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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_________________

FORM 10-Q

OR

Commission file number 1-10670

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

Registrant’s telephone number, including area code:

(301) 986-0701

                                                                                                                                                      
Former name, former address and former fiscal year, if changed since last report.

        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes X No __

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 of the Exchange Act): Yes X No__

        As of November 10, 2003, 20,296,367 shares of common stock, $.01 par value per share were outstanding.

HANGER ORTHOPEDIC GROUP, INC.

INDEX

HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)

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

HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)

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

HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30
(Dollars in thousands, except share and per share amounts)

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

HANGER ORTHOPEDIC GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30
(Dollars in thousands)

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

HANGER ORTHOPEDIC GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X. They do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary (consisting solely of normal recurring adjustments) for a fair presentation of the consolidated financial statements have been included.

Certain prior period amounts have been reclassified to conform to the current period presentation.

These consolidated financial statements should be read in conjunction with the consolidated financial statements of Hanger Orthopedic Group, Inc. (the “Company”) and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2002, filed by the Company with the Securities and Exchange Commission.

NOTE B –SIGNIFICANT ACCOUNTING PRINCIPLES

Use of Estimates

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

Inventories

Inventories, which consist principally of raw materials, work in process and finished goods, are stated at the lower of cost or market using the first-in, first-out (FIFO) method. At its patient-care centers segment, the Company calculates cost of goods sold in accordance with the gross profit method. The Company bases the estimates used in applying the gross profit method on the actual results of the most recently completed fiscal year and other factors affecting cost of goods sold during the current reporting periods. Estimated cost of goods sold during the period is adjusted when the annual physical inventory is taken. The Company treats these adjustments as changes in accounting estimates in accordance with the provisions of Accounting Principles Board Opinion (“APB”) No. 20, Accounting Changes. At its distribution segment, a perpetual inventory is maintained.

NOTE B –SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)

Stock-Based Compensation

Restricted Shares

During the three and nine months ended September 30, 2003, the Company granted 196,313 and 206,593, respectively, restricted shares of the Company’s common stock, to certain executives and directors. No such shares were granted in 2002. The shares have vesting dates through August 2007 the first of which occurs in June of 2004. These shares had an aggregate market value of $2.8 million at the date of grant which is amortized to expense ratably over the vesting period. At September 30, 2003, the balance of unamortized compensation is $2.7 million.

Options

At September 30, 2003, the Company has multiple stock-based employee compensation plans and has outstanding non-qualified options held by employees. Stock-based compensation is accounted for using the intrinsic-value-based method in accordance with APB No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related Interpretations. No stock-based employee compensation expense for stock options is reflected in net income as all options granted under these plans and the non-qualified options granted to employees had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, to stock-based employee compensation:

NOTE B –SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)

Stock Based Compensation (continued)

Options (continued)

The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:

For the three months ended September 30, 2003 and 2002, the Company granted aggregate options to purchase 159,031 and 91,000 shares of the Company’s common stock, respectively. The Company granted aggregate options to purchase 301,503 and 725,998 shares of the Company’s common stock during the nine months ended September 30, 2003 and 2002, respectively. The weighted average fair value of each option granted was $8.92 and $6.80 per share for 2003 and 2002, respectively.

Segment Information

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”), applies a “management” approach to disclosure of segment information. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the basis of the Company’s reportable segments. The description of the Company’s reportable segments and the disclosure of segment information pursuant to SFAS 131 are presented in Note I.

New Accounting Standards

In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, Rescission of FASB Statements 4, 44, and 64, Amendment of FASB Statement 13, and Technical Corrections(“SFAS 145”). Under SFAS 145, gains and losses from the early extinguishment of debt are no longer classified as extraordinary items, unless they satisfied the criteria in APB No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions (“APB 30”) where extraordinary items are stated to be distinguishable by their unusual nature and by the infrequency of their occurrence. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in APB 30 for classification as an extraordinary item should be reclassified to non-operating. In addition, under

NOTE B – SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)

New Accounting Standards (continued)

SFAS 145, certain lease modifications that have economic effects similar to sale-leaseback transactions are to be accounted for in the same manner as sale-leaseback transactions. SFAS 145 was effective for fiscal years beginning after May 15, 2002. SFAS 145 was adopted by the Company on January 1, 2003 and resulted in the reclassification of the loss on extinguishment of debt of $4.7 million in 2002 from extraordinary item to inclusion in income before taxes.

In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees that are issued or modified after December 31, 2002. The adoption of this statement had no material effect on the Company’s financial statements.

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. FIN 46 addresses when a company should include the assets, liabilities and activities of a variable interest entity in its financial statements. It defines variable interest entities as those entities with a business purpose that either do not have any equity investors with voting rights, or have equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. The Company adopted FIN 46 as of March 2003 on all potential variable interest entities created after January 1, 2003. FIN 46 is effective for financial statements issued for the first interim period ending after December 15, 2003 for variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of this pronouncement is not expected to have a material impact on the Company’s financial statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”). SFAS 150 identifies three classes of financial instruments that require reclassification from equity to liabilities and their measurement at fair value. SFAS 150 is applicable to financial instruments entered into or modified subsequent to May 31, 2003 and to all financial instruments at the beginning of the first interim period beginning after June 15, 2003. The Company adopted the provisions of SFAS 150 as of July 1, 2003. The adoption of this statement has not had a material impact on the Company’s financial statements. In accordance with SFAS 150, the Company’s redeemable preferred stock did not require reclassification from mezzanine equity to liabilities.

NOTE C –SUPPLEMENTAL CASH FLOW FINANCIAL INFORMATION

The following are the supplemental disclosure requirements for the consolidated statements of cash flows:

NOTE D –ACQUISITIONS

During the three and nine months ended September 30, 2003, the Company acquired one and three orthotics and prosthetics companies, respectively. There were no acquisitions during the three and nine months ended September 30, 2002.

In connection with earnout agreements relating to the Company’s acquisitions, the Company paid $0.9 million and $4.2 million in the nine months ended September 30, 2003 and 2002, respectively. The Company has accounted for these amounts as additional purchase price, resulting in an increase in excess cost over net assets acquired. The Company estimates that it may pay an additional $2.0 million related to earn-out provisions in future periods.

The activity related to goodwill for the nine months ended September 30, 2003 is as follows:

NOTE E – NET INCOME PER COMMON SHARE

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

Income per share is computed as follows:

(a) Commencing with the second quarter ended June 30, 2003, it became more dilutive to net income per common share to convert the Company's outstanding preferred stock to common stock. Therefore, the preferred stock dividends declared and accretion were not included, and the number of shares of common stock into which the preferred stock is convertible was included, in the computation of diluted per common share data for the three and nine months ended September 30, 2003.

(b) For the three and nine months ended September 30, 2002, the shares used to compute dilutive per common share amounts exclude the effect of the conversion of the 7% Redeemable Convertible Preferred Stock into common stock as it is considered anti-dilutive.

Options to purchase 1,385,529 and 280,500 shares of common stock were outstanding at September 30, 2003, and 2002, respectively, and are not included in the computation of diluted net income per share for the three months ended September 30, 2003 and 2002, respectively, as these options are anti-dilutive. Options to purchase 1,535,029 and 1,006,313 shares of common stock were outstanding at September 30, 2003 and 2002, respectively, and are not included in the computation of diluted income per share for the nine months ended September 30, 2003 and 2002, respectively, as these options are anti-dilutive.

NOTE F – INVENTORY

Inventories consist of the following:

NOTE G – LONG TERM DEBT

Long-term debt consists of the following:

(1) Includes $2.8 million and $8.4 million for adjustments at September 30, 2003 and December 31, 2002, respectively, related to the interest rate swaps.

As a result of retiring the previously existing credit facility during 2002, the Company wrote off $4.7 million in unamortized debt issuance costs. These costs are included in extinguishment of debt for the nine months ended September 30, 2002. The gross amount has been reclassified to a non-operating item and the tax benefit has been reclassified into the provision for income taxes as a result of the Company’s adoption of SFAS 145. Previously, the extinguishment of debt costs was reported as an extraordinary item, net of a tax benefit of $1.8 million.

NOTE G – LONG TERM DEBT (CONTINUED)

On February 15, 2002, the Company sold $200.0 million principal amount of its 10 3/8% Senior Notes due 2009 (the “Senior Notes”) and established a new $75.0 million senior secured revolving line of credit (the “Revolving Credit Facility”). The Senior Notes were issued under an indenture, dated as of February 15, 2002, with Wilmington Trust Company, as trustee. The Company used the $194.0 million net proceeds from the sale of the Senior Notes, along with approximately $36.9 million from the Revolving Credit Facility, to retire approximately $228.4 million of indebtedness outstanding under the Company’s previously existing revolving credit and term loan facilities, plus related fees and expenses.

During April 2003, the total availability under the Revolving Credit Facility was increased from $75.0 million to $100.0 million and the administrative agent was changed from BNP Paribas to GE Capital Corporation. As of September 30, 2003, the Company had unused availability of $93.6 million under the Revolving Credit Facility. The Company’s debt covenants allow it to draw on the revolver on a 1:1 match based on the Company’s last-twelve-months EBITDA, as defined.

During August 2003, the Company terminated its interest rate swap agreements with BNP Paribus and GE Capital Corporation. As a result of the termination, the Company received $2.8 million, which will be recognized, using the effective interest rate method, over the remaining term of the Senior Subordinated Notes. The interest rate swaps were entered into in connection with the issuance of the Senior Notes in order to mitigate interest rate risk.

In October 2003, the Company obtained a variable interest $150.0 million credit facility maturing September 30, 2009 (“New Credit Facility”). Payments on the New Credit Facility commence December 31, 2003. The New Credit Facility incurs an interest, at the Company’s option, of LIBOR plus a variable margin rate, which was 3.9% at October 31, 2003, or a Base Rate (as defined in the debt agreement) plus a variable margin rate. The covenants of the New Credit Facility mirror those under the existing credit facilities in addition to (i) requiring the Company to apply cash proceeds from certain activities toward the payment of debt and (ii) increasing the maximum senior secured leverage ratio used in the calculation of one of the covenants. The New Credit Facility permits the Company to redeem up to $30 million of its outstanding redeemable preferred stock if certain criteria are met. The obligations under the New Credit Facility are guaranteed by the Company’s subsidiaries and by a first priority perfected security interest in the Company’s subsidiaries’ shares, all of the Company’s assets and all of the assets of the Company’s subsidiaries. The Company used the proceeds of the New Credit Facility to purchase tendered Senior Subordinated notes for an aggregate principal of $134.4 million. The balance, in addition to a draw on the Revolving Credit Facility, was used to pay a $15.5 million tender fee and approximately $3.1 million in transaction costs.

NOTE H –COMMITMENTS AND CONTINGENT LIABILITIES

Commitments

In October 2001, the Company entered into a supply agreement with United States Manufacturing Company (“USMC”), under which it agreed to purchase certain products and components for use solely by the Company’s patient-care centers during a five-year period following the date of the agreement. The Company satisfied its obligation to purchase from USMC at least $8.5 million and $7.5 million of products and components during the first two years following the date of the agreement. Accordingly, in October 2003 and November 2002, the escrow agent released $1.0 million in escrowed funds to the Company for the satisfaction of such purchase obligations.

In addition, the Company is obligated to purchase from USMC at least $9.5 million of products and components during the third year following the agreement, subject to certain adjustments. In the event purchases during each of the fourth and fifth years are less than approximately $8.7 million, the Company shall pay USMC an amount equal to $0.1 million multiplied by the number of $1.0 million units by which actual purchases during each of the fourth and fifth years are less than approximately $8.7 million. The penalties in the fourth and fifth year are capped at $0.9 million per year.

Contingencies

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

On November 28, 2000, a class action complaint (Norman Ottmann v. Hanger Orthopedic Group, Inc., Ivan R. Sabel and Richard A. Stein; Civil Action No. 00CV3508) was filed against the Company in the United States District Court for the District of Maryland on behalf of all purchasers of our common stock from November 8, 1999 through and including January 6, 2000. The complaint also names as defendants Ivan R. Sabel, the Company’s Chairman of the Board and Chief Executive Officer (and then President), and Richard A. Stein, the Company’s former Chief Financial Officer, Secretary and Treasurer (the “Class Action Lawsuit”).

The complaint alleges that during the above period of time, the defendants violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934 by, among other things, knowingly or recklessly making material misrepresentations concerning the Company’s financial results for the quarter ended September 30, 1999, and the progress of the Company’s efforts to integrate the recently-acquired operations of NovaCare O&P. The complaint further alleges that by making those material misrepresentations, the defendants artificially inflated the price of the Company’s common stock. The plaintiff seeks to recover damages on behalf of all of the class members. The Class Action Lawsuit was dismissed on October 7, 2002 by the District Court for failure to comply with statutory requirements, and is currently being appealed.

NOTE H —COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

Guarantees and Indemnifications

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

NOTE I – SEGMENT AND RELATED INFORMATION

The Company has identified two reportable segments based on the products and services it provides. The Company evaluates segment performance and allocates resources based on the segment’s EBITDA. EBITDA is defined as net income (loss) before extraordinary item, interest, taxes, depreciation and amortization and unusual charges. EBITDA, as used by management to evaluate segment performance, is not a measure of performance under U.S. GAAP. Other EBITDA not directly attributable to reportable segments is primarily related to corporate general and administrative expenses.

The two reportable segments are: (i) patient-care centers and (ii) distribution. The reportable segments are described further below:

Patient-care centers –This segment consists of the Company’s owned and operated orthotic and prosthetic (“O&P”) patient-care centers, fabrication centers of O&P components and OPNET. The patient-care centers provide services to design and fit O&P devices to patients. These centers also instruct patients in the use, care and maintenance of the devices. Fabrication centers are involved in the fabrication of O&P components for both the O&P industry and the Company’s own patient-care centers. OPNET is a national managed care agent for O&P services and a patient referral clearing house.

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

The accounting principles of the segments are the same as those described in the summary of Note B, “Significant Accounting Principles.”

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

NOTE I – SEGMENT AND RELATED INFORMATION (CONTINUED)

NOTE I – SEGMENT AND RELATED INFORMATION (CONTINUED)

The following tables reconcile EBITDA to consolidated net income:

NOTE J –CONSOLIDATING FINANCIAL INFORMATION

The Company’s Senior Notes and Senior Subordinated Notes are guaranteed fully, jointly and severally, and unconditionally by all of the Company’s current and future domestic subsidiaries. The following is summarized condensed consolidating financial information, as of September 30, 2003 and December 31, 2002, and for the three and nine months ended September 30, 2003 and 2002 of the Company, segregating the parent company (Hanger Orthopedic Group, Inc.) and its guarantor subsidiaries, as each of the Company’s subsidiaries is wholly-owned.

NOTE J –CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

NOTE J – CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

NOTE J –CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)