THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT

THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT

        THIRD AMENDED AND RESTATED EMPLOYMENT AGREEMENT effective as of the 1st day of January, 2005 (“Agreement”), by and between HANGER PROSTHETICS & ORTHOTICS, INC., a Delaware corporation (the “Company”), and GEORGE E. McHENRY (the “Executive”).

        WHEREAS, the Executive and Hanger Orthopedic Group, Inc. (“Hanger”) executed an initial Employment Agreement on August 1, 2001 (“Original Agreement”), which Original Agreement was amended by the Amended and Restated Employment Agreement, dated April 18, 2003, and the Second Amended and Restated Employment Agreement, effective January 1, 2005 (“Second Amended Agreement”);

        WHEREAS, the Second Amended Agreement was assigned from Hanger to the Company pursuant to the Assignment of Employment Agreement, effective as of January 1, 2007, between the Executive, the Company and Hanger;

        WHEREAS, the parties hereto desire to amend the Second Amended Agreement as set forth in this Agreement, with such amendments to be retroactively effective to January 1, 2005; and

        WHEREAS, the Company desires to employ the Executive and to incentivize the Executive to remain in the employ of the Company, subject to the terms and conditions set forth below.

        NOW, THEREFORE, in consideration of the promises and mutual agreements set forth below, both parties agree as follows:

        1.1     Employment . The Company agrees to employ the Executive in the position and with the responsibilities, duties, and authority set forth in Section 2.

        1.2     Term . The term of the Executive’s employment under this Agreement shall commence as of the effective date of the Original Agreement and shall terminate on the fifth anniversary of the effective date thereof, unless extended or sooner terminated in accordance with this Agreement. In the event the Executive continues to be employed by the Company following the fifth anniversary of the effective date of the Original Agreement, this Agreement shall automatically renew for successive one (1) year terms, unless terminated pursuant to Section 1.3, Section 6 or Section 7 of this Agreement.

        1.3     Automatic Extension . As of the fifth anniversary date of the Original Agreement, and as of each anniversary subsequent thereto (“Automatic Renewal Date”), unless either party shall have given thirty (30) days’ prior written notice of non-extension prior to such Automatic Renewal Date, the term of this Agreement shall be extended automatically for a period of one year. In the event that the Company gives written notice of non-extension, such notice shall be considered a Termination without Cause under the provisions of Section 6.4, unless otherwise mutually agreed between the Parties.

        1.4     Termination Date . For purposes of this Agreement, the term “Termination Date” shall mean (i) if the Executive’s employment is terminated by the Company for any reason whatsoever, other than death or Disability, the Executive’s last day of work; (ii) if the Executive’s employment is terminated by reason of death or Disability, the date of death of the Executive or the effective date of the Disability, as the case may be; and (iii) if the Executive’s employment is terminated by the Executive, the expiration date of the applicable notice period that is required pursuant to this Agreement. Notwithstanding the foregoing, no Termination Date shall be earlier than the date as of which the Executive has incurred a “separation from service” within the meaning of Internal Revenue Code (“Code”) Section 409A, as determined by applying the default rules thereof.

        1.5     Office . The Executive's principal office will be located in Bethesda, Maryland.

        The Executive shall serve the Company in the positions of Treasurer and Secretary and Hanger in the positions of Executive Vice President and Chief Financial Officer. The Executive shall faithfully and diligently perform the duties appropriate to said positions, which, in addition to those responsibilities assigned to him from time to time by the Chief Executive Officer and the Board of Directors of Hanger (the “Board of Directors”), shall include, among other things, responsibility for the financial, accounting, financial reporting, treasury, tax and audit functions of Hanger and its subsidiaries. The Executive shall devote his full business time and attention to the performance of his duties and responsibilities hereunder.

        3.1     Salary . Commencing after the Executive reports for full time duty with the Company, on or about October 15, 2001 and continuing during the term of this Agreement, the Company shall pay to the Executive a minimum base salary at the rate of Two Hundred Seventy-Five Thousand Dollars ($275,000.00) per annum, payable in accordance with the standard payroll practices of the Company (the “Base Salary”). The Base Salary shall be increased to Two Hundred Eighty-Three Thousand Two Hundred Fifty Dollars ($283,250.00) effective January 1, 2006 and shall be increased to Two Hundred Ninety-Two Thousand Dollars ($292,000.00) effective January 1, 2007. The Executive shall be entitled to such increases in Base Salary during the term hereof as shall be determined and approved by the Compensation Committee of the Board of Directors in its sole discretion, taking account of the performance of Hanger and the Executive, and other factors generally considered relevant to the salaries of executives holding similar positions with enterprises comparable to Hanger.

      3.2     Bonus .

        (a)     In addition to the Base Salary, the Executive shall participate in Hanger’s current bonus plan for senior corporate officers (the “Bonus Plan”) beginning January 1, 2002, as approved by the Compensation Committee of the Board of Directors in each calendar year during the term of this Agreement. The Executive’s target bonus is fifty percent (50%) of the Base Salary (the “Target Bonus”) and is contingent on the Executive meeting certain performance criteria and Hanger achieving certain year-end financial criteria, and up to one hundred percent (100%) of the Base Salary (the “Maximum Bonus”) if the Employee exceeds certain performance criteria and Hanger exceeds certain year-end financial criteria all as determined in the reasonable discretion of the Board of Directors and its Compensation Committee. The Executive shall be entitled to such increases in the “Target Bonus” and the “Maximum Bonus” during the term hereof as shall be determined and approved by the Compensation Committee of the Board of Directors in its sole discretion, taking account of the performance of Hanger, the Company and the Executive, and other factors generally considered relevant to the salaries of executives holding similar positions with enterprises comparable to Hanger.

        (b)     The bonus shall be payable between January 1 and March 15 (inclusive) of the calendar year following the calendar year for which the bonus is determined in accordance with the Company’s normal practices. In the event that the Executive is employed for less than the full calendar year in the year in which his Termination Date occurs (“Termination Year”), the bonus payable to the Executive shall be subject to Sections 6 and 7 of this Agreement and calculated based on the Executive meeting certain performance criteria and Hanger achieving certain year-end financial criteria, all as determined by the Compensation Committee of the Board of Directors, in its sole discretion. Such bonus shall be pro-rated for the portion of the Termination Year during which the Executive was employed by the Company. With respect to the bonus for the Termination Year, any bonus payable pursuant to this Section 3.2(b) shall be payable to the Executive between January 1 and March 15 (inclusive) of the calendar year following the calendar year for which the bonus is determined in accordance with the Company’s normal practices.

        3.3     Stock Options & Restricted Stock .

        (a)     As an incentive for the Executive’s future performance in improving shareholder value, the Company shall grant to the Executive options to purchase seventy-five thousand (75,000) shares of Hanger’s common stock, $0.01 par value per share (the “Stock”), with such options being valued at the closing price of the Stock on the first day of Executive’s employment. The Company shall also grant to the Executive options to purchase seventy-five thousand (75,000) shares of Stock on the first anniversary of Executive’s commencement date of employment. The Executive may participate in future awards of options to purchase Stock or restricted shares in a manner consistent with any stock option plan or restricted share plan adopted by Hanger for its senior corporate officers. Option or restricted share grants subsequent to the foregoing initial one-year period shall be based upon targets adopted annually by the Board of Directors, which targets may be derived from budgets generated by Hanger’s management, and the determination as to the amount of such options or restricted shares, if any, shall be at the sole discretion of the Board of Directors.

        (b)     The options or restricted shares provided in subparagraph (a) of this Section 3.3 shall be evidenced by a stock option agreement or restricted share agreement (“Stock Agreement”) between the Executive and Hanger, which Stock Agreement shall provide for a vesting schedule of four (4) years, in equal parts, of the options or restricted shares granted thereunder. Notwithstanding any provisions now or hereafter existing under any stock incentive plan of Hanger, all options or restricted shares granted to the Executive shall vest in full immediately upon the Termination Date except for termination of employment pursuant to Section 6.3 or Section 6.5 hereof, and the Executive (or his estate or legal representative, if applicable) shall thereafter have twelve (12) months from such Termination Date to exercise such options, if applicable.

        (c)     Notwithstanding any provisions now or hereafter existing under any stock option plan or restricted share plan of Hanger, in the event of a Change in Control (as hereinafter defined), all options or restricted shares provided to the Executive pursuant to Section 3.3(a) of the Original Agreement or any Stock Agreement shall be granted and shall immediately fully vest as of the date of such Change in Control with such options or restricted shares being valued at the closing price of Hanger’s common stock on the day prior to the day of the Change in Control.

        (d)     For purposes of this Agreement, a “Change in Control” shall be deemed to exist if:

        (e)     For purposes of this Agreement, the term “Continuing Director” shall mean a member of the Board of Directors who either was a member of the Board of Directors on the date hereof or who subsequently became a Director of Hanger and whose election, or nomination for election, was approved by a vote of at least two-thirds (2/3) of the Continuing Directors then in office.

        3.4     Senior Corporate Officer Benefits . The Executive shall be entitled to participate in benefit plans now existing or hereinafter adopted by the Board of Directors for the senior corporate officers of the Company. Upon a Change in Control, any interest of the Executive in any future Supplemental Executive Retirement Plan or deferred compensation plan shall immediately vest.

        3.5     Car Allowance and Parking . The Executive shall be provided with (a) a luxury-class automobile leased by the Company under the same terms and conditions as enjoyed by other senior corporate officers of the Company, which terms shall include reimbursement for all fuel, toll, maintenance, insurance and upkeep costs associated with the vehicle and (b) a paid parking space at the Company’s headquarters. Upon termination of the Executive’s employment under this Agreement for any reason, the Company may, at its option, demand the prompt return of the automobile, or, upon the mutual agreement of the Executive and the Company, the Executive may assume the lease for the automobile.

        3.6     Parachute Penalties . For all payments made or required to be made pursuant to the terms of this Agreement, including any payments made with respect to the Executive’s termination of employment for any reason, the Company shall determine and pay the Executive, as soon as practicable, an amount sufficient to cover the gross-up of any excise, income and other taxes resulting from the imposition of the parachute penalties of the Code or applicable state tax laws. Such determination and payment by the Company shall be made six (6) months and one (1) day after the Executive’s Termination Date or, if later, before the end of the calendar year following the calendar year in which the Executive paid any such excise tax.

        3.7     Relocation . The Company agrees to provide the following relocation benefits and the Executive agrees to execute a promissory note, in the form attached hereto as Exhibit A, payable to the Company relating hereto which will require the Executive to reimburse the Company for portions of the following amounts in the event of termination of the employment of the Executive pursuant to Section 6.3 (Due Cause) or Section 6.5 (Voluntary Termination) of the Original Agreement within the first twenty-four months after commencement of the term of the Original Agreement on October 15, 2001:

        (a)     reimbursement of all costs incurred by the Executive in connection with the packing, insuring, transporting and unpacking of his household items which are moved from his current residence to his new residence in the state of Maryland, the Commonwealth of Virginia or the District of Columbia (collectively called the “Washington D.C. Metropolitan Area”) as a result of his employment hereunder;

        (b)     reimbursement of reasonable costs incurred by Executive, including transportation, room, and food expenses, for up to two house-hunting trips from his current state of residence to the Washington D.C. Metropolitan Area (each house-hunting trip shall consist of a maximum period of five consecutive calendar days);

        (c)     payment of all closing costs (excluding points), reasonable fees and commissions to be paid in connection with the sale of the Executive’s current residence at 10 Blue Herron Court, Medford, NJ 08055;

        (d)     Payment of all closing costs (excluding points), reasonable fees and expenses directly related to the Executive’s purchase of a new residence in the Washington D.C. Metropolitan Area;

        (e)     reimbursement of travel costs, lodging, and meals incurred by the Executive during the first six (6) months immediately following the date of the Original Agreement, for purposes of the Executive performing his duties at the Company’s headquarters office located in Bethesda, MD while the Executive is still residing in his current residence at 10 Blue Herron Court, Medford, NJ 08055; and

        (f)     payment to the Executive of five thousand dollars ($5,000) upon closing of the purchase of the Executive’s new residence in the Washington D.C. Metropolitan Area to help to offset the expenses incurred by the Executive in his preparation of his new residence in the Washington D.C. Metropolitan Area for occupancy by the Executive.

        Any non-deductible portions of any payments made pursuant to Sections 3.7(b), (c), (d) and/or (e) will be paid to executive in an amount equal to (i) such payment as maybe actually due pursuant to such Sections 3.7 (b), (c), (d) and/or (e), plus (ii) any federal and state income tax imposed on Executive as a result of such payment.

        Section 3.8     Other . The Company agrees to (a) provide or reimburse the Executive’s costs for a supplemental long-term disability insurance policy and (b) provide or reimburse the Executive’s costs for a life insurance policy for the Executive in a minimum amount of two times the Base Salary in addition to the one times the Base Salary provided in the base benefit package, payable to a beneficiary of the Executive’s choosing.

        During the term of this Agreement, the Company shall reimburse the Executive for all reasonable and necessary out-of-pocket expenses incurred by him in connection with the performance of his duties hereunder, upon presentation of proper accounts in accordance with the Company’s policies and practices for senior corporate officers.

        5.1     Benefit Plans . During the term of this Agreement, the Executive will be eligible to participate in all employee benefit plans and programs (including, without limitation, 401(k), medical, dental, life, and disability plans of Hanger) offered by the Company from time to time to its senior corporate officers, subject to the provisions of such plans and programs as in effect from time to time.

        5.2     Vacation . The Executive shall be entitled to four (4) weeks vacation per year.

        6.1     Death .

        (a)     The Executive’s employment shall be terminated by the Executive’s death. In the event of the death of the Executive, the Company shall pay to the estate or other legal representative of the Executive the Base Salary and vacation as accrued through the Termination Date (at the annual rate then in effect) and the bonus provided for in Section 3.2 for the Termination Year (as well as any then earned but unpaid bonus for the year preceding the Termination Year, if applicable).

        (b)     In addition to the payments described in Section 6.1(a), the Company shall pay a death benefit of an additional eighteen (18) months of Base Salary and an additional bonus payment (“Additional Bonus Payment”) equal to one and one-half (1.5) times the Target Bonus for the Termination Year. Such payment shall be made in one (1) lump sum payment, with such payment to be made to the estate or other legal representative of the Executive within forty-five (45) days after receipt by the Company of notice of Executive’s death. The Executive’s estate or legal representative shall have no right to designate the taxable year of payment. Rights and