10-Q

_______________________________________________________

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_____________________________

FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2005
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934
For the transition period from
______ to ______


Commission File Number: 000-30406

HEALTHTRONICS, INC.
(Exact name of registrant as specified in its charter)

GEORGIA	58-2210668
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

1301 Capitol of Texas Highway, Suite 200B, Austin, Texas 78746
           (Address of principal executive offices)                (Zip Code)

(512) 328-2892
(Registrant’s telephone number, including area code)

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 described in Rule 12b-2 of the Exchange Act).

YES   X  NO     

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Title of Each Class
     Common Stock, no par value Number of Shares Outstanding at
April 30, 2005
33,838,178

PART I

ITEM 1 — FINANCIAL INFORMATION

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HEALTHTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

	Three Months Ended March 31,
($ in thousands, except per share data)	2005			2004
Revenue:
Urology	$	33,360		$	14,395
Medical Device Sales and Service		2,698			1,824
Specialty Vehicle Manufacturing		26,974			23,757
Other		194			237
Total revenue		63,226			40,213
Cost of services and general and administrative expenses:
Urology		14,561			5,931
Medical Device Sales and Service		678			1,048
Specialty Vehicle Manufacturing		24,030			21,706
Corporate		1,537			952
Depreciation and amortization		3,277			1,620
		44,083			31,257
Operating income		19,143			8,956
Other income (expenses):
Interest and dividends		142			88
Interest expense		(2,929	)		(2,289	)
Loan fees		(1,183	)		--
		(3,970	)		(2,201	)
Income from continuing operations before provision
for income taxes and minority interest		15,173			6,755
Minority interest in consolidated income		11,433			4,891
Provision for income taxes		1,425			683
Income from continuing operations		2,315			1,181
Loss from discontinued operations, net of $355 tax benefit		(576	)		--
Net income	$	1,739		$	1,181
Basic earnings per share:
Income from continuing operations	$	0.07		$	0.06
Discontinued operations	$	(0.02	)	$	--
Net income	$	0.05		$	0.06
Weighted average shares outstanding		33,315			18,670
Diluted earnings per share:
Income from continuing operations	$	0.07		$	0.06
Discontinued operations	$	(0.02	)	$	--
Net income	$	0.05		$	0.06
Weighted average shares outstanding		34,316			18,873

See accompanying notes to condensed consolidated financial statements.

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HEALTHTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

($ in thousands)	March 31, 2005 (Unaudited)			December 31, 2004 (Audited)
ASSETS
Current assets:
Cash and cash equivalents	$	16,403		$	21,960
Accounts receivable, less allowance for doubtful
accounts of $522 in 2005 and $513 in 2004		38,770			30,242
Other receivables		2,218			447
Deferred income taxes		17,229			17,295
Prepaid expenses and other current assets		3,010			2,259
Inventory		30,069			30,332
Total current assets		107,699			102,535
Property and equipment:
Equipment, furniture and fixtures		51,148			51,383
Building and leasehold improvements		17,702			17,638
		68,850			69,021
Less accumulated depreciation and
amortization		(25,179	)		(26,678	)
Property and equipment, net		43,671			42,343
Assets held for sale		16,644			16,169
Other investments		1,770			1,820
Goodwill, at cost		295,916			296,454
Intangible assets		6,948			7,307
Other noncurrent assets		7,354			7,645
	$	480,002		$	474,273

See accompanying notes to condensed consolidated financial statements.

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HEALTHTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

($ in thousands, except share data)	March 31, 2005 (Unaudited)		December 31, 2004 (Audited)
LIABILITIES
Current liabilities:
Current portion of long-term debt	$	9,104	$	39,754
Accounts payable		13,737		11,383
Accrued distributions to minority interests		6,248		8,429
Accrued expenses		19,250		19,263
Customer deposits		6,182		5,945
Total current liabilities		54,521		84,774
Liabilities held for sale		7,014		6,352
Deferred compensation liability		--		2,721
Long-term debt, net of current portion		142,226		110,304
Other long term obligations		1,167		1,417
Deferred income taxes		23,360		22,201
Total liabilities		228,288		227,769
Minority interest		30,846		29,277
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 30,000,000 shares authorized: none outstanding
Common stock, no par value, 70,000,000 authorized: 33,485,879 issued
and outstanding in 2005; 33,196,565 issued and outstanding in 2004		181,413		179,510
Accumulated earnings		39,455		37,717
Total stockholders' equity		220,868		217,227
	$	480,002	$	474,273

See accompanying notes to condensed consolidated financial statements.

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HEALTHTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Three Months Ended March 31,
($ in thousands)	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Fee and other revenue collected	$	55,724		$	50,222
Cash paid to employees, suppliers of goods and others		(47,358	)		(37,584	)
Interest received		144			88
Interest paid		(882	)		(151	)
Taxes (paid) refunded		(380	)		161
Net cash provided by operating activities		7,248			12,736
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of entities, net of cash acquired		195			3,843
Purchases of equipment and leasehold improvements		(5,471	)		(3,381	)
Distributions from investments		147			143
Proceeds from sales of assets		1,184			197
Discontinued operations		186			--
Other		23			3
Net cash (used in) provided by investing activities		(3,736	)		805
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable		35,890			722
Payments on notes payable, exclusive of interest		(34,817	)		(3,921	)
Distributions to minority interest		(12,825	)		(7,163	)
Contributions by minority interest, net of buyouts		780			343
Exercise of stock options		1,903			123
Net cash used in financing activities		(9,069	)		(9,896	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(5,557	)		3,645
Cash and cash equivalents, beginning of period		21,960			9,780
Cash and cash equivalents, end of period	$	16,403		$	13,425

See accompanying notes to condensed consolidated financial statements.

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HEALTHTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)

	Three Months Ended March 31,
($ in thousands)	2005			2004
Reconciliation of net income to net cash provided by operating activities:
Net income	$	1,739		$	1,181
Adjustments to reconcile net income
to net cash provided by operating activities
Minority interest in consolidated income		11,433			4,891
Depreciation and amortization		3,277			1,620
Provision for uncollectible accounts		4			(34	)
Provision for deferred income taxes		1,225			9
Equity in earnings of affiliates		(120	)		(22	)
Stock buyback agreements		--			(322	)
Other		(11	)		(293	)
Changes in operating assets and liabilities,
net of effect of purchase transactions
Accounts receivable		(8,532	)		9,152
Other receivables		(1,772	)		(530	)
Other assets		(2,916	)		(3,048	)
Accounts payable		2,592			(1,757	)
Accrued expenses		329			1,889
Total adjustments		5,509			11,555
Net cash provided by operating activities	$	7,248		$	12,736

See accompanying notes to condensed consolidated financial statements.

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HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(Unaudited)

1. General

The accompanying unaudited consolidated financial statements have been prepared in conformity with the accounting principles for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These consolidated financial statements reflect all adjustments which are, in our opinion, necessary for a fair presentation of the statement of the financial position as of March 31, 2005 and the results of operations and cash flows for the periods presented. These statements have not been audited by our independent registered public accounting firm. The operating results for the interim periods are not necessarily indicative of results for the full fiscal year.

The notes to consolidated financial statements appearing in our Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission should be read in conjunction with this Quarterly Report on Form 10-Q. There have been no significant changes in the information reported in those notes other than from normal business activities and as discussed herein.

On November 10, 2004, Prime Medical Services, Inc. (“Prime”) completed a merger with HealthTronics Surgical Services, Inc. (“HSS”) pursuant to which Prime merged with and into HSS, with HealthTronics, Inc. (“HealthTronics”) as the surviving corporation. Under the terms of the merger agreement, as a result of the merger, Prime’s stockholders received one share of HealthTronics common stock for each share of Prime common stock they owned. Immediately following the merger, Prime’s stockholders owned approximately 62% of the outstanding shares of HealthTronics common stock, and Prime’s directors and senior management represented a majority of the combined company’s directors and senior management. As a result, Prime was deemed to be the acquiring company for accounting purposes and the merger was accounted for as a reverse acquisition under the purchase method of accounting for business combinations in accordance with accounting principles generally accepted in the United States. The consideration paid (purchase price) was allocated to the tangible and intangible net assets of HSS based on their fair values, and the net assets of HSS were recorded at their fair values as of the completion of the merger and added to those of Prime. The assets acquired and liabilities assumed were deemed to be those of HealthTronics because HealthTronics was the surviving legal entity. The purchase price has been allocated to the assets and liabilities acquired on a preliminary basis and may change as additional information becomes available. The fair value of accounts receivable, leases, deferred taxes, and assets held for sale remains preliminary. Upon resolution of any amounts which existed as of the date of acquisition, we will reflect any settlements as an adjustment to goodwill.

2. Debt

In March 2005, we refinanced our existing revolving credit facility with a $175 million senior credit facility comprised of a five year $50 million revolver and a $125 million senior secured term loan B (“term loan B”), due 2011. In April 2005, we used the proceeds from the new term loan B to redeem our $100 million of 8.75% unsecured senior subordinated notes and reduce the amounts outstanding under our new revolving credit facility. We paid approximately $1.2 million in loan fees in March 2005 related to this refinancing and paid a $1.5 million premium to redeem the 8.75% notes in April 2005.

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HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(Unaudited)

3. Earnings per share

Basic earnings per share (“EPS”) is based on weighted average shares outstanding without any dilutive effects considered. Diluted EPS reflects dilution from all contingently issuable shares, including options and warrants. A reconciliation of such EPS data is as follows:

($ in thousands, except per share data)	Basic earnings per share		Diluted earnings per share
Three Months Ended March 31, 2005
Net income	$	1,739	$	1,739
Weighted average shares outstanding		33,315		33,315
Effect of dilutive securities		--		1,001
Shares for EPS calculation		33,315		34,316
Net income per share	$	0.05	$	0.05
Three Months Ended March 31, 2004
Net income	$	1,181	$	1,181
Weighted average shares outstanding		18,670		18,670
Effect of dilutive securities		--		203
Shares for EPS calculation		18,670		18,873
Net income per share	$	0.06	$	0.06

We did not include in our computation of diluted EPS unexercised stock options and warrants to purchase 281,000 and 2,567,000 shares of our common stock as of March 31, 2005 and 2004, respectively, because the effect would be antidilutive.

4. Segment Reporting

We have three reportable segments: urology, specialty vehicle manufacturing and medical device sales and service. The urology segment provides services related to the operation of lithotripters, including scheduling, staffing, training, quality assurance, regulatory compliance and contracting with payors, hospitals and surgery centers. The specialty vehicle manufacturing segment provides manufacturing services and installation, upgrade, refurbishment and repair of major medical equipment for mobile medical service providers and the mobile broadcast and communication industry. The medical device sales and service segment manufactures, sells, and maintains lithotripters, and markets fixed and mobile tables for urological treatments and imaging, as well as patient handling tables for use by pain management clinics.

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HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(Unaudited)

4. Segment Reporting (continued)

We measure performance based on the pretax income or loss from our operating segments, which does not include unallocated corporate general and administrative expenses or corporate interest income and expense.

($ in thousands)	Urology		Specialty Vehicle Manufacturing		Medical Device Sales and Service
Three Months Ended March 31, 2005
Revenue from external customers	$	33,360		26,974	$	2,698
Intersegment revenues		--		--		3,890
Segment profit		4,655		2,669		1,838
Three Months Ended March 31, 2004
Revenue from external customers	$	14,395	$	23,757	$	1,824
Intersegment revenues		--		--		907
Segment profit		2,368		1,746		706

The following is a reconciliation of the measure of segment profit per above to consolidated income before provision for income taxes per the consolidated statements of income:

	Three Months ended March 31,
($ in thousands)	2005			2004
Total segment profit	$	9,162		$	4,820
Corporate revenues		194			237
Unallocated corporate expenses:
General and administrative		(1,537	)		(976	)
Net interest expense		(2,643	)		(2,103	)
Loan fees		(1,183	)		--
Other, net		(253	)		(114	)
Total unallocated corporate expenses		(5,616	)		(3,193	)
Income before income taxes	$	3,740		$	1,864

5. Stock-Based Compensation

Upon adoption of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“Statement 123”), in 1996, we have continued to measure compensation expense for our stock-based employee compensation plans using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. We have provided proforma disclosures of net income and earnings per share as if the fair value-based method prescribed by Statement 123 had been applied in measuring compensation expense.

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HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(Unaudited)

5. Stock-Based Compensation (continued)

For purposes of proforma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. Our proforma information follows (in thousands except for earnings per share information):

	Three Months ended March 31,
	2005		2004
Net income, as reported	$	1,739	$	1,181
Stock-based employee compensation
expense, net of tax		1,195		308
Pro forma net income	$	544	$	873
Pro forma earning per share:
Basic	$	0.02	$	0.05
Diluted	$	0.02	$	0.05

6. Inventory

As of March 31, 2005 and December 31, 2004, inventory consists of the following:

	March 31, 2005		December 31, 2004
Raw Materials	$	12,293,000	$	11,326,000
Work in Progress		17,776,000		19,006,000
	$	30,069,000	$	30,332,000

7. Discontinued Operations

In 2004, we decided to divest our orthopaedics business unit and accordingly have shown all assets and liabilities related to these operations as held for sale in the accompanying consolidated financial statements. We continue to believe that our infrastructure, installed base, and the clinical benefits of a physician-directed, high energy product have a distinct advantage in the marketplace. However, the resources required to fully develop this market would detract from our focused efforts to improve our other core business lines and efficiently integrate Prime and HSS operations. We will, of course, maintain our managerial commitments to our partnerships and continue to provide maintenance, parts and consumables to the installed base until a sale is consummated. For the quarter ended March 31, 2005, we have not recorded depreciation in the amount of $398,000 related to the orthopaedics business.

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HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(Unaudited)

7. Discontinued Operations (continued)

As part of the merger between Prime and HSS in November 2004, HSS had a minority owned Swiss subsidiary, HMT Holding AG (“HMT”), which was in a net liability position at the date of acquisition. In December 2004, we decided to no longer fund the operations of HMT as part of our plan to rationalize its acquired manufacturing activities. Also in December 2004, the directors of HMT received a letter from their external auditors informing them HMT was over-indebted. Based on this action, the directors had a statutory obligation to initiate insolvency proceedings and in January 2005 filed for relief under Swiss insolvency laws. We deconsolidated the operations of HMT in December 2004. We recorded the assets and liabilities of HMT at the value of the net liabilities at the time of bankruptcy. In the first quarter of 2005, we paid $1.6 million in return for assignment of a $5.1 million claim against HMT held by a foreign bank. In addition to the claim, we also received an assignment from the bank of a pledge of HMT’s accounts receivable that secured the $5.1 million claim.

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Item 2 — Management’s Discussion and Analysis
of Financial Condition and
Results of Operations

Forward-Looking Statements

The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, hopes, intentions or strategies regarding the future. You should not place undue reliance on forward-looking statements. All forward-looking statements included in this report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results could differ materially from those in the forward-looking statements. In addition to any risks and uncertainties specifically identified below and in the text surrounding forward-looking statements in this report, you should consult our reports on Form 10-K and other filings with the Securities and Exchange Commission, for factors that could cause our actual results to differ materially from those presented.

Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “will”, “would”, “should”, “plans”, “likely”, “expects”, “anticipates”, “intends”, “believes”, “estimates”, “thinks”, “may”, and similar expressions, are forward-looking statements. The following important factors, in addition to those referred to above, could affect the future results of the health care industry in general, and us in particular, and could cause those results to differ materially from those expressed in such forward-looking statements:

• unexpected difficulties in integrating the operations of Prime and HSS;

• the effects of our indebtedness, which could adversely restrict our ability to operate, could make us vulnerable to general adverse economic and industry conditions, could place us at a competitive disadvantage compared to our competitors that have less debt, and could have other adverse consequences;

• uncertainties in our establishing or maintaining relationships with physicians and hospitals;

• the impact of current and future laws and governmental regulations;

• uncertainties inherent in third party payors’ attempts to limit health care coverages and levels of reimbursement;

• the effects of competition and technological changes;

• the availability (or lack thereof) of acquisition or combination opportunities; and

• general economic, market or business conditions.

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Item 2 — Management’s Discussion and Analysis
of Financial Condition and
Results of Operations

General

We provide healthcare services and manufacture medical devices, primarily for the urology community, as well as design and manufacture trailers and coaches that transport high technology medical devices and equipment for mobile command and control centers and the media and broadcast industry. We have three reportable segments: urology, specialty vehicle manufacturing, and medical device sales and service.

Urology. Our lithotripsy services are provided principally through limited partnerships or other entities that we manage, which use lithotripsy devices. In 2004, physicians who are affiliated with us used our lithotripters to perform approximately 36,700 procedures in the U.S. We do not render any medical services. Rather, the physicians do.

We have two types of contracts, retail and wholesale, that we enter into in providing our lithotripsy services. Retail contracts are contracts where we contract with the hospital and private insurance payors. Wholesale contracts are contracts where we contract only with the hospital. The two approaches functionally differ in that, under a retail contract, we generally bill for the entire non-physician fee for all patients other than governmental pay patients, for which the hospital bills the non-physician fee. Under a wholesale contract, the hospital generally bills for the entire non-physician fee for all patients. In both cases, the billing party contractually bears the costs associated with the billing service, including pre-certification, as well as non-collection. The non-billing party is generally entitled to its fees regardless of whether the billing party actually collects the non-physician fee. Accordingly, under the wholesale contracts where we are the non-billing party, the hospital generally receives a greater proportion of the total non-physician fee to compensate for its billing costs and collection risk. Conversely, under the retail contracts where we generally provide the billing services and bear the collection risk, we receive a greater proportion of the total non-physician fee.

Although the non-physician fee under both retail and wholesale contracts varies widely based on geographical markets and the identity of the third party payor, we estimate that nationally, on average, our share of the non-physician fee was roughly $2,100 and $2,000, respectively, for the first quarter of 2005 and 2004. At this time, we do not anticipate a material shift between our retail and wholesale arrangements.

As the general partner of the limited partnerships, we also provide services relating to operating our lithotripters, including scheduling, staffing, training, quality assurance, regulatory compliance, and contracting with payors, hospitals and surgery centers.

Also in the urology segment, we provide treatments for benign and cancerous conditions of the prostate. In treating benign prostate disease, we use a technology called transurethral microwave therapy, a process in which heat therapy is used to treat the enlarged prostate, or we may use a green light laser. For treating prostate and other cancers, we use a procedure called cryosurgery, a process which uses a double freeze thaw cycle to destroy cancer cells.

We recognize urology revenue primarily from the following sources:

• Fees for urology services. A substantial majority of our urology revenue is derived from fees related to lithotripsy treatments performed using our lithotripters. We, through our partnerships or other entities, facilitate the use of our equipment and provide other support services in connection with these treatments at hospitals and other health care facilities. The professional fee payable to the physician performing the procedure is generally billed and collected by the physician. Benign prostate disease and prostate cancer treatment services are billed in the same manner as our lithotripsy services under either retail or wholesale contracts. These services are also primarily performed through limited partnerships, which we manage.

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Item 2 — Management’s Discussion and Analysis
of Financial Condition and
Results of Operations

• Fees for operating our lithotripters. Through our partnerships and otherwise directly by us, we provide services related to operating our lithotripters and receive a management fee for performing these services.

Medical Device Sales and Service. We manufacture, sell and maintain lithotripters and their related consumables, and market fixed and mobile tables for urological treatments and imaging, as well as patient handling tables for use by pain management clinics.

• Fees for maintenance services. We provide equipment maintenance services to our partnerships as well as outside parties. These services are billed either on a time and material basis or at a fixed monthly contractual rate.

• Fees for equipment sales, consumable sales and licensing applications. We manufacture, sell and maintain lithotripters and certain medical tables. We also manufacture and sell consumables related to the lithotripters. With respect to some lithotripter sales, in addition to the original sales price we receive for such sales, we receive a licensing fee from the buyer of the lithotripter for each patient treated with such lithotripter. In exchange for this licensing fee, we provide the buyer of the lithotripter with certain consumables. All the sales for devices and consumables are recognized when the related items are delivered. Revenues from licensing fees are recorded when the patient is treated.

Specialty Vehicle Manufacturing. We design, construct and engineer mobile trailers, coaches, and special purpose mobile units that transport high technology medical devices such as magnetic resonance imaging, or MRI, cardiac catheterization labs, CT scanware, lithotripters and positron emission tomography, or PET, and equipment designed for mobile command and control centers, and broadcasting and communications applications.

A significant portion of our revenue has been derived from our specialty vehicle manufacturing operations. Specialty vehicle manufacturing revenue is recognized at the time we fulfill the terms of the contract under which we have sold the equipment.

Recent Developments

In the fourth quarter of 2004, we decided to divest our orthopaedics business unit. We continue to believe that our infrastructure, installed base, and the clinical benefits of a physician-directed, high energy product have a distinct advantage in the marketplace. However, the resources required to fully develop this market would detract from our focused efforts to improve our other core business lines and efficiently integrate the Prime and HSS operations. We intend to maintain our managerial commitments to our partnerships and continue to provide maintenance, parts and consumables to the installed base until a sale is consummated.

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Item 2 — Management’s Discussion and Analysis
of Financial Condition and
Results of Operations

In March 2005, we refinanced our existing revolving credit facility with a $175 million senior credit facility comprised of a five year $50 million revolver and a $125 million senior secured term loan B (“term loan B”), due 2011. In April 2005, we used the proceeds from the new term loan B to redeem our $100 million of 8.75% unsecured senior subordinated notes and reduce the amounts outstanding under our new revolving credit facility. We paid approximately $1.2 million in loan fees in March 2005 related to this refinancing and paid a $1.5 million premium to redeem the 8.75% notes in April 2005.

We purchased debt of HMT AG in the first quarter of 2005. We paid $1.3 million and incurred certain contingent obligations in the amount of $350,000 in return for assignment of a $5.1 million claim against HMT AG held by a foreign bank. In addition to the claim, we also received an assignment from the bank of a pledge of HMT AG’s accounts receivable that secured the $5.1 million claim.

Critical Accounting Policies and Estimates.

Management has identified the following critical accounting policies and estimates:

Impairments of goodwill and other intangible assets are both a critical accounting policy and estimate that requires judgment and is based on assumptions of future operations. We are required to test for impairments at least annually or if circumstances change that would reduce the fair value of a reporting unit below its carrying value. We test for impairment of goodwill during the fourth quarter. We have three reporting units, urology, medical device sales and service, and specialty vehicle manufacturing. The fair value of each reporting unit is calculated using estimated discounted future cash flow projections. As of March 31, 2005, we had goodwill of $296 million.

A second critical accounting policy and estimate which requires judgment of management is the estimated allowance for doubtful accounts and contractual adjustments. We have based our estimates on historical collection amounts, current contracts with payors, current changes of the facts and circumstances relating to these matters and certain negotiations with related payors.

A third critical accounting policy is consolidation of our investment in partnerships where we, as the general partner, exercise effective control, even though our ownership is less than 50%. The consolidated financial statements include our accounts, our wholly-owned subsidiaries, and entities more than 50% owned and limited partnerships where we, as the general partner, exercise effective control, even though our ownership is less than 50%. The related partnership agreements provide for broad powers by the general partner. The limited partners do not participate in the management of the partnership and do not have the substantial ability to remove the general partner. Investment in entities in which our investment is less than 50% ownership and we do not have significant control are accounted for by the equity method if ownership is between 20% - 50%, or by the cost method if ownership is less than 20%. We have reviewed each of the underlying agreements and determined we have effective control; however, if it was determined this control did not exist, these investments would be reflected on the equity method of accounting. Although this would change individual line items within our consolidated financial statements, it would have no effect on our net income and/or total stockholders’ equity.

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Item 2 — Management’s Discussion and Analysis
of Financial Condition and
Results of Operations

Three months ended March 31, 2005 compared to the three months ended March 31, 2004

Our total revenues for the three months ended March 31, 2005 increased $23,013,000 (57%) as compared to the same period in 2004. Revenues from our urology operations increased by $18,965,000 (132%) in the quarter primarily related to our merger with HSS in November 2004 and significant growth in our greenlight laser operations. Urology revenues associated with legacy HSS entities totaled $18.2 million for the first quarter of 2005, while greenlight laser revenues from our organic operations increased from $6,000 in 2004 to $1,216,000 in 2005. The actual number of procedures performed in the three months ended March 31, 2005 increased by 88% compared to the same period in 2004. The average rate per procedure increased by 1% for the first quarter of 2005 as compared to the same period a year ago. Revenues for our medical device sales and services segment increased by $874,000 (48%) compared to the same period in 2004 due primarily to our merger with HSS. Medical device sales and service revenues before intersegment eliminations totaled $6.6 million. We sold 5 lithotripers and 15 tables in the first quarter of 2005 compared to 1 lithotripter and 12 tables in the same period in 2004. Our specialty vehicle manufacturing revenues increased $3,217,000 (14%) compared to the same period in 2004 due to the number of units shipped increasing from 78 during 2004 to 102 during 2005.

Our costs of services and general and administrative expenses for the three months ended March 31, 2005 increased $12,826,000 in absolute terms, but decreased from 78% to 70% as a percentage of revenues compared to the same period in 2004. Our costs of services associated with our urology operations for the first quarter of 2005 increased $8,630,000 (146%) in absolute terms and increased from 41% to 44% of our urology revenues compared to the same period in 2004. Urology costs associated with legacy HSS entities were $9.1 million for the first quarter 2005. Costs from our organic urology operations actually decreased by $479,000 in the first quarter of 2005 as compared to same period in 2004. Our costs of services associated with our medical device sales and services operations for the first quarter 2005 decreased $370,000 (35%) in absolute terms and decreased from 57% to 25% of the segment revenues compared to the same period in 2004. A significant portion of medical device sales and services costs relate to providing maintenance services to our urology segment. The intersegment eliminations of these maintenance charges were the primary reason for decrease in medical device sales and service costs. Our cost of services associated with our specialty vehicle manufacturing operations increased $2,324,000 (11%) in absolute terms for the first quarter 2005 but decreased from 91% to 89% of our specialty vehicle manufacturing revenues compared to the same period in 2004 due to increased sales on the medical side of the specialty vehicle manufacturing segment which historically has higher product margins. Our corporate expenses remained consistent at 2% of revenues compared to the same period in 2004, increasing $585,000 (61%) in absolute terms for the first quarter 2005 due to our merger with HSS in November 2004. Our corporate expenses decreased $678,000 from the fourth quarter of 2004 as we have made significant progress in integrating our combined operations.

Depreciation and amortization expense increased $1,657,000 for the three months ended March 31, 2005 compared to the same period in 2004 due primarily to our merger with HSS. Legacy HSS entities had depreciation and amortization totaling $1.8 million for the three month ended March 31, 2005.

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Item 2 — Management’s Discussion and Analysis
of Financial Condition and
Results of Operations

Minority interest in consolidated income for the three months ended March 31, 2005 increased $6,542,000 (134%) compared to the same period in 2004, as a result of an increase in income from our urology segment due primarily to the HSS merger. Legacy HSS entities had minority interest expense totaling $5.6 million for the three month ended March 31, 2005.

Provision for income taxes for the three months ended March 31, 2005 increased $742,000 compared to the same period in 2004 due to an increase in taxable income.

Liquidity and Capital Resources

Cash Flows

Our cash and cash equivalents were $16,403,000 and $21,960,000 at March 31, 2005 and December 31, 2004, respectively. Our subsidiaries generally distribute all of their available cash quarterly, after establishing reserves for estimated capital expenditures and working capital. For the three months ended March 31, 2005 and 2004, our subsidiaries distributed cash of approximately $12,825,000 and $7,163,000, respectively, to minority interest holders.

Cash provided by our operations, after minority interest, was $7,248,000 for the quarter ended March 31, 2005 and $12,736,000 for the quarter ended March 31, 2004. For the three months ended March 31, 2004 compared to the three months ended 2005, fee and other revenue collected increased by $5,502,000 due primarily to the HSS merger discussed previously, partially offset by a $7.1 million increase in specialty vehicle manufacturing accounts receivable. Cash paid to employees, suppliers of goods and others for the first quarter 2005 increased by $9,774,000 compared to the same period in 2004. These fluctuations are attributable to the HSS merger as well as the timing of accounts payable and accrued expense payments. An increase in interest payments of $731,000 for the first quarter 2005 was due primarily to our increase in the line of credit balance. Loan fees of $1,184,000 were paid in the first quarter of 2005 related to our debt refinancing discussed previously.

Cash used by our investing activities for the quarter ended March 31, 2005, was $3,736,000. We purchased equipment and leasehold improvements totaling $5,471,000 during that quarter. Cash provided by our investing activities for the quarter ended March 31, 2004, was $805,000 primarily due to $3,843,000 net cash received from our acquisition of Medstone International, Inc., partially offset by equipment and leasehold improvements purchases totaling $3,381,000.

Cash used in our financing activities for the quarter ended March 31, 2005, was $9,069,000, primarily due to distributions to minority interests of $12,825,000 and payments on notes payable of $34,817,000 partially offset by borrowings on notes payable of $35,890,000. Cash used in our financing activities for the quarter ended March 31, 2004, was $9,896,000, primarily due to distributions to minority interests of $7,163,000 and net payments on notes payable of $3,199,000.

Accounts receivable as of March 31, 2005 has increased $8,528,000 from December 31, 2004. This increase is primarily related to an increase in receivables in our specialty vehicle manufacturing segment which totaled $7.1 million. Bad debt expense was less than $10,000 for the quarter ended March 31, 2005 compared to approximately $70,000 for the same period in 2004.

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Item 2 — Management’s Discussion and Analysis
of Financial Condition and
Results of Operations

Inventory as of March 31, 2005 totaled $30,069,000 and decreased $263,000 from December 31, 2004. Total backlog for the manufacturing segment was $28,448,000 and $32,391,000 as of March 31, 2005 and 2004, respectively.

Senior Credit Facility

Our senior credit facility is comprised of a five-year $50 million revolver and a $125 million senior secured term loan due 2011. We entered into a new senior credit facility in March 2005. At March 31, 2005, $33 million was drawn on the revolver. Our senior credit facility contains covenants that, among other things, limit our ability to incur debt, create liens, make investments, sell assets, pay dividends, make capital expenditures, make restricted payments, enter into transactions with affiliates, and make acquisitions. In addition, our facility requires us to maintain certain financial ratios.

8.75% Notes

In addition, we had $100 million of unsecured senior subordinated notes at March 31, 2005. The notes were subject to an 8.75% rate of interest and interest was payable semi-annually on April 1st and October 1st. Principal was due April 2008.

In April 2005, our $125 million term loan was funded and we used the proceeds to redeem the $100 million of unsecured senior subordinated notes.

Other

Interest Rate Swap .. In August 2002, we entered into an interest rate swap which was designated as a fair value hedge pursuant to the provisions of FAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and FAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, An Amendment of FASB Statement No. 133. This swap was executed to convert $50 million of the 8.75% notes from a fixed to floating rate instrument. The floating rate was based on LIBOR plus 4.56%. In March 2003, we amended our interest rate swap agreement to add an additional $25 million with a floating rate based on LIBOR plus 5.11%. We terminated the swaps in May 2003. In August 2003, we entered into two new interest rate swaps for $25 million each which were also designated as fair value hedges. The floating rates of these two interest rate swap agreements were based on LIBOR plus 4.72% and 4.97%, respectively. In January 2004, we terminated these swaps for approximately $150,000. As of March 31, 2005, approximately $564,000 in proceeds from these swaps was capitalized and was being amortized as a reduction to future interest expense over the remaining life of the 8.75% notes. In April 2005, the remaining amount was recognized when the 8.75% notes were redeemed as described above.

Other long term debt. At March 31, 2005, we had approximately $3.8 million of mortgage debt related to our building in Austin, Texas which bears interest at prime plus 1% and is due in monthly installments until November 2006. We also had notes totaling $13.9 million as of March 31, 2005 related to equipment purchased by our limited partnerships. These notes are paid from the cash flows of the related partnerships. They bear interest at LIBOR or prime plus a certain premium and are due over the next three years.

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Item 2 — Management’s Discussion and Analysis
of Financial Condition and
Results of Operations

Other long term obligations. At March 31, 2005, we had an obligation totaling $900,000 related to payments to the previous owner of Aluminum Body Corporation (“ABC”), an entity we acquired in January 2003, for $75,000 per quarter until March 31, 2008 as consideration for a noncompetition agreement. Also at March 31, 2005, as part of our Medstone acquisition, we had an obligation totaling $580,000 related to payments to an employee for $20,833 a month until February 28, 2007 and $4,167 a month beginning March 1, 2007 and continuing until February 28, 2009 as consideration for a noncompetition agreement. We also had as part of our HSS merger, two obligations totaling $387,000 related to payments to two former employees of HSS. One obligation is for $8,333 a month until October 31, 2007 as consideration for a noncompetition agreement. The other obligation is for $4,167 a month until October 31, 2007 as consideration for a noncompetition agreement.

General

The following table presents our contractual obligations as of March 31, 2005 (in thousands):

	Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Long Term Debt (1)	$	151,330	$	9,104	$	11,720	$	36,756	$	93,750
Operating Leases (2)		12,842		3,054		4,766		2,796		2,226
Non-compete contracts (3)		1,867		700		1,121		46		--
Total	$	166,039	$	12,858	$	17,607	$	39,598	$	95,976

(1)	Represents long term debt as discussed above.
(2)	Represents operating leases in the ordinary course of our business.
(3)	Represents other long term obligations as discussed above.

In addition, the scheduled principal repayments for all long term debt as of March 31, 2005 are payable as follows:

	($ in thousands)
2005	$	9,104
2006		8,430
2007		3,290
2008		2,061
2009		34,695
Thereafter		93,750
Total	$	151,330

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Item 2 — Management’s Discussion and Analysis
of Financial Condition and
Results of Operations

Our primary sources of cash are cash flows from operations and borrowings under our senior credit facility. Our cash flows from operations and therefore our ability to make scheduled payments of principal, or to pay the interest on, or to refinance our indebtedness, or to fund planned capital expenditures, will depend on our future performance, which is subject to general economic, financial, competitive, legislative, regulatory and other factors. Likewise, our ability to borrow under our senior credit facility will depend on these factors, which will affect our ability to comply with the covenants in our credit facility and our ability to obtain waivers for, or otherwise address, any noncompliance with the terms of our credit facility with our lenders.

We intend to increase our urology operations primarily through forming new operating subsidiaries in new markets as well as by acquisitions. We seek opportunities to grow our specialty vehicle manufacturing operations through acquisitions, expanding our product lines and by selling to a broader customer base. We plan to increase our medical device sales and services segment by offering new devices and expanding our customer base. We intend to fund the purchase price for future acquisitions and developments using borrowings under our senior credit facility and cash flows from our operations. In addition, we may use shares of our common stock in such acquisitions where appropriate.

Based upon the current level of our operations and anticipated cost savings and revenue growth, we believe that cash flows from our operations and available cash, together with available borrowings under our senior credit facility, will be adequate to meet our future liquidity needs both for the short term and for at least the next several years. However, there can be no assurance that our business will generate sufficient cash flows from operations, that we will realize our anticipated revenue growth and operating improvements or that future borrowings will be available under our senior credit facility in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs.

Inflation

Our operations are not significantly affected by inflation because we are not required to make large investments in fixed assets. However, the rate of inflation will affect certain of our expenses, such as employee compensation and benefits.

Recently Issued Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payments (SFAS 123R). The statement requires that we record stock option expense in our financial statements based on a fair value methodology. In April 2005, this statement was delayed until the first annual period starting after June 15, 2005 or our first quarter of 2006. We are evaluating the impact of the new standard and the method and timing of adoption.

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Item 3 — Quantitative and Qualitative Disclosures
About Market Risk

Interest Rate Risk

As of March 31, 2005, we had long-term debt (including current portion) totaling $151,330,000, of which $100 million had a fixed rate of interest of 8.75%, $9,260,000 had fixed rates of 1% to 11%, $3,772,000 incurred interest at a variable rate equal to a specified prime rate, and $37,734,000 incurred interest at a variable rate equal to LIBOR + 1.25 to 2.25% or prime + .25 to 1.25%. The remaining $564,000 related to interest rate swaps which are discussed below. We are exposed to some market risk due to the floating interest rate debt totaling $41,506,000. We make monthly or quarterly payments of principal and interest on $8,506,000 of the floating rate debt. An increase in interest rates of 1% would result in a $415,000 annual increase in interest expense on this existing principal balance.

Additionally, in August 2002, we entered into an interest rate swap, which was designated as a fair value hedge pursuant to the provisions of FAS No. 133 and FAS No. 138. This swap had the effect of converting $50 million of our 8.75% notes from a fixed to floating rate instrument with a rate of LIBOR plus 4.56%. In March 2003, we amended our interest rate swap agreement to add an additional $25 million with a floating rate based on LIBOR plus 5.11%. We terminated the swaps in May 2003. Approximately $1.2 million in proceeds from the swaps was capitalized and will be amortized as a reduction to future interest expense over the remaining life of the 8.75% notes. In August 2003, we entered into two new interest rate swaps for $25 million each which were designated as fair value hedges. The floating rates of the two interest rate swap agreements were based on LIBOR plus 4.72% and 4.97%, respectively. In January 2004, we terminated these swaps for approximately $150,000.

In April 2005, the $100 million of 8.75% notes were redeemed and replaced with a new $125 million senior secured term loan B, due 2011. This new loan bears interest at a variable rate equal to LIBOR + 1.25 to 2.25% or prime + ..25 to 1.25%. We will make quarterly principal payments in connection with the term loan B of $312,500 until February 2010, when quarterly payments will increase to $29.7 million. We may also make an annual payment of either 25% or 50% of Excess Cash Flow as defined in the loan agreement based on the level of the Total Leverage Ratio as calculated per the loan agreement.

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Item 4 – Controls and Procedures

At March 31, 2005, under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), we evaluated the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of March 31, 2005, our disclosure controls and procedures were effective.

There have been no significant changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting.

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PART II

OTHER INFORMATION

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Item 6. Exhibits

(a)

         
         
         
         
         
         


         
         

         
          Exhibits

10.1 Executive Employment Agreement, dated April 15, 2004, by and between Prime and Joseph M. Jenkins, M.D.
10.2 Deferred Compensation Plan for HealthTronics, Inc. adopted December 1, 2004.
12.1 Computation of ratio of earnings to fixed charges.
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer
32.2 Certification of Chief Financial Officer

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

                                                     



Date: May 6, 2005



                                                     
                                                     
                                                      HEALTHTRONICS, INC.







By: /s/ John Q. Barnidge                                
     John Q. Barnidge, Senior Vice President
         and Chief Financial Officer

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EX-10

EXHIBIT 10.1

EXECUTIVE EMPLOYMENT AGREEMENT

        This Executive Employment Agreement (this “Agreement”) is by and between Prime Medical Services, Inc., a Delaware corporation (“Employer”) and Joseph M. Jenkins, M.D., an individual (“Executive”), and shall be effective as of April 15, 2004 (the “Effective Date”).

Preliminary Statements

        Executive and Employer desire to terminate any employment agreement between the Executive and Employer existing prior to the Effective Date.

        Executive desires to be employed by Employer upon the terms and conditions stated herein, and Employer desires to employ Executive provided that, in so doing, it can protect its confidential information, business, accounts, patronage and goodwill.

        Employer and Executive have specifically determined that the terms of this Agreement are fair and reasonable.

Statement of Agreement

        NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, and for other good, valuable and binding consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:

ARTICLE I.

Term; Termination; Prior Agreements.

        Section 1.1 Term. Employer hereby hires Executive and Executive accepts such employment for a term beginning on the Effective Date and ending on April 15, 2007.

        Section 1.2 Termination Upon Expiration. Unless earlier terminated by Employer or Executive in accordance with the terms of this Agreement, this Agreement shall terminate automatically upon the expiration of the term described in Section 1.1. While this Agreement will terminate upon expiration of the term as provided in the preceding sentence, if Employer and Executive then mutually agree in writing (which neither is under any obligation whatsoever to do), Employer and Executive may elect to continue the employment relationship on an “at will” basis (and such relationship will not be governed by this Agreement) or extend the terms of this Agreement.

         Section 1.3 Termination Upon Death or Permanent Disability. This Agreement shall be automatically terminated on the death of Executive or on the permanent disability of Executive if Executive is no longer able to perform in all material respects the usual and customary duties of Executive’s employment hereunder. For purposes hereof, a disability shall be deemed permanent if, in the medical opinion of a licensed physician selected by the Company and subsequently confirmed by a licensed physician selected by Executive (or Executive’s guardian), the disability could reasonably be expected to impair Executive’s ability to materially perform Executive’s duties hereunder during any period of one hundred twenty calendar days or more.

        Section 1.4 Termination for Cause. If this Agreement has not been previously terminated, and no party has previously given notice of termination pursuant to Section 1.5, Section 1.6 or Section 1.7, then Employer may terminate this Agreement “For Cause” if:

                (a)        in connection with the business of Employer, Executive is convicted of an offense constituting a felony, theft, or embezzlement; or

                (b)        in a material and substantial way, (i) Executive (A) violates any lawful written policy of Employer that applies uniformly to all employees of Employer that are similarly situated and that is not intended to demean Executive, (B) violates any provision of this Agreement, (C) fails to follow reasonable written instructions or directions from the managers of Employer (the “Board”), which instructions are consistent with Executive’s job title and are not intended to demean Executive, or (D) fails to use reasonable good-faith efforts to perform the services required pursuant to this Agreement; and (ii) Executive fails to materially cure such violation or failure within twenty days after receiving written notice from the Board clearly specifying the act or circumstances that gave rise to such violation or failure.

        A notice of termination pursuant to this Section shall be in writing and shall state the alleged reason for termination. If Employer is not reasonably satisfied with the result of any cure effort by Executive, or if Executive contests the allegations of fact in the notice of termination, then Executive, within not less than fifteen nor more than thirty days after such notice or after the end of the cure period, shall be given the opportunity to appear before the Board, or a committee thereof, to rebut or dispute the alleged reason for termination. If the Board or committee determines in good faith, after having given Executive the opportunity to rebut or dispute the allegations, that such reason is indeed valid, Employer may immediately terminate Executive’s employment under this Agreement “For Cause.” Immediately upon giving the notice contemplated by this paragraph, Employer may elect, during the pendency of such inquiry, to place Executive on paid leave of absence pursuant to which Executive is relieved of his regular duties until the inquiry is completed.

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        Section 1.5 Termination for Good Reason. If this Agreement has not been previously terminated, and no party has previously given notice of termination pursuant to Section 1.4, then Executive is entitled to terminate this Agreement for “Good Reason,” with twenty days prior written notice, upon any of the following occurrences:

                (a)        Within six months following any Change of Control, Executive may terminate this Agreement, for any or no reason, provided that notice of termination cannot be given prior to the consummation of the Change of Control;

                (b)        Executive may terminate this Agreement if Executive’s base salary, as provided hereunder, is diminished;

                (c)        Executive may terminate this Agreement upon any material reduction in the benefits Executive is entitled to receive under this Agreement;

                (d)        Executive may terminate this Agreement upon any material and substantial breach by Employer under this Agreement, but only if Employer fails to materially cure such breach within twenty days after receiving written notice from Executive clearly specifying the act or circumstances that constitute such breach;

                (e)        Executive may terminate this Agreement if Employer shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official over it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall take any corporate action to authorize any of the foregoing.

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        Executive agrees that Employer can relieve Executive of Executive’s duties hereunder prior to the end of the applicable notice period provided for in this Section.

        As used in this Agreement, “Change of Control” shall mean the occurrence of any of the following:

                (a)     Any person, entity or “group” within the meaning of § 13(d) or 14(d) of the Securities and Exchange Act of 1934 (the “Exchange Act”) becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of the Board;

                (b)     a merger, reorganization or consolidation whereby Employer’s equity holders existing immediately prior to such merger, reorganization or consolidation do not, immediately after consummation of such reorganization, merger or consolidation, own more than 50% of the combined voting power of the surviving entity’s then outstanding voting securities entitled to vote generally in the election of directors;

                (c)     the sale of all or substantially all of Employer’s assets to an entity in which Employer, any subsidiary of Employer, or Employer’s equity holders existing immediately prior to such sale beneficially own less than 50% of the combined voting power of such acquiring entity’s then outstanding voting securities entitled to vote generally in the election of directors;

                (d)     any change in the identity of directors constituting a majority of the Board within a twenty-four month period unless the change was approved by a majority of the Incumbent Directors, where “Incumbent Director” means a member of the Board at the beginning of the period in question, including any director who was not a member of the Board at the beginning of such period but was elected or nominated to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors; or

4

                (e)     any sale, in a single transaction or series of directly related transactions, of greater than fifty percent of the business conducted by Employer’s Urology Division, determined by comparing (i) the Urology Division’s trailing twelve months’ revenues at the time of the sale, determined in accordance with generally accepted accounting principles consistently applied against (ii) the same trailing twelve months’ revenues reduced in amount by the revenues attributable to the assets and business disposed of in the sale and increased in amount by the historical revenues over the corresponding period of any assets or business that Employer acquires for the Urology division at the time of the sale (or intends to acquire at the time of the sale if such acquisition is closed within 60 days of the sale).

        Section 1.6 Termination of Agreement by Employer Without Cause. Employer has the right to terminate this Agreement, other than “for cause,” on 30 days prior written notice. Any termination of this Agreement by Employer other than pursuant to the express terms of Section 1.2, Section 1.3 or Section 1.4 shall be deemed a termination pursuant to this Section, irrespective of whether the notice required under this Section is properly given.

        Section 1.7 Termination of Agreement by Executive Without Good Reason. Executive may terminate Executive’s employment, other than for “good reason,” upon thirty days prior written notice stating that this Agreement is terminated other than for “good reason”. Executive agrees that Employer can relieve Executive of Executive’s duties hereunder prior to the end of such thirty-day notice period, and in such event, Executive shall not thereafter be entitled to any of the benefits or salary described in Article III hereof.

         Section 1.8 Executive's Rights Upon Termination. Upon termination of this Agreement, Executive shall be entitled to the following:

                (a)        If this Agreement is terminated pursuant to Section 1.2, Section 1.3, Section 1.4, or Section 1.7, then Employer shall (i) pay Executive or Executive’s representative, as the case may be, Executive’s then-current base salary (excluding any bonuses and non-cash benefits) through the effective date of termination, and (ii) extend an offer of COBRA benefits to Executive in the manner and to the extent required by applicable law. If this Agreement is terminated pursuant to Section 1.2 or Section 1.3, then, in addition to the provisions of the preceding sentence, Employer shall pay Executive or Executive’s representative, as the case may be, the pro rata portion of any bonus that would otherwise have been payable to Executive during the annual bonus period in which the Agreement is terminated, based only on the performance levels from the beginning of such bonus period to the date of termination. Employer shall have no further obligations hereunder.

5

                (b)        If Executive terminates this Agreement for Good Reason pursuant to Section 1.5, or Employer terminates this Agreement other than “for cause” pursuant to Section 1.6, then, in addition to receiving Executive’s then current base salary through the effective date of termination, Executive (i) shall receive within 15 days of the effective date of termination a lump-sum payment equal to (A) 200% of Executive’s then-current annualized base salary, and (B) cash bonuses, if any, paid by Employer to Executive during the preceding two years, and (ii) Employer shall extend an offer of COBRA benefits to Executive in the manner and to the extent required by applicable law and shall pay the premiums for such benefits. Executive and Employer agree that the effective date of any termination pursuant to Section 1.5 shall be the earlier of the end of the applicable notice period, if any, or the date on which Employer relieves Executive of Executive’s duties hereunder.

        Section 1.9 Survival. Any termination of this Agreement and Executive’s employment as a result thereof shall not release either Employer or Executive from their respective obligations to the date of termination nor from the provisions of this Agreement which, by necessary or reasonable implication, are intended to apply after termination of this Agreement, including, without limitation, the provisions of Article IV and V.

        Section 1.10 Termination of Existing Agreements. Any previous employment agreement between Executive on the one hand and Employer or any of Employer’s Affiliates (as hereinafter defined) on the other hand is hereby terminated.

6

ARTICLE II.

Duties of Executive

        Subject to the approvals by and the ultimate supervision of the Board, Executive during the term hereof shall serve as President — Urology. Subject to the control of the Board, Executive shall have the responsibilities commensurate with Executive’s title and as otherwise provided in Employer’s regulations and other governing documents.

        During the period of employment hereunder, Executive shall devote substantially all of Executive’s professional time and reasonable best efforts to the business of Employer for the profit, benefit and advantage of Employer, and shall perform such other services as shall be lawfully designated, from time to time, by the Board to the extent such other services (a) are consistent with Executive’s title and duties assigned to other employees who are situated similarly with Executive and (b) are not intended to demean Executive; provided, however, that this Section shall not be construed as preventing Executive from investing Executive’s personal assets in business ventures that do not compete with Employer or are not otherwise prohibited by this Agreement, and spending reasonable amounts of personal time in the management thereof. Without otherwise limiting the provisions of this Section and Article IV, Employer acknowledges that Executive may continue to serve as the Medical Director of Carolina Lithotripsy and perform such duties and receive such compensation therefor as (a) has been described in written documentation delivered to Employer prior to execution of this Agreement and (b) is consistent with the scope of his engagement existing prior to the execution of this Agreement. Executive shall use Executive’s reasonable best efforts to promote the interests of Employer, and to preserve Employer’s goodwill with respect to Employer’s employees, customers, suppliers and other persons having business relations with Employer. For purposes of this Agreement, Employer’s subsidiaries, parent companies and other affiliates are collectively referred to as “Affiliates.”

ARTICLE III.

Salary; Expense Reimbursements

        Section 3.1 Salary. As compensation for Executive’s service under and during the term of this Agreement (or until terminated pursuant to the provisions hereof) Employer shall pay Executive a salary of $275,000 per calendar year (prorated for partial years), payable in accordance with the regular payroll practices of Employer, as in effect from time to time. Such salary shall be subject to withholding for the prescribed federal income tax, social security and other items as required by law and for other items consistent with Employer’s policy with respect to health insurance and other benefit plans for similarly situated employees of Employer in which Executive may elect to participate. Such salary may not be decreased during the term of this Agreement but may, in the sole discretion of the Board, be increased.

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        Section 3.2 Other Benefits. During the term of this Agreement, Executive also shall be entitled to four weeks of paid vacation per year and all regular holidays recognized by Employer. Unless otherwise approved in writing in advance by Employer, Executive will not be paid for unused vacation, and unused vacation cannot be carried forward to subsequent years. Executive shall have use of a corporate apartment located in reasonable proximity to Employer’s Atlanta premises, leased and appropriately furnished by Employer (with the location to be mutually agreed between Employer and Executive). Employer shall reimburse Executive for all actual moving expenses incurred to move furnishings that Executive wishes to locate at the Atlanta corporate apartment (excluding the cost of the furnishings). Executive shall have use of an Employer vehicle while in Atlanta. Without limiting the foregoing, Executive shall also receive such paid sick leave, insurance and other fringe benefits as are generally made available to other personnel of Employer who may become employed in comparable positions with comparable duties and responsibilities.

        Section 3.3 Bonuses. In the discretion of Employer, and without implying any obligation on Employer ever to award a bonus to Executive, Executive may from time to time be awarded a cash bonus or bonuses for services rendered to Employer during the term of Executive’s employment under this Agreement. If and to the extent a bonus is ever considered for Executive, it is expected that any such bonus will be based not only on Executive’s individual performance and Executive’s relative position, service tenure and responsibilities with Employer, but also on the performance and profitability of the entire business of Employer.

        Section 3.4 Expenses. Employer shall reimburse all reasonable out-of-pocket travel and business expenses incurred by Executive in connection with the performance of Executive’s duties pursuant to this Agreement. Executive shall provide Employer with documentation of Executive’s expenses, in a form acceptable to Employer and which satisfies applicable federal income tax reporting and record keeping requirements.

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        Section 3.5 Travel. Employer acknowledges that Executive may maintain his current home of Fayetteville, North Carolina as his primary residence, subject to Executive traveling to and from Employer’s Atlanta premises weekly (once reasonably appropriate divisional executive office space is established) with weekdays spent at the Atlanta premises (unless Executive’s duties require travel elsewhere). The parties acknowledge and agree that Executive’s employment duties hereunder will require significant amounts of travel.

ARTICLE IV.

Executive’s Restrictive Covenants

        Section 4.1 Confidentiality Agreement. Executive acknowledges that Executive has been exposed to, and Employer agrees that it will continue to expose Executive to, confidential information and trade secrets (“Proprietary Information”) pertaining to, or arising from, the business of Employer and/or Employer’s subsidiaries, that such Proprietary Information is unique and valuable and that Employer and/or Employer’s subsidiaries would suffer irreparable injury if this information were divulged to those in competition with Employer or Employer’s subsidiaries. Therefore, Executive agrees to keep in strict secrecy and confidence, both during and after the period of Executive’s employment, any and all Proprietary Information. Proprietary Information shall not include information that has been publicly disclosed by Employer or Employer’s subsidiaries, is a matter of common knowledge by their respective competitors, or is in the public domain (in each case except to the extent resulting from action by Executive). The Proprietary Information covered by this Agreement shall include, but shall not be limited to, information relating to any inventions, processes, software, formulae, plans, devices, compilations of information, technical data, mailing lists, management strategies, business distribution methods, names of suppliers (of both goods and services) and customers, names of employees and terms of employment, arrangements entered into with suppliers and customers, including, but not limited to, proposed expansion plans of Employer, marketing and other business and pricing strategies, and trade secrets of Employer and/or Employer’s subsidiaries.

        Except with prior approval of the Board, or except as required through legal process, Executive will not, either during or after Executive’s employment hereunder: (a) directly or indirectly disclose any Proprietary Information to any person except authorized personnel of Employer or an Affiliate; nor, (b) use Proprietary Information in any manner other than in furtherance of the business of Employer. Upon termination of employment (whether voluntary or involuntary, For Cause, for Good Reason, or without cause), Executive will deliver to Employer within forty-eight hours of termination (without retaining copies thereof) all documents, records or other memorializations including copies of documents and any notes which Executive has prepared, that contain Proprietary Information or relate to Employer’s or Employer’s subsidiaries’ business, all other tangible Proprietary Information in Executive’s possession or control, and all of Employer’s and the subsidiaries’ credit cards, keys, equipment, vehicles, supplies and other materials that are in possession or under Executive’s control.

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        Section 4.2 Nonsolicitation Agreement. During Executive’s employment hereunder, Executive shall not, directly or indirectly, for Executive’s own account or otherwise (i) solicit business from, divert business from, or attempt to convert to other methods of using the same or similar products or services as provided by Employer or its subsidiaries, any client, account or location of Employer or Employer’s subsidiaries with which Executive has had any contact as a result of Executive’s employment hereunder; or (ii) solicit for employment or employ any employee or former employee of Employer or Employer’s subsidiaries.

ARTICLE V.

Remedies

        Executive understands and agrees that damages at law alone will be an insufficient remedy for Employer and Employer will suffer irreparable injury if Executive violates the terms of Article IV. Accordingly, Employer, upon application to a court of competent jurisdiction, shall be entitled to injunctive relief to enforce the provisions of Article IV in the event of any breach, or threatened breach, of its terms. Executive hereby waives any requirement that Employer post bond or other security prior to obtaining such injunctive relief. Injunctive relief may be sought in addition to any other available rights or remedies at law. Employer shall additionally be entitled to reasonable attorneys’ fees incurred in enforcing any provision of this Agreement.

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ARTICLE VI.

Miscellaneous

        Section 6.1 Assignment. Except for an assignment by Employer in connection with a sale of substantially all of its assets and business, no party to this Agreement may assign this Agreement or any or all of its rights or obligations hereunder without first obtaining the written consent of all other parties hereto. Any assignment in violation of the foregoing shall be null and void. Subject to the preceding sentences of this Section, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, legal representatives, successors and permitted assigns. This Agreement shall not be deemed to confer upon any person not a party to this Agreement any rights or remedies hereunder.

         Section 6.2 Amendments. This Agreement cannot be modified or amended except by a written agreement executed by all parties hereto.

        Section 6.3 Waiver of Provisions; Remedies Cumulative. Any waiver of any term or condition of this Agreement must be in writing, and signed by all of the parties hereto. The waiver of any term or condition hereof shall not be construed as either a continuing waiver with respect to the term or condition waived, or a waiver of any other term or condition hereof. No party hereto shall by any act (except by written instrument pursuant to this Section), delay, indulgence, omission or otherwise be deemed to have waived any right, power, privilege or remedy hereunder or to have acquiesced in any default in or breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of any party hereto, any right, power, privilege or remedy hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power, privilege or remedy hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power, privilege or remedy. No remedy set forth in this Agreement or otherwise conferred upon or reserved to any party shall be considered exclusive of any other remedy available to any party, but the same shall be distinct, separate and cumulative and may be exercised from time to time as often as occasion may arise or as may be deemed expedient.

        Section 6.4 Entire Agreement. This Agreement (a) constitutes the entire agreement of the parties hereto regarding the Executive’s employment by Employer, and (b) supersedes all prior agreements and understandings, both written and oral, among the parties hereto, or any of them, with respect to Executive’s employment by Employer.

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        Section 6.5 Severability; Illegality. In the event any state or federal laws or regulations, now existing or enacted or promulgated after the date hereof, are interpreted by judicial decision, a regulatory agency or Employer’s legal counsel in such a manner as to indicate that any provision hereof may be illegal, invalid or unenforceable, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement a provision that (a) preserves the underlying economic and financial arrangements between the parties hereto without substantial economic detriment to any particular party and (b) is as similar in effect to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. No party to this Agreement shall claim or assert illegality as a defense to the enforcement of this Agreement or any provision hereof; instead, any such purported illegality shall be resolved pursuant to the terms of this Section.

        Section 6.6 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS OF LAWS) OF THE STATE OF TEXAS.

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        Section 6.7 Language Construction. This Agreement shall be construed, in all cases, according to its fair meaning, and without regard to the identity of the person who drafted the various provisions contained herein. The parties acknowledge that each party and its counsel have reviewed and revised this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation hereof. As used in this Agreement, “day” or “days” refers to calendar days unless otherwise expressly stated in each instance. The captions in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. When the context requires, the gender of all words used herein shall include the masculine, feminine and neuter and the number of all words shall include the singular and plural. Use of the words “herein”, “hereof”, “hereto”, “hereunder” and the like in this Agreement shall be construed as references to this Agreement as a whole and not to any particular Article, Section or provision of this Agreement, unless otherwise expressly noted.

        Section 6.8 Notice. Whenever this Agreement requires or permits any notice, request, or demand from one party to another, the notice, request, or demand must be in writing to be effective and shall be deemed to be delivered and received (a) if personally delivered or if delivered by facsimile, when actually received by the party to whom notice is sent or (b) if delivered by mail (whether actually received or not), at the close of business on the third business day next following the day when placed in the mail, postage prepaid, certified or registered, addressed to the appropriate party or parties, at the address of such party set forth below (or at such other address as such party may designate by written notice to all other parties in accordance herewith):

     If to Employer:
                           
                           
                            Prime Medical Services, Inc.
1301 Capital of Texas Hwy, Suite C-300
Austin, TX 78746
Attention: President

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     If to Executive:
                         
                          Joseph M. Jenkins, M.D.
2848 Skye Drive
Fayetteville, NC 28303

         Section 6.9 ARBITRATION; ATTORNEYS' FEES. EMPLOYER AND EXECUTIVE AGREE AS FOLLOWS:

                (A)        IN GENERAL. ANY CLAIM OR CONTROVERSY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY BREACH OF THIS AGREEMENT, OTHER THAN AN ACTION TO ENFORCE THE PROVISIONS OF ARTICLES IV OR V, SHALL BE SETTLED BY FINAL AND BINDING ARBITRATION IN THE CITY OF DALLAS, TEXAS, IN ACCORDANCE WITH THE COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION IN EFFECT ON THE DATE THE CLAIM OR CONTROVERSY ARISES.

                (B)        PROCEDURE. ALL CLAIMS OR CONTROVERSIES SUBJECT TO ARBITRATION UNDER THIS AGREEMENT SHALL BE SUBMITTED TO AN ARBITRATION HEARING WITHIN THIRTY DAYS AFTER WRITTEN NOTICE OF THE CLAIM OR CONTROVERSY IS FIRST COMMUNICATED TO EITHER PARTY. ALL CLAIMS OR CONTROVERSIES SHALL BE RESOLVED BY A PANEL OF THREE ARBITRATORS SELECTED IN ACCORDANCE WITH THE APPLICABLE COMMERCIAL ARBITRATION RULES. THE ARBITRATORS SHALL ISSUE A WRITTEN DECISION WITH RESPECT TO ALL CLAIMS OR CONTROVERSIES SUBMITTED UNDER THIS SECTION WITHIN THIRTY DAYS AFTER THE COMPLETION OF THE ARBITRATION HEARING. THE PARTIES ARE ENTITLED TO BE REPRESENTED BY LEGAL COUNSEL AT ANY ARBITRATION HEARING, AND EACH PARTY SHALL BE RESPONSIBLE FOR ITS OWN ATTORNEYS’ FEES. EXCEPT FOR ATTORNEYS’ FEES AND RELATED DISBURSEMENTS, THE PARTIES AGREE TO EQUALLY SPLIT THE ACTUAL DIRECT COSTS OF THE ARBITRATION PROCEEDING. THE ARBITRATORS SHALL AWARD PUNITIVE OR EXEMPLARY DAMAGES.

                (C)        ENFORCEMENT. THE PARTIES AGREE THAT EITHER PARTY MAY SPECIFICALLY ENFORCE THIS SECTION, AND SUBMISSION TO ARBITRATION MAY BE COMPELLED BY ANY COURT OF COMPETENT JURISDICTION. THE PARTIES FURTHER ACKNOWLEDGE AND AGREE THAT THE DECISION OF THE ARBITRATORS MAY BE SPECIFICALLY ENFORCED BY EITHER PARTY IN ANY COURT OF COMPETENT JURISDICTION.

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         Section 6.10 Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument.

[Signature page follows]

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SIGNATURE PAGE TO
EXECUTIVE EMPLOYMENT AGREEMENT

        EXECUTED by Employer and Executive to be effective for all purposes as of the Effective Date provided above.

EMPLOYER:


                                      
                                      

EXECUTIVE:

                                      
                                       PRIME MEDICAL SERVICES, INC.


____________________________________________
Brad A. Hummel, President and Chief Executive Officer



____________________________________________
Joseph M. Jenkins, M.D.

S-1

EX-10

EXHIBIT 10.2

DRAFT

For Discussion Purposes ONLY

SAMPLE COMPANY

DEFERRED COMPENSATION PLAN

DATE

DRAFT

For Discussion Purposes ONLY

SAMPLE COMPANY

DEFERRED COMPENSATION PLAN

TABLE OF CONTENTS

SECTION 1 INTRODUCTION AND DEFINITIONS

   1.1. Statement of Plan

   1.2. Definitions

      1.2.1. Account

      1.2.2. Affiliate

      1.2.3. Annual Valuation Date

      1.2.4. Base Salary

      1.2.5. Beneficiary

      1.2.6. Board of Directors

      1.2.7. Bonus

      1.2.8. Change in Control

      1.2.9. Code

      1.2.10. Committee

      1.2.11. Common Stock

      1.2.12. Consideration Shares

      1.2.13. Disabled or Disability

      1.2.14. Early Retirement Date

      1.2.15. Effective Date

      1.2.14. Employer

      1.2.16. Employer Discretionary Contribution

      1.2.17. Enrollment Period

      1.2.18. ERISA

      1.2.19. Hours of Service

      1.2.20. Normal Retirement Date

      1.2.21. Participant

      1.2.22. Plan

      1.2.23. Plan Year

      1.2.24 Termination of Employment

      1.2.25 Trust          1

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DRAFT

For Discussion Purposes ONLY

      1.2.26. Valuation Date

      1.2.27. Years of Service

   1.3. Gender

      1.3.1. Gender and Number


SECTION 2 PARTICIPATION

   2.1. Who May Participate

      2.1.1. Eligible Participant

      2.1.2. Terms and Conditions of Participation

      2.1.3. Termination of Participation

      2.1.4. Change in Employment Status


SECTION 3 CREDITS TO ACCOUNTS

   3.1. Voluntary Deferrals from Salary

      3.1.1. Amount of Deferrals

      3.1.2. Additional Credits

      3.1.3. Crediting to Accounts

   3.2. Voluntary Deferrals from Bonuses

      3.2.1. Amount of Deferrals

      3.2.2. Crediting to Accounts

   3.3. Employer Discretionary Contribution

   3.4. Credits from Measuring Investments

   3.5. Operational Rules for Deferrals


SECTION 4 STOCK OPTION GAIN DEFERRAL

   4.1.

   4.2. Timing of Filing Stock Option Gain Deferral Agreement

   4.3. Contents of Stock Option Gain Deferral Agreement

   4.4. Manner of Exercising Option Shares

   4.5. Determiinatiion of Gain Shares

   4.6. Conversion of Gain Shares to Phantom Share Units

   4.7. Changes to the Stock Option Gain Deferral Agreement

   4.8. Failure to Properly Exercise

   4.9. Deliver of Gain Shares           3

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ii

DRAFT

For Discussion Purposes ONLY

SECTION 5 ADJUSTMENT OF ACCOUNTS

   5.1. Establishment of Accounts

   5.2. Accounting Rules


SECTION 6 VESTING OF ACCOUNTS

   6.1. Participation Deferrals

   6.2. Employer Discretionary Contributions

   6.3. Exceptions to Vesting Schedule.


SECTION 7 SPENDTHRIFT PROVISION


SECTION 8 DISTRIBUTIONS

   8.1. Time of Distribution

      8.1.1. Application for Distribution

      8.1.2. Code §162(m) Delay

   8.2. Benefit Upon Normal or Early Retirement

      8.2.1. Form of Distribution

      8.2.2. Manner and Time of Election

      8.2.3.Calculation of Installment Amounts

   8.3. Key Employees

   8.4. Benefit Upon Termination of Employment

   8.5. Payment to Beneficiary

      8.5.1. Pre-Retirement Death Benefit

      8.5.2. Post-Retirement Death Benefit

   8.6. Designation of Beneficiaries

      8.6.1. Right to Designate

      8.6.2. Failure of Designation

      8.6.3. Disclaimers by Beneficiaries

   8.7. Death Prior to Full Distribution

   8.8. Facility of Payment

   8.9. In-Service Distribution for Financial Hardship

   8.10.Effect of Disability

   8.11. Distributions in Cash


SECTION 9 FUNDING OF PLAN         8

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iii

DRAFT

For Discussion Purposes ONLY

   9.1. Unfunded Plan

   9.2. Corporate Obligation


SECTION 10 AMENDMENT AND TERMINATION

   10.1 Amendment and Termination

   10.2 No Oral Amendments

   10.3 Plan Binding on Successors


SECTION 11 DETERMINATIONS - RULES AND REGULATIONS

   11.1. Determinations

   11.2. Rules and Regulations

   11.3. Method of Executing Instruments

   11.4. Claims Procedure

      11.4.1. Original Claim

      11.4.2. Review of Denied Claim

      11.4.3. General Rules

   11.5. Limitations and Exhaustion

      11.5.1. Limitations

      11.5.2. Exhaustion Required


SECTION 12 PLAN ADMINISTRATION

   12.1. Officers

   12.2. Board of Directors

   12.3. Committee

   12.4. Delegation

   12.5. Conflict of Interest

   12.6. Administrator

   12.7. Service of Process

   12.8. Expenses

   12.9. Tax Withholding

   12.10. Certifications

   12.11. Errors in Computations


SECTION 13 CONSTRUCTION

   13.1. Applicable Laws         12

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iv

DRAFT

For Discussion Purposes ONLY

      13.1.1. ERISA Status

      13.1.2. IRC Status

      13.1.3. References to Laws

   13.2. Effect on Other Plans

   13.3. Disqualification

   13.4. Rules of Document Construction

   13.5. Choice of Law

   13.6. No Employment Contract        18

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v

DRAFT

For Discussion Purposes ONLY

SAMPLE COMPANY

DEFERRED COMPENSATION PLAN

SECTION 1

INTRODUCTION AND DEFINITIONS

1.1.     Statement of Plan. Effective Date, SAMPLE COMPANY, a STATE corporation (hereinafter sometimes referred to as the “Sponsor”) and all affiliated business entities, referred to as the “Employers,” hereby create a nonqualified, unfunded, deferred compensation plan for the benefit of a select group of management and highly compensated employees of the Employers.

1.2.     Definitions. When the following terms are used herein with initial capital letters, they shall have the following meanings:

        1.2.1.     Account means the separate bookkeeping account representing the separate unfunded and unsecured general obligation of the Employers established with respect to each person who is a Participant in this Plan in accordance with Section 2 and to which is credited the dollar amounts specified in Section 3 and Section 4 and from which are subtracted payments made pursuant to Section 7.

        1.2.2.     Affiliate means a business entity which is affiliated in ownership with the Sponsor either directly or indirectly, and is recognized as an Affiliate by the Committee for purposes of this Plan.

        1.2.3.     Annual Valuation Date means each December 31.

        1.2.4.     Base Salary means, with respect to a Participant, such Participant’s annual rate of base salary, plus commissions paid to such Participant by his Employer before reduction because of salary deferrals into this Plan or any other plan or arrangement of the Employer whereby compensation is deferred, including, without limitation, a plan whereby compensation is reduced in accordance with Code Section 401(k) or Code Section 125. Base salary shall exclude all other remuneration paid by the Participant’s Employer, such as Bonuses, stock options, distributions of compensation previously deferred, restricted stock, allowances for expenses (including moving, travel expenses and automobile expenses) and fringe benefits payable in a form other than cash.

        1.2.5.     Beneficiary means a person designated by a Participant (or automatically by operation of the Plan) to receive all or a part of the Participant’s Account in the event of the Participant’s death prior to full distribution thereof. A person so designated shall not be considered a Beneficiary until the death of the Participant.

1

DRAFT

For Discussion Purposes ONLY

        1.2.6.     Board of Directors means the Board of Directors of the Sponsor or its successor. “Board of Directors” shall also mean and refer to any properly authorized committee of the Board of Directors.

        1.2.7.     Bonus means, with respect to a Participant, the total cash remuneration paid or payable under the various annual management bonus programs (“annual bonuses”) by an Employer to such individual, including any amount which would be included in the definition of Bonus, but for the individual’s election to defer some or all of his or her annual bonus pursuant to this Plan; but excluding any other remuneration paid by such Participant’s Employer, such as base salary, commissions, stock options, distributions of compensation previously deferred, restricted stock, allowances for expenses (including moving, travel expenses and automobile allowances), and fringe benefits payable in a form other than cash.

        1.2.8.     Change of Control shall have the meaning ascribed such term under the Trust.

        1.2.9.     Code means the Internal Revenue Code of 1986, as amended.

        1.2.10.     Committee means the Compensation Committee of the Sponsor appointed by and serving at the direction of the Board of Directors.

        1.2.11.     Common Stock means Common Stock means the common stock of Sample Company.

        1.2.12.     Consideration Shares means the shares of Common Stock owned by a Participant for six months or longer

        1.2.13.     Disabled or Disability, with respect to a Participant, shall have the same definition as in the Employer’s existing long term disability insurance program, or in the absence of such program or if a Participant is not eligible to participate in such program, then any disability which the Committee, in its discretion, reasonably expects will qualify such individual for disability benefits under the Social Security Act.

        1.2.14.     Early Retirement Date means the last day of the calendar month in which the Participant reaches the age of 55 while in the employ of the Employer or if later, completes at least ten (10) years of service with the Employer.

        1.2.15.     Effective Date means Date.

        1.2.16.     Employer means the Sponsor and any Affiliate that employs persons who are designated for participation in this Plan.

        1.2.17.     Employer Discretionary Contribution means the amounts contributed to the Plan in accordance with Section 3.3.

        1.2.18.     Enrollment Period means the period of time designated by the Committee prior to the first day of each Plan Year (or the initial enrollment date in the case of new Participants) during which an eligible person may elect to participate in the Plan.

2

DRAFT

For Discussion Purposes ONLY

        1.2.19.     ERISA means the Employee Retirement Income Security Act of 1974, as amended.

        1.2.20.     Hours of Service means hours of service determined in accordance with the provisions of the existing Sample Company 401 (k) Plan.

        1.2.21.     Key Employee is defined under Code section 416(i) as a top-50 officer with compensation in excess of $130,000, a 5-percent owner, or a 1-percent owner with compensation in excess of $150,000.

        1.2.22.     Normal Retirement Date means the last day of the calendar month in which the Participant reaches the age of 65 while in the employ of the Employer.

        1.2.23.     Participant means an employee of an Employer who is designated as eligible to participate in this Plan in accordance with the provisions of Section 2 and who has elected to defer compensation under Section 3. An employee who has become a Participant shall be considered to continue as a Participant in this Plan until the date of the Participant’s death or, if earlier, the date when the Participant no longer has any Account under this Plan (that is, the Participant has received a distribution of all of the Participant’s Account).

        1.2.24.     Plan means the Sample Company Deferred Compensation Plan, as amended from time to time.

        1.2.25.     Plan Year means the twelve (12) consecutive month period ending on each Annual Valuation Date.

        1.2.26.     Termination of Employment means a complete severance of an employee’s employment relationship with the Employers and all Affiliates, for any reason other than the employee’s death. A transfer from employment with an Employer to employment with an Affiliate of an Employer shall not constitute a Termination of Employment. If an Employer who is an Affiliate ceases to be an Affiliate because of a sale of substantially all the stock or assets of the Employer, then Participants who are employed by that Employer and who cease to be employed by a participating Employer in this Plan on account of the sale of substantially all the stock or assets of the Employer shall be deemed to have thereby had a Termination of Employment for the purpose of commencing distributions from this Plan.

        1.2.27.     Trust means the Sample Company Deferred Compensation Trust Agreement, as amended from time to time.

        1.2.28.     Valuation Date means the business day coincident with or next preceding the Annual Valuation Date and the last business day of each other month, and any other date designated by the Committee in its discretion.

        1.2.29.     Years of Service means the number of consecutive Plan Years (including years prior to the effective date of this Plan) for which the Participant had at least 1,000 hours of service.

3

DRAFT

For Discussion Purposes ONLY

1.3.     Gender.

        1.3.1.     Gender and Number. Except as otherwise indicated by context, masculine terminology used herein also includes the feminine and neuter, and terms used in the singular may also include the plural.

SECTION 2

PARTICIPATION

2.1.     Who May Participate.

        2.1.1.     Eligible Participant. Only an employee of an Employer who is eligible for the Plan and who is selected for participation in this Plan for a particular Plan Year by the Committee shall be eligible to become a Participant in this Plan.

        2.1.2.     Terms and Conditions of Participation. Such selected employee shall be eligible to become a Participant as of the day designated by the Committee (or, if the Committee does not designate a day of initial participation, as of the first day of the next following Plan Year). The Committee shall not select any employee for participation unless the Committee determines that such employee is a member of a select group of management or highly compensated employees (as that expression is used in ERISA). The Committee may at any time determine that a Participant is no longer eligible to make voluntary deferrals under Section 3.1 or Section 3.2.

        2.1.3.     Termination of Participation. Once an individual has become a Participant in the Plan, participation shall continue until the first to occur of (i) payment in full of all benefits to which the Participant or Beneficiary is entitled under the Plan, or (ii) the occurrence of an event specified in Section 2.1.4. which results in loss of benefits.

        2.1.4.     Change in Employment Status. If a Participant has a change in his or her employment responsibilities, title and/or compensation, such that the Participant would not qualify for initial participation in the Plan as determined by the Committee, the Committee shall have the right to (i) terminate any deferral election the Participant has made for the remainder of the Plan Year in which such Participant’s membership status changes, (ii) prevent such Participant from making future deferral elections and receiving Employer contributions, and/or (iii) immediately distribute the Participant’s benefit in the Plan. A Participant whose participation in the Plan has terminated as a result of his change in employment responsibilities, title and/or compensation shall not be eligible to recommence participation in the Plan unless and until the Participant again qualifies for participation.

SECTION 3

CREDITS TO ACCOUNTS

3.1.     Voluntary Deferrals from Salary.

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        3.1.1.     Amount of Deferrals. On forms furnished by and filed with the Committee, a Participant may elect to defer between (and including) 1% and 90% of such Participant’s base salary for a Plan Year. The Committee or Board of Directors may establish prospectively other limits or other pay eligible for deferral. To be effective for a Plan Year, the form must be received by the Committee during the Enrollment Period.

        3.1.2.      Additional Credits. As a condition of participating in this Plan, each Participant shall be deemed to have elected to defer under this Plan the receipt of any amounts that become distributable to such Participant by reason of the Employer’s 401(k) savings plan exceeding the applicable limitations on elective deferrals and/or matching contributions under Code Sections 402(g), 401(k)(3) or 401(m)(2) and the Treasury regulations issued thereunder. Any such amounts deferred pursuant to the foregoing shall be treated in the same manner as the Participant’s deferral amounts under Section 3.1.1.

        3.1.3.     Crediting to Accounts. The Committee shall cause to be credited to the Account of each Participant the amount, if any, of such Participant’s voluntary deferrals of base salary or other pay under Section 3.1.1. Such amount shall be credited within three business days of the date on which such salary or other pay would otherwise have been paid to the Participant.

3.2.     Voluntary Deferrals from Bonuses.

        3.2.1.     Amount of Deferrals. On forms furnished by and filed with the Committee, a Participant may elect to defer up to 100% of such Participant’s bonus. The Committee or Board of Directors may establish prospectively other limits or other bonuses eligible for deferral. To be effective, a bonus deferral election must be received by the Committee prior to the first day of the Plan Year (or such earlier deadline) during which such bonus is otherwise payable.

        3.2.2.      Crediting to Accounts. The Committee shall cause to be credited to the Account of each Participant the amount, if any, of such Participant’s voluntary deferrals of bonus under Section 3.2.1. Such amount shall be credited within three business days of the date in which such bonus would otherwise have been paid to the Participant.

3.3.     Employer Discretionary Contribution. Each Employer who has Participants in the Plan may at the total discretion of each such Employer, choose to make additional contributions to the Participants in the Plan. Any Employer Discretionary Contributions to the Plan shall be subject to the vesting rules of Section 5.

3.4.     Credits from Measuring Investments. On forms furnished by and filed with the Committee prior to the first day of each month, each Participant shall designate the following “Measuring Investments,” which shall be used to determine the value of such Participant’s Account):

(a) A Measuring Investment for the opening balance of the Account as of the first day of each valuation period, and

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(b) A Measuring Investment for the compensation that is deferred and credited to the Account as of the last business day of the prior valuation period.

The Accounts and such Measuring Investments are specified solely as a device for computing the amount of benefits to be paid by the Employers under this Plan, and the Employers are not required to purchase such investments.

Participants may elect to transfer their account balances between the Measuring Investments in such manner and at such times as determined by the Committee in its sole discretion. Additional Measuring Investments and rules for implementation of this Section 3.4 (including rules for designating and changing Measuring Investments) shall be determined (and revised) by the Committee.

3.5.     Operational Rules for Deferrals. A Participant’s election to defer under Section 3.1 or 3.2 shall be “evergreen” (that is, it shall remain in effect for such Plan Year and, unless timely revised by the Participant for a later Plan Year before the beginning of such Plan Year, for all later Plan Years). If a Participant’s pay after deferrals is not sufficient to cover tax or other payroll withholding requirements, the Committee shall reduce the Participant’s deferrals to the extent necessary to cover such requirements.

SECTION 4

STOCK OPTION GAIN DEFERRALS

4.1.     Subject to provisions of this Section 4, Participants may elect to defer receipt and distribution of the gain related to the exercise of Options and resulting Gain Shares until the end of an elected Deferral Period by filing a Stock Option Gain Deferral Agreement with the Administrative Committee. The stock option gain deferral features of the Plan are effective for deferral elections made on or after DATE.

4.2.     Timing of Filing Stock Option Gain Deferral Agreement. A Stock Option Gain Deferral Agreement must be filed at least six months prior to the date of exercise and prior to the calendar year in which occurs the date of exercise.

4.3.     Contents of Stock Option Gain Deferral Agreement. Each Stock Option Gain Deferral Agreement shall set forth: (i) the number of Options subject to deferral, (ii) the date of grant of the Options; (iii) the Deferral Period, which is not to be less than three years; (iv) any other item determined to be appropriate by the Administration Committee. A participant may elect to defer gain on 25%, 50%, 75% or 100% of the Options exercised on any one date of exercise.

4.4.     Manner of Exercising Option Shares. A Participant who desires to exercise an Option and to defer current receipt and distribution of the related Gain Shares must follow the procedures and requirements that are applicable to the Option under Prime Medical Services Inc. Option Stock Plan, including the procedures and requirements relating to the exercise of an Option; provided, however, that in the case of a deferral of Gain shares under this Plan, the participant shall only be permitted to tender Consideration Shares to pay the entire exercise price for any such Option exercised. Notwithstanding the foregoing, the Administrative Committee may in its discretion accept the Participant’s attestation that he or she owns the number of Consideration Shares necessary to effectuate the stock swap contemplated hereunder.

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4.5.     Determination of Gain Shares. Upon exercise of an Option, the Gain Shares form which the Participant has elected to defer hereunder shall be determined as follows: (i) the aggregate exercise price for all exercised Option shares subject to the plan Participant’s Stock Option Gain Deferral Agreement shall be determined; (ii) the number of Consideration Shares need to pay the exercise price for such Option share shall be determined, (iii) the difference between the number of exercised Option shares subject to the Participant’s Stock Option Gain Deferral Agreement and the number of Consideration Shares shall be the number of Gain shares resulting from such exercised less any applicable withholdings that are satisfied in the form of common Stock. Any fractional Gain Shares that results from the computations hereunder shall be rounded up to the nearest whole number.

4.6.     Conversion of Gain Shares to Phantom Share Units. As of the date of exercise, Gain share shall be converted to Phantom Share Units by dividing the amount of the aggregate Fair Market Value of the Gain Shares as of the date of exercise by the Fair Market Value of one share of Common Stock as of the date of exercise. The resulting number of Phantom Share Units shall be credited to the Participant’s Gain Share Account. A Participant shall always be 100% vested in his or her Gain Share Account. Any fractional Phantom Share Unit that results form the computations hereunder shall be rounded up to the nearest whole number.

4.7.     Changes to the Stock Option Gain Deferral Agreement. A Stock Option Gain Deferral Agreement may not be amended or revoked after the day on which it is filled with the Administrative Committee, except that the Deferral Period may be extended if an amended Stock Option Gain Deferral Agreement is filled with the Administrative Committee at least one full calendar year before the Deferral period (as in effect before such amendment) ends, provided that only one such amendment may be filled with respect to each Stock Option Gain Agreement. Under no circumstances may be a Participant’s Stock Option Gain Deferral Agreement be made, modified or revoked retroactively, nor may a deferral period be shortened or reduced.

4.8.     Failure to Properly Exercise. If a Participant makes a valid election under this Article 4 to defer Gain Shares and if the Option expires without a proper exercise of the Option by the Participant or if the Participant fails to properly tender or attest to the Consideration shares upon exercise of the option, the Participant shall forfeit any opportunity to defer gain with respect to such Option.

4.9.     Deliver of Gain Shares. The Gain Shares may be physically delivered to the rabbi trustee or delivered to such other entity as may designated by the Committee for safe keeping of such shares.

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SECTION 5

ADJUSTMENT OF ACCOUNTS

5.1.     Establishment of Accounts. There shall be established for each Participant an unfunded, bookkeeping Account which shall be adjusted each Valuation Date.

5.2.     Accounting Rules. The Committee may adopt (and revise) accounting rules for the Accounts (but such rules shall not change the Valuation Dates).

SECTION 6

VESTING OF ACCOUNTS

6.1.     Participation Deferrals. Participant deferrals made pursuant to Sections 3.1 or 3.2 are fully vested immediately.

6.2.     Employer Discretionary Contributions. The Participants interest in Employer Discretionary Contributions under Section 3.3 shall vest according to the following schedule:

Years Of Service	Percentage of Employer Contributions Vested
1    2    3    4    5	20%     40%     60%     80%     100%

For purposes of crediting Years of Service under the foregoing Schedule, Participants will be credited with Years of Service beginning with the year in which the participant began his employment with the Employer.

6.3.     Exceptions to Vesting Schedule. Employer contributions shall be fully vested upon a Participant’s death prior to termination of employment, Disability, or attainment of his Normal Retirement Date, and upon a Change of Control.

SECTION 7

SPENDTHRIFT PROVISION

No Participant or Beneficiary shall have any interest in the Account which can be transferred nor shall any Participant or Beneficiary have any power to anticipate, alienate, dispose of, pledge or encumber the same while in the possession or control of the Employer, nor shall the Committee recognize any assignment thereof, either in whole or in part, nor shall the Account be subject to attachment, garnishment, execution following judgment or other legal process before the Account is distributed to the Participant or Beneficiary.

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The power to designate Beneficiaries to receive the Account of a Participant in the event of such Participant’s death shall not permit or be construed to permit such power or right to be exercised by the Participant so as thereby to anticipate, pledge, mortgage or encumber such Participant’s Account or any part thereof and any attempt of a Participant to so exercise said power in violation of this provision shall be of no force and effect and shall be disregarded by the Committee.

SECTION 8

DISTRIBUTIONS

8.1.     Time of Distribution. A Participant’s Account (reduced by the amount of any applicable payroll, withholding and other taxes) shall be distributable upon the Normal Retirement, Early Retirement or Termination of Employment of the Participant. The amount of such distribution shall be determined as of the Valuation Date immediately following such date and shall be actually paid (or, in the case of installments, commenced) by the Employers as soon as practicable after such determination (but in no event later than 90 days after such Valuation Date).

        8.1.1.     Application for Distribution. A Participant shall not be required to make application to receive payment. Distribution shall not be made to any Beneficiary, however, until such Beneficiary shall have filed a written application for benefits in a form acceptable to the Committee and such application shall have been approved by the Committee.

        8.1.2.     Code §162(m) Delay. If the Committee determines that delaying the time that initial payments are made or commenced would increase the probability that such payments would be fully deductible for federal or state income tax purposes, the Employers may unilaterally delay the time of the making or commencement of payments for up to twenty-four (24) months after the date such payments would otherwise be payable.

8.2.     Benefit Upon Normal or Early Retirement.

        8.2.1.     Form of Distribution. In the event of a Participant retires on or after attaining his Normal or Early Retirement Date, the Participant’s Account shall be distributed at the Participant’s election in either (a) a single lump sum or (b) a series of 5, 10 or 15 annual installments. In the absence of any such election, distribution shall be made in a single lump sum.

        8.2.2.     Manner and Time of Election. On forms furnished by and filed with the Committee, each Participant shall elect at the time of initial enrollment whether distribution of his Normal or Early Retirement benefit shall be made (i) in a lump sum, or (ii) in either 5, 10 or 15 annual installments. Any pre-selected distribution option may be changed, provided that such election is received by the Committee at least 12 months before the Participant’s actual Normal Retirement or Early Retirement Date.

        8.2.3.     Calculation of Installment Amounts. The amount of each installment (if any) shall be determined, as of a Valuation Date, by dividing the amount of the Account as of the Valuation Date as of which the installment is being paid by the number of remaining installment payments to be made (including the payment being determined). After the first installment, the amount of future installments will be determined as of each following December 31 (beginning with the December 31 immediately following the first installment). Such installments shall be actually paid as soon as practicable after each such determination.

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8.3.     Key Employees. Any “key employee”, as defined in section 1.2.21, would be required to wait 6 months for the commencement of any payment triggered by a separation of service or death.

8.4.     Benefit Upon Termination of Employment. In the event a Participant separates from service for any reason other than due to his attainment of his Normal or Early Retirement Date, the Participant’s vested Account shall be distributed in full in a single lump sum.

8.5.     Payment to Beneficiary.

        8.5.1.     Pre-Retirement Death Benefit. In the event a Participant dies prior to his Normal or Early Retirement Date, the Beneficiary of such Participant shall receive distribution of the Participant’s vested Account in a single lump sum distribution.

        8.5.2.     Post-Retirement Death Benefit. In the event a Participant dies after attaining his Normal or Early Retirement Date, the Beneficiary of such Participant shall receive payment of the Participant’s remaining benefit in the same form and in the same manner as the Participant would have received such benefit had the Participant survived; provided, however, the Committee, in its discretion, may direct that such benefits be paid in full in a single lump sum or that such benefits be paid in installments over a shorter period of time.

8.6.     Designation of Beneficiaries.

        8.6.1.     Right to Designate. Each Participant may designate, upon forms to be furnished by and filed with the Committee, one or more primary Beneficiaries or alternative Beneficiaries to receive all or a specified part of such Participant’s Account in the event of such Participant’s death. The Participant may change or revoke any such designation from time to time without notice to or consent from any Beneficiary. No such designation, change or revocation shall be effective unless executed by the Participant and received by the Committee during the Participant’s lifetime.

        8.6.2.     Failure of Designation. If a Participant:

(a) fails to designate a Beneficiary,

(b) designates a Beneficiary and thereafter revokes such designation without naming another Beneficiary, or

(c) designates one or more Beneficiaries and all such Beneficiaries so designated fail to survive the Participant,

such Participant’s Account, or the part thereof as to which such Participant’s designation fails, as the case may be, shall be payable to the following classes of automatic Beneficiaries:

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Participant’s surviving spouse (unless legally separated)
Representative of Participant’s estate.

                8.6.3 Disclaimers by Beneficiaries. A Beneficiary entitled to a distribution of all or a portion of a deceased Participant’s Account may disclaim an interest therein subject to the following requirements. To be eligible to disclaim, a Beneficiary must be a natural person, must not have received a distribution of all or any portion of the Account at the time such disclaimer is executed and delivered, and must have attained at least age twenty-one (21) years as of the date of the Participant’s death. Any disclaimer must be in writing and must be executed personally by the Beneficiary before a notary public. A disclaimer shall state that the Beneficiary’s entire interest in the undistributed Account is disclaimed or shall specify what portion thereof is disclaimed. To be effective, duplicate original executed copies of the disclaimer must be both executed and actually delivered to the Committee after the date of the Participant’s death but not later than one hundred eighty (180) days after the date of the Participant’s death. A disclaimer shall be irrevocable when delivered to the Committee. A disclaimer shall be considered to be delivered to the Committee only when actually received by the Committee. The Committee shall be the sole judge of the content, interpretation and validity of a purported disclaimer. Upon the filing of a valid disclaimer, the Beneficiary shall be considered not to have survived the Participant as to the interest disclaimed. A disclaimer by a Beneficiary shall not be considered to be a transfer of an interest in violation of any other provisions under this Plan. No other form of attempted disclaimer shall be recognized by the Committee.

8.7.     Death Prior to Full Distribution. If, at the death of the Participant, any payment to the Participant was due or otherwise pending but not actually paid, the amount of such payment shall be included in the Account which is payable to the Beneficiary (and shall not be paid to the Participant’s estate).

8.8.     Facility of Payment. In case of the legal disability, including minority, of a Participant or Beneficiary entitled to receive any distribution under this Plan, payment shall be made by the Employers, if the Committee shall be advised of the existence of such condition: (i) to the duly appointed guardian, conservator or other legal representative of such Participant or Beneficiary, or (ii) to a person or institution entrusted with the care or maintenance of the incompetent or disabled Participant or Beneficiary, provided such person or institution has satisfied the Committee that the payment will be used for the best interest and assist in the care of such Participant or Beneficiary, and provided further, that no prior claim for said payment has been made by a duly appointed guardian, conservator or other legal representative of such Participant or Beneficiary. Any payment made in accordance with the foregoing provisions of this section shall constitute a complete discharge of any liability or obligation of the Employers therefore.

8.9 In-Service Distribution for Financial Hardship. On forms furnished by and filed with the Committee, a Participant may request to receive all or part of such Participant’s vested Account prior to Termination of Employment to alleviate a Financial Hardship. For purposes of the Plan, “Financial Hardship” means a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or a dependent (as defined in Section 152(a) of the Code), loss of the Participant’s property due to casualty, or other similar extraordinary and unforeseeable emergency circumstances arising as a result of events beyond the control of the Participant. If a hardship is or may be relieved either (a) through reimbursement or compensation by insurance or otherwise, (b) by liquidation of the Participant’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship), or (c) by cessation of deferrals under this Plan or any 401(k) plan, then the hardship shall not constitute a Financial Hardship for purposes of this Plan. If a Participant receives a distribution due to Financial Hardship, such Participant’s deferrals under Section 3 will then cease. The Participant may not again elect to defer compensation until the Enrollment Period for the Plan Year that begins at least 12 months after such distribution. A Beneficiary of a deceased Participant may also request an early distribution for Financial Hardship.

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8.10.     Effect of Disability. If the Participant becomes Disabled while actively employed by the Employer or an Affiliate, the Participant may by written notice to and approval of the Committee suspend further deferrals while so Disabled. A Participant suffering a Disability shall continue to be considered employed and eligible for the benefits provided herein unless and until the Committee, in it discretion, determines (solely for purposes of this Plan) that such Participant is deemed to have incurred a separation from service, in which case, the Participant’s vested Account shall be paid in a single lump sum (or in the case of a Participant who is eligible to retire, in accordance with Section 7.3).

8.11.     Distributions in Cash. All distributions from this Plan shall be made in cash.

SECTION 9

FUNDING OF PLAN

9.1.     Unfunded Plan. The obligation of the Employers to make payments under this Plan constitutes only the unsecured (but legally enforceable) joint and several promises of the Employers to make such payments. No Participant shall have any lien, prior claim or other security interest in any property of the Employers. The Employers shall have no obligation to establish or maintain any fund, trust or account (other than a bookkeeping account or reserve) for the purpose of funding or paying the benefits promised under this Plan. If such a fund, trust or account is established, the property therein shall remain the sole and exclusive property of the Employers. The Employers shall be obligated to pay the cost of this Plan out of its general assets. All references to accounts, accruals, gains, losses, income, expenses, payments, custodial funds and the like are included merely for the purpose of measuring the Employers’ obligation to Participants in this Plan and shall not be construed to impose on the Employers the obligation to create any separate fund for purposes of this Plan.

9.2.     Corporate Obligation. Neither any officer of any Employer nor any member of the Committee in any way secures or guarantees the payment of any benefit or amount which may become due and payable hereunder to or with respect to any Participant. Each Participant and other person entitled at any time to payments hereunder shall look solely to the assets of the Employers for such payments as an unsecured, general creditor. After benefits shall have been paid to or with respect to a Participant and such payment purports to cover in full the benefit hereunder, such former Participant or other person or persons, as the case may be, shall have no further right or interest in the other assets of the Employers in connection with this Plan. No person shall be under any liability or responsibility for failure to effect any of the objectives or purposes of this Plan by reason of the insolvency of the Employers.

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SECTION 10

AMENDMENT AND TERMINATION

10.1.     Amendment and Termination. The Board of Directors may unilaterally amend the Plan prospectively, retroactively or both, at any time and for any reason deemed sufficient by it without notice to any person affected by this Plan and may likewise terminate this Plan both with regard to persons receiving benefits and persons expecting to receive benefits in the future; provided, however, that:

(a) the benefit, if any, payable to or with respect to a Participant who has had a Termination of Employment as of the effective date of such amendment or the effective date of such termination shall not be, without the written consent of the Participant, diminished or delayed by such amendment or termination (but the Board of Directors may terminate the Plan completely and provide for immediate payment of all Accounts under the Plan in single lump sum payments), and

(b) the benefit, if any, payable to or with respect to each other Participant determined as if such Participant had a Termination of Employment on the effective date of such amendment or the effective date of such termination shall not be, without the written consent of the Participant, diminished or delayed by such amendment or termination (but the Board of Directors may terminate the Plan completely and provide for immediate payment of all Accounts under the Plan in single lump sum payments).

10.2.     No Oral Amendments. No modification of the terms of the Plan or termination of this Plan shall be effective unless it is in writing and signed on behalf of the Board of Directors by a person authorized to execute such writing. No oral representation concerning the interpretation or effect of the Plan shall be effective to amend the Plan.

10.3.      Plan Binding on Successors. Each Employer will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of such Employer by agreement, to expressly assume and agree to perform this Plan in the same manner and to the same extent that such Employer would be required to perform it if no such succession had taken place.

SECTION 11

DETERMINATIONS — RULES AND REGULATIONS

11.1.     Determinations. The Board of Directors and the Committee shall make such determinations as may be required from time to time in the administration of this Plan. The Board of Directors and the Committee shall have the discretionary authority and responsibility to interpret and construe the Plan and to determine all factual and legal questions under this Plan, including but not limited to the entitlement of Participants and Beneficiaries, and the amounts of their respective interests. Each interested party may act and rely upon all information reported to them hereunder and need not inquire into the accuracy thereof, nor be charged with any notice to the contrary.

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11.2.      Rules and Regulations. Any rule not in conflict or at variance with the provisions hereof may be adopted by the Committee.

11.3.     Method of Executing Instruments. Information to be supplied or written notices to be made or consents to be given by the Committee pursuant to any provision of the Plan may be signed in the name of the Committee by any officer who has been authorized to make such certification or to give such notices or consents.

11.4.     Claims Procedure. The claims procedure set forth in this Section 10.4 shall be the exclusive administrative procedure for the disposition of claims for benefits arising under this Plan.

11.4.1.     Original Claim. Any person may, if he or she so desires, file with the Committee a written claim for benefits under this Plan. Within ninety (90) days after the filing of such a claim, the Committee shall notify the claimant in writing whether the claim is upheld or denied in whole or in part or shall furnish the claimant a written notice describing specific special circumstances requiring a specified amount of additional time (but not more than one hundred eighty (180) days from the date the claim was filed) to reach a decision on the claim. If the claim is denied in whole or in part, the Committee shall state in writing:

(a) the specific reasons for the denial;

(b) the specific references to the pertinent provisions of the Plan on which the denial is based;

(c) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and

(d) an explanation of the claims review procedure set forth in this section.

        11.4.2.     Review of Denied Claim. Within sixty (60) days after receipt of notice that the claim has been denied in whole or in part, the claimant may file with the Board of Directors a written request for a review and may, in conjunction therewith, submit written issues and comments. Within sixty (60) days after the filing of such a request for review, the Board of Directors shall notify the claimant in writing whether, upon review, the claim was upheld or denied in whole or in part or shall furnish the claimant a written notice describing specific special circumstances requiring a specified amount of additional time (but not more than one hundred twenty (120) days from the date the request for review was filed) to reach a decision on the request for review.

        11.4.3.     General Rules.

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(a) No inquiry or question shall be deemed to be a claim or a request for a review of a denied claim unless made in accordance with the claims procedure. The Committee may require that any claim for benefits and any request for a review of a denied claim be filed on forms to be furnished by the Committee upon request.

(b) All decisions on original claims shall be made by the Committee and all decisions on requests for a review of denied claims shall be made by the Board of Directors.

(c) The Committee and the Board of Directors may, in their discretion, hold one or more hearings on a claim or a request for a review of a denied claim.

(d) A claimant may be represented by a lawyer or other representative (at the claimant’s own expense), but the Committee and the Board of Directors reserves the right to require the claimant to furnish written authorization. A claimant’s representative shall be entitled, upon request, to copies of all notices given to the claimant.

(e) The decision of the Committee on a claim and a decision of the Board of Directors on a request for a review of a denied claim shall be served on the claimant in writing. If a decision or notice is not received by a claimant within the time specified, the claim or request for a review of a denied claim shall be deemed to have been denied.

(f) Prior to filing a claim or a request for a review of a denied claim, the claimant or his or her representative shall have a reasonable opportunity to review a copy of the Plan and all other pertinent documents in the possession of the Committee and the Board of Directors.

(g) The Committee and the Board of Directors may permanently or temporarily delegate its responsibilities under this claims procedure to an individual or a committee of individuals.

11.5.      Limitations and Exhaustion.

        11.5.1.     Limitations. No claim shall be considered under these administrative procedures unless it is filed with the Committee within one (1) year after the claimant knew (or reasonably should have known) of the principal facts on which the claim is based. Every untimely claim shall be denied by the Committee without regard to the merits of the claim. No legal action (whether arising under section 502 or section 510 of ERISA or under any other statute or non-statutory law) may be brought by any claimant on any matter pertaining to this Plan unless the legal action is commenced in the proper forum before the earlier of:

(a) two (2) years after the claimant knew (or reasonably should have known) of the principal facts on which the claim is based, or

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(b) ninety (90) days after the claimant has exhausted these administrative procedures.

Knowledge of all facts that a Participant knew (or reasonably should have known) shall be imputed to each claimant who is or claims to be a Beneficiary of the Participant (or otherwise claims to derive an entitlement by reference to a Participant) for the purpose of applying the one (1) year and two (2) year periods.

        11.5.2.     Exhaustion Required. The exhaustion of these administrative procedures is mandatory for resolving every claim and dispute arising under this Plan. As to such claims and disputes:

(a) no claimant shall be permitted to commence any legal action relating to any such claim or dispute (whether arising under section 502 or section 510 of ERISA or under any other statute or non-statutory law) unless a timely claim has been filed under these administrative procedures and these administrative procedures have been exhausted; and

(b) in any such legal action all explicit and implicit determinations by the Committee and the Board of Directors (including, but not limited to, determinations as to whether the claim was timely filed) shall be afforded the maximum deference permitted by law.

SECTION 12

PLAN ADMINISTRATION

12.1.     Officers. Except as hereinafter provided, functions generally assigned to the Sponsor shall be discharged by its officers or delegated and allocated as provided herein.

12.2.      Board of Directors. Notwithstanding the foregoing, the Board of Directors shall have the exclusive authority, which may not be delegated, to amend the Plan or to terminate this Plan.

12.3.      Committee. The Committee shall:

(a) keep a record of all its proceedings and acts and keep all books of account, records and other data as may be necessary for the proper administration of the Plan; notify the Employers of any action taken by the Committee and, when required, notify any other interested person or persons;

(b) determine from the records of the Employers the compensation, status and other facts regarding Participants and other employees;

(c) prescribe forms to be used for distributions, notifications, etc., as may be required in the administration of the Plan;

(d) set up such rules, applicable to all Participants similarly situated, as are deemed necessary to carry out the terms of this Plan;

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(e) perform all other acts reasonably necessary for administering the Plan and carrying out the provisions of this Plan and performing the duties imposed on it by the Board of Directors.

(f) resolve all questions of administration of the Plan not specifically referred to in this section;

(g) in accordance with regulations of the Secretary of Labor, provide adequate notice in writing to any claimant whose claim for benefits under the Plan has been denied, setting forth the specific reasons for such denial, written in a manner calculated to be understood by the claimant; and

(h) delegate or redelegate to one or more persons, jointly or severally, and whether or not such persons are members of the Committee or employees of any Employer, such functions assigned to the Committee hereunder as it may from time to time deem advisable.

If there shall at any time be three (3) or more members of the Committee serving hereunder who are qualified to perform a particular act, the same may be performed, on behalf of all, by a majority of those qualified, with or without the concurrence of the minority. No person who failed to join or concur in such act shall be held liable for the consequences thereof, except to the extent that liability is imposed under ERISA.

12.4.     Delegation. The Board of Directors and the members of the Committee shall not be liable for an act or omission of another person with regard to a responsibility that has been allocated to or delegated to such other person pursuant to the terms of the Plan or pursuant to procedures set forth in the Plan.

12.5.     Conflict of Interest. If any individual to whom authority has been delegated or redelegated hereunder shall also be a Participant in this Plan, such Participant shall have no authority with respect to any matter specially affecting such Participant’s individual rights hereunder or the interest of a person superior to him or her in the organization (as distinguished from the rights of all Participants and Beneficiaries or a broad class of Participants and Beneficiaries), all such authority being reserved exclusively to other individuals as the case may be, to the exclusion of such Participant, and such Participant shall act only in such Participant’s individual capacity in connection with any such matter.

12.6.     Administrator. The Sponsor shall be the administrator for purposes of section 3(16)(A) of ERISA.

12.7.     Service of Process. In the absence of any designation to the contrary by the Committee, the General Counsel of the Sponsor and its Board of Directors is designated as the appropriate and exclusive agent for the receipt of process directed to this Plan in any legal proceeding, including arbitration, involving this Plan.

12.8.     Expenses. All expenses of administering this Plan shall be borne by the Employers.

17

DRAFT

For Discussion Purposes ONLY

12.9.     Tax Withholding. The Employers shall withhold the amount of any federal, state or local income tax or other tax required to be withheld by the Employers under applicable law with respect to any amount payable under this Plan.

12.10.     Certifications. Information to be supplied or written notices to be made or consents to be given by the Committee pursuant to any provision of this Plan may be signed in the name of the Committee by any officer who has been authorized to make such certification or to give such notices or consents.

12.11.     Errors in Computations. The Employers shall not be liable or responsible for any error in the computation of the Account or the determination of any benefit payable to or with respect to any Participant resulting from any misstatement of fact made by the Participant or by or on behalf of any survivor to whom such benefit shall be payable, directly or indirectly, to the Employers and used by the Committee in determining the benefit. The Committee shall not be obligated or required to increase the benefit payable to or with respect to such Participant which, on discovery of the misstatement, is found to be understated as a result of such misstatement of the Participant. However, the benefit of any Participant which is overstated by reason of any such misstatement or any other reason shall be reduced to the amount appropriate in view of the truth (and to recover any prior overpayment).

SECTION 13

CONSTRUCTION

13.1.     Applicable Laws.

        13.1.1.     ERISA Status. This Plan is adopted with the understanding that it is an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees as provided in section 201(2), section 301(3) and section 401(a)(1) of ERISA. Each provision shall be interpreted and administered accordingly.

        13.1.2.      IRC Status. This Plan is intended to be a nonqualified deferred compensation arrangement. The rules of section 401(a) et. seq. of the Code shall not apply to this Plan. The rules of section 3121(v) and section 3306(r)(2) of the Code shall apply to this Plan.

        13.1.3.     References to Laws. Any reference in the Plan to a statute or regulation shall be considered also to mean and refer to any subsequent amendment or replacement of that statute or regulation.

13.2.     Effect on Other Plans. This Plan shall not alter, enlarge or diminish any person’s employment rights or obligations or rights or obligations under any other employee pension benefit or employee welfare benefit plan.

13.3.     Disqualification. Notwithstanding any other provision of the Plan or any election or designation made under this Plan, any potential Beneficiary who feloniously and intentionally kills a Participant shall be deemed for all purposes of this Plan and all elections and designations made under this Plan to have died before such Participant. A final judgment of conviction of felonious and intentional killing is conclusive for this purpose. In the absence of a conviction of felonious and intentional killing, the Committee shall determine whether the killing was felonious and intentional for this purpose.

18

DRAFT

For Discussion Purposes ONLY

13.4.     Rules of Document Construction.

(a) An individual shall be considered to have attained a given age on such individual’s birthday for that age (and not on the day before). Individuals born on February 29 in a leap year shall be considered to have their birthdays on February 28 in each year that is not a leap year.

(b) Whenever appropriate, words used herein in the singular may be read in the plural, or words used herein in the plural may be read in the singular; the masculine may include the feminine; and the words “hereof,” “herein” or “hereunder” or other similar compounds of the word “here” shall mean and refer to the entire Plan and not to any particular paragraph or Section of the Plan unless the context clearly indicates to the contrary.

(c) The titles given to the various Sections of the Plan are inserted for convenience of reference only and are not part of the Plan, and they shall not be considered in determining the purpose, meaning or intent of any provision hereof.

(d) Notwithstanding anything apparently to the contrary contained in the Plan, the Plan Statement shall be construed and administered to prevent the duplication of benefits provided under this Plan and any other qualified or nonqualified plan maintained in whole or in part by the Employers.

13.5.     Choice of Law. Except to the extent that federal law is controlling, this instrument shall be construed and enforced in accordance with the laws of the State of STATE.

13.6.     No Employment Contract. This Plan is not and shall not be deemed to constitute a contract of employment between an Employer and any person, nor shall anything herein contained be deemed to give any person any right to be retained in an Employer’s employ or in any way limit or restrict the Employer’s right or power to discharge any person at any time and to treat any person without regard to the effect which such treatment might have upon him or her as a Participant in this Plan. Neither the terms of the Plan nor the benefits under this Plan or the continuance of the Plan shall be a term of the employment of any employee. The Employers shall not be obliged to continue this Plan.

19

EX-12

EXHIBIT 12

HEALTHTRONICS, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(Unaudited)

	Three Months Ended March 31,
($ in thousands)	2005		2004
Income before income taxes and after minority interests	$	2,809	$	1,864
Undistributed equity income		--		--
Minority interest income of subsidiaries with fixed charges		6,143		2,938
Adjusted earnings		8,952		4,802
Interest on debt		2,929		2,289
Loan fees		1,183		--
Total fixed charges		4,112		2,289
Total available earnings before fixed charges	$	13,064	$	7,091
Ratio		3.2		3.1

EX-31

Exhibit 31.1

CERTIFICATION

I, Brad A. Hummel, President and Chief Executive Officer of HealthTronics, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of HealthTronics, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 6, 2005
                                         
                                          By: /s/ Brad A. Hummel          
        Brad A. Hummel
        President and Chief Executive Officer

EX-31

Exhibit 31.2

CERTIFICATION

I, John Q. Barnidge, Chief Financial Officer of HealthTronics, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of HealthTronics, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 6, 2005
                                         
                                          By: /s/ John Q. Barnidge          
       John Q. Barnidge
       Chief Financial Officer

EX-32

Exhibit 32.1

Certification of
Chief Executive Officer
of HealthTronics, Inc.

This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies the quarterly report on Form 10-Q (the “Form 10-Q”) for the quarter ended March 31, 2005 of HealthTronics, Inc., a Georgia corporation (the “Issuer”).

I, Brad A. Hummel, the Chief Executive Officer of the Issuer, certify that to the best of my knowledge:

(i) the Form 10-Q fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and

(ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Issuer.

Dated: May 6, 2005

/s/ Brad A. Hummel          
Brad A. Hummel
President and Chief Executive Officer
HealthTronics, Inc.

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as part of the Form 10-Q or as a separate disclosure document.

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Issuer and will be retained by the Issuer and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32

Exhibit 32.2

Certification of
Chief Financial Officer
of HealthTronics, Inc.

This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies the quarterly report on Form 10-Q (the “Form 10-Q”) for the quarter ended March 31, 2005 of HealthTronics, Inc., a Georgia corporation (the “Issuer”).

I, John Q. Barnidge, the Chief Financial Officer of the Issuer, certify that to the best of my knowledge:

(i) the Form 10-Q fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and

(ii) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Issuer.

Dated: May 6, 2005

/s/ John Q. Barnidge          
John Q. Barnidge
Senior Vice President and Chief Financial Officer
HealthTronics, Inc.

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not being filed as part of the Form 10-Q or as a separate disclosure document.

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Issuer and will be retained by the Issuer and furnished to the Securities and Exchange Commission or its staff upon request.