Raises 2008 Annual Sales and Pro Forma EPS Guidance



    BETHESDA, Md., July 29 /EMWNews/ -- Hanger Orthopedic

Group, Inc. (NYSE: HGR) announces net sales of $181.2 million for the

quarter ended June 30, 2008 an increase of 13.0% from $160.4 million in the

prior year's comparable quarter. Net income increased by $2.9 million, or

57.2%, to $8.0 million in the second quarter 2008 from $5.1 million in same

quarter last year.



    Pro forma net income applicable to common stock was $8.0 million, or

$0.25 per diluted share (a 47% increase), for the quarter ended June 30,

2008 compared to net income applicable to common stock of $5.0 million, or

$0.17 per diluted share, in the second quarter of last year. The pro forma

results for the second quarter 2008 assume that a one-time, in-kind

preferred stock dividend occurred and the preferred stock was converted to

common stock at the beginning of the period. The preferred stock dividend

and conversion are explained in greater detail later in this press release.

Net income applicable to common stock on a GAAP basis, which includes the

full impact of the $5.3 million one-time non-cash dividend, was $2.8

million, or $0.11 per diluted share, for the quarter ended June 30, 2008.



    Net sales for the quarter ended June 30, 2008 increased by $20.8

million, or 13%, to $181.2 million from $160.4 million in the prior year's

comparable quarter. The sales growth was the result of a $12.7 million, or

8.9%, increase in same-center sales in our patient care business, a $3.2

million, or 20.6%, increase in sales of the Company's distribution segment,

and a $4.9 million increase related to acquired entities. Gross profit for

the second quarter of 2008 increased by $11.5 million, to $93.0 million, or

51.3% of net sales compared to $81.4 million, or 50.8% of net sales in the

second quarter of 2007. The increase in gross margin was due principally to

the increase in sales, which allowed us to leverage our relatively fixed

labor costs.



    Income from operations of $21.4 million in the second quarter of 2008

was $3.6 million, or 20.0% higher than that of the same period of the prior

year, principally due to the aforementioned increase in gross profit,

offset by $7.6 million of higher selling, general and administrative

expenses. Selling, general and administrative expenses increased due to a

$2.6 million increase in variable compensation accruals, $1.8 million of

increased personnel costs related primarily to employee benefits, a $1.4

million increase related to acquisitions, a $1.0 million increase in

professional fees and other expenses (some of which are one time expenses),

$0.8 million in merit increases, and $0.6 million of additional investment

in growth initiatives, offset by a $0.6 million decrease in bad debt

expense.



    Net interest expense for the second quarter 2008 was $1.1 million less

than the same quarter last year primarily due to lower variable rates. In

May 2008, the Company entered into two $75.0 million swap contracts that

fixed $150.0 million of floating rate debt and locked in LIBOR at 3.4% for

three years. As of June 30, 2008, $73.0 million, or 18.0%, of the Company's

total debt of $406.4 million was subject to variable interest rates.



    Net sales for the six months ended June 30, 2008 increased by $34.6

million, or 11.4%, to $338.8 million from $304.2 million for the same

period in the prior year. The sales growth was principally the result of a

$18.2 million, or 6.7%, increase in same-center sales in our patient care

business, a $6.7 million, or 23.5%, increase in sales of the Company's

distribution segment, and a $9.1 million increase related to acquired

entities. Gross profit for the six months ended June 30, 2008 increased by

$18.8 million to $171.5 million, or 50.6% of net sales, compared to $152.7

million, or 50.2% of net sales, in the first six months of the prior year.

The increase in gross margin was due principally to the increase in sales,

which allowed us to leverage our relatively fixed labor costs.



    Income from operations increased by $5.4 million, or 17.7%, in the

first six months of 2008 to $35.6 million from $30.2 million in the same

period of the prior year due to the increased gross profit, offset by a

$12.6 million increase in selling, general and administrative expenses.

Selling, general and administrative expenses increased due to $3.3 million

of increased personnel costs related principally to employee benefits, a

$2.9 million increase related to acquisitions, a $2.8 million increase in

variable compensation accruals, $2.0 million of additional investment in

growth initiatives, $1.6 million in merit increases, a $0.8 million

increase in advertising, and a $0.3 million increase in general overhead,

offset by a $1.1 million decrease in bad debt expense.



    Net interest expense for the six months ended June 30, 2008 decreased

$2.2 million, or 11.7%, from the same period in the prior year, primarily

due to lower variable rates. Net income for the six months ended June 30,

2008 increased $4.7 million, or 68.3%, to $11.6 million from $6.9 million

for the prior year's period.



    Pro forma net income applicable to common stock for the six months

ended June 30, 2008 was $11.6 million, or $0.37 per diluted share, a 60.9%

increase, compared to net income applicable to common stock of $6.0

million, or $0.23 per diluted share, in the prior year. The pro forma

results for the six months ended June 30, 2008 assume that the previously

described one-time, in- kind preferred stock dividend occurred and the

preferred stock was converted to common stock at the beginning of the

period. Net income applicable to common stock on a GAAP basis was $5.9

million, or $0.24 per diluted share, for the six months ended June 30,

2008.



    Cash flow from operations was $20.0 million in the second quarter of

2008 compared to the prior year period of $18.0 million. For the six months

ended June 30, 2008 cash flow from operations was $12.6 million compared to

the prior period of $20.1 million. The decrease in cash flow from

operations for the six months ended June 30, 2008 of $7.5 million was

principally due to an $11.3 million change in cash payments related to the

2007 incentive compensation plans. The first quarter 2008 payout increased

due to a combination of the elimination of two interim payments related to

the practitioners' incentive compensation plan and improved performance in

2007.



    The Company is also confirming existing guidance for the second half of

2008 and is increasing its full year sales guidance to a range of $680

million to $690 million and full year pro forma EPS guidance by $0.5 per

diluted share to a range of $0.80 to $0.82 per diluted share, representing

25% to 28% growth compared to 2007 reported EPS.



    In June 2008, the Company's common stock performance triggered an

acceleration of preferred stock dividends once the Company's average

closing price of its common stock price exceeded the Company's forced

conversion price of the Series A Convertible Preferred Stock by 200% for a

20-trading day period. This event triggered acceleration of the payment of

Series A Convertible Preferred Stock dividends due from the time of the

event through May 26, 2011. The accelerated dividends were paid in the form

of increased stated value of preferred stock, in lieu of cash. As a result,

the Company recorded an in-kind dividend on its preferred stock of $5.3

million in the quarter ended June 30, 2008, which represents 0.7 million

additional common shares on an as converted basis. In connection with the

acceleration event, the Company has decided to exercise its right to force

conversion of the preferred stock into common stock and has notified the

holder of its intention.



    Commenting on the results, Thomas F. Kirk, President and Chief

Executive Officer of Hanger Orthopedic Group, remarked, "I am extremely

pleased with our second quarter results, the tenth consecutive quarter in

meeting or exceeding First Call consensus estimates. Same-center growth in

our patient care division continues to drive a large portion of our

business with sales growth of 8.9%. Our distribution business also

accelerated its sales growth with an increase of 20.6% in the second

quarter, and now it represents 11.6% of our total sales for the quarter. We

continue to gain leverage on our infrastructure costs due to our business

model and our ongoing efforts to monitor expenses. As a result, operating

margins improved this quarter by 70 basis points to 11.8%. Finally, the

strong performance of our common stock triggered acceleration of the

preferred stock dividend. This occurred earlier than expected, but

highlights the value we have been able to create for all our shareholders

over the last two years. By forcing conversion of the preferred stock we

will simplify our capital structure, eliminate a preference that will

benefit our common shareholders and eliminate all future dividend

obligations related to the preferred stock. We are all energized on

carrying the momentum of our operating focus and our growth projects into

the second half of the year."



    Hanger Orthopedic Group, Inc., headquartered in Bethesda, Maryland, is

the world's premier provider of orthotic and prosthetic patient care

services. Hanger is the market leader in the United States, owning and

operating 661 patient care centers in 45 states and the District of

Columbia, with over 3,500 employees including 1,060 practitioners (as of

June 30, 2008). Hanger is organized into four units. The two key operating

units are patient care which consists of nationwide orthotic and prosthetic

practice centers and distribution which consists of distribution centers

managing the supply chain of orthotic and prosthetic componentry to Hanger

and third party patient care centers. The third is Linkia which is the

first and only provider network management company for the orthotics and

prosthetics industry. The fourth unit, Innovative Neurotronics, introduces

emerging neuromuscular technologies developed through independent research

in a collaborative effort with industry suppliers worldwide. For more

information on Innovative Neurotronics, Inc. or the WalkAide(R), visit

http://www.ininc.us. For more information on Hanger, visit

http://www.hanger.com.



    This document contains forward-looking statements relating to the

Company's results of operations. The United States Private Securities

Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-

looking statements. Statements relating to future results of operations in

this document reflect the current views of management. However, various

risks, uncertainties and contingencies could cause actual results or

performance to differ materially from those expressed in, or implied by,

these statements, including the Company's ability to enter into and derive

benefits from managed care contracts, the demand for the Company's orthotic

and prosthetic services and products and the other factors identified in

the Company's periodic reports on Form 10-K and Form 10-Q filed with the

Securities and Exchange Commission under the Securities Exchange Act of

1934. The Company disclaims any intent or obligation to update publicly

these forward-looking statements, whether as a result of new information,

future events or otherwise.










                        Hanger Orthopedic Group, Inc.

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

                                 (Unaudited)



                                 Three Months Ended       Six Months Ended

                                       June 30,                June 30,

    Income Statement:              2008        2007        2008        2007

    Net sales                    $181,184    $160,366    $338,840    $304,217

    Cost of goods sold

     (exclusive of depreciation

     and amortization)             88,223      78,945     167,292     151,494

    Selling, general and

     administrative                67,285      59,714     127,492     114,872

    Depreciation and

     amortization                   4,289       3,878       8,470       7,626

    Income from operations         21,387      17,829      35,586      30,225

    Interest expense                8,045       9,125      16,303      18,465

    Income before taxes            13,342       8,704      19,283      11,760

    Provision for income taxes      5,337       3,612       7,713       4,884

    Net income                      8,005       5,092      11,570       6,876

      Less preferred stock

       dividend - Series A

       Convertible Preferred

       Stock                        5,254         416       5,670         833

    Net income applicable to

     common stock                  $2,751      $4,676      $5,900      $6,043



    Basic Per Common Share Data:

    Net income                      $0.12       $0.21       $0.26       $0.27

    Shares used to compute

     basic per common share

     amounts                   23,017,282  22,399,292  22,949,127  22,295,606



    Diluted Per Common Share Data:

    Net income                      $0.11       $0.17       $0.24       $0.23

    Shares used to compute

     diluted per common share

     amounts                   24,208,631  30,049,735  24,121,834  29,908,304





                               Three Months Ended           Six Months Ended

    Pro-forma:                   June 30, 2008               June 30, 2008

    Net income applicable to

     common stock                     2,751                       5,900

    Preferred stock dividend -

     Series A Convertible

     Preferred Stock                  5,254                       5,670

    Pro-forma net income

     applicable to common stock      $8,005                     $11,570



    Diluted Per Share Data:

    Pro-forma net income per

     diluted common share             $0.25                       $0.37



    Shares used to compute

     diluted per common share

     amounts                     24,208,631                  24,121,834

    Effects of conversion of

     convertible preferred

     stock (1)                    7,308,730                   7,308,730

    Shares used to compute

     diluted per common share

     amounts, Pro-forma basis    31,517,361                  31,430,564



    (1) Assumes Preferred Stock dividend acceleration event occurred January

        1, 2008.  The Company believes the presentation of the pro-forma

        results, adjusted for the effects of the acceleration of the Preferred

        Stock dividend at the beginning of the period, is more reflective of

        the Company's current diluted operating results and provides investors

        with additional useful information to measure the Company's on-going

        performance.







                                         Three Months Ended  Six Months Ended

                                              June 30,          June 30,

    Income Statement as a % of Net Sales:   2008     2007     2008     2007

    Net sales                              100.0%   100.0%   100.0%   100.0%

    Cost of goods sold (exclusive of

     depreciation and amortization)         48.7%    49.2%    49.4%    49.8%

    Selling, general and administrative     37.1%    37.2%    37.6%    37.8%

    Depreciation and amortization            2.4%     2.5%     2.5%     2.5%

    Income from operations                  11.8%    11.1%    10.5%     9.9%

    Interest expense                         4.4%     5.7%     4.8%     6.1%

    Income before taxes                      7.4%     5.4%     5.7%     3.8%

    Provision for income taxes               3.0%     2.2%     2.3%     1.6%

    Net income                               4.4%     3.2%     3.4%     2.2%







                        Hanger Orthopedic Group, Inc.

                            (Dollars in thousands)

                                 (Unaudited)



                                        Three Months Ended   Six Months Ended

                                             June 30,            June 30,

    Cash Flow Data:                       2008      2007      2008      2007

    Cash flow from operations           $20,026   $17,950   $12,569   $20,106

    Capital expenditures                 $4,750    $4,969    $7,840    $9,094

    Increase (decrease) in cash         $11,007   $10,632   $(2,984)   $6,947



    Balance Sheet Data:                June 30,  Dec. 31,  June 30,  Dec. 31,

                                         2008      2007      2007      2006

    Cash and cash equivalents           $23,954   $26,938   $30,086   $23,139

    Days Sales Outstanding (DSO's)           52        56        57        60

    Working Capital                    $176,123  $165,794  $165,422  $157,208

    Total Debt                         $406,425  $410,892  $409,184  $410,624

    Shareholders' Equity               $200,052  $190,538  $175,879  $167,677



    Statistical Data:



                                               June 30,          June 30,

                                            2008     2007     2008     2007

    Patient-care centers                      661      621      661      621

    Number of practitioners                 1,060    1,029    1,060    1,029

    Number of states (including D.C.)          46       46       46       46



                                         Three Months Ended Six Months Ended

                                              June 30,          June 30,

    Percentage of net sales from:           2008     2007     2008     2007

      Patient-care services                 88.1%    90.0%    87.8%    90.4%

      Distribution                          11.6%     9.7%    11.8%     9.4%



    Payor mix:

      Private pay and other                 60.2%    58.9%    60.3%    59.3%

      Medicare                              28.3%    30.1%    28.2%    29.7%

      Medicaid                               6.0%     6.0%     6.1%     6.2%

      VA                                     5.5%     5.0%     5.4%     4.8%