UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
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
year ended December 31, 2008




OR




 ̈        TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE
SECURITIES EXCHANGE ACT OF 1934




Commission
File No. 0-12991







LANGER,
INC.


(Exact
Name of Registrant as Specified in its Charter)




Delaware
                  
                  11-2239561(State
      or Other Jurisdiction of
                    Incorporation
      or Organization)
                  
                  (I.R.S.
      Employer
                    Identification
      Number)




245
Fifth Avenue, Suite 2201


New
York, New York 10016


(Address
of Principal Executive Offices) (Zip Code)




(212)
687-3260


(Registrant’s
Telephone Number, Including Area Code)





Securities
registered pursuant to Section 12(b) of the Act: NONE




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




Common
Stock, par value $0.02 per share


(Title of
Class)




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




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes  ̈ 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  ̈




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes ý No  ̈




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




Large Accelerated Filer  ̈
            Accelerated Filer  ̈
            Non-accelerated Filer o
            Smaller reporting company ý




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




As of
June 30, 2008 (i.e., the last day of registrant’s most recently completed second
quarter), the aggregate market value of the common equity held by non-affiliates
of the registrant was $7,458,237, as computed by reference to the closing sale
price on the NASDAQ Global Market of such common stock ($1.21) multiplied by the
number of shares of voting stock outstanding on June 30, 2008 held by
non-affiliates (6,163,832 shares). Exclusion of shares from the calculation of
aggregate market value does not signify that a holder of any such shares is an
“affiliate” of the registrant.




The
number of shares of the registrant’s common stock outstanding at March 20, 2009
was 8,596,752 shares.




DOCUMENTS
INCORPORATED BY REFERENCE




The
information required by Part III of this report is incorporated herein by
reference to the registrant’s proxy statement for the 2009 annual meeting of the
registrant’s stockholders, which will be filed not later than 120 days after the
end of the fiscal year covered by this report.












LANGER,
INC.




ANNUAL
REPORT ON FORM 10-K




For
the Year Ended December 31, 2008




TABLE
OF CONTENTS




PagePART
      IItem
      1.
                                            
                                            Business
                                            
                                            2Item
      1A.
                                            
                                            Risk
      Factors
                                            
                                            15Item
      1B.
                                            
                                            Unresolved
      Staff Comments
                                            
                                            29Item
      2.
                                            
                                            Properties
                                            
                                            29Item
      3.
                                            
                                            Legal
      Proceedings
                                            
                                            29Item
      4.
                                            
                                            Submission
      of Matters to a Vote of Security Holders
                                            
                                            30PART
      IIItem
      5.
                                            
                                            Market
      for Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases
      of Equity Securities
                                            
                                            31Item
      7.
                                            
                                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                            
                                            32Item
      7A.
                                            
                                            Quantitative
      and Qualitative Disclosures about Market Risk
                                            
                                            44Item
      8.
                                            
                                            Financial
      Statements and Supplementary Data
                                            
                                            46Item
      9.
                                            
                                            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                                            
                                            77Item
      9A(T.)
                                            
                                            Controls
      and Procedures
                                            
                                            77PART
      IIIItem
      10.
                                            
                                            Directors
      and Executive Officers of the Company
                                            
                                            78Item
      11.
                                            
                                            Executive
      Compensation
                                            
                                            78Item
      12.
                                            
                                            Security
      Ownership of Certain Beneficial Owners and Management and RelatedStockholder
      Matters
                                            
                                            78Item
      13.
                                            
                                            Certain
      Relationships and Related Transactions
                                            
                                            78Item
      14.
                                            
                                            Principal
      Accountant Fees and Services
                                            
                                            78PART
      IVItem
      15.
                                            
                                            Exhibits
      and Financial Statement Schedules
                                            
                                            79Signatures




1




Forward-looking
Statements




This
Annual Report on Form10-K contains certain “forward-looking statements” within
the meaning of the Federal securities laws. Forward-looking statements include
statements concerning our plans, objectives, goals, strategies, future events,
future revenues or performance, capital expenditures, financing needs, plans or
intentions relating to acquisitions, our competitive strengths and weaknesses,
our business strategy and the trends we anticipate in the industry and economies
in which we operate and other information that is not historical information.
Words or phrases such as “estimates,” “expects,” “anticipates,” “projects,”
“plans,” “intends,” “believes” and variations of such words or similar
expressions are intended to identify forward-looking statements. These
statements reflect our current views about future events based on information
currently available and assumptions we make. These forward-looking and other
statements, which are not historical facts, are based largely upon our current
expectations and assumptions and are subject to a number of risks and
uncertainties that could cause actual results to differ materially from those
contemplated by such forward-looking statements.




These
risks and uncertainties include, among others:




·
            Our
      history of net losses and the possibility of continuing net losses beyond
      2008.




·
            The
      current economic downturn and its effect on the credit and capital markets
      as well as the industries and customers that utilize our
      products.




·
            The
      risk that any intangibles on our balance sheet may be deemed impaired
      resulting in substantial
write-offs.




·
              The
      risk that we may not be able to raise adequate financing to fund our
      operations and 
growth prospects.




·
            The
      cost and expense of complying with government regulations which affect the
      research, development and formulation of the
  products.




·
            Risks
      associated with the acquisition and integration of businesses we may
      acquire.




Accordingly,
we advise you to carefully review the information set forth in Item 1A, “Risk
Factors”.




We cannot
guarantee our future performance nor can we assure you that we will be
successful in the implementation of our growth strategy or that any such
strategy will result in our future profitability. Our failure to successfully
develop new revenue producing products could have a material adverse effect on
the market price of our common stock and our business, financial condition and
results of operations. You also should be aware that, other than as required by
law, we have no obligation to, and do not intend to, update any forward-looking
statements to reflect events or circumstances occurring after the date of
this Annual Report that may cause our actual results or performance to
differ from those expressed in the forward-looking statements.




References
in this report to “Langer,” “the Company,” “we,” “our,” and “us,” refer to
Langer, Inc. and, if so indicated or the context requires, includes our
wholly-owned subsidiaries Twincraft, Inc. (“Twincraft”) and Silipos, Inc.
(“Silipos”).




PART
I




Item
1. Business




Overview




Through
our wholly-owned subsidiaries, Twincraft and Silipos, we offer a diverse line of
personal care products for the private label retail, medical, and therapeutic
markets.  In addition, at Silipos, we design and manufacture high
quality gel-based medical products targeting the orthopedic and prosthetic
markets.  We sell our medical products primarily in the United States
and Canada, as well as in more than 30 other countries, to national, regional,
and international distributors.  We sell our personal care products
primarily in North America to branded marketers of such products, specialty
retailers, direct marketing companies, and companies that service various
amenities markets.




2




Our broad
range of gel-based orthopedic and prosthetics products are designed to protect,
heal, and provide comfort for the patient.  Our line of personal care
products includes bar soap, gel-based therapeutic gloves and socks, scar
management products, and other products that are designed to cleanse and
moisturize specific areas of the body, often incorporating essential oils,
vitamins, and nutrients to improve the appearance and condition of the
skin.




Twincraft,
a manufacturer of bar soap, focuses on the health and beauty, direct marketing,
amenities, and mass market channels, was acquired in January, 2007, and Silipos,
which offers gel-based personal care products which moisturize and provide
comfort, was acquired in September, 2004.




Operating
History:




Prior to
2008, Langer owned a diverse group of subsidiaries and businesses including
Twincraft, Silipos, the Langer branded custom orthotics and related products
business, Langer UK Limited (“Langer UK”), Regal Medical Supply, LLC (“Regal”),
and Bi-Op Laboratories, Inc. (“Bi-Op”).  In November 2007, we began a
study of strategic alternatives available to us with regard to our various
operating companies.  During 2008, the Company sold Langer UK, Bi-Op,
Regal, and the Langer orthotics business, as further discussed in Note 3 of the
accompanying financial statements.




The sales
of these businesses generated approximately $7.0 million in cash proceeds, which
includes approximately $100,000 received in February 2009, which the Company has
deployed in part to purchase its own capital stock in the market and has
retained for future needs.  The Company also holds approximately
$638,000 in notes receivable.




We
believe that along with strengthening our balance sheet through these
divestitures, by retaining Twincraft  and Silipos, we have honed our
focus on our two largest and most significant businesses.  In
addition, during 2008 we streamlined the corporate structure of the Company,
significantly reducing general and administrative expenses.  We expect
this streamlined and focused organization will enhance our ability to develop
and market innovative products.




In
addition, our Board has authorized the purchase of up to $6,000,000 of our
outstanding common stock.  In connection with this matter, the
Company’s senior lender, Wachovia Bank, National Association, has waived, until
April 15, 2009, the provisions of the credit facility that would otherwise
preclude the Company from making such repurchases.  From January 2008
through March 16, 2009, the Company has purchased 2,907,460 of its common shares
at a cost of $2,353,863 (or $0.81 per share) including commissions
paid.




Our
Addressable Markets




Personal
Care




Our
personal care products are generally sold in the retail cosmetic marketplace and
include soaps, cleansers, toners, moisturizers, exfoliants, and facial masks,
and can also include over-the-counter (“OTC”) drug products such as acne
soaps.  Many of these products combine traditional moisturizing and
cleansing agents with compounds such as retinoids, hydroxy acids, and
anti-oxidants that smooth and soothe dry skin, retain water in the outer layer
skin cells and help maintain or reinforce the skin’s protective barrier,
particularly skin tissue damaged from surgery or injury.




We
believe that growth in the personal care market will be driven by an aging
population, an increasing number of image-conscious consumers, and the growth
and popularity of spas and body/facial treatment centers.




Medical
Products




Through
Silipos we design, manufacture and market gel-based products focusing on the
orthopedic, orthotic, prosthetic, and scar management markets.




Our
orthopedic gel-based products include bunion guards, toe spreaders, heel
cushions, arch supports and other foot-related products which are marketed
through a wide range of international, national, and regional
distributors.  We no longer sell directly to health care professionals
or submit claims to any federal, state, or private health insurance programs for
these products.




3


Prosthetics
involve the design, fabrication and fitting of artificial limbs for patients who
have lost their limbs due to traumatic injuries, vascular diseases, diabetes,
cancer and congenital diseases. Our target market is comprised of the production
and distribution of the components utilized in the fabrication of these
prosthetic devices. Prosthetic componentry includes external mechanical joints
such as hips and knees, artificial feet and hands, and sheaths and liners
utilized as an interface between the amputee’s skin and prosthetic
socket.




We
believe that growth of the orthopedic and prosthetic markets we target will be
driven by the following factors:




·
            Aging Population. By
      2050, it is estimated that the median age of individuals in highly
      developed countries will be 45.5 years as compared to a median age of 37.3
      years in 2000. With longer life expectancy, expanded insurance coverage,
      improved technology and devices, and greater mobility, individuals are
      expected to seek orthopedic services and products more
    often.




·
            Increased Demand for
      Non-Invasive Procedures. We believe there is growing awareness and
      clinical acceptance by patients and health care professionals of the
      benefits of non-invasive solutions, which should continue to drive demand
      for non-operative rehabilitation
products.




·
            Technological Sophistication
      of Orthotic and Prosthetic Devices. In recent years the development
      of stronger, lighter and cosmetically appealing materials has led to
      advancements in design technology, driving growth in the orthotic and
      prosthetic industries. A continuation of this trend should enable the
      manufacture of new products that provide greater protection and comfort to
      the users of orthotic and prosthetic devices, and that more closely
      replicate the function of natural body
parts.




·
            Need for Replacement and
      Continuing Care. Most prosthetic and orthotic devices have useful
      lives ranging from three to five years, necessitating ongoing warranty
      replacement and retrofitting for the life of the
  patient.




·
            Growing Emphasis on Physical
      Fitness, Leisure Sports and Conditioning. As a large number of
      individuals participate in athletic activities, many of them suffer
      strains and injuries, requiring non-operative orthopedic rehabilitation
      products.




Growth
Strategy




·
            Research,
      Product, and Process Development. Since 2003, we have introduced
      over 100 new products, including the Dura-gel prosthetic liner in
      September 2005, which led to an 18% increase in prosthetic product
      sales in 2006. We also have invested resources in internally developing
      alternate gel materials and other thermoplastic elastomer materials in
      partnership with outside parties which we expect to increase our
      competitiveness.  We are also working on developing a new line
      of scar management products which utilize our gel based
      technologies.  These products are designed to compete favorably
      with scar management treatments that are currently offered in the
      marketplace.




·
            Innovation. Our
      personal care products group focuses on leveraging the research and
      development expertise of both Twincraft and Silipos to provide innovative
      products to our customers.For
      example, Twincraft has successfully commercialized the inclusion of a
      microsphere encapsulant within bar soap that incorporates a time-released
      delivery of an approved OTC active drug ingredient.Silipos has
      developed a triglyceride-based (mineral free) gel which is designed to
      appeal to consumers seeking environmentally-friendly
      products.  We continuously seek to improve and innovate our
      gel-based personal care products through the inclusion of various
      additives, the formulation of our gels for optimal performance given a
      particular application, and the usage of different components, packaging
      and product construction to meet the needs of our customers. We believe
      innovation will be a key to our success in the future.  Our
      sales strategy includes attempting to “partner” with customers to develop
      new products and bring them to the
market.




·
            Strategic Evaluation and
      Acquisition of Complementary Businesses.  In 2008 we
      completed the divestitures of our non-core and underperforming businesses,
      namely Langer UK, the Langer orthotics business, Bi-Op, and
      Regal.  Moving forward, subject to the availability of
      financing, we may consider targeted acquisitions in order to gain access
      to new product groups and customer
channels.




4


Competitive
Strengths




Management Team. Our
management team has been involved in the acquisition and integration of a
substantial number of companies. Our Chairman of the Board of Directors, Warren
B. Kanders, brings a track record spanning over 20 years of building public
companies through strategic acquisitions to enhance organic growth. W. Gray
Hudkins, who became our Chief Operating Officer on October 1, 2004, and our
President and Chief Executive Officer on January 1, 2006, brings a strong
investment banking background and has been involved in the acquisition and
integration of acquired companies prior to joining us, and has played a
significant role in the acquisition and the integration of Silipos and
Twincraft.  We are also reliant upon the skills and experience of
Kathleen P. Bloch, our Chief Financial Officer, Chief Operating Officer and Vice
President, as well as Peter A. Asch, the President of Twincraft and of our
personal care products division and a member of our Board of
Directors.




Strong Base
Business.  Our medical products business benefits from a
reputation of quality products, and we hold patents and patent applications, as
well as quality brands and trademarks.  Our personal care products
business benefits from a diverse list of blue chip customers in the health and
beauty, direct marketing, amenities and mass market channels, and we believe the
combination of Twincraft with our Silipos skincare business offers the
possibility of a number of synergistic revenue and expense
opportunities.




Strength Across Distribution
Channels. We believe we maintain strong relationships across various
distribution channels in our two reporting segments. In our medical products
group, this means maintaining a network of national, regional, independent and
international distributors, medical catalog companies, group purchasing
organizations, original equipment manufacturers, specialty retailers, and
consumer catalog companies. In our personal care products group, we enjoy strong
relationships with customers in a number of sales channels that provide
diversification and the ability to pursue growth opportunities in a number of
different markets focused on a variety of product types and price
points.




Products




Personal Care Products. We
offer a range of skincare products, including bar soap, beauty cleanser, acne
soap and gel-based products such as gloves and sock products that are used for
both cosmetic and scar management purposes. Our personal care products are
manufactured in our Winooski, VT and Niagara Falls, NY facilities. We offer our
personal care products to our customers in bulk form, where either they or an
outside party will package the products for sale, and fully packaged so that
they can be sold as shipped from our facilities.




Gel-Based Orthopedic
Products. We manufacture and sell gel-based products for the treatment of
common orthopedic and footcare conditions. These products include digitcare
products, diabetes management products, pressure, friction, and shear force
absorption products, products that protect the hands and wrists, and gel
sheeting products for various applications.




Gel-Based Prosthetic
Products.We
manufacture and sell a line of products that are utilized in the fabrication of
prosthetic devices. For example, we offer sheaths and liners that incorporate a
gel interface between the amputee’s skin and socket, providing protection for
patients who are subject to significant pressure between their skin and
prosthesis.




Customers




Our
personal care products are sold in a highly competitive global marketplace which
is experiencing increased trade concentration. With the growing trend toward
consolidation, we are increasingly dependent on key customers.




Our
customers include international, national, and regional
distributors.  Our personal care customers include branded marketers
of such products, specialty retailers, direct marketing companies, and companies
that service various amenities markets.  We have a diverse customer
base, and for the year ended December 31, 2008, no customer accounted for more
than 7.1% of our revenues.




5


Sales,
Marketing and Distribution




Personal
Care




For our
personal care product lines, our account representatives interact directly with
health and beauty companies, specialty retailers, cosmetics companies, direct
marketing companies, amenities companies, health clubs and spas, and catalog
companies. We will sometimes ship product to customers in bulk for their own
packaging pursuant to private label programs. In other cases, we will package
the product ourselves and sell under our own proprietary brands.




Medical
Products




Our
sales, marketing and distribution are managed through a combination of national
and regional account managers, field sales representatives, and inside sales
representatives who are regionally and nationally based. We utilize
international sales and marketing agents and employ representatives in the
United Kingdom, Europe, Asia and Australia. We also utilize educational seminars
to educate medical professionals about our product offerings.  Our
Silipos medical gel products continue to be sold exclusively through medical
distributors.  We no longer sell directly to medical professionals or
to patients and we do not submit claims to federal, state, or private health
care insurance programs.




Manufacturing
and Sourcing




Manufacturing




We
manufacture gel and gel products in our Niagara Falls, New York facility,
including orthotic and prosthetic products, and gel-based personal care skincare
products. This manufacturing process includes the molding of the gels into
specific shapes and sometimes the application of gels to textiles. Our Niagara
Falls facility has obtained ISO 9001 certification, which permits the marketing
of our products in certain foreign markets.




We
manufacture bar soap in our Winooski, Vermont, facility, with additional
warehousing capability in our Essex, Vermont facility.




Sourcing




We source
raw materials and components from a variety of suppliers. For bar soap, we
source soap base from a variety of sources in Malaysia and other parts of the
Far East and we also source significant amounts of textiles from various sources
in China for our gel-based medical and personal care products. We source
packaging materials both domestically as well as from sources in China and
Taiwan. We believe that all of our purchased products and materials could be
readily obtained from alternative sources at comparable costs.




Competition




Personal
Care




Our
personal care products are primarily in the skincare segments. Our largest
individual competitor in the private label specialty bar soap market is Bradford
Soapworks. However, there are a number of other companies that produce bar soap
in larger batch sizes for customers that are typically more focused on the mass
markets. Other competitive skincare products include lotions, creams,
water-based gels, oil-based gels, ointments and other types of products that
transmit moisture, vitamins, minerals, and comfort agents to the skin. Personal
care also includes categories in which the Company does not currently
participate such as oral care, ingestibles, and nutraceuticals, among others.
The market for high-end skincare products is dominated by a number of large
multinational companies that sell under brands such as Shiseido, LVMH Moet
Hennessy Louis Vuitton, Clarins and Revlon. We additionally compete with a
number of specialty retailers and catalog companies that focus on the skincare
market, such as The Body Shop and L’Occitaine, are vertically integrated and
manufacture their own products.




6


Medical
Products




The
markets for our medical products are highly competitive, and we compete with a
variety of companies ranging from small businesses to large corporations in the
foot care, podiatry, orthopedic and prosthetic markets. The markets for
off-the-shelf footcare products are dominated by large retail
channels.  We also market our products through local shoe stores and
medical practitioners’ offices. Included in the markets for off-the-shelf
footcare products are participants such as Dr. Scholls, Spenco and
ProFoot.




In each
of our target markets, the principal competitive factors are product design,
innovation and performance, efficiencies of scale, quality of engineering, brand
recognition, reputation in the industry, production capability and capacity, and
price and customer relations.




Patents
and Trademarks




We hold
or have the exclusive right to use a variety of patents, trademarks and
copyrights in several countries, including the United States. In addition, we
have (i) a non-exclusive, paid up (except for certain administrative fees)
license with Applied Elastomerics, Incorporated, dated as of November 30,
2001, as amended (the “AEI License”), to manufacture and sell certain products
using mineral oil-based gels which are manufactured using certain patents; the
license terminates upon the expiration of the patents, which expire between
November 16, 2010 and December 3, 2017, and (ii) a license with Gerald
Zook effective as of January 1, 1997, to manufacture and sell certain
products using mineral oil-based gels under certain patents and know-how in
exchange for sales-based royalty payments; the license is exclusive as to
certain products and non-exclusive as to other products, and terminates upon
expiration of the underlying patents, which expire between June 27, 2006
and March 12, 2013. Other than the AEI License and the Zook license, we
believe that none of our active patents or licenses are essential to the
successful operation of our business as a whole, although the loss of any patent
protection that we have could allow competitors to utilize techniques developed
by us or our licensors. We believe our trademarks and trade names, including
SiliposTM, Explorer Gel LinerTM, SilolinerTM, DuraGelTM, and SilopadTM, contribute
significantly to brand recognition for our products, and the inability to use
one or more of these names could have a material adverse effect on our business.
For the year ended December 31, 2008, revenues generated by the products
incorporating the technology licensed under the AEI License accounted for
approximately 21.3% of our revenues.




As part
of the divestiture of the Langer branded custom orthotics business in October
2008, the Company sold its rights to the trademarks used in the custom orthotics
business.  The Company also sold its rights to the trade name “Langer”
and has agreed to seek a change of its corporate name at its next annual
shareholders meeting.





Employees




As of
March 1, 2009, we have 261 employees, of which 187 were located in
Winooski, Vermont, 65 were located in Niagara Falls, New York, six were located
in New York, New York, and three are outside salespeople at various other
locations. None of our employees are represented by unions or covered by any
collective bargaining agreements. We have not experienced any work stoppages or
employee-related slowdowns and believe that our relationship with employees is
satisfactory.




Government
Regulation




Medical
Device Regulation




United States. Our products
and operations are subject to regulation by the Food and Drug Administration, or
FDA, the Federal Trade Commission, or FTC, state authorities and comparable
authorities in foreign jurisdictions. The FDA regulates the research, testing,
manufacturing, safety, labeling, storage, recordkeeping, premarket clearance or
approval, promotion, distribution and production of medical devices in the
United States to ensure that medical products distributed domestically are safe
and effective for their intended uses. In addition, the FDA regulates the export
of medical devices manufactured in the United States to international markets.
Under the Federal Food, Drug, and Cosmetic Act, or FFDCA, medical devices are
classified into one of three classes—Class I, Class II or Class III (described
below)—depending on the degree of risk associated with each medical device and
the extent of control needed to ensure safety and effectiveness. Our products
are generally Class I devices, with the exception of certain gel sheeting and
prosthetic devices which are Class II devices. The FTC regulates product
advertising to help ensure that claims are truthful and
non-misleading.




7


Class I
devices are subject to the lowest degree of regulatory scrutiny because they are
considered low risk devices. FDA requires Class I devices to comply with its
General Controls, which include compliance with the applicable portions of the
FDA’s Quality System Regulation, or QSR, facility registration and product
listing, reporting of adverse medical events, and appropriate, truthful and
non-misleading labeling, advertising, and promotional materials. Most Class I
devices are not required to submit 510(k) premarket notifications, but all are
subject to the FDA’s general misbranding and adulteration
prohibitions.




Class II
devices are subject to the General Controls as well as certain Special Controls
such as performance standards, post-market surveillance, and patient registries
to assure the device’s safety and effectiveness. Class II devices also typically
require the submission and clearance of a 510(k) premarket notification prior to
marketing. Unless a specific exemption applies, 510(k) premarket notification
submissions are subject to user fees. When a 510(k) premarket notification is
required, the manufacturer must submit information to the FDA demonstrating that
the device is “substantially equivalent” to a “predicate device” which is either
a device that was legally marketed prior to May 28, 1976 (the date upon
which the Medical Device Amendments of 1976 were enacted) or another
commercially available, similar device that was subsequently cleared through the
510(k) process.




If the
FDA agrees that the device is substantially equivalent, it will grant a
clearance order to allow the commercial marketing of the device in the U.S. By
statute, the FDA is required to clear a 510(k) premarket notification within 90
days of submission of the application. As a practical matter, clearance often
takes longer. If the FDA determines that the device, or its intended use, is not
“substantially equivalent” to a previously-cleared device or use, the FDA will
place the device, or the particular use of the device, into Class III, and the
device sponsor must then fulfill more rigorous premarketing requirements which
may include the submission of a premarket approval application or the submission
of a reclassification petition seeking de novo review of the device and
placement into Class I or Class II. There can be no assurance that future device
submissions will receive 510(k) clearances within 90 days of submission or that
we will be successful in obtaining 510(k) clearances for any of our products,
which could have a materially adverse effect on us.




Class III
devices are subject to the highest level of regulatory scrutiny and typically
include life support and life sustaining devices and implants as well as devices
with a new intended use or technological characteristics that are not
substantially equivalent to a use or technology currently being legally
marketed. A premarket approval application, or “PMA,” must be submitted and
approved by FDA before marketing in the U.S.





The FDA
will grant a PMA approval if it finds that the safety and effectiveness of the
product have been sufficiently demonstrated and that the product complies with
all applicable regulations and standards. The FDA may require further clinical
evaluation of the product, terminate the clinical trials, grant premarket
approval but restrict the number of devices distributed, or require additional
patient follow-up for an indefinite period of time. There can be no assurance
that we will be successful in obtaining a PMA for any Class III products, which
is necessary before marketing a Class III product in the U.S. Delays in
obtaining marketing approvals and clearances in the U.S. could have a material
adverse effect on us. Unless an exemption applies, PMA submissions also are
subject to user fees.




The FDA,
by statute and by regulation, has 180 days to review a PMA application that has
been accepted for filing, although the review of an application more often
occurs over a significantly longer period of time, and can take several years.
In approving a PMA application or clearing a 510(k) premarket notification
application, the FDA may also require some form of post-market surveillance when
the agency determines it to be necessary to protect the public health or to
provide additional safety and effectiveness data for the device. In such cases,
the manufacturer might be required to follow certain patient groups for a number
of years and to make periodic reports to the FDA on the clinical status of those
patients.




Medical
devices can be marketed only for the indications for which they are cleared or
approved. Modifications to a previously cleared or approved device that could
significantly affect its safety or effectiveness or that would constitute a
major change in its intended use, design or manufacture require the submission
of a new 510(k) premarket notification, a premarket approval supplement or a new
premarket approval application. We have modified various aspects of our devices
in the past and determined that new approvals, clearances or supplements were
not required or we filed a new 510(k). Nonetheless, the FDA may disagree with
our conclusion that clearances or approvals were not required for particular
products and may require approval or clearances for such past or any future
modifications or to obtain new indications for our existing products. Such
submissions may require the submission of additional clinical or preclinical
data and may be time consuming and costly, and may not ultimately be cleared or
approved by the FDA.




8


Our
manufacturing processes are required to comply with the applicable portions of
the QSR, which covers the methods and documentation of the design, testing,
production, processes, controls, quality assurance, labeling, packaging and
shipping of our products. The QSR also, among other things, requires maintenance
of a device master record, device history record, and complaint files. Domestic
and foreign facilities associated with the manufacturing of our products for
distribution in the United States are subject to periodic unscheduled
inspections by the FDA to assure compliance with the FFDCA and the regulations
thereunder. Based on internal audits, we believe that our facilities are in
substantial compliance with the applicable QSR regulations. We also are required
to report to the FDA if our products cause or contribute to a death or serious
injury or malfunction in a way that would likely cause or contribute to death or
serious injury were the malfunction to recur. Although medical device reports
have been submitted in the past 5 years, none have resulted in a recall of our
products or other regulatory action by the FDA. The FDA and authorities in other
countries can require the recall of products in the event of material defects or
deficiencies in design or manufacturing. The FDA can also withdraw or limit our
product approvals or clearances in the event of serious, unanticipated health or
safety concerns. We may also be required to submit reports to the FDA of
corrections and removals. Separately, we may on our own choose to conduct a
voluntary market withdrawal in situations that do not require a recall,
correction or removal. The FDA could disagree with this characterization and
require the reporting of a correction or removal.




The FDA
has broad regulatory and enforcement powers. If the FDA determines that we have
failed to comply with applicable regulatory requirements, it can impose a
variety of enforcement actions from public warning letters, fines, injunctions,
consent decrees and civil penalties to suspension or delayed issuance of
approvals, seizure or recall of our products, total or partial shutdown of
production, withdrawal of approvals or clearances already granted, and criminal
prosecution. The FDA can also require us to repair, replace or refund the cost
of devices that we manufactured or distributed. If any of these events were to
occur, it could materially adversely affect us.




Legal
restrictions on the export from the United States of any medical device that is
legally distributed in the United States are limited. However, there are
restrictions under U.S. law on the export from the United States of medical
devices that cannot be legally distributed in the United States. If a Class I or
Class II device does not have 510(k) clearance, and the manufacturer reasonably
believes that the device could obtain 510(k) clearance in the United States,
then the device can be exported to a foreign country for commercial marketing
without the submission of any type of export request or prior FDA approval, if
it satisfies certain limited criteria relating primarily to specifications of
the foreign purchaser and compliance with the laws of the country to which it is
being exported (Importing Country Criteria). We believe that all of our current
products which are exported to foreign countries currently comply with these
restrictions.





International. In many of the
foreign countries in which we market our products, we are subject to similar
regulatory requirements concerning the marketing of new medical devices. The
regulations affect, among other things, product standards, packaging
requirements, labeling requirements, import restrictions, tariff regulations,
duties and tax requirements. The regulation of our products in Europe falls
primarily within the European Economic Area, which consists of the fifteen
member states of the European Union as well as Iceland, Lichtenstein and Norway.
The legislative bodies of the European Union have adopted three directives in
order to harmonize national provisions regulating the design, manufacture,
clinical trials, labeling and adverse event reporting for medical devices: the
Council Directives 90/385/EEC (Actives Implantables Directive); 93/42/EEC
(Medical Device Directive); and 98/79/EC (In-Vitro-Diagnostics Directive). The
member states of the European Economic Area have implemented the directives into
their respective national laws. Medical devices that comply with the essential
requirements of the national provisions and the directives will be entitled to
bear a CE marking. Unless an exemption applies, only medical devices which bear
a CE marking may be marketed within the European Economic Area. There can be no
assurance that we will be successful in obtaining CE marks for our products in a
timely manner, if at all, which could have a material adverse effect on the
market price of our common stock and our business, financial condition and
results of operations.




The
European Standardization Committees have adopted numerous harmonized standards
for specific types of medical devices. Compliance with relevant standards
establishes the presumption of conformity with the essential requirements for a
CE marking and we are subject to conformity audits at any time.




Post
market surveillance of medical devices in the European Economic Area is
generally conducted on a country-by-country basis. The requirement within the
member states of the European Economic Area vary. Due to the movement towards
harmonization of standards in the European Union and the expansion of the
European Union, we expect a changing regulatory environment in Europe
characterized by a shift from a country-by-country regulatory system to a
European Union-wide single regulatory system. The timing of this harmonization
and its effect on us cannot currently be predicted.




9


In
Canada, the Medical Devices Regulations of the Medical Device Bureau,
Therapeutic Products Directorate of Health Canada (“TPD”), set out the
requirements governing the sale, importation and advertisement of medical
devices. The regulations are intended to ensure that medical devices distributed
in Canada are both safe and effective. The Canadian medical device
classification system is broadly similar to the classification systems in place
in the European Union and the United States and is based on a Class I to Class
IV risk-based classification system, with Class I being the lowest risk and
Class IV being the highest. The TPD has provided a comprehensive set of rules
determining the classification of a device, and, ultimately, the responsibility
of classification lies with the manufacturer or importer. The TPD has provided a
database of common devices and their risk classifications for reference. Devices
that are Class II, III and IV are required to have a device license. Class I
devices are not so required. Device licenses must be obtained from the TPD
before the sale of the device, effectively creating a premarket approval regime
for these categories. Many non-invasive devices are classified as Class I
devices requiring only an establishment license, while manufacturers of Class
II, III and IV devices do not. Effective January 1, 2003, new Canadian
regulatory quality systems requirements for medical devices took effect applying
established quality standards to all Canadian and foreign manufacturers holding
Class II, III and IV medical device licenses, and all Canadian and foreign
manufacturers applying for Class II, III and IV medical licenses. These quality
system regulations require Class II, III and IV medical devices to be designed
and manufactured under CAN/CSA ISO 13485-2003. There are no regulatory quality
system requirements for Class I medical devices.




Personal
Care Product Regulation




Our
personal care products are subject to regulation by the U.S. FDA, FTC, the
Consumer Product Safety Commission (the “CPSC”) and various other federal,
state, and foreign governmental authorities. Depending upon product claims and
formulation, skincare products may be regulated as consumer products, cosmetics,
drugs or devices. The Silipos skincare products are primarily regulated as
cosmetics, with the exception of the scar management gel sheeting which are
medical devices because of their mode of use. Currently 22.2% of the Twincraft
business is soap product that is not regulated by the FDA, but by the CPSC as a
consumer product. Currently 75.6% of the Twincraft business is beauty
soap/cleanser that is regulated by FDA as a cosmetic. Currently 2.2% of the
Twincraft business is antimicrobial soap that is regulated by FDA as an OTC drug
product.




Traditional
soap products, which are defined as products in which most of the nonvolatile
matter consists of an alkali salt of fatty acid and the detergent properties are
due to the alkali-fatty acid compounds, are regulated by the CPSC under the
authority of the Federal Hazardous Substances Act (“FHSA”). The FHSA requires
that certain household products bear cautionary labeling to alert consumers to
potential hazards that those products present. This could include warning labels
for soap products if they are viewed as having irritant properties. If the CPSC
believes a consumer product poses a significant hazard, it may demand recall of
the product.




Traditional
soap products which are intended not only for cleansing but for other cosmetic
uses such as beautifying, deodorizing, or moisturizing, are regulated by FDA as
cosmetics, as are beauty soaps/cleansers that do not consist primarily of alkali
salts of fatty acids. These products would need to meet FDA’s cosmetic
requirements. There are fewer regulatory requirements for cosmetic products than
for drugs or medical devices. Cosmetics marketed in the United States must
comply with the FFDCA, the Fair Packaging and Labeling Act, and the FDA’s
implementing regulations. Cosmetics must also comply with the FDA’s ingredient,
quality, and labeling requirements and the FTC’s requirements pertaining to
truthful and non-misleading advertising.




Traditional
soap products and beauty soaps/cleansers that include claims to cure, treat, or
prevent disease or to affect the structure or any function of the human body are
regulated as drug products. A small percentage of the Twincraft soap products
are marketed as acne soaps which are regulated by the FDA as OTC drug products
under the final monograph or regulation for topical antimicrobial drug products.
Any deviation from the conditions described in the final monograph would require
premarket approval from the FDA. If a product is marketed beyond the scope of
the final monograph, such as making a labeling claim or including an active
ingredient not covered by the monograph, the FDA will consider the product to be
unapproved and misbranded and can take enforcement action against the Company or
the product. OTC drug products must also comply with the FTC’s requirements
pertaining to truthful and non-misleading advertising.




10




The FDA,
FTC, or CPSC could disagree with our characterization of our skincare products
or product claims. This could result in a variety of enforcement actions which
could require the reformulation or relabeling of our products, the submission of
information in support of the products’ claims or the safety and effectiveness
of our products, or more punitive action, all of which could have a material
adverse effect on the market price of our common stock and our business,
financial condition and results of operations.




Pursuant
to the FFDCA, the portion of the Twincraft business that is involved with the
manufacture of acne soap products must also comply with the FDA’s current good
manufacturing practices, or GMPs, for drugs. As part of its regulatory
authority, the FDA may periodically inspect the physical facilities, machinery,
processes, records, and procedures that we use in the manufacture, packaging,
storage and distribution of the drug products. The FDA may perform these
inspections at any time and without advanced notice. Twincraft has a dedicated
manufacturing line for soaps that are subject to drug regulations. Based on
internal audits of the Twincraft facility, we believe it is in substantial
compliance with the applicable drug GMP regulations. However, subsequent
internal or FDA inspections may require us to make certain changes in our
manufacturing facilities and processes. We may be required to make additional
expenditures to comply with these orders or possibly discontinue selling certain
products until we comply with these orders. As a result, our business could be
adversely affected.




The
portion of Twincraft’s business that involves OTC drug products such as acne
soaps and antimicrobial drug products must also comply with recently enacted
FFDCA provisions requiring serious adverse event reporting, the maintenance of
adverse event report records, and the listing of contact information for adverse
event reporting on product labeling.  Failure to comply with these
provisions is a “prohibited act” and could adversely affect our
business.




That
portion of Twincraft’s business that is subject to the CPSC requirements must
comply with new certification requirements under the Consumer Product Safety
Improvement Act of 2008 (“CPSIA”).  Under the CPSIA, every
manufacturer of a product subject to a consumer product safety rule, or similar
rule, ban, standard or regulation, must certify to compliance based on a test of
each product or upon a reasonable testing program.  Consumer products
labeled for pediatric use (12 and under) may have additional
requirements.  While the certification and testing requirements are
currently stayed until February 10, 2010, products subject to the CPSC’s
jurisdiction must continue to comply with the underlying
requirements.  The CPSIA also granted the CPSC significantly enhanced
reporting and recall authority.  Failure to comply with CPSC
requirements could result in significant penalties and/or fines and could
significantly affect our business.




Federal
Patient Information Privacy Laws




Numerous
state, federal and international laws and regulations govern the collection,
dissemination, use, privacy, confidentiality, security, availability and
integrity of patient health information (“patient information”), including the
Health Insurance Portability and Accountability Act of 1996, or HIPAA and its
associated regulations (collectively “HIPAA”).  Many of these federal
and state laws are more restrictive than, and not preempted by HIPAA, and may be
subject to varying interpretations by courts and government agencies, creating
complex compliance issues and potentially exposing entities subject to these
laws to additional expense, adverse publicity and liability.




We do not
collect, use, maintain or transmit patient health information protected by these
privacy laws, and we are not otherwise currently subject to
them.  However, we were subject to them when we owned and operated
Regal.  Regal is a covered entity directly subject to these privacy
laws.  Moreover, Regal had contractual arrangements with other covered
entities that at that time involved the use and disclosure of patient
information (called “business associate agreements”).  Any patient
information we may have held associated with the operations of Regal, either
directly as a covered entity or indirectly as a business associate of another
covered entity, was transferred in accordance with applicable law to Regal’s
purchaser upon our divestiture of Regal, and we did not retain any patient
information.  Any business associate obligations Regal may have had
regarding patient information were likewise transferred to Regal’s
purchaser.  As a result, we are no longer directly subject to these
privacy laws although it is possible we could be found to be liable if a
violation of these laws was determined to have occurred, prior to our
divestiture of Regal, which could subject us to criminal or civil penalties and
fines.




Federal
and state consumer laws are also being applied increasingly by the Federal Trade
Commission, or FTC, and state attorneys general to regulate the collection, use
and disclosure of personal or patient information, through web sites or
otherwise, and to regulate the presentation of web site content. Courts may also
adopt the standards for fair information practices promulgated by the FTC, which
concern consumer notice, choice, security and access.




11


Third-Party
Reimbursement




Some of
our medical products are prescribed by physicians or other health care service
providers.  These physicians and providers are eligible for
third-party reimbursement, including from federal and state health insurance
programs, such as Medicare and Medicaid. An important consideration for our
business is whether third-party payment amounts will be adequate, since this is
a factor in our customers’ selection of our products. The health care industry
is continuing to experience a trend toward cost containment as government and
private third-party payers seek to contain reimbursement and utilization rates
and to negotiate reduced payment schedules with health care product suppliers.
We believe that third-party payers will continue to focus on measures to contain
or reduce their costs through managed care and other efforts. These trends may
result in a reduction from historical levels in per item revenue received for
our products.




Medicare
policies are important to our business because some of our products are covered
by Medicare and sold to Medicare beneficiaries. Moreover, third-party payers
often model their policies after the Medicare program’s coverage and
reimbursement policies. On December 8, 2003, the Medicare Prescription
Drug, Improvement and Modernization Act of 2003, or Modernization Act, was
enacted. This legislation, among other things, substantially revised the manner
in which Medicare covers and pays for items of durable medical equipment and
orthotic devices. Among other things, the Modernization Act provided that all
Medicare suppliers of durable medical equipment, prosthetics, orthotics and
supplies (“DMEPOS”) must meet new supplier quality standards and be accredited
by independent accreditation organizations. Our suppliers will be subject to
these new quality standards and accreditation requirements. This legislation
also provided that certain products would be required to meet specified clinical
conditions to qualify for Medicare payment.  The Modernization Act
also changed the payment methodology that would apply to certain items of DMEPOS
by providing that beginning in 2007, Medicare would begin paying for them
through a competitive bidding program instead of the fee schedule payment
methodology. Off-the-shelf orthotic devices and other non-Class III devices were
originally subject to the competitive bidding program, which was scheduled to
begin in ten high population metropolitan statistical areas in 2007, and then be
expanded to 70 metropolitan statistical areas in 2009, and additional areas
thereafter. Payments in regions not subject to competitive bidding may also be
adjusted using payment information from regions subject to competitive
bidding.  The Centers for Medicare and Medicaid Services (“CMS”)
published final regulations governing the competitive bidding program on April
10, 2007, and ultimately awarded 329 contracts to qualified suppliers of
DMEPOS.  Payment pursuant to the competitive bidding program was
scheduled to begin on July 1, 2008, in the ten identified competitive bidding
areas.




On July
15, 2008, the Medicare Improvements for Patients and Providers Act (“MIPPA”) was
enacted.  MIPPA made certain limited changes to the Modernization
Act’s competitive bidding program.  First, MIPPA delayed
implementation of the competitive bidding program and terminated all of the
previously awarded 329 contracts, effective June 30, 2008.  This
action effectively reinstated the payment methodology for the competitively bid
items and services to the Medicare fee schedule amounts and allowed any enrolled
DMEPOS supplier to provide the items and services in accordance with Medicare
rules.  Second, MIPPA requires that a second round of competition to
select DMEPOS suppliers be conducted to rebid the previously awarded
contracts.  This rebid will include the same items and services bid in
the first round and in the same geographic areas, with certain limited
exceptions.  MIPPA also delays competition for round two of the
competitive bidding program from 2009 to 2011 and subsequent competition under
the program from 2009 until after 2011.




Certain
of our products will be subject to competitive bidding in the markets where we
do business although MIPAA excludes off-the-shelf orthotics provided by certain
providers, such as hospitals, during a patient admission or on date of
discharge.  However, Medicare payment rates for our products will be
affected even in markets where competitive bidding is not implemented, thereby
affecting revenue for certain of our products.




In recent
years, efforts to control Medicare costs have also included the heightened
scrutiny of reimbursement codes and payment methodologies. Under Medicare,
certain devices used by outpatients are classified using reimbursement codes,
which in turn form the basis for each device’s Medicare payment levels. Changes
to the reimbursement codes describing our products can result in reduced payment
levels or the breadth of products for which reimbursement can be sought under
recognized codes.  Reduced Medicare payment levels will affect the
price we can charge for our products.




12


On
February 11, 2003, CMS made effective an interim final regulation
implementing “inherent reasonableness” authority, which allows the agency and
contractors to adjust payment amounts by up to 15% per year for certain items
and services when the existing payment amount is determined to be grossly
excessive or grossly deficient. The regulation lists factors that may be used by
CMS and its contractors to determine whether an existing reimbursement rate is
grossly excessive or grossly deficient and to determine a realistic and
equitable payment amount. CMS may make a larger adjustment each year if it
undertakes prescribed procedures. The agency’s authority to use its inherent
reasonableness authority was limited somewhat by the Modernization Act. We do
not know what impact inherent reasonableness and competitive bidding would have
on us or the reimbursement of our products or the applicability of the inherent
reasonableness authority.




Considerable
uncertainty surrounds the future determination of Medicare reimbursement levels
for our products. Items reimbursable under the Medicare program are subject to
legislative change, administrative rulings, interpretations, discretion,
governmental funding restrictions and requirements for utilization review. Such
matters, as well as more general governmental budgetary concerns, may
significantly reduce payments available for our products under this
program.




In
addition to Medicare-related changes, numerous legislative proposals have been
introduced in the U.S. Congress and in various state legislatures over the past
several years that could cause major reforms of the U.S. health care
system.




Fraud
and Abuse




We are
subject directly and indirectly to various federal and state laws pertaining to
health care fraud and abuse, including anti-kickback laws and physician
self-referral laws. Violations of these laws are punishable by criminal and
civil sanctions, including, in some instances, exclusion from participation in
federal and state health care programs, including Medicare, Medicaid, Veterans
Administration health programs and TRICARE. We believe that our operations are
in material compliance with such laws to the extent that such laws apply to us.
However, because of the far-reaching nature of these laws, there can be no
assurance that we would not be required to alter one or more of our practices to
be deemed to be in compliance with these laws. In addition, there can be no
assurance that the occurrence of one or more violations of these laws or
regulations would not result in a material adverse effect on our financial
condition and results of operations.




Anti-kickback
and Fraud Laws




Our
operations are subject to federal and state anti-kickback laws. Certain
provisions of the Social Security Act, which are commonly known collectively as
the Medicare Fraud and Abuse Statute, prohibit persons from knowingly and
willfully soliciting, receiving, offering or providing remuneration directly or
indirectly to induce either the referral of an individual, or the furnishing,
recommending, or arranging for a good or service, for which payment may be made
under a federal health care program such as Medicare and Medicaid. The
definition of “remuneration” has been broadly interpreted to include anything of
value, including such items as gifts, discounts, waiver of payments, and
providing anything at less than its fair market value. Health and Human Services
(“HHS”) has issued regulations, commonly known as safe harbors that set forth
certain provisions which, if fully met, will assure health care providers and
other parties that they will not be prosecuted under the Medicare Fraud and
Abuse Statute. Although full compliance with these provisions ensures against
prosecution under the Medicare Fraud and Abuse Statute, the failure of a
transaction or arrangement to fit within a specific safe harbor does not
necessarily mean that the transaction or arrangement is illegal or that
prosecution under the Medicare Fraud and Abuse Statute will be pursued. The
penalties for violating the Medicare Fraud and Abuse Statute include
imprisonment for up to five years, fines of up to $25,000 per violation and
possible exclusion from federal health care programs such as Medicare and
Medicaid. Many states have adopted prohibitions similar to the Medicare Fraud
and Abuse Statute, some of which apply to the referral of patients for health
care services reimbursed by any source, not only by the Medicare and Medicaid
programs.




HIPAA
created two new federal crimes: health care fraud and false statements relating
to health care matters. The health care fraud statute prohibits knowingly and
willfully executing or attempting to execute a scheme or artifice to defraud any
health care benefit program, including private payers. The false statements
statute prohibits knowingly and willfully falsifying, concealing or covering up
a material fact or making any materially false, fictitious or fraudulent
statement or representation in connection with the delivery of or payment for
health care benefits, items or services. This statute applies to any health
benefit plan, not just Medicare and Medicaid. Additionally, HIPAA granted
expanded enforcement authority to HHS and the United States Department of
Justice, (“DOJ”) and provided enhanced resources to support the activities and
responsibilities of the Office of Inspector General (“OIG”) and DOJ by
authorizing large increases in funding for investigating fraud and abuse
violations relating to health care delivery and payment.




13




Physician
Self-Referral Laws




We are
also potentially subject to federal and state physician self-referral laws.
Federal physician self-referral legislation (commonly known as the Stark Law)
prohibits, subject to certain exceptions, physician referrals of Medicare and
Medicaid patients to an entity providing certain “designated health services” if
the physician or an immediate family member has any financial relationship with
the entity. The Stark Law also prohibits the entity receiving the referral from
billing any good or service furnished pursuant to an unlawful referral, and any
person collecting any amounts in connection with an unlawful referral is
obligated to refund such amounts. A person who engages in a scheme to circumvent
the Stark Law’s referral prohibition may be fined up to $100,000 for each such
arrangement or scheme. The penalties for violating the Stark Law also include
civil monetary penalties of up to $15,000 per service and possible exclusion
from federal health care programs such as Medicare and Medicaid. Various states
have corollary laws to the Stark Law, including laws that require physicians to
disclose any financial interest they may have with a health care provider to
their patients when referring patients to that provider. Both the scope and
exceptions for such laws vary from state to state.




False
Claims Laws




Under
separate statutes, submission of claims for payment that are “not provided as
claimed” may lead to civil money penalties, criminal fines and imprisonment,
and/or exclusion from participation in Medicare, Medicaid and other federal
health care programs and federally funded state health programs. These false
claims statutes include the federal False Claims Act, which prohibits the
knowing filing of a false claim or the knowing use of false statements to obtain
payment from the federal government. When an entity is determined to have
violated the False Claims Act, it may be liable for up to three times the actual
damages sustained by the government, plus mandatory civil penalties of between
$5,000 and $10,000 for each separate false claim. Suits filed under the False
Claims Act, known as “qui tam” actions, can be brought by any individual on
behalf of the government and such individuals (known as “relators” or, more
commonly, as “whistleblowers”) may share in any amounts paid by the entity to
the government in fines or settlement. In addition, certain states have enacted
laws modeled after the federal False Claims Act. Qui tam actions have increased
significantly in recent years, causing greater numbers of health care companies
to have to defend against false claim actions, pay fines or be excluded from the
Medicare, Medicaid or other federal or state health care programs as a result of
an investigation arising out of such action. In addition, the Deficit Reduction
Action of 2005 (“DRA”) encourages states to enact state-versions of the False
Claims Act that establish liability to the state for false and fraudulent
Medicaid claims and that provide for, among other things, claims to be filed by
qui tam relators.




We do not
file claims for payment with federal, state or private health insurance programs
although we did file claims for payment under such programs on behalf of Regal
prior to our divestiture of Regal.  It is therefore possible that we
could be found to have violated the False Claims Act, or similar state law, for
filing inaccurate claims for services Regal provided during that
time.  We are not aware of any pending actions under the False Claims
Act or any similar state law or any violation of those laws occurring prior to
our divestiture of Regal.




Seasonality




Factors which can result in quarterly
variations include the timing and amount of new business generated by us, the
timing of new product introductions, our revenue mix, and the competitive
and fluctuating economic conditions in the medical and skincare
industries.




Inflation




We have
in the past been able to increase the prices of our products or reduce overhead
costs sufficiently to offset the effects of inflation on wages, materials and
other expenses except for soap base pricing which increased dramatically in
2008.  Soap base prices are highly correlated to petroleum prices and
soap base prices escalated by more than 80% in 2008 from 2007
prices.  We were unable to fully pass these increases on to our
customers.  After peaking in May of 2008, soap base pricing has
declined to pre-2008 levels.  Since petroleum has recently been
subject to dramatic price volatility, there can be no assurance that Twincraft’s
soap base pricing will not increase in the future.




14


Item
1A. Risk Factors




In
addition to other information in this Annual Report on Form 10-K, the following
risk factors should be carefully considered in evaluating our business, because
such factors may have a significant impact on our business, operating results,
liquidity and financial condition. As a result of the risk factors set forth
below, actual results could differ materially from those mentioned in any
forward-looking statements. Additional risks and uncertainties not presently
known to us, or that we currently consider to be immaterial, may also impact our
business, operating results, liquidity and financial condition. If any of the
following risks occur, our business, operating results, liquidity and financial
condition, and the price of our common stock, could be materially adversely
affected.




Risks
Related to Our Operations




We
have a history of net losses and may incur additional losses in the
future.




For the
twelve months ended December 31, 2008 and 2007, the Company had consolidated net
losses of $13.6 million and $4.5 million, respectively.  We face the
risk that these losses may continue beyond 2008.  In order for us to
achieve and maintain consistent profitability from our operations, we must
continue to achieve product revenue at or above current levels. We may increase
our operating expenses as we attempt to expand our product lines and to the
extent we acquire other businesses and products. As a result, we may need to
increase our revenues significantly to achieve sustainable profitability. We
cannot assure you that we will be able to achieve sustainable profitability. Any
such failure could have a material adverse effect on the market price of our
common stock and our business, financial condition and results of
operations.




A
write-off of intangible assets may adversely affect our results of
operations.




In the year ended December 30, 2008, we
recorded a $2.4 million impairment relating to our Twincraft customer list and a
$3.3 million impairment to the goodwill associated with
Twincraft.  This impairment was based upon the results of an
independent valuation of the Company’s identifiable intangible assets and
goodwill at October 1, 2008.  In the year ended December 31, 2007, we
recorded a loss of approximately $176,000 associated with the disposal of Langer
UK which included an impairment on goodwill allocated of approximately
$463,000.  At December 31, 2008, our total assets include intangible
assets of $25,977,562, which includes goodwill acquired in connection with prior
acquisitions.  We evaluate on a regular basis whether events and
circumstances have occurred that indicate that all or a portion of the carrying
amount of goodwill or other intangible assets may no longer be recoverable in
which case a charge to earnings is required.  In the future, we may
need to record additional provisions(s) for impairment, and such provisions(s)
may be material, which could have a material adverse effect on the market price
of our common stock and our financial condition and results of
operations.  The current unsettled economic environment increases the
likelihood of additional impairments in the future.




Our
business plan relies on certain assumptions for the markets for our products
which, if incorrect, may adversely affect our profitability.




We
believe that various demographics and industry-specific trends will help drive
growth in the medical and personal care markets, including:




·
                  an
      aging population with broad medical coverage, increased disposable income
      and longer life
expectancy;




·
                  a
      growing emphasis on physical fitness, leisure sports and conditioning,
      which will continue to lead to increased
  injuries;




·
                  increasing
      awareness and use of non-invasive devices for prevention, treatment and
      rehabilitation purposes;
and




·
                  an
      increase in the utilization of personal care products for various
      applications, including cleansing, cosmetic and for the treatment of
      various
conditions.




These
demographics and trends are uncertain. The projected demand for our products
could materially differ from actual demand if our assumptions regarding these
factors prove to be incorrect or do not materialize, or if alternative
treatments to those offered by our products gain widespread
acceptance.




15




The
growth of our personal care business depends on the successful development and
introduction of new products and services.




The
growth of our personal care business depends on the success of existing products
and services, including the manufacturing capabilities of our Twincraft
subsidiary, as well as the successful development and introduction of new
products, which face the uncertainty of customer acceptance and reaction from
competitors. In addition, our ability to create new products and new
manufacturing services, and to sustain existing products and services, is
affected by whether we can:




·
              develop and fund
      technological innovations;




·
              receive and maintain
      necessary patent and trademark
protection;


·
              obtain governmental
      approvals and registrations of regulated products and manufacturing
      operations;


·
              comply with Food and
      Drug Administration (FDA), Federal Trade Commission (FTC), Consumer
      Product Safety Commission, and other governmental regulations;
      and




·
            successfully
      anticipate consumer needs.




The
failure to develop and launch successful new products and provide new and
competitive manufacturing services could hinder the growth of our business.
Also, any delay in the development or launch of a new product could result in
our not being the first to market, which could compromise our competitive
position.




Rising
material and other costs and our increasing dependence on key suppliers could
adversely impact our profitability.




Raw and
packaging material commodities are subject to wide price variations. Increases
in the costs of these commodities and other costs, such as energy costs, may
adversely affect the Company’s profit margins if we are unable to pass along any
higher costs in the form of price increases or otherwise achieve cost
efficiencies. Of particular importance is the price of soap base, the largest
raw material used in the production of soap, representing over 60% of
Twincraft’s raw material purchases for 2008.  Soap base pricing is
highly correlated to petroleum prices and soap base escalated by more than 80%
in 2008 from 2007 prices.  We were not able to fully pass these price
increases on to our customers during 2008 and can provide no assurance that we
will be able to do so in the future.  Since petroleum has recently
been subject to dramatic price volatility, there can be no assurance that
Twincraft’s soap base costs will not increase in the future which would have a
negative impact on our gross profit and our net income.




Changes
in the requirements of our personal care customers and increasing dependence on
key customers may adversely affect our business.




Our
personal care products are sold in a highly competitive global marketplace which
is experiencing increased trade concentration. With the growing trend toward
consolidation, we are increasingly dependent on key customers. They may
use their bargaining strength to demand lower prices, higher trade
discounts, allowances or slotting fees, which could lead to reduced sales or
profitability. We may also be negatively affected by changes in the requirements
of our customers, such as inventory de-stocking, and other
conditions.




Our
business is highly competitive.  If we fail to compete successfully,
our sales and operating results may be negatively affected and we may not
achieve future growth.




The
orthopedic, orthotic, prosthetic, skincare and personal care markets are highly
competitive. Certain of our competitors in these markets have more resources and
experience, as well as more recognizable trademarks for products similar to
those sold by us. In addition, the market for orthopedic devices and related
products is characterized by new product development and corresponding
obsolescence of existing products. Our competitors may develop new techniques,
therapeutic procedures or alternative products that are more effective than our
current technology or products or that render our technology or products
obsolete or uncompetitive, which could cause a decrease in orders. Such
decreases would have a material adverse effect on the market price of our common
stock and our business, financial condition and results of
operations.




We may
not be able to develop successful new products or enhance existing products,
obtain regulatory clearances and approval of such products, and market such
products in a commercially viable manner or gain market acceptance for such
products. Failure to develop, license or market new products and product
enhancements could materially and adversely affect our competitive position,
which could cause a significant decline in our sales and
profitability.




16




We expect
that the level of competition faced by us may increase in the future. Some
competitors have substantially greater financial, marketing, research and
technical resources than us.  There can be no assurance that we will
be able to compete successfully in the orthopedic, orthotic, prosthetic,
skincare and personal care markets.  Any such failure could have a
material adverse effect on the market price of our common stock and our
business, financial condition and results of operations.




We
may not be able to raise adequate financing to fund our operations and growth
prospects.




Our
product expansion programs, debt servicing requirements, targeted acquisition
strategy, and existing operations will require substantial capital
resources.  We cannot assure you that we will be able to generate
sufficient operating cash flow or obtain sufficient additional financing to meet
these requirements.  In May, 2007, we negotiated and executed a $20
million asset-based lending facility with Wachovia Bank, National
Association.   Subsequent amendments to the facility have reduced
maximum availability to $12 million. This facility, alone, may not be adequate
to supply the amount of capital that may be required in the event of any
material acquisition. As of February 28, 2009, our availability under the credit
facility was approximately $7.5 million.  Any material acquisition is
subject to the approval of Wachovia.  If we do not have adequate
resources and cannot obtain additional capital on terms acceptable to us or at
all, we may be required to reduce operating costs by altering and delaying our
business plan or otherwise radically altering our business
practices.  Failure to meet our future capital requirements could have
a material adverse effect on the market price of our common stock and our
business, financial condition and results of operations.




We
may be unable to realize the benefits of our net operating loss (“NOL”)
carryforwards.




NOLs may
be carried forward to offset federal and state taxable income in future years
and eliminate income taxes otherwise payable on such taxable income, subject to
certain adjustments. Based on current federal corporate income tax rates, our
NOL could provide a benefit to us, if fully utilized, of significant future tax
savings. However, our ability to use these tax benefits in future years will
depend upon the amount of our otherwise taxable income. If we do not have
sufficient taxable income in future years to use the tax benefits before they
expire, we will lose the benefit of these NOL carryforwards permanently.
Additionally, future utilization of net operating losses may be limited under
existing tax law due to the change in control of Langer in 2001 and may be
further limited as a result of pending or future offerings of our common
stock.




The
amount of NOL carryforwards that we have claimed to date of approximately $13.1
million has not been audited or otherwise validated by the U.S. Internal Revenue
Service (the “IRS”). The IRS could challenge our calculation of the amount of
our NOL or any deductions or losses included in such calculation, and provisions
of the Internal Revenue Code may limit our ability to carry forward our NOL to
offset taxable income in future years. If the IRS were successful with respect
to any challenge in respect of the amount of our NOL, the potential tax benefit
of the NOL carryforwards to us could be substantially reduced.





Recent
turmoil across various sectors of the financial markets may negatively impact
the Company’s business, financial condition and/or operating
results.





Recently,
the various sectors of the credit markets and the financial services industry
have been experiencing a period of unprecedented turmoil and upheaval
characterized by disruption in the credit markets and availability of credit and
other financing, the failure, bankruptcy, collapse or sale of various financial
institutions and an unprecedented level of intervention from the United States
federal government. While the ultimate outcome of these events cannot be
predicted, they may have a material adverse effect on our ability to obtain
financing necessary to effectively execute our strategic reevaluation strategy,
the ability of our customers and suppliers to continue to operate their
businesses, the demand for our products or the ability to obtain future
financing which could have a material adverse effect on the market price of
our common stock and our business, financial condition and results of
operations.




Our
senior lender may have suffered losses related to the weakening economy and may
not be able to fund our borrowings.





Our
senior lender may have suffered losses related to their lending and other
financial relationships, especially because of the general weakening of the
national economy and increased financial instability of many borrowers. As a
result, our senior lender may become insolvent or tighten its lending standards,
which could make it more difficult for us to borrow under our credit facility or
to obtain other financing on favorable terms or at all.  Our financial
condition and results of operations could be adversely affected if we were
unable to draw funds under our credit facility because of a lender default or
failure to obtain other cost-effective financing.





17




The
current economic downturn could continue to result in a decrease in our future
sales, earnings, and liquidity.




Economic
conditions have recently deteriorated significantly in the United States, and
worldwide, and may remain depressed for the foreseeable future. These conditions
have resulted in a decline in our sales and earnings and could continue to
impact our sales and earnings in the future. Sales of our products are impacted
by downturns in the general economy primarily due to decreased discretionary
spending by consumers. The general level of consumer spending is affected by a
number of factors, including, among others, general economic conditions,
inflation, and consumer confidence, all of which are generally beyond our
control. Consumer purchases of our products declines during periods of economic
downturn, when disposable income is lower.  The economic downturn also
impacts distributors, our primary customers, resulting in the inability of our
customers to pay amounts owed to us. In addition, if our retail customers are
unable to sell our product or are unable to access credit, they may experience
financial difficulties leading to bankruptcies.




Substantially
all our assets are pledged to a secured lender.




On May
11, 2007, we entered into a loan and security agreement with Wachovia Bank,
National Association, under which we have obtained a credit facility for loans
and other financial accommodations of up to a current maximum of $12 million, of
which approximately $7.5 million is available as of February 28,
2009.  The amount of funds available to us under the credit facility
is based primarily on our levels of eligible accounts receivable and eligible
inventory, and as of the date of this report, we do not have any currently
outstanding borrowings under the facility. Substantially all our assets,
including assets acquired in the future, are pledged to the lender to secure our
obligations to the lender. If we draw down funds under the credit facility and
are unable to repay the funds when due, or are otherwise in default of the
financial covenants and related obligations under the credit facility, the
lender would have the right to foreclose upon our assets, which would have a
material adverse effect on our business, prospects, financial condition and
results of operations.




We
may be adversely affected by legal actions or proceedings.




On or
about February 13, 2006, Dr. Gerald P. Zook filed a demand for arbitration with
the American Arbitration Association, naming Langer, Inc. and Silipos as 2 of
the 16 respondents. (Four of the other respondents are the former owners of
Silipos and its affiliates, and the other 10 respondents are unknown
entities.)  The demand for arbitration alleges that Silipos is in
default of obligations to pay royalties in accordance with the terms of a
license agreement between Dr. Zook and Silipos dated as of January 1, 1997, with
respect to seven patents owned by Dr. Zook and licensed to
Silipos.  Silipos has paid royalties to Dr. Zook, but Dr. Zook claims
that greater royalties are owed.   Dr. Zook has agreed to drop
Langer, Inc. (but not Silipos) from the arbitration, without
prejudice.  Arbitration hearings were held on February 2-6, 2009, at
which time Dr. Zook sought almost $1 million in damages and a declaratory
judgment with respect to royalty reports. Post-arbitration
briefs are due by the parties by March 23, 2009 and reply briefs are due by
March 30, 2009.




Additionally,
in the normal course of business, we may be subject to claims and litigation in
the areas of general liability, including claims of employees, and claims,
litigation or other liabilities as a result of acquisitions we have completed.
The results of legal proceedings are difficult to predict and we cannot provide
you with any assurance that an action or proceeding will not be commenced
against us, or that we will prevail in any such action or proceeding. An
unfavorable outcome of the arbitration proceeding commenced by Dr. Gerald P.
Zook against Silipos may adversely affect our rights to manufacture and/or sell
certain products or raise the royalty costs of those certain
products.




An
unfavorable resolution of any legal action or proceeding could materially
adversely affect the market price of our common stock and our business, results
of operations, liquidity or financial condition.




We
rely heavily on our relationships with distributors and their relationships with
health care practitioners for marketing our products, and the failure to
maintain these relationships could adversely affect our business.




Our
marketing success depends largely upon our arrangements with distributors and
their expertise and relationships with customers such as podiatrists,
orthopedists, orthopedic surgeons, dermatologists, cosmetic and plastic
surgeons, occupational and physical rehabilitation professionals, prosthetists,
orthotists and other health care professionals in the marketplace. Failure of
our products to retain the support of these surgeons and other specialists, or
the failure of our products to secure and retain similar support from leading
surgeons and other specialists, could have a material adverse effect on the
market price of our common stock and our business, financial condition and
results of operation.  Our failure to maintain relationships with our
distributors for marketing our products, or their failure to maintain
relationships with health care professionals, could have an adverse effect on
the market price of our common stock and our business, financial condition and
results of operations.




18




We
enter into multi-year contracts with customers that can impact our
results.




We enter
into multi-year contracts with some of our customers which include terms
affecting our pricing flexibility.  There can be no assurance that
these restraints will not have an adverse impact on our margins and operating
income. While we have a diverse customer base, and no customer or distributor
constituted more than 7.1% of our consolidated revenues for the year ended
December 31, 2008, we do have customers and independent, third-party
distributors, the loss of which could have a material negative effect on our
consolidated results of operations.




The
nature of our business could subject us to potential product liability and other
claims.




The sale
of orthotic and prosthetic products and other biomechanical devices and personal
care products entails the potential risk of physical injury to patients and
other end users and an inherent risk of product liability, lawsuits and product
recalls. We currently maintain product liability insurance with coverage limits
of $1 million per occurrence and for an annual aggregate maximum subject to a
deductible of $25,000. However, we cannot assure you that this coverage would be
sufficient to cover the payment of any potential claim. In addition, we cannot
assure you that this or any other insurance coverage will continue to be
available or, if available, will be obtainable at a reasonable cost. Our
existing product liability insurance coverage may be inadequate to protect us
from any liabilities we might incur, and we will continue to be exposed to the
risk that our claims may be excluded and that our insurers may become insolvent.
A product liability claim or series of claims brought against us for uninsured
liabilities or liabilities in excess of our insurance coverage could have a
material adverse effect on the market price of our common stock and our
business, financial condition and results of operations. In addition, as a
result of a product liability claim, our reputation could be harmed and we may
have to recall some of our products, which could result in significant costs to
us and have a material adverse effect on the market price of our common stock
and our business, financial condition and results of operations.




There
are significant risks associated with acquiring and integrating
businesses.




An
element of our growth strategy may include targeted acquisitions, that is, the
acquisition of businesses and assets that will complement our current business
or products, increase size, expand our geographic scope of operations, and
otherwise offer growth opportunities. We may not be able to successfully
identify attractive acquisition opportunities, obtain financing for
acquisitions, make acquisitions on satisfactory terms, or successfully acquire
and/or integrate identified targets.  Additionally, competition for
acquisition opportunities in our industries may escalate which would increase
the costs to us of completing acquisitions or prevent us from making
acquisitions. An acquisition may also subject the Company to other risks and
costs, including:




·
              loss
      of key employees, customers or suppliers of acquired
      businesses;




·
              diversion
      of management’s time and attention from our core
    businesses;




·
              adverse
      effects on existing business relationships with suppliers and
      customers;




·
              our
      ability to realize operating efficiencies, synergies, or other benefits
      expected from an acquisition;




·
              risks
      associated with entering markets in which we have limited or no
      experience; and




·
              assumption
      of contingent or undisclosed liabilities of acquisition
      targets.




In
addition, in connection with our acquisition of Twincraft, Inc. in 2007, we face
the risk of incurring potential liabilities of that company which may not be
covered by the limited indemnification provisions in the acquisition
agreement.




The above
risks could have a material adverse effect on the market price of our common
stock and our business, financial condition and results of
operations.




19


Health
care regulations could materially adversely affect the market price of our
common stock and our business, financial condition and results of
operations.




Our
businesses are subject to governmental regulation and supervision in the United
States at the federal and state levels and abroad.  These regulations
include regulations of the FDA of our medical and personal care products, and
other laws and regulations governing our business relationships involved in the
marketing of our medical devices, products and services.  When we
acquire a new company, we may be subject to certain disclosure, enrollment and
other requirements regarding the acquired company’s ongoing
operations.  In addition, Twincraft, our soap manufacturing business
(which is part of our personal care segment) is also subject to potentially far
reaching regulation by the Consumer Product Safety Commission, FDA and FTC,
which may require us to alter one or more of our practices to be in compliance
with the applicable laws and regulations.  Collectively, our products
are actively regulated by various government entities as to their safety and
quality, and additional regulatory obligations apply as to our medical products
regulated as medical devices and the soap products regulated as OTC drug
products.




If we
fail to obtain the necessary product approvals or otherwise comply with
applicable regulatory requirements, it could result in government authorities
taking punitive actions against us, including, among other things, imposing
fines and penalties on us or preventing us from manufacturing or selling our
products.  In addition, health care fraud and abuse regulations are
complex, and even minor or inadvertent irregularities in submissions can
potentially give rise to claims that the statute has been
violated.  In connection with our original acquisition of Regal, we
subsequently acquired the membership interests of Regal Medical Supply, LLC, in
order to effectuate the original intent of the parties and ensure that its
provider numbers and taxpayer identification number were effectively acquired
with the Company’s purchase of Regal.  No assurance can be given that
the federal government will interpret these requirements, which are often highly
technical and subject to interpretation, in the same manner as the Company has,
or that regulatory authorities will not question the manner in which Regal was
conducted prior to acquisition of the membership interests of Regal Medical
Supply, LLC, and subsequent to our divestiture of it.  Any violations
of these laws, including those relating to Medicare and Medicaid reimbursement
for the period prior to the acquisition of the membership interests of Regal
Medical Supply, LLC, or subsequent to our divestiture of it could result in
claims for repayment of prior reimbursements or otherwise have a material
adverse effect on the market price of our common stock and our business,
financial condition and results of operations.




Changes
in government and other third-party payer reimbursement levels could adversely
affect the revenues and profitability of our medical segment.




Our
medical products are sold by us through our network of national, regional,
independent and international distributors who sell our products to hospitals,
doctors and other health care providers, many of whom are reimbursed for the
health care services provided to their patients by third-party payers, such as
government programs, including Medicare and Medicaid, private insurance plans
and managed care programs. Many of these programs set maximum reimbursement
levels for certain of our products sold in the United States. We may be unable
to sell our products through our distributors on a profitable basis if
third-party payers deny coverage or reduce their current levels of
reimbursement, or if our costs of production increase faster than increases in
reimbursement levels. The percentage of our products for which a health care
provider or ultimate consumer receives reimbursement from Medicare or other
insurance programs may increase as the portion of the United States population
over age 65 continues to grow, making us more vulnerable to reimbursement level
reductions by these organizations. Reduced government reimbursement levels could
result in reduced private payer reimbursement levels because of indexing of
Medicare fee schedules by certain third-party payers. Furthermore, the health
care industry is experiencing a trend towards cost containment as government and
private insurers seek to contain health care costs by imposing lower
reimbursement rates and negotiating reduced contract rates with service
providers.




Outside
the United States, reimbursement systems vary significantly by country. Many
foreign markets have government-managed health care systems that govern
reimbursement for new devices and procedures. The ability of hospitals supported
by such systems to purchase our products is dependent, in part, upon public
budgetary constraints. Canada and some European countries, for example, have
tightened reimbursement rates.  If adequate levels of reimbursement
from third-party payers outside of the United States are not obtained,
international sales of our products may decline, which could adversely affect
our net sales and could have a material adverse effect on the market price of
our common stock and our business, financial condition and results of
operations.




20


Our
business is subject to substantial government regulation relating to medical
products, personal care products, and services that could have a material
adverse effect on our business.




Government
regulation in the United States and other countries is a significant factor
affecting the research, development, formulation, manufacture and marketing of
our products. In the United States, the FDA has broad authority to regulate the
design, manufacture, formulation, marketing and sale of medical devices, and
other medical products, and many of our personal care products.  FDA’s
regulation of personal care products includes ingredient, quality, and labeling
requirements.  The Consumer Products Safety Commission has authority
over our non-cosmetic soap products and could require cautionary labeling for
products viewed as having irritant properties.  The FTC has broad
authority over all product advertising to ensure statements are truthful and
non-misleading. Overseas, these activities are subject to foreign governmental
regulation, which is in many respects similar to regulation in the United States
but which vary from country to country. United States and foreign regulation
continues to evolve, which could result in additional burdens on our operations.
If we fail to comply with applicable regulations we may be subject to, among
other things, fines, suspension or withdrawal of regulatory approvals, product
recalls, operating restrictions, and criminal prosecution. Additionally, the
cost of maintaining personnel and systems necessary to comply with applicable
regulations is substantial and increasing.




Some of
our medical products may require or will require regulatory clearance or
approval prior to being marketed. The process of obtaining these clearances or
approvals can be lengthy and expensive. We may not be able to obtain or maintain
necessary clearances or approvals for testing or marketing our products.
Moreover, regulatory clearances and approvals, if granted, may include
significant limitations on the indicated uses for which our products may be
marketed or other restrictions or requirements that reduce the value to us of
the products. Regulatory authorities may also withdraw product clearances or
approvals if we fail to comply with regulatory standards or if any problems
related to our products develop following initial marketing. We are also subject
to strict regulation with respect to our manufacturing operations. This
regulation includes testing, control and documentation requirements, and
compliance with the Quality Systems Regulation and current good manufacturing
practices, which is monitored through inspections by regulatory
authorities.




Our
profitability depends, in part, upon our and our distributors’ ability to obtain
and maintain all necessary certificates, permits, approvals and clearances from
the United States and foreign regulatory authorities and to operate in
compliance with applicable regulations. Delays in the receipt of, or failure to
receive necessary approvals, the loss of previously obtained clearances or
approvals, or failure to comply with existing or future regulatory requirements
could have a material adverse effect on the market price of our common stock and
our business, financial condition and results of operations.




The
portion of our personal care business that involves the sale of acne soaps and
antimicrobial drug products is subject to substantial government regulation that
could have a material adverse effect on our business.




Drug
products are subject to substantial government regulation in the United States
that affects the research, development, formulation, manufacture, storage,
distribution, labeling, and marketing of the products.  This includes
strict regulation of all facets of the manufacturing process including
production and process controls, packaging and labeling controls, holding and
distribution, testing, and documentation.  Compliance with current
good manufacturing practice (GMP) regulations and adverse event reporting and
recordkeeping requirements are monitored through FDA
inspections.   We are also subject to state requirements and
licenses applicable to manufacturers of drug products.  Twincraft has
a dedicated manufacturing line for soaps that are subject to drug
regulations.  Failure to pass a GMP inspection or to comply with these
and other applicable regulatory requirements could result in disruption of our
operations and manufacturing delays.  Failure to take adequate
corrective action could result in, among other things, significant fines,
seizures or recalls of products, operating restrictions and criminal
prosecution. We cannot assure you that the FDA or other governmental authorities
would agree with our interpretation of applicable regulatory requirements or
that we have in all instances fully complied with all applicable
requirements.  Any failure to comply with applicable requirements
could adversely affect our product sales and profitability and could have a
material adverse effect on the market price of our common stock and our
business, financial condition and results of operations.




Twincraft’s
acne soaps are subject to FDA regulation as OTC drug products under the final
monograph or regulation for topical antiacne products.  Any deviation
from the specific ingredients, labeling requirements, or conditions described in
the final monograph or the general drug regulations could misbrand the product
and render it an unapproved new drug.  This could result in a variety
of enforcement actions against the Company and/or the product as well as the
reformulation or relabeling of our products, all of which could have a material
adverse effect on the market price of our common stock and our business,
financial condition and results of operations.




If the
FDA, FTC, or CPSC disagrees with our characterization of our other skincare
products or product claims and determines that they are drug products, this
could result in a variety of enforcement actions which could require the
reformulation or relabeling of our products, the submission of information in
support of the products’ claims or the safety and effectiveness of our products,
or more punitive action, all of which could have a material adverse effect on
the market price of our common stock and our business, financial condition and
results of operations.




21


The
portion of our personal care products business that involves the sale of soaps
as consumer products is subject to substantial government regulation that could
have a material adverse effect on our business.




That
portion of Twincraft’s business that is subject to the CPSC requirements must
comply with new certification requirements under the Consumer Product Safety
Improvement Act of 2008 (“CPSIA”).  Under the CPSIA, every
manufacturer of a product subject to a consumer product safety rule, or similar
rule, ban, standard, or regulation, must certify to compliance based on a test
of each product or upon a reasonable testing program.  Consumer
products labeled for pediatric use (12 and under) may have additional
requirements.  While the certification and testing requirements are
currently stayed until February 10, 2010, products subject to the CPSC’s
jurisdiction must continue to comply with the underlying
requirements.  The CPSIA also granted the CPSC significantly enhanced
reporting and recall authority.  Failure to comply with CPSC
requirements could result in significant penalties and/or fines and could
significantly affect our business.




The
development and marketing of new product lines, including any scar management
products, is subject to government regulation that could delay the planned
launch of such products and could have a material adverse effect on our
business.




Any new
product lines, including any scar management products, which we may introduce
will be subject to government regulation which could affect the research,
development and formulation of the products.  In the United States,
the products may be subject to regulation by the FDA and FTC and various other
federal and state laws and requirements. Overseas, these products may be subject
to foreign governmental regulation which may in many respects be similar to the
US, but which could vary from country to country.  Depending on
product claims and formulations, such products may be regulated as cosmetics,
devices, drugs, or combination drug-devices.




There is
no assurance that the products will be successfully developed or launched in the
current year or at any time in the future or that the FDA or FTC will agree with
our characterization of the products as cosmetics or our product
claims.  This could result in a variety of enforcement actions which
could require the reformulation or relabeling of our products, further safety or
clinical testing of the products, the submission of information in support of
the product claims or the safety of the products, or more punitive action, all
of which could have a material adverse effect on our business.




We
anticipate developing and launching in subsequent years scar management products
which may be regulated as cosmetics, devices, drugs, or combination drug-device
products, depending on the product claims and formulations.  Some or
all of the products may require extensive clinical testing and regulatory
clearance or approval prior to being marketed.  The process of
conducting these studies and obtaining the necessary clearances or approvals can
be lengthy and expensive and there is no assurance that we will ultimately
develop these products or obtain the necessary clearances or approvals for
testing or marketing these products.   Once launched, we would be
subject to continual oversight and regulation by the FDA, FTC and other
regulatory bodies as to product safety, quality and claims.  If
regulated as devices, drugs, or combination products, our manufacturing process
would be subject to strict regulation.  This regulation includes
testing, control and documentation requirements, compliance with the QSR and/or
current good manufacturing practice requirements, and FDA
inspection.  Delays in the receipt of, or failure to receive necessary
approvals or clearances, or failure to comply with existing or future regulatory
requirements could have a material adverse effect on our business.




Modifications
to our marketed devices may require FDA regulatory clearances or approvals and
may require us to cease marketing or recall the modified devices until such
clearances or approvals are obtained.




The
medical products we market in the United States have obtained market clearance
through the Premarket Notification process under Section 510(k) of the FFDCA or
are exempt from the 510(k) Premarket Notification requirements. We have modified
some of our products and product labeling since obtaining 510(k) clearance. We
believe those changes did not trigger the requirement for a new 510(k) filing,
but if FDA were to disagree, we would be required to submit new 510(k) Premarket
Notifications for the modifications to our existing products.  We may
be subject to enforcement action by the FDA for failure to file the 510(k)
submissions for the product changes and be required to stop marketing the
products while the FDA reviews the new 510(k) Premarket Notification
submissions. If the FDA requires us to go through a lengthier, more rigorous
examination than we expect, our product introductions or modifications could be
delayed or canceled, which could cause our sales to decline or otherwise
adversely impact our growth. In addition, the FDA may determine that future
products will be subject to the more costly, lengthy and uncertain Premarket
Approval, or PMA, process. Products that are approved through the PMA process
generally need FDA approval before they may be modified.




22


Our
products may be subject to product recalls even after receiving clearance or
approval, which would harm our reputation and our business.




The FDA,
the Consumer Products Safety Commission and foreign regulatory authorities have
the authority to request and, in some cases, require the recall of products if
they violate the applicable law or pose a risk of injury or gross
deception.  Typical reasons for recalls are material deficiencies,
design defects or manufacturing defects or consumer complaints which are
substantiated by the Consumer Products Safety Commission. A government-mandated
or voluntary recall by us could occur as a result of component failures,
manufacturing errors, design defects, adulteration, misbranding, or any other
incidents related to our medical devices or personal care products, including,
but not limited to, adverse event reports, cease and desist communications and
any other product liability issues related to our products. Any product recall
would divert managerial and financial resources and harm our reputation with
customers and our business.




If
our medical device products fail to comply with the FDA’s Quality System
Regulation, our manufacturing could be delayed, and our product sales and
profitability could suffer.




Our
device manufacturing processes are required to comply with the FDA’s Quality
System Regulation, which covers the procedures concerning (and documentation of)
the design, testing, production processes, controls, quality assurance,
labeling, packaging, storage and shipping of our devices. We also are subject to
state requirements and licenses applicable to manufacturers of medical devices.
In addition, we must engage in extensive recordkeeping and reporting and must
make available our manufacturing facilities and records for periodic unscheduled
inspections by governmental agencies, including the FDA, state authorities and
comparable agencies in other countries. Moreover, failure to pass a Quality
System Regulation inspection or to comply with these and other applicable
regulatory requirements could result in disruption of our operations and
manufacturing delays.  Failure to take adequate corrective action
could result in, among other things, significant fines, suspension of approvals,
seizures or recalls of products, operating restrictions and criminal
prosecution. We cannot assure you that the FDA or other governmental authorities
would agree with our interpretation of applicable regulatory requirements or
that we have in all instances fully complied with all applicable
requirements.  Any failure to comply with applicable requirements
could adversely affect our product sales and profitability.




Loss
of the services of key management personnel could adversely affect our
business.




Our
operations are dependent upon the skill, experience and performance of a
relatively small group of key management and technical personnel, including our
Chairman, our President and Chief Executive Officer, our Chief Financial Officer
and Chief Operating Officer and our head of our personal care business segment.
The unexpected loss of the services of one or more of key management and
technical personnel could have a material adverse effect on the market price of
our common stock and our business, financial condition and results of
operations.




Our
Chairman devotes only as much of his time as is necessary to the affairs of the
Company and also serves in various capacities with other public and private
entities, including blank check companies and not-for-profit entities affiliated
with Kanders & Company, an entity owned and controlled by Mr. Kanders. If
appropriate as a result of strategic changes in the nature of the Company’s
business, arrangements with certain executive officers of the Company may be
adjusted so they only devote as much as is necessary to the affairs of the
Company and serve other public and private entities including Kanders &
Company in various capacities. While management believes any such non-exclusive
arrangements involving Kanders & Company will benefit the Company by
availing itself of certain of the resources of Kanders & Company, the other
business interests of these individuals could limit their ability to devote time
to our affairs.




Our
business, operating results and financial condition could be adversely affected
if we become involved in litigation regarding our patents or other intellectual
property rights.




The
orthopedic, orthotic, prosthetics and personal care product industries have
experienced extensive litigation regarding patents and other intellectual
property rights, and companies in this industry have used intellectual property
litigation in an attempt to gain a competitive advantage. Our products may
become subject to patent infringement claims or litigation or interference
proceedings declared by the United States Patent and Trademark Office (the
“USPTO”), or the foreign equivalents thereto to determine the priority of
inventions, by competitors or other companies. The defense and prosecution of
intellectual property suits, USPTO interference proceedings or the foreign
equivalents thereto and related legal and administrative proceedings are both
costly and time consuming. An adverse determination in litigation or
interference proceedings to which we may become a party could:




·
                  subject us to
      significant liabilities to third
parties;




·
                  require disputed
      rights to be licensed from a third-party for royalties that may be
      substantial;




23




·
                  require us to cease
      manufacturing, using or selling such products or technology;
      or




·
                  result in the
      invalidation or loss of our patent
rights.




Any one
of these outcomes could have a material adverse effect on the market price of
our common stock and our business, financial condition and results of
operations. Furthermore, we may not be able to obtain necessary licenses on
satisfactory terms, if at all. Even if we are able to enter into licensing
arrangements, costs associated with these transactions may be substantial and
could include the long-term payment of royalties. Accordingly, adverse
determinations in a judicial or administrative proceeding or our failure to
obtain necessary licenses could prevent us from manufacturing and selling our
products, or from using certain processes to make our products which would have
a material adverse effect on the market price of our common stock and our
business, operating results and financial condition. Moreover, even if we are
successful in such litigation, the expense of defending such claims could be
material.




In
addition, we may in the future need to litigate to enforce our patents, to
protect our trade secrets or know-how or to determine the enforceability, scope
and validity of the proprietary rights of others. Such enforcement of our
intellectual property rights could involve counterclaims against us. Any future
litigation or interference proceedings may result in substantial expense to us
and significant diversion of effort by our technical and management
personnel.




Intellectual
property litigation relating to our products could also cause our customers or
potential customers to defer or limit their purchases of our products, or cause
health care professionals, agents and distributors to cease or lessen their
support and marketing of our products.




We
may not be able to maintain the confidentiality, or assure the protection, of
our proprietary technology.




We hold
or have the exclusive right to use a variety of patents, trademarks and
copyrights in several countries, including the United States that we are
dependent on, including patents and patent applications in the U.S. and certain
foreign jurisdictions and a number of trademarks for technologies and brands
related to our product offerings. The ownership of a patent or an interest in a
patent does not always provide significant protection, and the patents and
patent applications in which we have an interest may be challenged as to their
validity or enforceability. Others may independently develop similar
technologies or design around the patented aspects of our technology. Challenges
may result in potentially significant harm to our business. We are also
dependent upon a variety of methods and technologies that we regard as
proprietary trade secrets. In addition, we have (i) a non-exclusive, paid up
(except for certain administrative fees) license with Applied Elastomerics,
Incorporated (the “AEI License”) dated as of November 30, 2001, as amended, to
manufacture and sell certain products using mineral oil based gels under certain
patents, during the life of such patents, and (ii) a license with Gerald Zook
(the “Zook License”), effective as of January 1, 1997, to manufacture and sell
certain products using mineral oil based gels under certain patents and know
how, during the life of such patents, in exchange for sales based royalty
payments, that is exclusive as to certain products but is non-exclusive as to
others.  We believe our trademarks and trade names, including
SiliposTM, Explorer Gel LinerTM, SilolinerTM, and SilopadTM, contribute
significantly to brand recognition for our products, and the inability to use
one or more of these names could have a material adverse affect on our business.
For the years ended December 31, 2008 and 2007, revenues generated by the
products incorporating the technology licensed under the AEI License accounted
for approximately 22.4% and 36.4% of our revenues. For the years ended December
31, 2008 and 2007, revenues generated by products covered by the Zook License,
as we understand the Zook License, accounted for approximately 4.3% and 8.7% of
our revenues. In 2006, Dr. Gerald P. Zook, the licensor of the Zook License,
commenced an arbitration proceeding alleging that a broader range of products
sold by us are covered by the Zook License and that more license fees are
payable by us under the Zook License, but he subsequently discontinued the
arbitration against the Company (but not Silipos) with prejudice. See Item 3,
“Legal Proceedings.”




We rely
on a combination of trade secret, copyright, patent, trademark, unfair
competition and other intellectual property laws as well as contractual
agreements to protect our rights to such intellectual property. Due to the
difficulty of monitoring unauthorized use of and access to intellectual
property, however, such measures may not provide adequate protection. There can
be no assurance that courts will always uphold our intellectual property rights,
or enforce the contractual arrangements that we have entered into to protect our
proprietary technology and trade secrets.




Further,
although we seek to protect our trade secrets, know-how and other unpatented
proprietary technology, in part, with confidentiality agreements with certain of
our employees and consultants, we cannot assure you that:




·
            these
      confidentiality agreements will not be
breached;




·
            we
      will have adequate remedies for any
breach;




24


·
            we
      will not be required to disclose such information to the FDA or other
      governmental agency in order for us to have the right to market a product;
      or




·
              trade
      secrets, know-how and other unpatented proprietary technology will not
      otherwise become known to or independently
      developed by our competitors.




Any
finding of unenforceability, invalidity, non-infringement, or misappropriation
of our intellectual property could have a material adverse effect on the market
price of our common stock and our business, financial condition and results of
operations. In addition, if we bring or become subject to litigation to defend
against claimed infringement of our rights or of the rights of others or to
determine the scope and validity of our intellectual property rights, such
litigation could result in substantial costs and diversion of our resources.
Unfavorable results in such litigation could also result in the loss or
compromise of our proprietary rights, subject us to significant liabilities,
require us to seek licenses from third parties, or prevent us from selling our
products, which could have a material adverse effect on the market price of our
common stock and our business, financial condition and results of
operations.




In
addition, our licenses, including the AEI License and the Zook License, could be
terminated under a variety of circumstances including for material breach of the
license agreements or in the event of the bankruptcy or insolvency of the
licensor. Any such termination could have a material adverse effect on the
market price of our common stock and our business, financial condition and
results of operations.




A portion of our revenues and
expenditures is subject to exchange rate fluctuations that could adversely
affect our reported results of operations.




While a
majority of our business is denominated in United States dollars, in 2008 we
maintained operations in Canada that required payments in the local currency and
payments received from customers for goods sold in foreign countries are
typically in the local currency. Consequently, fluctuations in the rate of
exchange between the United States dollar and certain other currencies may
affect our results of operations and period-to-period comparisons of our
operating results. For example, the value of the U.S. dollar has fallen over the
last year relative to the Canadian dollar (which is the principal foreign
currency material to our business) causing an increase in our reported revenues
when we convert the higher valued foreign currencies into U.S. dollars. If the
value of the U.S. dollar were to increase in relation to that currency in the
future, there could be a negative effect on the value of our sales in that
market when we convert amounts to dollars when we prepare our financial
statements. We do not engage in hedging or similar transactions to reduce these
risks.




We
may be liable for contamination or other harm caused by hazardous materials that
we use.




Our
research and development and manufacturing processes involve the use of
hazardous materials. We are subject to federal, state and local regulation
governing the use, manufacture, handling, storage and disposal of hazardous
materials or waste. We cannot completely eliminate the risk of contamination or
injury resulting from hazardous materials or waste, and we may incur liability
as a result of any contamination or injury. In addition, under some
environmental laws and regulations, we could also be held responsible for all of
the costs relating to any contamination at our past or present facilities and at
third-party waste disposal sites even if such contamination was not caused by
us. We may incur significant expenses in the future relating to any failure to
comply with environmental laws. Any such future expenses or liability could have
a significant negative impact on our business, financial condition and results
of operations.




Our
quarterly operating results are subject to fluctuations.




Our
revenue and operating results have fluctuated and may continue to fluctuate from
quarter to quarter due to seasonal factors and for other
reasons.  Factors which can result in quarterly variations include the
timing and amount of new business generated by us, the timing of new product
introductions, product launches into new markets, our revenue mix, acquisitions,
the timing of additional selling and general and administrative expenses to
support the anticipated growth and development of new business units and the
competitive and fluctuating economic conditions in which we
operate.




Quarter-to-quarter
comparisons of our operating results are not necessarily meaningful and should
not be relied upon as indications of likely future performance or annual
operating results. Reductions in revenues or net income between quarters could
result in a decrease in the market price of our common stock.




25


We may be subject to claims and
liabilities with respect to the businesses we previously divested that may
result in adverse outcomes to our business.




In 2008, we completed the divestiture
of all but our current Silipos and Twincraft businesses.  When we
dispose of businesses we are subject to the risk, contractually agreed or
otherwise, of certain pre-transaction liabilities.  Although the
acquirers generally assumed liabilities relating to those businesses, we may be
subject to claims and lawsuits by third parties, including former vendors,
employees and consultants of ours, related to actions or inaction by an
acquirer. In addition, our divestiture agreements provided customary
indemnifications to purchasers of our businesses or assets.  We agreed
to indemnify the acquirers against specified losses in connection with the sold
businesses.  The divestiture agreement entered into on October 24,
2008, involving the sale by the Company of substantially all of the operating
assets and liabilities of the Langer branded custom orthotics and related
products business to a third party provided that $475,000 of the purchase price
will be held in escrow for up to 12 months to satisfy indemnification claims of
the purchaser. While the escrow holdback is expected to be released by October
2009, no assurance can be given that we will ultimately receive amounts held in
escrow.




If an acquirer makes an indemnification
claim or a third party commences an action against us or an acquirer, we may
incur substantial expense and our management may have to devote a substantial
amount of time resolving such claims or defending against such actions, which
could harm our business, operating results and financial condition. In addition,
we may be required to expend substantial resources trying to determine which
party has responsibility for a claim, even if we are ultimately found to be not
responsible.





In
connection with our 2008 divestitures, we will in the future be subject to
certain non-competition and non-solicitation restrictions.




The
non-competition and non-solicitation provisions of the agreement we entered into
when we disposed of the Langer branded custom orthotics and related products
business  provides that for a period of five years after the closing
of the sale (October 24, 2008), neither we nor any of our affiliates are
permitted: (i) to engage in any business  that competes with the
business of producing and selling high-quality custom orthodic devices, ankle
and foot orthodics and prefabricated foot products for the long-term care,
orthopedic, orthotic and prosthetic markets,  (ii) to own, be employed
by, provide financing to, consult with or otherwise render services to any
person who is engaged in such business (with certain exceptions); and (iii) to
solicit or induce any employee, distributor, sales representative, agent or
contract of the purchaser or any of its affiliates to terminate his or its
employment or other relationship with the purchaser or any of its
affiliates.




’ ’




In
addition, in connection with our sale of Langer UK, the Company has agreed that
for a period of two years following the sale ( January 18, 2008), the Company
will not engage in the sale of custom orthotics and lower limb braces in the
United Kingdom, Europe, Africa and Israel.





The
non-competition and non-solicitation prohibitions will restrict the business
opportunities available to us in the future.




Risks
Related to Our Common Stock




One
stockholder has the ability to significantly influence the election of our
directors and the outcome of corporate action requiring stockholder
approval.




As of
March 20, 2009, Warren B. Kanders, our Chairman of the Board of Directors, in
his capacity as sole manager and voting member of Langer Partners, LLC (“Langer
Partners”) and the sole stockholder of Kanders & Company, Inc., may be
deemed to be the beneficial owner of  2,041,856 shares, or
approximately 23.8% of our outstanding common stock. (This amount does not
include options which if exercised would provide 615,000 additional shares of
common stock and restricted stock awards of 500,000 shares, which presently will
vest only if and when the Company has earnings before interest, taxes,
depreciation and amortization of at least $10,000,000 in any period of four
consecutive fiscal quarters, commencing with the quarter beginning January 1,
2007, 1,126,199 shares issuable upon conversion of the 5% convertible notes, and
15,000 shares associated with unexercised warrants). As of March 24, 2009,
current executive officers and directors, including Mr. Kanders, beneficially
own an aggregate of 2,960,741 shares (excluding the options and restricted stock
awards, shares issuable upon conversion of the 5% convertible notes, and shares
associated with unexercised warrants referenced above) or approximately 34.4% of
our outstanding common stock. Consequently, Mr. Kanders, acting alone or
together with our other officers and directors, has the ability to significantly
influence all matters requiring stockholder approval, including the election of
our directors and the outcome of corporate actions requiring stockholder
approval, such as a change in control.




26


The
price of our common stock has been and is expected to continue to be volatile,
which could affect a stockholder’s return on investment.




There has
been significant volatility in the stock market and in particular in the market
price and trading volume of securities, which has often been unrelated to the
performance of the companies. The market price of our common stock has been
subject to significant fluctuations, and we expect it to continue to be subject
to such fluctuations for the foreseeable future. We believe the reasons for
these fluctuations include, in addition to general market volatility, the
relatively thin level of trading in our stock, and the relatively low public
float.  Therefore, variations in financial results, announcements of
material events, technological innovations or new products by us or our
competitors, our quarterly operating results, changes in general conditions in
the economy or the health care industry, other developments affecting us or our
competitors or general price and volume fluctuations in the market are among the
many factors that could cause the market price of our common stock to fluctuate
substantially.




Shares
of our common stock have been thinly traded in the past.




The
trading volume of our common stock has not been significant, and there may not
be an active trading market for our common stock in the future. As a result of
the thin trading market or “float” for our stock, the market price for our
common stock may fluctuate significantly more than the stock market as a whole.
Without a large float, our common stock is less liquid than the stock of
companies with broader public ownership and, as a result, the trading prices of
our common stock may be more volatile. In the absence of an active public
trading market, an investor may be unable to liquidate his investment in our
common stock. Trading of a relatively small volume of our common stock may have
a greater impact on the trading price for our stock than would be the case if
our public float were larger. We cannot predict the prices at which our common
stock will trade in the future.  Although our common stock is
currently traded on the NASDAQ Global Market, we cannot provide any assurance
that our common stock will continue to be listed on the NASDAQ Global
Market.





If
our shares of common stock are removed from listing on the NASDAQ Global Market,
our stock price and business opportunities may be adversely
affected.




Our
common stock is currently listed on the NASDAQ Global Market.  To
continue to be listed on the NASDAQ Global Market, we must continue to satisfy
certain “continued listing criteria,” including a minimum stock price of $1.00,
minimum market value of our listed shares of not less than $5,000,000, minimum
of 400 shareholders holding at least 100 shares, and a minimum of at least 2
registered market makers, and a majority of our directors must be “independent”
as defined in the NASDAQ rules.  At the present time, we satisfy the
requirement with respect to independent directors.  On October 3,
2008, we received two deficiency letters from the NASDAQ Stock Market Listing
Qualifications Department notifying us that for the past 30 consecutive business
days, our common stock had; (i) closed below the $1.00 per share minimum bid
price as required by NASDAQ Marketplace Rule 4450(a)(5) and (ii) not maintained
a minimum market value of publicity held shares of $5,000,000 as required by
NASDAQ Marketplace Rule 4450(a)(2).




In
accordance with the NASDAQ Marketplace Rules, we were provided (i) 90 calendar
days, or until January 2, 2009, to regain compliance with the $5 million minimum
market value requirement; and (ii) 180 calendar days, or until April 1, 2009, to
regain compliance with the minimum $1 price per share requirement. On October
22, 2008, we received notice from NASDAQ that we will have until April 7, 2009
to regain compliance with the $5 million minimum market value requirement and
until July 6, 2009 to regain compliance with the minimum $1 price per share
requirement. On March 24, 2009, we received a notice from NASDAQ that it is
suspending enforcement of the market value and the minimum bid price
requirements until July 20, 2009 and will inform the Company of the new
compliance period and specific dates by which it must regain compliance with
these requirements. There can be no guarantee that the Company will be able
to regain compliance with these NASDAQ continued listing
requirements.




If our
common stock does not regain compliance with these continued listing
requirements, NASDAQ will provide us with written notification that our common
stock will be delisted, after which we may appeal the staff determination to the
NASDAQ Listing Qualifications Panel if we so choose.  If our common
stock were delisted, the delisting may have an adverse impact on the price of
our shares of common stock, the volatility of the price of our shares, and/or
the liquidity of an investment in our shares of common stock.





We
may issue a substantial amount of our common stock in the future which could
cause dilution to investors and otherwise adversely affect our stock
price.




A key
element of our compensation strategy is to base a portion of the compensation
payable to management and our directors on restricted stock awards and other
equity-based compensation, to align the interests of directors and management
with the interests of the stockholders. In 2007, we have issued restricted stock
awards for an aggregate of 955,000 shares to 8 officers and directors, of which
restricted stock awards for 872,500 shares to 6 officers and
directors remain.  These awards will vest if and when the Company
achieves certain financial and operating targets or, in some cases, upon a
change of control. None of the restricted stock awards granted in 2007 is
presently vested.




27


We may
also issue additional shares of common stock as consideration for any
acquisitions we consummate. These issuances could be significant. To the extent
that we make acquisitions and issue our shares of common stock as consideration,
stockholders’ interest may be diluted. Any such issuance will also increase the
number of outstanding shares of common stock that will be eligible for sale in
the future. Persons receiving shares of our common stock in connection with
these acquisitions may be more likely to sell off their common stock than other
investors, which may influence the price of our common stock. In addition, the
potential issuance of additional shares in connection with anticipated
acquisitions could lessen demand for our common stock and result in a lower
price than might otherwise be obtained. We may issue common stock in the future
for other purposes as well, including in connection with financings, for
compensation purposes, in connection with strategic transactions or for other
purposes.




In
January and May, 2007, we issued an aggregate of 1,068,356 shares of our common
stock as part of the consideration we paid for the Twincraft acquisition, and we
may issue additional shares in 2009 if Twincraft achieves certain performance
targets which entitle the sellers of Twincraft to additional consideration. We
also issued 333,483 shares in connection with the Regal acquisition in
2007.




We
have a significant amount of convertible indebtedness outstanding and may issue
a substantial amount of our common stock in connection with these and other
outstanding securities and in connection with future acquisitions and our growth
plans; any such issuances of additional shares could adversely affect our stock
price.




On
December 8, 2006, we sold $28,880,000 of our 5% Convertible Notes in a private
placement. At the date of issuance, the 5% Convertible Notes were convertible
into 6,080,000 shares of our common stock at a conversion price of $4.75 per
share. As a result of the anti-dilution provisions of the 5% Convertible Notes
and the issuance of 1,068,356 shares of common stock in the Twincraft
acquisition and 333,483 shares in the Regal acquisition, the 5% Convertible
Notes are now convertible into 6,195,165 shares of our common stock, at a
conversion price, as adjusted, of $4.6617 per share, subject to further
adjustment in certain circumstances. The conversion of the 5% Convertible Notes
could result in dilution in the value of the shares of our outstanding stock and
the voting power represented thereby. The effect of the conversion of all of our
outstanding 5% Convertible Notes would be to increase outstanding shares and
dilute current shareholders by approximately 41.9% at March 20, 2009. In
addition, the conversion price of our 5% Convertible Notes may be lowered under
the conversion price adjustment provisions of the notes in certain
circumstances, including if we issue common stock at a net price per share less
than the conversion price then in effect or if we issue rights, warrants or
options entitling the recipients to subscribe for or purchase shares of our
common stock at a price per share less than the conversion price (after taking
into account any consideration we received for such rights, warrants or
options). A reduction in the conversion price would result in an increase in the
number of shares issuable upon the conversion of our 5% Convertible Notes. We
also have a significant number of stock options and warrants outstanding, and
restricted stock awards which would vest if we achieve certain performance
targets. Effective January 1, 2009, the Company adopted EITF 07-5 “Determining
Whether an Instrument is Indexed to an Entity’s Own
Stock” and
will mark to market the conversion feature in future reporting
periods which may result in more volatility in operating
results.




Our
certificate of incorporation, our bylaws and Delaware law contain provisions
that could discourage, delay or prevent a takeover attempt.




We are
subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits publicly-held Delaware
corporations to which it applies from engaging in a “business combination”
(generally including mergers, consolidations and sales of 10% or more of the
corporation’s assets) with an “interested stockholder” (generally defined as a
person owning 15% or more of the outstanding voting stock of the corporation,
subject to certain exceptions) for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. This provision could
discourage others from bidding for our shares and could, as a result, reduce the
likelihood of an increase in our stock price that would otherwise occur if a
bidder sought to buy our stock.




It could
also discourage, delay or prevent another company from merging with us or
acquiring us, even if our stockholders were to consider such a merger or
acquisition to be favorable.




Additionally,
our Board of Directors has the authority to issue up to 250,000 shares of
preferred stock, and to determine the price, rights, preferences and
restrictions, including voting and conversion rights, of those shares without
any further action or vote by the stockholders. The rights of the holders of
common stock will be subject to, and may be adversely affected by, the rights of
the holders of preferred stock that may be issued in the future. Such provisions
could adversely affect the holders of common stock in a variety of ways,
including by potentially discouraging, delaying or preventing a takeover of us
and by diluting our earnings per share.




28


We
do not expect to pay dividends in the foreseeable future.




We
currently do not intend to pay any dividends on our common stock. We currently
intend to retain any earnings for working capital, repayment of indebtedness,
capital expenditures and general corporate purposes.




Item
1B. Unresolved Staff Comments




Not
applicable.




Item
2. Properties




We are
headquartered and have sales offices in New York, New York and operate
manufacturing facilities in Niagara Falls, New York, and Winooski,
Vermont.  The following table sets forth information about our real
properties where our manufacturing, warehouse, sales and office space are
located:




Location
                              
                              Use
                              
                              2008
                                Annual
                                Rent
                              
                              Owned/
                                Leased
                              
                              Lease
                                Termination
                                Date
                              
                              
                              Size
                                (Square
                                Feet)Niagara
      Falls, New York
                              
                              Manufacturing
      and distribution
                              
                              $
                              432,511
                              
                              Leased
                              
                              May 31,
      2018
                              (1)
                              
                              40,000Niagara
      Falls, New York
                              
                              Manufacturing
                              
                              $
                              32,632
                              
                              Leased
                              
                              January
      31, 2010
                              (2)
                              
                              5,250New
      York, New York
                              
                              Corporate
      headquarters and sales
                              
                              $
                              117,112
                              
                              Leased
                              
                              June
      30, 2009
                              (3)
                              
                              4,902King
      of Prussia,
                                Pennsylvania
                              
                              Vacant
                              
                              $
                              96,310
                              
                              Leased
                              
                              December
      31, 2012
                              (4)
                              
                              24,000Winooski,
      Vermont
                              
                              Manufacturing
      and distribution
                              
                              $
                              444,958
                              
                              Leased
                              
                              January
      22, 2014
                              (5)
                              
                              90,500Essex,
      Vermont
                              
                              Distribution
      and warehousing
                              
                              $
                              303,600
                              
                              Leased
                              
                              October
      1, 2010
                              (5)
                              
                              80,100




(1)
            The
      rent increases each year throughout the
lease.


(2)
            The
      lease was renewed to January 31,
2010.


(3)
            Management
      expects to lease comparable space upon lease
  expiration.


(4)
            Formerly
      Regal Medical Supply, LLC’s sales and administration offices; it is
      anticipated that the property will be
sublet.


(5)
            Twincraft
      business that was acquired in January
2007.




We
believe that our manufacturing, warehouse and office facilities are suitable and
adequate and afford sufficient capacity for our current and reasonably
foreseeable future needs. We believe we have adequate insurance coverage for our
properties and their contents.




Item
3. Legal Proceedings




On or
about February 13, 2006, Dr. Gerald P. Zook filed a demand for arbitration with
the American Arbitration Association, naming the Company and Silipos as two of
the 16 respondents. (Four of the other respondents are the former owners of
Silipos and its affiliates, and the other 10 respondents are unknown entities.)
The demand for arbitration alleges that the Company and Silipos are in default
of obligations to pay royalties in accordance with the terms of a license
agreement between Dr. Zook and Silipos dated as of January 1, 1997, with respect
to seven patents owned by Dr. Zook and licensed to Silipos. Silipos has paid
royalties to Dr. Zook, but Dr. Zook claims that greater royalties are
owed.  Silipos vigorously disputes any liability and contests his
theory of damages. Dr. Zook has agreed to drop Langer, Inc. (but not Silipos)
from the arbitration, without prejudice. Arbitration hearings were conducted on
February 2-6, 2009, at which time Dr. Zook sought almost $1 million in damages
and a declaratory judgment with respect to royalty
reports.  Post-arbitration briefs are due by March 23, 2009 and reply
briefs by March 30, 2009.




29




On or
about February 13, 2006, Mr. Peter D. Bickel, who was the executive vice
president of Silipos, Inc., until January 11, 2006, alleged that he was
terminated by Silipos without cause and, therefore, was entitled, pursuant to
his employment agreement, to a severance payment of two years’ base salary. On
or about February 23, 2006, Silipos commenced action in New York State Supreme
Court, New York County, against Mr. Bickel seeking, among other things, a
declaratory judgment that Mr. Bickel is not entitled to severance pay or other
benefits, on account of his breach of various provisions of his employment
agreement with Silipos and his non-disclosure agreement with Silipos, and that
he voluntarily resigned his employment with Silipos. Silipos also sought
compensatory and punitive damages for breaches of the employment agreement,
breach of the non-disclosure agreement, breach of fiduciary duties,
misappropriation of trade secrets, and tortious interference with business
relationships. On or about March 22, 2006, Mr. Bickel removed the lawsuit to the
United States District Court for the Southern District of New York and filed an
answer denying the material allegations of the complaints and counterclaims
seeking a declaratory judgment that his non-disclosure agreement is
unenforceable and that he is entitled to $500,000, representing two years’ base
salary, in severance compensation, on the ground that Silipos did not have
“cause” to terminate his employment. On August 8, 2006, the Court determined
that the restrictive covenant was enforceable against Mr. Bickel for the
duration of its term (which expired on January 11, 2007) to the extent of
prohibiting Mr. Bickel from soliciting certain key customers of the Company with
whom he had worked during his employment with the Company. The Company has
withdrawn, without prejudice, its claims for compensatory and punitive damages
for breaches of the employment agreement, breach of the non-disclosure
agreement, breach of fiduciary duties, misappropriation of trade secrets, and
tortuous interference with business relations. On October 12, 2007, the court
issued an opinion and order dismissing all of Mr. Bickel’s claims against
Silipos, denying Mr. Bickel’s motion to dismiss the remaining claims of Silipos
against him, and allowing Silipos to proceed with its claims against Mr. Bickel
for breach of fiduciary duty and disloyalty. The case was settled in April 2008
by an agreement that the Company would drop its remaining claims against Mr.
Bickel in return for him foregoing any right to appeal the court decision in
favor of the Company.




Additionally,
in the normal course of business, the Company may be subject to claims and
litigation in the areas of general liability, including claims of employees, and
claims, litigation or other liabilities as a result of acquisitions completed.
The results of legal proceedings are difficult to predict and the Company cannot
provide any assurance that an action or proceeding will not be commenced against
the Company or that the Company will prevail in any such action or proceeding.
An unfavorable outcome of the arbitration proceeding commenced by Dr. Gerald P.
Zook against Silipos may adversely affect the Company’s rights to manufacture
and/or sell certain products or raise the royalty costs of these certain
products.




An
unfavorable resolution of any legal action or proceeding could materially
adversely affect the market price of the Company’s common stock and its
business, results of operations, liquidity, or financial condition.




Item
4. Submission of Matters to a Vote of Security Holders




There
were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Annual Report.




[Remainder
of page is intentionally left blank.]





30


PART
II




Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities




Price
Range of Common Stock




Our
common stock, par value $0.02 per share, has been traded on the NASDAQ Global
Market since August 23, 2005 under the symbol “GAIT”.  The following
table sets forth the high and low bid prices for the common stock as reported on
the NASDAQ Global Market.




The last
reported sale price on March 20, 2009, was $0.20. On such date, there were
approximately 171 holders of record of our common stock. This figure excludes
all owners whose stock is held beneficially or in “street” name.




Year
      ended December 31, 2009
                                                
                                                High
                                                
                                                LowFirst
      Quarter (January 1-March 20)
                                                
                                                
                                                $
                                                0.75
                                                
                                                
                                                $
                                                0.16Year
      ended December 31, 2008
                                                
                                                High
                                                
                                                LowFirst
      Quarter
                                                
                                                
                                                $
                                                2.95
                                                
                                                
                                                $
                                                1.70Second
      Quarter
                                                
                                                
                                                $
                                                2.07
                                                
                                                
                                                $
                                                .79Third
      Quarter
                                                
                                                
                                                $
                                                1.40
                                                
                                                
                                                $
                                                .56Fourth
      Quarter
                                                
                                                
                                                $
                                                1.00
                                                
                                                
                                                $
                                                .27Year ended December 31, 2007
                                                
                                                High
                                                
                                                LowFirst
      Quarter
                                                
                                                
                                                $
                                                6.24
                                                
                                                
                                                $
                                                3.76Second
      Quarter
                                                
                                                
                                                $
                                                6.00
                                                
                                                
                                                $
                                                4.62Third
      Quarter
                                                
                                                
                                                $
                                                6.00
                                                
                                                
                                                $
                                                4.52Fourth
      Quarter
                                                
                                                
                                                $
                                                5.18
                                                
                                                
                                                $
                                                2.00




Dividend
Policy




We have
not declared any cash dividends on our common stock in the past, and we do not
presently anticipate declaring or paying any cash dividends in the foreseeable
future. We currently anticipate that we will retain all future earnings for use
in our business. The payment of dividends in the future will be at the
discretion of our Board of Directors and will depend upon, among other things,
our results of operations, capital requirements, general business conditions,
contractual restrictions on payment of dividends, if any, legal and regulatory
restrictions on payment of dividends, and other factors our Board of Directors
deems relevant.




Purchase
of Equity Securities by the Issuer and Affiliated Purchasers




The
following table sets forth information regarding the Company’s purchases of
outstanding common stock during the quarter ended December 31,
2008.




Period
                                                                  
                                                                  (a)
      Total number
                                                                    of
      shares (or units
                                                                    purchased)
                                                                  
                                                                  
                                                                  (b)
      Average price
                                                                    paid
      per share (or
                                                                    unit)
                                                                  
                                                                  
                                                                  (c) Total number
                                                                    of shares (or units)
                                                                    purchased as part
                                                                    of publicly
                                                                    announced plans
                                                                    or programs
                                                                  
                                                                  
                                                                  (d) Maximum number
                                                                    (or
      approximate dollar
                                                                    value)
      of shares (or
                                                                    units)
      that may yet be
                                                                    purchased
      under the
                                                                    plans
      or programsOctober
      1 to October 31, 2008
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  $
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  $
                                                                  4,720,244
                                                                  (1)November
      1 to November 30, 2008
                                                                  
                                                                  
                                                                  1,621,589
                                                                  (2)
                                                                  
                                                                  
                                                                  0.53
                                                                  
                                                                  
                                                                  
                                                                  1,621,589
                                                                  
                                                                  
                                                                  
                                                                  3,868,344December
      1 to December 30, 2008
                                                                  
                                                                  
                                                                  267,207
                                                                  (2)
                                                                  
                                                                  
                                                                  0.52
                                                                  
                                                                  
                                                                  
                                                                  267,207
                                                                  
                                                                  
                                                                  
                                                                  3,729,493Total
                                                                  
                                                                  
                                                                  1,888,796
                                                                  
                                                                  
                                                                  $
                                                                  0.52
                                                                  
                                                                  
                                                                  
                                                                  1,888,796





(1)
            On
      April 16, 2008, the Company announced that it had entered into an
      amendment of its credit facility with its lender, Wachovia Bank, which,
      among other things, increased the amount of common stock that the Company
      is permitted to repurchase from $2,000,000 to $6,000,000 and extends the
      period during which the Company may carry out such purchases to April 15,
      2009.




(2)
            These
      shares were purchased in the open
market.


31




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




The
discussion in this Item 7 should be read in conjunction with our consolidated
financial statements and the related notes to those statements included
elsewhere in this Annual Report. In addition to historical consolidated
financial information, the following discussion and analysis contains
forward-looking statements that involve risks, uncertainties and assumptions.
Our actual results and timing of specific events may differ materially from
those anticipated in these forward-looking statements as a result of many
factors, including, but not limited to, those discussed in Item 1A, Risk
Factors, and elsewhere in this Annual Report.




Overview




Through
our wholly-owned subsidiaries, Twincraft and Silipos, we offer a diverse line of
personal care products for the private label retail, medical, and therapeutic
markets.  In addition, at Silipos, we design and manufacture high
quality gel-based medical products targeting the orthopedic and prosthetic
markets.  We sell our medical products primarily in the United States
and Canada, as well as in more than 30 other countries, to national, regional,
and international distributors.  We sell our personal care products
primarily in North America to branded marketers of such products, specialty
retailers, direct marketing companies, and companies that service various
amenities markets.




Our broad
range of gel-based orthopedic and prosthetics products are designed to protect,
heal, and provide comfort for the patient.  Our line of personal care
products includes bar soap, gel-based therapeutic gloves and socks, scar
management products, and other products that are designed to cleanse and
moisturize specific areas of the body, often incorporating essential oils,
vitamins, and nutrients to improve the appearance and condition of the
skin.




Twincraft,
a manufacturer of bar soap, focuses on the health and beauty, direct marketing,
amenities, and mass market channels, was acquired in January, 2007, and Silipos,
which offers gel-based personal care products which moisturize and provide
comfort, was acquired in September, 2004.




Recent
Developments:




Operating
History:




Prior to
2008, Langer owned a diverse group of subsidiaries and businesses including
Twincraft, Silipos, the Langer branded custom orthotics and related products
business, Langer UK Limited (“Langer UK”), Regal Medical Supply, LLC (“Regal”),
and Bi-Op Laboratories, Inc. (“Bi-Op”).  In November 2007, we began a
study of strategic alternatives available to us with regard to our various
operating companies.  During 2008, the Company sold Langer UK, Bi-Op,
Regal, and the Langer orthotics business, as further discussed in Note 3 of the
accompanying financial statements.




The sales
of these businesses generated approximately $7.0 million in cash proceeds, which
includes approximately $100,000 received in February 2009, which the Company has
deployed in part to purchase its own capital stock in the market and has
retained for future needs.  The Company also holds approximately
$638,000 in notes receivable.




We
believe that along with strengthening our balance sheet through these
divestitures, by retaining Twincraft and Silipos, we have honed our focus on our
two largest and most significant businesses.  In addition, during 2008
we streamlined the corporate structure of the Company, significantly reducing
general and administrative expenses.  We expect this streamlined and
focused organization will enhance our ability to develop and market innovative
products.




In
addition, our Board has authorized the purchase of up to $6,000,000 of our
outstanding common stock.  In connection with this matter, the
Company’s senior lender, Wachovia Bank, National Association, has waived, until
April 15, 2009, the provisions of the credit facility that would otherwise
preclude the Company from making such repurchases.  From January 2008
through March 16, 2009, the Company has purchased 2,907,460 of its common shares
at a cost of $2,353,863 (or $0.81 per share) including commissions
paid.


32




Receipt
of NASDAQ Deficiency Letters




On
October 3, 2008, the Company received two deficiency letters from the NASDAQ
Stock Market (“NASDAQ”) Listing Qualifications Department notifying the Company
that for the past 30 consecutive business days, its common stock had: (i) closed
below the $1 per share minimum bid price as required by NASDAQ Marketplace Rule
4450(a)(5) and (ii) not maintained a minimum market value of publicly held
shares of $5,000,000 as required by NASDAQ Marketplace Rule
4450(a)(2).




On
October 22, 2008, the Company received notification that as of October 16, 2008,
NASDAQ due to recent extraordinary market conditions, has suspended, for a three
month period, the enforcement of the rules requiring listed companies to
maintain a minimum $1.00 per share closing bid price and a $5 million minimum
market value of publicly held shares. On March 24, 2009, we received a notice
from NASDAQ that it is suspending enforcement of the market value and the
minimum bid price requirements until July 20, 2009 and will inform the Company
of the new compliance period and specific dates by which it must regain
compliance with these requirements.




There can
be no guarantee that the Company will be able to regain compliance with these
NASDAQ continued listing requirements.




Our
Products and Markets:




We
currently operate in two segments, medical products and personal care
products.  The operations of Twincraft are included in the personal
care segment, and the personal care products of Silipos are also included in
this segment.  The other segment is the medical products segment which
includes the medical, orthopedic and prosthetic gel-based products of
Silipos.




For the
year ended December 31, 2008, our personal care segment represented 79.0% of our
total revenue, compared to 78.4% of total revenues for the year ended December
31, 2007.  Our medical products segment’s revenue, on the other hand,
represented 21.0% of total revenues for the year ended December 31, 2008, as
compared to 21.6% of our total revenue for the year ended December 31,
2007.




We market
our medical products directly to international, national and regional wholesale
distributors.  We sell our personal care products primarily in North
America to branded marketers of such products, specialty retailers, direct
marketing companies and companies that service various amenities
markets.




Revenue
from product sales is recognized at the time of shipment. Our most significant
expense is cost of sales. Cost of sales consists of materials, direct labor and
overhead, and related shipping costs. General and administrative expenses
consist of executive, accounting and administrative salaries and
employee-related expenses, insurance, bank service charges, stockholder
relations and amortization of identifiable intangible assets with definite
lives. Selling expenses consist of advertising, promotions, commissions,
conventions, postage, travel and entertainment, sales and marketing salaries and
related expenses.




For each
of the years ended December 31, 2008 and 2007, we derived approximately 85.7%
and 87.0% of our revenue from North America, and approximately 14.3% and 13.0%
of our revenue from outside North America. Of our revenue derived from North
America for the years ended December 31, 2008 and 2007, approximately 95.2% and
approximately 94.4%, respectively, was generated in the United States and
approximately 4.8% and 5.6% respectively, was generated from
Canada.




Critical
Accounting Policies and Estimates




Our
accounting policies are more fully described in Note 1 of the Notes to
Consolidated Financial Statements. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Future events and their
effects cannot be determined with absolute certainty. Therefore, the
determination of estimates requires the exercise of judgment. Actual results may
differ from these estimates under different assumptions or
conditions.




Accounting Estimates.We believe
the most significant accounting estimates inherent in the preparation of our
consolidated financial statements include estimates associated with our reserves
with respect to collectibility of accounts receivable, allowances for sales
returns, inventory valuations, valuation allowance for deferred tax assets and
impairment of goodwill and identifiable intangible assets. Various assumptions
and other factors underlie the determination of these significant estimates. The
process of determining significant estimates is fact specific and takes into
account factors such as historical experience, current and expected economic
conditions, and product mix. We constantly re-evaluate these significant factors
and make adjustments where facts and circumstances dictate. Historically, actual
results have not significantly deviated from those determined using the
estimates described above.


33




Revenue Recognition.Revenue from
the sale of our products is recognized upon shipment. We generally do not have
any post-shipment obligations to customers other than for limited product
warranties.  Revenue from shipping and handling fees is included in
net sales in the consolidated statements of operations. Costs incurred for
shipping and handling is included in the cost of sales in the consolidated
statements of operations.




Goodwill and Identifiable Intangible
Assets.Goodwill
represents the excess of purchase price and related costs over the value
assigned to net tangible and identifiable intangible assets of businesses
acquired and accounted for under the purchase method.  As prescribed
under FAS 142 “Goodwill and Other Intangible Assets,” we test annually for
possible impairment to goodwill and our indefinite lived tradename. We perform
our test as of October 1st each year using a discounted cash flow analysis that
requires that certain assumptions and estimates be made regarding industry
economic factors and future growth and profitability at each of our reporting
units.  Our definite lived intangible assets are tested under FAS 144
“Accounting for the Impairment or Disposal of Long-Lived Assets” when impairment
indicators are present.  An undiscounted model is used to determine if
the carrying value of the asset is recoverable.  If not, a discounted
analysis is done to determine the fair value.  We engage a valuation
analysis expert to prepare the models and calculations used to perform the
tests, and we provide them with estimates regarding our reporting units’
expected growth and performance for future years.




Changes
in the assumptions used could materially impact our fair value estimates.
Assumptions critical to our fair value estimates are:  (i) discount
rate used to derive the present value factors used in determining the fair value
of the reporting units and trademarks and customer lists, (ii) royalty rates
used in our trademark valuations; (iii) projected average revenue growth rates
used in the reporting unit and trademark and customer list models; and (iv)
projected long-term growth rates used in the derivation of terminal year
values.  These and other assumptions are impacted by economic
conditions and expectations of management and will change in the future based on
period-specific facts and circumstances.




The
following table shows the range of assumptions we used to derive our fair value
estimates and the hypothetical additional impairment charge for goodwill,
trademarks, and customer lists resulting from a one percentage point unfavorable
change in each of our fair value assumptions:


Assumptions
      Used
                        
                        Goodwill
                        
                        
                        Trademarks
                        
                        
                        Customer
      ListDiscount
      rate
                        
                        
                        9.9-11.0
                        %
                        
                        
                        18.0-19.0
                        %
                        
                        
                        12.0
                        %Royalty
      Rate
                        
                        
                        N/A
                        
                        
                        
                        2.0-4.0
                        %
                        
                        
                        N/AAverage
      revenue growth rates
                        
                        
                        4.0-5.0
                        %
                        
                        
                        3.5-4.0
                        %
                        
                        
                        4.7
                        %Long-term
      growth rates
                        
                        
                        3.5-5.0
                        %
                        
                        
                        3.5-4.0
                        %
                        
                        
                        3.5
                        %Effect of one
      percentage point unfavorable
                        
                        (in
      thousands)change
      in:
                        
                        Goodwill
                        
                        
                        Trademarks
                        
                        
                        Customer
      ListDiscount
      rate
                        
                        $
                        1,945
                        
                        
                        $
                        —
                        
                        
                        $
                        1,124Royalty
      rate
                        
                        
                        —
                        
                        
                        
                        1,148
                        
                        
                        
                        —Average
      revenue growth rates
                        
                        
                        4,092
                        
                        
                        
                        —
                        
                        
                        
                        163Long-term
      growth rates
                        
                        
                        1,792
                        
                        
                        
                        —
                        
                        
                        
                        1




The 2008
goodwill charge of $3.3 million resulting from the goodwill impairment was
primarily the result of lower projected gross margins at our Twincraft reporting
unit.  At December 31, 2008, after the impairment charge, we had
goodwill remaining of approximately $15,898,000 for all three reporting
units.




The 2008
impairment charge to identifiable intangible assets of $2.4 million relates to
the customer list of our Twincraft reporting unit, which was primarily the
result of a decrease in the revenue derived from repeat
customers.  The financial models do not consider the Company’s ability
to replace lost customers with new customers.  At December 31, 2008,
after the impairment charge, we had identifiable intangible assets of
approximately $10,079,000.




As
indicated above, the method to compute the amount of impairment incorporates
quantitative data and qualitative criteria including new information that can
dramatically change the decision about the valuation of an intangible asset in a
very short period of time.  The Company will continue to monitor the
expected future cash flows of its reporting units for the purpose of assessing
the carrying values of its goodwill and its other intangible
assets.  Any resulting impairment loss could have a material adverse
effect on the Company’s reported financial position and results of operations
for any particular quarterly or annual period.


34




As of
October 1, 2008, the Company’s testing date, the Company’s market capitalization
was approximately $7,453,000, which is substantially lower than the Company’s
estimated combined fair values of its three reporting units. The Company’s
market capitalization at December 31, 2008 was $7,242,000 which changed
from October 1, 2008 as a result of share repurchases in the
fourth quarter offset by an increase in the stock price. The Company has
completed a reconciliation of the sum of the estimated fair values of its
reporting units to its market value (based upon its stock price at October 1,
2008, the Company’s annual testing date), which included the quantification of a
controlling interest premium.  The Company has $28.6 million of
convertible notes at the corporate level that are not allocated to the operating
units.  This was done because this financing was raised for corporate
strategic alternatives and not to fund the operations of the individual
reporting units. In addition, the Company considers the following qualitative
items that cannot be accurately quantified and are based upon the beliefs of
management, but provide additional support for the explanation of the remaining
difference between the estimated fair value of the Company’s reporting units and
its market capitalization:





·
            The
      Company’s stock is thinly traded;


·
            The
      decline in the Company’s stock price during 2008 is not correlated to a
      change in the overall operating performance of the Company;
      and


·
            Previously
      unseen pressures are in place given the global financial and economic
      crisis.




Because
of our strategy of growth through acquisitions, goodwill and other identifiable
intangible assets comprise a substantial portion (35.0% as of December 31, 2008
and 48.1% as of December 31, 2007) of our total assets.  Goodwill and
identifiable intangible assets, net, at December 31, 2008 were approximately
$15,898,000 and $10,079,000, respectively.  Goodwill and identifiable
intangible assets, net, at December 31, 2007 were approximately $21,956,000 and
approximately $13,624,000, respectively.




During
the year ended December 31, 2008, identifiable intangible assets decreased by
approximately $3,545,000 which was due to an impairment charge of approximately
$2,400,000 on the Twincraft customer list and amortization of other intangibles
of approximately $1,145,000 during the year.




During
the year ended December 31, 2008, goodwill decreased by approximately
$6,058,000. This decrease was attributable to the impairment charge of
$3,300,000 related to Twincraft, approximately $809,000 allocated to Bi-Op,
approximately $1,672,000 allocated to the Langer branded orthotics and related
products business, and $1,278,000 allocated to Regal, offset by $1,000,000 in
additional goodwill generated due to the $1,000,000 payment of escrow funds to
Twincraft.  Bi-Op, the Langer branded orthotics and related products
business and Regal were sold in 2008.  In December 2007, the Company
recorded an impairment of approximately $463,000 related to the allocated
portion of goodwill related to Langer UK as a result of the net loss associated
with the sale of Langer UK in January 2008.  Such impairment is
included in loss from operations of discontinued subsidiary.




Allowance for Doubtful
Accounts.Our allowance
for doubtful accounts was 3.0% of accounts receivable at December 31, 2008,
compared to 6.5% of accounts receivable at December 31, 2007. Management
believes that the overall allowance, as a percentage of accounts receivable at
December 31, 2008 is appropriate based upon the consolidated collection and
write-off history as well as the average age of the consolidated accounts
receivable. During the year ended December 31, 2008, we increased the reserve by
approximately $353,000 and wrote off, net of recoveries, approximately $585,000
against the allowance. As of December 31, 2008, the allowance for doubtful
accounts was approximately $172,000.  If future payments by our
customers were different from our estimates, we may need to increase or decrease
our allowance for doubtful accounts.  For the year ended December 31,
2007, we added approximately $140,000 and wrote off, net of recoveries,
approximately $164,000.




Inventory Reserve. During the
year ended December 31, 2008, we added approximately $113,000 of additional
reserves and wrote off approximately $291,000 in excess or obsolete inventory,
which was disposed of during the year. During 2008, we reviewed our inventory
levels and aging relative to current and expected usage and determined the
requirement for additions to the reserve. The inventory reserve for obsolete
inventory at December 31, 2008 was approximately $610,000. During the year ended
December 31, 2007, we added approximately $616,000 of additional reserves and
wrote off approximately $389,000 in excess or obsolete inventory which was
disposed of during the year.  The reserve for obsolete inventory was
approximately $788,000 at December 31, 2007.  If the inventory quality
or usage relative to quantities held were to deteriorate or improve in the
future, we may need to increase or decrease our reserve for excess or obsolete
inventory.


35




Inventory
write-downs represent the estimated loss of value of certain slow-moving
inventory or inventory that has been damaged or spoiled. Inventory usage is
analyzed using turnover analysis, and an allowance for obsolescence is provided
when inventory quantity exceeds its normal cycle. The percentage of allowance is
based upon actual usage, historical data and experience. Most of these reserves
are associated with raw materials used in the fabrication process and either
represent items no longer utilized in the process or significant excess
inventory. Inventory for which a reserve has been provided was approximately
$609,000 and approximately $789,000, on an original cost basis, at December 31,
2008 and 2007, respectively. Certain of the raw material inventory for which a
reserve was provided have subsequently been used in fabrication, with the
related reserve being reversed. However, we re-evaluate the reserve as of the
end of each reporting period based upon the age of the existing inventory and
the usage analysis.




Valuation Allowance—Deferred Tax
Assets.During the year ended December 31, 2008, the valuation
allowance was increased by approximately $2,300,000 to approximately $5,103,000
to reserve for various income tax benefits which may not be
realized.  During 2007, the valuation allowance was decreased by
approximately $3,959,000 to approximately $2,759,000.  The acquisition
of Twincraft during 2007 resulted in approximately $5,557,000 of deferred tax
liabilities being provided as a result of the carrying value of fixed assets and
identifiable intangibles for financial reporting purposes exceeding the related
tax basis of such assets.  These deferred tax liabilities resulted in
a corresponding reduction to the tax valuation allowance relating to the
Company’s net deferred tax assets.  In addition, the valuation
allowance was increased by approximately $1,417,000 to reserve a corresponding
amount of income tax benefits which more likely than not will not be
realized.  In 2008, a corresponding reduction in deferred tax
liabilities and valuation allowance was made as a result of the impairment at
Twincraft.




Stock-Based Compensation. We
estimate the fair value of stock options granted using the Black-Scholes option
pricing formula and a multiple option award approach. This fair value is then
amortized over the requisite service periods of the awards. This option pricing
model requires the input of highly subjective assumptions, including the
options’ expected lives, price volatility of the underlying stock, risk-free
interest rate and expected dividend rate. As stock-based compensation expense is
based on awards ultimately expected to vest, it has been reduced for estimated
forfeitures. Statement of Financial Accounting Standards (“SFAS”) No. 123(R),
“Share-Based Payment,” requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. Forfeitures were estimated based on historical
experience.




We
evaluate the assumptions used to value awards on a grant by grant basis. If
factors change or if we use a different model, future period estimates of
stock-based compensation expense may differ significantly and could have a
material effect on operating income, net income and earnings per
share.




Adoption of FIN
48.  We adopted Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”) on January 1, 2007.  We
performed a thorough review of our tax returns not yet closed due to the statute
of limitations and other currently pending tax positions of the
Company.  We reviewed and analyzed our tax records and documentation
supporting tax positions for purposes of determining the presence of any
uncertain tax positions and confirming other tax positions as certain under FIN
48.  We reviewed and analyzed our records in support of tax positions
represented by both permanent and temporary differences in reporting income and
deductions for tax and accounting purposes.  We maintain a policy,
consistent with principals under FIN 48, to continually monitor past and present
tax positions.   No uncertain tax positions were identified as a
result of this review.


36




Results
of Operations




The
following table presents selected consolidated statements of operations data as
a percentage of net sales:





2008
                      
                      
                      2007Consolidated
      Statements of Operations Data:Net
      sales
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %Cost
      of sales
                      
                      
                      71.0
                      
                      
                      
                      65.3Gross
      Profit
                      
                      
                      29.0
                      
                      
                      
                      34.7Selling
      expenses
                      
                      
                      11.6
                      
                      
                      
                      12.4General
      and administrative expenses
                      
                      
                      21.8
                      
                      
                      
                      25.0Research
      and development expenses
                      
                      
                      2.2
                      
                      
                      
                      2.0Provision
      for impairment of intangible assets
                      
                      
                      12.7
                      
                      
                      
                      —Operating
      (loss) income
                      
                      
                      (19.3
                      )
                      
                      
                      (4.7
                      )Other
      income (expense):Interest
      income
                      
                      
                      0.1
                      
                      
                      
                      0.5Interest
      expense
                      
                      
                      (5.0
                      )
                      
                      
                      (5.1
                      )Other
      income (expense)
                      
                      
                      —
                      
                      
                      
                      —Other
      expense, net
                      
                      
                      (4.9
                      )
                      
                      
                      (4.6
                      )Loss
      from continuing operations before income taxes
                      
                      
                      (24.2
                      )
                      
                      
                      (9.3
                      )Provision
      for (benefit from) income taxes
                      
                      
                      —
                      
                      
                      
                      (0.3
                      )Net
      loss from continuing operations
                      
                      
                      (24.2
                      )
                      
                      
                      (9.6
                      )Discontinued
      operations:Income
      (loss) from operations of discontinued subsidiary
                      
                      
                      (6.2
                      )
                      
                      
                      (0.7
                      )Income
      tax benefit (provision)
                      
                      
                      0.9
                      
                      
                      
                      (0.3
                      )Loss
      from discontinued operations
                      
                      
                      (5.3
                      )
                      
                      
                      (1.0
                      )Net
      loss
                      
                      
                      (29.5
                      )%
                      
                      
                      (10.6
                      )%





Years
Ended December 31, 2008 and 2007




During
2008, the Company sold all of the outstanding stock of Langer UK, sold our
entire membership interest in Regal, and sold all of the outstanding stock of
Bi-Op. In addition, on October 24, 2008, we sold substantially all of the
operating assets and liabilities of the Langer custom branded orthotics business
(“Langer Branded Orthotics”). The assets and liabilities of Langer UK, Regal,
Bi-Op and Langer branded orthotics are reflected as held for sale at December
31, 2007. The results of operations of Langer UK, Regal, Bi-Op, and Langer
Branded Orthotics are reflected as discontinued operations in the consolidated
statements of operations for the years ended December 31, 2008 and
2007.




Net loss
from continuing operations for the year ended December 31, 2008 was
approximately $11,308,000 or $(1.06) per share on a fully diluted basis,
compared to a net loss from continuing operations for the year ended December
31, 2007 of approximately $4,108,000 or $(.36) per share on a fully diluted
basis. The increase in the loss from continuing operations was primarily due to
the $5,700,000 impairment charge related to the Company’s goodwill and
intangible assets.  Other factors contributing to the decrease in
income from continuing operations were a decrease in gross profit of
approximately $1,739,000, a decrease of approximately $150,000 in interest
income, and an increase in the provision for income taxes of approximately
$294,000, which are more fully discussed below.




The
consolidated statement of operations includes losses arising from the sale of
two subsidiaries, Regal, Bi-Op, and the sale of the Langer Branded Orthotics
business, which are classified as discontinued operations. In 2008, we recorded
a net loss related to the sale of Regal of approximately $1,930,000 which
includes transaction costs of approximately $70,000 and goodwill of
$1,278,000.  Losses from operations through the date of sale of May
31, 2008, of approximately $243,000 and a loss associated with the leased
premises of approximately $175,000 are also included in discontinued operations.
The Company also recorded a net loss before income tax benefit on the sale of
Bi-Op of approximately $660,000, which includes transaction costs of
approximately $335,000 and goodwill of $809,000.  In addition we
recorded losses from operations of Bi-Op of approximately $7,000. In addition,
discontinued operations for 2008 includes approximately $269,000 representing
the operating income of the Langer custom branded orthotics business which was
sold on October 24, 2008. The loss on the sale of these assets and liabilities
was approximately $180,000, which included transaction costs of approximately
$565,000 and goodwill of $1,672,000.


37




In
January 2008, the Company sold Langer UK, and therefore has reclassified the
operating activities of this business as discounted operations as of December
31, 2007.  In addition, in 2007, we included in discontinued
operations the loss of approximately $176,000 associated with the disposal of
Langer UK.  The loss associated with disposal of Langer UK is based
upon the selling price of approximately $1,155,000 less net assets sold of
approximately $742,000, transaction costs of approximately $126,000, and
goodwill allocated to Langer UK of approximately $463,000.




Net sales
for the year ended December 31, 2008 were approximately $45,061,000, compared to
approximately $42,753,000 for the year ended December 31, 2007, an increase of
approximately $2,308,000, or 5.4%.  The principal reasons for the
increase were the increase in net sales of approximately $4,089,000 generated by
Twincraft, offset by a decrease in net sales of approximately $1,781,000 by
Silipos. Twincraft was acquired on January 23, 2007, and its sales for the first
23 days of 2007 of approximately $1,645,000 were not included in the Company’s
sales for the year ended December 31, 2007, a factor that contributed to the
increase in Twincraft’s net sales for 2008.




Net sales
of medical products were approximately $9,481,000 in 2008, compared to
approximately $9,245,000 in 2007, an increase of approximately $236,000 or
2.6%.  This increase is due to an increase in net sales of
approximately $1,007,000 due to an increase in shipments from one large
distributor of Silipos’ branded medical products which is offset by reductions
in sales to smaller distributors which are primarily as a result of competitive
pressures.




The
Company generated net sales of approximately $35,580,000 in our personal care
segment in the year ended December 31, 2008, compared to approximately
$33,508,000 in the year ended December 31, 2007, an increase of approximately
$2,072,000, or 6.2%.  This increase is attributable to an increase in
sales at Twincraft of approximately $4,089,000, offset by a decrease in net
sales of Silipos’ personal care products of approximately $2,017,000. The
increase in sales at Twincraft relate to the sales for the first 23 days of 2007
as discussed above and an increase in amenity product sales. The decrease in
Silipos’ personal care sales relate to a softening in the market for
discretionary care products due to the economic slowdown, as well as the
discriminatory buying patterns of retail customers, which can be volatile from
quarter to quarter.




Cost of
sales, on a consolidated basis, increased approximately $4,048,000, or 14.5%, to
approximately $31,982,000 for the year ended December 31, 2008, compared to
approximately $27,934,000 for the year ended December 31,
2007.  Approximately $1,508,000 of this increase is a result of
increases in net sales of 5.1% when comparing the year ended December 31, 2008
to the year ended December 31, 2007. The remaining increase is primarily
attributable to raw material price increases at Twincraft along with a shift in
the mix of revenues to amenities which are generally associated with higher
costs of goods sold and lower gross margins. The increases in material cost are
primarily related to the price of soap base, which represents the largest
component of Twincraft’s total material costs.




Cost of
sales in the medical products segment were approximately $4,684,000, or 49.4% of
medical products net sales in the year ended December 31, 2008, compared to
approximately $4,159,000 or 45.0% of medical products net sales in the year
ended December 31, 2007.  The increase in the cost of sales of Silipos
branded medical products is primarily due to the increases in certain raw
materials when comparing the same periods.




Cost of
sales for the personal care products were approximately $27,298,000, or 76.7% of
net sales of personal care products of approximately $35,580,000 in the year
ended December 31, 2008, compared to approximately $23,775,000, or 71.0% of net
sales of personal care products of approximately $33,508,000 in the year ended
December 31, 2007. The primary factors for the increase are raw material price
increases, in particular soap base, at Twincraft, which was offset by declines
in cost of sales at Silipos which were consistent with declines in net sales of
Silipos’ personal care products.




Consolidated
gross profit decreased approximately $1,739,000, or 11.7%, to approximately
$13,079,000 for the year ended December 31, 2008, compared to approximately
$14,819,000 in the year ended December 31, 2007.  Consolidated gross
profit as a percentage of net sales for the year ended December 31, 2008 was
29.0%, compared to 34.7% for the year ended December 31, 2007.  The
decrease in gross profit is primarily due to increases in raw material prices at
Twincraft, as discussed above.


38




General
and administrative expenses for the year ended December 31, 2008 were
approximately $9,853,000, or 22.5% of net sales, compared to approximately
$10,651,000, or 24.9% of net sales for the year ended December 31, 2007,
representing a decrease of approximately $798,000. The major factors causing
reductions to general and administrative expenses during the year ended December
31, 2008 as compared to the year ended December 31, 2007, are reductions in
insurance expense of approximately $351,000, reductions in professional fees
paid to consultants of approximately $1,001,000, a decrease of approximately
$170,000 in legal fees, a gain recognized on the surrender of our 41 Madison
Avenue, New York, NY lease in May 2008 of approximately $218,000, and a
reduction in rents of approximately $228,000. All of the above reductions were
offset by increases due to an acceleration of the depreciation expense of
approximately $464,000 on the leasehold improvements related to the surrendered
41 Madison Avenue, New York, NY lease, bank fees of approximately $175,000 that
relate to audits and other fees which support the Company’s credit facility,
severance payments of approximately $203,000 related to employee terminations,
increases in the amortization of intangible assets of approximately $93,000, an
increase in bad debt expense at Twincraft of approximately $256,000 due to the
bankruptcy of one customer, and approximately $114,000 in other expenses at
Twincraft since 2008 was the first full year of reporting, an approximately
$93,000 foreign exchange currency loss, and other increases of
$228,000.




Selling
expenses decreased approximately $73,000, or 1.4%, to approximately $5,248,000
for the year ended December 31, 2008, compared to approximately $5,321,000 for
the year ended December 31, 2007.  Selling expenses as a percentage of
net sales were 11.6% for the year ended December 31, 2008, compared to 12.4% of
net sales for the year ended December 31, 2007.  The principal reason
for the decrease of $73,000 was the elimination of certain salary, advertising,
and travel expenses at Twincraft and Silipos.




Research
and development expenses increased from approximately $838,000 in the year ended
December 31, 2007, to approximately $975,000 in the year ended December 31,
2008, an increase of approximately $137,000, or 16.3%, which was primarily
attributable to additional research and development personnel costs at
Twincraft.




During
2008, the Company recorded an impairment charge of $5,700,000.  The
2008 goodwill impairment charge was $3.3 million and resulted from the goodwill
impairment that was primarily the result of lower projected gross margins at our
Twincraft reporting unit.  The 2008 impairment charge to identifiable
intangible assets of $2.4 million relates to the customer list of Twincraft
reporting unit, and was primarily due to a decrease in the revenue derived from
repeat customers.




A
detailed discussion of the models and methodology used to calculate the
impairment is found in Critical Accounting Policies and Estimates.




Interest
expense was approximately $2,231,000 for the year ended December 31, 2008,
compared to approximately $2,186,000 for the year ended December 31, 2007, an
increase of approximately $45,000.  The principal reason for the
increase was related to the amortization of deferred financing costs related to
the Company’s credit facility with Wachovia Bank.




Interest
income was approximately $37,100 for the year ended December 31, 2008, compared
to approximately $187,000 for the year ended December 31,
2007.  Interest income in 2007 was related to the investment of
$28,880,000 in proceeds received from the issuance of the 5% Convertible
Notes.




Income
tax expense was approximately $409,000 for the year ended December 31, 2008,
compared to approximately $115,000 for the year ended December 31, 2007, an
increase of approximately $294,000 which is attributable to deferred tax expense
resulting from the difference in the carrying amount of goodwill for financial
reporting purposes as compared to its tax basis that resulted from the sale of
the Langer custom branded orthotics business.




Liquidity
and Capital Resources




Working
capital as of December 31, 2008, was approximately $12,789,000, compared to
approximately $17,388,000 as of December 31, 2007.  At December 31,
2007, working capital included assets and liabilities held for the sale of
approximately $6,258,000, which were sold during 2008.


39




In 2008,
the Company sold Langer UK, Bi-Op, Regal, and the Langer branded custom
orthotics and related products business, generating cash of approximately
$6,857,000.  During 2008 we generated net losses from the operation
and sales of discontinued operations of approximately $2,314,000.




In the
year ended December 31, 2008, the Company generated a net loss from continuing
operations of approximately $11,308,000, which included a provision for
impairment of intangible assets of $5,700,000, depreciation of property and
equipment and amortization of identifiable intangible assets of approximately
$3,904,000, amortization of debt acquisition costs, debt discount, and unearned
stock compensation of approximately $607,000, and a loss on a receivable
settlement and a provision for doubtful accounts of approximately
$280,000.  Changes in our operating assets and liabilities used an
additional $1,536,000 in cash which is primarily due to an approximately
$1,333,000 increase in inventory.  As a result of the above, our net
cash used for operating activities was approximately $2,204,000.  In
the year ended December 31, 2007, the Company generated a net loss from
continuing operations of approximately $4,108,000 which included depreciation
and amortization of debt acquisition costs, debt discount, and unearned stock
compensation expense of approximately $688,000.  Changes in our
operating assets and liabilities provided approximately $829,000 in cash from
operating activities in the year ended December 31, 2007.  There was
no provision for impairment of intangible assets in the year ended December 31,
2007.




Net cash
provided by investing activities was approximately $6,096,000 for the year ended
December 31, 2008.  Net cash provided by investing
activities reflects the net cash from the sales of subsidiaries of $6,857,000,
less cash of approximately $760,000 used to purchase property and
equipment.  Net cash used for investing activities for the year ending
December 31, 2007 was approximately $28,266,000 which included approximately
$25,901,000 used to purchase Twincraft and Regal, related acquisition costs of
approximately $420,000, cash placed in escrow of approximately $1,000,000 as a
result of the Twincraft acquisition, and approximately $946,000 used to purchase
property and equipment.




Net cash
used in financing activities for the year ended December 31, 2008 was
approximately $2,229,000 which reflects the net cash of approximately $2,220,000
used to purchase our common shares and a repayment of a note
payable.  Net cash used in financing activities in the year ended
December 31, 2007 includes approximately $267,000 in banking and professional
fees paid in connection with the establishment of our secured revolving credit
facility with Wachovia Bank, National Association, on May 11, 2007 (the “Credit
Facility”).




Our
Credit Facility with Wachovia Bank expires on September 30,
2011.  During 2008, the Company entered into two amendments that
decreased the maximum amount that the Company may borrow.  The Credit
Facility, as amended, provides an aggregate maximum availability, if and when
the Company has the requisite levels of assets, in the amount of $12
million.  The Credit Facility bears interest at 0.5 percent above the
lender’s prime rate or, at the Company’s election, at 2.5 percentage points
above an Adjusted Eurodollar Rate, as defined.  The obligations under
the Credit Facility are guaranteed by the Company’s domestic subsidiaries and
are secured by a first priority security interest in all the assets of the
Company and its subsidiaries.  The Credit Facility requires compliance
with various covenants including but not limited to a Fixed Charge Coverage
Ratio of not less than 1.0 to 1.0 at all times when excess availability is less
than $3 million.  As of December 31, 2008, the Company does not
have any outstanding draws under the Credit Facility and has
approximately $7.8 million (which includes approximately $1.8 million in term
loans based upon the value of Twincraft’s machinery and equipment) available
under the Credit Facility.  Availability under the Credit Facility is
reduced by 40% of the outstanding letters of credit related to the purchase of
eligible inventory, as defined, and 100% of all other outstanding letters of
credit.  At December 31, 2008, the Company had outstanding letters of
credit related to the purchase of eligible inventory of approximately $143,000,
and other outstanding letters of credit of approximately $713,000.




Our 2009
plan for capital investments is to approve additions to property and equipment
as the need may arise to support growth of revenues and provide for needed
equipment replacement.




We
believe that, based upon current levels of operations and anticipated growth,
cash to be generated from operations, together with other available sources of
liquidity, including borrowings available under our Credit Facility, will be
sufficient for the next twelve months to fund anticipated capital expenditures
and make the required payments of interest on the 5% Convertible Notes due
December 7, 2011.  There can be no assurance, however, that our
business will generate cash flow from operations sufficient to enable us to fund
our liquidity needs.  In addition, to continue our growth strategy
which contemplates making targeted acquisitions, we may need to raise additional
funds for this purpose.  In such event, we would likely need to raise
additional funds through banks or other institutional lenders or debt
financings, or through public or private equity offerings.  There can
be no assurance that any such funds will be available to us on favorable terms,
or at all.


40




Recent
distress in the financial markets has had an adverse impact on financial market
activities including among other things, extreme volatility in security prices,
severely diminished liquidity and credit availability, rating downgrades of
certain investments and declining valuations of others.  The Company
has assessed the implication of these factors on our current business and
determined that there has not been a significant impact on our financial
position, results of operations or liquidity during the year ended December 31,
2008.  However, there can be no assurance that as a result of these
conditions there will not be an impact on our future financial position, results
of operations or liquidity.  Based on available information, we
believe the lender under our Credit Facility is able to fulfill its commitment
as of the date of this filing; however, there can be no assurance that such
lender will be able to continue to fulfill its funding obligations.




Changes
in Significant Balance Sheet Accounts – December 31, 2008




Accounts
receivable, net, decreased from approximately $5,831,000 at December 31, 2007 to
approximately $5,592,000 at December 31, 2008, a decrease of approximately
$239,000.  The allowance for doubtful accounts and returns and
allowances decreased by approximately $231,000 from December 31, 2007 to
December 31, 2008.  Accounts receivable at Twincraft grew by
approximately $505,000 or 13.6% and accounts receivable at Silipos decreased
$744,000 or 35% which changes are consistent with changes in fourth quarter
sales at each subsidiary in 2008 as compared to 2007.




Inventories,
net, increased from approximately $5,600,000 at December 31, 2007 to
approximately $6,900,000 at December 31, 2008, an increase of approximately
$1,300,000.  This increase is due to the impact of the
previously discussed raw material price increases at Twincraft and
increases in quantities on hand related to a large customer order at
Twincraft.




Assets
held for sale at December 31, 2007 of approximately $9,438,000, along with
liabilities related to assets held for sale of approximately $3,180,000,
represent the assets and liabilities of Langer UK, Bi-Op, Regal, and the Langer
Branded Orthotics businesses, all of which were sold in 2008.




Property
and equipment, net, decreased from approximately $11,944,000 at December 31,
2007 to approximately $9,314,000 at December 31, 2008, a decrease of
approximately $2,630,000.  This decrease is due to a 2008 depreciation
expense of approximately $2,597,000, the write-off of approximately $793,000 in
leasehold improvements and other assets upon the surrender of the
Company’s  41 Madison Avenue, New York City lease, net of 2008
purchases of additional property and equipment of approximately
$760,000.




Because
of our strategy of growth through acquisitions, goodwill and other identifiable
intangible assets comprise a substantial portion (35.0% as of December 31, 2008
and 48.1% as of December 31, 2007) of our total assets.  Goodwill and
identifiable intangible assets, net, at December 31, 2008 were approximately
$15,898,000 and $10,079,000, respectively.  Goodwill and identifiable
intangible assets, net, at December 31, 2007 were approximately $21,956,000 and
$13,624,000, respectively.




During
the year ended December 31, 2008, identifiable intangible assets decreased by
approximately $3,545,000 which was due to an impairment charge of approximately
$2,400,000 on the Twincraft customer list and amortization of other intangibles
of approximately $1,145,000 during the year.




During
the year ended December 31, 2008, goodwill decreased by approximately
$6,058,000. This decrease was attributable to the impairment charge of
$3,300,000, approximately $809,000 allocated to Bi-Op, approximately $1,672,000
allocated to the Langer Branded Orthotics business, and $1,278,000 allocated to
Regal, all of which businesses were sold in 2008, offset by $1,000,000 in
additional goodwill generated due to the $1,000,000 payment of escrow funds to
Twincraft.  In December 2007, the Company recorded an impairment of
approximately $462,000 related to the allocated portion of goodwill related to
Langer UK as a result of the net loss associated with the sale of Langer UK in
January 2008.  Such impairment is included in loss from operations of
discontinued subsidiary.




Accounts
payable increased from approximately $2,181,000 at December 31, 2007 to
approximately $2,580,000 at December 31, 2008, an increase of
$399,000.  This increase is related to the increase in inventory at
Twincraft as discussed above.


41




Contractual
Obligations




Certain
of our facilities and equipment are leased under noncancelable operating and
capital leases. Additionally, as discussed below, we have certain long-term and
short-term indebtedness. The following is a schedule, by fiscal year, of future
minimum rental payments required under current operating and capital leases and
debt repayment requirements as of December 31, 2008 measured from the end of our
fiscal year ended December 31, 2008:




Payments due By Period (In thousands)Contractual Obligations
                  
                  Total
                  
                  
                  Less than
                    Year
                  
                  
                  1-3
                    Years
                  
                  
                  4-5
                    Years
                  
                  
                  More than
                    5 YearsOperating
      Lease Obligations
                  
                  $
                  3,434
                  
                  
                  $
                  1,020
                  
                  
                  $
                  1,376
                  
                  
                  $
                  1,000
                  
                  
                  $
                  38Capital
      Lease Obligations
                  
                  
                  4,715
                  
                  
                  
                  443
                  
                  
                  
                  920
                  
                  
                  
                  977
                  
                  
                  
                  2,375Interest
      on Long-term Debt
                  
                  
                  4,332
                  
                  
                  
                  1,444
                  
                  
                  
                  2,888
                  
                  
                  
                  —
                  
                  
                  
                  —5%
      Convertible Notes due December 7, 2011
                  
                  
                  28,880
                  
                  
                  
                  —
                  
                  
                  
                  28,880
                  
                  
                  
                  —
                  
                  
                  
                  —Severance
      Obligations
                  
                  
                  142
                  
                  
                  
                  142
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  $
                  41,503
                  
                  
                  $
                  3,049
                  
                  
                  $
                  34,064
                  
                  
                  $
                  1,977
                  
                  
                  $
                  2,413




Long-Term
Debt




On
December 8, 2006, the Company entered into a note purchase agreement for the
sale of $28,880,000 of 5% convertible subordinated notes due December 7, 2011
(the “5% Convertible Notes”).  The 5% Convertible Notes are not
registered under the Securities Act of 1933, as amended. The Company has agreed
to register the shares of the Company’s common stock acquirable upon conversion
of the 5% Convertible Notes, which may include an additional number of shares of
common stock issuable on account of adjustments of the conversion price under
the 5% Convertible Notes. The Company filed a registration statement with
respect to the shares acquirable upon conversion of the 5% Convertible Notes
(the “Underlying Shares”) on January 9, 2007, and has filed Amendment No. 1 to
the registration statement on November 19, 2007, Amendment No. 2 in April 2008,
and Amendments No. 3 and 4 in June 2008.  The 5% Convertible Notes
bear interest at the rate of 5% per annum, payable in cash semiannually on June
30 and December 31 of each year, commencing June 30, 2007.  For each
of the years ended December 31, 2008 and 2007 the Company recorded interest
expense related to the 5% Convertible Notes of approximately
$1,440,000.  At the date of issuance, the 5% Convertible Notes were
convertible at the rate of $4.75 per share, subject to certain reset provisions.
At the original conversion price at December 31, 2006, the number of Underlying
Shares was 6,080,000. Since the conversion price was above the market price on
the date of issuance and there were no warrants attached, there was no
beneficial conversion. Subsequent to December 31, 2006, on January 8, 2007 and
January 23, 2007, in conjunction with common stock issuances related to two
acquisitions, the conversion price was adjusted to $4.6706, and the number of
Underlying Shares was thereby increased to 6,183,359, pursuant to the
anti-dilution provisions applicable to the 5% Convertible Notes.  On
May 15, 2007, as a result of the issuance of an additional 68,981 shares of
common stock to the Twincraft sellers on account of upward adjustments to the
Twincraft purchase price, and the surrender to the Company of 45,684 shares of
common stock on account of downward adjustments in the Regal purchase price, the
conversion price under the 5% Convertible Notes was reduced to $4.6617, and the
number of Underlying Shares was increased to 6,195,165 shares.  This
resulted in a debt discount of $476,873, which is amortized over the term of the
5% Convertible Notes and is recorded as interest expense in the consolidated
statements of operations.  The charge to interest expense relating to
the debt discount for the year ended December 31, 2008 was approximately
$86,000.




The
principal of the 5% Convertible Notes is due on December 7, 2011, subject to the
earlier call of the 5% Convertible Notes by the Company, as follows: (i) the 5%
Convertible Notes may not be called prior to December 7, 2007; (ii) from
December 7, 2007, through December 7, 2009, the 5% Convertible Notes may be
called and redeemed for cash, in the amount of 105% of the principal amount of
the 5% Convertible Notes (plus accrued but unpaid interest, if any, through the
call date); (iii) after December 7, 2009, the 5% Convertible Notes may be called
and redeemed for cash in the amount of 100% of the principal amount of the 5%
Convertible Notes (plus accrued but unpaid interest, if any, through the call
date), and (iv) at any time after December 7, 2007, if the closing price of the
Common Stock of the Company on the NASDAQ Stock Market (or any other exchange on
which the Company’s common stock is then traded or quoted) has been equal to or
greater than $7.00 per share for 20 of the preceding 30 trading days immediately
prior to the Company’s issuing a call notice, then the 5% Convertible Notes
shall be mandatorily converted into Common Stock at the conversion price then
applicable.  The Company held a Special Meeting of Stockholders on
April 19, 2007, at which the Company’s stockholders approved the issuance by the
Company of the shares acquirable on conversion of the 5% Convertible
Notes.


42




In the
event of a default on the 5% Convertible Notes, the due date of the 5%
Convertible Notes may be accelerated if demanded by holders of at least 40% of
the 5% Convertible Notes, subject to a waiver by holders of 51% of the 5%
Convertible Notes if the Company pays all arrearages of interest on the 5%
Convertible Notes. Events of default are defined to include change in control of
the Company.




The
payment of interest and principal of the 5% Convertible Notes is subordinate to
the Company’s presently existing capital lease obligations, in the amount of
$2,700,000 as of December 31, 2008. The 5% Convertible Notes would also be
subordinated to any additional debt which the Company may incur hereafter for
borrowed money, or under additional capital lease obligations, obligations under
letters of credit, bankers’ acceptances or similar credit
transactions.




In
connection with the sale of the 5% Convertible Notes, the Company paid a
commission of $1,338,018 based on a rate of 4% of the amount of 5% Convertible
Notes sold, excluding the 5% Convertible Notes sold to members of the Board of
Directors and their affiliates, to Wm Smith & Co., who served as placement
agent in the sale of the 5% Convertible Notes.  The total cost of
raising these proceeds was $1,338,018, which will be amortized through December
7, 2011, the due date for the payment on the 5% Convertible
Notes.  The amortization of these costs for the year ended December
31, 2008 was $262,700.




Seasonality




Factors
which can result in quarterly variations include the timing and amount of new
business generated by us, the timing of new product introductions, our revenue
mix and development of new business units and the competitive and fluctuating
economic conditions in the medical products and personal care
industries.




Inflation




We have
in the past been able to increase the prices of our products or reduce overhead
costs sufficiently to offset the effects of inflation on wages, materials and
other expenses except for soap base pricing which increased dramatically in
2008.  Soap base prices are highly correlated to petroleum prices and
soap base escalated by more than 80% in 2008 from 2007 prices.  We
were unable to fully pass these increases on to our customers.  After
peaking in May of 2008, soap base pricing has declined to pre-2008
levels.  Since petroleum has recently been subject to dramatic price
volatility, there can be no assurance that Twincraft’s soap base pricing will
not increase in the future.




Recently
Issued Accounting Pronouncements




On
September 15, 2006, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. SFAS No. 157 provides guidance related to estimating fair value and
requires expanded disclosures. The standard applies whenever other standards
require (or permit) assets or liabilities to be measured at fair value. The
standard does not expand the use of fair value in any new circumstances. In
February 2008, the FASB provided a one year deferral for the implementation of
SFAS No. 157 for non-financial assets and liabilities recognized or disclosed at
fair value in the financial statements on a non-recurring basis. The Company
adopted SFAS No. 157 as of January 1, 2008.  The Company has no
financial assets or liabilities that are currently measured at fair value on a
recurring basis and therefore the adoption of the standard had no impact upon
the Company’s financial position or results of operations. The Company is in the
process of reviewing the implementation of SFAS No. 157 on non-financial assets
and liabilities which will be effective January 1, 2009.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.”  SFAS No. 159 allows
companies to choose to measure many financial instruments and certain other
items at fair value.  The statement requires that unrealized gains and
losses on items for which the fair value option has been elected be reported in
earnings.  SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007, although earlier adoption is permitted.  SFAS No.
159 was effective for the Company beginning in the first quarter of fiscal
2008.  The Company did not elect to adopt the provisions under SFAS
No. 159, therefore, the adoption of SFAS No. 159 in the first quarter of fiscal
2008 did not impact the Company’s financial position or results of
operations.


43




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141 (R)”), which requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest of an
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions. SFAS No.141 (R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008.  Earlier application is prohibited.  The Company
anticipates this will have a material effect on future acquisitions upon
adoption.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements,” which requires (1) ownership interests in
subsidiaries held by parties other than the parent to be clearly identified,
labeled, and presented in the consolidated statement of financial position
within equity, but separate from the parent’s equity; (2) the amount of
consolidated net income attributable to the parent and to the non-controlling
interest be clearly identified and presented on the face of the consolidated
statement of income; and (3) changes in a parent’s ownership interest while the
parent retains its controlling financial interest in its subsidiary be accounted
for consistently as equity transactions.  SFAS No. 160 applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.  Earlier application is prohibited.  The
adoption of SFAS No. 160 is not expected to have a material impact on our
results of operations or our financial position.




In March
2008, the FASB issued SFAS No. 161, “Disclosures and Derivative Instruments and
Hedging Activities — an Amendment of FASB Statement 133” (“SFAS 161”). SFAS 161
will change the disclosure requirements for derivative instruments and hedging
activities. Entities will be required to provide enhanced disclosures about (a)
how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance and
cash flows. SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. The Company has not
yet evaluated the impact, if any, of adopting this pronouncement.




In June
2008, the Emerging Issues Task Force of the FASB published EITF Issue 07-5
“Determining Whether an Instrument is Indexed to an Entity’s Own Stock” (“EITF
07-5”) to address concerns regarding the meaning of “indexed to an entity’s own
stock” contained in FASB Statement 133 “Accounting for Derivative Instruments
and Hedging Activities”.  This related to the determination of whether
a free-standing equity-linked instrument should be classified as equity or
debt.  If an instrument is classified as debt, it is valued at fair
value, and this value is remeasured on an ongoing basis, with changes recorded
in earnings in each reporting period.  EITF 07-5 is effective for
years beginning after December 15, 2008 and earlier adoption is not
permitted.  Although EITF 07-5 is effective for fiscal years beginning
after December 15, 2008, any outstanding instrument at the date of adoption will
require a retrospective application of the accounting through a cumulative
effect adjustment to retained earnings upon adoption.  The Company has
completed an analysis as it pertains to the conversion option in its convertible
debt, which was triggered by the reset provision, and has determined that the
fair value of the derivative liability is approximately $30,000 and the debt
discount is approximately $1,653,000 at January 1, 2009. In addition, the impact
on retained earnings would be approximately $2,100,000 at January 1,
2009, which represents the cumulative change in the fair value of the
conversion option, net the impact of amortization of the additional debt
discount from date of issuance of the notes (December 8, 2006) through adoption
of this pronouncement.  The debt discount will be amortized over the
remaining life of the debt resulting in greater interest expense in the
future.




Item
7A. Quantitative and Qualitative Disclosures about Market Risk




The
following discussion about our market risk involves forward-looking statements.
Actual results could differ materially from those projected in the
forward-looking statements.




In
general, business enterprises can be exposed to market risks, including
fluctuation in commodity and raw materials prices, foreign currency exchange
rates, and interest rates that can adversely affect the cost and results of
operating, investing, and financing activities. In seeking to minimize the risks
and/or costs associated with such activities, the Company manages exposure to
changes in commodities and raw material prices, interest rates and foreign
currency exchange rates through its regular operating and financing activities.
The Company does not utilize financial instruments for trading or other
speculative purposes, nor does the Company utilize leveraged financial
instruments or other derivatives.


44




The
Company’s exposure to market rate risk for changes in interest rates relates
primarily to the Company’s short-term monetary investments. There is a market
rate risk for changes in interest rates earned on short-term money market
instruments. There is inherent rollover risk in the short-term money market
instruments as they mature and are renewed at current market rates. The extent
of this risk is not quantifiable or predictable because of the variability of
future interest rates and business financing requirements. However, there is no
risk of loss of principal in the short-term money market instruments, only a
risk related to a potential reduction in future interest income. Derivative
instruments are not presently used to adjust the Company’s interest rate risk
profile.




The
majority of the Company’s business is denominated in United States
dollars.


45


Item
8. Financial Statements and Supplementary Data
  LANGER,
INC. AND SUBSIDIARIES
  INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
  PageReport
      of Independent Registered Public Accounting Firm
                              
                              47Consolidated
      Financial Statements:Consolidated
      Balance Sheets
                              
                              48Consolidated
      Statements of Operations
                              
                              49Consolidated
      Statements of Stockholders’ Equity
                              
                              50Consolidated
      Statements of Cash Flows
                              
                              51Notes
      to Consolidated Financial Statements
                              
                              53
  46
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  Board of
Directors and Stockholders
 Langer,
Inc.
 New York,
New York
  We have
audited the accompanying consolidated balance sheets of Langer, Inc. and
Subsidiaries (the “Company”) as of December 31, 2008 and 2007 and the related
consolidated statements of operations, stockholders’ equity, and cash flows for
the years then ended.  These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our 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 audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Langer, Inc. and
Subsidiaries at December 31, 2008 and 2007, and the results of their
operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of
America.
  (Signed
BDO Seidman, LLP)
  Melville,
New York
 March 20,
2009
  47
  LANGER,
INC. AND SUBSIDIARIES
  CONSOLIDATED
BALANCE SHEETS
  December 31,
                                  2008
                                
                                
                                December 31,
                                  2007AssetsCurrent
      assets:Cash
      and cash equivalents
                                
                                $
                                4,003,460
                                
                                
                                $
                                2,665,408Restricted
      cash – escrow
                                
                                
                                —
                                
                                
                                
                                1,000,000Accounts
      receivable, net of allowances for doubtful accounts and returnsand
      allowances aggregating $171,729 and $402,902, respectively
                                
                                
                                5,591,824
                                
                                
                                
                                5,830,587Inventories,
      net
                                
                                
                                6,865,294
                                
                                
                                
                                5,649,445Assets
      held for sale
                                
                                
                                —
                                
                                
                                
                                9,438,386Prepaid
      expenses and other current assets
                                
                                
                                1,517,929
                                
                                
                                
                                756,327Total
      current assets
                                
                                
                                17,978,507
                                
                                
                                
                                25,340,153Property
      and equipment, net
                                
                                
                                9,314,299
                                
                                
                                
                                11,943,684Identifiable
      intangible assets, net
                                
                                
                                10,079,499
                                
                                
                                
                                13,624,490Goodwill
                                
                                
                                15,898,063
                                
                                
                                
                                21,956,430Other
      assets
                                
                                
                                894,539
                                
                                
                                
                                1,068,867Total
      assets
                                
                                $
                                54,164,907
                                
                                
                                $
                                73,933,624Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Accounts
      payable
                                
                                $
                                2,579,976
                                
                                
                                $
                                2,181,204Liabilities
      related to assets held for sale
                                
                                
                                —
                                
                                
                                
                                3,179,938Other
      current liabilities, including current installment of note
      payable
                                
                                
                                2,609,225
                                
                                
                                
                                2,591,360Total
      current liabilities
                                
                                
                                5,189,201
                                
                                
                                
                                7,952,502Long-term
      debt:5%
      Convertible Notes, net of debt discount of  $300,264 and
      $390,771 at December 31, 2008 and 2007, respectively
                                
                                
                                28,579,736
                                
                                
                                
                                28,489,229Notes
      payable
                                
                                
                                —
                                
                                
                                
                                113,309Obligation
      under capital lease
                                
                                
                                2,700,000
                                
                                
                                
                                2,700,000Deferred
      income taxes payable
                                
                                
                                1,773,210
                                
                                
                                
                                1,792,209Other
      liabilities
                                
                                
                                —
                                
                                
                                
                                998,800Total
      liabilities
                                
                                
                                38,242,147
                                
                                
                                
                                42,046,049Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $1.00 par value; authorized 250,000 shares;no
      shares issued
                                
                                
                                —
                                
                                
                                
                                —Common
      stock, $.02 par value; authorized 50,000,000 shares;issued
      11,588,512  shares
                                
                                
                                231,771
                                
                                
                                
                                231,771Additional
      paid in capital
                                
                                
                                53,957,470
                                
                                
                                
                                53,800,139Accumulated
      deficit
                                
                                
                                (36,336,206
                                )
                                
                                
                                (22,713,086
                                )Accumulated
      other comprehensive income
                                
                                
                                536,893
                                
                                
                                
                                765,39218,389,928
                                
                                
                                
                                32,084,216Treasury
      stock at cost, 2,830,635 and 84,300 shares, at December 31, 2008 and
      2007, respectively
                                
                                
                                (2,467,168
                                )
                                
                                
                                (196,641
                                )Total
      stockholders’ equity
                                
                                
                                15,922,760
                                
                                
                                
                                31,887,575Total
      liabilities and stockholders’ equity
                                
                                $
                                54,164,907
                                
                                
                                $
                                73,933,624
 
 See
accompanying notes to consolidated financial statements.
  48
  LANGER,
INC. AND SUBSIDIARIES
  CONSOLIDATED
STATEMENTS OF OPERATIONS
 
 For
      the Years Ended December 31,2008
                            
                            
                            2007Net
      sales
                            
                            $
                            45,061,148
                            
                            
                            $
                            42,752,692Cost
      of sales
                            
                            
                            31,981,979
                            
                            
                            
                            27,934,116Gross
      profit
                            
                            
                            13,079,169
                            
                            
                            
                            14,818,576General
      and administrative expenses
                            
                            
                            9,852,695
                            
                            
                            
                            10,650,776Selling
      expenses
                            
                            
                            5,248,052
                            
                            
                            
                            5,320,684Research
      and development expenses
                            
                            
                            974,853
                            
                            
                            
                            837,934Provision
      for impairment
                            
                            
                            5,700,000
                            
                            
                            
                            —Operating
      loss
                            
                            
                            (8,696,431
                            )
                            
                            
                            (1,990,818
                            )Other
      expense, net:Interest
      income
                            
                            
                            37,100
                            
                            
                            
                            187,103Interest
      expense
                            
                            
                            (2,230,891
                            )
                            
                            
                            (2,185,978
                            )Other
                            
                            
                            (8,681
                            )
                            
                            
                            (3,046
                            )Other
      expense, net
                            
                            
                            (2,202,472
                            )
                            
                            
                            (2,001,921
                            )Loss
      from continuing operations before income taxes
                            
                            
                            (10,898,903
                            )
                            
                            
                            (3,992,739
                            )Provision
      for income taxes
                            
                            
                            (409,273
                            )
                            
                            
                            (115,234
                            )Loss
      from continuing operations
                            
                            
                            (11,308,176
                            )
                            
                            
                            (4,107,973
                            )Discontinued
      Operations:Loss
      from operations of discontinued subsidiaries (including loss on sales of
      subsidiaries of $2,769,077 and $175,558 in 2008 and 2007,
      respectively)
                            
                            
                            (2,814,539
                            )
                            
                            
                            (290,467
                            )(Provision
      for) benefit from income taxes
                            
                            
                            499,595
                            
                            
                            
                            (119,537
                            )Loss
      from discontinued operations
                            
                            
                            (2,314,944
                            )
                            
                            
                            (410,004
                            )Net
      Loss
                            
                            $
                            (13,623,120
                            )
                            
                            $
                            (4,517,977
                            )Net
      Loss per common share:Basic and
      diluted:Loss
      from continuing operations
                            
                            $
                            (1.06
                            )
                            
                            $
                            (0.36
                            )Loss
      from discontinued operations
                            
                            
                            (0.21
                            )
                            
                            
                            (0.04
                            )Basic and diluted loss per
      share
                            
                            $
                            (1.27
                            )
                            
                            $
                            (0.40
                            )Weighted
      average number of common shares usedin
      computation of net loss per share:Basic
      and diluted
                            
                            
                            10,700,914
                            
                            
                            
                            11,484,486
  See
accompanying notes to consolidated financial statements.
  49
  LANGER,
INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
  Common
      Stock
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                Accumulated
      Other
                                  Comprehensive
      Income (Loss)Shares
                                
                                
                                Amount
                                
                                
                                Treasury
                                  Stock
                                
                                
                                AdditionalPaid-in
                                  Capital
                                
                                
                                Accumulated
                                  Deficit
                                
                                
                                Unrecognized
                                  Periodic
                                  Pension
      Costs
                                
                                
                                Foreign
                                  Currency
                                  Translation
                                
                                
                                Comprehensive
                                  Income
      (Loss)
                                
                                
                                Total
                                  Stockholders’
                                  EquityBalance
      at January 1, 2007
                                
                                
                                10,156,673
                                
                                
                                $
                                203,134
                                
                                
                                $
                                (196,641
                                )
                                
                                $
                                46,951,501
                                
                                
                                $
                                (18,195,109
                                )
                                
                                $
                                (143,471
                                )
                                
                                $
                                397,450
                                
                                
                                
                                
                                
                                $
                                29,016,864Net
      loss
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (4,517,977
                                )
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                $
                                (4,517,977
                                )Actuarial
      loss written off due to plan termination
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                54,524
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                54,524Unrecognized
      transition costs written off due to plan termination
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                88,947
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                88,947Foreign
      currency adjustment
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                367,942
                                
                                
                                
                                367,942(4,150,035
                                )
                                
                                
                                (4,150,035
                                )Stock-
      based compensation expense
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                281,660
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                281,660Discount
      on 5% Convertible Notes
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                476,873
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                476,873Issuance
      of stock to purchase Regal
                                
                                
                                333,483
                                
                                
                                
                                6,670
                                
                                
                                
                                
                                
                                
                                
                                1,365,279
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                1,371,949Issuance
      of stock to purchase Twincraft
                                
                                
                                1,068,356
                                
                                
                                
                                21,367
                                
                                
                                
                                
                                
                                
                                
                                4,679,676
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                4,701,043Exercise
      of stock options
                                
                                
                                30,000
                                
                                
                                
                                600
                                
                                
                                
                                
                                
                                
                                
                                45,150
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                45,750Balance
      at December 31, 2007
                                
                                
                                11,588,512
                                
                                
                                
                                231,771
                                
                                
                                
                                (196,641
                                )
                                
                                
                                53,800,139
                                
                                
                                
                                (22,713,086
                                )
                                
                                
                                —
                                
                                
                                
                                765,392
                                
                                
                                
                                
                                
                                
                                
                                31,887,575Net
      loss
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (13,623,120
                                )
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (13,623,120
                                )Foreign
      currency adjustment
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (228,499
                                )
                                
                                
                                (228,499
                                )$
                                (13,851,619
                                )
                                
                                
                                (13,851,619
                                )Stock-
      based compensation expense
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                157,331
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                157,331Purchase
      of Treasury Stock
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (2,219,527
                                )
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (2,219,527
                                )Shares
      received as settlement of receivable
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (51,000
                                )
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                (51,000
                                )Balance
      at December 31, 2008
                                
                                
                                11,588,512
                                
                                
                                $
                                231,771
                                
                                
                                $
                                (2,467,168
                                )
                                
                                $
                                53,957,470
                                
                                
                                $
                                (36,336,206
                                )
                                
                                $
                                —
                                
                                
                                $
                                536,893
                                
                                
                                
                                
                                
                                
                                $
                                15,922,760
  See
accompanying notes to consolidated financial statements.
  50
 
 LANGER,
INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 
 For
      the Years Ended December 31,2008
                              
                              
                              
                              2007Cash
      Flows From Operating Activities:Net
      loss
                              
                              $
                              (13,623,120
                              )
                              
                              $
                              (4,517,977
                              )Loss
      from discontinued operations
                              
                              
                              2,314,944
                              
                              
                              
                              410,004Loss
      from continuing operations
                              
                              
                              (11,308,176
                              )
                              
                              
                              (4,107,973
                              )Adjustments
      to reconcile net loss from continuing operations to net cash provided by
      (used in) operating activities:Depreciation
      of property and equipment and amortization of identifiable intangible
      assets
                              
                              
                              3,903,875
                              
                              
                              
                              3,494,767Loss
      on abandonment of property and equipment
                              
                              
                              —
                              
                              
                              
                              28,193Loss
      on receivable settlement
                              
                              
                              49,000
                              
                              
                              
                              —Provision
      for impairment of intangible assets
                              
                              
                              5,700,000
                              
                              
                              
                              —Gain
      on lease surrender
                              
                              
                              (218,249
                              )
                              
                              
                              —Amortization
      of debt acquisition costs
                              
                              
                              358,892
                              
                              
                              
                              320,283Amortization
      of debt discount
                              
                              
                              90,507
                              
                              
                              
                              86,102Stock-based
      compensation expense
                              
                              
                              157,331
                              
                              
                              
                              281,660Loss
      on plan termination
                              
                              
                              —
                              
                              
                              
                              143,471Provision
      for doubtful accounts receivable
                              
                              
                              231,173
                              
                              
                              
                              22,609Deferred
      income tax provision
                              
                              
                              367,042
                              
                              
                              
                              127,747Changes
      in operating assets and liabilities, net of acquisitions:Accounts
      receivable
                              
                              
                              (81,013
                              )
                              
                              
                              (155,809
                              )Inventories
                              
                              
                              (1,332,984
                              )
                              
                              
                              100,448Prepaid
      expenses and other current assets
                              
                              
                              (386,605
                              )
                              
                              
                              (25,236
                              )Other
      assets
                              
                              
                              (1,645
                              )
                              
                              
                              788,365Accounts
      payable and other current liabilities
                              
                              
                              288,344
                              
                              
                              
                              183,773Unearned
      revenue and other liabilities
                              
                              
                              (21,635
                              )
                              
                              
                              (84,945
                              )Net
      cash provided by (used in) operating activities of continuing
      operations
                              
                              
                              (2,204,143
                              )
                              
                              
                              1,203,455Net
      cash provided by (used in) operating activities of discontinued
      operations
                              
                              
                              (227,574
                              )
                              
                              
                              572,010Net
      cash provided by (used in) operating activities
                              
                              
                              (2,431,717
                              )
                              
                              
                              1,775,465Cash
      Flows From Investing Activities:Proceeds
      from sale of property and equipment
                              
                              
                              —
                              
                              
                              
                              1,000Purchase
      of property and equipment
                              
                              
                              (760,326
                              )
                              
                              
                              (945,636
                              )Increase
      in restricted cash - escrow
                              
                              
                              —
                              
                              
                              
                              (1,000,000
                              )Deferred
      acquisition costs
                              
                              
                              —
                              
                              
                              
                              (419,823
                              )Net
      proceeds from sales of subsidiaries
                              
                              
                              6,856,779
                              
                              
                              
                              —Purchase
      of businesses, net of cash acquired
                              
                              
                              —
                              
                              
                              
                              (25,901,387
                              )Net
      cash provided by (used in) investing activities for continuing
      operations
                              6,096,453
                              
                              
                              
                              (28,265,846
                              )Net
      cash provided by (used in) investing activities of discontinued
      operations
                              
                              
                              (3,163
                              )
                              
                              
                              (424,189
                              )Net
      cash provided by (used in) investing activities
                              
                              
                              6,093,290
                              
                              
                              
                              (28,690,035
                              )
  51
  LANGER,
INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS (cont’d)
 
 For
      the Years Ended December 31,2008
                        
                        
                        
                        2007Cash
      Flows From Financing Activities:Proceeds
      from the exercise of stock options
                        
                        
                        —
                        
                        
                        
                        45,750Deferred
      financing costs
                        
                        
                        —
                        
                        
                        
                        (267,492
                        )Purchase of treasury stock
                        
                        
                        (2,219,527
                        )
                        
                        
                        —Repayment
      of note payable
                        
                        
                        (9,469
                        )
                        
                        
                        (36,265
                        )Net
      cash used in financing activities of continuing operations
                        
                        
                        (2,228,996
                        )
                        
                        
                        (258,007
                        )Net
      cash provided by (used in) financing activities of discontinued
      operations
                        
                        
                        —
                        
                        
                        
                        —Net
      cash used in financing activities
                        
                        
                        (2,228,996
                        )
                        
                        
                        (258,007
                        )Effect
      of exchange rate changes on cash
                        
                        
                        (94,525
                        )
                        
                        
                        70,988Net
      increase (decrease) in cash and cash equivalents
                        
                        
                        1,338,052
                        
                        
                        
                        (27,101,589
                        )Cash
      and cash equivalents at beginning of year
                        
                        
                        2,665,408
                        
                        
                        
                        29,766,997Cash
      and cash equivalents at end of year
                        
                        $
                        4,003,460
                        
                        
                        $
                        2,665,408Supplemental
      Disclosures of Cash Flow Information:Cash
      paid during the period for:Interest
                        
                        $
                        2,351,719
                        
                        
                        $
                        1,876,744Income
      taxes
                        
                        $
                        49,190
                        
                        
                        $
                        67,932Supplemental
      Disclosure of Non Cash Investing Activities:Treasury stock received related
      to Regal receivable settlement
                        
                        $
                        51,000
                        
                        
                        $
                        —Issuance of stock related to
      acquisition of Regal
                        
                        $
                        —
                        
                        
                        $
                        1,371,949Issuance of stock related to
      acquisition of Twincraft
                        
                        $
                        —
                        
                        
                        $
                        4,700,766Release
      of funds in escrow related to the Twincraft acquisition reclassified to
      goodwill
                        
                        $
                        1,000,000
                        
                        
                        $
                        —Note
      receivable related to sale of subsidiary
                        
                        $
                        162,981
                        
                        
                        $
                        —Supplemental
      Disclosures of Non Cash Financing Activities:Accounts
      payable and accrued liabilities relating toproperty
      and equipment
                        
                        $
                        31,045
                        
                        
                        
                        184,800
 
 See
accompanying notes to consolidated financial statements.
  52
  LANGER,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  (1)Summary of
Significant Accounting Policies
  (a)
Basis of Presentation
  The
accompanying consolidated financial statements include the accounts of Langer,
Inc. and its subsidiaries (the “Company” or “Langer”). All significant
intercompany transactions and balances have been eliminated in
consolidation.
  The
Company classifies as discontinued operations for all periods presented any
component of the Company’s business that the Company believes is probable of
being sold or has been sold that has operations and cash flows that are clearly
distinguishable operationally and for financial reporting
purposes.  For those components, the Company has no significant
continuing involvement after disposal, and their operations and cash flows are
eliminated from ongoing operations.  Sales of significant components
of the Company’s business not classified as discontinued operations are reported
as a component of income from continuing operations.
  In
accordance with the provisions of Statement of Financial Accounting Standards
(“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets,” the assets and liabilities relating to Langer (UK) Limited (“Langer
UK”), Regal Medical Supply, LLC (“Regal”), Bi-Op Laboratories, Inc. (“Bi-Op”),
and the Langer branded custom orthotics and related products business have been
reclassified as held for sale in the consolidated balance sheet at December 31,
2007.  The results of operations of Langer UK, Regal, Bi-Op, and the
Langer branded custom orthotics and related products business for the current
and prior period have been reported as discontinued operations.  The
Company sold the capital stock of Langer UK to a third party on January 18,
2008, sold its entire membership interest in Regal to a group of investors,
including a member of Regal’s management on June 11, 2008, and sold all of the
capital stock of Bi-Op on July 31, 2008. In addition, the Company sold
substantially all of the operating assets and liabilities related to the Langer
branded custom orthotics and related products business on October 24,
2008.  (See Note 3, “Sales of Subsidiaries”).
  (b)
Description of the Business
  Through
our wholly-owned subsidiaries, Twincraft, Inc. (“Twincraft”), and Silipos Inc.
(“Silipos”), the Company offers a diverse line of personal care products for the
private label retail, medical, and therapeutic markets.  The Company
sells its medical products primarily in the United States, as well as in more
than 30 other countries, to national, regional, and international distributors.
The Company sells its personal care products primarily in North America to
branded marketers of such products, specialty retailers, direct marketing
companies, and companies that service various amenities markets.
  The
Company offers a broad range of gel-based orthopedic and prosthetics products,
that are designed to correct, protect, heal and provide comfort for the
patient. The line of personal care products includes bar soap, gel-based
therapeutic gloves and socks, scar management products, and other products that
are designed to cleanse and moisturize specific areas of the body, often
incorporating essential oils, vitamins and nutrients to improve the appearance
and condition of the skin.
  (c)
Revenue Recognition
  Revenue
from the sale of the Company’s products is recognized upon shipment. The Company
does not have any post-shipment obligations to customers.  Revenues
from shipping and handling fees are included in net sales in the consolidated
statements of operations. Costs incurred for shipping and handling are included
in cost of sales in the consolidated statements of operations.
  53
  LANGER,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  (d)
Advertising and Promotion Expenses
  Advertising
and promotion costs are expensed as incurred. Advertising and promotion expenses
were approximately $299,000 and $365,000 for the years ended December 31, 2008
and 2007, respectively.
  The
Company accounts for sales and incentives which include discounts, coupons,
co-operative advertising and free products or services in accordance with
Emerging Issues Task Force Issue No. 01-09, “Accounting for Consideration Given
by a Vendor to a Customer”. Generally, cash consideration is to be classified as
a reduction of net sales, unless specific criteria are met regarding goods or
services that a vendor may receive in return for this consideration. The
Company’s consideration given to customers does not meet these conditions and,
accordingly is classified as a reduction to revenue.
  (e)
Cash Equivalents
  The
Company considers all short-term, highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.  The
Company’s short-term cash investments consist primarily of money market
funds.
 
 (f)
Inventories
  Inventories
are stated at the lower of cost or market. Cost is determined using the
first-in, first-out (FIFO) method.
  (g)
Property and Equipment
  Property
and equipment is stated at cost less accumulated depreciation and amortization.
Depreciation and amortization are calculated using the straight-line method. The
lives on which depreciation and amortization are computed are as
follows:
  Building
      and improvements
                
                20
      yearsOffice
      furniture and equipment
                
                3-10
      yearsComputer
      equipment and software
                
                3-10
      yearsMachinery
      and equipment
                
                5-15
      yearsLeasehold
      improvements
                
                5-10
      years or term of lease if shorterAutomobiles
                
                3-5
      years
  The
Company reviews long-lived assets and certain identifiable intangible assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If the sum of expected future cash flows
(undiscounted and without interest charges) is less than the carrying value of
the asset, an impairment loss is recognized.  If an impairment loss is
required, the amount of such loss is equal to the excess of the carrying value
of the impaired asset over its fair value.
 
 (h)
Goodwill and Identifiable Intangible Assets with Indefinite Lives and
Identifiable Intangible Assets with Definite Lives
  Goodwill
represents the excess of the purchase price and related costs over the value
assigned to net tangible and intangible assets of businesses acquired and
accounted for under the purchase method.  Accounting rules require
that the Company test at least annually for possible goodwill impairment in
accordance with the provisions of SFAS No. 142 “Goodwill and Other Intangible
Assets.” The Company performs its test in the fourth quarter of each year using
discounted cash flow and capitalized earning methods.  These methods
require that certain assumptions and estimates be made regarding industry
economic factors and future profitability. As a result of the 2008 impairment
analysis, the Company determined that the goodwill balance existing in its
personal care products segment was impaired as a result of decreases in
projected profitability.  Accordingly, the Company recorded an
impairment charge of $3,300,000, which is included in loss from continuing
operations in the consolidated statements of operations for the year ended
December 31, 2008.  In December 2007, the Company recorded an
impairment of $462,729 related to the allocated portion of goodwill related to
Langer UK as a result of the net loss associated with the sale of Langer UK in
January 2008.  This impairment is included in loss from operations of
discontinued subsidiaries for the year ended December 31, 2007.  In
addition, the Company annually tests for impairment of its indefinite lived
intangible asset, which is a trademark, in accordance with SFAS No.
142.  No impairment was identified for this asset during the years
ended December 31, 2008 and 2007.
  54
  LANGER,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  The
Company has certain identifiable intangible assets with definite lives such as
license agreements and customer lists, which are amortized over their useful
lives on a straight-line method or on an accelerated method which appropriately
reflects the economic benefit of the related intangible asset. These intangibles
are reviewed for impairment under SFAS No. 144, “Accounting for the Impairment
or Disposal of Long-Lived Assets” when impairment indicators are
present.  As a result of the 2008 impairment analysis, the Company
recorded an impairment charge on the Twincraft customer list of $2,400,000 as a
result of decreases in projected profitability.  This impairment
charge is included in loss from continuing operations in the consolidated
statements of operations for the year ended December 31, 2008.  No
impairment with respect to intangible assets was identified during the year
ended December 31, 2007.
  (i)
Income Taxes
  The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
  In June
2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”), an
interpretation of SFAS No. 109.  FIN 48 clarifies the accounting for
income taxes by prescribing a minimum recognition threshold that a tax position
is required to meet before being recognized in the financial
statements.  FIN 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting in interim
periods and disclosure.
  The
Company adopted FIN 48 on January 1, 2007.  Under FIN 48, tax benefits
are recognized only for tax positions that are more likely than not to be
sustained upon examination by tax authorities.  The amount recognized
is measured as the largest amount of benefit that is greater than 50 percent
likely to be realized upon ultimate settlement.  Unrecognized tax
benefits are tax benefits claimed or to be claimed in tax returns that do not
meet these measurement standards.  The Company’s adoption of FIN 48
did not have a material effect on the Company’s financial statements, as the
Company believes they have no uncertain tax positions.
  As
permitted by FIN 48, the Company also adopted an accounting policy to
prospectively classify accrued interest and penalties related to any
unrecognized tax benefits in its income tax provision.  Previously,
the Company’s policy was to classify interest and penalties as an operating
expense in arriving at pre-tax income.  At December 31, 2008 and 2007,
the Company does not have accrued interest and penalties related to any
unrecognized tax benefits.  The years subject to potential audit vary
depending on the tax jurisdiction.  Generally, the Company’s statutes
of limitation for tax liabilities are open for tax years ended December 31, 2004
and forward.  The Company’s major taxing jurisdiction is the United
States.  Within the United States, Vermont and New York could give
rise to significant tax liabilities.
  (j)
Net Loss Per Share
  Basic
loss per share is based on the weighted average number of shares of common stock
outstanding during the period. Diluted loss per share is based on the weighted
average number of shares of common stock and common stock equivalents (options,
warrants, stock awards and convertible subordinated notes) outstanding during
the period, except where the effect would be antidilutive.
  (k)
Foreign Currency Translation
  Assets
and liabilities of the foreign subsidiaries that are denominated in local
currencies have been translated at year-end exchange rates, while revenues and
expenses have been translated at average exchange rates in effect during the
year. Resulting cumulative translation adjustments have been recorded as a
separate component of accumulated other comprehensive income (loss) in
stockholders’ equity.
  55
  LANGER,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  (l)
Comprehensive Income (Loss)
  Comprehensive
income (loss) consists of changes to shareholders’ equity, other than
contributions from or distributions to shareholders, and net income (loss). The
Company’s other comprehensive income (loss) principally consists of unrealized
foreign currency translation gains and losses. The components of, and changes
in, accumulated other comprehensive income (loss) are presented in the Company’s
consolidated statements of stockholders’ equity.
  (m)
Use of Estimates
  The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
  (n)
Fair Value of Financial Instruments
  At
December 31, 2008 and 2007, the carrying amount of the Company’s financial
instruments, including cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities, approximated fair value because of their
short-term maturity. The carrying value of long-term debt, net of discount, at
December 31, 2008 and 2007 was $28,579,736 and $28,489,229, respectively. The
approximated fair value of long-term debt based on borrowing rates currently
available to the Company for debt with similar terms was $26,574,182 at December
31, 2008.
  (o)
Internal Use Software
  In
accordance with Statement of Position 98-1, “Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use”, the Company
capitalizes internal-use software costs upon the completion of the preliminary
project stage and ceases capitalization when the software project is
substantially complete and ready for its intended use. Capitalized costs are
amortized on a straight-line basis over the estimated useful life of the
software.
  (p)
Stock-Based Compensation
  The
Company accounts for share-based compensation cost in accordance with SFAS No.
123(R), “Share-Based Payment.”  The fair value of each option award is
estimated on the date of the grant using a Black-Scholes option valuation
model.  The compensation cost is recognized over the service period
which is usually the vesting period of the award.  Expected volatility
is based on the historical volatility of the price of the Company’s
stock.  The risk-free interest rate is based on U.S. Treasury issues
with a term equal to the expected life of the option.  The Company
uses historical data to estimate expected dividend yield, expected life and
forfeiture rates.  For stock options granted as consideration for
services rendered by non-employees, the Company recognizes compensation expense
in accordance with the requirements of EITF No. 96-18, “Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods and Services” and EITF 00-18 “Accounting
Recognition for Certain Transactions involving Equity Instruments Granted to
Other Than Employees,” as amended.
  (r)
Concentration of Credit Risk
  Financial
instruments which potentially expose the Company to concentration of credit risk
consist primarily of cash investments and accounts receivable. The Company
places its cash investments with high-credit quality financial institutions and
currently invests primarily in money market accounts. Accounts receivable are
generally diversified due to the number of customers comprising the Company’s
customer base. As of December 31, 2008 and 2007, the Company’s allowance for
doubtful accounts was approximately $172,000 and $403,000. The Company believes
no significant concentration of credit risk exists with respect to these cash
investments and accounts receivable. The carrying amounts of these financial
instruments are reasonable estimates of their fair value.
  56
  LANGER,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  (s)
Recently Issued Accounting Pronouncements
  On
September 15, 2006, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years. SFAS No. 157 provides guidance related to estimating fair value and
requires expanded disclosures. The standard applies whenever other standards
require (or permit) assets or liabilities to be measured at fair value. The
standard does not expand the use of fair value in any new circumstances. In
February 2008, the FASB provided a one year deferral for the implementation of
SFAS No. 157 for non-financial assets and liabilities recognized or disclosed at
fair value in the financial statements on a non-recurring basis. The Company
adopted SFAS No. 157 as of January 1, 2008.  The Company has no
financial assets or liabilities that are currently measured at fair value on a
recurring basis and therefore the adoption of the standard had no impact upon
the Company’s financial position or results of operations. The Company is in the
process of reviewing the implementation of SFAS No. 157 on non-financial assets
and liabilities which will be effective January 1, 2009.
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.”  SFAS No. 159 allows
companies to choose to measure many financial instruments and certain other
items at fair value.  The statement requires that unrealized gains and
losses on items for which the fair value option has been elected be reported in
earnings.  SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007, although earlier adoption is permitted.  SFAS No.
159 was effective for the Company beginning in the first quarter of fiscal
2008.  The Company did not elect to adopt the provisions under SFAS
No. 159, therefore, the adoption of SFAS No. 159 in the first quarter of fiscal
2008 did not impact the Company’s financial position or results of
operations.
  In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141 (R)”), which requires an acquirer to recognize the
assets acquired, the liabilities assumed, and any noncontrolling interest of an
acquiree at the acquisition date, measured at their fair values as of that date,
with limited exceptions. SFAS No.141 (R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008.  Earlier application is prohibited.  The Company
anticipates this will have a material effect on future acquisitions upon
adoption.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements,” which requires (1) ownership interests in
subsidiaries held by parties other than the parent to be clearly identified,
labeled, and presented in the consolidated statement of financial position
within equity, but separate from the parent’s equity; (2) the amount of
consolidated net income attributable to the parent and to the non-controlling
interest be clearly identified and presented on the face of the consolidated
statement of income; and (3) changes in a parent’s ownership interest while the
parent retains its controlling financial interest in its subsidiary be accounted
for consistently as equity transactions.  SFAS No. 160 applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.  Earlier application is prohibited.  The
Company anticipates the adoption of SFAS No. 160 will not have a material impact
on its results of operations or its financial position.
  In March
2008, the FASB issued SFAS No. 161, “Disclosures and Derivative Instruments and
Hedging Activities — an Amendment of FASB Statement 133” (“SFAS 161”). SFAS 161
will change the disclosure requirements for derivative instruments and hedging
activities. Entities will be required to provide enhanced disclosures about (a)
how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance and
cash flows. SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008.
  57
  LANGER,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  In June
2008, the Emerging Issues Task Force of the FASB published EITF Issue 07-5
“Determining Whether an Instrument is Indexed to an Entity’s Own Stock” (“EITF
07-5”) to address concerns regarding the meaning of “indexed to an entity’s own
stock” contained in FASB Statement 133 “Accounting for Derivative Instruments
and Hedging Activities”.  This related to the determination of whether
a free-standing equity-linked instrument should be classified as equity or
debt.  If an instrument is classified as debt, it is valued at fair
value, and this value is remeasured on an ongoing basis, with changes recorded
in earnings in each reporting period.  EITF 07-5 is effective for
years beginning after December 15, 2008 and earlier adoption is not
permitted.  Although EITF 07-5 is effective for fiscal years beginning
after December 15, 2008, any outstanding instrument at the date of adoption will
require a retrospective application of the accounting through a cumulative
effect adjustment to retained earnings upon adoption.  The Company has
completed an analysis as it pertains to the conversion option in its convertible
debt, which was triggered by the reset provision, and has determined that the
fair value of the derivative liability is approximately $30,000 and the debt
discount is approximately $1,653,000 at January 1, 2009. In addition, the impact
on retained earnings would be approximately $2,100,000 at January 1,
2009, which represents the cumulative change in the fair value of the
conversion option, net the impact of amortization of the additional debt
discount from date of issuance of the notes (December 8, 2006) through adoption
of this pronouncement.  The debt discount will be amortized over the
remaining life of the debt resulting in greater interest expense in the
future.
  (2)
Acquisitions
  (a)        Acquisition
of Regal
  On
January 8, 2007, the Company acquired Regal, which is a provider of contracture
management products and services to the long-term care market of skilled nursing
and assisted living facilities in 22 states. Regal was acquired in an effort to
gain access to the long-term care market, to gain a captive distribution channel
for certain custom orthotic products the Company manufactures into markets the
Company has not previously penetrated, and to establish a national network of
service professionals to enhance its customer relationships in both its core and
new markets. The results of operations of Regal since January 8, 2007 were
included in the Company’s consolidated financial statements as part of its own
operating segment but have subsequently been presented as discontinued
operations due to the sale of the business in June 2008.
  The
initial consideration for the acquisition of Regal (before post-closing
adjustments) was approximately $1,640,000, which was paid through the issuance
of 379,167 shares of the Company’s common stock valued under the asset purchase
agreement at a price of $4.329 per share. In addition, transaction costs in the
amount of $69,721 were incurred, which increased the acquisition cost to
$1,709,721. The purchase price was subject to a post-closing downward adjustment
to the extent that the working capital as reflected on Regal’s January 8, 2007
(closing date) balance sheet was less than $675,000. On March 12, 2007, the
Company and the sellers agreed to a post-closing downward adjustment, pursuant
to terms of the purchase agreement, reducing the price from $1,709,721 to
$1,441,670, which was effected by the cancellation of 45,684 shares, which were
valued for purposes of the adjustment at $4.114 per share, which was the average
closing price of the Company’s common stock on The NASDAQ Global Market for the
five trading days ended December 19, 2006. Subsequently, the Company
reclassified certain assets, and asserted against the seller a claim for
receivables acquired but not collected pursuant to the terms of the purchase
agreement; in March 2008, the Company accepted a return of 25,000 shares of its
common stock from the sellers in full settlement of this claim.  On
the date of the transfer of these shares, the fair value of the Company’s common
stock was $2.04 per share, and the Company recorded a loss of $49,000 related to
this settlement.  The Company entered into a three-year employment
agreement with a former employee and member of the seller and a non-competition
agreement with the seller and seller’s members.
  The
following table sets forth the components of the purchase price:
  Total
      stock consideration
                    
                    $
                    1,371,949Transaction
      costs
                    
                    
                    69,721Total
      purchase price
                    
                    $
                    1,441,670
  58
  LANGER,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  The
following table provides the final allocation of the purchase price based upon
the fair value of the assets acquired and liabilities assumed at January 8,
2007:
 
 Assets:Accounts
      receivable
                    
                    $
                    387,409Other
      assets
                    
                    
                    100,000Property
      and equipment
                    
                    
                    25,030Goodwill
                    
                    
                    1,277,5211,789,960Liabilities:Accounts
      payable
                    
                    
                    275,206Accrued
      liabilities
                    
                    
                    73,084348,290Total
      purchase price
                    
                    $
                    1,441,670
  In
accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible
Assets,” the Company will not amortize goodwill. The value of allocated goodwill
is not deductible for income tax purposes.
  On June
11, 2008, the Company sold its entire membership interest in Regal (see Notes 3
and 4).
  (b)
Acquisition of Twincraft
  On
January 23, 2007, the Company completed the acquisition of all of the
outstanding stock of Twincraft. Twincraft is a leading private label
manufacturer of specialty bar soaps supplying the health and beauty markets,
mass markets and direct marketing channels and operates out of a manufacturing
facility in Winooski, Vermont. Twincraft was acquired to enable the Company to
expand into additional product categories in the personal care market, to
increase the Company’s customer exposure for its current line of Silipos
gel-based skincare products, and to take advantage of potential commonalities in
research and development advances between Twincraft’s and the Company’s current
product lines. The results of operations of Twincraft since January 23, 2007
(the date of acquisition) have been included in the Company’s consolidated
financial statements as part of the personal care products operating
segment.
  The
purchase price paid for Twincraft at the time of closing was approximately
$26,650,000, of which $1,500,000 was held in two separate escrows to partially
secure payment of indemnification claims, and payment for any purchase price
adjustments and/or working capital adjustments based on the final post-closing
audit. On May 30, 2007, the escrow of $500,000 was released to the sellers of
Twincraft. The remaining escrow of $1,000,000 and accrued interest were paid on
July 23, 2008. The payment of these escrow funds increased goodwill. The
purchase price was paid 85% in cash and the balance through the issuance of the
Company’s common stock to the sellers of Twincraft, which was valued based on
the average closing price of the Company’s common stock on the two days before,
two days after, and on November 14, 2006, which was the date the Company and
Twincraft’s stockholders entered into the purchase agreement. The purchase price
was subject to adjustment based on Twincraft’s working capital target of
$5,100,000 at closing, and operating performance for the year ended December 31,
2006. On May 15, 2007, the working capital adjustment, which was agreed to by
the Company and the sellers of Twincraft, in effect increased the purchase price
of the Twincraft acquisition by approximately $1,276,000 payable in cash. In
addition, on May 15, 2007, the operating performance adjustments, pursuant to
the purchase agreement between the Company and the sellers of Twincraft,
increased the purchase price of Twincraft by approximately $1,867,000, and the
adjustments were made by the issuance of 68,981 shares of the Company’s common
stock (representing 15% of the adjustment to the purchase consideration) and the
balance of approximately $1,564,000 was paid in cash. The cash adjustments for
working capital and operating performance totaling approximately $2,840,000 were
paid to the sellers in May 2007. During the year 2007, approximately $193,000 of
additional transaction costs relating to the Twincraft acquisition were
incurred, resulting in an increase to the cost of the Twincraft acquisition, and
is reflected in goodwill. Total transaction costs were
$1,445,714.
  59
  LANGER,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  Effective
January 23, 2007, Twincraft entered into three-year employment agreements with
Peter A. Asch, who serves as President of Twincraft, and A. Lawrence Litke, who
served as Chief Operating Officer of Twincraft. Twincraft also entered into a
consulting agreement with Fifth Element, LLC, a consulting firm controlled by
Joseph Candido, who serves as Vice President of Sales and Marketing for
Twincraft. The employment agreements of Mr. Asch and Mr. Litke, and the
consulting agreement of Fifth Element, LLC, contain non-competition and
non-solicitation provisions covering the terms of their agreements and for any
extended severance periods and for one year after termination of the agreements
or the extended severance periods, if any. Messrs. Asch, Litke and Candido were
stockholders of Twincraft immediately before the sale of Twincraft to the
Company. Effective October 2, 2008, Mr. Litke’s employment with Twincraft was
terminated by Twincraft.
  Subject
to the terms and conditions set forth in the Twincraft purchase agreement, the
sellers of Twincraft (including Mr. Asch) can earn additional deferred
consideration for the years ended 2007 and 2008. Deferred consideration would
have been earned for the year ending December 31, 2007 if Twincraft’s adjusted
EBITDA (as defined in the purchase agreement) exceeded its 2006 adjusted EBITDA.
For the year ended December 31, 2007, the sellers of Twincraft did not earn any
additional consideration. Deferred consideration would have been earned for the
year ending December 31, 2008, if Twincraft’s 2008 adjusted EBITDA exceeded
$4,383,000, in which case the Company would have been obligated to pay to the
sellers three times the difference between Twincraft’s 2008 adjusted EBITDA and
$4,383,000. For the year ended December 31, 2008, the sellers of Twincraft did
not earn any additional consideration.
  On
January 23, 2007, as part of their employment agreements, the Company granted
stock options of 200,000 and 100,000 shares, respectively, to Messrs. Asch and
Litke, all under the Company’s 2005 Stock Incentive Plan, to purchase shares of
the Company’s common stock having an exercise price equal to $4.20 per share,
which vest in three equal consecutive annual tranches beginning on January 23,
2009. The Company also granted stock options, on January 23, 2007, to Mr. Mark
Davitt, another Twincraft employee, for 25,000 shares with an exercise price of
$4.20 per share, vesting in three equal consecutive annual tranches commencing
on the first anniversary of the grant date. The Company is recognizing stock
compensation expenses related to these options over the requisite service period
in accordance with SFAS No. 123(R). Pursuant to EITF No. 96-18, the Company
recorded consulting expenses relating to 100,000 stock options granted to Fifth
Element, LLC, a non-employee consultant, which is controlled by Mr. Joseph
Candido, a Twincraft officer and one of the former Twincraft
stockholders.
  The
following table sets forth the components of the purchase price:
  Total
      cash consideration
                    
                    $
                    25,492,639Total
      stock consideration
                    
                    
                    4,701,043Transaction
      costs
                    
                    
                    1,445,714Total
      purchase price
                    
                    $
                    31,639,396
  The
following table provides the final allocation of the purchase price based upon
the fair value of the assets acquired and liabilities assumed at January 23,
2007:
  Assets:Cash
      and cash equivalents
                    
                    $
                    36,966Accounts
      receivable
                    
                    
                    3,984,756Inventories
                    
                    
                    4,200,867Other
      current assets
                    
                    
                    127,911Property
      and equipment
                    
                    
                    7,722,140Goodwill
                    
                    
                    8,022,425Identifiable
      intangible assets (trade names of $2,629,300 and repeat customer base
      of $7,214,500)
                    
                    9,843,80033,938,865517,929Accrued
      liabilities
                    
                    
                    1,781,5402,299,469Total
      purchase price
                    
                    $
                    31,639,396
 
 In accordance with the provisions of
SFAS No. 142, the Company will not amortize goodwill. The intangible assets
are deemed to have definite lives and will be amortized over an appropriate
period that matches the economic benefit of the intangible assets. The trade
names will be amortized over a 23 year period and the repeat customer base over
a 19 year period.  The customer list is amortized using an accelerated
method that reflects the economic benefit of the asset.  The value
allocated to goodwill and identifiable intangible assets in the purchase of
Twincraft are not deductible for income tax purposes.  During the year
ended December 31, 2008, the Company recorded an impairment of $3,300,000
related to the goodwill and an impairment of $2,400,000 related to the repeat
customer list.  See note 1(h).
  60
  LANGER,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  (c) Unaudited Pro
Forma Results
  Below are
the unaudited pro forma results of operations for the year ended December 31,
2007, as if the Company had acquired Regal and Twincraft on January 1,
2007.  Such pro forma results are not necessarily indicative of the
actual consolidated results of operations that would have been achieved if the
acquisition occurred on the date assumed, nor are they necessarily indicative of
future consolidated results of operations.
  Unaudited
pro forma results for the year ended December 31, 2007 were:
 
 Net
      sales
                    
                    $
                    44,644,176Net
      loss
                    
                    
                    (3,979,544
                    )Loss
      income per share - basic and diluted
                    
                    
                    (.35
                    )
  (3)
Sale of Subsidiaries and Businesses
 
 Sale
of Langer (UK) Limited
  On
January 18, 2008, the Company sold all of the outstanding capital stock of its
wholly owned subsidiary, Langer UK, to an affiliate of Sole Solutions, a
retailer of specialty footwear based in the United Kingdom.  The sales
price was $1,155,313, of which $934,083 was paid at closing and the remaining
$221,230 is evidenced by a note receivable.  The note receivable bears
interest at 8.5% annually with quarterly payments of interest.  The
entire principal balance on the note receivable is due in full on January 18,
2010 and is included in other long-term assets.  In addition, upon
closing, the Company entered into an exclusive sales agency agreement and
distribution services agreement by which Langer UK will act as sales agent and
distributor for Silipos products in the United Kingdom, Europe, Africa, and
Israel.  These agreements have terms of three years.  In
December 2007, the Company recorded a loss before income taxes of $175,558
associated with this sale which included an impairment of goodwill of $462,729
and transaction costs of $125,914.  This loss is included in loss from
discontinued subsidiaries in the consolidated statements of operations for the
year ended December 31, 2007.
 
 Sale
of Regal Medical Supply, LLC
  On June
11, 2008, the Company sold its entire membership interest of its wholly-owned
subsidiary, Regal, to a group of investors, including a member of Regal’s
management.  The sales price was $501,000, which was paid in cash at
closing. The Company recorded a loss before income taxes of $1,929,564 which
included an impairment of $1,277,521 related to goodwill and transaction costs
of $69,921. This loss is included in loss from operations of discontinued
subsidiaries in the consolidated statements of operations for the year ended
December 31, 2008.
 
 Sale
of Bi-Op Laboratories, Inc.
  On July
31, 2008, the Company sold all of the outstanding capital stock of its
wholly-owned subsidiary, Bi-Op, to a third party, which included the general
manager of Bi-Op. The sales price of $2,040,816 was paid in cash at closing, and
was subject to adjustment following the closing to extent that working capital,
as defined by the purchase agreement, is less or greater than $488,520. In
October 2008, a working capital adjustment due to the Company in the amount of
$325,961 was agreed to by both parties to the transaction. The Company recorded
a loss before income taxes of $659,798 which included an impairment of goodwill
of $808,502 and transaction costs of $334,594.  This loss is included
in loss from operations of discontinued subsidiaries in the consolidated
statement of operations for the year ended December 31, 2008.
  61
  LANGER,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Sale
of Langer Branded Custom Orthotics Assets and Liabilities
  On
October 24, 2008, the Company sold substantially all of the operating assets and
liabilities of the Langer branded custom orthotics and related products business
to a third party. The sales price was approximately $4,750,000, of which
$475,000 will be held in escrow for up to 12 months to satisfy indemnification
claims of the purchaser. The $475,000 is included in prepaid expenses and other
current assets. The sale price was subject to adjustment within 90 days of
closing to the extent that working capital, as defined by the purchase
agreement, is less or greater than $1,100,000 as of the closing
date.  In January 2009, a working capital adjustment due to the
Company in the amount of $116,418 was agreed to by both parties to the
transaction.  The Company recorded a loss before income taxes on this
sale of $179,715, which included an impairment of $1,672,344 related to goodwill
and transaction costs of $565,327.  This loss is included in loss from
operations of discontinued subsidiaries in the consolidated statements of
operations for the year ended December 31, 2008.  In connection with
this sales transaction, the Company has surrendered its right to continue to use
the Langer name and trademark, accordingly, the Company has agreed to seek a
change of its corporate name at its next annual shareholder's
meeting.
 
 (4)
Discontinued Operations
  During
the year ended December 31, 2008, the Company completed the sale of Langer UK on
January 18, 2008, Regal on June 11, 2008, Bi-Op on July 31, 2008 and
substantially all of the operating assets and liabilities related to the Langer
branded custom orthotics and related products business on October 24, 2008 (see
Note 3).  In accordance with SFAS No. 144, the results of operations
of these wholly owned subsidiaries and businesses for the current and prior
periods have been reported as discontinued operations, and the assets and
liabilities related to these wholly owned subsidiaries and businesses were
reclassified as held for sale in the Company’s December 31, 2007 consolidated
balance sheet. Operating results of these wholly owned subsidiaries and
businesses, which were formerly included in the medical products and Regal
segments, are summarized as follows:
  Year
      Ended December 31,2008
                      
                      
                      2007Revenues:Langer
      UK
                      
                      $
                      —
                      
                      
                      $
                      3,168,499Regal
                      
                      
                      1,526,301
                      
                      
                      
                      3,752,324Bi-Op
                      
                      
                      1,617,356
                      
                      
                      
                      2,882,165Langer
      branded custom orthotics
                      
                      
                      9,208,341
                      
                      
                      
                      14,439,953Total
      revenues
                      
                      $
                      12,351,998
                      
                      
                      $
                      24,242,941Net
      loss from operations
                      
                      $
                      (77,064
                      )
                      
                      $
                      (190,191
                      )Loss
      on sale
                      
                      
                      (2,769,077
                      )
                      
                      
                      (175,558
                      )Other
      expense, net
                      
                      
                      31,602
                      
                      
                      
                      75,282Loss
      before income taxes
                      
                      
                      (2,814,539
                      )
                      
                      
                      (290,467
                      )Benefit
      from (provision for) income tax
                      
                      
                      499,595
                      
                      
                      
                      (119,537
                      )Loss
      from discontinued operations
                      
                      $
                      (2,314,944
                      )
                      
                      $
                      (410,004
                      )
 
 Loss from discontinued operations, net
of any tax benefit, is comprised of the following for the years ended December
31, 2008 and 2007:
  2008
                      
                      
                      2007Langer
      UK
                      
                      $
                      202,313
                      
                      
                      $
                      (442,833
                      )Regal
                      
                      
                      (2,163,721
                      )
                      
                      
                      (408,868
                      )Bi-Op
                      
                      
                      (422,195
                      )
                      
                      
                      84,724Langer
      branded custom orthotics
                      
                      
                      68,659
                      
                      
                      
                      356,973Total
                      
                      $
                      (2,314,944
                      )
                      
                      $
                      (410,004
                      )
 
 5)
Net assets held for sale
  The
assets and liabilities of Langer UK, Regal, Bi-Op and the Langer branded custom
orthotics and related products business are shown as held for sale as of
December 31, 2007 as they were sold during the year ended December 31,
2008.  The assets and liabilities related to these subsidiaries
consist of the following as of December 31, 2008 and 2007:
  62
  LANGER,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 December
      31,2008
                    
                    
                    2007Cash
                    
                    $
                    —
                    
                    
                    $
                    —Accounts
      receivable
                    
                    
                    —
                    
                    
                    
                    3,506,684Inventories
                    
                    
                    —
                    
                    
                    
                    1,411,040Other
      current assets
                    
                    
                    —
                    
                    
                    
                    454,216Identifiable
      intangible assets
                    
                    
                    —
                    
                    
                    
                    833,179Goodwill
      (See Note 7)
                    
                    
                    —
                    
                    
                    
                    287,171Property
      and equipment
                    
                    
                    —
                    
                    
                    
                    2,856,267Other
      assets
                    
                    
                    —
                    
                    
                    
                    89,829Assets
      held for sale
                    
                    $
                    —
                    
                    
                    $
                    9,438,386Accounts
      payable
                    
                    
                    —
                    
                    
                    
                    1,342,774Other
      current liabilities
                    
                    
                    —
                    
                    
                    
                    1,837,164Liabilities
      related to assets held for sale
                    
                    $
                    —
                    
                    
                    $
                    3,179,938
  (6)
Identifiable intangible assets
  Identifiable
intangible assets at December 31, 2008 consisted of:
  Assets
                  
                  Estimated
                    Useful Life
                    (Years)
                  
                  
                  Original
                    Cost
                  
                  
                  Accumulated
                    Amortization
                  
                  
                  Provision
                    for
                    Impairment
                  
                  
                  Net Carrying
                    ValueTrade
      names—Silipos
                  
                  Indefinite
                  
                  
                  $
                  2,688,000
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  2,688,000Repeat
      customer base—Silipos
                  
                  
                  7
                  
                  
                  
                  1,680,000
                  
                  
                  
                  1,158,994
                  
                  
                  
                  —
                  
                  
                  
                  521,006License
      agreements and related technology—Silipos
                  
                  
                  9.5
                  
                  
                  
                  1,364,000
                  
                  
                  
                  610,211
                  
                  
                  
                  —
                  
                  
                  
                  753,789Repeat
      customer base—Twincraft
                  
                  
                  19
                  
                  
                  
                  7,214,500
                  
                  
                  
                  1,107,988
                  
                  
                  
                  2,400,000
                  
                  
                  
                  3,706,512Trade
      names—Twincraft
                  
                  
                  23
                  
                  
                  
                  2,629,300
                  
                  
                  
                  219,108
                  
                  
                  
                  —
                  
                  
                  
                  2,410,192$
                  15,575,800
                  
                  
                  $
                  3,096,301
                  
                  
                  $
                  2,400,000
                  
                  
                  $
                  10,079,499
 
 Identifiable intangible assets at
December 31, 2007 consisted of:
 
 Assets
                    
                    Estimated
                      Useful Life
                      (Years)
                    
                    
                    Original
                      Cost
                    
                    Accumulated
                      Amortization
                    
                    
                    Net Carrying
                      ValueTrade
      names—Silipos
                    
                    Indefinite
                    
                    
                    $
                    2,688,000
                    
                    
                    $
                    —
                    
                    
                    $
                    2,688,000Repeat
      customer base—Silipos
                    
                    
                    7
                    
                    
                    
                    1,680,000
                    
                    
                    
                    885,807
                    
                    
                    
                    794,193License
      agreements and related technology—Silipos
                    
                    
                    9.5
                    
                    
                    
                    1,364,000
                    
                    
                    
                    466,632
                    
                    
                    
                    897,368Repeat
      customer base—Twincraft
                    
                    
                    19
                    
                    
                    
                    7,214,500
                    
                    
                    
                    494,080
                    
                    
                    
                    6,720,420Trade
      names—Twincraft
                    
                    
                    23
                    
                    
                    
                    2,629,300
                    
                    
                    
                    104,791
                    
                    
                    
                    2,524,509$
                    15,575,800
                    
                    
                    $
                    1,951,310
                    
                    
                    $
                    13,624,490
  As of
December 31, 2008, it was determined that the carrying value of the Twincraft
customer base was not recoverable and accordingly was written down to its fair
value resulting in an impairment of $2,400,000.
  Aggregate
amortization expense relating to the above identifiable intangible assets for
the years ended December 31, 2008 and 2007 were $1,444,990, and $1,088,257,
respectively. As of December 31, 2008, the estimated future amortization expense
is $912,597 for 2009, $879,894 for 2010, $615,461 for 2011, $746,342 for 2012,
$675,726 for 2013 and $3,561,479 thereafter.
  63
  LANGER,
INC. AND SUBSIDIARIES
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  (7)
Goodwill
  Changes
in goodwill for the years ended December 31, 2007 and 2008 are as
follows:
  Medical
                        Products
                      
                      
                      Personal
                        Care
                        Products
                      
                      
                      Regal
                      
                      
                      TotalBalance,
      January 1, 2007
                      
                      $
                      11,293,494
                      
                      
                      $
                      2,825,719
                      
                      
                      $
                      —
                      
                      
                      $
                      14,119,213Goodwill
      related to the Regal acquisition
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,277,521
                      
                      
                      
                      1,277,521Goodwill
      related to the Twincraft acquisition
                      
                      
                      —
                      
                      
                      
                      7,022,425
                      
                      
                      
                      —
                      
                      
                      
                      7,022,425Allocated
      to Langer UK, assets held for sale of which $175,558 was impaired and
      included in discontinued operations
                      
                      
                      (462,729
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (462,729
                      )Balance,
      December 31, 2007
                      
                      $
                      10,830,765
                      
                      
                      $
                      9,848,144
                      
                      
                      $
                      1,277,521
                      
                      
                      $
                      21,956,430Sale
      of Regal, included in discontinued operations
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (1,277,521
                      )
                      
                      
                      (1,277,521
                      )Allocated
      to Bi-Op, impaired and included in discontinued operations
                      
                      
                      (808,502
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (808,502
                      )Twincraft
      escrow payment
                      
                      
                      —
                      
                      
                      
                      1,000,000
                      
                      
                      
                      —
                      
                      
                      
                      1,000,000Twincraft
      impairment charge (See Note 1(h))
                      
                      
                      
                      
                      
                      
                      (3,300,000
                      )
                      
                      
                      
                      
                      
                      
                      (3,300,000
                      )Allocated
      to the Langer branded orthotics and related products business and included
      in discontinued operations
                      
                      
                      (1,672,344
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (1,672,344
                      )Balance
      at December 31, 2008
                      
                      $
                      8,349,919
                      
                      
                      $
                      7,548,144
                      
                      
                      $
                      —
                      
                      
                      $
                      15,898,063
 
 (8)Inventories,
net
  Inventories,
net, consisted of the following:
  December
      31,2008
                    
                    
                    2007Raw
      materials
                    
                    $
                    4,010,119
                    
                    
                    $
                    3,548,607Work-in-process
                    
                    
                    287,823
                    
                    
                    
                    289,847Finished
      goods
                    
                    
                    3,177,620
                    
                    
                    
                    2,598,9577,475,562
                    
                    
                    
                    6,437,411Less:
      Allowance for excess and obsolescence
                    
                    
                    610,268
                    
                    
                    
                    787,966$
                    6,865,294
                    
                    
                    $
                    5,649,445
  (9)Property and Equipment,
net
    December
      31,2008
                          
                          2007Land,
      building and improvements
                          
                          $
                          2,557,738
                          
                          
                          $
                          2,557,738Office
      furniture and equipment
                          
                          
                          381,067
                          
                          
                          
                          674,111Computer
      equipment and software
                          
                          
                          1,501,927
                          
                          
                          
                          1,362,301Machinery
      and equipment
                          
                          
                          9,601,178
                          
                          
                          
                          9,178,788Leasehold
      improvements
                          
                          
                          2,401,539
                          
                          
                          
                          3,593,71716,443,449
                          
                          
                          
                          17,366,655Less:
      Accumulated depreciation and amortization
                          
                          
                          7,129,150
                          
                          
                          
                          5,422,971$
                          9,314,299
                          
                          
                          $
                          11,943,684
  64
  LANGER,
INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  Depreciation
and amortization expense relating to property and equipment was $2,596,701 and
$2,135,205 for the years ended December 31, 2008 and 2007, respectively.
Property and equipment held under capital leases had a net book value of
$1,418,442 as of December 31, 2008 (See Note 12, “Long-Term Debt”).
  (10)Other Current
Liabilities
  Other current liabilities consisted of
the following:
  December
      31,2008
                    
                    
                    
                    2007Accrued
      payroll and taxes
                    
                    $
                    296,078
                    
                    
                    $
                    473,588Accrued
      professional fees
                    
                    
                    374,972
                    
                    
                    
                    830,498Accrued
      merchandise
                    
                    
                    669,366
                    
                    
                    
                    518,560Accrued
      transaction costs
                    
                    
                    152,224
                    
                    
                    
                    —Deferred
      interest – capital lease
                    
                    
                    235,797
                    
                    
                    
                    356,625Accrued
      bonuses
                    
                    
                    103,983
                    
                    
                    
                    113,033Accrued
      severance and severance related
                    
                    
                    141,992
                    
                    
                    
                    —Credits
      due customers
                    
                    
                    72,965
                    
                    
                    
                    —Accrued
      rent
                    
                    
                    225,623
                    
                    
                    
                    113,028Accrued
      royalty
                    
                    
                    19,321
                    
                    
                    
                    16,016Accrued
      sales rebates
                    
                    
                    58,335
                    
                    
                    
                    —Current
      portion of note payable
                    
                    
                    —
                    
                    
                    
                    35,541Other
                    
                    
                    258,569
                    
                    
                    
                    134,471$
                    2,609,225
                    
                    
                    $
                    2,591,360
 (11)Credit
Facility
  On
May 11, 2007, the Company entered into a secured revolving credit facility
agreement (the “Credit Facility”) with Wachovia Bank, N.A. (“Wachovia”),
expiring on September 30, 2011.  On April 16, 2008, the Company
entered into an amendment of the Credit Facility with Wachovia that changed
certain terms of the agreement. In addition, on October 24, 2008, the Company
entered into another amendment of the Credit Facility that decreased the maximum
amount that the Company may borrow under such facility.  The Credit
Facility, as amended, provides an aggregate maximum availability, if and when
the Company has the requisite levels of assets, in the amount of $12 million,
and is subject to a sub-limit of $12 million for the issuance of letter of
credit obligations, another sub-limit of $3 million for term loans, and a
sub-limit of $4 million on loans against inventory. The Credit Facility is
collateralized by a first priority security interest in inventory, accounts
receivables and all other assets and is guaranteed on a full and unconditional
basis by the Company and each of the Company’s domestic subsidiaries (Silipos
and Twincraft) and any other company or person that hereafter becomes a borrower
or owner of any property in which Wachovia has a security interest under the
Credit Facility.  As of December 31, 2008, the Company had no
outstanding advances under the Credit Facility and has approximately $6.1
million of remaining availability under the Credit Facility related to eligible
accounts receivable and inventory.  In addition, the Company has
approximately $1.7 million of availability related to property and equipment for
term loans.
  If the
Company’s availability under the Credit Facility drops below $3 million or
borrowings under the Credit Facility exceed $10 million, the Company is required
under the Credit Facility to deposit all cash received from customers into a
blocked bank account that will be swept daily to directly pay down any amounts
outstanding under the Credit Facility. In such event, the Company would not have
any control over the blocked bank account.
  The
Company’s borrowings availabilities under the Credit Facility are limited to 85%
of eligible accounts receivable and 60% of eligible inventory, and are subject
to the satisfaction of certain conditions. Any term loans shall be secured by
equipment or real estate hereafter acquired. The Company is required to submit
monthly unaudited financial statements to Wachovia.
  If the
Company’s availability is less than $3,000,000, the Credit Facility requires
compliance with various covenants including but not limited to a fixed charge
coverage ratio of not less than 1.0 to 1.0.  Availability under the
Credit Facility is reduced by 40% of the outstanding letters of credit related
to the purchase of eligible inventory, as defined, and 100% of all other
outstanding letters of credit. At December 31, 2008, the Company had outstanding
letters of credit related to the purchase of eligible inventory of approximately
$143,000, and other outstanding letters of credit of approximately
$713,000.
  65
  LANGER,
INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  The
Company is required to pay monthly interest in arrears at 0.5 percent above
Wachovia’s prime rate or, at the Company’s election, at 2.5 percentage points
above an Adjusted Eurodollar Rate, as defined in the Credit Facility, which is
based on the London Interbank Offered Rate (“LIBOR”). To the extent that amounts
under the Credit Facility remain unused, while the Credit Facility is in effect
and for so long thereafter as any of the obligations under the Credit Facility
are outstanding, the Company will pay a monthly commitment fee of three eights
of one percent (0.375%) on the unused portion of the loan commitment. The
Company paid Wachovia a closing fee in the amount of $75,000 in August 2007. In
addition, the Company paid legal and other costs associated with obtaining the
credit facility of $319,556 in 2007.  In April 2008, the Company paid
a $20,000 fee to Wachovia related to an amendment of the Credit Facility, which
has been recorded as a deferred financing cost and is being amortized over the
remaining term of the Credit Facility. As of December 31, 2008, the Company had
unamortized deferred financing costs in connection with the Credit Facility of
$262,828. Amortization expense for the years ended December 31, 2008 and 2007
was $94,145 and $57,583, respectively.
  (12)
Long-Term Debt
  On
December 8, 2006, the Company entered into a note purchase agreement for the
sale of $28,880,000 of 5% convertible subordinated notes due December 7, 2011
(the “5% Convertible Notes”). The 5% Convertible Notes are not registered under
the Securities Act of 1933, as amended. The Company has agreed to register the
shares of the Company’s common stock acquirable upon conversion of the 5%
Convertible Notes, which may include an additional number of shares of common
stock issuable on account of adjustments of the conversion price under the 5%
Convertible Notes. The Company filed a registration statement with respect to
the shares acquirable upon conversion of the 5% Convertible Notes (the
“Underlying Shares”) on January 9, 2007, and has filed Amendment No. 1 to the
registration statement on November 19, 2007, Amendment No. 2 in April 2008 and
Amendments No. 3 and 4 in June 2008.
  The 5%
Convertible Notes bear interest at the rate of 5% per annum, payable in cash
semiannually on June 30 and December 31 of each year, commencing June 30,
2007.  For each of the years ended December 31, 2008 and 2007, the
Company recorded interest expense relating to the 5% Convertible Notes of
approximately $1,443,000.
  At the
date of issuance, the 5% Convertible Notes were convertible into shares of the
Company’s common stock at the rate of $4.75 per share, subject to an adjustment
for certain anti-dilution provisions.  At the original conversion
price at December 31, 2006, the number of shares acquirable on conversion was
6,080,000.  Since the conversion price was above the market price on
the date of issuance, there was no beneficial conversion.  Effective
January 8, 2007 and January 23, 2007, in conjunction with common stock issuances
related to two acquisitions (see Note 2, “Acquisitions”), the conversion price
was adjusted to $4.6706 per share, and the number of shares acquirable upon
conversion was thereby increased to 6,183,359, pursuant to the anti-dilution
provisions applicable to the 5% Convertible Notes.  On May 15, 2007,
as a result of the issuance of an additional 68,981 shares of common stock to
the Twincraft sellers on account of upward adjustments to the Twincraft purchase
price, and the surrender to the Company of 45,684 shares of common stock, on
account of downward adjustments in the Regal purchase price, the conversion
price under the 5% Convertible Notes was reduced to $4.6617 per share, and the
number of shares acquirable on conversion was increased to 6,195,165
shares.  This resulted in a debt discount of $476,873, which is being
amortized over the term of the 5% Convertible Notes and is being recorded as
interest expense in the consolidated statements of operations.  The
charge to interest expense relating to the debt discount for the years ended
December 31, 2008 and 2007 was approximately $91,000 and $86,000, respectively.
The principal of the 5% Convertible Notes is due on December 7, 2011, subject to
the earlier call of the 5% Convertible Notes by the Company, as follows: (i) the
5% Convertible Notes may not be called prior to December 7, 2007; (ii) from
December 7, 2007, through December 7, 2009, the 5% Convertible Notes may be
called and redeemed for cash, in the amount of 105% of the principal amount of
the 5% Convertible Notes (plus accrued but unpaid interest, if any, through the
call date);  (iii) after December 7, 2009, the 5% Convertible Notes
may be called and redeemed for cash in the amount of 100% of the principal
amount of the 5% Convertible Notes (plus accrued but unpaid interest, if any,
through the call date); and (iv) at any time after December 7, 2007, if the
closing price of the common stock of the Company on the Nasdaq Global Market (or
any other exchange on which the Company’s stock is then traded or quoted) has
been equal to or greater than $7.00 per share for 20 of the preceding 30 trading
days immediately prior to the Company’s issuing a call notice, then the 5%
Convertible Notes shall be mandatorily converted into common stock at the
conversion price then applicable. The Company held a Special Meeting of
Stockholders on April 19, 2007, at which the Company’s stockholders approved the
issuance by the Company of the shares acquirable on conversion of the 5%
Convertible Notes.
  66
  LANGER,
INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  In the
event of a default on the 5% Convertible Notes, the due date of the 5%
Convertible Notes may be accelerated if demanded by holders of at least 40% of
the 5% Convertible Notes, subject to a waiver by at least 51% of the 5%
Convertible Notes if the Company pays all arrearages of interest on the 5%
Convertible Notes.
  The
payment of interest and principal of the 5% Convertible Notes is subordinate to
the Company’s presently existing capital lease obligation, in the amount of
$2,700,000, excluding current installments, as of December 31, 2008, and the
Company’s obligations under the Credit Facility.  The 5% Convertible
Notes would also be subordinated to any additional debt which the Company may
incur hereafter for borrowed money, or under additional capital lease
obligations, obligations under letters of credit, bankers’ acceptances or
similar credit transactions (see Note 11, “Credit Facility”).
  In
connection with the sale of the 5% Convertible Notes, the Company paid a
commission of $1,060,000 based on a rate of 4% of the amount of 5% Convertible
Notes sold, excluding the 5% Convertible Notes sold to members of the Board of
Directors and their affiliates, to Wm Smith & Co., who served as placement
agent in the sale of the 5% Convertible Notes.  The total cost of
raising these proceeds was $1,338,018, which is being amortized through December
7, 2011, the due date for the payment on the 5% Convertible
Notes.  The amortization of these costs for the years ended December
31, 2008 and 2007 was $264,747 and $262,700, and is recorded as interest expense
in the consolidated statements of operations.
  In June
2006, the Company elected, pursuant to its option under the lease of 41 Madison
Avenue, New York, N.Y., to finance $202,320 of leasehold improvements by
delivery of a note payable to the landlord (the “Note”).  The Note,
which matures in July 2011, provides for interest at a rate of 7% per annum and
60 monthly installments of principal and interest totaling $4,006, commencing
August 2006.  The Note was secured by a $202,320 increase to an
unsecured letter of credit originally provided to the landlord at lease
commencement.  The amount of the revised unsecured letter of credit
was $570,992.  The current portion of the Note was $35,541 at December
31, 2007, and is included in other current liabilities, including current
installments of note payable, and the non-current portion of the Note was
$113,309 at December 31, 2007.  In May, 2008, the Company executed a
surrender agreement with the landlord which provided for the termination of the
lease effective May 19, 2008.  As part of the agreement, the landlord
agreed to forgive the remaining outstanding balance of $139,281 on the note
payable with the landlord which was recorded as a gain.  See Note
13.
  Annual
future minimum capital lease payments are as follows:
  Years
      Ending December 31:2009
                    
                    $
                    443,0122010
                    
                    
                    453,5122011
                    
                    
                    467,1172012
                    
                    
                    481,1302013
                    
                    
                    495,564Later
      years through 2018
                    
                    
                    2,374,827Total
      minimum lease payments
                    
                    
                    4,715,162Less:
      Amount representing interest
                    
                    
                    2,015,162Present
      value of net minimum capital lease payments
                    
                    
                    2,700,000Less:
      Current installments of obligations under capital lease
                    
                    
                    —Obligations
      under capital lease, excluding current installment
                    
                    $
                    2,700,000
  Pursuant
to the acquisition of Silipos, the Company is obligated under a capital lease
covering the land and building at the Silipos facility in Niagara Falls, N.Y.
that expires in 2018.  This lease also contains two five-year renewal
options.  As of December 31, 2008 and 2007, the Company’s obligation
under the capital lease, excluding current installments, is
$2,700,000.
  67
  LANGER,
INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  Additionally,
the Company has accrued interest of $235,797 and $356,625 at December 31, 2008
and 2007, respectively, with respect to the capital lease which is included in
other current liabilities at the respective balance sheet dates.
  At
December 31, 2008 and 2007, the gross amount of land and building and related
accumulated depreciation recorded under the capital lease was as
follows:
  December
      312008
                      
                      
                      2007Land
                      
                      $
                      278,153
                      
                      
                      $
                      278,153Building
                      
                      
                      1,654,930
                      
                      
                      
                      1,654,9301,933,083
                      
                      
                      
                      1,933,083Less:
      Accumulated Depreciation
                      
                      
                      514,641
                      
                      
                      
                      393,549$
                      1,418,442
                      
                      
                      $
                      1,539,534
  (13)
Commitments and Contingencies
  (a)
              Leases
  Certain
of the Company’s facilities and equipment are leased under noncancelable
operating leases. Rental expense amounted to $1,251,279 and $1,473,531 for the
years ended December 31, 2008 and 2007, respectively. The leases expire at
various dates through 2018.
  Future
minimum rental payments required under current operating leases
are:
  Years Ending December 31:2009
                    
                    $
                    1,019,6932010
                    
                    
                    814,9812011
                    
                    
                    561,4062012
                    
                    
                    544,1912013
                    
                    
                    455,672Thereafter
                    
                    
                    37,708$
                    3,433,651
  The Company relocated its executive
offices in May 2008. The Company executed a surrender agreement with the
landlord of 41 Madison Avenue, New York, NY, which provided for the termination
of the lease effective May 19, 2008. As part of the agreement, the landlord
agreed to forgive the remaining outstanding balance of $139,281 on the Company’s
existing note payable with the landlord. The Company vacated the premises in May
2008 and recorded a net gain of $218,249. This gain, which is comprised
primarily of the net deferred rent balance and the forgiveness of the note
payable, is included as a reduction of general and administrative expenses in
the consolidated statements of operations for the year ended December 31, 2008.
In addition, the Company has entered into a sublease agreement for office space
at 245 Fifth Avenue, New York, NY. This sublease requires monthly payments of
$13,889 per month, commencing in May 2008, until June 30, 2009, which is the
expiration date of the sublease.
  (b)
Royalties
  The
Company has entered into several agreements with licensors, consultants and
suppliers, which require the Company to pay royalty fees relating to the sale of
certain products. Royalties in the aggregate under these agreements totaled
$221,320, and $257,336 for the years ended December 31, 2008 and 2007,
respectively.
  (c)
Letters of Credit
  In
connection with its sublease agreement for office space at 245 Fifth Avenue, New
York, NY, the Company issued an irrevocable letter of credit in the amount of
approximately $213,000 in favor of the landlord to secure its performance under
the terms of the sublease.  The letter of credit expires June 30,
2009.
  68


LANGER,
INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




The
Company has outstanding a $500,000 standby letter of credit to secure inventory
purchases from a vendor, which expires December 31, 2009.




(14)
Employee Restricted Stock and Other Stock Issuances




On January 23, 2007, the Board of
Directors approved a grant of 75,000 shares of restricted stock to Kathy Kehoe,
275,000 shares of restricted stock to W. Gray Hudkins, 7,500 shares of
restricted stock to Stephen M. Brecher, 7,500 shares of restricted stock to
Burtt R. Ehrlich, 7,500 shares to Stuart Greenspon and 500,000 shares of
restricted stock to Warren B. Kanders, subject to certain performance
conditions.  In September 2007, the Board of Directors approved a
grant of 75,000 shares of restricted stock to Kathleen P. Bloch, subject to
certain performance conditions.  During the year ended December 31,
2008, the restricted shares issued to Kathy Kehoe were forfeited on account of
her resignation as an officer and employee effective February 5,
2008.  The Company will record stock compensation expense once the
performance criteria is probable.  As of December 31, 2008, no stock
compensation expense with respect to any of these restricted stock awards has
been recorded.




(15)
Stock Options




Effective
January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based
Payment.”  SFAS No. 123(R) replaces SFAS No. 123 and supersedes APB
Opinion No. 25. SFAS No. 123(R) requires that all stock-based compensation be
recognized as an expense in the financial statements and that such costs be
measured at the fair value of the award.  The total stock compensation
expense for the years ended December 31, 2008 and 2007 was $157,331 and
$281,661, and are included in general and administrative expenses in the
consolidated statements of operations.




The fair
value of stock-based awards to employees is calculated through the use of option
pricing models, even though such models were developed to estimate the fair
value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company’s stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. Because share-based compensation expense is based on awards that are
ultimately expected to vest, share-based compensation expense is reduced for
estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates.




During
the years ended December 31, 2008 and 2007, the Company’s calculations were made
using the Black-Scholes option pricing model and are on a multiple option
valuation approach. The Black-Scholes model is affected by the Company’s stock
price as well as assumptions regarding certain subjective variables. These
variables include, but are not limited to, the Company’s expected stock price
volatility over the term of the awards, the risk-free interest rate, and the
expected life of the options. The risk-free interest rate is based on a treasury
instrument whose term is consistent with the expected life of the stock options
granted. The expected volatility, holding period, and forfeitures of options are
based on historical experience. The historical period used for volatility is
comprised of daily historical activity for a period equal to the term. For the
years ended December 31, 2008 and 2007, as permitted under SFAS No. 123(R), the
Company calculated its expected term using the short cut method as they believe
they do not have enough information related to historical activity.




The
following table lists the weighted average assumptions used by the Company in
determining the fair value of stock options for the years ended December 31,
2008 and 2007:




2008
                    
                    
                    2007Expected
      volatility
                    
                    
                    77
                    %
                    
                    
                    75
                    %Expected
      dividends
                    
                    
                    —
                    
                    
                    
                    —Expected
      terms (in number of months)
                    
                    
                    84
                    
                    
                    
                    84Risk-free
      interest rate
                    
                    
                    3.25
                    %
                    
                    
                    3.63
                    %Option
      grants (weighted average fair value)
                    
                    $
                    3.35
                    
                    
                    $
                    3.27


69


LANGER,
INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




At the
Company’s July 17, 2001 annual meeting, the shareholders approved and adopted a
stock incentive plan for a maximum of 1,500,000 shares of common stock (the
“2001 Plan”). Outstanding options granted under the 2001 Plan are exercisable
for a period of up to ten years from the date of grant at an exercise price at
least equal to 100 percent of the fair market value of the Company’s common
stock at the date of grant and option awards generally vest in 3 years of
continuous service, all of which are subject to the approval of the Board of
Directors.  At December 31, 2008, there were 347,752 options
outstanding under the 2001 Plan. On June 23, 2005, the shareholders approved the
Company’s 2005 Stock Incentive Plan (the “2005 Plan”), with substantially the
same terms as the 2001 Plan, pursuant to which a maximum 2,000,000 shares of
common stock are reserved for issuance and available for awards. At December 31,
2008, there were 1,100,000 options outstanding under the 2005
Plan.  On June 20, 2007, the shareholders approved the Company’s 2007
Stock Incentive Plan (the “2007 Plan”) with substantially the same terms as the
previous plans, pursuant to which a maximum of 2,000,000 shares of common stock
are reserved for issuance and available for rewards.  At December 31,
2008, there were 60,000 options outstanding under the 2007
Plan.  Additionally, 250,000 non-plan options were outstanding at
December 31, 2008.




The
following is a summary of activity to the Company’s qualified and non-qualified
stock options:




Number
      of
                    Shares
                  
                  
                  Exercise
                    Price
                    Range
      Per
                    Share
                  
                  
                  Weighted
                    Average
                    Exercise
                    Price
      Per
                    ShareOutstanding
      at December 31, 2006
                  
                  
                  1,709,252
                  
                  
                  
                  1.53
      – 8.07
                  
                  
                  
                  5.63Granted
                  
                  
                  425,000
                  
                  
                  
                  4.20
                  
                  
                  
                  4.20Exercised
                  
                  
                  (30,000
                  )
                  
                  
                  1.53
                  
                  
                  
                  1.53Cancelled
      or forfeited
                  
                  
                  (141,000
                  )
                  
                  
                  1.53
      – 8.07
                  
                  
                  
                  4.26Outstanding
      at December 31, 2007
                  
                  
                  1,963,252
                  
                  
                  
                  
                  
                  
                  
                  5.28Granted
                  
                  
                  60,000
                  
                  
                  
                  0.90
                  
                  
                  
                  0.90Cancelled
      or forfeited
                  
                  
                  (265,500
                  )
                  
                  
                  1.53
      – 8.07
                  
                  
                  
                  5.04Outstanding
      at December 31, 2008
                  
                  
                  1,757,752
                  
                  
                  
                  
                  
                  
                  
                  5.17Vested
      at December 31, 2008
                  
                  
                  1,428,585
                  
                  
                  
                  
                  
                  
                  
                  5.20Exercisable
      at December 31, 2008
                  
                  
                  1,428,585
                  
                  
                  
                  
                  
                  
                  
                  5.20





Under the
2001 Plan, at December 31, 2008, all 393,252 options were exercisable. Under the
2005 Plan, at December 31, 2008, 725,333 options were exercisable. Under the
2007 Plan, 60,000 options were exercisable at December 31,
2008.  Additionally, at December 31, 2008, there were 250,000 non-plan
options which are exercisable.




The
options outstanding at December 31, 2008 had remaining lives ranging from
approximately 0.1 years to 8.3 years, with a weighted average life of
approximately 6.1 years.




The
following table summarizes the Company’s nonvested stock option activity for the
year ended December 31, 2008:




Number
                        Outstanding
                      
                      
                      Weighted
                        Average
                        Fair Value
                        at Grant DateNon-vested
      options at December 31, 2007
                      
                      
                      550,000
                      
                      
                      $
                      1,711,757Options
      cancelled or forfeited
                      
                      
                      (200,000
                      )
                      
                      
                      (648,436
                      )Vested
      options at December 31, 2008
                      
                      
                      (20,833
                      )
                      
                      
                      (66,165
                      )Non-Vested
      options at December 31, 2008
                      
                      
                      329,167
                      
                      
                      $
                      997,156




The
aggregate intrinsic value of options outstanding at December 31, 2008 and 2007
was approximately $1,200 and $176,800, respectively and the aggregate intrinsic
value of exercisable options was $1,200 and $149,700, respectively. No options
were exercised during the year ended December 31, 2008.  Options
exercised during the year ended December 31, 2007 had an intrinsic value of
$33,150. At December 31, 2008, there was approximately $783,000 of unrecognized
compensation cost related to share-based payments, which is expected to be
recognized over a weighted-average period of approximately 2.2
years.




At
December 31, 2008 and 2007, the Company had 60,000 warrants
outstanding.


70


LANGER,
INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




(16)
Segment Information




At
December 31, 2008, the Company operated in two segments (medical products and
personal care).  Our medical products segment, which used to include
Langer UK, Bi-Op and the Langer branded custom orthotics and related
products business, includes the orthopedic and prosthetic products of
Silipos.  The personal care segment includes the operations of
Twincraft and the personal care products of Silipos.  In January 2007,
the Company acquired Regal, which operated as its own segment until its sale in
2008.  Assets and expenses related to the Company’s corporate offices
are reported under “other” as they do not relate to any of the operating
segments.  Intersegment sales are recorded at cost.




Segment
information for the years ended December 31, 2008 and 2007 is summarized as
follows:




Year
      Ended December 31, 2008
                    
                    Medical
                    
                    
                    Personal
                      Care
                    
                    
                    Other
                    
                    
                    TotalNet
      sales
                    
                    $
                    9,481,160
                    
                    
                    $
                    35,579,988
                    
                    
                    $
                    –
                    
                    
                    $
                    45,061,148Operating
      income (loss) from continuing operations
                    
                    
                    1,526,131
                    
                    
                    
                    (5,691,809
                    )
                    
                    
                    (4,530,753
                    )
                    
                    
                    (8,696,431
                    )Provision
      for impairment
                    
                    
                    –
                    
                    
                    
                    (5,700,000
                    )
                    
                    
                    –
                    
                    
                    
                    (5,700,000
                    )Depreciation
      of property and equipment and amortization of identifiable intangible
      assets
                    
                    
                    572,803
                    
                    
                    
                    2,573,601
                    
                    
                    
                    757,471
                    
                    
                    
                    3,903,875Long-lived
      assets
                    
                    
                    5,382,068
                    
                    
                    
                    13,775,100
                    
                    
                    
                    236,630
                    
                    
                    
                    19,393,798Total
      assets
                    
                    
                    16,256,335
                    
                    
                    
                    31,596,294
                    
                    
                    
                    6,312,278
                    
                    
                    
                    54,164,907Capital
      expenditures
                    
                    
                    218,206
                    
                    
                    
                    520,252
                    
                    
                    
                    21,868
                    
                    
                    
                    760,326





Year Ended December 31,
2007
                
                Medical
                
                
                Personal
                  Care
                
                
                Other
                
                
                TotalNet
      sales
                
                $
                9,245,039
                
                
                $
                33,507,653
                
                
                $
                –
                
                
                $
                42,752,692Operating
      (loss) income from continuing operations
                
                
                2,102,462
                
                
                
                1,668,215
                
                
                
                (5,761,495
                )
                
                
                (1,990,818
                )Depreciation
      of property and equipment and amortization of identifiable intangible
      assets
                
                
                557,530
                
                
                
                2,380,431
                
                
                
                556,806
                
                
                
                3,494,767Long-lived
      assets
                
                
                4,973,983
                
                
                
                19,037,147
                
                
                
                1,557,044
                
                
                
                25,568,174Total
      assets (a)
                
                
                18,266,373
                
                
                
                38,272,944
                
                
                
                7,955,921
                
                
                
                64,495,238Capital
      expenditures
                
                
                300,229
                
                
                
                645,407
                
                
                
                –
                
                
                
                945,636





(a)
            Total
      assets do not include assets held for sale of $9,438,386 for the year
      ended December 31, 2007.  Assets held for sale represent the
      assets of Langer UK, Regal, Bi-Op and the Langer branded
      custom orthotics and related products business
      which were sold during 2008. (See Note
  3.)





71


LANGER,
INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Geographical
segment information is summarized as follows:




Year
      Ended December 31, 2008
                                
                                United
      States
                                
                                
                                Canada
                                
                                
                                Europe
                                
                                
                                Other
                                
                                
                                Consolidated
                                  TotalNet
      sales to external customers
                                
                                $
                                36,752,558
                                
                                
                                
                                1,848,966
                                
                                
                                
                                5,172,888
                                
                                
                                $
                                1,286,735
                                
                                
                                $
                                45,061,147Gross
      profit
                                
                                
                                9,815,108
                                
                                
                                
                                407,542
                                
                                
                                
                                2,331,749
                                
                                
                                
                                524,771
                                
                                
                                
                                13,079,170Operating
      income (loss)
                                
                                
                                (9,724,036
                                )
                                
                                
                                29,114
                                
                                
                                
                                827,285
                                
                                
                                
                                171,206
                                
                                
                                
                                (8,696,431
                                )Provision
      for impairment
                                
                                
                                (5,700,000
                                )
                                
                                
                                –
                                
                                
                                
                                –
                                
                                
                                
                                –
                                
                                
                                
                                (5,700,000
                                )Depreciation
      of property and equipment and amortization of identifiable intangible
      assets
                                
                                
                                3,903,875
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                3,903,875Long-lived
      assets
                                
                                
                                19,393,768
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                19,393,768Total
      assets (a)
                                
                                
                                53,797,296
                                
                                
                                
                                
                                
                                
                                
                                367,611
                                
                                
                                
                                
                                
                                
                                
                                54,164,907Capital
      expenditures
                                
                                
                                760,326
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                
                                760,326





Year Ended December 31,
2007
                
                United States
                
                
                Canada
                
                
                Europe
                
                
                Other
                
                
                Consolidated
                  TotalNet
      sales to external customers
                
                $
                35,135,679
                
                
                
                2,069,333
                
                
                
                4,214,199
                
                
                $
                1,333,480
                
                
                $
                42,752,691Gross
      profit
                
                
                11,418,352
                
                
                
                551,841
                
                
                
                2,124,518
                
                
                
                723,865
                
                
                
                14,818,576Operating
      income (loss)
                
                
                (3,399,681
                )
                
                
                116,939
                
                
                
                953,366
                
                
                
                338,558
                
                
                
                (1,990,818
                )Depreciation
      of property and equipment and amortization of identifiable intangible
      assets
                
                
                3,494,767
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                3,494,767Long-lived
      assets
                
                
                25,568,174
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                25,568,174Total
      assets (a)
                
                
                64,072,221
                
                
                
                
                
                
                
                423,017
                
                
                
                
                
                
                
                64,495,238Capital
      expenditures
                
                
                945,636
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                945,636





(a)
            Total
      assets do not include assets held for sale of $9,438,386 for the year
      ended December 31, 2007.  Assets held for sale represent the
      assets of Langer UK, Regal, Bi-Op and the Langer branded custom
      orthotics and related products business
      which were sold during 2008. (See Note
  3.)





Export sales from the Company’s
United States operations accounted for approximately 18% and 17% of net sales
for the years ended December 31, 2008 and 2007, respectively.





(17)
Retirement Plan




The
Company has a defined contribution retirement and savings plan (the “401(k)
Plan”) designed to qualify under Section 401(k) of the Internal Revenue Code
(the “Code”). Eligible employees include those who are at least twenty-one years
old and who have worked at least 1,000 hours during any one year. The Company
may make matching contributions in amounts that the Company determines at its
discretion at the beginning of each year. In addition, the Company may make
further discretionary contributions. Participating employees are immediately
vested in amounts attributable to their own salary or wage reduction elections,
and are vested in Company matching and discretionary contributions under a
vesting schedule that provides for ratable vesting over the second through sixth
years of service. The assets of the 40l (k) Plan are invested in stock, bond and
money market mutual funds. For the years ended December 31, 2008 and 2007, the
Company made contributions totaling $88,314 and $71,298, respectively, to the
401(k) Plan.




(18)
Income Taxes




The
components of net income (loss) before the provision for (benefit from) income
taxes are as follows:




2008
                        
                        
                        2007Domestic
      operations
                        
                        $
                        (11,193,083
                        )
                        
                        $
                        (4,284,992
                        )Foreign
      operations
                        
                        
                        294,180
                        
                        
                        
                        292,253$
                        (10,898,903
                        )
                        
                        $
                        (3,992,739
                        )


72


LANGER,
INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




The
provision for (benefit from) income taxes is comprised of the
following:




Years
      Ended December 31,2008
                              
                              
                              2007Current:Federal
                              
                              $
                              —
                              
                              
                              $
                              (15,280
                              )State
                              
                              
                              42,231
                              
                              
                              
                              —Foreign
                              
                              
                              —
                              
                              
                              
                              —42,231
                              
                              
                              
                              (15,280
                              )Deferred:Federal
                              
                              
                              311,986
                              
                              
                              
                              113,520State
                              
                              
                              55,056
                              
                              
                              
                              16,994Foreign
                              
                              
                              —
                              
                              
                              
                              —367,042
                              
                              
                              
                              130,514$
                              409,273
                              
                              
                              $
                              115,234




As of
December 31, 2008, the Company has net Federal and state tax operating loss
carryforwards of approximately $16,500,000, which may be applied against future
taxable income and which expire from 2009 through 2028.  Future
utilization of these net operating loss carryforwards will be limited under
existing tax law due to the change in control of the Company in
2001.




The
following is a summary of deferred tax assets and liabilities:




December
      31,2008
                                        
                                        
                                        2007Current
      assets:Accounts
      receivable
                                        
                                        $
                                        62,980
                                        
                                        
                                        $
                                        575,364Stock
      options
                                        
                                        
                                        654,379
                                        
                                        
                                        
                                        650,266Inventory
      reserves
                                        
                                        
                                        488,329
                                        
                                        
                                        
                                        805,254Accrued
      expenses and other
                                        
                                        
                                        25,784
                                        
                                        
                                        
                                        116,9461,231,472
                                        
                                        
                                        
                                        2,147,830Non-current
      assets:Capital
      lease
                                        
                                        
                                        642,029
                                        
                                        
                                        
                                        639,096Intangible
      assets
                                        
                                        
                                        186,602
                                        
                                        
                                        
                                        791,036Net
      operating loss carryforwards
                                        
                                        
                                        6,608,089
                                        
                                        
                                        
                                        4,552,966Other
                                        
                                        
                                        9,543
                                        
                                        
                                        
                                        5,9587,446,263
                                        
                                        
                                        
                                        5,989,056Valuation
      allowances
                                        
                                        
                                        (5,102,721
                                        )
                                        
                                        
                                        (2,759,090
                                        )Non-current
      liabilities:Property
      and equipment
                                        
                                        
                                        (1,128,333
                                        )
                                        
                                        
                                        (1,687,601
                                        )Goodwill
      and Trade Names
                                        
                                        
                                        (4,219,891
                                        )
                                        
                                        
                                        (5,482,404
                                        )(5,348,224
                                        )
                                        
                                        
                                        (7,170,005
                                        )Net
      deferred tax liabilities
                                        
                                        $
                                        (1,773,210
                                        )
                                        
                                        $
                                        (1,792,209
                                        )




The
impairment of goodwill and the customer list of Twincraft during 2008 resulted
in approximately $960,000 of decreases in deferred tax
liabilities.  These deferred tax liabilities resulted in a
corresponding reduction to the tax valuation allowance relating to the Company’s
net deferred tax assets.


73


LANGER,
INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




The
Company’s provision for income taxes differs from the Federal statutory rate.
The reasons for such differences are as follows:




Years
      Ended December 31,2008
                      
                      
                      2007Amount
                      
                      
                      %
                      
                      
                      Amount
                      
                      
                      %Provision
      at Federal statutory rate
                      
                      $
                      (3,705,627
                      )
                      
                      
                      (34.0
                      )
                      
                      $
                      (1,357,531
                      )
                      
                      
                      (34.0
                      )Other
      Permanent items
                      
                      
                      1,226,470
                      
                      
                      
                      11.2
                      
                      
                      
                      134,177
                      
                      
                      
                      3.3Increase
      (decrease) in taxes resulting from:State
      income tax expense, net of federal benefit
                      
                      
                      97,287
                      
                      
                      
                      0.9
                      
                      
                      
                      11,216
                      
                      
                      
                      0.3Expiration
      of NOL’s
                      
                      
                      250,626
                      
                      
                      
                      2.3
                      
                      
                      
                      11,215
                      
                      
                      
                      0.3Effect
      of foreign operations
                      
                      
                      (100,021
                      )
                      
                      
                      (0.9
                      )
                      
                      
                      (99,366
                      )
                      
                      
                      (2.5
                      )Change
      in valuation allowance
                      
                      
                      2,640.538
                      
                      
                      
                      24.2
                      
                      
                      
                      1,416,959
                      
                      
                      
                      35.5Other
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (1,436
                      )
                      
                      
                      —Provision
      for Income Taxes
                      
                      $
                      409,273
                      
                      
                      
                      3.7
                      %
                      
                      $
                      115,234
                      
                      
                      
                      2.9
                      %








The
Company does not provide for income taxes on the unremitted earnings of foreign
subsidiaries where, in management’s opinion, such earnings have been
indefinitely reinvested in those operations or will be remitted as dividends
with taxes substantially offset by foreign tax credits, which are immaterial. It
is not practical to determine the amount of unrecognized deferred tax
liabilities for temporary differences related to these investments.




The
Company adopted FIN 48 effective January 1, 2007.  Under FIN 48, tax
benefits are recognized only for tax positions that are more likely than not to
be sustained upon examination by tax authorities.  The amount
recognized is measured as the largest amount of benefit that is greater than 50%
likely to be realized upon ultimate settlement.




At
December 31, 2008, the Company did not have any unrecognized tax
benefits.  The year subject to potential audit varies depending on the
tax jurisdiction.  Generally, the Company’s statutes are open for tax
years ended December 31, 2005 and forward.  The Company’s major taxing
jurisdictions include the United States and New York State.




(19)
Reconciliation of Basic and Diluted Earnings Per Share




Basic
earnings per common share (“EPS”) are computed based on the weighted average
number of common shares outstanding during each period. Diluted earnings per
common share are computed based on the weighted average number of common shares,
after giving effect to dilutive common stock equivalents outstanding during each
period. The diluted income (loss) per share computations for the years ended
December 31, 2008 and 2007 exclude approximately 1,758,000 and 1,963,000 shares,
respectively, related to employee stock options because the effect of including
them would be anti-dilutive. The impact of the 5% Convertible Notes on the
calculation of the fully-diluted earnings per share was anti-dilutive and is
therefore not included in the computation for the years ended December 31, 2008
and 2007.




(20)
Related Party Transactions




Consulting Agreement with Kanders
& Company, Inc. On November 12, 2004, the Company entered into a
consulting agreement (the “Consulting Agreement”) with Kanders & Company,
Inc. (“Kanders & Company”), the sole stockholder of which is Warren B.
Kanders, who on November 12, 2004, became the Company’s Chairman of the Board of
Directors, and who is the sole manager and voting member of Langer Partners, LLC
(“Langer Partners”), the Company’s largest stockholder. The Consulting Agreement
provides that Kanders & Company will act as the Company’s non-exclusive
consultant to provide the Company with strategic consulting and corporate
development services for a term of three years. Pursuant to the Consulting
Agreement, Kanders & Company is entitled to an annual fee of $300,000 and
may receive separate compensation for assistance, at the Company’s request, with
certain transactions or other matters to be determined by the Board from time to
time. During 2008, Kanders & Company continued to render consulting services
to the Company and the Company continued to pay for such services in
accordance with the terms of the expired consulting agreement, as approved by
the Board of Directors.  The Company expects to negotiate a new consulting
agreement with Kanders & Company during 2009.


74


LANGER,
INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




5% Convertible Subordinated
Notes.  On December 8, 2006, the Company sold $28,880,000 of the
Company’s 5% Convertible Notes due December 7, 2011 (the “5% Convertible Notes”)
in a private placement. The number of shares of common stock issuable on
conversion of the 5% Convertible Notes, as of December 31, 2008, is 6,195,165,
and the conversion price as of such date was $4.6617. The number of shares and
conversion price are subject to adjustment in certain circumstances as described
in the 5% Convertible Notes. During the year ended December 31, 2008, the
Company’s Chairman of the Board of Directors, Warren B. Kanders, purchased
$3,250,000, President and CEO, W. Gray Hudkins, and CFO and COO, Kathleen P.
Bloch, each purchased $250,000 of the Company’s 5% Convertible Notes from the
previous debt holders. A trust controlled by Mr. Warren B. Kanders, the
Company’s Chairman of the Board of Directors and largest beneficial stockholder,
owns (as a trustee for a member of his family) $5,250,000 of the 5% Convertible
Notes, and one director, Stuart P. Greenspon, owns $150,000 of the 5%
Convertible Notes.




During
2007, the Company entered into a sublease agreement for a portion of its former
leased space at 41 Madison Avenue, New York, NY.  (See Note
13.)  A member of the Company’s board of directors is also a member of
the subtenant’s board of directors.  Sublease payments received by the
Company amounted to $51,895 and $45,000 for the years ended December 31, 2008
and 2007.




(21)
Litigation




On or
about February 13, 2006, Dr. Gerald P. Zook filed a demand for arbitration with
the American Arbitration Association, naming the Company and Silipos as 2 of the
16 respondents.  (Four of the other respondents are the former owners
of Silipos and its affiliates, and the other 10 respondents are unknown
entities.)  The demand for arbitration alleges that the Company and
Silipos are in default of obligations to pay royalties in accordance with the
terms of a license agreement between Dr. Zook and Silipos dated as of January 1,
1997, with respect to seven patents owned by Dr. Zook and licensed to
Silipos.  Silipos has paid royalties to Dr. Gerald P. Zook, but Dr.
Zook claims that greater royalties are owed.  Silipos vigorously
disputes any liability and contests his theory of damages. Dr. Zook has agreed
to drop Langer, Inc. (but not Silipos) from the arbitration, without prejudice.
Arbitration hearings were conducted on February 2-6, 2009 at which time Dr. Zook
sought almost $1 million in damages and a declaratory judgment with respect to
royalty reports. Post-arbitration
briefs are due by March 23, 2009 and reply briefs are due by March 30,
2009.




On or
about February 13, 2006, Mr. Peter D. Bickel, who was the executive vice
president of Silipos, Inc., until January 11, 2006, alleged that he was
terminated by Silipos without cause and, therefore, was entitled, pursuant to
his employment agreement, to a severance payment of two years’ base salary. On
or about February 23, 2006, Silipos commenced action in New York State Supreme
Court, New York County, against Mr. Bickel seeking, among other things, a
declaratory judgment that Mr. Bickel is not entitled to severance pay or other
benefits, on account of his breach of various provisions of his employment
agreement with Silipos and his non-disclosure agreement with Silipos, and that
he voluntarily resigned his employment with Silipos. Silipos also sought
compensatory and punitive damages for breaches of the employment agreement,
breach of the non-disclosure agreement, breach of fiduciary duties,
misappropriation of trade secrets, and tortious interference with business
relationships. On or about March 22, 2006, Mr. Bickel removed the lawsuit to the
United States District Court for the Southern District of New York and filed an
answer denying the material allegations of the complaints and counterclaims
seeking a declaratory judgment that his non-disclosure agreement is
unenforceable and that he is entitled to $500,000, representing two years’ base
salary, in severance compensation, on the ground that Silipos did not have
“cause” to terminate his employment. On August 8, 2006, the Court determined
that the restrictive covenant was enforceable against Mr. Bickel for the
duration of its term (which expired on January 11, 2007) to the extent of
prohibiting Mr. Bickel from soliciting certain key customers of the Company with
whom he had worked during his employment with the company. The Company has
withdrawn, without prejudice, its claims for compensatory and punitive damages
for breaches of the employment agreement, breach of the non-disclosure
agreement, breach of fiduciary duties, misappropriation of trade secrets, and
tortuous interference with business relations. On October 12, 2007, the court
issued an opinion and order dismissing all of Mr. Bickel’s claims against
Silipos, denying Mr. Bickel’s motion to dismiss the remaining claims of Silipos
against him, and allowing Silipos to proceed with its claims against Mr. Bickel
for breach of fiduciary duty and disloyalty. The case was settled in April 2008
by an agreement that the Company would drop its remaining claims against Mr.
Bickel in return for him foregoing any right to appeal the court decision in
favor of the Company.




Additionally,
in the normal course of business, the Company may be subject to claims and
litigation in the areas of general liability, including claims of employees, and
claims, litigation or other liabilities as a result of acquisitions completed.
The results of legal proceedings are difficult to predict and the Company cannot
provide any assurance that an action or proceeding will not be commenced against
the Company or that the Company will prevail in any such action or proceeding.
An unfavorable outcome of the arbitration proceeding commenced by Dr. Gerald P.
Zook against Silipos may adversely affect the Company’s rights to manufacture
and/or sell certain products or raise the royalty costs of these certain
products.


75


LANGER,
INC. AND SUBSIDIARIES





NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




An
unfavorable resolution of any legal action or proceeding could materially
adversely affect the market price of the Company’s common stock and its
business, results of operations, liquidity, or financial condition.




(22)
Restructuring




On May 3, 2007, the Company announced
its plan to close its Anaheim manufacturing facility in order to better leverage
the Company’s resources by reducing costs, obtaining operational efficiencies
and to further align the Company’s business with market conditions, future
revenue expectations and planned future product directions.  The plan
included the elimination of 27 positions, which represented approximately 4.5%
of the Company’s workforce.  During the year ended December 31, 2007,
the Company recognized expenses of $200,485, consisting of employee termination
benefits and related costs of $128,572, loss on the abandonment of fixed assets
of $28,193, expenses relating to the exiting of the Anaheim leased facility,
which would have expired in December, 2007, of $34,560, and other exit costs of
$9,160.  This plan was completed by the end of 2007.




(23)
Stock Repurchase Plan




On December 6, 2007, the Company’s
Board of Directors authorized the purchase of up to $6,000,000 of its common
stock.  In connection with this matter, the Company’s senior lender,
Wachovia Bank, National Association has waived, until April 15, 2009, the
provisions of the credit facility that would otherwise preclude the Company from
making purchases of its common stock.  During the year ended December
31, 2008, the Company acquired 2,746,335 shares at a cost of
$2,270,507.  From January 1, 2009 through March 20, 2009, the
Company has acquired an additional 161,125 shares at a cost of
$83,356.  Through March 20, 2009, the Company has acquired a
total of 2,907,460 shares at an average price of $.81 per share and at a cost of
$2,353,863 under this program.


76




LANGER,
INC. AND SUBSIDIARIES





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





Nothing
to report.





Item
9A(T). Controls and Procedures





Disclosure
Controls and Procedures





The
Company’s management, including its Chief Executive Officer (“CEO”) and Chief
Financial Officer (“CFO”), has evaluated the effectiveness of the Company’s
disclosure controls and procedures, as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) as of December 31, 2008.  Based on that evaluation,
the Company’s CEO and CFO have concluded that the Company’ disclosure controls
and procedures are effective in recording, processing, summarizing and
reporting, within the time periods specified in the SEC’s rules and forms,
information required to be disclosed by the Company in the reports it files or
submits under the Exchange Act, and in ensuring that information required to be
disclosed is in the reports that the Company files or submits under the Exchange
Act is collected and conveyed to the Company’s management, including its CEO and
CFO, to allow timely decisions to be made regarding required
disclosure.





Management’s
Report on Internal Control Over Financial Reporting





The
Company’s management is responsible for establishing and maintaining adequate
control over financial reporting, as such term defined in Exchange Act Rules
13a-13(f) and 15d-15(f). The Company performed an evaluation, under supervision
and with participation of the Company’s management, including its CEO and CFO,
of the effectiveness of the Company’s internal control over financial reporting
based on the framework in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission.  Based on that evaluation, the CEO and CFO concluded that
the Company’s internal control over financial reporting was effective as of
December 31, 2008.





This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting.  Management’s report was not subject to
attestation by the Company’s independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permits the Company to provide only management’s report in this annual
report.





Changes
in Internal Control over Financial Reporting





There
have been no changes in the Company’s internal control over financial reporting
during the most recent quarter that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting.


77


PART
III




Item
10. Directors and Executive Officers of the Company




The
information set forth under the caption “Election of Directors” in the proxy
statement to be distributed by the Board of Directors of the Company in
connection with the 2009 Annual Meeting of Stockholders, which is expected to be
filed on or before April 30, 2009, is incorporated herein by
reference.




The
Company has adopted a code of ethics that applies to its Chief Executive Officer
and Chief Financial Officer, who are the Company’s principal executive officer
and principal financial and accounting officer, and to all of its other
officers, directors and managerial employees. The code of ethics may be accessed
at www.langercorporate.com, our Internet website, at the tab “Investor
Relations”. The Company intends to disclose future amendments to, or waivers
from, certain provision of its code of ethics, if any, on the above website
within four business days following the date of such amendment or
waiver.




Item
11. Executive Compensation




The
information required by Item 11 appearing under the caption “Executive
Compensation” of the Company’s proxy statement for the 2009 Annual Meeting of
Stockholders, which is expected to be filed on or before April 30, 2009, is
incorporated herein by reference.




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




The
information required by Item 12 appearing under the caption “Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder Matters” of
the Company’s proxy statement for the 2009 Annual Meeting of Stockholders, which
is expected to be filed on or before April 30, 2009, is incorporated herein by
reference.




Item
13. Certain Relationships and Related Transactions




The
information required by Item 13 appearing under the caption “Certain
Relationships and Related Transactions” of the Company’s proxy statement for the
2009 Annual Meeting of the Stockholders, which is expected to be filed on or
before April 30, 2009, is incorporated herein by reference.




Item
14. Principal Accountant Fees and Services




The
information required by Item 14 appearing under the caption “Principal
Accountant Fees and Services” of the Company’s proxy statement for the 2009
Annual Meeting of the Stockholders, which is expected to be filed on or before
April 30, 2009, is incorporated herein by reference.


78




PART
IV




Item
15. Exhibits and Financial Statement Schedules




1.
Financial Statements




For a
list of the financial statements of the Company included in this report, please
see the Index to Consolidated Financial Statements appearing at the beginning of
Item 8, Financial Statements.




2.
Exhibits




Exhibit
                  No.
                
                Description of Exhibit3.1
                
                Agreement
      and Plan of Merger dated as of May 15, 2002, between Langer, Inc., a New
      York corporation, and Langer, Inc., a Delaware corporation (the surviving
      corporation), incorporated herein by reference to Appendix A of our
      Definitive Proxy Statement for the Annual Meeting of Stockholders held on
      June 27, 2002, filed with the Securities and Exchange Commission on May
      31, 2002.3.2
                
                Certificate
      of Incorporation, incorporated herein by reference to Appendix B of our
      Definitive Proxy Statement for the Annual Meeting of Stockholders held on
      June 27, 2002, filed with the Securities and Exchange Commission on May
      31, 2002.3.3
                
                By-laws,
      incorporated herein by reference to Appendix C of our Definitive Proxy
      Statement for the Annual Meeting of Stockholders held on June 27, 2002,
      filed with the Securities and Exchange Commission on May 31,
      2002.4.1
                
                Specimen
      of Common Stock Certificate, incorporated herein by reference to our
      Registration Statement of Form S-1 (File No. 2- 87183).10.1†+
                
                Consulting
      Agreement between Langer, Inc. and Kanders & Company, Inc., dated
      November 12, 2004.10.2+
                
                Option
      Agreement between Langer, Inc. and Kanders & Company, Inc., dated
      February 13, 2001, incorporated herein by reference to Exhibit (d)(1)(G)
      to the Schedule TO (File Number 005-36032).10.3
                
                Registration
      Rights Agreement between Langer, Inc. and Kanders & Company, Inc.,
      dated February 13, 2001, incorporated herein by reference to Exhibit
      (d)(1)(I) to the Schedule TO (File Number 005-36032).10.4
                
                Indemnification
      Agreement between Langer, Inc. and Kanders & Company, Inc., dated
      February 13, 2001, incorporated herein by reference to Exhibit (d)(1)(J)
      to the Schedule TO (File Number 005-36032).10.5+
                
                The
      Company’s 2001 Stock Incentive Plan incorporated herein by reference to
      Exhibit 10.18 of our Annual Report on Form 10-K for the fiscal year ended
      December 31, 2001.10.6
                
                Langer
      Biomechanics Group Retirement Plan, restated as of July 20, 1979
      incorporated by reference to our Registration Statement of Form S-1 (File
      No. 2-87183).10.7
                
                Agreement,
      dated March 26, 1992, and effective as of March 1, 1992, relating to our
      401(k) Tax Deferred Savings Plan, incorporated by reference to our Form
      10-K for the fiscal year ended February 29, 1992.10.8
                
                Registration
      Rights Agreement, dated May 6, 2002, among Langer, Inc., Benefoot, Inc.,
      Benefoot Professional Products, Inc., and Dr. Sheldon Langer, incorporated
      herein by reference to Exhibit 10.1 of our Current Report on Form 8-K,
      filed with the Securities and Exchange Commission on May 13,
      2002.


79





Exhibit
                No.
              
              Description of Exhibit10.9
              
              Stock
      Purchase Agreement, dated as of September 22, 2004, by and among Langer,
      Inc., LRC North America, Inc., SSL Holdings, Inc., and Silipos, Inc.,
      incorporated herein by reference to Exhibit 2.1 of our Current Report on
      Form 8-K filed with the Securities and Exchange Commission on October 6,
      2004.10.10
              
              Note
      and Warrant Purchase Agreement, dated September 30, 2004, by and among
      Langer, Inc., and the investors named therein, incorporated herein by
      reference to Exhibit 4.1 of our Current Report on Form 8-K filed with the
      Securities and Exchange Commission on October 6, 2004.10.11
              
              Form
      of Warrant to purchase shares of the common stock of Langer, Inc.,
      incorporated herein by reference to Exhibit 4.3 of our Current Report on
      Form 8-K filed with the Securities and Exchange Commission on October 6,
      2004.10.12†+
              
              Stock
      Option Agreement between Langer, Inc. and W. Gray Hudkins, dated November
      12, 2004.10.13†+
              
              Restricted
      Stock Agreement between Langer, Inc. and W. Gray Hudkins, dated November
      12, 2004.10.14†
              
              Stock
      Option Agreement between Langer, Inc. and Kanders & Company, Inc.
      dated November 12, 2004.10.15†
              
              Patent
      License Agreement, including amendment no. 1 thereto, between Applied
      Elastomerics, Inc. and SSL Americas, Inc., dated effective November 30,
      2001, incorporated herein by reference to Exhibit 10.41 of our Annual
      Report on Form 10-K for the year ended December 31, 2004, filed with the
      Securities and Exchange Commission on March 30, 2005.10.16
              
              Assignment
      and Assumption Agreement, dated as of September 30, 2004, by and between
      SSL Americas, Inc. and Silipos, Inc., incorporated herein by reference to
      Exhibit 10.42 of our Annual Report on Form 10-K for the year ended
      December 31, 2004, filed with the Securities and Exchange Commission on
      March 30, 2005.10.17
              
              License
      Agreement, dated as of January 1, 1997, by and between Silipos, Inc. and
      Gerald P. Zook, incorporated herein by reference to Exhibit 10.43 of our
      Annual Report on Form 10-K for the year ended December 31, 2004, filed
      with the Securities and Exchange Commission on March 30,
    2005.10.18
              
              Copy
      of Sublease between Calamar Enterprises, Inc. and Silipos, Inc., dated May
      21, 1998; First Amendment to Sublease between Calamar Enterprises, Inc.
      and Silipos, Inc., dated July 15, 1998; and Second Amendment to Sublease
      between Calamar Enterprises, Inc. and Silipos, Inc., dated March 1, 1999,
      incorporated herein by reference to Exhibit 10.45 of our Annual Report on
      Form 10-K for the year ended December 31, 2004, filed with the Securities
      and Exchange Commission on March 30, 2005.10.19
              
              Lease
      dated December 19, 2005, between the Company (as tenant) and 41 Madison,
      L.P., of office space at 41 Madison Avenue, New York, N.Y., incorporated
      herein by reference to Exhibit 10.1 of the Company’s Current Report on
      Form 8-K filed on December 22, 2005.10.20
      +
              
              Form
      of Amendment to Stock Option Agreement, incorporated herein by reference
      to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed on
      December 27, 2005.10.21 +
              
              Form
      of Amendment to Restricted Stock Award Agreement, incorporated herein by
      reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K
      filed on December 27,
2005.


80





Exhibit
                    No.
                  
                  Description of Exhibit10.22
                  
                  Form
      of Note Purchase Agreement dated as of December 7, 2006, among the Company
      and the purchasers of the Company’s 5% Convertible Notes Due December 7,
      2011, including letter amendment dated as of December 7, 2006, without
      exhibits, incorporated herein by reference to Exhibit 10.1 of the
      Company’s Current Report on Form 8-K filed on December 14,
      2006.10.23
                  
                  Form
      of the Company’s 5% Convertible Note Due December 7, 2011, incorporated
      herein by reference to Exhibit 10.2 of the Company’s Current Report on
      Form 8-K filed on December 14, 2006.10.24
                  
                  Registration
      Rights Agreement dated as of January 23, 2007, by and between the Company,
      Peter A. Asch, Richard D. Asch, A. Lawrence Litke, and Joseph M. Candido,
      incorporated herein by reference to Exhibit 10.1 of the Company’s Current
      Report on Form 8-K filed on January 29, 2007.10.25 +
                  
                  Employment
      Agreement dated January 23, 2007, between Twincraft, Inc. and Peter A.
      Asch, incorporated herein by reference to Exhibit 10.2 of the Company’s
      Current Report on Form 8-K filed on January 29, 2007.10.26+
                  
                  Employment
      Agreement dated January 23, 2007, between Twincraft, Inc. and A. Lawrence
      Litke, incorporated herein by reference to Exhibit 10.3 of the Company’s
      Current Report on Form 8-K filed on January 29, 2007.10.27+
                  
                  Employment
      Agreement dated January 23, 2007, between Twincraft, Inc. and Richard
      Asch, incorporated herein by reference to Exhibit 10.4 of the Company’s
      Current Report on Form 8-K filed on January 29, 2007.10.28+
                  
                  Consulting
      Agreement dated January 23, 2007, between Twincraft, Inc. and Fifth
      Element LLC, incorporated herein by reference to Exhibit 10.5 to the
      Company’s Current Report on Form 8-K filed on January 29,
      2007.10.29
                  
                  Lease
      Agreement dated January 23, 2007, between Twincraft, Inc. and Asch
      Partnership, incorporated herein by reference to Exhibit 10.6 to the
      Company’s Current Report on Form 8-K filed on January 29,
      2007.10.30
                  
                  Lease
      dated October 1, 2003 and as amended January 23, 2006, between Twincraft,
      Inc. and Asch Enterprises, LLC, incorporated herein by reference to
      Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on January
      29, 2007.10.31
                  
                  Stock
      Purchase Agreement dated as of November 14, 2006, by and among Langer,
      Inc., Peter A. Asch, Richard D. Asch, A. Lawrence Litke, and Joseph M.
      Candido, incorporated herein by reference to Exhibit 10.8 to the Company’s
      Current Report on Form 8-K filed on January 29, 2007.10.32
                  
                  Loan
      and Security Agreement dated as of May 11, 2007, between Wachovia Bank,
      National Association, and Langer, Inc., Silipos, Inc., Regal Medical,
      Inc., and Twincraft, Inc., incorporated herein by reference to Exhibit
      10.1 to the Company’s Current Report on Form 8-K filed on May 15,
      2007.10.33 +
                  
                  Employment
      Agreement dated as of July 26, 2007, between the Company and Kathleen P.
      Bloch, incorporated herein by reference to Exhibit 10.1 to the Company’s
      Current Report on Form 8-K filed on July 27, 2007.


10.34 +
            
            Employment
      Agreement dated as of October 1, 2007, between the Company and W. Gray
      Hudkins, incorporated herein by reference to Exhibit 10.1 to the Company’s
      Current Report on Form 8-K filed on October 12,
  2007.





81





Exhibit
                      No.
                    
                    Description of Exhibit10.35
                    
                    Amendment
      dated June 21, 2007, to Loan and Security Agreement dated as of May 11,
      2007, between Wachovia Bank, National Association, and Langer, Inc.,
      Silipos, Inc., Regal Medical, Inc., and Twincraft,
      Inc.,  incorporated herein by reference to Exhibit 10.63 to our
      Annual Report on Form 10-K for the year ended December 31, 2007, filed on
      March 31, 2008.10.36
                    
                    Amendment
      No. 2 dated as of October 1, 2007, to Loan and Security Agreement dated as
      of May 11, 2007, between Wachovia Bank, N.A., and Langer, Inc., Silipos,
      Inc., Regal Medical, Inc., and Twincraft, Inc., incorporated herein by
      reference to Exhibit 10.64 to our Annual Report on Form 10-K for the year
      ended December 31, 2007, filed on March 31, 2008.10.37
                    
                    Form
      of Indemnification Agreement between the Company and its executive
      officers and directors, incorporated herein by reference to Exhibit 10.65
      to our Annual Report on Form 10-K for the year ended December 31, 2007,
      filed on March 31, 2008.10.38
                    
                    Amendment
      No. 3 dated as of April 16, 2008, to Loan and Security Agreement dated as
      of May 11, 2007, between Wachovia Bank, N.A., and Langer, Inc., Silipos,
      Inc., Regal Medical, Inc., and Twincraft, Inc., incorporated herein by
      reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on
      April 18, 2008.10.39
                    
                    Form
      of Sublease between the Langer, Inc. as undertenant and Smile Train, Inc.,
      as overtenant with respect to premises at 245 Fifth Avenue, New York,
      N.Y., incorporated herein by reference to Exhibit 10.1 to our Current
      Report on Form 8-K, filed on May 7, 2008.10.40
                    
                    Sale
      Agreement dated June 11, 2008, among Langer, Inc., as seller and Messrs.
      John Shero, Carl David Ray, and Ryan Hodge, as purchasers with respect to
      the outstanding membership interests in Regal Medical Supply, LLC.,
      incorporated herein by reference to Exhibit 2.1 to our Current Report on
      Form 8-K, filed on June 17, 2008.10.41
                    
                    Share
      Purchase Agreement, dated as of July 31, 2008, by and among Langer Canada,
      Inc. and 9199-9200 Quebec, Inc., incorporated herein by reference to
      Exhibit 2.1 to our Current Report on Form 8-K, filed on August
      1,  2008.10.42
                    
                    Amendment
      No. 4 dated October 24, 2008, to Loan and Security Agreement dated May 11,
      2007, between Wachovia Bank, National Association, Langer,
      Inc.,  Silipos, Inc., Regal Medical, Inc., and Twincraft,
      Inc.,  incorporated herein by reference to Exhibit 10.1 to our
      Current Report on Form 8-K, filed on October 30, 2008.10.43
                    
                    Asset
      Purchase Agreement dated as October 24, 2008, by and between Langer, Inc.,
      and Langer Acquisition Corp.,  incorporated herein by reference
      to Exhibit 2.1 to our Current Report on Form 8-K, filed on October 30,
      2008.21.1
                    
                    Subsidiaries
      of the Registrant.23.1
                    
                    Consent
      of BDO Seidman, LLP.31.1
                    
                    Rule
      13a-14(a)/15d-14(a) Certification by Principal Executive
      Officer.31.2
                    
                    Rule
      13a-14(a)/15d-14(a) Certification by Principal Financial
      Officer.32.1
                    
                    Section
      1350 Certification by Principal Executive
  Officer.


82





Exhibit
                  No.
                
                Description of Exhibit32.2
                
                Section
      1350 Certification by Principal Financial
  Officer.





†
            Incorporated
      herein by reference to our Registration Statement on Form S-1 (File No.
      333-120718) filed with the Securities and Exchange Commission on November
      23, 2004.


+
            This
      exhibit represents a management contract or compensation
    plan.


83


SIGNATURES




Pursuant
to the requirements of Section l3 or l5(d) of the Securities Exchange Act of
l934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.




LANGER,
      INC.Date:
      March 24, 2009
                    
                    By:
                    /s/
      W. GRAY HUDKINSW.
      Gray HudkinsPresident
      and Chief Executive Officer
                      (Principal
      Executive Officer)Date:
      March 24, 2009
                    
                    By:
                    /s/
      KATHLEEN P. BLOCHKathleen
      P. BlochVice
      President and Chief Financial Officer
                      (Principal
      Financial
Officer)




Pursuant
to the requirements of the Securities Exchange Act of l934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.




Date:
      March 24, 2009
                          
                          By:
                          /s/
      WARREN B. KANDERSWarren
      B. KandersDirectorDate:
      March 24, 2009
                          
                          By:
                          /s/
      PETER A. ASCHPeter
      A. AschDirectorDate:
      March 24, 2009
                          
                          By:
                          /s/
      STEPHEN M. BRECHERStephen
      M. BrecherDirectorDate:
      March 24, 2009
                          
                          By:
                          /s/
      BURTT R. EHRLICHBurtt
      R. EhrlichDirectorDate:
      March 24, 2009
                          
                          By:
                          /s/
      STUART P. GREENSPONStuart
      P. GreensponDirectorDate:
      March 24, 2009
                          
                          By:
                          /s/
      DAVID S. HERSHBERGDavid
      S. HershbergDirectorDate:
      March 24, 2009
                          
                          By:
                          /s/
      W. GRAY HUDKINSW.
      Gray HudkinsDirector







EXHIBIT
LIST




Exhibit
                No.
              
              Description
      of Exhibit21.1
              
              Subsidiaries23.1
              
              Consent
      of Independent Registered Public Accounting Firm31.1
              
              Certification
      of Principal Executive Officer31.2
              
              Certification
      of Principal Financial Officer32.1
              
              Certification
      of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as
      adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
              
              Certification
      of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as
      adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002