Hanger, Inc.

Ivan Sabel - Chairman George Mchenry - EVP and CFO Tom Kirk - President and CEO

Henry Reukauf - Deutsche Bank. Larry Solow Mike Petusky Dawn Brock Brandon Elton Rebecca Dernbach

Thank you very much, Andrea. Good morning everyone and thank you for joining us for our Fourth Quarter 2007 Earnings Call.

Before we get started, I need to read our Safe Harbor statement. During this call, management will make 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 performances to differ materially from those expressed in, or implied by these statements. This includes 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. Now to the results of our fourth quarter: I'm pleased to report that we ended the year, delivering strong financial performance with a net income of $6.6 million, and an 11% revenue growth for the quarter-ended December 31, 2007.

Our reported EPS increased by 35% from $0.17 per share to $0.23 per share. These solid earnings performance represent the eight consecutive quarters in which the company has met or exceeded first call consensus estimates.

Of note was the compelling 8% same-store center growth of our patient care business, which resulted in a sales increase of $11.2 million over last year. Additionally, sales in our distribution segment continued to accelerate, with a growth of $2.7 million or a 21.1% increase over the prior year.

As many of you know, we also announced that I will be stepping back from day to day operations and turning the CEO responsibilities over to Tom Kirk on March 1st. I’ll still remain as Chairman, continue to be active with the various clinical aspects of the company, and certainly be supportive of our strategic growth initiatives.

The Board and I have a great deal of confidence that with Tom's passion, commitment to operational excellence, and leadership skills, he is the right person to take Hanger to its next level. Given the robust performance in 2007, he has a solid foundation with which to execute on this growth strategy that we’ve set in motion.

Now I would like to turn the call over to George Mchenry, Our Chief Financial Officer.

Thank you, Ivan. Good morning everyone.

To review the results, let me first give you an overview of the quarter and the year. Overall, we had a great quarter and year surpassing our own improved expectations for sales and earnings.

But now there has been concern about our level of SG&A. Let me try to put that in perspective, while a large part of that was insensitive compensation in Q4, if you look at the year, it was only one-third of the increase.

Another third was caused by the employee fund, and another third was due to our continued investment in Linkia and IN Inc. This was due to acquisitions which were largely made in the second half of the year, so they had more impact on the third and fourth quarter.

Let me firs turn my attention to the incentive compensation to explain that and I’ll explain the other variances as I get into the more detail analysis of the quarter in the year. All of our plans are formulated approach and they are tied to performance.

All of our employees suffered over the last three years during the freeze and frankly there was an element of catch-up in our accruals in Q4 that we do not expect to re-occur, and it was a result of better leverage over our future growth. Concerning the 30% plan, if you look at our overall performance, the increased sales and collections caused us to accrue more incentive compensation, principally for our practitioners, because their plan is largely based on collections.

The successful application of this plan, however, helped us end the year with over $34 million in cash on the balance sheet. We reduced our DSOs to 56 days, or bad debt expense to 2.5%, and we reduced our overall leverage to 4.2 times trialing EBITDA.

A smaller part of the incentive compensation accrual related to the formula-based incentive compensation that is payable for the rest of management, and it is payable only upon achieving our overall goals, as we did in Q4. While accrual had the higher SG&A cost, we didn't improve our EBITDA margins of 13.2% for the year, which was a 30 basis-points improvement over 2006 and in line with our guidance.

Also, due to improved tax planning, we saw an improvement in our tax rate for the year to 39% from our previous estimates of 41.5%. This is in conjunction with our improved EBITDA, which helped us exceed consensus and reported EPS to $0.23 for the quarter and $0.64 for the year.

In summary, we met or exceeded our guidance at the sales EBITDA margins and EPS. Now I will discuss the quarter and the year in more detail, and we'll give guidance for 2008 as well.

Our sales increased during the quarter by $16.9 million or 11% comp sales. Our patient care centers increased to 8% or $11.2 million for the quarter, exceeding our expectation of 3% to 5% growth.

SPS had a strong quarter reporting $2.7 million and increased outside sales of 21.1% increase, and the balance of the increase was attributable to acquisitions. Our cost to goods as a percentage of sales of 44.8% for the quarter, labor costs increased by $3.3 million, compared to 2006, due to the impact of start ups acquisitions, merit increases and increased benefit cost.

As a percentage of sales, labor cost was comparable to last year. Material cost decreased by $5 million compared to the same quarter last year, despite the sales increase.

This decrease was due principally to the favorable impact of the Medicare rate increase and adjustments related to our annual physical inventory which is conducted in fourth quarter. SG&A increased by $17.1 million in the quarter, due principally to a $9.4 million increase in incentive and variable compensation, as we just discussed.

As a result of the improved earnings and strong cash collections, our salaries increased $3.7 million due to the impact of the annual merit increases, increased commissions and health care costs. The balance of the increase on SG&A was due to the $2 million investment in our growth strategies, $800,000 and additional bad debts due to the sales increase, and the balance of $1.2 million was due mostly to travel and other costs.

EBITDA at $23.5 million increased by $1.5 million compared to the prior year, due to the factors I just mentioned. Our interest, with $200,000 less than last year, principally due to reduced variable interest rates, and due to both our improved results for the trailing 12 quarter and the reduction in interest our total leverage, now stands at 4.2 times trailing EBITDA as I mentioned a minute ago.

Income taxes: To understand the provision for the quarter and the year -- for the quarter, you need to understand the year. The income tax provision for the year was 37.8% of pre-tax income.

It has benefited by some one-time tax benefits, which will bring our rate for the year to 39% compared to the first three quarters estimated at 41.5%. The benefit of the reduced rate, which is sustainable in the future, along with one-time benefits, compared to the rate of use for the first three quarters, reduced our rate in Q4 to 30.4%.

EPS, based on the results just discussed was $0.23 compared to $0.17 in 2006, a $0.06 or 35% increase. Our sales for the year increased by $38.6 million or 6.4%.

Comp sales in our patient care centers accounted for the bulk of the increase at 5% or $27.2 million increase, which was at the high-end of our expectations as Ivan mentioned and our best results in 2001. SPS outside sales increased by $5.9 million or 9.3% compared to the prior year, and the balance of the increase that came from acquisitions.

Cost of goods sold, as a percentage of sales, decreased by 1.8% of sales due to a decrease in labor that was sixth-tenth of a percent, and material was 1.2%. Our labor costs in absolute dollars however, increased by $3.7 million, due to the impact of annual merit increases on labor, the impact of acquisitions, and increased healthcare costs.

Our material cost increased by $4.2 million versus the prior year, but decreased as a percentage of sales, as I mentioned a minute ago, due to the impact of the Medicare rate increase and favorable adjustments related to the annual physical inventory. SG&A increased by $23.9 million for the year due to an $8.4 million increase in incentive and variable comp, which I have already discussed, and an $8.1 million increase in labor cost was primarily due to merit increases, commissions and increased healthcare costs.

There was a $4.3 million investment in our Linkia and Innovative Neurotronics growth strategies, $1.4 million in rent, and $2.2 million in travel and other. This was all offset by a $400,000 decrease in bad debt, as expenses dropped from 2.7% to 2.5% of sales.

Based on these results, we reported EBITDA of $83.9 million, an increase of $6.8 million or 8.9%, compared to $77.1 million in the prior year. Our interest was $1.7 million lower than last year, due to a combination of higher interest income as a result of our strong cash flow, and resulting higher cash balances; the impact of re-pricing of our debt; and lower variable interest rates.

I already talked about the income tax provision. Based on the above our EPS for the year, it was $0.64 compared to pro forma EPS in 2006 of $0.49, a $0.15 or 31% increase.

Now, moving on to the balance sheet: AR decreased by $300,000 compared to 2006, despite a $38.6 million increase in the sales and the impact of acquisitions. This added $1.1 million to our AR.

Our DSO’s decreased to 56 days compared to 61 days a year ago. AR over 120 days, measured with the quality of our receivables, was 14.4% of total AR in 2007 compared to 16.3% a year ago.

So our balances were reduced and the quality of our AR increased. At the same time, we reduced our bad debts, as I mentioned before, to 2.5% of sales.

Our inventory increased by $6.4 million to $82.2 million, compared to $75.8 million in 2006, due to a combination of acquisitions and balances needed to support our higher sales volume. CapEx for the quarter was $6.7 million compared to $4.9 million in 2006.

For the year we expect $20.1 million on capital additions, compared to $12.8 million last year. Our cash flow from operations was $21.4 million for the fourth quarter, compared to $15.9 million in 2006, an increase of $5.5 million.

For the year, cash flow from operations improved by $22.3 million to $51.7 million, this compared to pro forma cash flow of $29.4 million in the prior year. Finally, I'd to like to discuss guidance for 2008.

As I mentioned before, our EPS for 2007 was $0.64, so if you level-set that by the one-time benefits in income taxes, we have a base of $0.62 going into 2008. We had $0.02 in the fourth quarter in one-time benefits.

With that in mind, from that base we expect our 2008 EPS to be in the range of $0.70 to $0.72 per share, and from sales a range of $670 million to $680 million. That would make our sales growth for 2008 in the range of 5% to 7% and our EPS growth in the range of 13% to 16%.

Now I am going to turn the call over to Tom Kirk to give you some more color on our operations.

Thanks George. Good to be with you this morning.

I'll take few moments to review the events that impacted our operations for the quarter and the year, and then I'll give you an update on some of our growth initiatives. First, let's take a look at HPO, our patient care division.

They achieved $11.2 million increase in sales, or 8% same center sales growth for the quarter; and a $27.2 million increase, or a 5% same-store sales growth rate for the year. The performance in the quarter is partially attributable to the rollout of the January 1, 2007 4.3% CPIU increase, which impacts about 35% of our book of business during the year of '07.

This translates to about 1.5% of the 8% during the quarter being attributable to price. The balance of 6.5% is attributable to volume and mix.

This strong increase of 6.5% indicates that the programs that we've been developing and employing over the past several quarters are continuing to gain traction. Now let's take a look at some of these programs for the quarter.

While they are concentrated in four areas, the first is the continued improvement in our Linkia book of business. I want to remind everyone that HPO is the primary vehicle for the delivery of services under the Linkia contract, and we'll speak a bit more about Linkia in a moment.

On an overall basis, the bottom-line for their revenue that came from the Linkia designated contracts was up 16% for the quarter compared to the last year, and 7.4% for the overall year compared to 2006. Now the second area of programs is our continued emphasis on our higher performing products, such as microprocessor prosthetic hands, knees and feet components.

For the quarter, the revenue from the delivery of these product lines was up about 45% compared to fourth quarter of last year, and almost 40% year-over-year. The third area of our program are patient evaluation clinics, and as you will recall, these were a series of national and local patient clinics where we invite the patients to come back in to check on their fit and function, and to ensure that their devices are working properly.

These PECs, as we call them, have produced approximately 11% more revenue during the quarter compared to Q4 of last year, and 8% for the year. The good thing about this is an excellent opportunity to also expose our patients to the latest products, as well as confirming that fit and function are in order.

It’s a great opportunity for good patient care and also a good revenue opportunity. And the fourth area of our programs are sales, marketing and public relations efforts that support our practitioners by identifying local opportunities that are specific to their businesses.

They then assist our practitioners in the implementation of the activities to translate those plans into results. Translations get small local contracts, just near market share, and that's one of the reasons that we've got that at 6.5%, which we attribute to mix and volume.

Next point, we recognized that the changing dynamics of our healthcare system field demands that we continue to spend resources working with our industry and trade association partners to ensure that the policymakers understand the unique benefit that our profession can deliver and does deliver. In order to make proper decisions on reimbursement, it is important that all the policymakers view restoration of functionality as a net cost savings on a lifecycle basis, as well as a quality of life enhancement.

As an example, we are working with the Amputee Coalition of America on educating state legislatures on the issues involved with reimbursement caps, and how these deprive patients of quality care and doomed them to lower levels of mobility. Six states passed prosthetic parity in 2006, and two have passed in 2007.

As we sit here today, almost 20 states are planning actions for 2008 and 2009. In addition, Hanger has been supporting National Patient Advocacy Groups in their quest to find sponsorship for the prosthetic parity bill, and to advance parity on the national front.

As we've mentioned, this is good for the patient, because it's impossible that they can get care. The care that they need over their lifetime with these caps limit imposed upon them, and the success that we’re seeing, demonstrate that these patients are doing much better, and can enjoy the full suit of services that our profession can offer.

We’re still working with the association on the details of qualified provider quality standards and the enforcement provisions for these standards. Our long-term goal is simply to make certain that CMS and other payers are following the laws and regulations by reimbursing only the qualified providers for the work that is performed.

We believe it's in the profession's best interest to reduce fraud and ensure that those payments are delivered only to those that are qualified to deliver the care. Let's now turn our attention to SPS.

Their outside sales were up approximately $2.7 million or roughly 21%, compared to the third quarter of '06 and $5.1 million or 9.3% for the full year. This is excluding the SureFit business, which made an acquisition in the third quarter, and I’ll discuss that shortly.

Coming back to SPS’s core business, we must keep in mind that 2006 presents a very difficult period for comparison as they grew in excess of 22% during '06 compared to '05, so it’s a difficult comp period. Their success in continuing to build sales is attributable to three major areas: First, their new warehouse, which opened in early July located in Eastern Pennsylvania, has permitted better service into the North East market.

Second, their superior customer service has been the impetus for gaining some new large customers. And third, they have implemented their eCatalogue and are following this with an e-Commerce module, which is being well-received by their customers.

It saves time, saves effort, and makes SPS a premier company to do business with. I want to go back to SureFit for the moment, in July we announced the acquisition of SureFit, a custom foot orthotics company.

We’ve been integrating it into SPS since that acquisition. We anticipate three sources of benefit from this acquisition.

First, the broadening of SPS's product line; second, extending SPS's relationship into the podiatry market, and once SPS is established in this market we'll even see a translation affect because podiatrists are a very valuable referral source for our custom business as well. So we see a cross benefit in terms of custom, as well as our distribution business.

And the third benefit is enhancing the company. With Hanger, in general, our technological tools for automating the fitting of patients for custom foot orthotics, which are custom in search, diabetic and functional, as well as custom shoes.

And let's move on now to a brief review of Linkia. Linkia continues and its dual mission of first-off, building share in the key healthcare company's book of business.

And second, is negotiating a fair price for the services provided by the providers within the network. The network consists of the Hanger patients care centers, as well as independent providers.

And those independent providers have grown from 250 at the last call to 280 today. As I mentioned earlier, Linkia continues to increase their business as a provider in network management.

I have quoted those stats, and it's about 17% for the fourth quarter and 7% for the year. During 2007 they have also successfully obtained fee increases from three of our payer companies.

And for those of you who have been following Hanger for a while, you will know that there is the reversal of the trends that we saw in the earlier 2000. And on the marketing side, they are continuing their discussion and negotiation with key national and large regional healthcare management companies, as well as the firms in the workman's compensation segment.

So they continue to gain ground on volume and price. Last division, and now let’s turn our attention to WalkAide and Innovative Neurotronics.

You will recall WalkAide is a product that has been introduced by Innovative Neurotronics into certain kinds of disease indications, such as stroke in MS. And you also remember that we have mentioned in the past that there are three stages in obtaining reimbursement, or CMS approval on reimbursement.

They are code, coverage, and finally reimbursement. The key negating issue here is our ability to get patients into our clinical trials so that we make those filings on coverage in reimbursement.

And that is in front-mind for us. We are continuing to recruit patients into our clinical trials, which are going to be the basis for our applications on coverage.

Then, of course, the health economics studies that come from those clinical trials will be the data that we will use to submit for reimbursement. We believe that the current progress of our clinical trials places us on schedule to apply for coverage and reimbursement with CMS around the middle to third quarter of 2008.

So I did want to give you some color on some of the accomplishments that Innovative Neurotronics has made during the fourth quarter. Early clinical trial results have been submitted to Peer Reviewed Journals in the US, as well as the UK.

We had mentioned one in the UK during the last call, and in continuing support of our ability to publish through peer-reviewed articles, which is why we are continuing this clinical trial. Innovative Neurotronics had its best year in terms of the number of units in revenues.

And they grew revenue by over 250% for the total year. To date, they've trained over 1200 orthotics.

This includes those within Hanger, and the independents, which are being trained by SPS. Additional training sessions are planned in 2008.

We are going to step up our efforts aimed at continuing, training and expanding training into the physical therapy and rehabilitation market. We are continuing to penetrate rehabilitation sales with good results, and because of those results, we've hired additional sales personnel for our field efforts.

Their distinct mission is to manage the territories supporting the orthotics that Hangers and also the Independents in going after that rehabilitation market in support of those therapeutic clinics. IN, Inc.

continues to expand its international presence. They now have representatives from six European and Middle Eastern companies on board, in addition to major partner located in Japan.

We have identified them in the past through a press release. It is Teijin, a very large healthcare company in Japan, who see quite a good market opportunity over there.

Interest in the WalkAide device remains very strong. Year-to-date this is about the first five and half weeks of this year's.

Innovative has 4,300 leads, and we qualify leads because people have taken the time to fill out our survey and request the information. So it's a level above just a phone call.

That 4,300 so far this year and compare that with the 11,000 for all of 2007 and 7,500 for all of 2006, so interest continues to mount. Two weeks ago a documentary story aired on Good Morning America, in which they described the WalkAide as "a brain in a box" in a medical miracle.

The improvement, which was demonstrated by one of our patients, generated a great deal of interest and we are pursuing each of the contracts that the media spot has yielded. Finally, a few words on acquisition and some of our other developmental projects: For 2007, we closed on SureFit early in the third quarter, as I mentioned.

The integration is well underway, and with respect to our O&P acquisitions, we continue to have discussions with candidates that have strategic value to us in the form of location, quality practitioners, and/or favorable product service mix. On the developmental front, we’re very pleased with the progress of our beta tests involving new products; a new channel to deliver our products and services.

We’ve advanced these projects during the quarter, and they will enter the rollout phase a little later in 2008. In closing, the results of the quarter in the year validate that the projects put into place last year are correct.

Most importantly, our personnel are using them to generate positive results. Now, as we look to 2008, we’ll continue to leverage the existing products, enhance our businesses with some new products, and drive benefit from the pervious announced CMS, CPIU fee schedule increase for 2008 of 2.7%.

Finally, we’re renewing our efforts in managing our SG&A cost to ensure that they are commensurate with our needs and in line with our revenues. Thank you.

I’ll turn it back over to Ivan to manage the questions.

Thank you, Tom. Andre, we can open up the Q&A session.

Congrats on a nice quarter, great same store sales growth.

Thanks, Henry.

Just a quick question actually maybe for modeling purposes, I just looked at the quarter in the gross margin and SG&A on the SG&A levels and there was some volatility that when through that discussion. If I look to the end of the year, I see basically a little bit of growth in the SG&A and also some growth in the overall gross margin.

Are those margin levels for the yearend? Are they what we should be thinking about within some range, a point or so on a go-forward basis with some sort -- you had some exceptional stuff this quarter?

What would you say that go-forward range for gross profit margin and SG&A as a percentage of revenue?

Well, if you look at our EBITDA margin that might be the easiest way to look at it going forward. We improved by about 30 basis points this year, we expect to improve by 10 to 20 basis points next year.

So, that would mean overall that our margins are going to stay intact. We'll have the normal inflation in SG&A that our line item should be -- but we'll be making some investment in IN Inc as we are completing the clinical trials.

We do have a little bit of concern about current foreign currency impact on our material cost in '08. But we think, we take all the factors that are impacting our results next year that we should have in total a slight improvement in our EBITDA margins and we should keep our other operating margins pretty much intact.

And the core growth in SG&A is around the 4% level, what you say or?

Its 3.5%, lets say that in that range.

And then just I've heard you talking about it much parity and just about the advantages of that you and what that could mean in terms of insurance coverage and that sort of thing?

Sure, Henry. We look at parity being primarily from the perspective of our patients and that's why we have supported the ACA because that's the group that represents our prosthetic patients.

To give you an idea of how ridiculous some of this could be, as they may take a young person who say has lost the limb because of trauma or because of cancer and impose the limit of $2,500 as the life time cap on a prosthetic device and even a simple prosthetic device below knee could easily be double that. So, coming right out of the gate they can post the severe restriction on them.

So, what we like to look at is the ability to offer them a complete suite of products over their lifetime and depending upon, if you look at the state level about the half of the insurance companies are state charter and so if you look at what their prosthetic spend is, this is going to be a pickup for us. It's pretty difficult to come back in and estimate and give you from the modeling perspective that every time we rack up a state this is what you can expect to see in the increased in our prosthetic revenues.

The other half is on the national side, because half of the insurance companies are nationally chartered and therefore they fall under the rest of rules. But there is a significant opportunity across the entire profession, because this will affect everyone.

Sometimes people that have these limits can go to Church groups or other ways or even their employers will step up and make this benefit for them. So, we don't put a number on it, simply because we are not doing it for that.

We've recognized that of course there will be benefit for us as we take care of the patients, but this is just good patient care and it's the kind of care that should be offered in the insurance plan. So, we are not in it for the money, we are in for patient-care.

But there will be a benefit coming back to us simply because we can add that care over their life.

So, you said there was parity already in the federal chartered or national chartered insurance companies?

No. To date there have been six states in '06 and two more in '07.

So, we have a total of eight states. 20 states have it on the book, or it's in some stage of discussion.

So, if we could get all of those over the next two years we'll have 28 or more than 50% and at some point, we hope that what the states are going through demonstrates to the federal lawmakers that they really have interest in these benefits and as a result of that we are starting early. We are working with the ACA to get a national bill drafted and introduced into the Congress and find appropriate sponsors that will take the message forward in an essence become the aggregate for a national bill.

So eight states have it, 20 more working on it and the national bill has been put together and we are working the ACA to find sponsorship to advance the bill in the Congress. So, there is nothing on the national level other than we are trying to get it off the ground and bring it to the attention of the federal legislatures.

Now I understand. Thanks very much.

You are welcome.

Can you maybe just quantify how much there was a true-up in inventory at the end of the year. Is there a number you can give to that?

Sure. The benefit from the book to physical was roughly $4 million.

$4 million and that was all in the Q4?

Yes. The physical was actually taken on October.

It's a fourth quarter adjustment.

Okay. And then it seems like a pretty good quarter all around, I know, last quarter you had talked about there were a couple of underperforming divisions, can I gather then you had said you expect them to kind of be backup the call by year end, can you give us any update on that?

Sure. We've made progress, as we have told you we've identified a couple of those and we brought those up to a level where we're going to continue to work with them but they certainly are performing much better than they were in the couple of prior quarters, as we sit here today, I would say that the three that are targeted are performing better but we're still going to continue to work.

In one case, we've put in a new manger and he has been active through the entire year and has re-stabilized the team and as we move forward we're certainly looking out on the horizon well aware of the events that are occurring in the automotive in the industrial segments. And so, we're monitoring that closely certainly individual losses their job, they lose their benefits and they start thinking twice when the cover runs out.

But so we're monitoring those situations but we haven't seen any of that impact short but we're doing much better on a market-by-market basis.

Okay, great. And then last question do you have any guidance for projection for CapEx for 2008?

Sure. CapEx should be in the range of $19 million to $20 million.

Okay so it's similar to '07s run rate, great.

Yes, somewhat.

Okay, excellent, thank you.

Good morning.

Good morning, Mike.

Good Morning. A couple of questions for George and then I guess one probably for Tom the sales guidance that you gave does that include any I think catches if you say this does that include any estimate for acquisition revenue?

No, it does not, our internal target is to acquire in the $20 million range during the year, but that's not built into estimates for sales growth.

Okay. So, potentially there is another $20 million, , if you find the right deals on top that, what you have guided to?

That's well annualized.

Right. I am sorry, annualize.

Okay.

The $40 million that is annual number. So, the impact hints on the timing.

Keep in mind though the 5% to 7% growth range does have in it the second half of the benefit of the acquisitions that we made in 2007 SureFit. And then there was about roughly $5 million with O&P business we bought.

Okay. And I was wondering if you could, George, drill down a little bit, you said, obviously everybody knows that a big aspect of the incentive comp is formulated, but you said, there was an element of catch-up.

Can you quantify that it all, hope people understand that?

Well, I mean, if you look at the practitioner incentive compensation plan it will payout roughly $5 million more and it did last year. So, year-over-year increase, you have that, and it's based on metrics.

And if the parity does not, 100% tie to our accrual based result as there was a cash component to that compensation. But we expect that plan to payout roughly the same levels of only a little higher in 2008.

There was a catch-up in the other plans that only daily paid out over the three years in the range of 30% to 50%. So there is, the people on that pool which is the rest of -- all the rest of management that you call 5% or 100% payout this year.

The catch-up was probably close might -- in terms of the overall accrual.

I am sorry, I didn't catch. How many the dollars are in catch-up?

Was roughly $2 million, related to the entire pool, so we had $5 million from the incentive comp, the variable comp for the practitioners which is spread out over the entire company and but $2 million which was all the other plans together. And as I pointed out during the over view that's big than odd numbers for 2008 to exceed those numbers we expect to see pretty good leverage from that, because it shouldn't have much impact on the incentive comp.

Alright, and then one other question and I think I caught this but I want to make sure. Additional sales people that you guys are hiring in terms of WalkAide are those people targeted at the rehab markets, I mean, are you going after and marketing to occupational therapist, physical therapist is that how I should understand this?

What we've done is switched their focus a bit and what we've designated them as regional experts and so they support the orthotics that are out there, frequently an orthotics to who have a relationship somewhere maybe say the hospital and ask for indebt in service to go teach the hospital. They may have physical therapist, may have occupational therapist in the hospital.

So, they are supporting the orthotics. Sometimes the orthotics will have what we call clinics like WalkAide clinic where just as we do on the prosthetic or the orthotic side they will call in from their legacy patient base, people that they have fit with ankle foot orthoses and they might be MS.

So they could be stroke and maybe 20, 30 people will show up they will bringing an RSS for a support that's our code for the regional sales and services specialist, or they may go out on their own and go into a rehabilitation hospital and carry the message forward and in that case what they are trying to do is to demonstrate to that hospital to the Director of Rehab, the PTs the OTs, the nature of the device and how it can improve the outcome and to try and get that facility to establish the WalkAide as their official protocol, which now means that every time a new patient comes into that facility they are fit with the WalkAide and that is used in their therapy. And when it comes time to discharge them they then would want to have a WalkAide when they go home.

So the facility would call an orthotics who they have a relationship with the fitter. So we look at those sales people as being in-charge of an overall territory, managing that territory in terms of all that needs to be done and that could be Hanger orthotics, independent orthotics are going directly at the rehabs themselves.

And they also sell independently. If that rehab facility wants to buy a set of the tools and the supply of the devices they are perfectly capable of making a sales so they do both educational backup, they do onsite support for fitting in the clinical side, as well as they can conduct sales and we have found that that reduces channel conflict and it also puts an expert at the disposal of the orthotics that are out there to help them as they grow knowledge.

As with new device and this one is computer driven, this is a microprocessors smart device so it involves setup and it involves looking back overtime, there is always a little bit of hesitancy on behalf of the practitioner to get into that and without knowing for the first couple, without having the in-depth knowledge in the [RFS] is to back them up to give him that kind of confidence. So it's a different approach than we started out a year and half ago and we found throughout the year it's worked well.

It gained traction and then in mid-year we decided to put more on and they were all hired as of December, so we are going into '08 with the full fleet of this people now.

Okay. So is it fair to say your outreach to rehab facilities, if this was nine inning baseball game, its in the early going, second or third inning, I am assuming that the penetration is pretty modest at this point is it fair to say?

Yeah, it is correct, yes.

Okay. Alright, great thanks.

You're welcome.

Good morning.

Good morning, Dawn.

How are you doing?

Excellent.

There are two things that I just wanted a little bit more color on. The first is how much do you currently have in NOL carry forwards?

Well, the only NOL carry forwards we’ve are at the state level.

Okay.

And that’s a hard question to answer, because its state-by-state we’ve NOLs. There is an asset on the books that represents mostly NOLs and I might have to answer that question offline, we’ve about $10.7 million asset in our books, which is mostly NOLs at the state level.

Some of the NOLs have reserves on them, some of them do not, based on the accounting what’s appropriate from the standpoint of the accounting literature. So they don’t affect your tax rate in any one given period, because the assets are already valued.

Okay.

You are forgetting that is why our rate is better.— First of all its hard to effect the tax planning, last year we were hit by a pretty large charge related to the refi, that makes it to hard to be efficient from a standpoint of your state taxes. We've just done some work knowing that we’re going have those kinds of charges in the past and we’re doing a little better job of efficiently managing where, what state your income is in.

Okay. So is it --

That's recurring benefit going forward.

Okay. Is it fair to just say that, the kind of revised tax rate that we should be using for '08 40% includes the some of those tax benefits on a state-by-state basis?

Yeah, the NOLs are baked into that. If anything were to change with NOLs Dawn, if any our reserved NOLs, which is possible become usable that will create a benefit, but it’s usually a onetime benefit.

You recognize it when you prove to the world that you can utilize those NOL and be a specific discrete charge will come through at point, it won't be something that impacts your rate, your tax rate on that permanent basis. So, that 40% rate, 39%, 40% rate is what we expect our rate to be going forward exclusive of any impact of NOLs.

No, no, understood. That's excellent.

The second thing is, are you open to giving us a little bit more information or color on the breakdown of revenue, in the past you've given us kind of incremental Linkia and WalkAide, as well as SPS kind of what you're looking for the year, even if it's in kind of broad strokes?

Are you referring to Dawn to '07 or '08?

Well you gave to us in '07, for '07. So I think I was just looking for a little bit more guidance in '08 on a unit basis?

Okay. Well, if we look to the revenues for Linkia, why don’t we start there and then maybe talk a bit about the increases as we see going forward.

Linkia's year revenues for '07 and keep in mind, as I've said most of this flows right through the HPO. There is a side slip stream that goes off into the independents as well, but Linkia's overall revenue that flows through their books was about $65 million.

And as we look on the horizon going forward, we would expect to see that probably and I think we've reset that at around 5%, 6% increase for next year combination of some continuing to get some more volume and obviously we know that as we've mentioned to you in the past, as we renegotiate those contracts we'll then reach back and grab the current Medicare fee schedule. So that gives us a little bit of pop as well.

Tom can I just stop you for one second?

Yes.

Just quickly now is that what would consider the consolidated revenue growth or are you talking all of Linkia?

That's all of Linkia.

Okay. So from an incremental perspective, if we look at the contribution that kind of the HPO contribution that would be consolidated from Linkia for '07 what would that be?

That’s baked in our overall numbers. Dawn, just try to simplify the answer, we are affecting -- if you look at SPS the distribution company first we are expecting that to generate about $4 million to $5 million in growth.

Okay.

And most of the rest of the growth is coming from HPO.

Yes, part of that being.

And it is little bit coming from the SureFit acquisition as well as there is about $3.5 million to $4 million from SureFit, which will benefit SPS, such over and above the, let's $4 million in comp growth. And then, the rest of the growth is coming from HPO and its comp sales growth it's got the Linkia thing that Tom's talking about baked into it.

And we continued -- we keep trying to purchase some new products and we have done an outstanding job as you could tell from the percentages that I quoted to 40% and 45% of moving microprocessors into the fields and that's because they function so much better on patients that I think our insurance companies are recognizing more and more that these are not experimental devices. So, it make us that easier for us to provide them the increased stability, the improved cardiovascular because people walk-on them better.

So, there is some of that growth in there as well, got some of the Linkia growth. You have a piece of the price increase to 2.7% will get the first year of that and then the second year of the 4.3 that we had, the government gave us in '07, so that's all baked right into that overall number.

Okay. Good enough.

May be I'll try and get something more from you offline. Thank you so much.

You are welcome.

Hi, guys. Congratulations, good beat there.

Thank you.

Why don't you just delve into the deal? So it looks like you guys had a really strong quarter for collections.

I was just curious, how much of your SG&A in Q4 was related to incentives for collections or collections of what might have been previously considered allowance for [Delco] stuff like that?

Well, the incentive compensation plan for the practitioners, the principal metric for that is collections and frankly, normally in the fourth quarter our collections trail off a little bit because it’s a really good sales period but we collect in the fourth quarter over 100%., They just collected a hell of a lot of cash which is why we've $34 million in cash on the books and our AR in absolute dollars went down year-over-year even when you factor an acquisition. So that was a large factor and why their plant went up by $5 million year-over-year because that great activity happened in fourth quarter not very much a bit related to things there were previously charged off during the whole year last year we probably collected about a $1 million of previously charged off receivables this is just good nuts and bolts day-to-day collection of their AR and obviously they can't continue to do that 100% going forward.

So, we expect that going forward to be a marginal increase in the payout on that plan next year.

Is there like a catch-up effect on this is there a sense of well it was a bit higher in Q4 so our collections were so good so it might be a bit less than what we would normally expect to put out in compensation in Q1 since so much that was taken care in Q4 is that a fair assessment or was it a catch-up from Q3?

Well, it's an annual plan and it's only paid out in the first quarter based on the prior year's activity. So, you really have to yet to make estimates in the first three quarters or what you think are collection rates going to be and we frankly this year exceeded what our historical collection rate had been and our cost rate wasn't too bad for last few years but we've been steadily brining down our DSOs.

So, trying to answer your question we would expect the first couple of quarters of next year to be a little higher than the prior year, because we do expect to be pay in a higher level commensurate with '07 in '08 but it shouldn't be substantially higher than prior years. And keep in mind, Q1 is a seasonally low sales quarter for us so the accruals will be less in Q1 just because of that.

Let me ask you, have there been any business going into SG&A has there been any changes in the way you guys compensate on that line over the last 12 months. So, it was Q4 just sort of like a perfect storm where all the kind of things where you guys compensate for the exceptional levels, just happens to be exceptional characteristics of the quarter?

There haven’t been any substantial changes in how we compensate people in three years. So it's way more than 12 months.

It was -- I think, if you want to call a perfect storm like, there clearly was a case over the last three years where we run it free that people got paid less. And there was, because the way our plans work they are tied to earnings and we put the shareholder first and if we can't accrue it and meet our goals, it doesn't get paid.

And the practition plan is tie to collections and the controller, labor and materials and in fact that we ended up with almost $35 million on our balance sheet is the byproduct of the wonderful collections.

Right.

History that they have this year. So, you have one leading to the other, I mean, their incentive to mange their receivables and mange their collections and they did a spectacular job of that and they've been rewarded for that.

But so as the company and we closed out the quarter with the year with record cash on our balance sheet.

Yeah, I fully appreciate that, but I mean, if your DSOs go from 64 days to 54 days, that 10 days that you know you paid for this year that presumably you wouldn't necessarily be paying for next year, and this is as much unless they go to 30 and plus they go to 44 days DSO right?

I agree. We don't expect to see a same level of increase next year that we had this year.

Okay, and I guess on the -- you talked about leverage so the idea I guess going forward that every -- that if you guys beat those numbers that you give another 5%, 10% and hopefully you will be , your earnings estimates by 8% or something like that is that sound a better, right?

We beat our leverage numbers, we'll beat our earnings estimates.

Right. If you beat your revenues by 10%, I mean, obviously I am talking big 90…

Prepared our revenues, yes.

Yeah so it's usually -- a percentage built on the top line is roughly a percentage built on the bottom line take plus or minus a few points?

Yes. I think that correlates.

Okay, excellent. And the last question, can I get just sort of -- just want to talk about WalkAide a bit and some clarifications from points you made.

Can I get, you guys to repeat those numbers on the prospects for '06, '07 and first two months of '08?

Sure what I had mentioned was these are in terms of weeks and as I mentioned we get a lot of calls, thousands of calls; an individual or care giver takes the time to fill our survey and they can go online and do that or they can go to one of the agencies that we have out there. We classify that as lead and the numbers that I had just mentioned was that we've 4,300 leadsso far this year.

And if we compare that to all of '07 we had 11,000 leads and all of '06 to 7,500 leads. There is a tremendous amount of interest in the product and part of that is that the word is getting out.

People are beginning to recognize what it does and we believe the conversion rate of those leads will continue to improve as the word gets out and people can see the efficacy of the device. The second thing that will help in the conversion rate, no question about it is, getting reimbursement by the federal government and that's why we are so focused on those clinical trials, so we can come back and get that reimbursement.

Part of the interest generation is that was been picked up on a couple of networks, local and the national and Good Morning America where they went and saw an MS patient and did the before and after and it was a life changing event. She has responded very well to the treatment and as a result Diane Sawyer and I think its Deborah Roberts have taken the time and brought one of our clinical specialist into their studios to demonstrate the device on Deborah and as a result that has simulated a tremendous amount of interest in the product and that has been one of the leading reasons that we've had all the boost in terms of the number of lead.

And my point in the discussion was that now we've got the lead we are putting in much more sophisticated systems to track the lead, to get people following up appropriately and to get them in for that fitting to find out if in fact they are a candidate. It's a multiple step process.

We've bring them in, got to make sure that they have got the neuro-pathways to make sure that it works, got to make sure that the disease indication is such that the device can produce the desired results. So we are very pleased with the amount of interest, the amount of leads we have and that is the first step as you will recognize to getting the sale.

Is that Good Morning America clip going to be put up on your website anytime soon?

Obviously, we don't own that clip, we’re talking to them, but for a period and I don’t know if its still there you could go right on to the ABC, Good Morning America and it was up on their website.

Well, you can at least provide a to show it.

Pardon me.

If you can provide a link to their website they probably wouldn’t mind the free exposure.

Probably not, that’s right.

The 4300, that’s a monster number for 2 months does, that play into your Medicare process there, is that something that you guys can put into your literature that goes right o them.

Certainly that influences the number that they like to see in the numbers that they are most interested is how many devise have you fit. And as it’s a first step in the process it could be a pre indicator of interest and ultimately higher levels of sales.

And let’s keep in mind that the 4300 was just generated over the month of January and week and half in February here. So we’re very optimistic about that, but what Medicare looks at for the individual code, co-coverage and reimbursement, three steps is, it is how is the treatment unique and how large is to sold the patient population.

And as we’ve told you in the past that are numbers were low such as Medicare said it’s not worth for to bother for unique code, but we still have a code it’s an E code rather than L code.

Right. Okay.

And then my actually last question here, sorry if I had a few last questions. On the schedule, when you said basically late fall, were you talking about reimbursements to have everything said and done on the reimbursement can you sort of layout the schedule for the three stages of Medicare there?

I wasn’t sure if it was reimbursement or if it was just recognition whatever the second category is?

When I said late fall it was to take the clinical trial, transform those into articles, have them peer-reviewed, which is a necessary step and then make the filings with Medicare. And that would be for coverage and what we are going for there is a demonstration and that's why peer-review is so important of the efficacy of the device, the coverage means that the device work for its intended purpose on the intended patient population.

And at the same time, we would take the data out of the clinical trials and we will analyze it in terms of cost avoidance, whoever the payer is, government, insurance company whatever and at a same time, that we would also analyze it in terms of quality of life improvement. And we would make those filings in relation in the late of fall.

And then it's in the governments hands and that now we are in the queue. The good news is that, its not one of those government filings, you can only make once a year when the date is available and go ahead and make an on a quarterly filing basis and then work to satisfy whatever questions Medicare would have.

But in the mean time, we're also trying to gather that data and go out to the private insurance companies to make the compelling argument to them as well. But, they move on their timetable, not on ours.

So when I said, late fall, I was talking about our submissions to them.

Hey, thanks guys.

Thank you.

You're welcome.

Hi guys, how are you?

Hi, Rebecca. How are you?

Good, good. Great now that you have such a great quarter.

I'm very happy about it. Well, my questions are I think you guys are getting pummeled about the WalkAide.

In fact, I just had a few more questions about it. I know, Tom you were saying that, you are going to make some submissions to the private insurance companies.

Have you seen it all with some of the patients that are already buying the device themselves and then going and trying to get reimbursed by the insurance company, have any of them made any traction?

We need to gather the data first, before we can go and sit in front and as I have mentioned to you clinical trials are still underway. So we've had preliminary discussions but we've not been able to go in and make the compelling argument based on data which is what they respond to.

Some of the patients have applied for insurance very few in number and it really depends on the nature of their individual insurance coverage. So that has not been the norm and I don't want to give the misleading impression that all the private insurance companies through out their lining up and reimbursing, I think, the key to swing this matter we kept this clinical trials done and then we'll go out private and CMS and try to make the compelling arguments.

Alright, okay, thanks. And you had put out some numbers that you when you pass the thousand unit mark, are you substantially beyond that at this point, how the units just by people buying it themselves than picking up at all?

Yes units have kept continued to go up as well as we see units' sales into two major outlets, one or the individuals, and second because of the nature of the work of [RSS] they have sold units to rehab centers as well as part of their protocol installation and we have seen improvement in both of those regards.

Okay. And what is…

Year-over-year you are looking at revenues its almost 280% over the last year.

Okay, great. Well that's it and congratulations Tom on taking the CEO spot that's really encouraging and Ivan, time to see you go but glad to see Tom being the person who take your place.

I'll be here as Chairman, Rebecca.

Okay. Alright.

Thanks a lot.

Thank you.

Yeah. A just real quick Tom, I want to follow-up on Brendan's question.

I thought, I had taken a note earlier that you were talking about third quarter for submission for reimbursement for WalkAide and then when I hear late fall, I think technically late fall goes as late as December 19th. So, I just want to dial that in.

Are you guys making a submission somewhere after mid-year of third quarter or are we talking about -- could be late November, early December before you make a submission?

We are looking third quarter and the key to that Mike is that focusing on what we can control. It looks like third quarter but trying to get those articles out for few reviews and as we all know it depends where you send them and how many comments their editors have and how quickly you can get it through that [engine mill] to get it out.

So, but that's our target for the third quarter.

Alright. Great.

Thanks guys.

Thank you, Andrea and thank you all for joining us. We look forward to talking to you with Q1 results.

Have a good day.