10-K

_______________________________________________________

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

_____________________________

FORM 10-K

[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2006
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities 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)	(I.R.S. Employer Identification No.)

1301 Capitol of Texas Highway, Suite B-200, Austin, TX 78746
           (Address of principal executive office)                (Zip code)

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

Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock

      Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES __ NO X

      Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES __ NO X

      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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. X

      Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer  ¨                 Accelerated filer   x                 Non-accelerated filer  ¨

      Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES __ NO X

      State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

Aggregate Market Value at June 30, 2006: $ 217,851,000

Indicate the number of shares outstanding of each of the registrant’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 February 28, 2007
35,379,831

DOCUMENTS INCORPORATED BY REFERENCE

      Selected portions of the Registrant’s definitive proxy material for the 2007 annual meeting of stockholders are incorporated by reference into Part III of the Form 10-K.

HEALTHTRONICS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
PART I

ITEM 1.     BUSINESS

General

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.

In this document, references to “we,” “us,” “our” and “HealthTronics” shall mean HealthTronics and its consolidated subsidiaries after the merger, except when the context requires, such references shall refer to HealthTronics and its consolidated subsidiaries either before or after the merger. References to “Prime” shall mean Prime and its consolidated subsidiaries before the merger, and references to “HSS” shall mean HSS and its consolidated subsidiaries before the merger.

We provide healthcare services and manufacture medical devices, primarily for the urology community. Prior to July 31, 2006, we also designed and manufactured trailers and coaches that transport high technology medical devices and equipment for mobile command and control centers and the media and broadcast industry. On July 31, 2006, we completed the sale of our specialty vehicle manufacturing division. For a further discussion of this sale, see “Specialty Vehicle Manufacturing” under this Part I.

For a discussion of recent developments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Recent Developments.”

Urology

Our lithotripsy services are provided principally through limited partnerships or other entities that we manage, which use lithotripsy devices. In 2006, physicians who are affiliated with us used our lithotripters to perform approximately 51,000 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.

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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 $2,000, respectively, for both 2006 and 2005. At this time, we do not anticipate a material shift between our retail and wholesale arrangements.

As the general partner of the limited partnerships or the manager of the other types of entities, 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 deploy three technologies: (1) trans-urethral microwave therapy (TUMT), (2) photo-selective vaporization of the prostate (PVP), and (3) trans-urethral needle ablation (TUNA). All three technologies apply an energy source which reduces the size of the prostate gland. For treating prostate and other cancers prior to November 30, 2006, we used a procedure called cryosurgery, a process which uses a double freeze thaw cycle to destroy cancer cells. We sold our cryosurgery business on November 30, 2006 and have classified it as discontinued operations in the accompanying consolidated financial statements.

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.

• 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 Products

We manufacture, sell and maintain lithotripters and their related consumables. We also manufacture, sell and maintain intra-operative X-ray imaging systems and other mobile patient management tables.

• 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 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 equipment and consumables are recognized when the related items are delivered. Revenues from licensing fees are recorded when the patient is treated.

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Specialty Vehicle Manufacturing

Before July 31, 2006, we designed, constructed and engineered 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 manufacturing operations. Revenue from the manufacture of trailers where we have a customer contract prior to beginning production is recognized when the project is substantially complete. Substantially complete is when the following have occurred (1) all significant work on the project is done; (2) the specifications under the contract have been met; and (3) no significant risks remain. Revenue from the manufacture of trailers built to an OEM’s forecast is recognized upon delivery.

On June 22, 2006, HealthTronics and AK Acquisition Corp., a wholly-owned subsidiary of Oshkosh Truck Corporation (“Oshkosh”), entered into an Interest and Stock Purchase Agreement pursuant to which Oshkosh agreed to acquire our specialty vehicle manufacturing segment for $140 million in cash. We completed this sale on July 31, 2006 and have classified it as discontinued operations in the accompanying consolidated financial statements.

Orthotripsy

In orthopaedics, we provided non-invasive surgical solutions for a wide variety of orthopaedic conditions such as chronic plantar fasciitis and chronic lateral epicondylitis, more commonly known as heel pain and tennis elbow, respectively. We provided these services with our device called the OssaTron, which is an evolution of the lithotripsy technology. The OssaTron is approved by the FDA for the two previously stated indications and has been demonstrated to be effective through clinical studies. In August 2005, we sold our orthopaedics business unit to SanuWave, Inc., a company controlled by Prides Capital Partners L.L.C.

Revenues and Industry Segments

The information required by Regulation S-K Items 101(b) and 101(d) related to financial information about segments and financial information about sales is contained in Note K of our consolidated financial statements, which are included in this Annual Report on Form 10-K.

Competition

The lithotripsy services market is highly fragmented and competitive. We compete with other companies, private facilities and medical centers that offer lithotripsy machines and services, including smaller regional and local lithotripsy service providers. Certain of our current and potential competitors have substantial financial resources and may compete with us for acquisitions and development of operations in markets targeted by us. Additionally, while we believe that lithotripsy has emerged as the superior treatment for kidney stone disease, we also compete with hospitals, clinics and individual medical practitioners that offer alternative treatments for kidney stones.

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In Medical Products, we also compete with other manufacturers of minimally invasive medical devices in our markets. The primary competitors include Dornier MedTech GmbH, Siemens AG, Storz Medical, Richard Wolf GmbH and Direx.

Potential Liabilities-Insurance

All medical procedures performed in connection with our business activities are conducted directly by, or under the supervision of, physicians who are not our employees. We do not provide medical services to any patients. However, patients being treated at health care facilities at which we provide our non-medical services could suffer a medical emergency resulting in serious injury or death, which could subject us to the risk of lawsuits seeking substantial damages.

We may also face product liability claims as a result of our medical device manufacturing.

We currently maintain general and professional liability insurance with a total limit of $1,000,000 per loss event and $3,000,000 policy aggregate and an umbrella excess limit of $10,000,000, with a deductible of $50,000 per occurrence. In addition, we require medical professionals who utilize our services to maintain professional liability insurance. All of these insurance policies are subject to annual renewal by the insurer. If these policies were to be canceled or not renewed, or failed to provide sufficient coverage for our liabilities, we might be forced to self-insure against the potential liabilities referred to above. In that event, a single incident might result in an award of damages that might have a material adverse effect on our results of operations or financial condition. We sponsor a partially self-insured group medical insurance plan. The plan is designed to provide a specified level of coverage, with stop-loss coverage provided by a commercial insurer. Our maximum claim exposure is limited to $100,000 per person per policy year.

Government Regulation and Supervision

We are directly, or indirectly through physicians and hospitals and other health care facilities, which we will refer to as Customers, subject to extensive regulation by both the federal government and the governments in states in which we conduct business, including:

• the federal False Claims Act;

• the federal Medicare and Medicaid Anti-Kickback Law, and state anti-kickback prohibitions;

• federal and state billing and claims submission laws and regulations;

• the federal Health Insurance Portability and Accountability Act of 1996 and state laws relating to patient privacy;

• the federal physician self-referral prohibition commonly known as the Stark Law and the state law equivalents of the Stark Law;

• state laws that prohibit the practice of medicine by non-physicians, and prohibit fee-splitting arrangements involving physicians; and

• federal and state laws governing the equipment we use in our business concerning patient safety and equipment operating specifications.

Practices prohibited by these statutes include, but are not limited to, the payment, receipt, offer, or solicitation of money or other consideration in connection with the referral of patients for services covered by a federal or state health care program. We contract with physicians under a variety of financial arrangements, and physicians have ownership interests in some entities in which we also have an interest. If our operations are found to be in violation of any of the laws and regulations to which we or our Customers are subject, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines, exclusion from the Medicare, Medicaid, and other governmental healthcare programs, loss of licenses, and the curtailment of our operations. While we believe that we are in compliance with all applicable laws, we cannot assure that our activities will be found to be in compliance with these laws if scrutinized by regulatory authorities. Any penalties, damages, fines or curtailment of our operations, individually or in the aggregate, could adversely affect our ability to operate our business and our financial results. The risks of us being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or in the courts, and their provisions are open to a variety of interpretations. Any action brought against us for violation of these laws or regulations, even if we were to successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.

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As previously reported on a Form 8-K filed by Prime on September 28, 2004, we concluded an internal investigation of a business transaction involving our manufacturing division, which transaction may have violated the federal anti-kickback laws. We voluntarily reported the transaction to the U.S. General Services Administration, or GSA. The GSA has assigned a government investigator in response to our voluntary disclosure and we intend to fully cooperate with any GSA investigation. Based on the findings of our outside legal counsel, we (1) believe this was an isolated incident, and (2) do not believe the pending resolution of this matter will materially and adversely affect our financial condition, results of operation, or business.

Equipment

We either manufacture or purchase our urology equipment and maintain that equipment with either internal personnel or pursuant to service contracts with the manufacturers or other service companies. For mobile lithotripsy, we either purchase or lease the tractor, usually for a term up to five years, and purchase the trailer or a self contained coach. We are not dependent on one manufacturer of medical equipment.

Employees

As of February 28, 2007, we employed approximately 293 full-time employees and approximately 17 part-time employees.

Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed below, which could materially affect our business, financial condition or future results.

If we are not able to establish or maintain relationships with physicians and hospitals, our ability to successfully commercialize our current or future service offerings will be materially harmed.

We are dependent on health care providers in two respects. First, if physicians and hospitals and other health care facilities, which we will refer to as Customers, determine that our services are not of sufficiently high quality or reliability, or if our Customers determine that our services are not cost effective, they will not utilize our services. In addition, any change in the rates of or conditions for reimbursement could substantially reduce (1) the number of procedures for which we or our Customers can obtain reimbursement or (2) the amounts reimbursed to us or our Customers for services provided by us. If third-party payors reduce the amount of their payments to Customers, our Customers may seek to reduce their payments to us or seek an alternate supplier of services. Because unfavorable reimbursement policies have constricted and may continue to constrict the profit margins of the hospitals and other healthcare facilities we bill directly, we may need to lower our fees to retain existing customers and attract new ones. These reductions could have a significant adverse effect on our revenues and financial results by decreasing demand for services or creating downward pricing pressure. Second, physicians generally own equity interests in our partnerships. We provide a variety of services to the partnerships and in general manage their day-to-day affairs. Our operations could become disrupted, and financial results adversely affected, if these physician partners became dissatisfied with our services, if these physician partners believe that our competitors or other persons provide higher quality services or a more cost-beneficial model or service, or if we became involved in disputes with our partners.

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We are subject to extensive federal and state health care regulation.

We are subject to extensive regulation by both the federal government and the governments in states in which we conduct business. See “Government Regulation and Supervision” under this Part I for further discussion on these regulations.

Third party payors could refuse to reimburse health care providers for use of our current or future service offerings and products, which could make our revenues decline.

Third party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement of medical procedures and treatments. In addition, significant uncertainty exists as to the reimbursement status of newly approved health care products. Lithotripsy treatments are reimbursed under various federal and state programs, including Medicare and Medicaid, as well as under private health care programs, primarily at fixed rates. Governmental programs are subject to statutory and regulatory changes, administrative rulings, interpretations of policy and governmental funding restrictions, and private programs are subject to policy changes and commercial considerations, all of which may have the effect of decreasing program payments, increasing costs or requiring us to modify the way in which we operate our business. These changes could have a material adverse effect on us.

New and proposed federal and state laws and regulatory initiatives relating to various initiatives in health care reform (such as improving privacy and the security of patient information and combating health care fraud) could require us to expend substantial sums to appropriately respond to and comply with this broad variety of legislation (such as acquiring and implementing new information systems for privacy and security protection), which could negatively impact our financial results.

Recent legislation and several regulatory initiatives at the state and federal levels address patient privacy concerns. New federal legislation extensively regulates the use and disclosure of individually identifiable health-related information and the security and standardization of electronically maintained or transmitted health-related information. We do not yet know the total financial or other impact of these regulations on our business. Continuing compliance with these regulations will likely require us to spend substantial sums, including, but not limited to, purchasing new computer systems, which could negatively impact our financial results. Additionally, if we fail to comply with the privacy regulations, we could suffer civil penalties of up to $25,000 per calendar year per standard (with well over fifty standards with which to comply) and criminal penalties with fines of up to $250,000 for willful and knowing violations. In addition, health care providers will continue to remain subject to any state laws that are more restrictive than the federal privacy regulations. These privacy laws vary by state and could impose additional penalties.

The provisions of HIPAA criminalize situations that previously were handled exclusively civilly through repayments of overpayments, offsets and fines by creating new federal health care fraud crimes. Further, as with the federal laws, general state criminal laws may be used to prosecute health care fraud and abuse. We believe that our business arrangements and practices comply with existing health care fraud law. However, a violation could subject us to penalties, fines and/or possible exclusion from Medicare or Medicaid. Such sanctions could significantly reduce our revenue or profits.

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A number of proposals for health care reform have been made in recent years, some of which have included radical changes in the health care system. Health care reform could result in material changes in the financing and regulation of the health care business, and we are unable to predict the effect of such change on our future operations. It is uncertain what legislation on health care reform, if any, will ultimately be implemented or whether other changes in the administration of or interpretation of existing laws involving governmental health care programs will occur. There can be no assurance that future health care legislation or other changes in the administration of or interpretation of existing legislation regarding governmental health care programs will not have a material adverse effect on our business or the results of our operations.

We face intense competition and rapid technological change that could result in products that are superior to the products we manufacture or superior to the products on which our current or proposed services are based.

Competition in our business segments is intense. We compete with national, regional and local providers of urology services. This competition could lead to a decrease in our profitability. Moreover, if our customers determine that our competitors offer better quality products or services or are more cost effective, we could lose business to these competitors. The medical device industry is subject to rapid and significant technological change. Others may develop technologies or products that are more effective or less costly than our products or the products on which our services are based, which could render our products or services obsolete or noncompetitive. Our business is also impacted by competition between lithotripsy services, on the one hand, and surgical and other established methods for treating urological conditions, on the other hand.

We may be subject to costly and time-consuming product liability actions that would materially harm our business.

Our urology services and manufacturing business exposes us to potential product liability risks that are inherent in these industries. All medical procedures performed in connection with our business activities are performed by or under the supervision of physicians who are not our employees. We do not perform medical procedures. However, we may be held liable if patients undergoing urology treatments using our devices are injured. We may also face product liability claims as a result of our medical device manufacturing. We cannot ensure that we will be able to avoid product liability exposure. Product liability insurance is generally expensive, if available at all. We cannot ensure that our present insurance coverage is adequate or that we can obtain adequate insurance coverage at a reasonable cost in the future.

Our success will depend partly on our ability to operate without infringing on or utilizing the proprietary rights of others.

The medical device industry is characterized by a substantial amount of litigation over patent and other intellectual property rights. No one claims that any of our medical devices infringe on their intellectual property rights; however, it is possible that we may have unintentionally infringed on others’ patents or other intellectual property rights. Intellectual property litigation is costly. If we do not prevail in any litigation, in addition to any damages we might have to pay, we could be required to stop the infringing activity or obtain a license. Any required license may not be available to us on acceptable terms. If we fail to obtain a required license or are unable to design around a patent, we may be unable to sell some of our products, which would reduce our revenues and net income.

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If we fail to attract and retain key personnel and principal members of our management staff, our business, financial condition and operating results could be materially harmed.

Our success depends greatly on our ability to attract and retain qualified management and technical personnel, as well as to retain the principal members of our existing management staff. The loss of services of any key personnel could adversely affect our current operations and our ability to implement our growth strategy. There is intense competition within our industry for qualified staff, and we cannot assure you that we will be able to attract and retain the necessary qualified staff to develop our business. If we fail to attract and retain key management staff, or if we lose any of our current management team, our business, financial condition and operating results could be materially harmed.

The market price of our common stock may experience substantial fluctuation for reasons over which we have little control.

Our stock price has a history of volatility. Fluctuations have occurred even in the absence of significant developments pertaining to our business. Stock prices and trading volume of companies in the health care and health services industry have fallen and risen dramatically in recent years. Both company-specific and industry-wide developments may cause this volatility. Factors that could impact the market price of our common stock include the following:

• future announcements concerning us, our competition or the health care services market generally;

• developments relating to our relationships with hospitals, other health care facilities, or physicians;

• developments relating to our sources of supply;

• claims made or litigation filed against us;

• changes in, or new interpretations of, government regulations;

• changes in operating results from quarter to quarter;

• sales of stock by insiders;

• news reports relating to trends in our markets;

• acquisitions and financings in our industry; and

• overall volatility of the stock market.

Furthermore, stock prices for many companies fluctuate widely for reasons that may be unrelated to their operating results. These fluctuations, coupled with changes in our results of operations and general economic, political and market conditions, may adversely affect the market price of our common stock.

Our acquisition strategy could fail or present unanticipated problems for our business in the future, which could adversely affect our ability to make acquisitions or realize anticipated benefits from those acquisitions.

We have followed an acquisition strategy since 1992 that has resulted in rapid growth in our business. This acquisition strategy may include acquiring healthcare services businesses and is dependent on the continued availability of suitable acquisition candidates and our ability to finance and complete any particular acquisition successfully. Moreover, the U.S. Federal Trade Commission, or FTC, initiated an investigation in 1991 to determine whether the limited partnerships in which Lithotripters, Inc., now one of our wholly-owned subsidiaries, was the general partner posed an unreasonable threat to competition in the healthcare field. While the FTC closed its investigation and took no action, the FTC or another governmental authority charged with the enforcement of federal or state antitrust laws or a private litigant might, due to our size and market share, seek to (1) restrict our future growth by prohibiting or restricting the acquisition of additional lithotripsy operations or (2) require that we divest certain of our lithotripsy operations. Furthermore, acquisitions involve a number of risks and challenges, including:

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• diversion of management’s attention;

• the need to integrate acquired operations;

• potential loss of key employees of the acquired companies; and

• an increase in our expenses and working capital requirements.

Any of these factors could adversely affect our ability to achieve anticipated levels of cash flows from our acquired businesses or realize other anticipated benefits from those acquisitions.

Our results of operations could be adversely affected as a result of goodwill impairments.

Goodwill represents the excess of the purchase price paid for a company over the fair value of that company’s tangible and intangible net assets acquired. As of December 31, 2006, we had goodwill of $229 million. If we determine in the future that the fair value of any of our reporting segments does not exceed the carrying value of the related reporting segment, goodwill in that reporting segment will be deemed impaired. If impaired, the amount of goodwill will be reduced to the value determined by us to be the fair value of the reporting segment. The amount of the reduction will be deducted from earnings during the period in which the impairment occurs. An impairment will also reduce stockholders’ equity in the period incurred by the amount of the impairment. In the fourth quarter of 2006, we recorded an impairment to our goodwill totaling $12.2 million related to our urology services segment and $8.4 million related to our medical products segment. The impairment to our urology services segment is due primarily to a decrease in the number of overall procedures during 2006, primarily across our western region partnerships, combined with the loss of certain partnerships and contracts late in 2006. The impairment in our medical products segment relates primarily to our decision to reduce or exit certain product lines during the fourth quarter of 2006.

Our manufacturing operations are partially dependent upon third-party suppliers, making us vulnerable to a supply shortage.

We obtain materials and manufactured components from third-party suppliers. Some of our suppliers are the sole source for a particular supply item. Any delay in our suppliers’ abilities to provide us with necessary material and components may affect our manufacturing capabilities or may require us to seek alternative supply sources. Delays in obtaining supplies may result from a number of factors affecting our suppliers, such as capacity constraints, labor disputes, the impaired financial condition of a particular supplier, suppliers’ allocations to other purchasers, weather emergencies or acts of war or terrorism. Any delay in receiving supplies could impair our ability to deliver products to our customers and, accordingly, could have a material adverse effect on our business, results of operations and financial condition.

We could be adversely affected by special risks and requirements related to our medical products manufacturing business.

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We are subject to various special risks and requirements associated with being a medical equipment manufacturer, which could have adverse effects. These include the following:

• the need to comply with applicable federal Food and Drug Administration and foreign regulations relating to good manufacturing practices and medical device approval requirements, and with state licensing requirements;

• the need for special non-governmental certifications and registrations regarding product safety, product quality and manufacturing procedures in order to market products in the European Union;

• potential product liability claims for any defective goods that are distributed; and

• the need for research and development expenditures to develop or enhance products and compete in the equipment markets.

Our indebtedness may limit our financial and operating flexibility.

As of December 31, 2006, we had indebtedness of approximately $11.4 million related to equipment purchased by our limited partnerships, which debt is repaid from the cash flows of the partnerships. We also have a revolving line of credit with a borrowing limit of $50.0 million pursuant to a senior credit facility we entered into in March 2005. As of December 31, 2006, there were no amounts drawn on the revolver. Prior to July 31, 2006, we had outstanding a $125.0 million senior secured term loan B due 2011. This term loan B was repaid on July 31, 2006 with a portion of the proceeds we received from the sale of our specialty vehicles manufacturing division.

We have been assigned a B-1 senior implied rating by Moody’s Investor Service Inc. We have also been assigned a BB- corporate credit rating by Standard and Poor’s Ratings Group. All of these ratings are below investment grade. As a result, at times we may have difficulty accessing capital markets or raising capital on favorable terms as we will incur higher borrowing costs than our competitors that have higher ratings. Therefore, our financial results may be negatively affected by our inability to raise capital or the cost of such capital as a result of our credit ratings.

We must comply with various covenants contained in our revolving credit facility and any other future debt arrangements that, among other things, limit our ability to:

• incur additional debt or liens;

• make payments in respect of or redeem or acquire any debt or equity issued by us;

• sell assets;

• make loans or investments;

• acquire or be acquired by other companies; and

• amend some of our contracts.

Our level of indebtedness could have important consequences to you. For example, it could:

• increase our vulnerability to general adverse economic and industry conditions;

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• limit our ability to fund future working capital and capital expenditures, to engage in future acquisitions, or to otherwise realize the value of our assets and opportunities fully because of the need to dedicate a portion of our cash flow from operations to payments on our debt or to comply with any restrictive terms of our debt;

• limit our flexibility in planning for, or reacting to, changes in the industry in which we operate; and

• place us at a competitive disadvantage as compared to our competitors that have less debt.

In addition, if we fail to comply with the terms of any of our debt, our lenders will have the right to accelerate the maturity of that debt and foreclose upon the collateral, if any, securing that debt. Realization of any of these factors could adversely affect our business, financial condition and results of operations.

We have in the past identified material weaknesses in our internal control over financial reporting, and the identification of any significant deficiencies or material weaknesses in the future could affect our ability to ensure timely and reliable financial reports.

In connection with our management’s assessment of internal control over financial reporting as of December 31, 2005 under Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules issued by the Securities and Exchange Commission (“SEC”), which assessment is set forth in our Annual Report on Form 10-K for 2005, we identified two material weaknesses in our internal control over financial reporting. The Public Company Accounting Oversight Board defines a material weakness as a single deficiency, or combination of deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. We have remedied these material weaknesses.

Although our management will continue to periodically review and evaluate the effectiveness of our internal controls, we can give you no assurance that there will be no material weaknesses in our internal control over financial reporting. We may in the future have material weaknesses in our internal control over financial reporting as a result of our controls becoming inadequate due to changes in conditions, the degree of compliance with our internal control policies and procedures deteriorating, or for other reasons. If we have significant deficiencies or material weaknesses in our internal control over financial reporting, our ability to record, process, summarize and report financial information within the time periods specified in the rules and forms of the SEC will be adversely affected. This failure could materially and adversely impact our business, our financial condition and the market value of our securities.

Executive Officers

As of February 28, 2007, our executive officers were as follows:

Name	Age	Position
Sam B. Humphries	63	Chief Executive Officer and President
Ross A. Goolsby	39	Chief Financial Officer and Senior Vice President
James S.B. Whittenburg	35	President –Urology Services
Christopher B. Schneider	39	President – Medical Products

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Name	Age	Position
Richard A. Rusk	45	Vice President, Corporate Controller, Treasurer and Secretary

The foregoing does not include positions held in our subsidiaries. Our officers are elected for annual periods. There are no family relationships between any of our executive officers and/or directors.

Mr. Humphries was appointed as our President and Chief Executive Officer effective on May 11, 2006. In joining us, Mr. Humphries resigned from his position as President and Chief Executive Officer of Uroplasty, Inc., a publicly-traded medical device company, in which positions he served since January 2005. He was previously a partner of Ascent Medical Technology Fund, L.P., a venture capital fund founded in 1995. Mr. Humphries has over 25 years experience in the healthcare and medical device industry, including serving as President and Chief Executive Officer of American Medical Systems, Inc., a publicly-traded manufacturer of medical devices primarily for the urology market. Mr. Humphries serves on the Board of Directors of Uroplasty, Inc., Criticare Systems, Inc. and Universal Hospital Services, Inc.

Mr. Goolsby joined us as our Chief Financial Officer and Senior Vice President on January 8, 2007. Prior to such appointment, Mr. Goolsby served as the Chief Financial Officer, Vice President of Finance and Secretary of SigmaTel, Inc., a publicly-traded semiconductor company, from September 2001 to December 2006. From 1999 until 2001, Mr. Goolsby served as Chief Financial Officer of Utiliserve, Inc., an electrical utility products distributor, and was responsible for Utiliserve’s finance, accounting and human resources functions. From 1993 until 1999, Mr. Goolsby served as a Vice President and Controller of Cameron Ashley Building Products, Inc., a publicly-traded building products distributor, where he was responsible for finance and accounting and was involved in merger and acquisition transactions and preparing periodic filings with the Securities and Exchange Commission. Mr. Goolsby holds a Bachelor of Business Administration in Accounting from the University of Houston.

Mr. Whittenburg was named President of our Urology Division in June 2006. Prior to this time, Mr. Whittenburg served as President of our Specialty Vehicle Manufacturing Division from December 2005 until its sale in July 2006 and was our General Counsel and Senior Vice President–Development from March 2004 until June 2006. Previously Mr. Whittenburg practiced law at Akin Gump Strauss Hauer & Feld LLP, where he specialized in corporate and securities law. Mr. Whittenburg, a CPA, is licensed to practice law in Texas.

Mr. Schneider joined us as Vice President of Sales and Marketing in August 2004 and was named President of the newly-formed Medical Products division in May 2005. Prior to joining us, Mr. Schneider was Vice President of U.S. Sales and Marketing for Carbomedics, the cardiac surgery division of the Sorin Group, from June 2001 through July 2004. His experience also includes ten years in various sales, marketing and general management positions for General Electric Medical Systems.

Mr. Rusk joined us in August 2000 as our Corporate Controller and was named Vice President in June 2002. In June 2006, Mr. Rusk was named our Treasurer and in September 2006, Mr. Rusk was named our Secretary. Before joining us, Mr. Rusk, a CPA, was with KPMG LLP for approximately seventeen years, the last ten years as a senior audit manager.

Available Information

We file annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”). You may read and copy any materials that we file with the SEC at the SEC’s public reference room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains a website that contains these SEC filings. You can obtain these filings at the SEC’s website at http://www.sec.gov.

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We also make available free of charge on or through our website (http://www.healthtronics.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

ITEM 1A.     RISK FACTORS

The information required by this item is set forth under “Risk Factors” in Part I, Item 1.

ITEM 1B.     UNRESOLVED STAFF COMMENTS

None.

ITEM 2.     PROPERTIES

Our principal executive office is located in Austin, Texas in an office building owned by us. In addition, in May 2005, we entered into a five-year lease on a 41,000 square foot facility in Kennesaw, Georgia related to our Medical Products operations for approximately $23,000 a month.

ITEM 3.     LEGAL PROCEEDINGS

We are involved in various claims and legal actions that have arisen in the ordinary course of business. We believe that any liabilities arising from these actions will not have a material adverse effect on our financial condition, results of operations or cash flows.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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PART II

ITEM 5.     MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
                    MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The following table sets forth the high and low closing prices per share for our common stock on the Nasdaq Global Select Market for the years ended December 31, 2006 and 2005 (NASDAQ Symbol “HTRN”).

	2006						2005
	High			Low			High			Low
First Quarter	$	8	.60	$	7	.08	$	11	.71	$	9	.35
Second Quarter	$	8	.50	$	6	.67	$	13	.84	$	10	.95
Third Quarter	$	7	.60	$	5	.97	$	13	.99	$	9	.67
Fourth Quarter	$	7	.38	$	6	.10	$	10	.00	$	6	.49

On January 25, 2007, we had 617 holders of record of our common stock.

We are not currently paying dividends on our common stock. We have the authority to declare and pay dividends on our common stock at our discretion, as long as we have funds legally available to do so and our senior credit facility permits the declaration and payment. Our senior credit facility restricts our ability to pay cash dividends. In addition, we intend to retain our earnings to finance the expansion of our business and for general corporate purposes. Therefore, we do not anticipate paying cash dividends on our common stock in the foreseeable future.

Equity Compensation Plan Information

At December 31, 2006, we had seven separate equity compensation plans: the Prime 1993 and 2003 stock option plans, the HSS general, 2000, 2001 and 2002 stock option plans, and the HSS 2004 equity incentive plan. The plans, and all amendments thereto, had been approved by Prime’s and HSS’ shareholders, as the case may be. The following table sets forth certain information as of December 31, 2006 about our equity compensation plans:

	(a)		(b)			(c)
Plan Category	Number of shares of our common stock to be issued upon exercise of outstanding options		Weighted-average exercise price of outstanding options			Number of shares of our common stock remaining available for future issuance under equity compensation plans (exceeding securities reflected in column (a))
Prime 1993 stock option plan		361,169	$	7	.46		--
Prime 2003 stock option plan		129,000	$	5	.84		--
HSS equity incentive plan and stock
option plans		3,417,278	$	7	.36		683,165
Other equity compensation plans
approved by our security holders		N/A		N/A			N/A

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Performance Graph

The following graph compares our cumulative total shareholder return with the cumulative total shareholder returns of the Nasdaq Market Index and the Nasdaq Health Services Index, for the period from December 31, 2002 through December 31, 2006.

ITEM 6.      SELECTED FINANCIAL DATA

The following tables set forth our summary consolidated historical financial information that has been derived from (a) our audited consolidated statements of income and cash flows for each of the years ended December 31, 2006, 2005, 2004 and 2003, (b) our unaudited consolidated statements of income and cash flows for the year ended December 31, 2002, (c) our audited consolidated balance sheets as of December 31, 2006, 2005 and 2004, (d) our unaudited consolidated balance sheets as of December 31, 2003 and 2002, and (e) our unaudited consolidated statements of income and cash flows for each of the three months ended December 31, September 30, June 30, and March 31, for 2006 and 2005. As discussed under “Business-General” under Part I, Item 1 of this Annual Report on Form 10-K, the merger of Prime and HSS was accounted for as a reverse acquisition under the purchase method of accounting for business combinations in accordance with U.S. generally accepted accounting principles. As a result, the financial information presented below reflects the results of operations of Prime and HSS on a consolidated basis after November 10, 2004 and the results of operations of Prime for the periods prior to November 10, 2004. In addition, the financial information presented below reflects our financial condition on a consolidated basis as of December 31, 2006, 2005 and 2004 and Prime’s financial condition as of December 31, 2003 and 2002. You should read this financial information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The historical results are not necessarily indicative of results to be expected in any future period.

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(In thousands, except per share data)	Years Ended December 31,
	2006			2005			2004			2003		2002
Revenues:
Urology Services	$	123,265		$	133,360		$	75,361		$	58,702	$	69,498
Medical Products		19,080			18,202			10,846			1,714		803
RVC		--			--			--			--		10,143
Other		546			705			936			1,022		739
Revenues from continuing operations	$	142,891		$	152,267		$	87,143		$	61,438	$	81,183
Income (loss) from:
Continuing Operations		(16,446	)		10,933			5,261			6,301		(1,982	)
Discontinued Operations		25,129			(1,745	)		(3,908	)		121		2,483
Net income	$	8,683	(1)	$	9,188		$	1,353	(2)	$	6,422	$	501	(3)
Diluted earnings (loss) per share:
Continuing Operations	$	(0.47	)	$	0.31		$	0.24		$	0.36	$	(0.12	)
Discontinued Operations	$	0.72		$	(0.05	)	$	(0.18	)	$	0.01	$	0.15
Total	$	0.25		$	0.26		$	0.06		$	0.37	$	0.03
Dividends per share		None			None			None			None		None
Total assets	$	346,733		$	483,037		$	474,158		$	279,378	$	265,050
Long-term obligations (a)	$	6,063		$	129,980		$	114,442		$	113,125	$	118,306

(a) Includes long term debt, other long term obligations and deferred compensation liability.

Quarterly Data	Quarter Ended
(in thousands, except per share data)	March 31		June 30		Sept. 30			Dec. 31
2006			(unaudited)
Revenues	$	37,106	$	36,474	$	35,863		$	33,448
Net income (loss)	$	1,273	$	1,368	$	31,177	(1)	$	(25,135	)(1)
Per share amounts (basic):
Net income (loss)	$	0.04	$	0.04	$	0.88		$	(0.71	)
Weighted average shares outstanding		34,906		35,056		35,286			35,373
Per share amounts (diluted):
Net income (loss)	$	0.04	$	0.04	$	0.88		$	(0.71	)
Weighted average shares outstanding		35,251		35,361		35,370			35,373

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Quarterly Data	Quarter Ended
(in thousands, except per share data)	March 31		June 30		Sept. 30		Dec. 31
2005			(unaudited)
Revenues	$	34,943	$	37,821	$	41,339	$	38,164
Net income	$	1,534	$	2,575	$	3,131	$	1,948
Per share amounts (basic):
Net income	$	0.05	$	0.08	$	0.09	$	0.06
Weighted average shares outstanding		33,315		34,040		34,889		34,976
Per share amounts (diluted):
Net income	$	0.04	$	0.07	$	0.09	$	0.06
Weighted average shares outstanding		34,316		35,218		35,789		35,379

(1) In the third quarter of 2006, we completed the sale of our Specialty Vehicle Manufacturing segment and recognized a gain of $53.6 million. This gain utilized approximately $20.4 million of our deferred tax asset. In the fourth quarter of 2006, we recorded an impairment to our goodwill totaling $12.2 million related to our urology services segment and $8.4 million related to our medical products segment. The impairment to our urology services segment is due primarily to a decrease in the number of overall procedures during 2006, primarily across our western region partnerships, combined with the loss of certain partnerships and contracts late in 2006. The impairment in our medical products segment relates primarily to our decision to reduce or exit certain product lines during the fourth quarter of 2006.

(2) In the fourth quarter of 2004, we incurred $1 million of costs related to the Prime and HSS merger. These costs primarily included certain severance costs of Prime employees, costs related to our new HealthTronics branding and certain costs for exiting board members primarily for the cashless exercise of stock options. We also accrued $1.9 million of costs related to our discretionary bonus plan. We also incurred costs totaling $6 million related to the closing of our manufacturing plants in Carlisle, Pennsylvania and Sanford, Florida. In connection with completing this closing process, we also reorganized our division management and culled backlog of commitments based on revised cost structure and resources, which resulted in a write-down of work in process for projects that would be unprofitable and raw materials for product lines which we are discontinuing.

(3) During 2002, we recognized an impairment of approximately $17 million related to the disposal of our refractive vision operations. Additionally, we recognized an impairment related to certain lithotripsy assets located in south Florida due to a loss of the related hospital contract.

ITEM 7.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                    AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of Section 21E of the Exchange Act and the Private Securities Litigation Reform Act of 1995 about us that are subject to risks and uncertainties. All statements other than statements of historical fact included in this document are forward-looking statements. Although we believe that in making such statements our expectations are based on reasonable assumptions, such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected.

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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 discussed under “Risk Factors” under Part I, Item 1, 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.

• 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.

General

We provide healthcare services and manufacture medical devices, primarily for the urology community. Prior to July 31, 2006, we also designed and manufactured trailers and coaches that transport high technology medical devices and equipment for mobile command and control centers and the media and broadcast industry.

Urology Services. Our lithotripsy services are provided principally through limited partnerships or other entities that we manage, which use lithotripsy devices. In 2006, physicians who are affiliated with us used our lithotripters to perform approximately 51,000 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 $2,000 for both 2006 and 2005. At this time, we do not anticipate a material shift between our retail and wholesale arrangements.

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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 deploy three technologies: (1) trans-urethral microwave therapy (TUMT), (2) photo-selective vaporization of the prostate (PVP), and (3) trans-urethral needle ablation (TUNA). All three technologies apply an energy source which reduces the size of the prostate gland. For treating prostate and other cancers, prior to November 30, 2006, we used 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. (For a further discussion on our partnerships, see “Urology” and “Government Regulation and Supervision” in Part I.) 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.

• 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 Products. We manufacture, sell and maintain lithotripters and their related consumables. We also manufacture, sell and maintain intra-operative X-ray imaging systems and other mobile patient management tables.

We recognize medical device sales and service revenue from the following sources:

• 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 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.

Recent Developments

On June 22, 2006, we entered into an Interest and Stock Purchase Agreement pursuant to which Oshkosh agreed to acquire our specialty vehicle manufacturing segment for $140 million in cash. We completed this sale on July 31, 2006. We used a portion of the proceeds from the sale of our specialty vehicle manufacturing segment to repay our term loan B in full and our mortgage debt related to our building in Austin, Texas.

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On November 30, 2006, we sold our cryosurgery operations to Advanced Medical Partners, Inc., a closely held private company (AMPI). We used the proceeds from the sale to acquire approximately 10% of the outstanding shares of AMPI. Due to the uncertainty of any future distributions related to our AMPI shares, we have assigned no value to this investment.

On February 13, 2007, we entered into a Stock Purchase Agreement and an Interest Purchase Agreement pursuant to which we agreed to purchase all of the outstanding capital stock of Keystone ABG, Inc., which owns a 21% general partner interest in Keystone Mobile Partners, L.P. (the “Partnership”), all of the outstanding capital stock of Keystone Kidney Associates, PC, and an approximate 14% limited partner interest in the Partnership from the owners thereof, for an aggregate purchase price of $8,100,000 plus an earnout. The transaction is subject to certain closing conditions and the company can give no assurances that it will close.

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 now have two reporting units, urology services and medical products. The fair value of each reporting unit is calculated using estimated discounted future cash flow projections. In the fourth quarter of 2006, we recorded an impairment to our goodwill totaling $12.2 million related to our urology services segment and $8.4 million related to our medical products segment. The impairment to our urology services segment is due primarily to a decrease in the number of overall procedures during 2006, primarily across our western region partnerships, combined with the loss of certain partnerships and contracts late in 2006. The impairment in our medical products segment relates primarily to our decision to reduce or exit certain product lines during the fourth quarter of 2006. As of December 31, 2006, we had goodwill of $229 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 or limited liability companies (LLCs) where we, as the general partner or managing member, 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 or LLCs where we, as the general partner or managing member, exercise effective control, even though our ownership is less than 50%. The related agreements provide us with broad powers. The other parties do not participate in the management of the entity and do not have the substantial ability to remove us. 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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Year ended December 31, 2006 compared to the year ended December 31, 2005

Our total revenues decreased $9,376,000 (6%) as compared to 2005. Revenues from our urology services segment decreased $10,095,000 (8%) as compared to 2005. Revenues from our lithotripsy business decreased $8,386,000 in 2006 as compared to 2005, while revenues from our prostate business decreased $1,709,000 in 2006 as compared to 2005. The actual number of lithotripsy procedures performed in 2006 decreased by 9% compared to 2005, primarily due to weak performance across our western region partnerships and the loss of certain partnerships and contracts in late 2006. The average rate per procedure increased by 1% in 2006 as compared to 2005. Revenues for our medical products segment increased by $878,000 (5%) compared to 2005 primarily due to a mix of sales between external customers and sales to our urology services segment. Medical products revenues before intersegment eliminations totaled $28.4 million for 2006 and $27.4 million for 2005. We sold 17 lithotripters and 100 tables in 2006 compared to 16 lithotripters and 73 tables in 2005. Revenues from our service operations and consumable sales decreased $399,000 in 2006 as compared to 2005. Revenues from our new lab which started operations in January 2006, totaled $1,138,000 for the year ended December 31, 2006.

Our costs of services and general and administrative expenses for 2006 increased $33,907,000 compared to 2005. Our costs associated with salaries, wages and benefits in 2006 increased $5,014,000 (13%) compared to 2005. The primary cause of this increase relates to $1.3 million in severance costs paid to two executives in 2006, $1.8 million of share-based compensation cost recorded in 2006 and an increase in our medical products segment salaries of approximately $1.6 million, primarily related to increased head count in our sales force and our new lab. Our costs associated with other costs of services for the year ended December 31, 2006 increased $2,870,000 (18%) compared to 2005. This increase relates primarily to increased medical supplies costs in our prostate operations as well as increased costs of travel primarily in our medical products segment. Our bad debt expense also increased approximately $600,000 in 2006 as compared to 2005. Our general and administrative costs increased $606,000 (8%) over 2005. This increase relates primarily to additional recruiting costs related to the searches for our new CEO and CFO, totaling approximately $200,000 and additional board of director fees totaling approximately $340,000, related to a change in Board compensation in late 2005. Costs associated with legal and professional fees increased $2,488,000 (116%) in 2006. This increase is primarily due to $1.8 million in fees from our strategic consultants. Manufacturing costs increased $2,906,000 (42%) in 2006. This increase is due primarily to the increase in sales to external customers, noted above. In the future, we expect margins in medical products to vary significantly from period to period based on the mix of intercompany and third-party sales. In the fourth quarter of 2006, we recorded an impairment to our goodwill totaling $12.2 million related to our urology services segment and $8.4 million related to our medical products segment. The impairment to our urology services segment is due primarily to a decrease in the number of overall procedures during 2006, primarily across our western region partnerships, combined with the loss of certain partnerships and contracts late in 2006. The impairment in our medical products segment relates primarily to our decision to reduce or exit certain product lines during the fourth quarter of 2006.

On June 22, 2006, we entered into an agreement to sell our specialty vehicle manufacturing segment. Accordingly, in 2005 we have classified this segment as held for sale in the accompanying consolidated financial statements. The sale was completed on July 31, 2006. As a result of the sale we realized a gain of $53.6 million, which is included in discontinued operations in the accompanying financial statements. This gain utilized approximately $20.4 million of our deferred tax assets.

Depreciation and amortization expense decreased $169,000 in 2006 compared to 2005.

Minority interest in consolidated income for 2006 decreased $4,539,000 (9%) compared to 2005, as a result of a decrease in income from our urology services segment due primarily to lower revenues noted above.

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Provision for income taxes in 2006 decreased $11,065,000 compared to 2005 due to a decrease in taxable income, primarily related to our goodwill impairment recorded in 2006. Our effective tax rate significantly increased in 2006 as compared to 2005, since approximately half of our goodwill impairment was not deductible for tax purposes.

Year ended December 31, 2005 compared to the year ended December 31, 2004

Our total revenues increased $65,124,000 (75%) as compared to 2004. Revenues from our urology services operations increased by $57,999,000 (77%) primarily related to the merger between Prime and HSS in November 2004 and significant growth in our greenlight laser operations. Urology services revenues associated with legacy HSS entities increased $55 million in 2005 from 2004, primarily due to 2005 reflecting a full twelve months of operations of legacy HSS entities, while greenlight laser revenues from our organic operations increased from $1,677,000 in 2004 to $5,403,000 in 2005. The actual number of procedures performed in 2005 increased by 71% compared to 2004, primarily due to 2005 reflecting a full twelve months of operations of legacy HSS entities. The average rate per procedure increased by 7% in 2005 as compared to 2004. Revenues for our medical products segment increased by $7,356,000 (68%) compared to 2004 due primarily to the merger between Prime and HSS. We sold 16 lithotripters and 73 tables in 2005 compared to 10 lithotripters and 89 tables in 2004.

Our costs of services and general and administrative expenses for 2005 increased $35,051,000 in absolute terms and decreased from 59% to 57% as a percentage of revenues compared to 2004. Costs associated with legacy HSS entities increased $24 million in 2005 from 2004, primarily due to 2005 reflecting a full twelve months of operations of legacy HSS entities. The merger with HSS in November, 2004 is the primary reason for the large increases in all expense categories, as 2005 reflects a full twelve months of operations as opposed to the two months of operations post merger in 2004. Our costs associated with salaries, wages and benefits in 2005 increased $15,939,000 (67%) compared to 2004. Our costs associated with other costs of services for the year ended December 31, 2005 increased $8,432,000 (106%) compared to 2004, primarily due to reflecting the full year of legacy HSS operations as well as $1.8 million in additional supply costs related to green light lasers. Our general and administrative costs increased $2,466,000 (45%) over 2004. Costs associated with legal and professional fees increased $1,052,000 (97%) in 2005. Manufacturing costs increased $1,582,000 (30%) in 2005. This increase is due primarily to the increase in sales to external customers. In the future, we expect margins in medical products to vary significantly from period to period based on the mix of intercompany and third-party sales.

Depreciation and amortization expense increased $4,681,000 in 2005 compared to 2004 due primarily to the merger between Prime and HSS. Legacy HSS entities depreciation and amortization increased $3.8 million in 2005 from 2004, primarily due to 2005 reflecting a full twelve months of operations of legacy HSS entities.

Minority interest in consolidated income for 2005 increased $20,786,000 (77%) compared to 2004, as a result of an increase in income from our urology segment due primarily to the Prime-HSS merger. Legacy HSS entities minority interest expense increased $17.4 million in 2005 from 2004, primarily due to 2005 reflecting a full twelve months of operations of legacy HSS entities.

Provision for income taxes in 2005 increased $3,255,000 compared to 2004 due to an increase in taxable income. The effective tax rate increased in 2005 as compared to 2004 due to contingencies being reversed in 2004, as the statute of limitations expired.

23

2007 Outlook

As discussed above under “Recent Developments,” the urology services segment experienced a decrease in overall lithotripsy procedures during 2006 (as compared to 2005), primarily across our western region partnerships, combined with loss of certain partnerships and contracts in the fourth quarter of 2006. In addition, we exited or reduced sales efforts in certain product lines in the medical products segment in the fourth quarter of 2006. The numbers of procedures performed have remained relatively stable over the third and fourth quarters of 2006. We intend to increase our urology services operations primarily through forming new operating partnerships in new markets as well as by acquisitions. We intend to grow our medical products operations by offering new equipment and expanding our customer base. As of the date of filing this Annual Report on Form 10-K, we anticipate that the levels of revenues and income from continuing operations (exclusive of goodwill impairments) for 2007 will be materially consistent with or lower than the reported financial results for 2006. We cannot provide assurances that the 2007 results will be materially consistent with our 2006 results. See “Forward Looking Statements” under this Item 7 and “Risk Factors” under Part I, Item 1.

Liquidity and Capital Resources

Cash Flows

Our cash and cash equivalents were $27,857,000 and $21,077,000 at December 31, 2006 and 2005, respectively. Our subsidiaries generally distribute all of their available cash quarterly, after establishing reserves for estimated capital expenditures and working capital. For the years ended December 31, 2006 and 2005, our subsidiaries distributed cash of approximately $46,969,000 and $46,434,000, respectively, to minority interest holders.

Cash provided by our operations was $48,892,000 for the year ended December 31, 2006 and $56,260,000 for the year ended December 31, 2005. From 2005 to 2006, fee and other revenue collected decreased by $12,081,000 due primarily to decreased revenues. Cash paid to employees, suppliers of goods and others decreased by $13,403,000 in 2006. These fluctuations are attributable to the significant payoff of accrued expenses in 2005 as well as a decrease in inventory purchases in 2006.

Cash provided by our investing activities for the year ended December 31, 2006, was $128,409,000. We purchased equipment and leasehold improvements totaling $11,902,000 in 2006. Cash from discontinued operations was $138,971,000 and consisted primarily of the sales proceeds from the sale of our specialty vehicle manufacturing segment. Cash used by our investing activities for the year ended December 31, 2005, was $7,093,000, primarily due to $10,578,000 in equipment and leasehold improvements purchases.

Cash used in our financing activities for the year ended December 31, 2006, was $175,369,000, primarily due to distributions to minority interests of $46,969,000 and payments on notes payable of $134,257,000 partially offset by borrowings on notes payable of $4,657,000. Cash used in our financing activities for the year ended December 31, 2005, was $45,400,000, primarily due to distributions to minority interests of $46,434,000 and payments on notes payable of $173,265,000 partially offset by borrowings on notes payable of $163,814,000. We also received $12,825,000 in proceeds from the exercise of stock options in 2005.

Accounts receivable as of December 31, 2006 has decreased $2,402,000 from December 31, 2005. This decrease relates primarily to lower urology revenues as well as to the timing of collections. Bad debt expense was approximately $600,000 for 2006.

24

Senior Credit Facility

Our senior credit facility is comprised of a five-year $50 million revolver and a $125 million senior secured term loan B due 2011. We entered into this senior credit facility in March 2005. The loan bears interest at a variable rate equal to LIBOR + 1.25 to 2.25% or prime + .25 to 1.25%. On July 31, 2006, we used a portion of the proceeds from the sale of our specialty vehicle manufacturing segment to repay the term loan B in full. As of December 31, 2006, there were no amounts 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. We were in compliance with the covenants under our senior credit facility as of December 31, 2006.

8.75% Notes

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

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. In the second quarter of 2005, approximately $564,000 in proceeds from these swaps were recognized when the 8.75% notes were redeemed as described above.

Other long term debt. On July 31, 2006, we used a portion of the proceeds from the sale of our specialty vehicle manufacturing segment to repay approximately $3.5 million of mortgage debt related to our building in Austin, Texas. As of December 31, 2006, we had notes totaling $11.4 million 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.

Other long term obligations. At December 31, 2006, we had an obligation totaling $375,000 related to payments to the previous owner of one of our subsidiaries for $75,000 per quarter until March 31, 2008 as consideration for a noncompetition agreement. Also at December 31, 2006, as part of our Medstone acquisition, we had an obligation totaling $142,000 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 the Prime-HSS merger, two obligations totaling $125,000 related to payments to two previous 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.

25

General

The following table presents our contractual obligations as of December 31, 2006 (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)	$	11,357	$	5,677	$	4,494	$	1,152	$	34
Operating Leases (2)		7,552		1,721		2,885		2,015		931
Non-compete contracts (3)		642		508		134		--		--
Total	$	19,551	$	7,906	$	7,513	$	3,167	$	965

(1) Represents long term debt as discussed above.

(2) Represents operating leases in the ordinary course of our business.

(3) Represents an obligation of $375 due to the previous owner of one of our subsidiaries, at a rate of $75 per quarter, an obligation of $142 due to an employee of Medstone, at a rate of $21 per month until February 28, 2007 and $4 beginning March 1, 2007 and continuing until February 28, 2009, an obligation of $83 due to a previous employee of HealthTronics, at a rate of $8 per month until October 31, 2007 and an obligation of $42 due to a previous employee of HealthTronics, at a rate of $4 per month until October 31, 2007.

(4) Represents the estimated liability, in accordance with SFAS No. 150, of the “put” rights discussed in “Recent Developments” under this Item 7.

In addition, the scheduled principal repayments for all long term debt as of December 31, 2006 are payable as follows:

($ in thousands)
2007	$	5,677
2008		2,651
2009		1,843
2010		883
2011		269
Thereafter		34
Total	$	11,357

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 discussed under “Risk Factors” under Part I. 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 facility and our ability to obtain waivers for, or otherwise address, any noncompliance with the terms of our facility with our lenders.

We intend to increase our urology services operations primarily through forming new operating subsidiaries in new markets as well as by acquisitions. We seek opportunities to grow our medical products operations by offering new equipment 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 we deem appropriate.

26

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 September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) 108 regarding the process of quantifying financial statement misstatements. SAB 108 states that registrants should use both a balance sheet approach and an income statement approach when quantifying and evaluating the materiality of a misstatement. The interpretations in SAB 108 contain guidance on correcting errors under the dual approach as well as provide transition guidance for correcting errors. This interpretation does not change the requirements within SFAS 154, Accounting Changes and Error Corrections – a replacement of APB 20 and FASB Statement 3, for the correction of an error on financial statements. SAB 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. We adopted this interpretation on December 31, 2006. The adoption of SAB 108 did not have a significant effect on our consolidated financial statements.

In July 2006, the Financial Accounting Standards Board (FASB) finalized Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. In addition, FIN 48 clearly scopes out income taxes from FASB No. 5, Accounting for Contingencies. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the effect FIN 48 will have on our consolidated financial position, cash flows, or results from operations.

At its June 2005 meeting, the Emerging Issues Task Force (EITF) reached a consensus which was ratified by the FASB on EITF 04-05 with regards to consolidation of limited partnership interests by the general partner. The requirements replace counterpart requirements in Statement of Position (SOP) 78-9, which provides guidance on accounting for investments in real-estate ventures, but has come to be used for all types of limited partnerships. EITF 04-05 is based on the same presumption in SOP 78-9 that the general partner controls the limited partnership and should consolidate it, regardless of the level of its ownership interest. However, EITF 04-05 establishes a new framework for evaluating whether the presumption that the general partner controls the limited partnership is overcome. The presumption of general-partner control would be overcome only if the limited partners have either “kick-out rights”—the right to dissolve or liquidate the partnership or otherwise remove the general partner “without cause” or “participating rights”—the right to effectively participate in significant decisions made in the ordinary course of the partnership’s business. The kick-out rights and the participating rights must be substantive in order to overcome the presumption of general partner control. We adopted EITF 04-05 effective January 1, 2006 and this adoption did not have a material effect on our consolidated financial statements.

27

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154). SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle and applies to all voluntary changes in an accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting changes and error corrections occurring in fiscal years beginning after December 15, 2005. We adopted SFAS 154 effective January 1, 2006, and this adoption did not have a material effect on our financial position or results of operations.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs, amendment to ARB No. 43 Chapter 4 (SFAS No. 151), which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. We adopted SFAS No.151 effective January 1, 2006, and the impact was not material.

ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

As of December 31, 2006, we had long-term debt (including current portion) totaling $11,357,000, of which $7,645,000 had fixed rates of 1% to 11%, and $3,712,000 incurred interest at a variable rate equal to a specified prime rate. We are exposed to some market risk due to the remaining floating interest rate debt totaling $3,712,000. We make monthly or quarterly payments of principal and interest on $2,132,000 of the floating rate debt. An increase in interest rates of 1% would result in a $37,100 annual increase in interest expense on this existing principal balance

ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is contained in Appendix A attached hereto.

ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                    ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.      CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures

As of December 31, 2006, 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 December 31, 2006, our disclosure controls and procedures were effective.

(b) Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

28

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2006 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its report entitled Internal Control—Integrated Framework.

Based on this assessment, our management concluded that, as of December 31, 2006, our internal control over financial reporting was effective based on those criteria.

Ernst & Young, LLP, our independent registered public accounting firm, has issued an audit report on management’s assessment of our internal control over financial reporting. The report of Ernst & Young, LLP is included herein.

(c) Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the three months ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting.

ITEM 9B.      OTHER INFORMATION

In connection with the audit of our 2006 financial statements, we determined that goodwill related to our urology services and medical products segments was impaired. We recognized in the fourth quarter of 2006, goodwill impairment of approximately $12.2 million related to our urology services segment and $8.4 million related to our medical products segment. The impairment of our urology services segment is due primarily to a decrease in the number of overall lithotripsy procedures during 2006, primarily across our western region partnerships, combined with the loss of certain partnerships and contracts late in 2006. The impairment in our medical products segment relates primarily to our decision to reduce or exit certain product lines during the fourth quarter of 2006.

29

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
HealthTronics, Inc.:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that HealthTronics, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). HealthTronics, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that HealthTronics, Inc. and subsidiaries maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, HealthTronics, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

30

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of HealthTronics, Inc. and subsidiaries as of December 31, 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for year then ended of HealthTronics, Inc. and our report dated March 8, 2007, expressed an unqualified opinion thereon.

/s/: Ernst & Young LLP
Austin, Texas
March 8, 2007

31

PART III

ITEM 10.      DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item will be contained in our definitive proxy statement to be filed in connection with our 2007 annual meeting of stockholders, except for the information regarding our executive officers, which is presented in Part I of this Form 10-K. The information required by this item contained in our definitive proxy statement is incorporated herein by reference.

ITEM 11.      EXECUTIVE COMPENSATION

The information required by this item will be contained in our definitive proxy statement to be filed in connection with our 2007 annual meeting of stockholders and is incorporated herein by reference.

ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
                      RELATED STOCKHOLDER MATTERS

The information required by this item will be contained in our definitive proxy statement to be filed in connection with our 2007 annual meeting of stockholders and is incorporated herein by reference.

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                      INDEPENDENCE

The information required by this item will be contained in our definitive proxy statement to be filed in connection with our 2007 annual meeting of stockholders and is incorporated herein by reference.

ITEM 14.      PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item will be contained in our definitive proxy statement to be filed in connection with our 2007 annual meeting of stockholders and is incorporated herein by reference.

32

PART IV

ITEM 15.      EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) 1. Financial Statements.

          The information required by this item is contained in Appendix A attached hereto.

     

         

(b) Exhibits. (1)

 3.1
 
 
 3.2
 
 
 4.1
 
 10.1
 
 
 10.2
 
 
 10.3*
 
 
 10.4*
 
 
 10.5*
 
 10.6*
 
 
 10.7*
 
 
 10.8*
 
 10.9*
 
 10.10*
 
 10.11*
 10.12*
 10.13
 
 
  Amended and Restated Articles of Incorporation of the Company (Incorporated by
reference to Annex D to the Rule 424(b)(3) joint proxy statement/prospectus, dated
October 6, 2004, filed by HealthTronics with the SEC on October 7, 2004)
Amended and Restated Bylaws of the Company (Incorporated by reference to Annex E
to the Rule 424(b)(3) joint proxy statement/prospectus, dated October 6, 2004, filed by
HealthTronics with the SEC on October 7, 2004)
Specimen of Common Stock Certificate (Filed as an Exhibit to the HSS Registration
Statement on Form S-4 (Registration No. 33-56900))
Form of Indemnification Agreement dated October 11, 1993 between the Company and
certain of its officers and directors (Filed as an Exhibit to the Current Report on Form 8-
K of Prime dated October 18, 1993)
Release and Severance Agreement dated December 30, 2001 by and between Prime
Medical Services Inc. and Kenneth S. Shifrin (Filed as an Exhibit to the Annual Report
on Form 10-K of Prime for the year ended December 31, 2001)
Amended and Restated 1993 Stock Option Plan, as amended June 18, 2002 (Filed as an
Exhibit to the Annual Report on Form 10-K of Prime for the year ended December 31,
2002)
Prime Medical Services, Inc., 2003 Stock Option Plan (Incorporated by reference to
Annex D of the Rule 424(b)(3) joint proxy statement/prospectus, dated January 7, 2004,
filed by Prime with the SEC on January 8, 2004)
HealthTronics 2004 Equity Incentive Plan (Incorporated by reference to Exhibit 10.2 to
HealthTronics’ current report on Form 8-K filed on January 25, 2005)
Form of Board Service and Release Agreement by and between HealthTronics and Argil
J. Wheelock, M.D. (Filed as Exhibit 10.22 to the HSS Registration Statement on Form S-
4 (Registration No. 333-117102))
Board Service, Amendment and Release Agreement by and between HealthTronics and
Kenneth S. Shifrin (Incorporated by reference to the HSS Registration Statement on
Form S-4 (Registration No. 333-117102))
HSS Stock Option Plan - 2002 (Incorporated by reference to Exhibit 10.1 of
HealthTronics’ Current Report on Form 8-K filed on January 25, 2005)
HSS Stock Option Plan - 2001 (Incorporated by reference to Appendix A to HSS’ proxy
statement filed with the SEC on April 18, 2001)
HSS Stock Option Plan - 2000 (Incorporated by reference to Appendix A to HSS’ proxy
statement filed with the SEC on April 25, 2000)
Form of Incentive Stock Option Agreement
Form of Nonstatutory Stock Option Agreement
Credit Agreement, dated as of March 23, 2005, among HealthTronics, Inc. the lenders
party thereto, Bank of America, N.A., as Syndication Agent, and JPMorgan Chase Bank,
National Association, as Administrative Agent for the lenders (Incorporated by reference
to Exhibit 10.1 of the Company’s 10-Q filed with the Securities and Exchange
Commission on November 8, 2005).

33

10.14



10.15



10.16



10.17*


10.18


10.19


10.20


10.21



10.22



10.23


10.24


10.25



10.26



10.27



10.28



Consulting and Non-Competition Agreement, dated September 21, 2005, by and between
HealthTronics, Inc. and Brad A. Hummel (incorporated by reference to Exhibit 99.2 to
the Company’s Form 8-K filed with the Securities and Exchange Commission on
September 27, 2005).
Executive Employment Agreement, effective October 1, 2005, by and between
HealthTronics, Inc. and James S. B. Whittenburg (incorporated by reference to
Exhibit 99.4 to the Company’s Form 8-K filed with the Securities and Exchange
Commission on September 27, 2005).
Executive Employment Agreement, effective October 1, 2005, by and between
HealthTronics, Inc. and Christopher B. Schneider (incorporated by reference to Exhibit
99.5 to the Company’s Form 8-K filed with the Securities and Exchange Commission on
September 27, 2005.
First Amendment to the HealthTronics, Inc. 2004 Equity Incentive Plan (incorporated by
reference to Exhibit 10.1 to HealthTronics’ Quarterly Report on Form 10-Q for the
quarter ended June 30, 2005, filed on August 5, 2005).
Form of Indemnification Agreement for directors and certain officers of HealthTronics
(incorporated by reference to Exhibit 99.1 to HealthTronics’ Current Report on Form 8-K
filed on June 1, 2005).
Deferred Compensation Plan for HealthTronics, Inc., adopted December 1, 2004
(incorporated by reference to Exhibit 10.2 to HealthTronics’ Quarterly Report on Form
10-Q for the quarter ended March 31, 2005, filed May 10, 2005).
First Amendment to Board Service and Release Agreement, dated as of March 2, 2006,
by and between HealthTronics and Argil J. Wheelock, M.D. (incorporated by reference to
Exhibit 10.1 of HealthTronics’ Current Report Form 8-K filed on March 8, 2006.)
Consulting and Non-Competition Agreement, dated as of January 23, 2006 by and
between the Company and Joseph M. Jenkins, M.D. (incorporated by reference to
Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Securities
and Exchange Commission on May 11, 2006).
Executive Employment Agreement, effective as of May 8, 2006, by and between the
Company and Sam B. Humphries (Incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 1, 2006.)
Second Amendment to the Company’s 2004 Equity Incentive Plan (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on June 14, 2006.)
Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2
to the Company’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 14, 2006).
Interest and Stock Purchase Agreement, dated as of June 22, 2006, by and between
HealthTronics, Inc. and AK Acquisition Corp. (incorporated by reference to Exhibit 10.1
to the Company’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on June 28, 2006).
Severance and Non-Competition Agreement, dated July 27, 2006, by and between
HealthTronics, Inc. and John Q. Barnidge (incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on July 28, 2006)
Second Amendment to Executive Employment Agreement, dated as of August 23, 2006,
by and between HealthTronics, Inc. and Sam B. Humphries (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 25, 2006)
Executive Employment Agreement, effective January 8, 2007, by and between
HealthTronics and Ross A. Goolsby (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 11, 2006).

34

21.1
23.1
23.2
31.1
31.2
32.1
32.2
List of subsidiaries of the Company. (Filed herewith)
Consent of Independent Registered Public Accounting Firm. (Filed herewith)
Consent of Independent Registered Public Accounting Firm. (Filed herewith)
Certification of Chief Executive Officer. (Filed herewith)
Certification of Chief Financial Officer. (Filed herewith)
Certification of Chief Executive Officer. (Filed herewith)
Certification of Chief Financial Officer. (Filed herewith)

_____________________
* Executive compensation plans and arrangements.

(1) The exhibits listed above will be furnished to any security holder upon written request for such exhibit to Ross A. Goolsby, HealthTronics, Inc., 1301 Capital of Texas Highway, Suite 200B, Austin, Texas 78746. The Securities and Exchange Commission (the “SEC”) maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC at “http://www.sec.gov”.

35

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

HEALTHTRONICS, INC.







By: /s/ Sam B. Humphries                                
       Sam B. Humphries
       Chief Executive Officer and
        President (Principal Executive Officer)

       Date: March 15, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By:
         





Date:





By:
         




Date:





By:
         


Date:



By:
         


Date:



By:
         


Date:



By:
         


Date: /s/ Sam B. Humphries
Sam B. Humphries,
Chief Executive Officer and
President (Principal Executive Officer)
and Director


March 15, 2007





/s/ Ross A. Goolsby
Ross A. Goolsby,
Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)


March 15, 2007





/s/ R. Steven Hicks
R. Steven Hicks, Non-executive Chairman of the Board


March 15, 2007



/s/ Donny R. Jackson
Donny R. Jackson, Director


March 15, 2007



/s/ Timothy J. Lindgren
Timothy J. Lindgren, Director


March 15, 2007



/s/ Kevin A. Richardson II
Kevin A. Richardson II, Director


March 15, 2007

36

By:
         





Date:





By:
         




Date:





By:
         


Date:



By:
         


Date:



By:
         


Date:



/s/ William A. Searles
William A. Searles, Director





March 15, 2007





/s/ Kenneth S. Shifrin
Kenneth S. Shifrin, Director




March 15, 2007





/s/ Perry M. Waughtal
Perry M. Waughtal, Directorr


March 15, 2007



/s/ Argil J. Wheelock, M.D.
Argil J. Wheelock, M.D., Director


March 15, 2007



/s/ Mark G. Yudof
Mark G. Yudof, Director


March 15, 2007

37

APPENDIX A

INDEX

Page

Reports of Independent Registered Public Accounting Firms Consolidated Financial Statements:       Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004.       Consolidated Balance Sheets at December 31, 2006 and 2005.       Consolidated Statements of Stockholders’ Equity for the years ended December       31, 2006, 2005 and 2004.       Consolidated Statements of Cash Flows for the years ended December 31, 2006,      2005 and 2004.      Notes to Consolidated Financial Statements.

A-2 A-4 A-5 A-7 A-8 A-11

A-1

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders HealthTronics, Inc.:

We have audited the accompanying consolidated balance sheet of HealthTronics, Inc. and subsidiaries as of December 31, 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of HealthTronics, Inc. and subsidiaries at December 31, 2006, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

As discussed in Note I to the consolidated financial statements, effective January 1, 2006, the Company changed its method of accounting for stock-based compensation to conform to Statement of Financial Accounting Standards No. 123(R), Share-Based Payment.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of HealthTronics, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 8, 2007, expressed an unqualified opinion thereon.

/s/: Ernst & Young LLP
Austin, Texas
March 8, 2007

A-2

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
HealthTronics, Inc.:

We have audited the accompanying consolidated balance sheet of HealthTronics, Inc. and subsidiaries (HealthTronics) as of December 31, 2005, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of HealthTronics and subsidiaries as of December 31, 2005, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2005, in conformity with generally accepted accounting principles in the United States of America.



/s/: KPMG LLP
Austin, Texas

April 13, 2006, except as to Note L (2004 and 2005 information related
to Specialty Vehicles Manufacturing, CryoSurgery, Rocky Mountain Prostate
Thermotherapies, and HIFU discontinued operations and assets and liabilities
held for sale) which is as of March 12, 2007.

A-3

HEALTHTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

($ in thousands, except per share data)	Years Ended December 31,
	2006			2005			2004
Revenue:
Urology Services	$	123,265		$	133,360		$	75,361
Medical Products		19,080			18,202			10,846
Other		546			705			936
Total revenue		142,891			152,267			87,143
Cost of services and general and administrative expenses:
Salaries, wages and benefits		44,755			39,741			23,802
Other costs of services		19,247			16,377			7,945
General and administrative		8,552			7,946			5,480
Legal and professional		4,630			2,142			1,090
Manufacturing costs		9,761			6,855			5,273
Advertising		1,151			1,490			872
Other		261			330			49
Goodwill impairment		20,600			--			--
Depreciation and amortization		11,275			11,444			6,763
		120,232			86,325			51,274
Operating income		22,659			65,942			35,869
Other income (expenses):
Interest and dividends		755			448			319
Interest expense		(1,146	)		(1,139	)		(650	)
		(391	)		(691	)		(331	)
Income from continuing operations before provision
for income taxes and minority interest		22,268			65,251			35,538
Minority interest in consolidated income		43,277			47,816			27,030
Provision (benefit) for income taxes		(4,563	)		6,502			3,247
Income (loss) from continuing operations		(16,446	)		10,933			5,261
Income (loss) from discontinued operations, net of tax		25,129			(1,745	)		(3,908	)
Net income	$	8,683		$	9,188		$	1,353
Basic earnings per share:
Income (loss) from continuing operations	$	(0.47	)	$	0.32		$	0.24
Income (loss) from discontinued operations	$	0.72		$	(0.05	)	$	(0.18	)
Net income	$	0.25		$	0.27		$	0.06
Weighted average shares outstanding		35,157			34,311			21,903
Diluted earnings per share:
Income (loss) from continuing operations	$	(0.47	)	$	0.31		$	0.24
Income (loss) from discontinued operations	$	0.72		$	(0.05	)	$	(0.18	)
Net income	$	0.25		$	0.26		$	0.06
Weighted average shares outstanding		35,347			35,182			22,201

See accompanying notes to consolidated financial statements.

A-4

HEALTHTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

($ in thousands)	December 31,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	27,857		$	21,077
Accounts receivable, less allowance for doubtful
accounts of $2,166 in 2006 and $1,491 in 2005		22,752			25,154
Other receivables		1,201			3,296
Deferred income taxes		6,825			19,978
Prepaid expenses and other current assets		1,716			3,084
Inventory		11,474			11,506
Total current assets		71,825			84,095
Property and equipment:
Equipment, furniture and fixtures		46,155			43,920
Building and leasehold improvements		12,710			12,706
		58,865			56,626
Less accumulated depreciation and
amortization		(24,595	)		(23,591	)
Property and equipment, net		34,270			33,035
Assets held for sale		1,258			99,092
Other investments		1,348			1,323
Goodwill, at cost		229,261			255,817
Intangible assets		5,669			6,937
Other noncurrent assets		3,102			2,738
	$	346,733		$	483,037

See accompanying notes to consolidated financial statements.

A-5

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

($ in thousands, except share data)	December 31,
	2006			2005
LIABILITIES
Current liabilities:
Current portion of long-term debt	$	5,664		$	11,043
Accounts payable		6,295			5,813
Accrued distributions to minority interests		7,687			8,250
Accrued expenses		10,477			9,701
Total current liabilities		30,123			34,807
Liabilities held for sale		258			19,271
Long-term debt, net of current portion		5,673			129,195
Other long-term obligations		134			642
Deferred income taxes		24,924			24,091
Total liabilities		61,112			208,006
Minority interest		30,104			33,549
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 30,000,000 shares authorized: none outstanding		--			--
Common stock, no par value, 70,000,000 authorized: 35,475,236 issued and 35,379,831
outstanding in 2006; 35,010,656 issued and 34,866,735 outstanding in 2005		200,941			196,080
Accumulated earnings		55,473			46,790
Treasury stock, at cost, 95,405 shares in 2006 and 143,921 shares in 2005		(897	)		(1,388	)
Total stockholders' equity		255,517			241,482
	$	346,733		$	483,037

See accompanying notes to consolidated financial statements.

A-6

HEALTHTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 2006, 2005 and 2004

($ in thousands, except share data)	Issued Common Stock						Capital in Excess of			Accumulated		Treasury Stock
	Shares			Amount			Par Value			Earnings		Shares			Amount			Total
Balance, December 31, 2003		17,324,585		$	173		$	70,813		$	36,249		(242,716	)	$	(1,214	)	$	106,021
Net income		--			--			--			1,353		--			--			1,353
Purchase of treasury stock		--			--			--			--		(140,250	)		(704	)		(704	)
Retirement of treasury stock		(382,966	)		(1,918	)		--			--		382,966			1,918			--
Value of stock options assumed in
acquisition		--			4,346			--			--		--			--			4,346
Conversion to no par common stock		--			88,959			(88,959	)		--		--			--			--
Issuance of stock for acquisition		16,107,279			87,412			17,891			--		--			--			105,303
Exercise of stock options, including
tax benefit totaling $295		114,677			537			166			--		--			--			703
Exercise of stock warrants		32,990			1			89			--		--			--			90
Balance, December 31, 2004		33,196,565			179,510			--			37,602		--			--			217,112
Net income		--			--			--			9,188		--			--			9,188
Purchase of treasury stock		--			--			--			--		(143,921	)		(1,388	)		(1,388	)
Issuance of stock for acquisitions		89,200			1,236			--			--		--			--			1,236
Exercise of stock options, including
tax benefit totaling $2,509		1,675,207			15,334			--			--		--			--			15,334
Exercise of stock warrants		49,684			--			--			--		--			--			--
Balance, December 31, 2005		35,010,656			196,080			--			46,790		(143,921	)		(1,388	)		241,482
Net income		--			--			--			8,683		--			--			8,683
Purchase of treasury stock		--			--			--			--		(10,000	)		(73	)		(73	)
Contribution of treasury stock		--			--			--			--		58,516			564			564
Issuance of stock for acquisitions		166,666			1,095			--			--		--			--			1,095
Exercise of stock options, including
tax benefit totaling $69		297,914			1,978			--			--		--			--			1,978
Share-based compensation		--			1,788			--			--		--			--			1,788
Balance, December 31, 2006		35,475,236		$	200,941		$	--		$	55,473		(95,405	)	$	(897	)	$	255,517

See accompanying notes to consolidated financial statements.

A-7

HEALTHTRONICS, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS

($ in thousands)	Years Ended December 31,
	2006			2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Fee and other revenue collected	$	146,658		$	158,739		$	85,358
Cash paid to employees, suppliers
of goods and others		(83,235	)		(96,638	)		(53,377	)
Interest received		755			448			308
Interest paid		(1,296	)		1,140			(1,161	)
Taxes (paid) refunded		(475	)		(407	)		1,893
Discontinued Operations		(13,515	)		(7,022	)		832
Net cash provided by operating activities		48,892			56,260			33,853
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of entities, net of cash acquired		--			2,417			4,902
Purchases of equipment and leasehold improvements		(11,902	)		(10,578	)		(7,285	)
Proceeds from sales of equipment		1,365			2,198			949
Distributions from investments		--			992			406
Other		(25	)		--			--
Discontinued Operations		138,971			(2,122	)		(2,592	)
Net cash provided by (used in) investing activities		128,409			(7,093	)		(3,620	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable, exclusive of interest		(134,257	)		(173,265	)		(28,623	)
Borrowings on notes payable		4,657			163,814			34,992
Distributions to minority interest		(46,969	)		(46,434	)		(25,896	)
Contributions by minority interest, net of buyouts		(314	)		963			377
Exercise of stock options		1,907			12,825			408
Purchase of treasury stock		(73	)		(1,388	)		--
Discontinued Operations		(320	)		(1,915	)		689
Net cash used in financing activities		(175,369	)		(45,400	)		(18,053	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		1,932			3,767			12,180
Cash and cash equivalents, beginning of period, includes cash
from discontinued operations of $4,650, $2,292
and $2,427 for 2006, 2005 and 2004, respectively		25,727			21,960			9,780
Cash and cash equivalents, end of period, includes cash
from discontinued operations of $(198), $4,650 and $2,292
for 2006, 2005 and 2004 respectively	$	27,659		$	25,727		$	21,960

See accompanying notes to consolidated financial statements.

A-8

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

($ in thousands)	Years Ended December 31,
	2006			2005			2004
Reconciliation of net income to net cash
provided by operating activities:
Net income	$	8,683		$	9,188		$	1,353
Adjustments to reconcile net income to cash provided
by operating activities:
Minority interest in consolidated income		43,277			47,816			27,030
Depreciation and amortization		11,275			11,444			6,763
Provision for uncollectible accounts		581			835			32
Equity in earnings of affiliates		--			(987	)		(425	)
Provision for deferred income taxes		(4,997	)		3,975			(231	)
Proceeds from termination of interest rate swap		--			(564	)		--
Non-cash share-based compensation		2,352			--			--
Impairment charges		20,600			--			--
Other		(636	)		(134	)		(64	)
Discontinued Operations		(38,643	)		(2,294	)		9,381
Changes in operating assets and liabilities,
net of effect of purchase transactions:
Accounts receivable		1,821			1,823			(1,920	)
Other receivables		2,094			(2,273	)		209
Other assets		1,036			(5,360	)		59
Accounts payable		482			(103	)		(4,409	)
Accrued expenses		967			(7,106	)		(3,925	)
Total adjustments		40,209			47,072			32,500
Net cash provided by operating activities	$	48,892		$	56,260		$	33,853

See accompanying notes to consolidated financial statements.

A-9

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

($ in thousands)	Years Ended December 31,
	2006		2005			2004
SUPPLEMENTAL INFORMATION OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
At December 31, the Company had accrued distributions payable
to minority interests. The effect of this transaction was as follows:
Current liabilities increased by	$	7,687	$	8,250		$	8,429
Minority interest decreased by		7,687		8,250			8,429
In 2005, the Company acquired two lithotripsy partnerships and made
residual adjustments for 2004 acquisitions. The acquired
assets and liabilities were as follows:
Current assets increased by		--		356			--
Noncurrent assets decreased by		--		(4,973	)		--
Goodwill increased by		--		10,295			--
Current liabilities increased by		--		3,272			--
Other long-term obligations increased by		--		83			--
Stockholders' equity increased by		--		1,236			--
In 2004, the Company acquired two lithotripsy companies
The acquired assets and liabilities were as follows:
Current assets increased by		--		--			20,621
Noncurrent assets increased by		--		--			42,638
Goodwill increased by		--		--			115,855
Current liabilities increased by		--		--			22,524
Other long-term obligations increased by		--		--			56,967
Deferred income taxes increased by		--		--			4,076
Stockholders' equity increased by		--		--			106,739

See accompanying notes to consolidated financial statements.

A-10

HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A.   ORGANIZATION AND OPERATION OF THE COMPANY

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 that agreement, as a result of the merger, Prime’s stockholders received one share of HealthTronics common stock for each share of Prime’s common stock. Because Prime’s stockholders now own approximately 62% of the shares of HealthTronics common stock due to the merger, and because Prime’s directors and senior management represent a majority of the combined company’s directors and senior management, 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 U.S. generally accepted accounting principles. 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 fair value 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 is the surviving legal entity.

On June 22, 2006, we and AK Acquisition Corp., a wholly-owned subsidiary of Oshkosh Truck Corporation (“Oshkosh”), entered into an Interest and Stock Purchase Agreement pursuant to which Oshkosh agreed to acquire our specialty vehicle manufacturing segment for $140 million in cash. We completed this sale on July 31, 2006. Accordingly, we have included our specialty vehicle manufacturing segment in discontinued operations in the accompanying consolidated financial statements.

During the fourth quarter of 2006, we also sold our cryosurgery operations, committed to sell our Rocky Mountain Prostate business and announced our decision to discontinue our involvement in the clinical trials of the Ablatherm device. Accordingly, all of these activities have been reflected as discontinued operations in the accompanying consolidated financial statements.

We now provide healthcare services and manufacture medical devices, primarily for the urology community. Prior to July 31, 2006, we also designed and manufactured trailers and coaches that transport high technology medical devices and equipment for mobile command and control centers and the media and broadcast industry.

We are headquartered in Austin, Texas and provide urology services in approximately 40 states.

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation

The consolidated financial statements include the accounts of the Company, our wholly-owned subsidiaries, and entities more than 50% owned and limited partnerships or limited liability corporations (LLCs) where we, as the general partner or managing member, exercise effective control, even though our ownership is less than 50%. The related agreements provide for broad powers by us. The other parties do not participate in the management of the entity and do not have the substantial ability to remove us. In accordance with Financial Accounting Standards Board (FASB) Interpretation 46R, Consolidation of Variable Interest Entities (VIE), an Interpretation of ARB No. 51 (FIN 46), the Company has determined that one of our consolidated partnerships, acquired in the HSS Merger and in which we have a 20% interest, has related party relationships with two VIEs and has consolidated those entities. Investments 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%. All significant intercompany accounts and transactions have been eliminated.

A-11

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Cash Equivalents

We consider as cash equivalents demand deposits and all short-term investments with a maturity at date of purchase of three months or less.

Property and Equipment

Property and equipment are stated at cost. Major betterments are capitalized while normal maintenance and repairs are charged to operations. Depreciation is computed by the straight-line method using estimated useful lives of three to twenty years. Leasehold improvements are generally amortized over ten years or the term of the lease, whichever is shorter. When assets are sold or retired, the corresponding cost and accumulated depreciation or amortization are removed from the related accounts and any gain or loss is credited or charged to operations. Depreciation expense for property and equipment was $9,844,000, $10,183,000 and $6,459,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

Impairment of long-lived assets

We review long-lived assets, other than goodwill and other intangible assets with indefinite lives, for impairment whenever facts and circumstances indicate that the carrying amounts of the assets may not be recoverable. An impairment loss is recognized only if the carrying amount of the asset is not recoverable and exceeds its fair value. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future net cash flows expected to be generated by the asset. If the asset’s carrying value is not recoverable, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds its fair value. We determine fair values by using a combination of comparable market values and discounted cash flows, as appropriate.

Goodwill and Other Intangible Assets

We record as goodwill the excess of the purchase price over the fair value of the net assets associated with acquired businesses. Goodwill and intangible assets with indefinite useful lives are not amortized, but instead are tested for impairment at least annually. Intangible assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual values. We test for impairment of goodwill during the fourth quarter. We now have two reporting units, urology services and medical products. The fair value of each reporting unit is calculated using a combination of estimated discounted future cash flow projections and comparable market values.

Revenue Recognition

Our revenue recognition policies are in accordance with the SEC’s Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements, SAB No. 104, Revenue Recognition, and other authoritative accounting literature. In the case of arrangements which require significant production, modification or customization of products, we follow the guidance in the AICPA Statement of Position (“SOP”) 81-1, Accounting for Performance of Construction-Type and Certain Production Type Contracts, whereby we apply the completed contract method, since all our contracts are of a short-term nature. After the sale of our specialty vehicles manufacturing segment in July 2006, we no longer have any sale arrangements which follow SOP 81-1.

A-12

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Our fees for urology services are recorded when the procedure is performed and are based on a contracted rate with a hospital (wholesale contract) or based on a contractual rate with commercial insurance carriers (retail contract), individual or state and federal health care agencies, net of contractual fee reduction. Management fees from limited partnerships are recorded monthly when earned. Distributions from cost basis investments are recorded when received and totaled $1,005,000, $987,000 and $425,000 in 2006, 2005 and 2004, respectively.

Sales of medical devices including related accessories (which started in February 2004 with the acquisition of Medstone International, Inc. (“Medstone”)) are recorded when delivered to the customer and any trial period ends. There are no post-shipment obligations after revenue is recognized except a possible maintenance equipment contract. If the sale includes maintenance services over a period of time, we defer the fair value of the maintenance services and recognize it ratably over the contract period. Fair value of undelivered elements is determined based on prices when the items are sold separately. Licensing fees (which started with the acquisition of Medstone in February 2004) are recorded when the related lithotripsy procedure is performed on the equipment we sold to third parties; leasing fees and revenues from maintenance contracts are recorded monthly as the related services are provided; sales of consumable products are recorded when delivered to the customer.

Prior to the sale of our specialty vehicle manufacturing segment on July 31, 2006, revenue from the manufacture of trailers where we had a customer contract prior to beginning production was recognized when the project was substantially complete. Substantially complete was when the following had occurred (1) all significant work on the project was done; (2) the specifications under the contract had been met; and (3) no significant risks remained. Revenue from the manufacture of trailers built to an OEM’s forecast was recognized upon delivery. Costs incurred, which primarily consist of labor and materials, on uncompleted projects were capitalized as work in process. Provisions for estimated losses on uncompleted projects were made in the period in which the losses were determined.

Major Customers and Credit Concentrations

For the years ending December 31, 2006, 2005 and 2004, we had no customers who exceeded 10% of consolidated revenues. Concentrations of credit risk with respect to cash relate to deposits held with banks in excess of insurance provided. Generally, these deposits may be redeemed upon demand and, therefore, in the opinion of management, bear minimal risk. Concentrations of credit risk with respect to receivables are limited due to the wide variety of customers, as well as their dispersion across many geographic areas. Other than as disclosed below, we do not consider ourselves to have any significant concentrations of credit risk. At December 31, 2006, approximately 23% of accounts receivable relate to units operating in New York, 7% relate to units operating in Florida, 7% relate to units in Louisiana, 6% related to units in Texas, and 5% each relate to units in Georgia, Indiana and Minnesota. At December 31, 2005, approximately 16% of accounts receivable relate to units operating in New York and 5% relate to units operating in Florida.

Income Tax

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

A-13

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Accounts Receivable

Accounts receivable are recorded based on revenues, net of contractual fee reductions and less an estimated allowance for doubtful accounts. The allowance for doubtful accounts is based on our assessment of the collectibility of customer accounts. We regularly review the allowance by considering factors such as historical experience, credit quality, age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. The following is a summary of accounts receivable allowances:

($ in thousands)	Balance at Beginning of Year		Costs and Expenses		Deductions		Other			Balance at End of Year
Allowance for Doubtful Accounts:
2006	$	1,491	$	776	$	101	$	--		$	2,166
2005	$	812	$	835	$	156	$	--		$	1,491
2004	$	402	$	32	$	70	$	448	(a)	$	812

(a)    Amounts acquired in acquisitions.

Inventory

Inventory is stated at the lower of cost or market. Cost is determined using the average cost method. Certain components that meet our manufacturing requirements are only available from a limited number of suppliers. The inability to obtain components as required or to develop alternative sources, if and as required in the future, could result in delays or reduction in product shipments, which in turn could have a material adverse effect on our manufacturing business, financial condition and results of operations.

As of December 31, 2006 and 2005, inventory consists of the following (in thousands):

	2006			2005
Raw Materials		$	7,070		$	7,570
Finished Goods			4,404			3,936
		$	11,474		$	11,506

Stock-Based Compensation

On January 1, 2006, we adopted Statement of Financial Accounting Standard (“SFAS”) No. 123(R), Share-Based Payment, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including stock option grants based on estimated fair values. SFAS No. 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the award’s portion that is ultimately expected to vest is recognized as expense over the requisite service periods. Prior to the adoption of SFAS No. 123(R), we accounted for share-based awards to employees and directors using the intrinsic valued method in accordance with Accounting Principles Board Opinion (“APB”) No. 25 as allowed under SFAS No. 123, Accounting for Stock-Based Compensation. Under the intrinsic value method, share-based compensation expense was only recognized by us if the exercise price of the stock option was less than the fair market value of the underlying stock at the date of grant.

A-14

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

We have elected to use the modified prospective application method whereby SFAS No. 123(R) applies to new awards, the unvested portion of existing awards and to awards modified, repurchased or canceled after the effective date. In accordance with the modified prospective method, our consolidated financial statements for the year ended December 31, 2005 and prior have not been restated to reflect, and do not include, the impact of SFAS No. 123(R). We have provided proforma disclosures of net income and earnings per share as if the fair value-based method prescribed by SFAS No. 123 had been applied in measuring compensation expense in footnote I.

Debt Issuance Costs

We expense debt issuance costs as incurred.

Advertising costs.

Costs related to advertising are expensed as incurred.

Research and Development

Research and development costs are expensed as incurred and are not material in any of the periods presented.

Estimates Used to Prepare Consolidated Financial Statements

Management uses estimates and assumptions in preparing financial statements in accordance with U.S. generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were assumed in preparing the consolidated financial statements.

Reclassification

Certain reclassifications have been made to expense catagories presented in previous years to be consistent with the 2006 presentation.

Earnings Per Share

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

A-15

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(In thousands, except per share data)	Net Income		No. of Shares		Per Share Amounts
For the year ended December 31, 2006
Basic	$	8,683		35,157	$	0.25
Effect of dilutive securities:
Options		--		190
Diluted	$	8,683		35,347	$	0.25
For the year ended December 31, 2005
Basic	$	9,188		34,311	$	0.27
Effect of dilutive securities:
Options		--		871
Diluted	$	9,188		35,182	$	0.26
For the year ended December 31, 2004
Basic	$	1,353		21,903	$	0.06
Effect of dilutive securities:
Options and warrants		--		298
Diluted	$	1,353		22,201	$	0.06

Unexercised employee stock options and warrants to purchase 3,223,000, 751,000 and 1,666,000 shares of our common stock as of December 31, 2006, 2005 and 2004, respectively, were not included in the computations of diluted EPS because the exercise prices were greater than the average market price of our common stock during the respective periods.

Recently Issued Pronouncements

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) 108 regarding the process of quantifying financial statement misstatements. SAB 108 states that registrants should use both a balance sheet approach and an income statement approach when quantifying and evaluating the materiality of a misstatement. The interpretations in SAB 108 contain guidance on correcting errors under the dual approach as well as provide transition guidance for correcting errors. This interpretation does not change the requirements within SFAS 154, Accounting Changes and Error Corrections – a replacement of APB 20 and FASB Statement 3, for the correction of an error on financial statements. SAB 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. We adopted this interpretation on December 31, 2006. The adoption of SAB 108 did not have a significant effect on our consolidated financial statements.

In July 2006, the FASB finalized Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. In addition, FIN 48 clearly scopes out income taxes from FASB No. 5, Accounting for Contingencies. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the effect FIN 48 will have on our consolidated financial position, cash flows, or results from operations.

At its June 2005 meeting, the Emerging Issues Task Force (EITF) reached a consensus which was ratified by the FASB on EITF 04-05 with regards to consolidation of limited partnership interests by the general partner. The requirements replace counterpart requirements in SOP 78-9, which provides guidance on accounting for investments in real-estate ventures, but has come to be used for all types of limited partnerships. EITF 04-05 is based on the same presumption in SOP 78-9 that the general partner controls the limited partnership and should consolidate it, regardless of the level of its ownership interest. However, EITF 04-05 establishes a new framework for evaluating whether the presumption that the general partner controls the limited partnership is overcome. The presumption of general-partner control would be overcome only if the limited partners have either “kick-out rights”—the right to dissolve or liquidate the partnership or otherwise remove the general partner “without cause” or “participating rights”—the right to effectively participate in significant decisions made in the ordinary course of the partnership’s business. The kick-out rights and the participating rights must be substantive in order to overcome the presumption of general partner control. We adopted EITF 04-05 effective January 1, 2006 and this adoption did not have a material effect on our consolidated financial statements.

A-16

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154). SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle and applies to all voluntary changes in an accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting changes and error corrections occurring in fiscal years beginning after December 15, 2005. We adopted SFAS 154 effective January 1, 2006, and this adoption did not have a material effect on our financial position or results of operations.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs, amendment to ARB No. 43 Chapter 4 (SFAS No. 151), which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 is effective for fiscal years beginning after June 15, 2005. We adopted SFAS No. 151 effective January 1, 2006, and the impact was not material.

C.     GOODWILL AND OTHER INTANGIBLE ASSETS

We adopted SFAS No. 142 “Goodwill and Other Intangible Assets” effective January 1, 2002. Under this standard, we no longer amortize goodwill and indefinite life intangible assets, but those assets are subject to annual impairment tests. As of December 31, 2006, we had $4 million in indefinite life intangible assets related to the HealthTronics brand name. Other intangible assets with finite lives consisted primarily of non-compete agreements, hospital contracts and patents at December 31, 2006 and 2005. The agreements will continue to be amortized over their useful lives.

The net carrying value of goodwill as of December 31, 2006 and 2005 is comprised of the following:

	Total			Urology Services			Medical Products
Balance, December 31, 2004	$	245,725		$	228,206		$	17,519
Additions		10,092			10,092			--
Deletions		--			--			--
Balance, December 31, 2005	$	255,817		$	238,298		$	17,519
Additions		402			402			--
Deletions		(6,358	)		(6,358	)		--
Impairments		(20,600	)		(12,200	)		(8,400	)
Balance, December 31, 2006	$	229,261		$	220,142		$	9,119

A-17

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In the fourth quarter of 2006, we recorded an impairment to our goodwill totaling $12.2 million related to our urology services segment and $8.4 million related to our medical products segment. The impairment to our urology services segment is due primarily to a decrease in the number of overall procedures during 2006, primarily across our western region partnerships, combined with the loss of certain partnerships and contracts late in 2006. The impairment in our medical products segment relates primarily to our decision to reduce or exit certain product lines during the fourth quarter of 2006.

Other intangible assets as of December 31, 2006 and 2005, subject to amortization expense, are comprised of the following:

	Gross Carrying Amount		Accumulated Amortization		Net
December 31, 2006
Urology Services	$	2,130	$	1,215	$	915
Medical Products		2,656		1,902		754
Total	$	4,786	$	3,117	$	1,669
December 31, 2005
Urology Services	$	2,476	$	1,064	$	1,412
Medical Products		2,494		969		1,525
Total	$	4,970	$	2,033	$	2,937

Amortization expense for other intangible assets with finite lives was $1,431,000, $1,261,000 and $304,000 for the years ended December 31, 2006, 2005 and 2004, respectively. We estimate annual amortization expense for each of the five succeeding fiscal years as follows:

Year	Amount
2007	$	997,000
2008		314,000
2009		111,000
2010		82,000
2011		82,000
2012		83,000

D. ACQUISITIONS

On July 14, 2005, we acquired a 33% interest in each of Cascade Urological Services, LLC and Cascade Laser Services, LLC. As part of the consideration paid, we issued a total of 89,200 shares of our common stock. We determined the fair value of our common stock issued of $1,236,000 by using the closing price on July 14, 2005. We recorded approximately $3.3 million of goodwill related to this transaction, all of which is tax deductible.

A-18

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Unaudited proforma combined income data for the year ended December 31, 2006 of the Company assuming the acquisition was effective January 1, of each year is as follows:

($ in thousands, except per share data)	2005
Total revenues	$	154,203
Total expenses		143,075
Discontinued Operations		(1,557	)
Net income	$	9,571
Diluted earnings per share	$	0.27

E. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of our significant financial instruments as of December 31, 2006 and 2005 are as follows:

	2006				2005
( $ in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	27,857	$	27,857	$	21,077	$	21,077
Warrants		150		544		150		220
Financial liabilities:
Debt	$	11,337	$	11,337	$	140,238	$	140,238
Other long-term obligations		134		130		642		618

The following methods and assumptions were used by us in estimating our fair value disclosures for financial instruments.

Cash and Cash Equivalents

The carrying amounts for cash and cash equivalents approximate fair value because they mature in less than 90 days and do not present unanticipated credit concerns.

Debt

The carrying value of the debt at December 31, 2006 and 2005 approximates fair value.

Other Long-Term Obligations

At December 31, 2006, we had an obligation totaling $375,000 related to payments to the previous owner of one of our subsidiaries for $75,000 per quarter until March 31, 2008 as consideration for a noncompetition agreement. Also at December 31, 2006, as part of our Medstone acquisition, we had an obligation totaling $142,000 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 $125,000 related to payments to two previous employees. 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.

A-19

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Warrants

At December 31, 2006 and 2005, we had 200,000 warrants to purchase EDAP TMS S.A. common stock. We have determined the fair value of these warrants using the Black-Scholes Merton option pricing model.

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the aforementioned estimates.

F. ACCRUED EXPENSES

Accrued expenses consist of the following:

	December 31,
($ in thousands)	2006		2005
Accrued group insurance costs	$	321	$	457
Compensation and payroll related expense		3,339		2,954
Accrued interest		13		163
Accrued taxes		2,937		2,033
Accrued severance payments		--		1,410
Accrued professional fees		480		746
Unearned revenues		1,325		1,058
Other		2,062		880
	$	10,477	$	9,701

G. INDEBTEDNESS

Long-term debt is as follows:

($ in thousands)		December31,
Interest Rates	Maturities	2006		2005
Floating	2007-2012	$	3,712	$	132,770
1%-11%	2007-2012		7,625		7,468
		$	11,337	$	140,238
Less current portion of long-term debt			5,664		11,043
		$	5,673	$	129,195

A-20

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Senior Credit Facility

In March 2005, we refinanced our then 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.

This new loan bore interest at a variable rate equal to LIBOR + 1.25 to 2.25% or prime + .25 to 1.25%. We were required to make quarterly principal payments in connection with the term loan B of $312,500 until February 2010, when quarterly payments would have increased to $29.7 million. On July 31, 2006, we used a portion of the proceeds from the sale of our specialty vehicle manufacturing segment to repay the term loan B in full. At December 31, 2006, there were no amounts 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. Our assets and the stock of our subsidiaries collateralize the revolving credit facility. We were in compliance with the covenants under our senior credit facility as of December 31, 2006.

8.75% Notes

In April 2005, our $125 million term loan B was funded and we used the proceeds to redeem the $100 million of 8.75% unsecured senior subordinated notes. The notes were subject to an 8.75% rate of interest and interest was payable semi-annually on April 1st and October 1st.

Other long term debt.

On July 31, 2006, we used a portion of the proceeds from the sale of our specialty vehicle manufacturing segment to repay approximately $3.5 million of mortgage debt related to our building in Austin, Texas. As of December 31, 2006, we had notes totaling $11.3 million 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. These notes include two revolvers at two separate partnerships which total $4.8 million. As of December 31, 2006, $1,579,000 was drawn on these two revolvers.

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. In the second quarter of 2005, approximately $564,000 in proceeds from these swaps were recognized when the 8.75% notes were redeemed as described above.

A-21

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The stated principal repayments for all indebtedness as of December 31, 2006 are payable as follows:

Year	Amount
2007	$	5,664
2008		2,644
2009		1,843
2010		883
2011		269
Thereafter		34

H. COMMITMENTS AND CONTINGENCIES

We are involved in various claims and legal actions that have arisen in the ordinary course of business. Management believes that any liabilities arising from these actions will not have a material adverse effect on our financial condition, results of operations or cash flows.

A Consolidated Amended Class Action Complaint was filed on July 3, 2004 with the United States District Court, Northern District of Georgia, Atlanta Division, amending and consolidating several previously filed shareholder class action lawsuits alleging securities fraud. All claims in the dispute have been fully settled pursuant to an Order and Final Judgment by the court on December 1, 2005. The entire settlement cost of $2.825 million (plus interest) was paid by our directors and officers insurance carrier.

We sponsor a partially self-insured group medical insurance plan. The plan is designed to provide a specified level of coverage, with stop-loss coverage provided by a commercial insurer. Our maximum claim exposure is limited to $100,000 per person per policy year. At December 31, 2006, we had 273 employees enrolled in the plan. The plan provides non-contributory coverage for employees and contributory coverage for dependents. Our contributions totaled $2,351,000, $2,586,000 and $1,610,000, in 2006, 2005 and 2004 respectively.

We lease office space and certain manufacturing plants in several locations. Rent expense totaled $1,491,000, $2,665,000 and $1,620,000 for the years ended December 31, 2006, 2005 and 2004. Future annual minimum lease payments under all noncancelable operating leases are as follows:

($ in thousands) Year	Amount
2007	$	1,721
2008		1,488
2009		1,398
2010		1,191
2011		823
Thereafter		931

A-22

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

I. STOCK BASED COMPENSATION

On January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including stock option grants based on estimated fair values. SFAS No. 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the award’s portion that is ultimately expected to vest is recognized as expense over the requisite service periods. Prior to the adoption of SFAS No. 123(R), we accounted for share-based awards to employees and directors using the intrinsic valued method in accordance with Accounting Principles Board Opinion (“APB”) No. 25 as allowed under SFAS No. 123, Accounting for Stock-Based Compensation. Under the intrinsic value method, share-based compensation expense was only recognized by us if the exercise price of the stock option was less than the fair market value of the underlying stock at the date of grant.

We have elected to use the modified prospective application method such that SFAS No. 123(R) applies to new awards, the unvested portion of existing awards and to awards modified, repurchased or canceled after the effective date. In accordance with the modified prospective method, our consolidated financial statements for the years ended December 31, 2005 and prior have not been restated to reflect, and do not include, the impact of SFAS No. 123(R).

As of December 31, 2006, total unrecognized share-based compensation cost related to unvested stock options was approximately $4.7 million, which is expected to be recognized over a weighted average period of approximately 2.2 years. We have included approximately $1,789,000 for share-based compensation cost ($1,622,000 in salaries, wages and benefits and $167,000 in discontinued operations) in the accompanying consolidated statement of income for the year ended December 31, 2006.

Share-based compensation expense recognized during the year ended December 31, 2006 is related to awards granted prior to, but not yet fully vested as of, January 1, 2006 and awards granted subsequent to December 31, 2005. We have historically, and continue to estimate the fair value of share-based awards using the Black-Scholes-Merton (“Black Scholes”) option-pricing model.

Our income before income taxes for the year ended December 31, 2006, was lower by $1,789,000, and net income was lower by $1,450,000, than if we had continued to account for share-based compensation under APB Opinion No. 25. For the same period, basic earnings per share was $0.04 lower, and diluted earnings per share was $0.04 lower due to our adopting SFAS 123R.

Stock Option Plans

At December 31, 2006, we had seven separate equity compensation plans: the Prime 1993 and 2003 stock option plans, the HSS general, 2000, 2001 and 2002 stock option plans, and the HSS 2004 equity incentive plan. The plans, and all amendments thereto, had been approved by Prime’s and HSS’ shareholders, as the case may be. Since November 2004, the only active plan has been our 2004 equity incentive plan, which, as amended, authorized the grant of up to 2,950,000 shares to purchase our common stock, including 2,000,000 shares approved in June 2006.

Options granted under the plans shall terminate no later than ten years from the date the option is granted, unless the option terminates sooner by reason of termination of employment, disability or death. Options may vest immediately or over one to five years. In the third quarter of 2006, we modified the vesting terms of approximately 87,000 options related to employees of our specialty vehicle segment which was sold July 31, 2006, and recognized $167,000 in discontinued operations in 2006. In the second half of 2005, we modified the vesting terms of approximately 50,000 options related to employees of our orthotripsy segment which was sold, and recognized approximately $116,000 in discontinued operations in 2005. During 2004, we performed cashless exercises of 55,439 options which resulted in the issuance of 28,974 shares of our common stock. Stock based compensation related to these transactions totaled $295,000 and was primarily related to exiting board members.

A-23

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table sets forth certain information as of December 31, 2006 about our equity compensation plans:

	(a)		(b)			(c)
Plan Category	Number of shares of our common stock to be issued upon exercise of outstanding options		Weighted-average exercise price of outstanding options			Number of shares of our common stock remaining available for future issuance under equity compensation plans (exceeding securities reflected in column (a))
Prime 1993 stock option plan		361,169	$	7	.46		--
Prime 2003 stock option plan		129,000	$	5	.84		--
HSS equity incentive plan and stock
option plans		3,417,278	$	7	.36		683,165
Other equity compensation plans
approved by our security holders		N/A		N/A			N/A

Share-Based Compensation Cost under SFAS No. 123

Prior to January 1, 2006, we disclosed compensation cost in accordance with SFAS No. 123. The provisions of SFAS No. 123 require us to disclose the assumptions used in calculating the fair value pro forma expense. Had compensation expense for the plans been determined based on the fair value of the options at grant dates for awards under the plans consistent with SFAS No. 123, our net income and earnings per share would have been as follows:

	December 31,
($ in thousands)	2005			2004
Net income, as reported	$	9,188		$	1,353
Share-based compensation recorded, net of tax		72			184
Share-based compensation proforma, net of tax		(2,607	)		(1,859	)
Pro forma net income (loss)	$	6,653		$	(322	)
Pro forma earnings (loss) per share:
Basic	$	0.19		$	(0.02	)
Diluted	$	0.19		$	(0.02	)

To estimate compensation expense which would have been recognized under SFAS No. 123 for the years ended December 31, 2005 and 2004, and to calculate the compensation cost that was recognized under SFAS No. 123(R) for the year ended December 31, 2006, we used the Black-Scholes option-pricing model with the following weighted-average assumptions for equity awards granted. For December 31, 2006, 2005 and 2004, respectively: risk-free interest rates were 4.9%, 3.9% and 3.9%; dividend yields were 0%, 0% and 0%; volatility factors of the expected market price of our common stock were 47%, 46% and 45%; and a weighted-average expected life of the option of 6 years, 4 years and 4 years.

A-24

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The risk-free interest rate is based on the implied yield available on U.S. Treasury issues with an equivalent expected term. We have not paid dividends in the past and do not plan to pay any dividends in the future. We utilized the guidelines of Staff Accounting Bulletin No. 107 (SAB 107) of the Securities and Exchange Commission relative to “plain vanilla” options in determining the expected term of option grants. SAB 107 permits the expected term of “plain vanilla” options to be calculated as the average of the option’s vesting term and contractual period. This simplified method is based on the vesting period and the contractual term for each grant or for each vesting tranche for awards with graded vesting. The mid-point between the vesting date and the expiration date is used as the expected term under this method. We have used this method in determining the expected term of all options granted after December 31, 2005. We have determined volatility using historical stock prices over a period consistent with the expected term of the option. We recognize compensation cost for awards with graded vesting on a straight-line basis over the requisite service period for the entire award. The amount of compensation expense recognized at any date is at least equal to the portion of the grant date value of the award that is vested at that date.

Activity and pricing information regarding all stock options to purchase shares of our common stock are summarized as follows:

	2006					2005					2004
	Options (000)			Weighted Average Price		Options (000)			Weighted Average Price		Options (000)			Weighted Average Price
Outstanding at beginning of year		3,048		$	7.65		4,327		$	7.39		2,522		$	7.34
Granted		1,992			7.05		652			8.75		2,730			7.39
Exercised		(298	)		6.40		(1,675	)		7.59		(196	)		6.52
Cancelled		(588	)		8.78		(256	)		6.53		(729	)		7.40
Forfeited		(246	)		6.94		--			--		--			--
Outstanding at end of year		3,908		$	7.32		3,048		$	7.65		4,327		$	7.39
Exercisable at end of year		2,450		$	7.51		2,813		$	7.71		3,341		$	7.59
Weighted-average fair value of
options granted during the period		$3.38					$5.44				$	2.33

During the year ended December 31, 2006, the total intrinsic value of options exercised to purchase common stock was approximately $353,000 and the total fair value of shares vested during 2006 was $1.7 million.

During the year ended December 31, 2006, financing cash generated from share-based compensation arrangements amounted to $1,908,000 for the purchase of shares upon exercise of options. We issue new shares upon exercise of options to purchase our common stock.

A-25

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Additional information regarding options outstanding for all plans as of December 31, 2006, is as follows:

	Outstanding Options						Exercisable Options
Range of Exercise Prices	Options (000)		Weighted Average Remaining Contractual Life	Weighted Average Exercise Price			Options(000)			Weighted Average Remaining Contractual Life	Weighted Average Exercise Price
$4.49 - $6.49		269	5.8 years	$	5	.84			258	5.7 years	$	5	.85
$6.50 - $6.99		1,819	8.1 years		6	.66			827	5.9 years		6	.62
$7.00 - $7.50		817	6.8 years		7	.37			612	5.9 years		7	.42
$7.51 - $9.20		675	7.2 years		8	.07			425	5.9 years		8	.06
$9.21 - $14.25		328	4.5 years		10	.54			328	4.5 years		10	.54
Total		3,908		$	7	.32			2,450		$	7.	51
Aggregate intrinsic value (in thousands)	$	118						$	111

The aggregate intrinsic value in the table above is based on our closing stock price of $6.67 per share as of December 31, 2006.

As of December 31, 2004, we had issued warrants to purchase approximately 67,000 shares of common stock to third parties. The exercise prices of the warrants range from $2.89 to $4.34 per share. These warrants were exercised during 2005.

J. INCOME TAXES

We file a consolidated tax return with our wholly-owned subsidiaries and also own varying interests in numerous partnerships. A substantial portion of consolidated book income from continuing operations before provision for income taxes and minority interest is not taxed at the corporate level as it represents income attributable to other partners who are responsible for the tax on that income. Accordingly, only the portion of income from these partnerships attributable to our ownership interests is included in taxable income in the consolidated tax return and financial statements.

Components of income from continuing operations before income taxes are as follows:

	Years Ended December 31,
($ in thousands)	2006			2005		2004
United States	$	(19,947	)	$	15,944	$	8,508
Foreign		(1,062	)		1,491		--
	$	(21,009	)	$	17,435	$	8,508

A-26

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Income tax expense (benefit) consists of the following:

	Years Ended December 31,
($ in thousands)	2006			2005		2004
Federal:
Current	$	681		$	--	$	(273	)
Deferred		(4,877	)		5,611		2,781
State:
Current		456			154		506
Deferred		(582	)		398		233
Foreign:
Current		--			339		--
Deferred		(241	)		--		--
	$	(4,563	)	$	6,502	$	3,247

A reconciliation of expected income tax (benefit) expense (computed by applying the United States statutory income tax rate of 35% to earnings before income taxes) to total income tax expense in the accompanying consolidated statements of income follows:

	Years Ended December 31,
($ in thousands)	2006			2005			2004
Expected federal income tax	$	(7,353	)	$	6,102		$	2,978
State taxes		(82	)		359			480
Foreign rate differential		130			(183	)		--
Goodwill impairment		3,090			--			--
Other		(348	)		224			(211	)
	$	(4,563	)	$	6,502		$	3,247

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2006 and 2005 are presented below:

($ in thousands)	2006			2005
Deferred tax assets:
Net operating loss carryforward	$	3,754		$	15,008
Capital loss carryforward		--			5,308
Allowance for bad debts		328			--
FAS 123(R) expense		295			--
AMT Credit		783			--
Capitalized costs		707			(142	)
Loan origination fees amortizable for tax purposes		--			890
Accrued expenses deductible for tax purposes when paid		958			1,732
Total gross deferred tax assets		6,825			22,796
Less valuation allowance		--			--
Net deferred tax assets		6,825			22,796
Deferred tax liabilities:
Property and equipment, principally due to differences in depreciation		(292	)		(2,684	)
Intangible assets, principally due to differences in amortization periods for tax purposes		(24,632	)		(24,225	)
Total gross deferred tax liability		(24,924	)		(26,909	)
Net deferred tax liability	$	(18,099	)	$	(4,113	)

A-27

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In assessing the realizablity of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. In order to fully realize the deferred tax assets, we will need to generate future taxable ordinary income approximating $10 million prior to the expiration of net operating loss. Based on projections of future taxable income over the periods in which the deferred tax assets are deductible and tax planning strategies, management believes it is more likely than not that we will realize the benefits of these deductible differences at December 31, 2006. At December 31, 2006, we have federal net operating loss carry forwards of approximately $10 million which are available to offset federal taxable income in future years through 2025.

At December 31, 2006, and as a result of the HealthTronics merger in 2004, we acquired certain tax attributes from HealthTronics which are subject to Section 382 of the Internal Revenue Code. These tax attributes include net operating loss carry forwards, which are available to offset future taxable income through 2021 of approximately $27.6 million, capital loss carry forwards of $28 million and built-in losses available to offset future taxable income of $57.9 million. Due to the uncertainty of our ability to utilize these assets, no value was assigned to them in our purchase accounting and accordingly these tax attributes are not reflected in the deferred tax asset schedule above.

Deferred taxes are not provided on undistributed earnings of foreign subsidiaries because such earnings are expected to be indefinitely reinvested outside the United States. If these amounts were not considered permanently reinvested, a cumulative deferred tax liability approximating $50,000 and $180,000 would be provided for in 2006 and 2005, respectively.

K. SEGMENT REPORTING

We now have two reportable segments: urology services and medical products. Our specialty vehicle manufacturing division, which was sold on July 31, 2006 was also considered a reportable segment prior to its sale. The urology services segment provides services related to the operation of the lithotripters, including scheduling, staffing, training, quality assurance, maintenance, regulatory compliance and contracting with payors, hospitals and surgery centers. Our medical products segment manufactures, sells and maintains lithotripters and their related consumables, and markets fixed and mobile tables for urological treatments and imaging, as well as patient handling tables for use by pain management clinics. Our specialty vehicle manufacturing designed, constructed and engineered mobile trailers, coaches and special purpose mobile units that transport high technology medical devices, equipment designed for mobile command and control centers, and equipment for broadcasting and communications applications.

The accounting policies of the segments are the same as those described in Note B, Summary of Significant Accounting Policies. We measure performance based on the pretax income or loss after consideration of minority interests from our operating segments, which do not include unallocated corporate general and administrative expenses and corporate interest income and expense.

Our segments are divisions that offer different services, and require different technology and marketing approaches. The majority of the urology segment is comprised of acquired entities, as is the manufacturing segment.

Substantially all of our revenues are earned in the United States and long-lived assets are located in the United States. We do not have any major customers who account for more than 10% of our revenues.

A-28

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

($ in thousands)	Urology Services		Medical Products
2006
Revenue from external customers	$	123,265	$	19,080
Intersegment revenues		--		9,296
Interest income		294		55
Interest expense		872		1
Depreciation and amortization		8,535		1,972
Impairment of Goodwill		12,200		8,400
Segment profit		1,346		(11,586	)
Segment assets		293,119		37,065
Capital expenditures		8,743		4,315
2005
Revenue from external customers	$	133,360	$	18,202
Intersegment revenues		--		9,250
Interest income		230		64
Interest expense		834		--
Depreciation and amortization		9,707		855
Segment profit		18,233		5,164
Segment assets		314,887		43,319
Capital expenditures		10,207		382
2004
Revenue from external customers	$	75,361	$	10,846
Intersegment revenues		--		5,514
Interest income		76		94
Interest expense		369		4
Depreciation and amortization		5,509		650
Segment profit		11,402		1,813
Segment assets		311,916		33,903
Capital expenditures		6,400		180

A-29

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following is a reconciliation of revenues per above to the consolidated revenues per the consolidated statements of income:

($ in thousands)	2006			2005			2004
Total revenues for reportable segments	$	151,641		$	160,812		$	91,721
Corporate revenue		546			705			936
Elimination of intersegment revenues		(9,296	)		(9,250	)		(5,514	)
Total consolidated revenues	$	142,891		$	152,267		$	87,143

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

($ in thousands)	2006			2005			2004
Total profit (loss) for reportable segments	$	(10,240	)	$	23,397		$	13,215
Corporate revenue		546			705			936
Unallocated corporate expenses:
General and administrative		(10,680	)		(5,634	)		(4,911	)
Net interest expense		133			(150	)		(127	)
Other, net		(768	)		(883	)		(605	)
Unallocated corporate expenses total		(11,315	)		(6,667	)		(5,643	)
Income (loss) before income taxes	$	(21,009	)	$	17,435		$	8,508

The following is a reconciliation of segment assets per above to the consolidated assets per the consolidated balance sheets:

($ in thousands)	2006		2005		2004
Total assets for reportable segments	$	330,184	$	358,206	$	345,819
Unallocated corporate assets		16,549		124,831		128,339
Consolidated total	$	346,733	$	483,037	$	474,158

A-30

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The reconciliation of the other significant items to the amounts reported in the consolidated financial statements is as follows:

($ in thousands)	Segments		Corporate		Eliminating Entries			Consolidated
2006
Interest and dividends	$	349	$	406	$	--		$	755
Interest expense		873		273		--			1,146
Depreciation and amortization		10,507		768		--			11,275
Capital expenditures		13,058		202		(1,358	)		11,902
2005
Interest and dividends	$	294	$	250	$	(96	)	$	448
Interest expense		834		401		(96	)		1,139
Depreciation and amortization		10,562		882		--			11,444
Capital expenditures		10,589		535		(546	)		10,578
2004
Interest and dividends	$	170	$	216	$	(67	)	$	319
Interest expense		373		344		(67	)		650
Depreciation and amortization		6,159		604		--			6,763
Capital expenditures		6,580		705		--			7,285

The amounts in 2006, 2005 and 2004 for interest income and expense, depreciation and amortization and capital expenditures represent amounts recorded by the operations of our corporate functions, which have not been allocated to the segments.

K. DISCONTINUED OPERATIONS

In November, 2006 we announced our decision to discontinue our involvement in the clinical trials of the Ablatherm device manufactured by EDAP TMS S.A. (EDAP). This decision results in our forfeiting the exclusive rights in the United States, when and if a Pre-Market Approval is granted by the FDA and forfeits our rights to earn additional warrants to EDAP common stock. We have accordingly included our costs related to the clinical trials in discontinued operations in the accompanying consolidated statements of income.

In the fourth quarter of 2006, we committed to a plan to sell our Rocky Mountain Prostate Thermotherapies (“RMPT”) business. We have classified this business as held for sale in the accompanying consolidated financial statements and included its results from operations in discontinued operations.

On November 30, 2006, we sold our cryosurgery operations to Advanced Medical Partners, Inc. (AMPI). Under the terms of the sale, we received approximately 10% of the outstanding shares of AMPI as consideration. Due to the uncertainty of any future distributions, we have assigned no value to this investment in a closely held private company. We have included the operations of this business in discontinued operations in the accompanying consolidated statements of income.

A-31

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

During the second quarter 2006, we committed to a plan to sell our specialty vehicle manufacturing segment. On June 22, 2006, we entered into an Interest and Stock Purchase Agreement pursuant to which Oshkosh agreed to acquire our specialty vehicle manufacturing segment for $140 million in cash. We completed this sale on July 31, 2006, and recognized a gain on the sale totaling $53.6 million. We have classified our specialty vehicle manufacturing segment as held for sale in the accompanying condensed consolidated balance as of December 31, 2005 and the results of its operations have been reported in discontinued operations for all periods presented. This gain utilized approximately $20.4 million of our deferred tax assets.

The following table details selected financial information included in income (loss) from discontinued operations in the consolidated statements of income for December 31, 2006, 2005 and 2004.

($ in thousands)	2006			2005			2004
For the Year Ended December 31
Revenue
Specialty Vehicles Manufacturing	$	57,526		$	109,447			109,844
CryoSurgery		1,490			2,589			331
Rocky Mountain Prostate Thermotherapies		4,289			3,391			520
Orthotripsy		--			6,613			2,468
HIFU		--			--			--
Cost of services
Specialty Vehicles Manufacturing		(51,616	)		(98,170	)		(106,235	)
CryoSurgery		(1,235	)		(1,780	)		(283	)
Rocky Mountain Prostate Thermotherapies		(4,587	)		(2,976	)		(432	)
Orthotripsy		--			(7,714	)		(1,739	)
HIFU		(1,233	)		(192	)		--
Depreciation and amortization
Specialty Vehicles Manufacturing		(542	)		(1,215	)		(1,076	)
CryoSurgery		(512	)		(558	)		(84	)
Rocky Mountain Prostate Thermotherapies		(224	)		(84	)		(23	)
Orthotripsy		--			(280	)		(261	)
HIFU		(17	)		(3	)		--
Other
Specialty Vehicles Manufacturing		(72	)		(109	)		(138	)
CryoSurgery		(118	)		(229	)		(62	)
Rocky Mountain Prostate Thermotherapies		(4	)		--			--
Orthotripsy		--			(1,077	)		(348	)
HIFU		--			--			--
Income from discontinued operations	$	3,145		$	7,653		$	2,482

Assets and liabilities held for sale as of December 31, 2006 relate entirely to our RMPT operations and primarily consist of accounts receivable, supplies and accrued expenses.

A-32

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The major classes of assets and liabilities of discontinued operations held for sale in the December 31, 2005 consolidated balance sheet are as follows:

Consolidated Balance Sheet

($ in thousands)	Specialty Vehicle Manufacturing		CryoSurgery		Rocky Mountain Prostate Thermotherapies
Cash	$	4,405	$	354	$	--
Accounts receivable		9,517		605		741
Prepaid expenses and other current assets		642		433		368
Inventory		22,392		--		--
Deferred income taxes		524		--		--
Property plant and equipment (net)		6,579		1,428		297
Goodwill		50,370		--		--
Other non-current assets		437		--		--
Total assets	$	94,866	$	2,820	$	1,406
Accounts payable	$	5,387	$	246	$	242
Accrued expenses		5,290		342		44
Customer deposits		4,594		--		--
Long-term debt		25		83		39
Other long-term obligations		--		417		--
Deferred income taxes		2,562		--		--
Total liabilities	$	17,858	$	1,088	$	325

Pursuant to EITF 87-24 “Allocation of Interest to Discontinued Operations,”, we have allocated certain interest and the related fees incurred to refinance our senior credit facility that was required to be repaid as a result of the disposal of our specialty vehicle manufacturing segment. Accordingly, we have included in discontinued operations interest expense totaling $4,830,000, $7,806,000 and $8,977,000 for the years ended December 31, 2006, 2005 and 2004. We have also included loan fees and bond call premium of $2,842,000 year ended December 31, 2005, which were incurred solely related to the refinancing of the debt which was required to be repaid.

($ in thousands)	Year Ended December 31,
	2006			2005			2004
Gain on sale of specialty vehicle manufacturing	$	53,551		$	--		$	--
Loss from disposal of cryosurgery operations		(3,729	)		--			--
Impairment of Rocky Mountain Prostate Thermotherapy		(4,263	)		--			--
Income from discontinued operations		3,145			7,653			2,482
Interest allocated to discontinued operations		(4,830	)		(10,648	)		(8,977	)
Income tax (expense) benefit on discontinued operations		(18,745	)		1,250			2,587
Income from discontinued operations, net of tax	$	25,129		$	(1,745	)	$	(3,908	)

The gain on sale of our specialty vehicle manufacturing operations, the loss from disposal of our cryosurgery operations, and the impairment of Rocky Mountain Prostate Thermotherapy, noted above, include charges to goodwill of $50.4 million, $2.7 million and $3.25 million, respectively.

A-33

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

In the fourth quarter of 2004, we decided to divest our orthopaedics business unit. In July 2005, we sold our orthopaedics business unit to SanuWave, Inc., a company controlled by Prides Capital Partners L.L.C., a related party. Under the terms of the sale we received $6.4 million in cash, two $2 million unsecured notes and a small passive ownership interest in the acquiring entity. The notes bear interest at 6% per annum with no payments for the first five years, then interest only payments for the next five years with a balloon payment after ten years. Due to the uncertainty of future estimated collections, we have assigned no value to the notes or the ownership interest. Prior to this divesture, we provided approximately $700,000 of maintenance services to our orthopaedics business unit which were eliminated in consolidation. Subsequent to this sale, we have provided limited assistance to SanuWave, Inc. related to certain sales and service operations. We were paid $100,000 per month from August 2005 until January 2006 related to these services. At December 31, 2006 and 2005, SanuWave, Inc. owed us a net amount of approximately $1,000,000 and $500,000, respectively. We terminated all sales operations effective April 30, 2006.

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 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. Through December 31, 2006, we had recovered approximately $1.8 million. Any additional recoveries in the future will be recorded as income when received.

K. VARIABLE INTEREST ENTITIES

We have determined that one of our consolidated partnerships, acquired in the HSS merger and in which we have a 20% interest, has certain related party relationships with two Variable Interest Entities (VIE), and in accordance with FIN 46(R), has consolidated those entities. As a result of consolidating the VIEs, of which the partnership is the primary beneficiary, we have recognized minority interest of approximately $1 million on our consolidated balance sheets at December 31, 2006 and 2005, which represents the difference between the assets and the liabilities recorded upon the consolidation of the VIEs. The liabilities recognized as a result of consolidating the VIEs do not represent additional claims on our general assets. Rather, they represent claims against the specific assets of the consolidated VIEs. Conversely, assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Reflected on our consolidated balance sheet are $3.6 million in both 2006 and 2005, respectively, of VIE assets, representing all of the assets of the VIEs. The VIEs assist the partnership in providing urological services, minimally invasive prostate treatments, and other services in the Greater New York metropolitan area.

A-34

HEALTHTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

N. RELATED PARTY TRANSACTIONS

On July 27, 2006, John Q. Barnidge resigned, effective August 10, 2006, from his positions as our Senior Vice President and Chief Financial Officer. In connection with his departure, we entered into a severance and non-competition agreement with Mr. Barnidge whereby (1) we agreed to make a severance payment of $310,000 to Mr. Barnidge and (2) Mr. Barnidge agreed to a four-year non-competition provision in exchange for a payment from us equal to $150,000 for each year under the non-competition provision. Such Payment totaled $910,000 was expensed when paid on August 10, 2006.

In March 2006, we and Argil J. Wheelock, M.D., our then chairman of the board, amended Dr. Wheelock’s board service and release agreement to provide that he would receive the $1,410,000 severance payment referred to in that agreement upon his no longer serving as our chairman of the board. After the amendment, Dr. Wheelock resigned from his position as chairman of the board, and we paid him the severance amount. Dr. Wheelock continues to serve as a member of our board of directors and will continue to be paid his monthly board service compensation set forth in his board service agreement.

O. SUBSEQUENT EVENTS

On February 13, 2007, we entered into a Stock Purchase Agreement and an Interest Purchase Agreement pursuant to which we agreed to purchase all of the outstanding capital stock of Keystone ABG, Inc., which owns a 21% general partner interest in Keystone Mobile Partners, L.P. (the “Partnership”), all of the outstanding capital stock of Keystone Kidney Associates, PC, and an approximate 14% limited partner interest in the Partnership from the owners thereof, for an aggregate purchase price of $8,100,000 plus an earnout. The transaction is subject to certain closing conditions and the company can give no assurances that it will close.

A-35

EX-21

EXHIBIT 21.1
SUBSIDIARIES OF HEALTHTRONICS, INC.

As of February 28, 2007

Name of Subsidiary (doing business as)	State of Incorporation or Organization
Alabama Renal Stone Institute, Inc.,	Alabama
HealthTronics Service Center, LLC.,	Delaware
Lithotripters, Inc.,	North Carolina
Medstone International, Inc.,	Delaware
Prime Kidney Stone Treatment, Inc.,	New Jersey
Prime Lithotripter Operations, Inc.,	New York
Prime Lithotripsy Services, Inc.,	New York
Prime Management, Inc.	Nevada
Prime Medical Operating, Inc.,	Delaware
Sun Medical Technologies, Inc.,	California
HealthTronics Group, L.P.,	Delaware
Prime RVC, Inc.,	Delaware
Surgicenter Management, Inc.,	Delaware
HT Lithotripsy Management Company, L.L.C.,	Delaware
HT Prostate Therapy Management Company, L.L.C.,	Delaware
HealthTronics Technology Services & Development, LLC,	Delaware
Litho Management, Inc.,	Texas
Litho Group, Inc.,	Delaware
HLE Corp.,	Texas
FLORIDA LITHOLOGY No. 2, INC.,	Florida
Rocky Mountain Prostate Thermotherapy LLC,	Colorado
HT Prostate Services, L.L.C.,	Delaware
West Coast Cambridge, Inc.,	California
Integrated Lithotripsy of Georgia, Inc.,	Georgia
Midwest Cambridge Inc.,	Illinois
T2 Lithotripter Investment, Inc.,	Delaware
Heritage Medical Services of Georgia, Inc.,	Georgia
T2 Lithotripter Investment of Indiana, Inc.,	Delaware
AmCare Health Services, Inc.,	Pennsylvania
AMCARE, Inc.,	California
N.Y.L.S.A. #4 Inc.,	Delaware
Integrated Hearing Services, Inc.,	Delaware
Integrated Health Care Management Corp.,	Delaware
TennGa Stone Group Three, LLC	Tennessee
NGST, Inc.,	Tennessee
Dallas Lithotripsy L.P.	Texas
Southern California Stone Center, L.L.C	California
Mobile Kidney Stone Centers, Ltd.	California
Fayetteville Lithotripters Limited Partnership - Arizona I	Arizona
Fayetteville Lithotripters Limited Partnership - Arkansas I	Arkansas
Reston Lithotripsy L.P.	Virginia
Metro Lithotripsy L.P.	Georgia
Louisiana Lithotripters Investment Limited Partnership	Louisiana
Fayetteville Lithotripters Limited Partnership - Louisiana I	Louisiana
Pacific Medical of Hawaii Limited Partnership	Hawaii
San Diego Lithotripters Limited Partnership	California
Northern Nevada Lithotripsy Associates, LLC	Nevada
Fayetteville Lithotripters Limited Partnership - South Carolina II	South Carolina
Tennessee Lithotripters Limited Partnership	Tennessee
Texas Lithotripsy Limited Partnership V L.P.	Texas
Utah Lithotripsy L.P.	Utah
Fayetteville Lithotripters Limited Partnership - Virginia I	Virginia
Texas Lithotripsy Limited Partnership III L.P.	Texas
Pacific Lithotripsy, G.P	California
Great Lakes Lithotripsy Partnership, L.P.	Wisconsin
South Orange County Lithotripters, LLC	California
Red River Urological Services L.P.	Texas
Washington Urological Services, LLC	Washington
Wyoming Urological Services, LP	Wyoming
Mobile Kidney Stone Centers of Calif. II, L.P.	California
Mobile Kidney Stone Centers of Calif., III, L.P.	California
Big Sky Urological Services, L.P.	Montana
Kentucky I Lithotripsy, LLC	Kentucky
Western Kentucky Lithotripters LP	Kentucky
Mississippi Lithotripters LP	Mississippi
Texas Lithotripsy LP VIII	Texas
Greater Atlanta Lithotripsy, LLC	Georgia
West Coast Litho Services, LLC	California
Galaxy Lithotripsy, LLC	Georgia
New Jersey Kidney Stone Center, LLC	New Jersey
Alaska Extracorporeal Shockwave Therapy, LLC	Alaska
High Plains Lithotripsy, LLC	Nebraska
Florida Lithology, LTD	Florida
Wave Forms Lithotripsy, LLC	Washington
Greater Nebraska Lithotripsy, LLC	Nebraska
Midwest Urologic Stone Unit, Limited Partnership	Minnesota
Bay Area Partners, Ltd.	Florida
West Florida Urology, LLC	Florida
Allied Urological Services, LLC	New York
Georgia Litho Group, LLLP	Georgia
Gulf South Lithotripsy	Louisiana
Gulf Coast II, L.P.	Louisiana
Kansas Lithotripsy, LLC	Kansas
Lithotripsy of Northern Indiana	Indiana
Lithotripsy Institute of Indiana	Indiana
Lithotripsy Leasing, LLC	Alabama
Mobile Bay Lithotripsy Partners	Alabama
South Kansas Lithotripsy	Kansas
South Texas Lithotripsy, L.P.	Texas
Sullivan County Lithotripsy Services	Tennessee
Advanced Urology Services, LLC	Delaware
Prostate Therapy Associates	Louisiana
Cryopartners	Delaware
New Jersey Urological Services, LLC	New Jersey
KCPR, LLC	Texas
HealthTronics GmbH	Switzerland
Sunshine Urological Services, LP	Texas
Montana Urological Services, LLC	Texas
Cobb Laser Services, LLC	Delaware
Cobb Stone Treatment Center	Delaware
OKS Prostate Services, LLC	Delaware
Sacramento ESL Services, LLC	Texas
Cascade Urological Services, LLC	Washington
Cascade Laser Services, LLC	Washington
Columbia Urological Services, LLC	Washington
Claripath Labs, Inc.	Delaware
HealthTronics Medical, LLC	Delaware
Northeast Tennessee Prostate Services, LLC	Delaware
South Kansas Prostate Lasers, LP	Delaware
South Orange West Coast Litho JV	California
Treasure Valley Urological Services, LLC	Idaho
Buckeye Urological Services, LP	Texas
Tenn-Ga Stone Group II, LP	Tennessee
Great Lakes Laser Services, LP	Texas
Greater Alabama Lithotripsy, LLC	Alabama
Promobile Therapies, LLC	Indiana
East Tennessee Prostate Services, LP	Tennessee
Beltway Urology Services LP	Texas
Northeast Tennessee Lithotripsy Partners, LP	Delaware
Sacramento Urological Services, LLC	Texas

EX-23

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors
HealthTronics, Inc.:

We consent to the incorporation by reference the following Registration Statements:

1. Registration Statement (Form S-8 No. 333-31820) pertaining to the HealthTronics, Inc. stock option plan;

2. Registration Statement (Form S-8 No. 333-43412) pertaining to the HealthTronics Surgical Services, Inc. 2000 stock option plan;

3. Registration Statement (Form S-8 No. 333-68292) pertaining to the HealthTronics Surgical Services, Inc. 2001 stock option plan;

4. Registration Statement (Form S-8 No. 333-104403) pertaining to the HealthTronics Surgical Services, Inc. 2002 stock option plan;

5. Registration Statement (Form S-8 No. 333-120430) pertaining to the Prime Medical Services, Inc. 2003 stock option plan and 1993 stock option plan;

6. Registration Statement (Form S-8 No. 333-126301) pertaining to the HealthTronics, Inc. 2004 equity incentive plan;

7. Registration Statement (Form S-8 No. 333-135100) pertaining to the HealthTronics, Inc. 2004 equity incentive plan;

8. Registration Statement (Form S-3 No. 333-106867) of HealthTronics, Inc.; and

9. Registration Statement (Form S-3 No. 333-114221) of HealthTronics, Inc.

of our reports dated March 8, 2007, with respect to the consolidated financial statements of HealthTronics, Inc., HealthTronics, Inc. management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of HealthTronics, Inc., included in this Annual Report (Form 10-K) of HealthTronics, Inc. for the year ended December 31, 2006.

/s/ Ernst & Young LLP
Austin, Texas
March 8, 2007

EX-23

Exhibit 23.2

Consent of Independent Registered Public Accounting Firm

The Board of Directors
HealthTronics, Inc.:

We consent to the incorporation by reference in the registration statements (Nos. 333-31820, 333-43412, 333-68292, 333-104403, 333-120430, 333-126301 and 333-135100) on Form S-8 and (Nos. 333-106867 and 333-114221) on Form S-3 of HealthTronics, Inc. of our report dated April 13, 2006, except as to Note L (2004 and 2005 information related to Specialty Vehicles Manufacturing, CryoSurgery, Rocky Mountain Prostate Thermotherapies, and HIFU discontinued operations and assets and liabilities held for sale) which is as of March 12, 2007, with respect to the consolidated balance sheet of HealthTronics, Inc. as of December 31, 2005, and the related consolidated statements of income, stockholders’ equity, and cash flows for the two-year period ended December 31, 2005, which report appears in the December 31, 2006 annual report on Form 10-K of HealthTronics, Inc.

/s/ KPMG LLP      
Austin, Texas
March 12, 2007

EX-31

Exhibit 31.1

CERTIFICATION

I, Sam B. Humphries, President and Chief Executive Officer of HealthTronics, Inc., certify that:

1. I have reviewed this annual report on Form 10-K 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: March 15, 2007
                                         
                                          By: /s/ Sam B. Humphries          
      Sam B. Humphries
      President and Chief Executive Officer
      

EX-31

Exhibit 31.2

CERTIFICATION

I, Ross A. Goolsby, Chief Financial Officer of HealthTronics, Inc., certify that:

1. I have reviewed this annual report on Form 10-K 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: March 15, 2007
                                         
                                          By: /s/ Ross A. Goolsby          
       Ross A. Goolsby
       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 annual report on Form 10-K (the “Form 10-K”) for the year ended December 31, 2006 of HealthTronics, Inc., a Georgia corporation (the “Issuer”).

I, Sam B. Humphries, the President and Chief Executive Officer of the Issuer, certify that to the best of my knowledge:

(i) the Form 10-K 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-K fairly presents, in all material respects, the financial condition and results of operations of the Issuer.

Dated: March 15, 2007

/s/ Sam B. Humphries          
Sam B. Humphries
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-K 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 annual report on Form 10-K (the “Form 10-K”) for the year ended December 31, 2006 of HealthTronics, Inc., a Georgia corporation (the “Issuer”).

I, Ross A. Goolsby, Chief Financial Officer of the Issuer, certify that to the best of my knowledge:

(i) the Form 10-K 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-K fairly presents, in all material respects, the financial condition and results of operations of the Issuer.

Dated: March 15, 2007

/s/ Ross A. Goolsby           
Ross A. Goolsby
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-K 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.