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, 2008
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.)

9825 Spectrum Drive, Building 3, Austin, Texas
    (Address of principal executive office)    78717   
 (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 (§ 229.405) 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.

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

Large accelerated filer __ Accelerated filer X  Non-accelerated filer __
(do not check if a smaller
   reporting company) Smaller reporting company __

      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, 2008: $ 87,066,000

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, 2009
37,619,384

DOCUMENTS INCORPORATED BY REFERENCE

      Selected portions of the Registrant’s definitive proxy material for the 2009 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, 2008
PART I

ITEM 1.     BUSINESS

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. 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.”

In this document, references to “we,” “us,” “our” and “HealthTronics” shall mean HealthTronics and its consolidated subsidiaries.

Urology Services

In our urology services segment, we provide services related to lithotripsy services, treatments for benign and cancerous conditions of the prostate, and image guided radiation therapy (IGRT).

Our lithotripsy services are provided principally through limited partnerships and other entities that we manage, which use lithotripsy devices. In 2008, physicians who are affiliated with us used our lithotripters to perform approximately 50,000 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 portion of the total non-physician fee.

Although the non-physician fee under both retail and wholesale contracts varies widely based on geographical markets and the identity of the third party payor, we estimate that nationally, on average, our share of the non-physician fee was roughly $2,100, respectively, for both 2008 and 2007. At this time, we do not anticipate a material shift between our retail and wholesale arrangements, or a material change in our share of the non-physician fee.

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As the general partner of limited partnerships or the manager of 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) photo-selective vaporization of the prostate (PVP), (2) trans-urethral needle ablation (TUNA), and (3) trans-urethral microwave therapy (TUMT) in certain partnerships. All three technologies apply an energy source which reduces the size of the prostate gland. In September 2007, we completed the sale of our Rocky Mountain Prostate business, which represented almost our entire TUMT treatment operations. For treating prostate and other cancers, we use a procedure called cryosurgery, a process which uses a double freeze thaw cycle to destroy cancers cells. In April 2008, we acquired Advanced Medical Partners, Inc. (“AMPI”), which significantly expanded our cryosurgery partnership base. Our prostate treatment services are also provided principally through limited partnerships and other entities that we manage, which use equipment to perform the treatments. Benign prostate disease and cryosurgery cancer treatment services are billed in the same manner as our lithotripsy services under either retail or wholesale contracts. We also provide services relating to operating the equipment, including scheduling, training, quality assurance, regulatory compliance and contracting.

We also provide image guided radiation therapy (IGRT) technical services for cancer treatment centers. Our IGRT technical services may relate to providing the technical (non-physician) personnel to operate a physician practice group’s IGRT equipment, leasing IGRT equipment to a physician practice group, providing services related to helping a physician practice group establish an IGRT treatment center, or managing an IGRT treatment center.

We recognize urology revenue primarily from the following sources:

• Fees for urology treatments . A substantial majority of our urology revenue is derived from fees related to lithotripsy treatments performed using our lithotripters. For Lithotripsy and prostate treatment services, we, through our partnerships and 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. We recognize revenue for these services when the services are provided. IGRT technical services are billed monthly and the related revenues are recognized as the related services are provided.

• Fees for managing the operation of our lithotripters and prostate treatment devices. Through our partnerships and otherwise directly by us, we provide services related to operating our lithotripters and prostate treatment equipment and receive a management fee for performing these services.

Medical Products

We sell and maintain lithotripters and related spare parts and consumables. We are also the exclusive U.S. distributor of the Revolix branded laser. We also provide anatomical pathology services primarily to the urology community. We have one pathology lab located in Georgia, Claripath Laboratories, that provides laboratory detection and diagnosis services to urologists throughout the United States. In addition, in July 2008, we acquired Uropath LLC, which managed pathology laboratories located at Uropath sites for physician practice groups located in Texas, Florida and Pennsylvania. Through Uropath, we continue to manage in-office pathology labs for practice groups and provide pathology services to physicians and practice groups with our lab equipment and personnel at our Uropath laboratory sites.

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• 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 contractual rate, payable monthly, quarterly, or annually. Revenues from these services are recorded when the related maintenance services are performed.

• Fees for equipment sales, consumable sales and licensing applications. We sell and maintain lithotripters and manufacture and sell consumables related to the lithotripters. We distribute the Revolix laser and consumables related to the laser. 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. In some cases, we lease certain equipment to our partnerships, as well as third parties. Revenues from these leases are recognized on a monthly basis or as procedures are performed.

• Fees for anatomical pathology services. We provide anatomical pathology services primarily to the urology community. Revenues from these services are recorded when the related laboratory procedures are performed.

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.

Before July 31, 2006, a significant portion of our revenue had been derived from our manufacturing operations. 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 is when the following has 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 was 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.

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.

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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 on services 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.

The prostate treatment services market is also highly fragmented and competitive. We compete with other companies, private facilities and medical centers that offer prostate treatment equipment and services, including smaller regional and local service providers. Certain of our current and potential competitors have substantial financial resources and may compete with us on services, for acquisitions and development of operations in markets targeted by us.

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.

Competition in our lab business is also intense. We compete with national, regional and local anatomical pathology labs. Certain of our lab competitors have significantly greater resources than us and some have nationally-recognized reputations. In addition, regional and local labs may have regionally-recognized reputations. In addition, these regional and local labs may have pre-established long-term relationships with physicians and practice groups whereby the physicians and practice groups are comfortable with the level of expertise of the labs and therefore place a high value on the relationships.

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 subjects 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 $110,000 per person per policy year.

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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

• state and federal laws affecting the ownership and operation of the equipment we use and the manner in which we provide services; 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 and, in certain other cases, other payors. 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.

The Centers for Medicare & Medicaid Services (“CMS”) recently issued a rule that amended regulations that implement the Stark Law. Under the rule, effective October 1, 2009, certain physician-owned ventures (e.g., laser, cryotherapy, and TUMT partnerships) will not be able to contract with hospitals for the lease of space or equipment under a per-procedure or per-click payment arrangement. Also under the rule, CMS acknowledged that lithotripsy services performed under arrangements at hospitals is not a “designated health service” (“DHS”) under the Stark Law. However, to the extent a physician with an ownership or compensation interest in one of our lithotripsy partnerships refers patients to the hospital for other DHS services, the Stark Law still applies and an exception must be met. CMS has also issued an answer in the form of a “Frequently Asked Question” on its website, where it indicates that the provision of lithotripsy services may be considered a service contract and not a lease of space or equipment. Thus, according to the FAQ advice from CMS, our lithotripsy partnerships may continue to contract with hospitals on a per-procedure payment basis so long as the contract is a service arrangement rather than a leasing arrangement and the physician partners in the partnership do not refer “designated health services” to the contracting hospitals. If the partnership provides a technician and related support when providing lithotripsy services, we believe such arrangement is a service arrangement. If an arrangement is considered a leasing arrangement or if such any of the physician partners refer “designated health services” to a contracting hospital, then the fee arrangements between partnership and the hospitals must comply with the new rule by October 1, 2009. In addition, our prostate treatment partnerships must comply with the new rule by October 1, 2009. We are still considering options to restructure our partnerships and/or hospital contracts that must comply with the new rule by October 1, 2009. Our options include restructuring ownership of the partnerships, repurchasing or buying out the physician partners’ interests in the partnerships, and amending hospital contracts to provide for a payment arrangement that is not on a per-procedure basis and otherwise complies with the new rule. Although we believe these restructurings will not have a material adverse affect on us, we cannot give you any assurance that these restructurings would not have a material adverse effect on our operations, relationships with urologists, financial condition or results of operations.

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In addition, this new rule may make physician investment in our partnerships less attractive. As a result, it may be more difficult to retain physician partners in our partnerships and attract new physician partners to our partnerships. At this time we are unable to assess the extent to which the new rule will affect relationships with our existing physician partners and our ability to attract new physician partners. However, if the new rule has a negative effect on our physician partner relationships, then our operations and results of operations could be materially adversely affected.

Furthermore, physician ownership and contracts with entities that provide ancillary medical services are a subject of intensive legislative and regulatory attention. It is likely that additional legislation may be passed and additional regulations will be promulgated that will further affect our business and our relationships with physicians. The recently-passed American Recovery and Reinvestment Act of 2009 (commonly known as the Stimulus Bill) contains a number of provisions affecting healthcare entities like us, including new requirements relating to information technology, privacy, and data security. The President has stated that his administration will make health care reform a major initiative, which may impact our provision of services and our reimbursement. We are unable to state with certainty the effect of any such legislation or regulation on our business.

As previously reported on a Form 8-K filed by Prime Medical Services Inc. (to which we are a successor by virtue of our merger with Prime in November 2004) 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.

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Employees

As of February 28, 2009, we employed approximately 550 full-time employees and approximately 30 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.

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.

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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.

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. We anticipate that federal legislation will be enacted in 2009 that will significantly reform health care. 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. Future health care legislation or other changes in the administration of or interpretation of existing legislation regarding governmental health care programs could have an adverse effect on our business and 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 and prostate treatment services, on the one hand, and surgical and other established methods for treating urological conditions, on the other hand.

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Competition in our lab business is also intense. We compete with national, regional and local anatomical pathology labs. Certain of our lab competitors have significantly greater resources than us and some have nationally-recognized reputations. In addition, regional and local labs may have regionally-recognized reputations. In addition, these regional and local labs may have pre-established long-term relationships with physicians and practice groups whereby the physicians and practice groups are comfortable with the level of expertise of the labs and therefore place a high value on the relationships.

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.

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:

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• 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 that has resulted in rapid growth in our business. This acquisition strategy includes 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:

• 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.

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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, 2008, we had goodwill of $93.6 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 2008, in connection with our annual goodwill impairment test, we recorded an impairment to our urology services segment goodwill totaling $144 million. Although our core operations remain stable and reflect growth over the prior year, we adjusted certain assumptions in our discounted cash flow model to address the recent declines in our market capitalization, which had fallen significantly below our consolidated net assets. In addition, the market comparables component of our impairment test was negatively impacted by the current global economic crisis and global decline in the stock markets. In the fourth quarter of 2007, in connection with our annual goodwill impairment test, we recorded an impairment to our urology services segment goodwill totaling $20.8 million. This impairment was due to a decrease in our estimated future discounted cash flows from this segment. This decrease was primarily caused by lower projected growth rates for our laser operations as well as the timing of certain future growth for our IGRT operations. For further discussion of our 2008 and 2007 goodwill impairments, see footnote C to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Our 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. In addition, we obtain consumables for use in performing lithotripsy and prostate treatment services with our partnerships’ equipment. 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 or consumables may affect our manufacturing capabilities and urology services 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.

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;

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• 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, 2008, we had indebtedness of approximately $5.4 million related to equipment purchased by our limited partnerships, which indebtedness we believe will be repaid from the cash flows of the partnerships. We also have a revolving line of credit with a borrowing limit of $60.0 million pursuant to a senior credit facility we entered into in March 2005. As of December 31, 2008, we have drawn $41 million 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-2 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.

We currently have $41 million drawn on our $60 million revolving line of credit, which could have important consequences to you. For example, it could:

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

• 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

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• 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.

Our lenders may be unable or unwilling to fund their commitments under our senior credit facility.

Our senior credit facility includes a revolving line of credit under which we may regularly draw funds. Many U.S. financial institutions are having difficulty maintaining regulatory capital at levels required for additional lending, and some institutions are experiencing liquidity shortfalls. If some of the lenders participating in our senior credit facility fail to meet their funding commitments, we could be required to borrow from other sources at a higher cost or we may be required to monetize some of our assets to meet our liquidity requirements, which could have an adverse effect on our financial position and results of operations.

The current turmoil in the equity and credit markets could limit demand for our services and products and affect the overall availability and cost of capital.

The current turmoil in the equity and credit markets could limit demand for our services and products, and affect the overall availability and cost of capital. At this time, it is unclear whether and to what extent the actions taken by the U.S. government, including, without limitation, the passage of the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009 and other measures currently being implemented or contemplated, will mitigate the effects of the crisis. While we have no immediate need to access the equity or credit markets at this time, the impact of the current crisis on our ability to obtain financing in the future, and the cost and terms of the financing, is unclear. No assurances can be given that the effects of the current crisis will not have a material adverse effect on 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.

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.

The risks described in our Annual Report on Form 10-K and above are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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Executive Officers

As of March 6, 2009, our executive officers were as follows:

Name	Age	Position
James S.B. Whittenburg	37	Chief Executive Officer and President
Richard A. Rusk	47	Vice President, Corporate Controller, Treasurer, Secretary and Interim Chief Financial Officer
Robert A. Yonke	48	President, Urology Services
Clayton H. Duncan	36	Vice President-Radiation Therapy
Scott A. Herz	32	Vice President-Corporate Development

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. Whittenburg was appointed as our President and Chief Executive Officer on August 13, 2007. From June 2006 until August 13, 2007, Mr. Whittenburg served as President of our Urology Division, and he was our acting President and Chief Executive Officer from May 2007 until August 2007. He 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. 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. In September of 2008, Mr. Rusk was named Interim Chief Financial Officer. Before joining us, Mr. Rusk, a CPA, was with KPMG LLP for approximately seventeen years, the last ten years as a senior audit manager.

Mr. Yonke joined us in April 2008 in connection with our acquisition of AMPI. In July 2008, Mr. Yonke was appointed as President – Urology Services. Mr. Yonke co-founded AMPI in 2002 and served as AMPI’s chief executive officer from 2002 to April 2008. Prior to that time, Mr. Yonke served as chief executive officer of U.S. Medical Development, Inc., a Dallas based Urology company that specialized in the development and service of Lithotripsy partnerships and specialty hospitals. Mr. Yonke has been in the medical business since 1986 and brings an extensive background to HTRN in physician practice management, partnership development, medical start ups, mergers and acquisitions, radiologic imaging, and physical rehabilitation. A graduate of Emporia State University, Mr. Yonke holds a Bachelors degree in Business Administration, with an emphasis in Finance.

Mr. Duncan joined us in August 2007 as Vice President – Radiation Therapy. From August 2002 to August 2007, Mr. Duncan was employed by McKesson Provider Technologies, where he most recently held the position of Vice President of Corporate Accounts for the Automation Solutions division. Prior to that time, Mr. Duncan served in numerous development and sales leadership positions in the healthcare and technology industries. Mr. Duncan began his professional career by practicing law at Strasburger & Price LLP in the International Franchise and Distribution section. Mr. Duncan obtained his J.D. from Southern Methodist University, holds a Master of International Management from Thunderbird, The American Graduate School of International Management, and also holds a B.B.A. in Finance from Texas Tech University. Mr. Duncan is licensed to practice law in Texas.

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Mr. Herz joined us in February 2005 in our Specialty Vehicles division as Associate Vice President-Finance. In June 2006, Mr. Herz was appointed Associate Vice President – Corporate Development and in December 2007 he was appointed Vice President – Corporate Development. Prior to joining us, Mr. Herz served as an associate investment banker at RSM Equico from 2004 to 2005. Prior to that time, Mr. Herz worked as a mechanical engineer at Colorado MEDtech, Inc. from 1999 to 2002. From 2002 to 2004, Mr. Herz obtained his MBA from Pepperdine University and also holds a BS in Mechanical Engineering from Michigan State University.

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.

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. On June 16, 2008, we sold the office building in which our principal executive offices were located for approximately $6,750,000. We subsequently relocated our principal executive offices in late September 2008. In December 2008, we also relocated our Medical Products operations from leased facilities in Kennesaw, Georgia to warehouse space that occupies the same leased building as our principal executive offices in Austin, Texas.

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, 2008 and 2007 (NASDAQ Symbol “HTRN”).

	2008						2007
	High			Low			High			Low
First Quarter	$	4	.47	$	3	.12	$	6	.60	$	5	.06
Second Quarter	$	4	.30	$	2	.68	$	5	.47	$	4	.35
Third Quarter	$	4	.50	$	2	.83	$	5	.25	$	3	.66
Fourth Quarter	$	3	.04	$	1	.03	$	5	.30	$	4	.03

On February 24, 2009, we had 568 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.

Issuer Purchases of Equity Securities^(a)

Period	Total Number of Shares Purchased			Average Price Paid Per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares That May Yet to be Purchased Under the Plans or Programs
Month 1 (10/1/2008 – 10/31/2008)		1,700,000		$	2	.20		1,700,000	$	6,260,000
Month 2 (11/1/2008 – 11/30/2008)		8,927	(b)	$	2	.25		--		--
Month 3 (12/1/2008 – 12/31/2008)		--				--		--		--
Total		1,708,927		$	2	.20		1,700,000

_____________________

(a)

On October 6, 2008, our Board of Directors authorized the repurchase of up to $10 million of our common stock. We anticipate that the stock will be repurchased through privately-negotiated transactions or on the open market. We intend to comply with the SEC’s Rule 10b-18, and the repurchases will be subject to market conditions, applicable legal requirements, and other factors. We are not obligated to repurchase shares under the program, and our Board of Directors may suspend or terminate the program at any time. The repurchase program has no expiration date. We have no repurchase plans or programs that expired during the period covered by the above table, and we have no repurchase plans or programs that we intend to terminate prior to expiration or under which we no longer intend to make further purchases.

(b)

Represents shares used by Mr. Whittenburg to pay his federal tax withholding obligation related to the vesting of a restricted stock award in November 2008.

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Equity Compensation Plan Information

At December 31, 2008, we had seven separate equity compensation plans: the Prime Medical Services, Inc. (“Prime”) 1993 and 2003 stock option plans, the HealthTronics Surgical Services, Inc. (“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. On November 10, 2004, Prime completed a merger with HSS pursuant to which Prime merged with and into HSS with HealthTronics, Inc. as the surviving corporation. The following table sets forth certain information as of December 31, 2008 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		65,666	$	7	.79		--
Prime 2003 stock option plan		94,000	$	5	.63		--
HSS equity incentive plan and stock
option plans		2,399,099	$	7	.06		2,582,141
Other equity compensation plans
approved by our security holders		N/A		N/A			N/A

In 2004, in connection with the merger of HSS and Prime, we assumed in the merger stock options to acquire approximately 2,154,000 shares of common stock.

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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, 2004 through December 31, 2008.

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, 2008, 2007, 2006, 2005 and 2004, (b) our audited consolidated balance sheets as of December 31, 2008, 2007, 2006, 2005, and 2004, and (c) 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 2008 and 2007. The November 10, 2004 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. 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,
	2008			2007			2006			2005			2004
Revenues:
Urology Services	$	145,265		$	122,736		$	123,265		$	133,360		$	75,361
Medical Products		20,389			17,101			19,080			18,202			10,846
Other		288			581			546			705			936
Revenues from continuing operations	$	165,942		$	140,418		$	142,891		$	152,267		$	87,143
Income (loss) from:
Continuing Operations	$	(128,693	)	$	(14,485	)	$	(16,446	)	$	10,933		$	5,261
Discontinued Operations		--			(147	)		25,129			(1,745	)		(3,908	)
Net income (loss)	$	(128,693	)(1)	$	(14,632	)(2)	$	8,683	(3)	$	9,188		$	1,353	(4)
Diluted earnings (loss) per share:
Continuing Operations	$	(3.53	)	$	(0.41	)	$	(0.47	)	$	0.31		$	0.24
Discontinued Operations		--			--			0.72			(0.05	)		(0.18	)
Total	$	(3.53	)	$	(0.41	)	$	0.25		$	0.26		$	0.06
Dividends per share		None			None			None			None			None
Total assets	$	234,386		$	336,056		$	346,733		$	483,037		$	474,158
Long-term obligations (a)	$	45,662		$	4,269		$	6,063		$	129,980		$	114,442

_____________________

(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
2008			(unaudited)
Revenues	$	33,954	$	42,580	$	44,771	$	44,637
Net income (loss)	$	452	$	710	$	1,327	$	(131,182	)(1)
Per share amounts (basic):
Net income (loss)	$	0.01	$	0.02	$	0.04	$	(3.64	)
Weighted average shares outstanding		35,425		37,059		37,503		36,004
Per share amounts (diluted):
Net income (loss)	$	0.01	$	0.02	$	0.04	$	(3.64	)
Weighted average shares outstanding		35,425		37,165		37,604		36,004

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Quarterly Data	Quarter Ended
(in thousands, except per share data)	March 31			June 30		Sept. 30		Dec. 31
2007				(unaudited)
Revenues	$	32,751		$	35,563	$	35,955	$	36,149
Net income (loss)	$	(30	)	$	179	$	745	$	(15,526	)(2)
Per share amounts (basic):
Net income (loss)	$	--		$	0.01	$	0.02	$	(0.44	)
Weighted average shares outstanding		35,406			35,425		35,425		35,425
Per share amounts (diluted):
Net income (loss)	$	--		$	0.01	$	0.02	$	(0.44	)
Weighted average shares outstanding		35,417			35,426		35,425		35,425

_____________________

1)   In the fourth quarter of 2008, in connection with our annual goodwill impairment test, we recorded an impairment to our urology services segment goodwill totaling $144 million. Although our core operations remain stable and reflect growth over the prior year, we adjusted certain assumptions in our discounted cash flow model to address the recent declines in our market capitalization, which had fallen significantly below our consolidated net assets. In addition, the market comparables component of our impairment test was negatively impacted by the current global economic crisis and global decline in the stock markets.

(2)   In the fourth quarter of 2007, in connection with our annual goodwill impairment test, we recorded an impairment to our urology services segment goodwill totaling $20.8 million. This impairment was due to a decrease in our estimated future discounted cash flows for this segment. This decrease was primarily caused by lower projected growth rates for our laser operations as well as the timing of certain future growth for our IGRT operations.

(3)   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 was 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 to competitors. The impairment in our medical products segment relates primarily to our decision to reduce or exit certain product lines, specifically patient management tables and orthopedic consumables during the fourth quarter of 2006 along with the closing of our European operations. 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.

(4)   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.

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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.

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 medical devices, primarily to the urology marketplace. We have two reportable segments: urology services and medical products. 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 and other entities that we manage, which use lithotripsy devices. In 2008, physicians who are affiliated with us used our lithotripters to perform approximately 50,000 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 portion 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 $2,100, respectively, for both 2008 and 2007. At this time, we do not anticipate a material shift between our retail and wholesale arrangements, or a material change in our share of the non-physician fee.

As the general partner of limited partnerships or the manager of 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) photo-selective vaporization of the prostate (PVP), (2) trans-urethral needle ablation (TUNA), and (3) trans-urethral microwave therapy (TUMT) in certain partnerships. All three technologies apply an energy source which reduces the size of the prostate gland. In September 2007, we completed the sale of our Rocky Mountain Prostate business, which represented almost our entire TUMT treatment operations. For treating prostate and other cancers, we use a procedure called cryosurgery, a process which uses a double freeze thaw cycle to destroy cancers cells. In April 2008, we acquired AMPI, which significantly expanded our cryosurgery partnership base. Our prostate treatment services are also provided principally through limited partnerships and other entities that we manage, which use equipment to perform the treatments. Benign prostate disease and cryosurgery cancer treatment services are billed in the same manner as our lithotripsy services under either retail or wholesale contracts. We also provide services relating to operating the equipment, including scheduling, training, quality assurance, regulatory compliance and contracting.

We also provide image guided radiation therapy (IGRT) technical services for cancer treatment centers. Our IGRT technical services may relate to providing the technical (non-physician) personnel to operate a physician practice group’s IGRT equipment, leasing IGRT equipment to a physician practice group, providing services related to helping a physician practice group establish an IGRT treatment center, or managing an IGRT treatment center.

We recognize urology revenue primarily from the following sources:

• Fees for urology treatments . A substantial majority of our urology revenue is derived from fees related to lithotripsy treatments performed using our lithotripters. For lithotripsy and prostate treatment services, we, through our partnerships and 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. We recognize revenue for these services when the services are provided. IGRT technical services are billed monthly and the related revenues are recognized as the related services are provided.

• Fees for managing the operation of our lithotripters and prostate treatment devices. Through our partnerships and otherwise directly by us, we provide services related to operating our lithotripters and prostate treatment equipment and receive a management fee for performing these services.

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Medical Products. We sell and maintain lithotripters and related spare parts and consumables. We are also the exclusive U.S. distributor of the Revolix branded laser. We also provide anatomical pathology services primarily to the urology community. We have one pathology lab located in Georgia, Claripath Laboratories, that provides laboratory detection and diagnosis services to urologists throughout the United States. In addition, in July 2008, we acquired Uropath LLC, which managed pathology laboratories located at Uropath sites for physician practice groups located in Texas, Florida and Pennsylvania. Through Uropath, we continue to manage in-office pathology labs for practice groups and provide pathology services to physicians and practice groups with our lab equipment and personnel at our Uropath laboratory sites.

• 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 contractual rate, payable monthly, quarterly, or annually. Revenues from these services are recorded when the related maintenance services are performed.

• Fees for equipment sales, consumable sales and licensing applications. We sell and maintain lithotripters and manufacture and sell consumables related to the lithotripters. We distribute the Revolix laser and consumables related to the laser. 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. In some cases, we lease certain equipment to our partnerships, as well as third parties. Revenues from these leases are recognized on a monthly basis or as procedures are performed.

• Fees for anatomical pathology services. We provide anatomical pathology services primarily to the urology community. Revenues from these services are recorded when the related laboratory procedures are performed.

Recent Developments

On October 10, 2008, we entered into a Stock Purchase Agreement with Atlantic Urological Associates (“AUA”), pursuant to which we purchased the outstanding shares of capital stock of Ocean Radiation Therapy, Inc., a wholly-owned subsidiary of AUA (“Ocean”), for a purchase price of approximately $35 million in cash. Ocean provides IGRT technical services to AUA’s IGRT cancer treatment center. Also on October 10, 2008, we drew $35 million under our revolving line of credit to finance this acquisition.

We have one pathology lab located in Georgia, Claripath Laboratories, that provides laboratory detection and diagnosis services to urologists throughout the United States. In addition, in July 2008, we acquired Uropath LLC, which managed pathology laboratories located at Uropath sites for physician practice groups located in Texas, Florida and Pennsylvania. Through Uropath, we continue to manage in-office pathology labs for practice groups and provide pathology services to physicians and practice groups with our lab equipment and personnel at our Uropath laboratory sites.

On October 8, 2008, pursuant to a $10 million stock repurchase program adopted by our Board of Directors on October 6, 2008, in a private transaction, we repurchased 1.7 million shares of our common stock from Prides Capital Partners, L.L.C. for an aggregate purchase price of $3,740,000.

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Effective September 30, 2008, Ross Goolsby resigned his position as our Chief Financial Officer. Richard A. Rusk assumed the duties of interim Chief Financial Officer effective on September 30, 2008. Mr. Rusk continues to retain his responsibilities as Vice President, Controller, Treasurer, and Secretary.

On July 15, 2008, we acquired UroPath, LLC (“UroPath”) for $7.5 million in cash. Founded in 2003, UroPath is a leading provider of anatomical pathology laboratory services in the U.S. with locations in Florida, Texas, and Pennsylvania.

On June 16, 2008, we sold the office building in which our principal executive offices are located for approximately $6,750,000. We entered into a lease agreement for new office space. We relocated our principal executive offices in late September 2008.

On April 17, 2008, we acquired AMPI for a purchase price of approximately $6.9 million in cash and approximately 1.8 million shares of our common stock, plus a two-year earn-out based on the future achievement of EBITDA.

We continue to look at other strategic acquisition opportunities and believe conditions in the market favor our strong financial position, national platform of urologist relationships, and diversification within the urology services space.

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 require judgment and are 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 estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. Because we have recognized goodwill based solely on our controlling interest, the fair value of each reporting unit also relates only to our controlling interest. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying value of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit. Both the income approach and the market approach require significant assumptions to determine the fair value of each reporting unit. The significant assumptions used in the income approach include estimates of our future revenues, profits, capital expenditures, working capital requirements, operating plans, industry data and other relevant factors. The significant assumptions utilized in the market approach include the determination of appropriate market comparables, the estimated multiples of revenue, EBIT and EBITDA a willing buyer is likely to pay, and the estimated control premium a willing buyer is likely to pay. For a discussion of our 2008 and 2007 goodwill impairments and the specific assumptions used in the income and market approaches in the 2008 and 2007 analyses, see footnote C to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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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 investments 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.

Year ended December 31, 2008 compared to the year ended December 31, 2007

Our total revenues increased $25,524,000 as compared to 2007. Revenues from our urology services segment increased $22,529,000 (18%) in 2008 as compared to 2007. Revenues from our lithotripsy business increased $5,193,000 (4.8%) as compared to 2007, while revenues from our prostate business increased $17,336,000 in 2008 as compared to 2007. Revenues from our AMPI acquisition, which was effective April 1, 2008, were the primary driver in the increased prostate revenues. Prostate revenues from AMPI entities totaled $18.4 million in 2008. The actual number of lithotripsy procedures performed in 2008 increased by 3% compared to 2007. The average rate per procedure increased by 1% in 2008 as compared to 2007. Revenues for our medical products segment for 2008 increased $3,288,000 as compared to 2007. Medical products revenues before intersegment eliminations totaled $30.6 million for 2008 and $26.1 million for 2007. We sold five lithotripters and one table in 2008. We sold eight lithotripters and 28 tables during the same period in 2007. We discontinued the sale of tables in 2007. Revenues from our Claripath laboratory which commenced operations in January 2006, totaled $5,113,000 and $3,418,000 for the years ended December 31, 2008 and 2007, respectively. Revenues from our Uropath acquisition, which was effective July, 10, 2008 totaled $1,993,000 in 2008.

Our costs of services and general and administrative expenses for 2008 increased $139,542,000 (124%) compared to 2007. Our cost of services associated with our urology services operations increased $11,695,000 (22%) in 2008 as compared to 2007. The primary cause of this increase relates to cost of services at our new AMPI entities, whose costs totaled $12,964,000 in 2008, partially offset by an overall decrease in cost of services of $1,269,000 attributed to our organic urology business. This decrease in our organic business costs is primarily related to the write off of a certain payable at one of our partnerships in the first quarter of 2008 of approximately $700,000 which was recorded against operating expenses and $250,000 of insurance reimbursements received at one of our partnerships related to damages suffered during hurricane Katrina. Our cost of services associated with our medical products operations for 2008 decreased $731,000 (7%) compared to 2007. This decrease is due to lower cost of sales on fewer device sales in the period, partially offset by approximately $740,000 in increased expenses at our Claripath lab which has experienced significant growth year over year, $1,888,000 in expenses at our new Uropath labs, and approximately $1 million in restructuring and moving costs related to moving our Medical Products operations from Kennesaw, Georgia to Austin, Texas. A significant portion of medical products costs relate to providing maintenance services to our urology services segment and are allocated to the urology services segment. In the future, we expect margins in medical products to continue to vary significantly from period to period based on the mix of intercompany and third-party sales. Our selling, general and administrative costs for the year ended December 31, 2008 increased $4,122,000 compared to the same period in 2007. This increase primarily relates to increased compensation expenses of $1.8 million related to restricted stock grants to employees which vested as performance goals were reached in the second and third quarters of 2008 and approximately $1 million in increases in sales and marketing expenses associated with our Claripath lab in 2008. In addition, we received approximately $900,000 as a result of our former Swiss manufacturing subsidiary’s insolvency proceedings in 2007, which was recorded against selling, general and administrative expenses.

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In the fourth quarter of 2008, in connection with our annual goodwill impairment test, we recorded an impairment to our urology services segment goodwill totaling $144 million. Although our core operations remain stable and reflect growth over the prior year, we adjusted certain assumptions in our discounted cash flow model to address the recent declines in our market capitalization, which had fallen significantly below our consolidated net assets. In addition, the market comparables component of our impairment test was negatively impacted by the current global economic crisis and global decline in the stock markets. In the fourth quarter of 2007, in connection with our annual goodwill impairment test, we recorded an impairment to our urology services segment goodwill totaling $20.8 million. This impairment was due to a decrease in our estimated future discounted cash flows for this segment. This decrease was primarily caused by lower projected growth rates for our laser operations as well as the timing of certain future growth for our IGRT operations.

In 2007, we had a loss from discontinued operations of $147,000 attributable to our RMPT and HIFU operations. This loss included a gain of $450,000 from the sale of our RMPT business, which closed September 28, 2007.

Depreciation and amortization expense increased $1,256,000 in 2008 compared to 2007, primarily due to the addition of our new AMPI entities and the amortization on our Ocean services agreement.

Minority interest in consolidated income for 2008 increased $8,691,000 (19%) compared to 2007, as a result of increases in minority interest percentages at certain partnerships, combined with an increase in income at our existing urology partnerships and minority interest expense at our new AMPI entities.

Provision for income taxes in 2008 decreased $8,662,000 compared to 2007 due to the decrease in our taxable net income and the addition of a full valuation allowance on our deferred tax assets primarily as a result of the goodwill impairment recorded in the fourth quarter. For the next several years, we will only be an alternative minimum tax payer as we will utilize our existing net operating loss carry forwards to offset any current taxes payable.

Year ended December 31, 2007 compared to the year ended December 31, 2006

Our total revenues decreased $2,473,000 (2%) as compared to 2006. Revenues from our urology services decreased $529,000 (0.4%) as compared to 2006. Revenues from our lithotripsy business decreased $1,694,000 in 2007 as compared to 2006, while revenues from our prostate business increased $1,165,000 in 2007 as compared to 2006. The actual number of lithotripsy procedures performed in 2007 decreased by 5% compared to 2006, primarily due to partnership and mobile route closures in late 2006 and continued weak performance across our western region partnerships in early 2007. The average rate per procedure increased by 3% in 2007 as compared to 2006. Revenues for our medical products segment decreased by $1,979,000 (10%) compared to 2006 primarily due to less sales of our lithotripters and the discontinuation of sales of certain tables in early 2007. Medical products revenues before intersegment eliminations totaled $26.1 million for 2007 and $28.4 million for 2006. We sold 8 lithotripters and 28 tables in 2007 compared to 17 lithotripters and 100 tables in 2006. Revenues from our service operations and consumable sales decreased $2,173,000 in 2007 as compared to 2006. This decrease relates primarily to lower electrode sales especially as related to our foreign operations which we closed in 2006. Revenues from our new laboratory which commenced operations in January 2006, totaled $3,418,000 and $1,138,000 for the years ended December 31, 2007 and 2006, respectively.

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Our costs of services and general and administrative expenses for 2007 decreased $7,726,000 (6%) compared to 2006. Our cost of services associated with our urology services operations increased $2,228,000 (4%) in 2007 as compared with 2006. The cause of this increase relates primarily to increased rental expenses paid on Revolix units leased from our medical products division of $1,500,000 and a decrease in gains resulting from sales of various partnership interests in 2007 as compared to 2006 of $969,000 which are recorded against operating expenses. This was partially offset by lower laser supply costs of $1,087,000, which corresponds to more partnerships utilizing the Revolix laser as compared to the greenlight laser. Our cost of services associated with our medical products operations for 2007 decreased $5,572,000 (33%) compared to 2006. The primary cause of this decrease relates to significant decreases in external sales of lithotripters and tables in 2007, a cost reduction recorded as a result of the receipt of lease payments from our urology services division on Revolix units noted above, partially offset by approximately $900,000 in increased expenses at our new lab. A significant portion of medical products costs relate to providing maintenance services to our urology services segment and are allocated to the urology services segment. In the future we expect margins in medical products to continue to vary significantly from period to period based on the mix of intercompany and third-party sales. Our selling, general and administrative costs decreased $4,414,000 (22%) in 2007 as compared to 2006. This is primarily attributable to approximately $1,850,000 in costs paid to strategic consultants, $1 million in severance payments, $500,000 in higher share based compensation costs which were incurred in 2006 compared to 2007, as well as approximately $516,000 in decreased personnel, insurance, marketing, recruiting and other costs. In addition we received approximately $900,000 as a result of our former Swiss manufacturing subsidiary’s insolvency proceedings in 2007, which was recorded against selling, general and administrative expenses.

In the fourth quarter of 2007, in connection with our annual goodwill impairment test, we recorded an impairment to our urology services segment goodwill totaling $20.8 million. This impairment was due to a decrease in our estimated future discounted cash flows for this segment. This decrease was primarily caused by lower projected growth rates for our laser operations as well as the timing of certain future growth for our IGRT operations. 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 was 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 to competitors. The impairment in our medical products segment relates primarily to our decision to reduce or exit certain product lines, specifically patient management tables and orthopedic consumables during the fourth quarter of 2006 along with the closing of our European operations.

Income from discontinued operations in 2007 decreased $25,276,000 compared to 2006. Income from discontinued operations in 2006 included $33,542,000 attributable to our specialty vehicle manufacturing segment and $8,413,000 in losses attributable to our HIFU, cryosurgery, and Rocky Mountain Thermotherapy (“RMPT”) operations. We recognized a gain, net of tax, totaling $33.2 million in 2006 from the sale of our specialty vehicle manufacturing segment. In 2007, we had a loss from discontinued operations of $147,000 attributable to our RMPT and HIFU operations. This loss included a gain of $450,000 from the sale of our RMPT business, which closed September 28, 2007.

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Depreciation and amortization expense decreased $168,000 in 2007 compared to 2006.

Minority interest in consolidated income for 2007 increased $2,291,000 (5%) compared to 2006, as a result of increases in minority interest percentages at certain partnerships.

Provision for income taxes in 2007 increased $1,709,000 compared to 2006 due to lower taxable loss in 2007 than 2006.

Liquidity and Capital Resources

Cash Flows

Our cash and cash equivalents were $22,854,000 and $25,198,000 at December 31, 2008 and 2007, respectively. While our subsidiaries generally distribute all of their available cash quarterly, after establishing reserves for estimated capital expenditures and working capital, these distributions are made just after quarter end which leads to an accumulated cash balance at the end of each quarter. For the years ended December 31, 2008 and 2007, our subsidiaries distributed cash of approximately $53,757,000 and $42,736,000, respectively, to minority interest holders. In 2009, we anticipate that our subsidiaries will begin making distributions on a monthly basis rather than a quarterly basis.

Cash provided by our operations, after minority interest, was $70,845,000 for the year ended December 31, 2008 and $61,877,000 for the year ended December 31, 2007. From 2007 to 2008, fee and other revenue collected increased by $23,044,000 due primarily to increased revenues from our acquisitions. Cash paid to employees, suppliers of goods and others increased by $13,578,000 in 2008. This fluctuation is primarily attributable to increased operating expenses from our acquisitions and significant pay down of certain accrued expenses related to our AMPI acquisition.

Cash used by our investing activities for the year ended December 31, 2008, was $52,311,000. We utilized $49,487,000 in 2008 to acquire assets or interests in certain entities. Approximately $35 million of that cash was used to acquire the Ocean services contract, $10 million was used to acquire AMPI, and $6.3 million to acquire Uropath. In addition we increased our interest in certain existing litho partnerships. We purchased equipment and leasehold improvements totaling $11,779,000 in 2008. Cash used by our investing activities for the year ended December 31, 2007, was $18,757,000. We used approximately $8 million in cash to acquire our interests in the new Keystone partnership and we used $4 million to acquire increased ownership in two other partnerships. We purchased equipment and leasehold improvements totaling $9,469,000 in 2007.

Cash used in our financing activities for the year ended December 31, 2008, was $20,878,000, primarily due to distributions to minority interests of $53,757,000 and payments on notes payable of $14,508,000 partially offset by borrowings on our revolving line of credit of $50 million and on notes payable of $1,747,000. Cash used in our financing activities for the year ended December 31, 2007, was $45,581,000, primarily due to distributions to minority interests of $42,736,000 and payments on notes payable of $5,760,000 partially offset by borrowings on notes payable of $2,546,000.

Accounts receivable as of December 31, 2008 has increased $5,798,000 from December 31, 2007. This increase relates primarily to our purchases of AMPI and Uropath, whose accounts receivable at acquisition totaled $3,072,000 and $1,040,000, respectively, as well as increases related primarily to higher revenues and to the timing of collections.

Inventory as of December 31, 2008 totaled $8,843,000 and decreased $1,378,000 from December 31, 2007.

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Senior Credit Facility

Our senior credit facility is comprised of a five-year $60 million revolving line of credit due March 2010 and a $125 million senior secured term loan B due 2011. We entered into this senior credit facility in March 2005 and amended it in April and October 2008. 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, 2008, we have drawn $41 million 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, 2008.

On April 14, 2008, we amended our senior credit facility to (1) increase the revolving line of credit from $50 million to $60 million, (2) create an exception to the restricted payments negative covenant of the senior credit facility to enable us to repurchase up to $10 million of our common stock, through a stock repurchase program or otherwise, (3) increase the dollar amount of permitted acquisitions under the acquisitions negative covenant of the senior credit facility from $25 million to $30 million during any twelve month period beginning after April 14, 2008 and (4) create an exception from the calculation of such permitted acquisitions basket for our acquisition of AMPI.

On October 10, 2008, we amended our senior credit facility, to increase the dollar amount of permitted acquisitions under the acquisitions negative covenant from $30 million to $48 million during any twelve month period commencing on or after April 18, 2008 and prior to March 31, 2009 (which dollar amount of permitted acquisitions will decrease back to $30 million during any twelve month period commencing after March 31, 2009), provided that any such acquisitions will be subject to the prior written approval of the administrative agent under the senior credit facility.

Other

Other long term debt. As of December 31, 2008, we had notes totaling $5.4 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 either a fixed rate ranging from four to nine percent or LIBOR or prime plus a certain premium and are due over the next four years.

Other long term obligations. At December 31, 2008, as part of our acquisition of Medstone International Inc. in February 2004, we had an obligation totaling $8,338 related to payments to an employee for $4,167 a month continuing until February 28, 2009 as consideration for a noncompetition agreement. We have an obligation totaling $60,000 related to payments of $3,333 a month until June 15, 2010 as consideration for a noncompetition agreement with a previous employee of our Medical Products division.

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General

The following table presents our contractual obligations as of December 31, 2008 (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)	$	46,387	$	2,490	$	43,359	$	154	$	384
Operating Leases (2)		11,410		2,629		4,607		2,971		1,203
Non-compete contracts (3)		68		48		20		--		--
Total	$	57,865	$	5,167	$	47,986	$	3,125	$	1,587

_____________________

(1) Represents long term debt as discussed above.

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

(3) Represents an obligation of $8 due to an employee of Medstone, at a rate of $4 per month continuing until February 28, 2009, and an obligation of $60 due to a previous employee of ours, at a rate of $3 per month until June 15, 2010.

In addition, the scheduled principal repayments for all long term debt as of December 31, 2008 are payable as follows:

($ in thousands)
2009	$	2,490
2010		42,680
2011		679
2012		145
2013		9
Thereafter		384
Total	$	46,387

Our primary sources of cash are cash flows from operations and borrowings under our senior credit facility which is due in March 2010. 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 partnerships in new markets, expanding our IGRT customer base and by acquisitions. We seek opportunities to grow our medical products operations by expanding our anatomical pathology lab operations and acquisitions. 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.

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.

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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 April 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. 142-3, Determination of the Useful Life of Intangible Assets. FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. Based on our current operations, we do not expect that the adoption of FSP 142-3 will have a material impact on our financial position or results of operations.

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162 (“SFAS No. 162”), The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States (the GAAP hierarchy). SFAS 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. Based on our current operations, we do not expect that the adoption of SFAS 162 will have a material impact on our financial position or results of operations.

In December 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007), "Business Combinations", (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, including goodwill, the liabilities assumed and any non-controlling interest in the acquiree. The Statement also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The impact of adopting SFAS 141R will be dependent on the future business combinations that we may pursue after its effective date.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51" (“SFAS 160”). This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 requires companies to report a noncontrolling interest in a subsidiary as equity. Additionally, companies are required to include amounts attributable to both the parent and the noncontrolling interest in the consolidated net income and provide disclosure of net income attributable to the parent and to the noncontrolling interest on the face of the consolidated statement of income. This Statement clarifies that after control is obtained, transactions which change ownership but do not result in a loss of control are accounted for as equity transactions. Prior to this Statement being issued, decreases in a parent’s ownership interest in a subsidiary could be accounted for as equity transactions or as transactions with gain or loss recognition in the income statement. A change in ownership of a consolidated subsidiary that results in a loss of control and deconsolidation would result in a gain or loss in net income. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 with earlier adoption prohibited. The adoption of SFAS 160 will revise our presentation of consolidated financial statements and further impact will be dependent on our future changes in ownership in subsidiaries after the effective date.

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In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair value accounting to many financial instruments and certain other items. The fair value option is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 did not have a material impact on our financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In December 2007, the FASB released a proposed FASB Staff Position (FSP FAS 157-b-Effective Date of FASB Statement No. 157) which, if adopted as proposed, would delay the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). In February 2008, the FASB issued FASB Staff Position FAS 157-2, “Effective Date of FASB Statement No. 157” (the “FSP”). The FSP delayed, for one year, the effective date of FAS 157 for all nonfinancial assets and liabilities, except those that are recognized or disclosed in the financial statements on at least an annual basis. The implementation of SFAS No. 157 for financial assets and financial liabilities, effective January 1, 2008, did not have a material impact on our consolidated financial position and results of operations.

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ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

As of December 31, 2008, we had long-term debt (including current portion) totaling $46,387,000, of which $4,859,000 had fixed rates of 4% to 9%, and $41,528,000 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 $41,528,000. We make monthly or quarterly payments of principal and interest on $528,000 of the floating rate debt. An increase in interest rates of 1% would result in a $415,000 annual increase in interest expense on this existing principal balance.

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, 2008, under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and our Interim 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 Interim Chief Financial Officer concluded that, as of December 31, 2008, 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 Exchange Act. 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.

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, 2008 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, 2008, our internal control over financial reporting was effective based on those criteria.

34

Ernst & Young, LLP, our independent registered public accounting firm, has audited our internal controls over financial reporting. The attestation 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, 2008 that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting.

ITEM 9B.      OTHER INFORMATION

In the fourth quarter of 2008, in connection with our annual goodwill impairment test, we recorded an impairment to our urology services segment goodwill totaling $144 million. Although our core operations remain stable and reflect growth over the prior year, we adjusted certain assumptions in our discounted cash flow model to address the recent declines in our market capitalization, which had fallen significantly below our consolidated net assets. In addition, the market comparables component of our impairment test was negatively impacted by the current global economic crisis and global decline in the stock markets. For further discussion of this impairment, see footnote C to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

35

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
of HealthTronics, Inc.:

We have audited HealthTronics, Inc. internal control over financial reporting as of December 31, 2008, 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.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, 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, HealthTronics, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of HealthTronics, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008 of HealthTronics, Inc. and our report dated March 4, 2009 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Austin, Texas
March 4, 2009

36

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 2009 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 2009 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 2009 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 2009 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 2009 annual meeting of stockholders and is incorporated herein by reference.

37

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
             
             
3.3
             
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)
First Amendment to Bylaws of HealthTronics, Inc. (incorporated by reference to Exhibit 3.1 of
HealthTronics’ Current Report Form 8-K filed on December 17, 2007.)
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).

38

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
            
            
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 Current
Report on 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).
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 on Form 8-K filed on March 8, 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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2008 filed with the
Securities and Exchange Commission on May 12, 2008).
Second Amendment to Executive Employment Agreement, dated as of October 26, 2007, by and
between HealthTronics, Inc. and James S. B. Whittenburg (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 12, 2008).
Stock Purchase Agreement, dated as of February 13, 2007, by and among HealthTronics, Inc.,
Lithotripters, Inc., Keystone ABG Inc., Keystone Kidney Associates, PC, David Arsht, D.O., P.
Kenneth Brownstein, M.D., Larry E. Goldstein, M.D. and Michael Dernoga (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 February 20, 2007).
Interest Purchase Agreement, dated as of February 13, 2007, by and among HealthTronics, Inc.,
Lithotripters, Inc., David Arsht, D.O., P. Kenneth Brownstein, M.D., Larry E. Goldstein, M.D.
and Michael Dernoga (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 February 20, 2007).
Amended and Restated Distribution Agreement, dated as of February 28, 2007, by and among
HealthTronics, Inc., Lisa Laser USA, Inc., and LISA laser products OHG (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 March 6, 2007).
First Amendment to Interest Purchase Agreement, dated as of May 25, 2007, by and among
HealthTronics, Inc., Lithotripters, Inc., David Arsht, D.O., P. Kenneth Brownstein, M.D., Larry
E. Goldstein, M.D. and Michael Dernoga (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 May
31, 2007).
First Amendment to Executive Employment Agreement, dated as of August 10, 2007, by and between
HealthTronics, Inc. and James S. B. Whittenburg (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 15, 2007).
Stock Purchase Agreement, dated as of March 18, 2008, by and among HealthTronics, Inc., Litho
Management, Inc., Advanced Medical Partners, Inc. and the stockholders of Advanced Medical
Partners, Inc. (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 March 20, 2008).

39

10.27
            
            
            
10.28
            
            
            
10.29
            
            
10.30
            
            
            
10.31
            
            
10.32
            
            
10.33
            
            
            
10.34
            
            
            
10.35*
            
10.36
            
            

21.1
23.1
31.1
31.2
32.1
32.2 First Amendment to Credit Agreement, dated as of April 14, 2008, by and among HealthTronics,
Inc., the lenders party thereto, JPMorgan Chase Bank, National Association, and the other
parties thereto (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 April 16, 2008).
Piggy-Back Registration Rights Agreement, dated as of April 17, 2008, by and among
HealthTronics, Inc., Robert A. Yonke, Christopher J. Ringel and Kevin Bentley. (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 April 22, 2008).
Third Amendment to the 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
May 14, 2008).
Earnest Money Contract—Commercial Improved Property (Office Condominiums) dated as of April 1,
2008 (as amended on each of April 15, 2008 and May 12, 2008) by and between HealthTronics, Inc.
and HPI Acquisition Company, LLC. (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 20, 2008).
Lease Agreement dated May 19, 2008, by and between HealthTronics, Inc. and HEP-Davis Spring,
L.P. (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 20, 2008).
Termination and Consulting Agreement, dated September 19, 2008, by and between HealthTronics,
Inc. 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 September 22, 2008).
Stock Purchase Agreement, dated as of October 10, 2008, by and between HealthTronics, Inc. and
Atlantic Urological Associates, P.A (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 October 15,
2008).
Second Amendment to Credit Agreement, dated as of October 10, 2008, by and among HealthTronics,
Inc., the lenders party thereto, and JPMorgan Chase Bank, National Association (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 October 15, 2008).
Executive Employment Agreement, effective August 15, 2007, by and between HealthTronics, Inc.
and Clayton H. Duncan (filed herewith).
Form of Director Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 to
the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, filed on
November 7, 2008).

List of subsidiaries of the Company. (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 Richard A. Rusk, HealthTronics, Inc., 9825 Spectrum Drive, Austin, Texas 78717. 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”.

40

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/ James S. B. Whittenburg                                
        James S. B. Whittenburg,
       Chief Executive Officer and
        President (Principal Executive Officer)

       Date: March 10, 2009

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below 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/ James S. B. Whittenburg
James S. B. Whittenburg,
Chief Executive Officer and
President (Principal Executive Officer)
and Director


March 10, 2009





/s/ Richard A. Rusk
Richard A. Rusk,
Interim Chief Financial Officer
(Principal Financial and Accounting Officer)


March 10, 2009





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


March 10, 2009



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


March 10, 2009



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


March 10, 2009



/s/ Ken S. Shifrin
Ken S. Shifrin, Director


March 10, 2009

41

By:
         


Date:





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


March 10, 2009

42

APPENDIX A

INDEX

Page

Report of Independent Registered Public Accounting Firm Consolidated Financial Statements:      Consolidated Statements of Income for the years ended December 31, 2008, 2007     and 2006.      Consolidated Balance Sheets at December 31, 2008 and 2007.      Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2008,      2007 and 2006.      Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006.      Notes to Consolidated Financial Statements.

A-2 A-3 A-4 A-6 A-7 A-10

A-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
of HealthTronics, Inc.:

We have audited the accompanying consolidated balance sheets of HealthTronics, Inc. and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of HealthTronics, Inc. and subsidiaries at December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

As discussed in Note J to the consolidated financial statements, effective January 1, 2007, the Company changed its method of accounting for income taxes to conform to Financial Accounting Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), HealthTronics, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2008, 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 4, 2009, expressed an unqualified opinion thereon.

/s/: Ernst & Young LLP   

Austin, Texas
March 4, 2009

A-2

HEALTHTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

($ in thousands, except per share data)	Years Ended December 31,
	2008			2007			2006
Revenue:
Urology Services	$	145,265		$	122,736		$	123,265
Medical Products		20,389			17,101			19,080
Other		288			581			546
Total revenue		165,942			140,418			142,891
Cost of services and general and administrative expenses:
Urology Services		65,185			53,490			51,262
Medical Products		10,494			11,225			16,797
Selling, general and administrative		20,006			15,884			20,298
Impairment charges		144,000			20,800			20,600
Depreciation and amortization		12,363			11,107			11,275
		252,048			112,506			120,232
Operating income		(86,106	)		27,912			22,659
Other income (expenses):
Interest and dividends		1,233			1,146			755
Interest expense		(1,077	)		(829	)		(1,146	)
		156			317			(391	)
Income from continuing operations before provision
for income taxes and minority interest		(85,950	)		28,229			22,268
Minority interest in consolidated income		54,259			45,568			43,277
Provision (benefit) for income taxes		(11,516	)		(2,854	)		(4,563	)
Income (loss) from continuing operations		(128,693	)		(14,485	)		(16,446	)
Income (loss) from discontinued operations, net of tax		--			(147	)		25,129
Net income (loss)	$	(128,693	)	$	(14,632	)	$	8,683
Basic earnings per share:
Income (loss) from continuing operations	$	(3.53	)	$	(0.41	)	$	(0.47	)
Income (loss) from discontinued operations	$	--		$	--		$	0.72
Net income (loss)	$	(3.53	)	$	(0.41	)	$	0.25
Weighted average shares outstanding		36,499			35,421			35,157
Diluted earnings per share:
Income (loss) from continuing operations	$	(3.53	)	$	(0.41	)	$	(0.47	)
Income (loss) from discontinued operations	$	--		$	--		$	0.72
Net income (loss)	$	(3.53	)	$	(0.41	)	$	0.25
Weighted average shares outstanding		36,499			35,421			35,347

See accompanying notes to consolidated financial statements.

A-3

HEALTHTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

($ in thousands)	December 31,
	2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	22,854		$	25,198
Accounts receivable, less allowance for doubtful
accounts of $2,485 in 2008 and $2,368 in 2007		27,687			21,889
Other receivables		1,410			2,703
Deferred income taxes		--			12,547
Prepaid expenses and other current assets		2,895			1,656
Inventory		8,843			10,221
Total current assets		63,689			74,214
Property and equipment:
Equipment, furniture and fixtures		55,050			47,751
Building and leasehold improvements		8,254			12,437
		63,304			60,188
Less accumulated depreciation and
amortization		(30,535	)		(27,169	)
Property and equipment, net		32,769			33,019
Other investments		1,819			1,353
Goodwill, at cost		93,620			217,505
Intangible assets		40,278			5,220
Other noncurrent assets		2,211			4,745
	$	234,386		$	336,056

See accompanying notes to consolidated financial statements.

A-4

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

($ in thousands, except share data)	December 31,
	2008			2007
LIABILITIES
Current liabilities:
Current portion of long-term debt	$	2,490		$	4,332
Accounts payable		6,468			5,859
Accrued distributions to minority interests		95			226
Accrued expenses		9,221			7,275
Total current liabilities		18,274			17,692
Long-term debt, net of current portion		43,897			4,194
Other long term obligations		1,765			75
Deferred income taxes		3,355			30,024
Total liabilities		67,291			51,985
Minority interest		47,723			41,653
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 30,000,000 shares authorized: none outstanding		--			--
Common stock, no par value, 70,000,000 authorized: 39,494,314 issued
and 37,618,206 outstanding in 2008; 35,610,236 issued and 35,560,097
outstanding in 2007		211,667			202,049
Accumulated earnings (deficit)		(87,852	)		40,841
Treasury stock, at cost, 1,876,108 shares in 2008 and 50,139 shares in 2007		(4,443	)		(472	)
Total stockholders' equity		119,372			242,418
	$	234,386		$	336,056

See accompanying notes to consolidated financial statements.

A-5

HEALTHTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 2008, 2007 and 2006

($ in thousands, except share data)	Issued Common Stock				Accumulated			Treasury Stock
	Shares		Amount		Earnings (Deficit)			Shares			Amount			Total
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
Net loss		--		--		(14,632	)		--			--			(14,632	)
Contribution of treasury stock		--		--		--			45,266			425			425
Share-based compensation		135,000		1,108		--			--			--			1,108
Balance, December 31, 2007		35,610,236		202,049		40,841			(50,139	)		(472	)		242,418
Net loss		--		--		(128,693	)		--			--			(128,693	)
Purchase of treasury stock		--		--		--			(1,763,580	)		(3,971	)		(3,971	)
Issuance of stock for acquisitions		1,987,486		6,737		--			--			--			6,737
Share-based compensation		1,896,592		2,881		--			(62,389	)		--			2,881
Balance, December 31, 2008		39,494,314	$	211,667	$	(87,852	)		(1,876,108	)	$	(4,443	)	$	119,372

See accompanying notes to consolidated financial statements.

A-6

HEALTHTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in thousands)	Years Ended December 31,
	2008			2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Fee and other revenue collected	$	167,865		$	144,821		$	146,658
Cash paid to employees, suppliers of goods and others		(95,939	)		(82,361	)		(83,235	)
Interest received		1,233			1,146			755
Interest paid		(990	)		(835	)		(1,296	)
Taxes paid		(1,324	)		(538	)		(475	)
Discontinued operations		--			(356	)		(13,515	)
Net cash provided by operating activities		70,845			61,877			48,892
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of entities, net of cash acquired		(49,487	)		(11,829	)		--
Purchases of equipment and leasehold improvements		(11,779	)		(9,469	)		(11,902	)
Proceeds from sales of assets		9,165			1,224			1,365
Other		(210	)		(18	)		(25	)
Discontinued operations		--			1,335			138,971
Net cash (used in) provided by investing activities		(52,311	)		(18,757	)		128,409
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable		51,747			2,546			4,657
Payments on notes payable, exclusive of interest		(14,508	)		(5,760	)		(134,257	)
Distributions to minority interest		(53,757	)		(42,736	)		(46,969	)
Contributions by minority interest, net of buyouts		(389	)		389			(314	)
Exercise of stock options		--			--			1,907
Purchase of treasury stock		(3,971	)		--			(73	)
Discontinued operations		--			(20	)		(320	)
Net cash used in financing activities		(20,878	)		(45,581	)		(175,369	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(2,344	)		(2,461	)		1,932
Cash and cash equivalents, beginning of period, includes cash
from discontinued operations of $(198) and $4,650
for 2007 and 2006, respectively		25,198			27,659			25,727
Cash and cash equivalents, end of period, includes cash
from discontinued operations of $(198) for 2006	$	22,854		$	25,198		$	27,659

See accompanying notes to consolidated financial statements.

A-7

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

($ in thousands)	Years Ended December 31,
	2008			2007			2006
Reconciliation of net income to net cash
provided by operating activities:
Net income (loss)	$	(128,693	)	$	(14,632	)	$	8,683
Adjustments to reconcile net income (loss) to cash provided
by operating activities:
Minority interest in consolidated income		54,259			45,568			43,277
Depreciation and amortization		12,363			11,107			11,275
Provision for uncollectible accounts		145			(108	)		581
Provision for deferred income taxes		(12,180	)		(624	)		(4,997	)
Non-cash share-based compensation		2,881			1,534			2,352
Impairment charges		144,000			20,800			20,600
Other		(1,112	)		70			(636	)
Discontinued Operations		--			(117	)		(38,643	)
Changes in operating assets and liabilities,
net of effect of purchase transactions:
Accounts receivable		(1,360	)		1,008			1,821
Other receivables		1,399			(1,124	)		2,094
Other assets		1,142			2,026			1,036
Accounts payable		(1,314	)		(579	)		482
Accrued expenses		(685	)		(3,052	)		967
Total adjustments		199,538			76,509			40,209
Net cash provided by operating activities	$	70,845		$	61,877		$	48,892

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,
	2008		2007		2006
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	$	95	$	226	$	7,687
Minority interest decreased by		95		226		7,687
In 2008, the Company acquired three lithotripsy partnerships,
a cryosurgical company, a pathology lab and an IGRT
services operation. The net assets and
liabilities acquired/sold were as follows:
Current assets increased by		6,456		--		--
Noncurrent assets increased by		3,812		--		--
Goodwill increased by		26,995		--		--
Current liabilities increased by		4,941		--		--
Other long-term obligations decreased by		906		--		--
Minority interest increased by		5,825		--		--
In 2007, the Company acquired two lithotripsy partnerships and sold
three lithotripsy partnerships. The net assets and
liabilities acquired/sold were as follows:
Current assets increased by		--		580		--
Noncurrent assets increased by		--		1,816		--
Goodwill increased by		--		9,044		--
Current liabilities increased by		--		380		--
Other long-term obligations decreased by		--		354		--
Minority interest increased by		--		802		--

See accompanying notes to consolidated financial statements.

A-9

HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A.   ORGANIZATION AND OPERATION OF THE COMPANY

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.

We are headquartered in Austin, Texas and provide urology services in approximately 46 states.

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 a plan 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. In September 2007, we completed the sale of our Rocky Mountain Prostate business.

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), we have determined that one of our consolidated partnerships, 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.

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 $11,076,000, $10,079,000 and $9,844,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

A-10

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

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 have two reporting units, urology services and medical products. We test for impairment of goodwill at least annually, during the fourth quarter, at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair value of the reporting units are estimated using a combination of the income, or discounted cash flows approach and the market approach, which utilizes comparable companies’ data. Because we have recognized goodwill based only on our controlling interest, the fair value of each reporting unit also relates only to our controlling interest. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.

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-11

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 $1,508,000, $1,321,000 and $1,005,000 in 2008, 2007 and 2006, 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. We provide anatomical pathology services primarily to the urology market place. Revenues from these services are recorded when the related laboratory procedures are performed. IGRT technical services are billed monthly and the related revenues are recognized as the related services are provided.

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, 2008, 2007 and 2006, 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, 2008, approximately 16% of accounts receivable relate to units operating in New York, 6% relate to units in Florida, 5% relate to units operating in Virginia, 5% relate to units operating in Minnesota, 5% related to units in Louisiana, and 5% relate to units in Indiana. At December 31, 2007, approximately 28% of accounts receivable relate to units operating in New York, 7% relate to units in Louisiana, 6% relate to units operating in Florida, 6% related to units in Indiana, and 5% each relate to units in Texas and Minnesota.

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-12

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:
2008	$	2,368	$	285	$	(140	)	$	(28	)	$	2,485
2007	$	2,166	$	329	$	(437	)	$	310		$	2,368
2006	$	1,491	$	776	$	(195	)	$	94		$	2,166

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, 2008 and 2007, inventory consists of the following (in thousands):

	2008		2007
Raw Materials	$	5,993	$	6,144
Finished Goods		2,850		4,077
	$	8,843	$	10,221

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-13

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.

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.

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:

(In thousands, except per share data)	Net Income (loss)			Wtd. Avg. No. of Shares		Per Share Amounts
For the year ended December 31, 2008
Basic	$	(128,693	)		36,499	$	(3.53	)
Effect of dilutive securities:
Options and non-vested shares
Diluted	$	(128,693	)		36,499	$	(3.53	)
For the year ended December 31, 2007
Basic	$	(14,632	)		35,421	$	(0.41	)
Effect of dilutive securities:
Options and non-vested shares					--
Diluted	$	(14,632	)		35,421	$	(0.41	)
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

A-14

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

Unexercised employee stock options and non-vested shares to purchase 2,783,000, 3,329,000 and 3,223,000 shares of our common stock as of December 31, 2008, 2007 and 2006, 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 or we had a net loss in the respective period.

Recently Issued Pronouncements

In April 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. 142-3, Determination of the Useful Life of Intangible Assets. FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. Based on our current operations, we do not expect that the adoption of FSP 142-3 will have a material impact on our financial position or results of operations.

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162 (“SFAS 162”), The Hierarchy of Generally Accepted Accounting Principles. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States (the GAAP hierarchy). SFAS 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. Based on our current operations, we do not expect that the adoption of SFAS 162 will have a material impact on our financial position or results of operations.

In December 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised 2007), “Business Combinations”, (“SFAS 141R”). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, including goodwill, the liabilities assumed and any non-controlling interest in the acquiree. The Statement also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The impact of adopting SFAS 141R will be dependent on the future business combinations that we may pursue after its effective date.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements–an amendment of ARB No. 51" (“SFAS 160”). This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 requires companies to report a noncontrolling interest in a subsidiary as equity. Additionally, companies are required to include amounts attributable to both the parent and the noncontrolling interest in the consolidated net income and provide disclosure of net income attributable to the parent and to the noncontrolling interest on the face of the consolidated statement of income. This Statement clarifies that after control is obtained, transactions which change ownership but do not result in a loss of control are accounted for as equity transactions. Prior to this Statement being issued, decreases in a parent’s ownership interest in a subsidiary could be accounted for as equity transactions or as transactions with gain or loss recognition in the income statement. A change in ownership of a consolidated subsidiary that results in a loss of control and deconsolidation would result in a gain or loss in net income. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 with earlier adoption prohibited. The adoption of SFAS 160 will revise our presentation of consolidated financial statements and further impact will be dependent on our future changes in ownership in subsidiaries after the effective date.

A-15

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

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair value accounting to many financial instruments and certain other items. The fair value option is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 did not have a material impact on our financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In December 2007, the FASB released a proposed FASB Staff Position (FSP FAS 157-b-Effective Date of FASB Statement No. 157) which, if adopted as proposed, would delay the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). In February 2008, the FASB issued FASB Staff Position FAS 157-2, “Effective Date of FASB Statement No. 157” (the “FSP”). The FSP delayed, for one year, the effective date of FAS 157 for all nonfinancial assets and liabilities, except those that are recognized or disclosed in the financial statements on at least an annual basis. The implementation of SFAS No. 157 for financial assets and financial liabilities, effective January 1, 2008, did not have a material impact on our consolidated financial position and results of operations.

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, 2008, we had $4 million in indefinite life intangible assets related to the HealthTronics brand name. Intangible assets with finite lives consisted primarily of $34.6 million related to our IGRT services contract, and $1.7 million related to two non-compete agreements, hospital contracts and patents at December 31, 2008. The agreements will continue to be amortized over their useful lives.

The net carrying value of goodwill as of December 31, 2008 and 2007 is comprised of the following:

(in thousands)	Total			Urology Services			Medical Products
Balance, December 31, 2006	$	229,261		$	220,142		$	9,119
Additions		11,735			11,735			--
Deletions		(2,691	)		(2,691	)		--
Impairments		(20,800	)		(20,800	)		--
Balance, December 31, 2007	$	217,505		$	208,386		$	9,119
Additions		26,995			19,164			7,831
Deletions		(6,880	)		(6,880	)		--
Impairments		(144,000	)		(144,000	)		--
Balance, December 31, 2008	$	93,620		$	76,670		$	16,950

A-16

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

In the fourth quarter of 2008, in connection with our annual goodwill impairment test, we recorded an impairment to our urology services segment goodwill totaling $144 million. Although our core operations remain stable and reflect growth over the prior year, we adjusted certain assumptions in our discounted cash flow model to address the recent declines in our market capitalization, which had fallen significantly below our consolidated net assets. In addition, the market comparables component of our impairment test was negatively impacted by the current global economic crisis and global decline in the stock markets. In the fourth quarter of 2007, in connection with our annual goodwill impairment test, we recorded an impairment to our urology services segment goodwill totaling $20.8 million. This impairment was due to a decrease in our estimated future discounted cash flows for this segment. This decrease was primarily caused by lower projected growth rates for our laser operations as well as the timing of certain future growth for our IGRT operations.

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 have two reporting units, urology services and medical products. We test for impairment of goodwill at least annually, during the fourth quarter, at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. Because we have recognized goodwill based only on our controlling interest, the fair value of each reporting unit also relates only to our controlling interest.

If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.

Our discounted cash flow projections for each reporting unit were based on five-year financial forecasts. The five-year forecasts were based on annual financial forecasts developed internally by management for use in managing our business and through discussions with an independent valuation firm engaged by us. For our December 31, 2008 forecast, the significant assumptions of these five-year forecasts included annual revenue growth rates ranging from 2.9% to 4.5% and from 10.4% to 20% for the urology services and medical products reporting units, respectively. The future cash flows were discounted to present value using a mid-year convention and a discount rate of 13% for the urology services and the medical products reporting units. Terminal values for both reporting units were calculated using a Gordon growth methodology with a long-term growth rate of 3.0%. The future terminal values of the urology services and medical products reporting units were $153 million and $61 million respectively at December 31, 2008.

For our December 31, 2007 forecast, the significant assumptions of the five-year forecasts included annual revenue growth rates ranging from 5.6% to 11% and from 9.8% to 18.3% for the urology services and medical products reporting units, respectively. The future cash flows for 2007 were discounted to present value using a mid-year convention and a discount rate of 11% for the urology services reporting unit and 12.0% for the medical products reporting unit. Terminal values for both reporting units were calculated using a Gordon growth methodology with a long-term growth rate of 5.0%. The future terminal values of the urology services and medical products reporting units were $284 million and $45 million respectively at December 31, 2007.

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

The significant assumptions used in determining fair values of reporting units using comparable company market values include the determination of appropriate market comparables, the estimated multiples of revenue, EBIT, and EBITDA a willing buyer is likely to pay, and the estimated control premium a willing buyer is likely to pay.

Other intangible assets as of December 31, 2008 and 2007, subject to amortization expense, are comprised of the following (in thousands):

	Gross Carrying Amount		Accumulated Amortization		Net
December 31, 2008
Urology Services	$	36,655	$	1,493	$	35,162
Medical Products		2,341		1,225		1,116
Total	$	38,996	$	2,718	$	36,278
December 31, 2007
Urology Services	$	2,590	$	1,759	$	831
Medical Products		2,776		2,387		389
Total	$	5,366	$	4,146	$	1,220

Amortization expense for other intangible assets with finite lives was $1,286,000, $1,028,000 and $1,431,000 for the years ended December 31, 2008, 2007 and 2006, respectively. We estimate annual amortization expense for each of the five succeeding fiscal years as follows (in thousands):

Year	Amount
2009	$	2,392
2010		2,241
2011		1,971
2012		1,905
2013		1,753
Thereafter		26,016

D.   ACQUISITIONS

On October 10, 2008, we entered into a Stock Purchase Agreement with Atlantic Urological Associates (“AUA”), pursuant to which we purchased the outstanding shares of capital stock of Ocean Radiation Therapy, Inc., a wholly-owned subsidiary of AUA (“Ocean”), for a purchase price of approximately $35 million in cash. Ocean provides image guided radiation therapy (“IGRT”) technical services to AUA’s IGRT cancer treatment center. The Ocean entity was formed concurrent with and as a result of the purchase. Ocean’s only asset was the IGRT services agreement valued at approximately $35 million which is recorded in intangible assets. We have estimated that this service agreement has a 20 year useful life and we are amortizing that asset over that life.

A-18

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

On July 15, 2008, we acquired UroPath, LLC (“UroPath”) for $7.5 million in cash. Founded in 2003, UroPath is a leading provider of anatomical pathology laboratory services in the U.S. with locations in Florida, Texas, and Pennsylvania. Based on our preliminary allocation of the purchase price, we recorded approximately $7.4 million of goodwill related to this transaction, all of which is tax deductible.

On April 17, 2008, we completed the acquisition of Advance Medical Partners, Inc. (“AMPI”) pursuant to the Stock Purchase Agreement dated March 18, 2008 between us, Litho Management, Inc., AMPI and the stockholders of AMPI. Founded in 2003, AMPI is a leading provider of urological cryosurgery services in the U.S. with operations in 46 states. We acquired the outstanding shares of capital stock of AMPI (other than shares already held by us) for an aggregate purchase price of approximately $13 million, consisting of $6.9 million in cash and approximately 1.8 million shares of our common stock, plus a two-year earn-out based on the future achievement of EBITDA. We determined the value of our common stock by using an average closing price for the two trading days prior to and after the public announcement of the merger. Based upon our preliminary allocation of the purchase price, we recognized $12.3 million of goodwill related to this transaction, all of which is not tax deductible.

In 2008, we purchased three partnerships, increased our ownership in three existing partnerships and purchased a small service company for an aggregate purchase price of approximately $6.4 million. We recorded approximately $7.2 million of goodwill related to these transactions, all of which is tax deductible.

Effective April 28, 2007, we acquired a 21% general partner interest in Keystone Mobile Partners, L.P. (“Keystone”) and an additional 14% limited partner interest in Keystone for an aggregate purchase price of approximately $6.8 million plus certain additional cash consideration to be paid depending on the number of limited partner units sold by us in a post-closing offering of such units, plus certain earnouts. In August 2007, we completed our post-closing offering of the limited partner units and paid an additional $934,000. Keystone provides lithotripsy services to the Greater Philadelphia and eastern Pennsylvania area. We recorded approximately $8 million of goodwill related to this transaction, all of which is tax deductible.

In 2007, we increased our ownership in two partnerships for an aggregate purchase price of approximately $4 million. We recorded approximately $3.6 million of goodwill related to these transactions, all of which is tax deductible.

Our unaudited proforma combined income data for the periods ended December 31, 2008 and 2007, assuming the acquisitions were effective January 1, of each year, is as follows:

($ in thousands, except per share data)	2008			2007
Total revenues	$	182,750		$	185,904
Total expenses		309,942			196,977
Discontinued Operations		--			(147	)
Net income (loss)	$	(127,192	)	$	(11,220	)
Diluted earnings per share	$	(3.42	)	$	(0.30	)

A-19

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

E.   FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of our significant financial instruments as of December 31, 2008 and 2007 are as follows:

	2008				2007
( $ in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	22,854	$	22,854	$	25,198	$	25,198
Warrants/Common Stock		290		290		450		360
Financial liabilities:
Debt	$	46,387	$	46,387	$	8,526	$	8,526
Other long-term obligations		1,765		1,727		75		67

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 debt has a floating rate, therefore, the carrying value of the debt at December 31, 2008 and 2007 approximates fair value.

Other Long-Term Obligations

At December 31, 2008, as part of our acquisition of Medstone International Inc. in February 2004, we had an obligation totaling $8,334 related to payments to an employee for $4,167 per month continuing until February 28, 2009 as consideration for a noncompetition agreement. We have an obligation totaling $60,000 related to payments of $3,333 a month until June 15, 2010 as consideration for a noncompetition agreement with a previous employee of our Medical Products division. At December 31, 2008 we had $1,242,000 in long term deferred rent related to leaseholds at our new corporate office space in Austin, Texas. We are amortizing this deferred rent at a rate of $18,136 per month. At December 31, 2008, we had an obligation totaling $500,000 for restructuring costs related to the vacating of two leased properties. Lease payments, net of the projected sublease income, totaling $100,000 will continue until September 30, 2010. Lease payments, net of projected sublease income, totaling $400,000 will continue until October 3, 2010. Leases have been recorded at fair value. We estimated the fair value of the noncompete payments based on discounted cash flows, which is a level three analysis.

Warrants

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 to distribute such device in the United States, when and if a Pre-Market Approval of such device is granted by the FDA and forfeits our rights to vest in additional warrants to EDAP common stock. We have accordingly included our costs related to the clinical trials of High Intensity Focused Ultrasound (“HIFU”) in discontinued operations in the accompanying condensed consolidated statements of income. During 2007, we exercised these warrants and now own 200,000 shares of EDAP common stock. The warrants have been valued based on a quoted market price, which is a level one analysis.

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

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)	2008		2007
Accrued group insurance costs	$	304	$	393
Compensation and payroll related expense		3,339		3,840
Accrued interest		94		7
Accrued taxes		613		871
Accrued professional fees		317		170
Unearned revenues		1,181		913
Deferred Rent		396		--
Other		2,977		1,081
	$	9,221	$	7,275

G.   INDEBTEDNESS

Long-term debt is as follows:

($ in thousands)		December 31,
Interest Rates	Maturities	2008		2007
Floating	2007-2012	$	41,528	$	2,394
4%-9%	2007-2012	$	4,859		6,132
		$	46,387	$	8,526
Less current portion of long-term debt		$	2,490		4,332
		$	43,897	$	4,194

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 due in March 2010 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. On April 14, 2008, we amended our senior credit facility to increase the revolving line of credit from $50 million to $60 million. On October 10, 2008, we amended our senior credit facility, to increase the dollar amount of permitted acquisitions under the acquisitions negative covenant from $30 million to $48 million during any twelve month period commencing on or after April 18, 2008 and prior to March 31, 2009.

A-21

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

This 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. As of December 31, 2008, we have drawn $41 million 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, 2008.

Other long term debt

As of December 31, 2008, we had notes totaling $5.4 million related to equipment purchased by our limited partnerships, which indebtedness we believe will be repaid from the cash flows of the partnerships. They bear interest at either a fixed rate of four to nine percent or LIBOR or prime plus a certain premium and are due over the next four years.

The stated principal repayments for all indebtedness as of December 31, 2008 are payable as follows (in thousands):

Year	Amount
2009	$	2,490
2010		42,680
2011		679
2012		145
2013		9
Thereafter		384

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.

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 $110,000 per person per policy year. At December 31, 2008, we had 323 employees enrolled in the plan. The plan provides non-contributory coverage for employees and contributory coverage for dependents. Our contributions totaled $2,781,000, $2,852,000 and $2,351,000, in 2008, 2007 and 2006 respectively.

A-22

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

We lease office space in several locations. Rent expense totaled $2,445,000, $1,757,000 and $1,491,000 for the years ended December 31, 2008, 2007 and 2006. Future annual minimum lease payments under all noncancelable operating leases are as follows:

($ in thousands) Year	Amount
2009	$	2,629
2010		2,483
2011		2,124
2012		1,511
2013		1,460
Thereafter		1,203

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.

Under SFAS No. 123R, nonvested stock awards are awards that the employee has not yet earned the right to sell, and are subject to forfeiture if the terms of service are not satisfied. These awards should be measured based on the market prices of otherwise identical (i.e., identical except for the vesting condition) common stock at the grant date. A nonvested equity share awarded to an employee shall be measured at its fair value as if it were vested and issued on the grant date. The vesting restrictions are taken into account by recognizing compensation cost only for awards for which the employee has rendered the requisite service (i.e., vested).

In 2008, we granted a total of 1,896,592 of non-vested shares under our 2004 Equity Incentive Plan. 170,449 shares vest 25% on each of the first four anniversaries of the grant date. 1,121,993 shares vest based on the achievement of the performance targets outlined below. 604,150 shares vest 25% on each of the first four anniversaries of the grant date; however, their vesting can be accelerated if the following performance targets are reached. 735,136 of the shares that vest per the performance targets below have a two year service requirement regardless of the performance targets being met.

A-23

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

Percent of Grant Vesting		Performance Target (% increase over grant price)
	25%		15	%
	25%		30	%
	25%		45	%
	25%		60	%

On May 5, 2008, the first performance target related to one of the grants was met and as a result 92,862 of the non-vested stock awards vested, which resulted in the recognition of approximately $307,000 in share based compensation cost. On August 25, 2008, the second performance target was met resulting in the vesting of an additional 92,862 shares and the recognition of approximately $118,000 in share based compensation cost.

As of December 31, 2008, total unrecognized share-based compensation cost related to unvested stock options was approximately $1.3 million, which is expected to be recognized over a weighted average period of approximately 1.3 years. We also had $3.1 million of unrecognized compensation costs related to non-vested stock awards as of December 31, 2008, which is expected to be recognized over a weighted average period of approximately 1.6 years. For the years ended December 31, 2008 and 2007, we have included approximately $2,881,000 and $1,108,000, respectively, for share-based compensation cost in the accompanying consolidated statement of income.

Share-based compensation expense recognized during the years ended December 31, 2008 and December 31, 2007 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 stock options using the Black-Scholes-Merton (“Black Scholes”) option-pricing model. For our performance-based non-vested stock awards, we relied upon a closed-form barrier option valuation model, which is a derivation of the Black Scholes model to determine the fair value of the awards and utilized a lattice model to analyze the appropriate service period. For our service-based non-vested stock awards, fair value is based on the fair value at the grant date.

Stock Option Plans

At December 31, 2008, we had seven separate equity compensation plans: the Prime Medical Services, Inc. (“Prime”) 1993 and 2003 stock option plans, the HealthTronics Surgical Services, Inc. (“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. On November 10, 2004, Prime completed a merger with HSS pursuant to which Prime merged with and into HSS with HealthTronics, Inc. as the surviving corporation.

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.

A-24

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

The following table sets forth certain information as of December 31, 2008 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		65,666	$	7	.79		--
Prime 2003 stock option plan		94,000	$	5	.63		--
HSS equity incentive plan and stock
option plans		2,399,099	$	7	.06		2,582,141
Other equity compensation plans
approved by our security holders		N/A		N/A			N/A

To calculate the compensation cost that was recognized under SFAS No. 123(R) for the three years ended December 31, 2008, 2007, and 2006, we used the Black-Scholes option-pricing model with the following weighted-average assumptions for equity awards granted. For December 31, 2007 and 2006, respectively: risk-free interest rates were 4.6% and 4.9%; dividend yields were 0%; volatility factors of the expected market price of our common stock were 47%; and a weighted-average expected life of the option of 6 years. There were no options granted in the year ended December 31, 2008.

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.

A-25

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

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

	2008					2007					2006
	Options (000)			Weighted Average Exercise Price		Options (000)			Weighted Average Exercise Price		Options (000)			Weighted Average Exercise Price
Outstanding at beginning of year		3,194		$	7.07		3,908		$	7.32		3,048		$	7.65
Granted		--			--		245			5.82		1,992			7.05
Exercised		--			--		--			--		(298	)		6.40
Cancelled		(399	)		7.60		(552	)		8.07		(588	)		8.78
Forfeited		(236	)		6.61		(407	)		7.38		(246	)		6.94
Outstanding at end of year		2,559		$	7.03		3,194		$	7.07		3,908		$	7.32
Exercisable at end of year		2,182		$	7.13		2,049		$	7.35		2,450		$	7.51
Weighted-average fair value of
options granted during the period		N/A					$2.99				$	3.38

During the year ended December 31, 2008, there were no exercises of options to purchase common stock and the total fair value of shares vested during 2008 was $1,153,000. During the year ended December 31, 2007, there were no exercises of options to purchase common stock and the total fair value of shares vested during 2007 was $966,000.

During the year ended December 31, 2008 and 2007, there was no financing cash generated from share-based compensation arrangements for the purchase of shares upon exercise of options. We issue new shares upon exercise of options to purchase our common stock.

Additional information regarding options outstanding for all plans as of December 31, 2008, 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		326	5.4 years	$	5	.83		243	4.4 years	$	5	.98
$6.50 - $6.99		1,412	5.7 years		6	.65		1,167	5.2 years		6	.64
$7.00 - $7.50		455	6.7 years		7	.37		406	6.7 years		7	.39
$7.51 - $9.50		180	4.3 years		7	.98		180	4.3 years		7	.98
$9.51 - $13.69		186	4.5 years		10	.26		186	4.5 years		10	.26
		2,559		$	7	.03		2,182		$	7	.13
Aggregate intrinsic value (in thousands)	$	--					$	--

The aggregate intrinsic value in the table above is based on our closing stock price of $2.25 per share as of December 31, 2008.

A-26

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

A summary of the status of the our nonvested shares as of December 31, 2008 and changes during the years ended December 31, 2008 and 2007 is as follows:

Nonvested Shares	Shares (000)			Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2007		--		$	--
Granted		135			4.75
Vested		--			--
Forfeited		--			--
Nonvested at December 31, 2007		135		$	4.75
Granted		1,897			2.52
Vested		(220	)		3.52
Forfeited		(62	)		3.22
Nonvested at December 31, 2008		1,750		$	2.55

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)	2008			2007			2006
United States	$	(139,959	)	$	(17,881	)	$	(19,947	)
Foreign		(250	)		542			(1,062	)
	$	(140,209	)	$	(17,339	)	$	(21,009	)

Income tax expense (benefit) consists of the following:

	Years Ended December 31,
($ in thousands)	2008			2007			2006
Federal:
Current	$	--		$	--		$	681
Deferred		(8,147	)		(2,878	)		(4,877	)
State:
Current		202			212			456
Deferred		(3,643	)		(401	)		(582	)
Foreign
Current		--			--			--
Deferred		72			213			(241	)
	$	(11,516	)	$	(2,854	)	$	(4,563	)

A-27

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

A reconciliation of expected income tax expense (benefit), 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)	2008			2007			2006
Expected federal income tax	$	(49,073	)	$	(6,069	)	$	(7,353	)
State taxes		(2,238	)		(123	)		(82	)
Foreign rate differential		73			17			130
Goodwill impairment		24,672			3,589			3,090
Affect of valuation allowance		14,776			--			--
Other		274			(268	)		(348	)
	$	(11,516	)	$	(2,854	)	$	(4,563	)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:

($ in thousands)	2008			2007
Deferred tax assets:
Net operating loss carryforward	$	34,395		$	9,193
Allowance for bad debts		32			123
State deferred tax		3,792			--
FAS 123(R) expense		1,129			552
AMT Credit		789			578
HTRN acquired built-in losses		4,331			--
Capitalized costs		1,384			1,105
Accrued expenses deductible for tax purposes when paid		733			996
Total gross deferred tax assets		46,585			12,547
Less valuation allowance		(46,585	)		--
Net deferred tax assets		--			12,547
Deferred tax liabilities:
Property and equipment, principally due to differences in depreciation		(1,212	)		(894	)
Intangible assets, principally due to differences in amortization periods for tax purposes		(2,143	)		(26,683	)
Total gross deferred tax liability		(3,355	)		(27,577	)
Net deferred tax liability	$	(3,355	)	$	(15,030	)

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 not 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 (including the impact of available carry back and carry forward periods), projected future taxable income and tax planning strategies in making this assessment. Based on these criteria, management believes it will not realize the benefits of these deductible differences; accordingly, we have recorded a full valuation allowance at December 31, 2008. The valuation allowance was zero at December 31, 2007.

At December 31, 2008 and 2007, we have federal net operating loss carry forwards, for federal income tax purposes, of $97,988,000 and $84,344,000, respectively, which are available to offset federal taxable income, if any, through 2028. In addition, we have alternative minimum tax credit carry forwards at December 31, 2008 of $511,000, which is available to reduce future federal regular income taxes, if any, over an indefinite period.

A-28

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

As a result of the merger in 2004 in which Prime Medical Services, Inc. (“Prime”) completed a merger with HealthTronics Surgical Services, Inc. (“HSS”) pursuant to which Prime merged with and into HSS, with HeathTronics, Inc. as the surviving corporation, we acquired certain tax benefits, a portion of which were subject to limitations imposed by Section 382 of the Internal Revenue Code. Due to the uncertainty of our ability to realize these tax benefits, there was no recognition of them in our purchase accounting at that time.

In October, 2005, we filed tax refund claims related to HSS’s previously filed 2000 – 2003 federal income tax returns. In late September, 2008, the Internal Revenue Service (“IRS”) completed examinations of our 2000 – 2006 federal income tax returns. As a result of the examinations, $2.3 million of previously unrecognized tax benefits were recognized and recorded as a reduction of goodwill in the third quarter of 2008. In October, 2008, we received $5.2 million from the IRS, a portion representing tax refunds of $4.3 million and a portion representing interest income of $856,000. The tax refund of $4.3 million and interest income of $165,000 was recorded as a reduction of goodwill while the interest income earned subsequent to the merger, totaling, $691,000, has been recorded as interest income in our income statement.

The tax benefits acquired in the merger included built-in losses that are available to offset future taxable income of approximately $12.4 million and net operating loss carry forwards that are available to offset future taxable income through 2027 of approximately $67.9 million. As a result of the completion of the IRS examination during the third quarter of 2008, the tax affected amount of these tax benefits, which total $31.7 million, has been recorded as deferred tax asset on our balance sheet. A valuation allowance of $30.6 million was established in the third quarter of 2008 and an additional $1.1 million was established in the fourth quarter of 2008 due to the uncertainty in our ability to realize these tax benefits.

Effective January 1, 2007, we adopted Financial Accounting Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 specifies the way public companies are to account for uncertainties in income tax reporting, and prescribes a methodology for recognizing, reversing, and measuring the tax benefits of a tax position taken, or expected to be taken, in a tax return. Adoption of FIN 48 on January 1, 2007 did not result in a cumulative effect adjustment to our retained earnings. At January 1, 2007, our unrecognized tax benefits totaled $2.3 million and are included in deferred and other tax liabilities, none of which, if recognized in total, would impact the effective income tax rate.

A reconciliation of the beginning and ending amount of our unrecognized tax benefit is as follows:

($ in thousands)
Balance at beginning of year	$	2,294
Additions based on tax positions related to the current year		--
Additions for tax positions of prior years		--
Reductions for tax provisions for prior years		--
Settlements		(2,294	)
Reductions for lapse of statute of limitations		--
Balance at end of year	$	--

Our continuing practice is to recognize interest and penalty expense in operating expenses. For the years ended December 31, 2008 and 2007, we expensed no penalties and interest and $153,000 of penalties and interest, respectively. The $153,000 of interest expensed in 2007 was reversed in 2008 due to the completion of the IRS examination.

A-29

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

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 $87,000 and $118,000 would be provided for in 2008 and 2007, respectively.

K.   SEGMENT REPORTING

We 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. 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. We also provide image guided radiation therapy (“IGRT”) technical services for cancer treatment centers. Our medical products segment manufactures, sells and maintains lithotripters and their related consumables. They also manufacture, sell and maintain intra-operative X-ray imaging systems and other mobile patient management tables, and are the exclusive U.S. distributor of the Revolix branded laser. The operations of our Claripath and Uropath pathology laboratories are also included in our medical products segment.

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 services segment is comprised of acquired entities.

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-30

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

($ in thousands)	Urology Services			Medical Products
2008
Revenue from external customers	$	145,265		$	20,389
Intersegment revenues		--			10,175
Interest income		297			49
Interest expense		529			1
Depreciation and amortization		8,261			3,678
Impairment of Goodwill		144,000			--
Segment profit (loss)		(132,002	)		1,384
Segment assets		181,847			47,938
Capital expenditures		2,485			7,573
2007
Revenue from external customers	$	122,736		$	17,101
Intersegment revenues		--			9,039
Interest income		523			38
Interest expense		767			--
Depreciation and amortization		8,116			2,322
Impairment of Goodwill		20,800			--
Segment profit (loss)		(10,991	)		738
Segment assets		285,239			37,732
Capital expenditures		3,321			5,775
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 (loss)		1,346			(11,586	)
Segment assets		293,119			37,065
Capital expenditures		8,743			4,315

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

($ in thousands)	2008			2007			2006
Total revenues for reportable segments	$	175,829		$	148,876		$	151,641
Corporate revenue		288			581			546
Elimination of intersegment revenues		(10,175	)		(9,039	)		(9,296	)
Total consolidated revenues	$	165,942		$	140,418		$	142,891

A-31

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

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

($ in thousands)	2008			2007			2006
Total profit (loss) for reportable segments	$	(130,618	)	$	(10,253	)	$	(10,240	)
Corporate revenue		288			581			546
Unallocated corporate expenses:
General and administrative		(9,794	)		(7,519	)		(10,680	)
Net interest expense		339			522			133
Other, net		(424	)		(670	)		(768	)
Unallocated corporate expenses total		(9,879	)		(7,667	)		(11,315	)
Income (loss) before income taxes	$	(140,209	)	$	(17,339	)	$	(21,009	)

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

($ in thousands)	2008		2007		2006
Total assets for reportable segments	$	229,785	$	322,971	$	330,184
Unallocated corporate assets		4,601		13,085		16,549
Consolidated total	$	234,386	$	336,056	$	346,733

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
2008
Interest and dividends	$	346	$	887	$	--		$	1,233
Interest expense		530		547		--			1,077
Depreciation and amortization		11,939		424		--			12,363
Capital expenditures		10,058		1,721		--			11,779
2007
Interest and dividends	$	561	$	585	$	--		$	1,146
Interest expense		767		62		--			829
Depreciation and amortization		10,438		669		--			11,107
Capital expenditures		9,096		373		--			9,469
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

A-32

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

The amounts in 2008, 2007 and 2006 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.

L.    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. In July 2007, we entered into a purchase agreement to sell the RMPT business for $1.35 million. This sale closed on September 28, 2007. We classified this business as held for sale in the accompanying 2006 consolidated balance sheet and included its results from operations in discontinued operations.

On November 30, 2006, we sold our cryosurgery operations to 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 at that time. We have included the operations of this business in discontinued operations in the accompanying consolidated statements of income for 2006.

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. This gain utilized approximately $20.4 million of our deferred tax assets. Our specialty vehicle manufacturing segment has been reported in discontinued operations for all periods presented.

A-33

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

The following table details selected financial information included in income (loss) from discontinued operations in the consolidated statements of income for December 31, 2007 and 2006.

Consolidated Statements of Income
($ in thousands)	2007			2006
For the Year Ended December 31
Revenue
Specialty Vehicles Manufacturing	$	--		$	57,526
CryoSurgery		--			1,490
Rocky Mountain Prostate Thermotherapies		3,268			4,289
HIFU		--			--
Cost of services
Specialty Vehicles Manufacturing		--			(51,616	)
CryoSurgery		--			(1,235	)
Rocky Mountain Prostate Thermotherapies		(3,739	)		(4,587	)
HIFU		(216	)		(1,233	)
Depreciation and amortization
Specialty Vehicles Manufacturing		--			(542	)
CryoSurgery		--			(512	)
Rocky Mountain Prostate Thermotherapies		--			(224	)
HIFU		(3	)		(17	)
Other
Specialty Vehicles Manufacturing		--			(72	)
CryoSurgery		--			(118	)
Rocky Mountain Prostate Thermotherapies		--			(4	)
HIFU		--			--
Income (loss) from discontinued operations	$	(690	)	$	3,145

	Year Ended December 31,
($ in thousands)	2007			2006
Gain on sale of specialty vehicle manufacturing	$	--		$	53,551
Gain on Sale of Rocky Mountain Prostate Thermotherapy		451			--
Loss from disposal of cryosurgery operations		--			(3,729	)
Impairment of Rocky Mountain Prostate Thermotherapy		--			(4,263	)
Income from discontinued operations		(690	)		3,145
Interest allocated to discontinued operations		--			(4,830	)
Income tax (expense) benefit on discontinued operations		92			(18,745	)
Income (loss) from discontinued operations, net of tax	$	(147	)	$	25,129

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 for the year ended December 31, 2006.

A-34

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

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.

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, 2008, we had recovered approximately $2.8 million. Any additional recoveries in the future will be recorded as income when received.

M.   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 $800,000 on our consolidated balance sheets at December 31, 2008 and 2007, 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 our general assets. Reflected on our consolidated balance sheet are $4 million for both 2008 and 2007, 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.

N.   RELATED PARTY TRANSACTIONS

On September 17, 2008, Ross A. Goolsby resigned, effective on September 30, 2008, from his position as Senior Vice President and Chief Financial Officer. In connection with Mr. Goolsby’s departure, the Company entered into a Termination and Consulting Agreement with Mr. Goolsby whereby (1) we will pay Mr. Goolsby $95,000 on September 30, 2008 in lieu of participation in our annual incentive compensation program for 2008, (2) Mr. Goolsby agreed to provide consulting services until January 7, 2009 and we will make semi-monthly payments of $11,458 to Mr. Goolsby during this period for these consulting services, (3) Mr. Goolsby will be eligible to continue to participate in our employee benefit plans made generally available to our employees (to the extent permitted by law and the terms of the plans) until the earlier of January 7, 2009 or the termination of Mr. Goolsby’s consultancy, and (4) we will reimburse COBRA expenses of Mr. Goolsby for his continued coverage under the our medical plan until the earlier of (i) the expiration of the period of coverage under COBRA, and (ii) the date Mr. Goolsby is eligible for participation in a new employer’s group plans. The Termination and Consulting Agreement also provides that the nonsolicitation provision set forth in Mr. Goolsby’s Executive Employment Agreement will continue in full force and effect and that such Executive Employment Agreement is otherwise terminated.

A-35

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

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.

A-36

EX-10

Exhibit 10.35

EXECUTIVE EMPLOYMENT AGREEMENT

        This Executive Employment Agreement (this “Agreement”) is by and between HealthTronics, Inc., a Georgia corporation (“Employer”), and Clayton H. Duncan, an individual (“Executive”), and shall be effective as of August 22, 2007 (the “Effective Date”).

Preliminary Statements

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

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

Statement of Agreement

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

ARTICLE I.
Term; Termination; Prior Agreements

        Section 1.1. Term. Employer hereby hires Executive and Executive accepts such employment for an initial term of one year commencing on the Effective Date.

        Section 1.2. Termination Upon Expiration. The term of this Agreement shall automatically renew for successive one year periods immediately following the expiration of the initial one year term and each successive one-year term thereafter. Either Executive or Employer may provide the other party with written notice of non-renewal not less than 90 days prior to the expiration of the then current term, and, as long as neither Executive nor Employer terminates or gives notice of termination of this Agreement pursuant to the other terms and provisions contained herein, then this Agreement shall terminate automatically upon the expiration of the term during which notice of non-renewal is properly given pursuant to this Section. Neither the provision of written notice of non-renewal, nor the termination upon expiration of this Agreement following delivery of written notice of non-renewal, shall itself be deemed a termination of this Agreement by any party pursuant to any other Section of this Agreement.

        Section 1.3. Termination Upon Death or Permanent Disability. This Agreement shall be automatically terminated on the death of Executive or on the permanent disability of Executive if Executive is no longer able to perform in all material respects the usual and customary duties of Executive’s employment hereunder. For purposes hereof, any condition which in reasonable likelihood is expected to impair Executive’s ability to materially perform Executive’s duties hereunder for a period of three months or more shall be considered to be permanent.

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

        (a)     In connection with the business of Employer, Executive is convicted of an offense constituting a felony or involving moral turpitude; or

        (b)       in a material and substantial way, (i) Executive (A) violates any written policy of Employer, (B) violates any provision of this Agreement, (C) fails to follow reasonable written instructions or directions from the Board of Directors of Employer (the “Board”), or any other person authorized by the Board to instruct or supervise Executive (for purposes of this Agreement, any such authorized person is referred to as an “Authorized Board Designee”), or (D) fails to use good-faith efforts to perform the services required pursuant to this Agreement; and (ii) Executive fails to materially cure such violation or failure within fifteen days after receiving written notice from the Board clearly specifying the act or circumstances that gave rise to such violation or failure.

        A notice of termination pursuant to this Section shall be in writing and shall state the alleged reason for termination. Executive, within not less than fifteen nor more than thirty days after such notice, shall be given the opportunity to appear before the Board, or a committee thereof, to rebut or dispute the alleged reason for termination. If the Board or committee determines, by a majority of the disinterested directors, after having given Executive the opportunity to rebut or dispute the allegations, that such reason is indeed valid, Employer may immediately terminate Executive’s employment under this Agreement for cause. Immediately upon giving the notice contemplated by this paragraph, Employer may elect, during the pendency of such inquiry, to relieve Executive of Executive’s regular duties.

        Section 1.5. Termination for Good Reason. Executive is entitled to terminate this Agreement for "good reason," with thirty days prior written notice, upon any of the following occurrences:

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

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

        (c)     Executive may terminate this Agreement if Employer requires that Executive move to a city other than Austin;

        (d)     Executive may terminate this Agreement if the Board or any Authorized Board Designee materially and unreasonably interferes with Executive’s ability to fulfill Executive’s job duties; or

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        (e)     Executive may terminate this Agreement if Executive is reassigned to a position with diminished responsibilities, or Executive’s job responsibilities are materially narrowed or diminished.

        Without limiting the provisions of Section 1.8 hereof, Executive agrees that Employer can relieve Executive of Executive’s duties hereunder prior to the end of the applicable notice period provided for in this Section, and in such event, Executive shall not thereafter be entitled to any of the benefits or salary described in Article III hereof. Furthermore, if the term of this Agreement expires upon notice of non-renewal given pursuant to Section 1.2 prior to the end of any notice period otherwise required under this Section, then the applicable notice period required under this Section does not apply and notice may be given at any time prior to such expiration.

        If Employer does not relieve Executive of Executive’s duties during any applicable notice period under this Section, and the applicable notice period extends beyond the expiration of the term of this Agreement pursuant to Section 1.2, then the terms and provisions of this Agreement shall govern Executive’s employment by Employer until the end of such notice period, and the term of this Agreement shall be deemed automatically extended until the end of such notice period.

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

        Section 1.7. Termination of Agreement by Executive Without Good Reason. Executive may terminate Executive’s employment, other than for “good reason,” upon 30 days prior written notice stating that this Agreement is terminated other than for “good reason”. Executive agrees that Employer can relieve Executive of Executive’s duties hereunder prior to the end of such 30 day notice period, and in such event, Executive shall not thereafter be entitled to any of the benefits or salary described in Article IIIhereof.

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

        (a)     If this Agreement is terminated pursuant to Section 1.2, Section 1.3, Section 1.4, or Section 1.7 then Employer shall pay Executive or Executive’s representative, as the case may be, Executive’s then-current base salary (excluding any bonuses and non-cash benefits) through the effective date of termination (which, in the case of Section 1.7, shall follow any portion of the applicable notice period during which Executive has not been relieved of Executive’s duties hereunder), and Employer shall have no further obligations hereunder.

        (b)     If Employer terminates this Agreement without cause pursuant to Section 1.6 or otherwise, or Executive terminates this Agreement pursuant to Section 1.5, then, in addition to receiving Executive’s then current base salary through the effective date of termination, Executive (i) shall receive within 15 days of the effective date of termination a lump-sum payment equal to (A) 100% of Executive’s then-current annualized base salary, and (B) cash bonuses, if any, paid by Employer to Executive during the preceding twelve months, and (ii) shall be released from the provisions of Section 4.2, notwithstanding that the provisions of such Section would otherwise survive termination of this Agreement pursuant to Section 1.9. Executive and Employer agree that the effective date of any termination pursuant to Section 1.5 shall be the earlier of the end of the applicable notice period, if any, or the date on which Employer relieves Executive of Executive’s duties hereunder. Executive and Employer agree that the effective date of any termination pursuant to Section 1.6 hereof shall be only upon the expiration of the 30 day notice period described in Section 1.6, regardless of whether Employer earlier relieves Executive of Executive’s duties hereunder. As a condition to receiving the severance payments provided in this Section 1.8(b), Executive must execute a full release and waiver of all claims against Employer in a form reasonably acceptable to Employer (excluding claims for amounts required under this Agreement to be paid upon severance and existing indemnification obligations to Executive).

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        Section 1.9. Survival. Any termination of this Agreement and Executive’s employment as a result thereof shall not release either Employer or Executive from their respective obligations to the date of termination nor from the provisions of this Agreement which, by necessary or reasonable implication, are intended to apply after termination of this Agreement, including, without limitation, the provisions of Article IV. Furthermore, neither the termination of this Agreement nor the termination of Executive’s employment under this Agreement shall affect, limit or modify in any manner the existence or enforceability of any other written agreement between Executive and Employer, even if such other agreements provide employment related benefits to Executive.

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

        Section 1.11. “Change of Control.” As used in this Agreement, “Change of Control” shall mean the occurrence of any of the following:

        (a)     Any person, entity or “group” within the meaning of § 13(d) or 14(d) of the Securities and Exchange Act of 1934 (the “Exchange Act”) becomes the beneficial owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of the Board, but only if such event results in a change in Board composition such that the directors immediately preceding such event do not comprise a majority of the Board following such event;

        (b)     a merger, reorganization or consolidation whereby Employer’s equity holders existing immediately prior to such merger, reorganization or consolidation do not, immediately after consummation of such reorganization, merger or consolidation, own more than 50% of the combined voting power of the surviving entity’s then outstanding voting securities entitled to vote generally in the election of directors, but only if such event results in a change in Board composition such that the directors immediately preceding such event do not comprise a majority of the board of directors of such surviving entity following such event;

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        (c)     the sale of all or substantially all of Employer’s assets to an entity in which Employer, any subsidiary of Employer, or Employer’s equity holders existing immediately prior to such sale beneficially own less than 50% of the combined voting power of such acquiring entity’s then outstanding voting securities entitled to vote generally in the election of directors, but only if such event results in a change in Board composition such that the directors immediately preceding such event do not comprise a majority of the board of directors of such acquiring entity following such event; or

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

        Section 1.12. Excise Tax Limitation.

        (a)     Notwithstanding anything contained in this Agreement to the contrary, to the extent that the payments and benefits provided under this Agreement and benefits provided to, or for the benefit of, Executive under any other Employer plan or agreement (such payments or benefits are collectively referred to as the “Payments”) would be subject to the excise tax (the “Excise Tax”) imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), the Payments shall be reduced (but not below zero) if and to the extent necessary so that no Payment to be made or benefit to be provided to Executive shall be subject to the Excise Tax (such reduced amount is hereinafter referred to as the “Limited Payment Amount”). Unless Executive shall have given prior written notice specifying a different order to Employer to effectuate the foregoing, Employer shall reduce or eliminate the Payments, by first reducing or eliminating the portion of the Payments which are not payable in cash and then by reducing or eliminating cash payments, in each case in reverse order beginning with payments or benefits which are to be paid the farthest in time from the Determination (as hereinafter defined). Any notice given by Executive pursuant to the preceding sentence shall take precedence over the provisions of any other plan, arrangement or agreement governing Executive’s rights and entitlements to any benefits or compensation.

        (b)     The determination of whether the Payments shall be reduced to the Limited Payment Amount pursuant to this Agreement and the amount of such Limited Payment Amount shall be made, at Employer’s expense, by a reputable accounting firm selected by Executive and reasonably acceptable to Employer (the “Accounting Firm”). The Accounting Firm shall provide its determination (the “Determination”), together with detailed supporting calculations and documentation to Employer and Executive within ten (10) days of the date of termination, if applicable, or such other time as specified by mutual agreement of Employer and Executive, and if the Accounting Firm determines that no Excise Tax is payable by Executive with respect to the Payments, it shall furnish Executive with an opinion reasonably acceptable to Executive that no Excise Tax will be imposed with respect to any such Payments. The Determination shall be binding, final and conclusive upon Employer and Executive.

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ARTICLE II.
Duties of Executive

        Subject to the approvals by and the ultimate supervision of the Board and each Authorized Board Designee, Executive during the term hereof shall serve as Vice President of Development-Prostate Therapies and Large Partnerships. Subject to the control of the Board and any Authorized Board Designee, Executive shall have the responsibilities commensurate with Executive’s title and as otherwise provided in Employer’s bylaws and other governing documents.

        During the period of employment hereunder, Executive shall devote all of Executive’s working time, attention, energies and best efforts to the business of Employer for the profit, benefit and advantage of Employer, and shall perform such other services as shall be designated, from time to time, by the Board or any Authorized Board Designee. The foregoing shall not be construed as preventing Executive from making personal investments in such form or manner as will require Executive’s services in the operation or affairs of the companies or enterprises in which such investments are made; provided that it does not interfere with Executive’s duties hereunder. Further, the Executive may not during the period of employment hereunder invest Executive’s personal assets in business ventures that compete with Employer or Employer’s Affiliates. Executive shall use Executive’s best efforts to promote the interests of Employer and Employer’s Affiliates, and to preserve their goodwill with respect to their employees, customers, suppliers and other persons having business relations with Employer. Executive agrees to accept and hold all such offices and/or directorships with Employer and Employer’s Affiliates as to which Executive may, from time to time, be elected. For purposes of this Agreement, Employer’s subsidiaries, parent companies and other affiliates are collectively referred to as “Affiliates.”

ARTICLE III.
Salary; Expense Reimbursements

        Section 3.1. Salary. As compensation for Executive’s service under and during the term of this Agreement (or until terminated pursuant to the provisions hereof) Employer shall pay Executive a salary of $16,666.67 per calendar month (prorated for partial months), payable in accordance with the regular payroll practices of Employer, as in effect from time to time, which such salary may be increased from time to time by the Board or the Compensation Committee of the Board in its sole discretion. Such salary shall be subject to withholding for the prescribed federal income tax, social security and other items as required by law and for other items consistent with Employer’s policy with respect to health insurance and other benefit plans for similarly situated employees of Employer in which Executive may elect to participate.

        Section 3.2. Other Benefits. During the term of this Agreement, Executive also shall be entitled to the same amount of paid vacation per year as was available to Executive and other senior management executives of Employer under the policy of Employer in effect on the Effective Date. Executive will not be paid for unused vacation, and unused vacation cannot be carried forward to subsequent years. Without limiting the foregoing, Executive shall also receive such paid sick leave, insurance and other fringe benefits as are generally made available to other personnel of Employer in comparable positions, with comparable service credit and with comparable duties and responsibilities. Any benefits in excess of those granted other salaried employees of Employer shall be subject to the prior approval of the Board. Notwithstanding the foregoing, Executive shall be eligible for participation in Employer’s Stock Option Plan (if any), but all option grants thereunder shall be subject to the sole discretion of the Board.

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        Section 3.3. Bonuses. For calendar year 2007, Executive will be eligible for an annual bonus equal to the Bonus Percentage (as defined below) multiplied by Executive’s annualized base salary for 2007, and pro-rated based on the number of days employed by Employer in 2007. For purposes of this Section 3.3, “Bonus Percentage” will mean an amount equal to (a) the percentage of base salary paid to senior management executives of Employer (other than the Chief Executive Officer) for 2007 under Employer’s annual non-equity incentive compensation program, multiplied by (b) 20%; provided, that the Bonus Percentage will not exceed 40%. For each calendar year thereafter, in the discretion of the Board, and without implying any obligation on Employer ever to award a bonus to Executive, Executive may from time to time be awarded a cash bonus or bonuses for services rendered to Employer during the term of Executive’s employment under this Agreement. If and to the extent a bonus is ever considered for Executive, it is expected that any such bonus will be based not only on Executive’s individual performance and Executive’s relative position and responsibilities with Employer, but also on the performance and profitability of the entire business of Employer.

        Section 3.4. IGRT Center Bonuses. For each of the calendar years 2007, 2008 and 2009, Executive will be entitled to receive an annual bonus equal to: (a) $5,000 for each Center (as defined below) with respect to which a letter of intent is entered into between Employer and the applicable physician practice group(s) during such calendar year (excluding Centers with respect to which a letter of intent was entered into prior to the Effective Date); plus (b) $15,000 for each Center with respect to which the related physician practice groups have consummated their practice group consolidation during such calendar year, provided that if there will be no practice group consolidation with respect to a particular Center, then an additional $7,500 amount will be paid as a result of meeting the requirement under (a) above with respect to such Center (excluding Centers with respect to which a letter of intent was entered into prior to the Effective Date) and an additional $7,500 amount will be paid as a result of meeting the requirement under (c) below with respect to such Center; plus (c) $10,000 for each Center opened during such calendar year. For purposes of this Section 3.4, “Center” will mean an image guided radiation therapy center that Employer has approved and with respect to which Employer enters into a letter of intent prior to December 31, 2009. For calendar years after 2009, the amount of any annual IGRT center bonuses will be determined in the discretion of the Board.

        Section 3.5. Stock Options. Subject to the approval of the Board, Employer shall grant Executive a stock option to acquire 35,000 shares of Employer’s common stock, no par value (“Shares”), under such terms and conditions as provided for under Employer’s 2004 Equity Incentive Plan (as amended, the “Plan”) and the stock option agreement governing such stock option. The exercise price per Share of such stock option shall be equal to the Fair Market Value (as defined in the Plan) on the date of grant. The Shares shall vest in four equal annual installments on each of the first four anniversaries of the date of grant.

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        Section 3.6. Expenses. Employer shall reimburse all reasonable out-of-pocket travel and business expenses incurred by Executive in connection with the performance of Executive’s duties pursuant to this Agreement. Executive shall provide Employer with documentation of Executive’s expenses, in a form acceptable to Employer and which satisfies applicable federal income tax reporting and record keeping requirements.

        Section 3.7. Location of Employment. The parties acknowledge and agree that Executive’s employment duties hereunder are performable in Austin, Texas, subject to business travel commensurate with Executive’s duties hereunder and as otherwise requested by Employer.

ARTICLE IV.
Executive’s Restrictive Covenants

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

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

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

        Section 4.3. Noncompetition Agreement. In consideration of the substantial benefits that Executive is receiving under this Agreement and the Proprietary Information to be provided to Executive, Executive hereby agrees with Employer that Executive will not:

        (a)        During Executive’s employment hereunder and for a period of two years after Executive ceases to be employed by Employer (the “Non-Compete Termination Date”), directly or indirectly, alone or as a partner, joint venturer, officer, director, member, employee, consultant, agent, independent contractor, or equity interest holder of, or lender to, any Person (as defined below) or business, engage in any Restricted Business (as defined below) anywhere in the United States.

        (b)        From the Effective Date until the Non-Compete Termination Date, directly or indirectly (i) induce any individual, partnership, limited liability company, corporation, association, joint stock company, trust, entity, joint venture, labor organization, unincorporated organization, or governmental body (each, a “Person”) that is a customer of Employer or any of its Affiliates to enter into any contract with or otherwise patronize any business directly or indirectly in competition with the business conducted by Employer or any of its Affiliates; (ii) canvass, solicit, or accept from any Person who is a customer of Employer, or any of its Affiliates, any business; or (iii) request or advise any Person who is a customer, vendor, or lessor of Employer, or any of its Affiliates, to withdraw, curtail, or cancel any such customer’s, vendor’s, or lessor’s business with Employer or any of its Affiliates.

        (c)        From the Effective Date until the Non-Compete Termination Date, directly or indirectly employ, or knowingly permit any Affiliate of Executive to employ, any Person whom Employer or any of its Affiliates employed within the prior six months.

        (d)        From the Effective Date until the Non-Compete Termination Date, directly or indirectly (i) solicit for employment or other similar relationship with Executive, any of Executive’s Affiliates or any other Person, any employee or then currently active independent contractor of Employer, or any of its Affiliates, or any Person who was an employee or then currently active independent contractor of Employer, or any of its Affiliates, within the six-month period immediately preceding such solicitation of employment, other than such Person (A) whose employment or independent contractor relationship was terminated by Employer or the applicable Employer Affiliate, or (B) who independently responded to a general solicitation for employment by Executive or Executive’s Affiliate; or (ii) induce, or attempt to induce, any employee or independent contractor of Employer, or any of its Affiliates, to terminate such employee’s employment or independent contractor’s active contractual relationship with Employer or the applicable Employer Affiliate.

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        (e)        From the Effective Date until the Non-Compete Termination Date call on any Person that was operating a competitive business at any time during the period from the Effective Date to the Non-Compete Termination Date with the knowledge that such Person was operating a competitive business, for the purpose of acquiring, or arranging the acquisition of, that competitive business by any Person other than Employer, or any of its Affiliates (or preventing the acquisition of any competitive business by any Person other than Employer, or any of its Affiliates).

        (f)        Notwithstanding the foregoing, the beneficial ownership of less than 5% of any class of equity interests of a Person that are actively traded on a national securities exchange or over-the-counter market will not be deemed, in and of itself, to violate the prohibitions of this Section. Executive agrees and acknowledges that the restrictions in this Section are reasonable in scope and duration and are necessary to protect Employer and its Affiliates. If any provision of this Section, as applied to either party or to any circumstance, is adjudged by a judicial authority, arbitrator, or mediator not to be enforceable in accordance with its terms, the same will in no way affect any other circumstance or the enforceability of the remainder of this Agreement. If any such provision, or any part thereof, is held not to be enforceable in accordance with its terms because of the duration of such provision, the area covered thereby, or the scope of the activities covered, the parties agree that the judicial authority, arbitrator, or mediator making such determination will have the power to reduce the duration, area, and/or scope of activities of such provision, and/or to delete specific words or phrases, and in its reduced form such provision will then be enforceable in accordance with its terms and will be enforced. The parties agree and acknowledge that the violation of any provision of this Section will cause irreparable damage to Employer and its Affiliates and upon violation of any provision of this Section, Employer and its Affiliates will be entitled to injunctive relief, specific performance, or other equitable relief without bond or other security; provided, however, that the foregoing remedies will in no way limit any other remedies that Employer or any of its Affiliates may have. Employer may, without notifying Executive, notify any subsequent employer of Executive of Executive’s rights and obligations under this Section.

        As used in this Agreement, the term “Restricted Business” means the business engaged in by Employer as of the date Executive ceases to be employed by Employer.

        Section 4.4. Remedies. Executive understands and acknowledges damages at law alone will be an insufficient remedy for Employer and Employer will suffer irreparable injury if Executive violates the terms of this Agreement. Accordingly, Employer, upon application to a court of competent jurisdiction, shall be entitled to injunctive relief to enforce the provisions of this Agreement in the event of any breach, or threatened breach, of its terms. Executive hereby waives any requirement that Employer post bond or other security prior to obtaining such injunctive relief. Injunctive relief may be sought in addition to any other available rights or remedies at law. Employer shall additionally be entitled to reasonable attorneys’ fees incurred in enforcing the provisions of this Agreement.

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ARTICLE V.
Miscellaneous

        Section 5.1. Assignment. No party to this Agreement may assign this Agreement or any or all of its rights or obligations hereunder without first obtaining the written consent of all other parties hereto. Any assignment in violation of the foregoing shall be null and void. Subject to the preceding sentences of this Section, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, legal representatives, successors and permitted assigns. This Agreement shall not be deemed to confer upon any person not a party to this Agreement any rights or remedies hereunder. The provisions of this Section do not preclude the sale, transfer or assignment of the ownership interests of any entity that is a party to this Agreement, although such a sale, transfer or assignment may be expressly prohibited or conditioned pursuant to other provisions of this Agreement.

        Section 5.2. Amendments. This Agreement cannot be modified or amended except by a written agreement executed by all parties hereto.

        Section 5.3. Waiver of Provisions; Remedies Cumulative. Any waiver of any term or condition of this Agreement must be in writing, and signed by all of the parties hereto. The waiver of any term or condition hereof shall not be construed as either a continuing waiver with respect to the term or condition waived, or a waiver of any other term or condition hereof. No party hereto shall by any act (except by written instrument pursuant to this Section), delay, indulgence, omission or otherwise be deemed to have waived any right, power, privilege or remedy hereunder or to have acquiesced in any default in or breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of any party hereto, any right, power, privilege or remedy hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power, privilege or remedy hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power, privilege or remedy. No remedy set forth in this Agreement or otherwise conferred upon or reserved to any party shall be considered exclusive of any other remedy available to any party, but the same shall be distinct, separate and cumulative and may be exercised from time to time as often as occasion may arise or as may be deemed expedient.

        Section 5.4. Further Assurances. At and from time to time after the Effective Date, each party shall, at the request of another party hereto, but without further consideration, execute and deliver such other instruments and take such other actions as the requesting party may reasonably request in order to more effectively evidence or consummate the transactions or activities contemplated hereunder.

        Section 5.5. Entire Agreement. This Agreement and the agreements contemplated hereby or executed in connection herewith (a) constitute the entire agreement of the parties hereto regarding the subject matter hereof, and (b) supersede all prior employment agreements, both written and oral, among the parties hereto, or any of them.

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        Section 5.6. Severability; Illegality. In the event any state or federal laws or regulations, now existing or enacted or promulgated after the date hereof, are interpreted by judicial decision, a regulatory agency or legal counsel in such a manner as to indicate that any provision hereof may be illegal, invalid or unenforceable, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement a provision that (a) preserves the underlying economic and financial arrangements between the parties hereto without substantial economic detriment to any particular party and (b) is as similar in effect to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. No party to this Agreement shall claim or assert illegality as a defense to the enforcement of this Agreement or any provision hereof; instead, any such purported illegality shall be resolved pursuant to the terms of this Section.

        Section 5.7. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HERETO SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS (BUT NOT THE RULES GOVERNING CONFLICTS OF LAWS) OF THE STATE OF TEXAS.

        Section 5.8. Language Construction. This Agreement shall be construed, in all cases, according to its fair meaning, and without regard to the identity of the Person who drafted the various provisions contained herein. The parties acknowledge that each party and its counsel have reviewed and revised this Agreement and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation hereof. As used in this Agreement, “day” or “days” refers to calendar days unless otherwise expressly stated in each instance. The captions in this Agreement are for convenience of reference only and shall not limit or otherwise affect any of the terms or provisions hereof. When the context requires, the gender of all words used herein shall include the masculine, feminine and neuter and the number of all words shall include the singular and plural. Use of the words “herein”, “hereof”, “hereto”, “hereunder” and the like in this Agreement shall be construed as references to this Agreement as a whole and not to any particular Article, Section or provision of this Agreement, unless otherwise expressly noted.

        Section 5.9. Notice. Whenever this Agreement requires or permits any notice, request, or demand from one party to another, the notice, request, or demand must be in writing to be effective and shall be deemed to be delivered and received (a) if personally delivered or if delivered by facsimile or courier service, when actually received by the party to whom notice is sent or (b) if delivered by mail (whether actually received or not), at the close of business on the third business day next following the day when placed in the mail, postage prepaid, certified or registered, addressed to the appropriate party or parties, at the address of such party set forth below (or at such other address as such party may designate by written notice to all other parties in accordance herewith):

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If to Employer:
                                       
                                       
                                       
                                       

If to Executive:
                                       
                                       
                                        HealthTronics, Inc.
 1301 Capital of Texas Hwy, Suite B-200
 Austin, TX 78746
 Attention: President and Chief Executive Officer
 Facsimile Transmission: (512) 314-4503

 Clayton H. Duncan
 ________________________________
 ________________________________
 Facsimile Transmission: ______________

        Section 5.10. CHOICE OF FORUM; ATTORNEYS’ FEES. THE PARTIES HERETO AGREE THAT THIS AGREEMENT IS PERFORMABLE IN WHOLE AND IN PART IN TRAVIS COUNTY, TEXAS, AND SHOULD ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF THIS AGREEMENT BE INSTITUTED BY ANY PARTY HERETO (OTHER THAN A SUIT, ACTION OR PROCEEDING TO ENFORCE OR REALIZE UPON ANY FINAL COURT JUDGMENT ARISING OUT OF THIS AGREEMENT), SUCH SUIT, ACTION OR PROCEEDING SHALL BE INSTITUTED ONLY IN A STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS. EACH OF THE PARTIES HERETO CONSENTS TO THE IN PERSONAM JURISDICTION OF ANY STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS AND WAIVES ANY OBJECTION TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING. THE PARTIES HERETO RECOGNIZE THAT COURTS OUTSIDE TRAVIS COUNTY, TEXAS MAY ALSO HAVE JURISDICTION OVER SUITS, ACTIONS OR PROCEEDINGS ARISING OUT OF THIS AGREEMENT, AND IN THE EVENT THAT ANY PARTY HERETO SHALL INSTITUTE A PROCEEDING INVOLVING THIS AGREEMENT IN A JURISDICTION OUTSIDE TRAVIS COUNTY, TEXAS, THE PARTY INSTITUTING SUCH PROCEEDING SHALL INDEMNIFY ANY OTHER PARTY HERETO FOR ANY LOSSES AND EXPENSES THAT MAY RESULT FROM THE BREACH OF THE FOREGOING COVENANT TO INSTITUTE SUCH PROCEEDING ONLY IN A STATE OR FEDERAL COURT IN TRAVIS COUNTY, TEXAS, INCLUDING WITHOUT LIMITATION ANY ADDITIONAL EXPENSES INCURRED AS A RESULT OF LITIGATING IN ANOTHER JURISDICTION, SUCH AS REASONABLE FEES AND EXPENSES OF LOCAL COUNSEL AND TRAVEL AND LODGING EXPENSES FOR PARTIES, WITNESSES, EXPERTS AND SUPPORT PERSONNEL. THE PREVAILING PARTY IN ANY ACTION TO ENFORCE OR DEFEND RIGHTS UNDER THIS AGREEMENT SHALL BE ENTITLED TO RECOVER ITS COSTS AND REASONABLE ATTORNEYS’ FEES IN ADDITION TO ANY OTHER RELIEF GRANTED.

        Section 5.11. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument.

[Signature page follows]

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SIGNATURE PAGE TO
EXECUTIVE EMPLOYMENT AGREEMENT

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

EMPLOYER:

                                                 
                                                 
                                                 



EXECUTIVE: HEALTHTRONICS, INC.

By: /s/ James S.B. Whittenburg    
         James S.B. Whittenburg,
         President - Urology Services


/s/ Clayton H. Duncan                 
Clayton H. Duncan

S-1

EX-21

EXHIBIT 21.1
SUBSIDIARIES OF HEALTHTRONICS, INC.
As of February 28, 2009

Name of Subsidiary (doing business as)

State of Incorporation or Organization

HealthTronics Service Center, LLC., Lithotripters, Inc., Medstone International, Inc., Prime Kidney Stone Treatment, Inc., Prime Lithotripter Operations, Inc., Prime Lithotripsy Services, Inc., Prime Medical Operating, Inc., Sun Medical Technologies, Inc., HealthTronics Group, L.P., Surgicenter Management, Inc., HT Lithotripsy Management Company, L.L.C., HT Prostate Therapy Management Company, L.L.C., Litho Group, Inc., Florida Lithology No. 2, Inc., HT Prostate Services, L.L.C., West Coast Cambridge, Inc., Integrated Lithotripsy of Georgia, Inc., Midwest Cambridge Inc., T2 Lithotripter Investment, Inc., AmCare Health Services, Inc., AMCARE, Inc., N.Y.L.S.A. #4 Inc., Integrated Hearing Services, Inc., NGST, Inc., Dallas Lithotripsy L.P. Southern California Stone Center, L.L.C. Mobile Kidney Stone Centers, Ltd. Fayetteville Lithotripters Limited Partnership - Arkansas I Reston Lithotripsy L.P. Metro Lithotripsy L.P. Louisiana Lithotripters Investment Limited Partnership Fayetteville Lithotripters Limited Partnership - Louisiana I San Diego Lithotripters Limited Partnership Northern Nevada Lithotripsy Associates, LLC Fayetteville Lithotripters Limited Partnership - South Carolina II Tennessee Lithotripters Limited Partnership Texas Lithotripsy Limited Partnership V L.P. Utah Lithotripsy L.P. Fayetteville Lithotripters Limited Partnership - Virginia I Texas Lithotripsy Limited Partnership III L.P. Great Lakes Lithotripsy Partnership, L.P. South Orange County Lithotripters, LLC Red River Urological Services L.P. Wyoming Urological Services, LP Mobile Kidney Stone Centers of Calif. II, L.P. Mobile Kidney Stone Centers of Calif., III, L.P. Kentucky I Lithotripsy, LLC Western Kentucky Lithotripters LP Mississippi Lithotripters LP Texas Lithotripsy LP VIII Greater Atlanta Lithotripsy, LLC West Coast Litho Services, LLC Galaxy Lithotripsy, LLC New Jersey Kidney Stone Center, LLC Alaska Extracorporeal Shockwave Therapy, LLC High Plains Lithotripsy, LLC Florida Lithology, LTD Greater Nebraska Lithotripsy, LLC Midwest Urologic Stone Unit, Limited Partnership Bay Area Partners, Ltd. Allied Urological Services, LLC Georgia Litho Group, LLLP Gulf South Lithotripsy Gulf Coast II Lithotripsy, L.P. Kansas Lithotripsy, LLC Lithotripsy of Northern Indiana Lithotripsy Institute of Indiana Mobile Bay Lithotripsy Partners South Kansas Lithotripsy Sullivan County Lithotripsy Services Advanced Urology Services, LLC Prostate Therapy Associates Cryopartners New Jersey Urological Services, LLC KCPR, LLC HealthTronics GmbH Sunshine Urological Services, LP Montana Urological Services, LLC Cobb Laser Services, LLC Cobb Stone Treatment Center OKS Prostate Services, LLC Sacramento ESL Services, LLC Cascade Laser Services, LLC Claripath Labs, Inc. South Orange West Coast Litho JV Northwest Urological Services, LLC Treasure Valley Urological Services, LLC Buckeye Urological Services, LP Tenn-Ga Stone Group II, LP Great Lakes Laser Services, LP Greater Alabama Lithotripsy, LLC Promobile Therapies, LLC East Tennessee Prostate Services, LP Beltway Urology Services LP Northeast Tennessee Lithotripsy Partners, LP SI Lithotripsy, LLC Rocky Mountain Laser, LP HealthTronics Total Rad, LLC Total Rad OpCo, LLC Keystone ABG, LLC Keystone Mobile Partners, LP Diamond State Lithotripsy, LLC San Diego Urology, LLC Ocean Radiation Therapy, Inc. Uropath, LLC Southern California Lithotripsy, LP Florida Laser Partners, LP HealthTronics Urology Services, LLC Advanced Medical Partners in Radiation, LLC Mid-Atlantic Mobile Lithotripsy, LLC Gold Coast Urology Services, LLC Blue Ridge Urology Services, LLC Melbourne Urology Services, LLC Advanced Medical Partners, Inc. Advanced Litho Associates, LLC Arizona Cryosurgical Partnership, LP Arizona Stone Center, LLC Atlantic Coast Cryotherapy, LP Capitol Cryotherapy, LP Central States Cryotherapy, LP Colorado Greenlight PVP, LP CTUSG Laser Partners, Ltd. Georgia Cryotherapy, LP Gulf State Cryotherapy, LP HT Cryotherapy Management Company, LLC Kansas Cryosurgery Associates, LLC Memphis Cryo Associates, LP Tampa Bay CryoSurgery Associates, LLC Illinois Cryotherapy, LP Michigan Cryogenic Equipment Co, LLC Mid America Cryotherapy, LP Midwest Cryotherapy, LP Mobile Cryosurgical Partners, LP Mountain West Cryotherapy, LP New England Cryotherapy, LP Northeast Cryotherapy, LP Oklahoma Urologic Therapies, LP Rocky Mountain Cryotherapy, LP SEFL Cryo Associates, LLC Southeast Cryotherapy, LP Southern States Cryotherapy, LP Tri-States Cryosurgical Partnership, LP West Coast Cryotherapy, LP

Delaware North Carolina Delaware New Jersey New York New York Delaware California Delaware Delaware Delaware Delaware Delaware Florida Delaware California Georgia Illinois Delaware Pennsylvania California Delaware Delaware Tennessee Texas California California Arkansas Virginia Georgia Louisiana Louisiana California Nevada South Carolina Tennessee Texas Utah Virginia Texas Wisconsin California Texas Wyoming California California Kentucky Kentucky Mississippi Texas Georgia California Georgia New Jersey Alaska Nebraska Florida Nebraska Minnesota Florida New York Georgia Louisiana Louisiana Kansas Indiana Indiana Alabama Kansas Tennessee Delaware Louisiana Delaware New Jersey Texas Switzerland Texas Texas Delaware Delaware Delaware Texas Washington Delaware California Washinton Idaho Texas Tennessee Texas Alabama Indiana Tennessee Texas Delaware Texas Delaware Delaware Delaware Pennsylvania Pennsylvania Delaware Delaware Delaware Texas Delaware Delaware Delaware Texas Maryland Delaware Delaware Delaware Delaware Texas Texas Arizona Texas Texas Texas Texas Texas Texas Texas Delaware Kansas Delaware Florida Texas Michigan Texas Texas Texas Texas Texas Texas Texas Texas Texas Texas Texas Texas Texas

EX-23

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

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-8 No. 333-151497) pertaining to the HealthTronics, Inc. 2004 Equity incentive plan;

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

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

of our reports dated March 4, 2009, with respect to the consolidated financial statements of HealthTronics, Inc., 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, 2008.

/s/ Ernst & Young LLP

Austin, Texas
March 4, 2009

EX-31

Exhibit 31.1

CERTIFICATION

I, James S. B. Whittenburg, 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 10, 2009
                                         
                                          By: /s/ James S. B. Whittenburg          
      James S. B. Whittenburg
      President and Chief Executive Officer
      

EX-31

Exhibit 31.2

CERTIFICATION

I, Richard A. Rusk, Interim 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 10, 2009
                                         
                                          By: /s/ Richard A. Rusk          
      Richard A. Rusk
      Interim 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, 2008 of HealthTronics, Inc., a Georgia corporation (the “Issuer”).

I, James S.B. Whittenburg, 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 10, 2009

/s/ James S. B. Whittenburg          
James S. B. Whittenburg
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, 2008 of HealthTronics, Inc., a Georgia corporation (the “Issuer”).

I, Richard A. Rusk, Interim 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 10, 2009

/s/ Richard A. Rusk          
Richard A. Rusk
Interim 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.