbia and six strategically located distribution facilities. In addition to providing O&P services and products the Company,
through its subsidiary, Linkia LLC ("Linkia"), manages an O&P provider network and develops programs to manage all aspects of O&P patient care for insurance companies. The Company provides
therapeutic solutions through its subsidiaries Innovative Neurotronics and Accelerated Care Plus Corp. Innovative Neurotronics ("IN, Inc.") introduces emerging neuromuscular technologies
developed through independent research in a collaborative effort with industry suppliers worldwide. Accelerated Care Plus Corp. ("ACP") is a developer of specialized rehabilitation technologies and a
leading provider of evidence-based clinical programs for post-acute rehabilitation serving more than 4,550 long-term care facilities and other sub-acute
rehabilitation providers throughout the U.S.

NOTE BSIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Revision of Previously Reported Consolidated Financial Information

During the fourth quarter of 2012, the Company identified adjustments necessary to correct prior periods for the overstatement of the value of
work-in-process inventory at December 31, 2011 and 2010. The Company assessed the materiality of the errors on previously reported periods and concluded the impact was not material to any prior
annual consolidated financial statements. Management, however, deemed the impact of this error on the consolidated financial statements for the three months ended March 31, 2012 and 2011 to be
material and will restate the first quarter 2012 and 2011 financial results. These errors had no impact on operating cash flows for any of the periods. During 2012, 2011 and 2010, the only interim
periods impacted by this error were the first and fourth quarters. Accordingly, the years ended December 31, 2011 and 2010 have been revised. The impact of the error on the Consolidated Balance
Sheets and Statements of Income and Comprehensive Income for the

F-9

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE BSIGNIFICANT ACCOUNTING POLICIES (Continued)

years
ended December 31, 2011 and 2010 is shown in the table below (in 000's). The impact of the errors are included in the results of the Patient Care segment in Note O.

2011

2010(Dollars in thousands, except share and per share amounts)

As Previously
Reported

As
Revised

As Previously
Reported

As
RevisedInventory

$
114,086

$
112,305

$
98,290

$
97,381Accrued expenses (taxes)


18,247


17,547


20,796


20,426Material costs

$
267,677

$
270,210

$
247,565

$
248,667Personnel Costs

$
322,765

$
321,529

$
284,095

$
282,417Other Operating expenses

$
178,335

$
177,910

$
163,673

$
165,158Income from operations

$
116,827

$
115,955

$
81,379

$
80,470Income before taxes

$
85,006

$
84,134

$
35,444

$
34,535Provision for income taxes

$
29,987

$
29,657

$
14,009

$
13,639Net income

$
55,019

$
54,477

$
21,435

$
20,896Basic Per Common Share Net Income

$
1.64

$
1.62

$
0.66

$
0.65Diluted Per Common Share Net Income

$
1.61

$
1.59

$
0.65

$
0.64


F-10

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE BSIGNIFICANT ACCOUNTING POLICIES (Continued)

Use of Estimates

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

Cash and Cash Equivalents

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

Restricted Cash

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

Credit Risk

The Company primarily provides O&P devices and services and products throughout the United States of America and is reimbursed by the patients'
third-party insurers, governmentally funded health insurance programs, and in the case of its Distribution segment from independent O&P providers. The Company also provides advanced rehabilitation
technology and clinical programs to skilled nursing facilities in the United States primarily through operating leases. The Company performs ongoing credit evaluations of its customers. Accounts
receivable are not collateralized. The ability of the Company's debtors to meet their obligations is dependent upon their financial stability which could be affected by future legislation and
regulatory actions. Additionally, the
Company maintains reserves for potential losses from these receivables that historically have been within management's expectations.

Inventories

Inventories in the Patient Care segment consisting principally of raw materials and work-in-process, which amounted to
$96.6 million and $81.0 million as of December 31, 2012 and 2011, respectively, are valued based on the gross profit method which approximates lower of cost or market using the
first-in first-out method. The Company applies the gross profit method on a patient care clinic basis in this segment's inventory to determine ending inventory at the end of
each interim period except on October 31st, which is the date of our Physical inventory. The annual physical inventory for this segment values the inventory at lower of cost or
market using the first-in first-out method and includes work-in-process consisting of materials, labor and overhead which is valued based on established
standards for the stage of completion of each custom order. Adjustments to reconcile the physical inventory to our books are treated as changes in accounting estimates and are recorded in the fourth
quarter. The Company recorded fourth quarter adjustments of a decrease of $0.5 million, an increase of $2.3 million and a decrease of $1.0 million to inventory as of
October 31, 2012, 2011 and 2010, respectively. The October 31st inventory is subsequently adjusted during interim periods to apply the gross profit method described
above.

F-11

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE BSIGNIFICANT ACCOUNTING POLICIES (Continued)

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

Fair Value Measurements

The Company follows the authoritative guidance for financial assets and liabilities, which establishes a framework for measuring fair value and
requires enhanced disclosures about fair value measurements. The authoritative guidance requires disclosure about how fair value is
determined for assets and liabilities and establishes a hierarchy by which these assets and liabilities must be categorized, based on significant levels of inputs as follows:

Level 1

unadjusted quoted prices for identical assets or liabilities in active markets accessible by the CompanyLevel 2

inputs that are observable in the marketplace other than those inputs classified as Level 1Level 3

inputs that are unobservable in the marketplace and significant to the valuation


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.

Financial Instruments

Assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 and 2011, are $11.0 million and $0,
respectively, and are comprised of cash equivalent money market investments. The money market investments are based on Level 1 observable market prices and are equivalent to one dollar.

The
carrying value of the Company's short-term financial instruments, such as receivables and payables, approximate their fair values based on the short-term maturities of
these instruments. The carrying value of the Company's Term Loan as of December 31 2012 and 2011, $293.3 million and $297.0, respectively, approximates fair value for debt with similar
terms and remaining maturities based on rates currently available to the Company and are considered Level 2 measurements. The fair value of the Senior Notes is based on a Level 1 quoted
market price, and was $211.5 million and $203.0 million as of December 31, 2012 and 2011, respectively, compared to the carrying value of $200.0 million and $200.0 million as of
those dates. Seller Notes recorded as a part of 2012 acquisitions, $21.9 million, were recorded at contractual carrying values, which are not based on observable rates and therefore represent
Level 3 measurements. The Company believes the carrying value of the Seller Notes approximate fair value for similar debt in all material respects.

Contingent
consideration recorded as a part of 2012 acquisitions was $2.7 million. Contingent consideration is recorded at fair value as of the date of the acquisition using Level 3
measurements.

Investments

Prior to December 2010, the Company's investments consisted of two auction rate securities ("ARS") totaling $7.5 million of par value;
$5.0 million was collateralized by Indiana Secondary Market Municipal Bond1998 ("Indiana ARS"), and $2.5 million was collateralized by Primus Financial

F-12

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE BSIGNIFICANT ACCOUNTING POLICIES (Continued)

Products
Subordinated Deferrable Interest Notes ("Primus ARS"). 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 attempt to sell via auction or continue to hold the securities at par. These securities were accounted for in accordance with authoritative
guidance for investments in debt and equity securities and were reported at fair value with unrealized gains and losses included in earnings.

In
May 2010, the Company sold its investment in the Primus ARS for $1.5 million. On July 1, 2010, the Company exercised its right to put the Indiana ARS back to UBS at par value of $5.0
million, resulting in a realized loss of $0.2 million. The $5.0 million proceeds were received on July 1, 2010. As part of the settlement, the Company closed out a
$3.6 million line of credit with UBS that the Company obtained as part of the buyback agreement originally executed in November 2008, with net cash proceeds of approximately
$1.4 million.

Interest Rate Swaps

Prior to December 2010, the Company utilized interest rate swaps to manage our exposure to interest rate risk associated with our variable rate
borrowings. On December 1, 2010, the Company was required to terminate the interest rate swaps due to refinancing of the credit facilities. The Company incurred a loss of $1.6 million,
which is recorded in loss/(gain) from interest rate swap on the Consolidated Statements of Income and Comprehensive Income.

Revenue Recognition

Revenues in the Company's patient care clinics are derived from the sale of O&P devices and the maintenance and repair of existing devices and are
recorded net of known contractual adjustments and discounts. The sale of O&P devices includes the design, fabrication, assembly, fitting and delivery of a wide range of braces, limbs and other
devices. Revenues from the sale of these devices are recorded when (i) acceptance by and delivery to the patient has occurred; (ii) persuasive evidence of an arrangement exists and there
are no further obligations to the patient; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured. Revenues from maintenance and repairs are
recognized when the service is provided. Revenues on the sale of O&P devices to customers by the Distribution segment are recorded upon the shipment of products, in accordance with the terms of the
invoice, net of merchandise returns. Discounted sales are recorded at net realizable value. Revenues in the Therapeutic Solutions segment are primarily derived from leasing rehabilitation technology
combined with clinical therapy programs and education and training. The revenue is recorded on a monthly basis according to terms of the contracts with our customers.

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

On
a quarterly basis, the Company evaluates cash collections, accounts receivable balances and write-off activity to assess the adequacy of the allowance for doubtful accounts.
Additionally, a company-wide evaluation of collectability of receivable balances older than 180 days is performed at least semi-annually, the results of which are used
in the next allowance analysis. In these detailed reviews, the account's net realizable value is estimated after considering the customer's payment history,

F-13

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE BSIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost less accumulated depreciation and amortization, with the exception of assets acquired through
acquisitions, which are initially recorded at fair value. Equipment acquired under capital leases is recorded at the lower of fair market value or the present value of the future minimum 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 Income and Comprehensive Income. Depreciation is computed for financial reporting purposes using the straight-line method over the estimated useful lives of the
related assets as follows:

Asset class

Estimated life
(in years)Furniture and fixtures

5Machinery and equipment

5Computers and software

5Buildings

10 - 40Assets under capital leases

Shorter of 10 or lease termLeasehold improvements

Shorter of 10 or lease termEquipment leased to third parties under operating leases

Up to 10


The
following table outlines the investment in equipment leased to third parties under operating leases:

(In thousands)Program equipment

$
34,827Less: Accumulated depreciation


(10,315
)Net book value at December 31, 2012

$
24,512


Depreciation
expense related to property, plant and equipment was approximately $29.2 million, $26.2 million, and $17.3 million for the years ended December 31, 2012, 2011, and
2010, respectively.

Repairs and Maintenance

Repair and maintenance costs are expensed as incurred. During the years ended December 31, 2012, 2011, and 2010, the Company incurred
$1.5 million, $1.6 million, and $1.5 million, respectively, in repair and maintenance costs.

Goodwill and Other Intangible Assets

The authoritative guidance for Accounting for Goodwill and Other Intangible Assets requires that purchased goodwill and indefinite-lived intangibles
not be amortized, but instead be tested for impairment at least annually or wherever facts or circumstances indicate potential impairment (the Company has selected October 1st as its
annual test date). The Company has the option to first assess

F-14

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE BSIGNIFICANT ACCOUNTING POLICIES (Continued)

qualitative
factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to
perform the two-step impairment test for goodwill and indefinite lived intangible assets. If the Company determines that a two-step impairment test is necessary or more efficient than a
qualitative approach, it measures the fair value of the Company's reporting units using any one of, or a combination of, income, market and cost approaches. The Company evaluated its intangible
assets, other than goodwill and the ACP trade name, and determined that all such assets have determinable lives.

Non-compete
agreements are recorded based on agreements entered into by the Company and are amortized, using the straight-line method, over their estimated term 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
20 years. The Company periodically evaluates the recoverability of intangible assets and takes into account events or circumstances that may warrant revised estimates of useful lives or that
indicate that impairment had occurred. Refer to Note D for further discussion.

Debt Issuance Costs

Debt issuance costs incurred in connection with the Company's long-term debt are amortized, on a straight-line basis, which
is not materially different from the effective interest method, through the maturity of the related debt instrument. Amortization of these costs is included in Interest Expense in the Consolidated
Statements of Income and Comprehensive Income.

Long-Lived Asset Impairment

The Company evaluates the carrying value of long-lived assets to be held and used whenever events or changes in circumstance indicate
that the carrying amount may not be recoverable. The carrying value of a long-lived asset group is not recoverable and is considered impaired if it exceeds the sum of the undiscounted cash
flows expected to result from the use and eventual disposition of the asset. The Company measures impairment as the amount by which the carrying value exceeds the fair market value. Fair market value
is determined primarily using the projected future cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a
similar
manner, except that fair market values are reduced for the cost to dispose. There were no long-lived asset impairments or indicators of impairment for the years ended December 31,
2012 or 2011.

Supplemental Executive Retirement Plan

Expense and liability balances associated with the Company's Supplemental Executive Retirement Plan are calculated based on certain assumptions
including benefits earned, discount rates, interest costs, mortality rates and other factors. Refer to Note K for further discussion.

Marketing

Marketing costs, including advertising, are expensed as incurred. The Company incurred $4.2 million, $3.9 million, and $4.3 million in
marketing costs during the years ended December 31, 2012, 2011, and 2010, respectively.

F-15

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE BSIGNIFICANT ACCOUNTING POLICIES (Continued)

Income Taxes

The Company recognizes deferred income tax liabilities and assets for the expected future tax consequences of events that have been included in the
financial statements or tax returns. Deferred income tax liabilities and assets are determined based on the difference between the financial statement and the tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected to reverse. The Company recognizes a valuation allowance on the deferred tax assets if it is more likely than not that
the assets will not be realized in future years. Significant accounting judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities.
The Company believes that its tax positions are consistent with applicable tax law, but certain positions may be challenged by taxing authorities. In the ordinary course of business, there are
transactions and calculations where the ultimate tax outcome is
uncertain. In addition, the Company is subject to periodic audits and examinations by the Internal Revenue Service and other state and local taxing authorities. Although the Company believes that its
estimates are reasonable, actual results could differ from these estimates.

Stock-Based Compensation

The Company issues restricted stock units of common stock under one active stock-based compensation plan. At December 31, 2012,
1.5 million shares of common stock were available for issuance under the Company's stock-based compensation plan. Shares of common stock issued under the stock-based compensation plan are
issued from the Company's authorized and unissued shares. Restricted stock units are granted at the fair market value of the Company's common stock on the grant date. Restricted stock units vest over
a period of time determined by the compensation plan, ranging from one to four years.

The
Company applies the fair value recognition provisions of the authoritative guidance for stock compensation, which require companies to measure and recognize compensation expense for all
stock-based payments at fair value.

Stock
compensation expense relates to restricted stock units, as all stock options are fully vested and all associated compensation expense has been recognized in prior years. The total value of the
restricted stock units 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 O.

Recently Adopted Accounting Guidance

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

F-16

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE BSIGNIFICANT ACCOUNTING POLICIES (Continued)

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

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

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

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

F-17

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE CSUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION

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

(In thousands)

2012

2011

2010Cash paid during the period for:Interest

$
27,362

$
27,799

$
27,758Income taxes


34,468


17,152


14,120Non-cash financing and investing activities:Purchase of property, plant, and equipment in accounts payable

$
1,525

$
810

$
2,660Unrealized loss on SERP (net of tax)


734


906


278Capital lease obligations


4,615


23


157Unrealized gain (loss) on interest rate swaps








1,514Earnouts payable on acquisitions


2,672


4,098


2,182Issuance of notes in connection with acquisitions


21,895


6,700


2,950Issuance of restricted stock units of common stock


5,996


12,754


9,325


NOTE DGOODWILL AND OTHER INTANGIBLE ASSETS

The Company completes its annual goodwill and indefinite lived intangible impairment analysis in the fourth quarter of each year. The Company determined that it has three reporting units to be
evaluated, which are the same as its reportable segments: (i) Patient Care; (ii) Distribution; and (iii) Therapeutic Solutions. The Company completed its annual goodwill and
indefinite lived intangible asset impairment in October 2012 and 2011 using a two-step approach, which did not result in an impairment as the fair value of the reporting units is
substantially in excess of the carrying value of the underlying assets. The fair value of the Company's reporting units was primarily determined based on the income approach and considered the market
and cost approach.

The
activity related to goodwill for the two years ended December 31, 2012 and 2011 is as follows:

(In thousands)

Patient
Care

Distribution

Therapeutic
Solutions

TotalBalance at December 31, 2010

$
456,232

$
38,388

$
96,079

$
590,699Additions due to acquisitions


17,192





851


18,043Contingent consideration(1)


742








742Balance at December 31, 2011

$
474,166

$
38,388

$
96,930

$
609,484Additions due to acquisitions


63,849





964


64,813Contingent consideration(1)


477








477Balance at December 31, 2012

$
538,492

$
38,388

$
97,894

$
674,774


(1)Contingent
consideration relates to acquisitions completed prior to the adoption of ASC 805.


F-18

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE DGOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

The
activity related to intangible assets for the two years ended December 31, 2012 and 2011 is as follows:

(In thousands)

Customer
Lists

Trade Name
ACP

Patents and
Other
Intangibles

TotalGross asset valueAs of December 31, 2010

$
32,447

$
9,070

$
25,262

$
66,779Write-offs and other adjustments








147


147Additions


2,436





692


3,128As of December 31, 2011


34,883


9,070


26,101


70,054Additions(1)


13,161





1,709


14,870As of December 31, 2012

$
48,044

$
9,070

$
27,810

$
84,924Accumulated AmortizationAs of December 31, 2010

$
(1,942
)
$


$
(8,458
)
$
(10,400
)Amortization expense


(2,706
)




(2,054
)

(4,760
)As of December 31, 2011


(4,648
)




(10,512
)

(15,160
)Amortization expense


(3,198
)




(2,285
)

(5,483
)As of December 31, 2012


(7,846
)




(12,797
)

(20,643
)Net book value

$
40,198

$
9,070

$
15,013

$
64,281


(1)The
weighted average life of the additions to customer lists, patents and other intangibles is 9.7 years.


The
$9.1 million ACP trade name has an indefinite life and is tested for recoverability in the annual impairment test. Estimated aggregate amortization expense for definite-lived intangible
assets for each of the five years ending December 31 and thereafter is as follows:

(In thousands)2013

$
6,7782014


6,7312015


6,6762016


5,1952017


4,720Thereafter


25,111$
55,211


F-19

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE EINVENTORIES

Inventories which are valued at the lower of cost or market, for the two years ended December 31, 2012 and 2011 are as follows:

(In thousands)

2012

2011Raw materials

$
41,372

$
39,121Work in process


56,931


43,954Finished goods


28,992


29,230$
127,295

$
112,305


NOTE FACQUISITIONS

In 2012, the Company acquired eighteen O&P companies, operating a total of 59 patient care clinics. The aggregate purchase price for these O&P businesses was $83.1 million, which consisted of
$60.1 million of cash on hand, $21.4 million of promissory notes and $1.6 million of contingent consideration payable within the next five years. The Company preliminarily
allocated the purchase price for 2012 acquisitions to the individual assets acquired and liabilities assumed. The Company's
valuations are subject to adjustment as additional information is obtained; however, these adjustments are not expected to be material. The excess of purchase price over the aggregate fair value was
recorded as goodwill. Contingent consideration is reported as accounts payable and other liabilities on the Company's Consolidated Balance Sheet. The Company recorded (i) approximately
$63.8 million of goodwill; (ii) $12.1 million of customer lists; (iii) $6.0 million in accounts receivable; and (iv) $1.2 million of other assets and
liabilities related to these acquisitions. The value of the goodwill from these acquisitions can be attributed to a number of business factors including, but not limited to, expected revenue and cash
flow growth in future years. The Company incurred $1.2 million in acquisition expenses, which were included in other operating expenses. The results of operations for these acquisitions are
included in the Company's results of operations from the date of acquisition. Pro forma results would not be materially different. Of the $63.8 million of goodwill recorded for the 2012
acquisitions, the Company intends to make an election to treat certain of these acquisitions as an asset acquisition for tax purposes resulting in $13.0 million of this amount being amortizable
for tax purposes.

In
2011 the Company acquired eight O&P companies, operating a total of 21 patient care clinics. The aggregate purchase price for these O&P businesses was $24.9 million, which consisted of $14.1
cash on hand, $6.7 million of promissory notes and $4.1 million of contingent consideration payable within the next four years. Contingent consideration is reported as accounts payable
and other liabilities on the Company's Consolidated Balance Sheet. The Company recorded (i) approximately $17.2 million of goodwill; (ii) $2.4 million of customer lists;
(iii) $3.0 million of accounts receivable; and (iv) $2.3 million of other assets and liabilities related to these acquisitions. The value of the goodwill from these
acquisitions can be attributed to a number of business factors including, but not limited to, expected revenue and cash flow growth in future years. The Company incurred $0.8 million in
acquisition expenses, which were included in other operating expenses. The results of operations for these acquisitions were included in the Company's results of operations from the date of
acquisition. Pro forma results would not be materially different. Of the $17.2 million of goodwill recorded for the 2011 acquisitions, the Company intends to make an election to treat certain
of these acquisitions as an

F-20

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE FACQUISITIONS (Continued)

asset
acquisition for tax purposes resulting in $14.0 million of this amount being amortizable for tax purposes.

On
December 1, 2010, the Company completed the acquisition of ACP for approximately $157.8 million in cash and incurred $5.4 million of costs to complete the transaction. These costs,
which were reflected as acquisition expenses on the consolidated financial statements, are comprised of $3.3 million in legal and advisor fees and $2.1 million in stock based compensation
related to the sale of stock to executives of ACP. The Company recorded: (i) approximately $96.9 million of goodwill, which is not amortizable for tax purposes;
(ii) $48.2 million of intangible assets; (iii) $32.5 million of fixed assets at fair value; (iv) $7.2 million of current assets;
(v) $6.4 million of current liabilities; and (vi) $20.4 million of deferred tax liabilities related to the ACP transaction. The value of the goodwill from this acquisition
can be attributed to a number of business factors including, but not limited to, expected revenue and cash flow growth in future years and the ability to provide services to a previously underserved
market. The Company identified intangible assets totaling $48.2 million comprised of: (i) $22.3 million of customer
relationships with a useful life of 14 years; (ii) $9.1 million related to the trade name which has an indefinite life; (iii) $8.1 million related to proprietary
treatment programs with a useful life of 15 years; (iv) $5.4 million of patented technology with a useful life of eight years; and (v) $3.3 million related to other
assets with a three to five year useful life. The results of operations for ACP are included in the Company's results of operations from the date of acquisition. Pro forma results would not be
materially different.

In
addition to ACP, the Company acquired five O&P companies in 2010, operating a total of six patient care clinics located in California, New York, Texas, and Utah. The aggregate purchase price for
these O&P businesses was $10.6 million, which consisted of $5.4 million of cash on hand, $3.0 million of promissory notes and $2.2 million of contingent considerations
payable within the next three years. Contingent consideration is reported as other liabilities on the Company's Consolidated Balance Sheet. The Company recorded approximately $9.2 million of
goodwill related to these acquisitions and the expenses incurred were included in other operating expenses. The results of operations for these acquisitions are included in the Company's results of
operations from the date of acquisition. Pro forma results would not be materially different. The goodwill related to the acquisitions is not amortizable for tax purposes.

In
connection with contingent consideration agreements with acquisitions completed prior to adoption of the revised authoritative guidance for business combinations becoming effective, the Company
made payments of $0.5 million, $0.7 million, and $1.3 million during the years ended December 31, 2012, 2011, and 2010, respectively. The Company has accounted for changes
in the estimates of these amounts as additional purchase price, resulting in an increase in goodwill. In connection with contingent consideration agreements with acquisitions completed subsequent to
adoption of the revised authoritative guidance, the Company made payments of $2.5 million in 2012, $1.5 million in 2011, and $0.4 million in 2010.

The
Company estimates that it may pay up to $6.3 million related to contingent consideration provisions of acquisitions in future periods.

F-21

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE GLONG-TERM DEBT

Long-term debt as of December 31 was as follows:

(In thousands)

2012

2011Revolving Credit Facility

$


$
Term Loan


293,300


297,00071/8% Senior Notes due 2018


200,000


200,000Subordinated 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 2.00% to 6.5%, maturing through November 2018


27,346


11,033520,646


508,033Less current portion


(11,082
)

(8,065
)$
509,564

$
499,968


Refinancing and Amendment

During the fourth quarter of 2010, the Company refinanced its senior debt through the issuance of $200.0 million of 71/8%
Senior Notes due 2018, a new $300.0 million Term Loan Facility which matures in 2016, and the establishment of a $100.0 million Revolving Credit Facility.
The Company recorded a $14.0 million charge related to the early extinguishment of the senior debt, comprised primarily of $9.8 million of premiums paid to debt holders and a
$4.2 million write-off of debt issuance costs and other fees. The proceeds of the refinancing were used for the following: (i) $184.8 million to retire the outstanding
101/4% Senior Notes due 2014 and related premiums and fees; (ii) $220.3 million to retire the outstanding balance under the existing Term Loan Facility;
(iii) $16.9 million to pay debt issuance costs; and (iv) $78.2 million to partially fund the purchase price for the acquisition of ACP.

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

Revolving Credit Facility

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

F-22

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE GLONG-TERM DEBT (Continued)

Facility.
The obligations under the Revolving Credit Facility are senior obligations, are guaranteed by the Company's subsidiaries, and are secured by a first priority perfected interest in the equity
interests of the Company's subsidiaries, all of the Company's assets, and all the assets of the Company's subsidiaries.

Term Loan Facility

The $300.0 million Term Loan Facility matures on December 1, 2016 and requires quarterly principal payments. From time to time,
mandatory prepayments may be required as a result of excess free cash flow as defined in the Credit Agreement, certain additional debt incurrences and asset sales, or other events as defined in the
Credit Agreement. During 2012, the Company made a mandatory prepayment on its Term Loan Facility of $700,000. The Term Loan Facility bears interest at LIBOR plus 3.0%, or the applicable rate (as
defined in the Credit Agreement), and includes a 1.0% LIBOR floor. As of December 31, 2012, the interest rate on the Term Loan Facility was 4.0%. The obligations under the Term Loan Facility
are senior obligations, are guaranteed by the Company's subsidiaries, and are secured by a first priority perfected interest in the Company's subsidiaries' shares, all of the Company's assets, and all
the assets of the Company's subsidiaries.

71/8% Senior Notes

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

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

Subsidiary Guarantees

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

Debt Covenants

The terms of the Senior Notes, the Revolving Credit Facility, and the Term Loan Facility limit the Company's ability to, among other things, incur
additional indebtedness, create liens, pay dividends on or redeem capital stock, make certain investments, make restricted payments, make certain dispositions of assets, engage in transactions with
affiliates, engage in certain business activities and engage in

F-23

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE GLONG-TERM DEBT (Continued)

mergers,
consolidations and certain sales of assets. At December 31, 2012 and 2011, the Company was in compliance with all covenants under these debt agreements.

Maturities
of long-term debt at December 31, 2012 and the years thereafter are as follows:

(In thousands)2013

$
11,0822014


10,9422015


10,4732016


287,5742017


200,575Thereafter


$
520,646


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 agreed to purchase assembled WalkAide system kits. As of December 31, 2012, IN, Inc. had outstanding purchase commitments of approximately $0.5 million
that the Company expects to be fulfilled over the next three months.

Contingencies

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

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

Guarantees and Indemnifications

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

F-24

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE INET INCOME PER COMMON SHARE

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

(In thousands, except share and per share data)

2012

2011

2010Net income applicable to common stock

$
63,692

$
54,477

$
20,896Shares of common stock outstanding used to compute basic per common share amounts


34,282,591


33,544,813


32,238,401Effect of dilutive restricted stock units and options


550,239


675,443


649,904Shares used to compute diluted per common share amounts


34,832,830


34,220,256


32,888,305Basic income per share applicable to common stock

$
1.86

$
1.62

$
0.65Diluted income per share applicable to common stock

$
1.83

$
1.59

$
0.64


NOTE JINCOME TAXES

Components of income tax expense attributable to continuing operations are as follows:

(In thousands)

2012

2011

2010Current:Federal

$
32,394

$
18,976

$
10,766State


6,386


2,242


2,121Total Current


38,780


21,218


12,887Deferred:Federal


(3,273
)

6,242


384State


(1,030
)

2,197


368Total Deferred


(4,303
)

8,439


752Provision for income taxes

$
34,477

$
29,657

$
13,639


A
reconciliation of the federal statutory tax rate to the Company's effective tax rate is as follows:

2012

2011

2010Federal statutory tax rate


35.0
%

35.0
%

35.0
%Increase (decrease) in taxes resulting from:State income taxes (net of federal effect)


4.3


4.3


5.7Domestic manufacturing deduction


(2.4
)

(2.0
)

(3.0
)Adjustments to uncertain tax positions








(2.1
)Non-deductible acquisition costs








2.3Other


(1.8
)

(2.0
)

1.6Provision for income taxes


35.1
%

35.3
%

39.5
%


F-25

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE JINCOME TAXES (Continued)

The
significant components of the net deferred income tax liability (asset) were as follows at December 31:

(In thousands)

2012

2011Deferred tax liabilities:Goodwill amortization

$
63,405

$
58,423Property, plant and equipment


3,339


6,011Acquired intangibles


18,062


18,091Debt issuance costs


1,600


2,446Tax accounting method changes


1,278


2,626Other


4,511


1,57892,195


89,175Deferred tax assets:Net operating loss carryforwards


4,943


5,499Accrued expenses


15,573


11,870Deferred benefit plan compensation


8,363


7,693Provision for doubtful accounts


7,911


5,756Inventory capitalization and reserves


2,408


2,247Restricted stock


2,182


1,947Deferred rent


1,432


1,282Other


557


59443,369


36,888Valuation allowance


(1,219
)

(1,374
)42,150


35,514Net deferred tax liabilities

$
50,045

$
53,661


At
December 31, 2012 and 2011, the Company had accumulated federal net operating loss carryforwards of $7.0 million, and $7.1 million, respectively, and state net operating loss
carryforwards of $49.7 million and $59.0 million, respectively. The federal net operating loss carryforwards expire from 2025 through 2029, and the state net operating loss carryforwards
for significant taxing jurisdictions expire from 2022 through 2028. Utilization of the acquired carryforwards is subject to limitations due to ownership changes that may delay the utilization of a
portion of the acquired carryforwards.

The
Company establishes valuation allowances when necessary to reduce deferred tax assets to amounts expected to be realized. As of December 31, 2012 and 2011, the Company recorded a valuation
allowance of $1.2 million and $1.4 million, respectively, related to state loss carryforwards, which are expected to expire before utilization.

F-26

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE JINCOME TAXES (Continued)

A
reconciliation of the beginning and ending balances of unrecognized tax benefits is as follows:

(In thousands)

2012

2011

2010Unrecognized tax benefits, at beginning of the year

$
230

$
420

$
1,709Additions for tax positions related to the current year


107





107Additions for tax positions of prior years


79





Decrease related to prior year positions





(190
)

(672
)Decrease for lapse of applicable statute of limitations


(39
)




(724
)Unrecognized tax benefits, at end of the year

$
377

$
230

$
420


As
of December 31, 2012, the total amount of unrecognized tax benefits, if recognized, that would affect the effective tax rate is $0.1 million. At December 31, 2012, there were
no unrecognized tax benefits that the Company expects would change significantly over the next 12 months.

The
Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of December 31, 2012, 2011, and 2010, the amount of accrued
interest and penalties was immaterial. The amount of interest and penalties recognized in all periods presented was immaterial.

The
Company is subject to income tax in U.S. federal, state and local jurisdictions. The Company is no longer subject to U.S. Federal income tax examinations for years before 2009, and with few
exceptions, is no longer subject to state and local income tax examinations by tax authorities for years before 2008. However, due to acquired net operating losses, tax authorities have the ability to
adjust those net operating losses related to closed years.

NOTE KEMPLOYEE BENEFITS

Savings Plan

The Company maintains a 401(k) Savings and Retirement plan that covers all of the employees of the Company. Under this 401(k) plan, employees may
defer such amounts of their compensation up to the levels permitted by the Internal Revenue Service. The Company recorded matching contributions of $4.2 million, $3.9 million, and
$3.5 million under this plan during 2012, 2011 and 2010, respectively.

Supplemental Executive Retirement Plan

Effective January 2004, the Company implemented an unfunded noncontributory defined benefit plan (the "Plan") for certain senior executives. The
Company has engaged an actuary to calculate the benefit obligation and net benefits cost at December 31, 2012 and has utilized such to establish the benefit obligation liability. The Plan,
which is administered by the Company, calls for annual payments upon retirement based on years of service and final average salary. Net periodic benefit expense is actuarially determined.

F-27

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE KEMPLOYEE BENEFITS (Continued)

The
Plan's net benefit cost is as follows:

(In thousands)Change in Benefit ObligationBenefit obligation at December 31, 2010

$
17,510Service cost


986Interest cost


807Payments


(526
)Actuarial loss


1,453Benefit obligation at December 31, 2011

$
20,230Service cost


878Interest cost


761Amortization of (Gain)/Loss


40Payments


(706
)Actuarial loss


1,174Benefit obligation at December 31, 2012

$
22,377Unfunded status

$
22,377Unamortized net (gain) loss


Net amount recognized

$
22,377Amounts Recognized in the Consolidated Balance SheetCurrent Accrued liabilities


1,247Non-Current Accrued liabilities


21,130Total Accrued liabilities

$
22,377


The
Company recorded comprehensive losses of $(1.2) million and $(1.4) million, which consists of actuarial losses for the years 2012 and 2011, respectively. The company recorded a tax benefit on the
unrealized losses for the plan years 2012 and 2011 of $0.4 million and $0.5 million, respectively. There were no other components such as prior service costs or transition obligations
relating to Plan costs recorded within accumulated other comprehensive income (loss) during 2012 or 2011. Accumulated other comprehensive loss at December 31, 2012 and 2011 was comprised of
actuarial losses of $0.7 million and $0.9 million, net of tax.

The
following weighted average assumptions were used to determine the benefit obligation and net benefit cost at December 31:

2012

2011Discount rate


3.25
%

3.90
%Average rate of increase in compensation


3.00
%

3.00
%


F-28

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE KEMPLOYEE BENEFITS (Continued)

At
December 31, 2012, the estimated accumulated benefit obligation is $22.4 million. Future payments under the Plan are as follows:

(In thousands)2013

$
1,2472014


1,5782015


1,5782016


1,5782017


1,578Thereafter


14,818$
22,377


NOTE LSTOCK-BASED COMPENSATION

On May 13, 2010, the stockholders of the Company approved the 2010 Omnibus Incentive Plan (the "2010 Plan") and terminated the Amended and Restated 2002 Stock Incentive and Bonus Plan (the
"2002 Plan") and 2003 Non-Employee Directors' Stock Incentive Plan (the "2003
Plan"). In conjunction with this approval, it was determined that no new awards will be granted under the 2002 Plan or the 2003 Plan; however, awards granted under either the 2002 Plan or the 2003
Plan that were outstanding will remain outstanding and continue to be subject to all of the terms and conditions of the 2002 Plan or the 2003 Plan, as applicable.

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

As
of December 31, 2012, of the 2.5 million shares of common stock authorized for issuance under the Company's 2010 Plan, approximately 1.2 million shares have been issued and
0.2 million have been canceled, leaving 1.5 million shares available for future issuance. Total unrecognized stock-based compensation cost related to unvested restricted stock units was
approximately $12.7 million at December 31, 2012, and is expected to be expensed as compensation expense over approximately four years.

Restricted Stock Units

For the year ended December 31, 2012, 2011, and 2010, the Company has included approximately $8.1 million, $8.1 million, and
$7.5 million, respectively, of stock-based compensation cost in the accompanying Consolidated Statements of Income and Comprehensive Income for the 2002, 2003, and 2010 Plans. Compensation
expense relates to restricted stock unit grants, as the amount of expense

F-29

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE LSTOCK-BASED COMPENSATION (Continued)

related
to options is immaterial in all periods presented. The total value of the restricted stock units is expensed ratably over the requisite service period of the employees receiving the awards.

The
summary of restricted stock units and weighted average exercise prices are as follows:

Employee Awards

Director AwardsShares

Weighted
Average
Grant Date
Fair Value

Shares

Weighted
Average
Grant Date
Fair ValueNonvested at December 31, 2009


986,461

$
12.29


129,123

$
13.21Granted


454,950


18.45


75,710


18.48Vested


(585,228
)

11.36


(71,079
)

12.86Forfeited


(48,112
)

13.99





Nonvested at December 31, 2010


808,071

$
16.33


133,754

$
16.38Granted


487,620


25.25


59,698


25.72Vested


(374,067
)

14.61


(62,533
)

15.46Forfeited


(28,101
)

19.17


(15,001
)

20.80Nonvested at December 31, 2011


893,523

$
21.84


115,918

$
21.12Granted


468,500


20.47


63,497


22.35Vested


(318,927
)

20.17


(58,059
)

19.34Forfeited


(231,537
)

21.26





Nonvested at December 31, 2012


811,559

$
21.76


121,356

$
22.62


During
the years ended December 31, 2012 and 2011, 376,986 and 436,600 restricted stock units of common stock with an intrinsic value of $7.6 million and $6.4 million,
respectively, became fully vested. As of December 31, 2012, total unrecognized compensation cost related to restricted stock units of common stock was approximately $12.7 million and the
related weighted-average period over which it is expected to be recognized is approximately two years. The aggregate granted units have vesting dates through August 2016. The 2012 and 2011 grants
totaled $11.0 million and $13.3 million, respectively, at the dates of grant, and are amortized to expense ratably over the vesting period of granted units.

F-30

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE LSTOCK-BASED COMPENSATION (Continued)

Options

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

Employee Awards

Director Awards

Non-Qualified AwardsShares

Weighted
Average Exercise
Price

Shares

Weighted
Average Exercise
Price

Shares

Weighted
Average Exercise
PriceOutstanding at December 31, 2009


764,332

$
13.74


95,464

$
11.46


406,000

$
5.95Granted

















Terminated


(1,500
)

4.63











Exercised


(328,332
)

14.16


(15,373
)

13.82


(30,000
)

5.50Outstanding at December 31, 2010


434,500

$
13.45


80,091

$
11.08


376,000

$
5.98Granted

















Terminated








(10,373
)

10.79





Exercised








(41,459
)

10.38


(376,000
)

5.98Outstanding at December 31, 2011


434,500

$
13.45


28,259

$
11.99




$
Granted

















Terminated


(1,500
)

15.60











Exercised


(230,000
)

14.82


(9,404
)

16.04





Outstanding at December 31, 2012


203,000

$
11.88


18,855

$
10.02




$
Aggregate intrinsic value at December 31, 2012

$
2,411,300




$
189,003




$
Weighted average remaining contractual term (years)


1.0





1.0








The intrinsic value of options exercised during the years ended December 31, 2012 and 2011 was $3.6 million and $2.7 million, respectively.
Options exercisable under the Company's stock-based compensation plans at December 31, 2012 and 2011 were 0.2 million and 0.5 million shares, respectively, with a weighted average
exercise price of $11.72 and $13.36, respectively, an average remaining
contractual term of 1.0 and 1.7 years, respectively, and an aggregate intrinsic value of $2.6 million and $6.2 million as of December 31, 2012 and 2011. Cash received by
the Company related to the exercise of options during the years ended December 31, 2012 and 2011 amounted to $3.6 million and $2.7 million. As of December 31, 2012 and
2011, there is no unrecognized compensation cost related to stock option awards.

F-31

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE LSTOCK-BASED COMPENSATION (Continued)

The
summary of the options vested and exercisable is as follows for the three years ended at December 31:

Employee
Plans

Director
Plans

Non-Qualified
Awards2012


203,000


18,855


2011


434,500


28,259


2010


434,500


80,091


376,000


Information
concerning outstanding and exercisable options as of December 31, 2012 is as follows:

Options Outstanding and
ExercisableWeighted AverageRange of
Exercise Prices

Number of
Options
or Awards

Remaining
Life (Years)

Exercise
Price$  5.09 to $12.00


113,482


1.1


8.0212.10 to  17.60


108,373


1.0


15.60221,855


1.0

$
11.72


NOTE MLEASES

Operating Leases

The Company leases office space under non-cancellable operating leases, the majority of which contain escalation clauses. The Company
recognizes rent expense on a straight-line basis for leases with escalation clauses. Certain of these leases also contain renewal options. Renewal periods vary according to lease
agreements. Rent expense was approximately $43.0 million, $41.4 million, and $40.4 million, for the years ended December 31, 2012, 2011, and 2010, respectively. Sublease
rental income of $1.3 million, $0.6 million, and $0.1 million, for the years ended December 31, 2012, 2011, and 2010, respectively, was netted against rent expense. The
Company estimates it will receive approximately $2.4 million of sublease rent income over the next four years.

Future
minimum rental payments, by year and in the aggregate, under operating leases with terms of one year or more at December 31, 2012 are as follows:

(In thousands)2013

$
45,0812014


36,5832015


26,2532016


19,3972017


14,031Thereafter


30,014$
171,359


F-32

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE NRELATED PARTY TRANSACTIONS

The firm of Foley & Lardner LLP serves as the Company's outside general counsel. The Company's Chairman is the brother-in-law of the partner in charge of the
relationship. Total fees paid by the Company to Foley & Lardner LLP were $2.4 million, $2.6 million, and $3.3 million, for the years ended 2012, 2011, and 2010,
respectively.

NOTE OSEGMENT AND RELATED INFORMATION

The Company has identified three reportable segments in which it operates based on the products and services it provides. The Company evaluates segment performance and allocates resources based on the
segments' income from operations. The reportable segments are: (i) Patient Care (ii) Distribution, and (iii) Therapeutic Solutions. The reportable segments are described further
below:

Patient CareThis segment consists of the Company's owned and operated patient care clinics and fabrication centers of O&P components. The patient care clinics
provide services to design and fit O&P devices to patients. These clinics 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 clinics. The principal reimbursement sources for the Company's services
are:



The
Company estimates that government reimbursement, comprised of Medicare, Medicaid and the U.S. Department of Veterans Affairs, in the aggregate, accounted for approximately 40.4%, 40.0%, and 40.4%
of the Company's net sales in 2012, 2011, and 2010, respectively.

DistributionThis segment distributes O&P products and components to both the O&P industry and the Company's own patient care clinics.

Therapeutic SolutionsThis segment consists of the leasing of rehabilitation equipment from, and the provision of clinical program by, ACP as well the operations of
IN, Inc. ACP is a developer of specialized rehabilitation technologies and provides evidence-based clinical programs for post-acute rehabilitation. IN, Inc. specializes in
bringing emerging MyoOrthotics Technologies® to the O&P market. MyoOrthotics Technologies represents the merging of orthotic technologies with electrical stimulation.

OtherThis consists of Hanger corporate and Linkia. Linkia is a national managed-care agent for O&P services and a patient referral clearing house.

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

F-33

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE OSEGMENT AND RELATED INFORMATION (Continued)

Summarized
financial information concerning the Company's reportable segments is shown in the following table. Intersegment sales mainly include sales of O&P components from the Distribution segment
to the Patient Care segment and were made at prices which approximate market values. The Patient Care segment results below are revised as described in footnote B.

(In thousands)

Patient Care

Distribution

Therapeutic
Solutions

Other

Consolidating
Adjustments

Total2012Net salesCustomers

$
813,556

$
107,266

$
63,921

$
807

$


$
985,550Intersegments


17,621


191,202


3,902





(212,725
)

Depreciation and amortization


14,307


1,139


11,232


7,974





34,652Income (loss) from operations


149,544


34,178


4,182


(57,500
)

(1,066
)

129,338Interest (income) expense


30,353


3,294


5,743


(8,221
)




31,169Income (loss) before taxes


119,191


30,884


(1,561
)

(49,279
)

(1,066
)

98,169Total assets


1,423,258


199,268


135,786


(520,985
)




1,237,327Capital expenditures


15,311


438


3,948


13,466





33,1632011Net salesCustomers

$
753,409

$
100,456

$
64,014

$
660

$


$
918,539Intersegments


15,853


174,431


3,520





(193,804
)

Depreciation and amortization


12,502


1,088


10,424


7,068


(113
)

30,969Income (loss) from operations


138,918


28,293


3,703


(54,654
)

(305
)

115,955Interest (income) expense


28,440


3,356


5,761


(5,736
)




31,821Income (loss) before taxes


110,478


24,937


(2,058
)

(48,918
)

(305
)

84,134Total assets


1,277,700


170,077


135,781


(456,839
)




1,126,719Capital expenditures


11,886


1,318


4,217


11,253





28,6742010Net salesCustomers

$
714,665

$
95,544

$
6,622

$
548

$


$
817,379Intersegments





168,823


3,839





(172,662
)

Depreciation and amortization


11,211


1,004


1,293


5,414


(113
)

18,809Income (loss) from operations


130,521


30,395


(5,402
)

(75,023
)

(21
)

80,470Interest (income) expense


28,410


3,397


480


(1,947
)




30,340Income (loss) before taxes


102,111


26,998


(5,882
)

(88,671
)

(21
)

34,535Total assets


1,053,361


146,166


142,970


(281,927
)




1,060,570Capital expenditures


17,599


1,112


2,056


9,826





30,593


F-34

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Table of Contents

HANGER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE OSEGMENT AND RELATED INFORMATION (Continued)

The
Company's foreign and export sales and assets located outside of the United States of America are not significant. Additionally, no single customer accounted for more than 10% of revenues in 2012,
2011, or 2010.

NOTE PCORPORATE OFFICE RELOCATION

The Company moved its corporate headquarters from Bethesda, Maryland to Austin, Texas in 2010. In conjunction with the move, the Company incurred employee separation costs, other relocation costs, and
lease termination costs. Employee separation costs are expensed pro-ratably over the requisite service period. The Company incurred $1.2 million of additional costs in 2011 and no
additional expenses in 2012 as the final employee moves were completed. In 2010 the Company abandoned its lease premises in Bethesda, Maryland and recorded a remaining lease termination liability, net
of anticipated sub-lease recoveries. $2.0 million of such liability remains as of December 31, 2012. The lease termination liability will be paid out over the remaining term
of the lease which expires on September 30, 2014.

The
following is a summary of the costs of the relocation incurred and to be paid in future periods:

(in thousands)

Employee
Separation

Other
Relocation

Lease
Termination

TotalBalance as of December 31, 2010

$
1,895

$


$
5,206

$
7,101Expenses incurred


(158
)

1,211


132


1,185Amounts paid


(1,511
)

(1,211
)

(2,253
)

(4,975
)Balance as of December 31, 2011

$
226

$


$
3,085

$
3,311Expenses incurred











Amounts paid


(134
)




(1,043
)

(1,177
)Balance as of December 31, 2012

$
92

$


$
2,042

$
2,134


F-35

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Table of Contents

HANGER, INC.  SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS

Year

Classification

Balance at
beginning of
year

Additions
Charged to
Costs and
Expenses

Write-offs

Balance at end
of year(In thousands)2012

Allowance for doubtful accounts

$
22,028

$
19,773

$
20,422

$
21,3792011

Allowance for doubtful accounts

$
16,686

$
22,101

$
16,759

$
22,0282010

Allowance for doubtful accounts

$
10,526

$
20,276

$
14,116

$
16,686




Year

Classification

Balance at
beginning of
year

Generated

Utilized/
Released

Balance at end
of year(In thousands)2012

Deferred tax asset valuation allowance

$
1,374

$
12

$
167

$
1,2192011

Deferred tax asset valuation allowance

$
828

$
547

$
1

$
1,3742010

Deferred tax asset valuation allowance

$
11,359

$
23

$
10,554

$
828


S-36

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Table of Contents

EXHIBIT INDEX

Exhibit No.

Document3.1

Restated Certificate of Incorporation of Hanger, Inc., dated August 27, 2012. (Incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the Registrant on
August 27, 2012).3.2

Amended and Restated By-Laws of Hanger Orthopedic Group, Inc., as amended effective February 2, 2012. (Incorporated herein by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the
Registrant on February 6, 2012).4.1

Indenture, dated November 2, 2010, by and among the Hanger Orthopedic Group, Inc., each of the Subsidiary Guarantors party thereto and Wilmington Trust Company, as trustee. (Incorporated herein by reference
to Exhibit 4.1 to the Registrant's Current Report on Form 8-K filed on October 29, 2010).4.3

First Supplemental Indenture, dated December 13, 2010, by and among the Hanger Orthopedic Group, Inc., each of the Subsidiary Guarantors party thereto and Wilmington Trust Company, as trustee. (Incorporated
herein by reference to Exhibit 4.3 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2010).4.4

Second Supplemental Indenture, dated February 15, 2011, by and among the Hanger Orthopedic Group, Inc., Accelerated Care Plus Corp., ACP Medical Supply Corporation, Liberty Health Services, LLC and
Wilmington Trust Company, as trustee. (Incorporated herein by reference to Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011).10.1

Amended and Restated 2002 Stock Incentive Plan, as amended through May 10, 2007. (Incorporated herein by reference to Appendix 1 to the Registrant's Proxy Statement, dated April 10, 2007, relating to
the Registrant's Annual Meeting of Stockholders held on May 10, 2007).*10.2

Amended and Restated 2003 Non-Employee Directors' Stock Incentive Plan, as amended through May 10, 2007. (Incorporated herein by reference to Appendix 2 to the Registrant's Proxy Statement, dated
April 10, 2007, relating to the Registrant's Annual Meeting of Stockholders held on May 10, 2007).10.3

Form of Stock Option Agreement (Non-Executive Employees), Stock Option Agreement (Executive Employees), Restricted Stock Agreement (Non-Executive Employees) and Restricted Stock Agreement (Executive Employees).
(Incorporated herein by reference to Exhibits 10.1, 10.2, 10.3 and 10.4, respectively, to the Registrant's Current Report on Form 8-K filed on February 24, 2005).*10.4

Supplemental Executive Retirement Plan, as amended and restated effective January 1, 2011 (Incorporated herein by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2010).*10.8

Credit Agreement, dated as of December 1, 2010, among the Company and the lenders and agents party thereto. (Incorporated herein by reference to Exhibit 4.1 to the Registrant's Current Report on
Form 8-K filed on December 1, 2010).10.9

Guarantee and Collateral Agreement, dated as of December 1, 2010, made by the Registrant, as Borrower, and certain of its subsidiaries, in favor of Bank of America, N/A., as Administrative Agent. (Incorporated
herein by reference to Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2010).


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Table of Contents

Exhibit No.

Document10.10

Amendment No. 1, dated as of March 11, 2011, to the Credit Agreement, dated as of December 1, 2010, among the Company and the lenders and gents party hereto. (Incorporated by reference to Exhibit 4.1
to the Current Report on Form 8-K filed by the Registrant on March 11, 2011).10.11

Fourth Amended and Restated Employment Agreement, effective as of January 1, 2012, by and between George E. McHenry and the Company. (Incorporated herein by reference to Exhibit 10.3 to the Registrant's
Current Report on Form 8-K filed on January 27, 2012).*10.12

Fourth Amended and Restated Employment Agreement, effective as of January 1, 2012, by and between Richmond L. Taylor and the Company. (Incorporated herein by reference to Exhibit 10.4 to the Registrant's
Current Report on Form 8-K filed on January 27, 2012).*10.13

Hanger Orthopedic Group, Inc. 2010 Omnibus Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
2010).*10.14

Form of Restricted Stock Agreement for Non-Employee Directors (incorporated herein by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
2010).*10.15

Form of Restricted Stock Agreement for Executives (incorporated herein by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2010).*10.16

Form of Restricted Stock Agreement for Employees Executives (incorporated herein by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
2010).*10.17

Form of Non-Employee Director Non-Qualified Stock Option Agreement (incorporated herein by reference to Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
2010).*10.18

Form of Executive Non-Qualified Stock Option Agreement (incorporated herein by reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
2010).*10.19

Form of Non-Qualified Stock Option Agreement (incorporated herein by reference to Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2010).*10.20

Securities Purchase and Lock-Up Agreement, dated October 18, 2010, by and between Hanger Orthopedic Group, Inc. and John B. Breach and Schedule of Substantially Identical Securities Purchase and Lock-Up
Agreements Omitted Pursuant to Instruction 2 to Item 601 of Regulation S-K (Incorporated herein by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on October 18, 2010).10.21

Amended and Restated Employment Agreement, as of January 1, 2012 by and between Vinit K. Asar and the Company. (Incorporated herein by reference to Exhibit 10.2 to the Registrant's Current Report on
Form 8-K filed on January 27, 2012).*10.22

Amended and Restated Employment Agreement, dated as of March 30, 2012, between Thomas E. Hartman and Hanger Prosthetics & Orthotics, Inc. (Filed herewith).*10.23

Second Amended and Restated Employment Agreement, dated August 27, 2012, by and between Vinit K. Asar and Hanger, Inc. (Incorporated herein by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed by the Registrant on August 27, 2012).*10.24

Amended and Restated Employment Agreement, dated as of February 25, 2013, by and between Kenneth W. Wilson and Southern Prosthetic Supply, Inc. (Filed herewith).*


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Table of Contents

Exhibit No.

Document21

List of Subsidiaries of the Registrant. (Filed herewith).23.1

Consent of PricewaterhouseCoopers LLP. (Filed herewith).31.1

Written Statement of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith).31.2

Written Statement of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith).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. (Filed
herewith).101

The following financial information from the Company's Annual Report on Form 10-K, for the period ended December 31, 2012, formatted in eXtensible Business Reporting Language: (i) Consolidated Balance
Sheets, (ii) Consolidated Statements of Income and Comprehensive Income, (iii) Consolidated Statements of Changes in Shareholders' Equity, (iv) Consolidated Statements of Cash Flows, (v) Notes to Consolidated Financial
Statements(1)


*Management
contract or compensatory plan


---