10-Q

_______________________________________________________

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

_____________________________

FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2009
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 78717
           (Address of principal executive office)                (Zip code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES  X  NO __

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES __ NO __

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 the definitions 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 

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

Title of Each Class
     Common Stock, no par value Number of Shares Outstanding at
November 1, 2009
45,420,552

PART I

FINANCIAL INFORMATION

Item 1 - Financial Statements

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

	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands, except per share data)	2009			2008			2009			2008
Revenues	$	47,283		$	44,771		$	135,051		$	121,305
Cost of revenues (exclusive of depreciation and
amortization shown separately below)		22,452			19,954			65,015			54,257
Gross profit		24,831			24,817			70,036			67,048
Operating expenses
Selling, general and administrative		7,290			4,600			16,706			14,186
Depreciation and amortization		3,737			3,073			10,613			8,770
Total operating expenses		11,027			7,673			27,319			22,956
Operating income		13,804			17,144			42,717			44,092
Other income (expenses):
Interest and dividends		13			806			95			1,098
Interest expense		(299	)		(182	)		(887	)		(591	)
		(286	)		624			(792	)		507
Income from operations before provision
for income taxes		13,518			17,768			41,925			44,599
Provision for income taxes		1,348			889			1,967			1,730
Consolidated net income		12,170			16,879			39,958			42,869
Less: Net income attributable to noncontrolling interest		(14,472	)		(15,552	)		(41,541	)		(40,380	)
Net income (loss) attributable to HealthTronics, Inc.	$	(2,302	)	$	1,327		$	(1,583	)	$	2,489
Basic earnings per share attributable to HealthTronics, Inc.:
Net income (loss) attributable to HealthTronics, Inc.	$	(0.06	)	$	0.04		$	(0.04	)	$	0.07
Weighted average shares outstanding		41,043			37,503			37,666			36,666
Diluted earnings per share attributable to HealthTronics, Inc.:
Net income (loss) attributable to HealthTronics, Inc.	$	(0.06	)	$	0.04		$	(0.04	)	$	0.07
Weighted average shares outstanding		41,043			37,604			37,666			36,734

See accompanying notes to condensed consolidated financial statements.

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

($ in thousands)	September 30, 2009			December 31, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	11,154		$	22,854
Accounts receivable, less allowance for doubtful
accounts of $2,462 in 2009 and $2,485 in 2008		31,289			27,687
Other receivables		948			1,410
Prepaid expenses and other current assets		3,650			2,895
Inventory		13,382			8,843
Total current assets		60,423			63,689
Property and equipment:
Equipment, furniture and fixtures		57,866			55,050
Building and leasehold improvements		8,332			8,254
		66,198			63,304
Less accumulated depreciation and
amortization		(35,246	)		(30,535	)
Property and equipment, net		30,952			32,769
Other investments		1,876			1,819
Goodwill		103,000			93,620
Intangible assets, net		49,636			40,278
Other noncurrent assets		5,778			2,211
	$	251,665		$	234,386

See accompanying notes to condensed consolidated financial statements.

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

($ in thousands, except share data)	September 30, 2009			December 31, 2008
LIABILITIES
Current liabilities:
Current portion of long-term debt	$	46,958		$	2,490
Accounts payable		5,815			6,468
Accrued expenses		12,855			9,316
Total current liabilities		65,628			18,274
Long-term debt, net of current portion		2,069			43,897
Other long term obligations		2,853			1,765
Deferred income taxes		5,430			3,355
Total liabilities		75,980			67,291
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 30,000,000 shares authorized: none outstanding
Common stock, no par value, 70,000,000 authorized: 47,310,616
issued and 45,418,667 outstanding in 2009 and
39,494,314 issued and 37,618,206 outstanding in 2008		226,209			211,667
Accumulated deficit		(89,435	)		(87,852	)
Treasury stock, at cost, 1,891,949 shares in 2009 and 1,876,108 shares in 2008		(4,464	)		(4,443	)
Total HealthTronics, Inc. shareholders' equity		132,310			119,372
Noncontrolling interest		43,375			47,723
Total Equity		175,685			167,095
	$	251,665		$	234,386

See accompanying notes to condensed consolidated financial statements.

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HEALTHTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Period ended September 30, 2009
(Unaudited)

($ in thousands, except share data)	Issued Common Stock					Accumulated			Treasury Stock						Non- Controlling
	Shares		Amount			Deficit			Shares			Amount			Interest			Total
Balance, December 31, 2008		39,494,314	$	211,667		$	(87,852	)		(1,876,108	)	$	(4,443	)	$	47,723		$	167,095
Net income (loss)		--		--			(1,583	)		--			--			41,541		$	39,958
Distributions paid to
noncontrolling interest		--		--			--			--			--			(47,077	)	$	(47,077	)
Sale of subsidiary interest to
noncontolling interest		--		--			--			--			--			4,585		$	4,585
Purchase of subsidiary interest from
noncontrolling interest		--		(1,041	)		--			--			--			(3,397	)	$	(4,438	)
Stock issued for acquisitions		7,398,396		13,217			--			--			--			--		$	13,217
Purchase of treasury stock		--		--			--			(15,841	)		(21	)		--		$	(21	)
Share-based compensation		417,906		2,366			--			--			--			--		$	2,366
Balance, September 30, 2009		47,310,616	$	226,209		$	(89,435	)		(1,891,949	)	$	(4,464	)	$	43,375		$	175,685

See accompanying notes to condensed consolidated financial statements.

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

	Nine Months Ended September 30,
($ in thousands)	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Fee and other revenue collected	$	137,095		$	122,053
Cash paid to employees, suppliers of goods and others		(80,917	)		(69,375	)
Cash paid for acquisition related costs		(9,922	)		--
Interest received		96			374
Interest paid		(869	)		(560	)
Taxes paid		(1,171	)		(1,187	)
Net cash provided by operating activities		44,312			51,305
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of entities, net of cash acquired		(3,427	)		(17,270	)
Purchases of equipment and leasehold improvements		(5,712	)		(8,762	)
Proceeds from sales of assets		404			8,755
Other		(57	)		(236	)
Net cash used in investing activities		(8,792	)		(17,513	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable		12,672			13,547
Payments on notes payable, exclusive of interest		(10,144	)		(10,561	)
Distributions to noncontrolling interest		(47,103	)		(42,797	)
Contributions by noncontrolling interest, net of buyouts		(2,624	)		(534	)
Purchase of treasury stock		(21	)		(211	)
Net cash used in financing activities		(47,220	)		(40,556	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(11,700	)		(6,764	)
Cash and cash equivalents, beginning of period		22,854			25,198
Cash and cash equivalents, end of period	$	11,154		$	18,434

See accompanying notes to condensed consolidated financial statements.

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

	Nine Months Ended September 30,
($ in thousands)	2009			2008
Reconciliation of net income to net cash provided by operating activities:
Net income	$	39,958		$	42,869
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization		10,613			8,770
Provision for uncollectible accounts		285			(42	)
Provision for deferred income taxes		2,076			918
Non-cash share based compensation		2,366			2,470
Other		241			(910	)
Changes in operating assets and liabilities,
net of effect of purchase transactions
Accounts receivable		1,002			(493	)
Other receivables		509			1,106
Inventory		2,461			596
Other assets		(1,058	)		(694	)
Accounts payable		(4,511	)		(2,534	)
Accrued expenses		(9,630	)		(751	)
Total adjustments		4,354			8,436
Net cash provided by operating activities	$	44,312		$	51,305

See accompanying notes to condensed consolidated financial statements.

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HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)

1. General

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with the accounting principles for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These condensed consolidated financial statements reflect all adjustments which are, in our opinion, necessary for a fair presentation of the statement of financial position as of September 30, 2009 and the results of operations and cash flows for the periods presented. Such adjustments are of a normal recurring nature unless otherwise noted herein. The operating results for the interim periods are not necessarily indicative of results for the full fiscal year.

The notes to consolidated financial statements appearing in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission should be read in conjunction with this Quarterly Report on Form 10-Q. There have been no significant changes in the information reported in those notes, other than from normal business activities and as discussed herein.

In December 2007, the Financial Accounting Standards Board (“FASB”) issued accounting guidance contained within ASC 810, Consolidation, (“ASC 810”), regarding noncontrolling interests, (formerly SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements). As a result of the adoption of ASC 810, certain reclassifications have been made to 2008 information to be consistent with the 2009 presentation. ASC 810 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.

2. Debt

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 September 30, 2009, we have drawn $44 million on the revolver. Although we plan to either extend the maturity date of our senior credit facility or enter into a new credit facility prior to its maturity in March 2010, we have reflected all amounts outstanding as current in the accompanying condensed consolidated balance sheet. 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 September 30, 2009.

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HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)

Other

As of September 30, 2009, we had notes totaling $5 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 five to nine percent or LIBOR or prime plus a certain premium and are due over the next four years.

3. Earnings per share

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

($ in thousands, except per share data)	Basic earnings per share			Diluted earnings per share
Nine Months Ended September 30, 2009
Net loss attributable to HealthTronics, Inc.	$	(1,583	)	$	(1,583	)
Weighted average shares outstanding		37,666			37,666
Effect of dilutive securities		--			--
Shares for EPS calculation		37,666			37,666
Net loss per share attributable to HealthTronics, Inc.	$	(0.04	)	$	(0.04	)
Nine Months Ended September 30, 2008
Net income attributable to HealthTronics, Inc.	$	2,489		$	2,489
Weighted average shares outstanding		36,666			36,666
Effect of dilutive securities		--			68
Shares for EPS calculation		36,666			36,734
Net income per share attributable to HealthTronics, Inc.	$	0.07		$	0.07

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HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)

($ in thousands, except per share data)	Basic earnings per share			Diluted earnings per share
Three Months Ended September 30, 2009
Net loss attributable to HealthTronics, Inc.	$	(2,302	)	$	(2,302	)
Weighted average shares outstanding		41,043			41,043
Effect of dilutive securities		--			--
Shares for EPS calculation		41,043			41,043
Net loss per share attributable to HealthTronics, Inc.	$	(0.06	)	$	(0.06	)
Three Months Ended September 30, 2008
Net income attributable to HealthTronics, Inc.	$	1,327		$	1,327
Weighted average shares outstanding		37,503			37,503
Effect of dilutive securities		--			101
Shares for EPS calculation		37,503			37,604
Net income per share attributable to HealthTronics, Inc.	$	0.04		$	0.04

We did not include in our computation of diluted EPS unexercised stock options and non-vested stock awards to purchase 3,160,000 and 2,997,000 shares of our common stock as of September 30, 2009 and 2008, respectively, because the effect would be antidilutive.

4. Segment Reporting

In the fourth quarter of 2008, our Medical Products division relocated from Kennesaw, Georgia to our corporate headquarters in Austin, Texas. Concurrent with this relocation, we made certain changes within our Medical Products management team so that these operations now report to the President of our Urology Services operations. After making these changes, we redesigned our internal financial reporting materials provided to our chief operating decision maker, as well as our executive management team. As of the first quarter of 2009, we do not have any operating segments, except our Urology Services operations, that meet the quantitative requirements of ASC 280, Segment Reporting (“ASC 280”), (formerly Statement of Financial Accounting Standards (“SFAS”) 131, Disclosures about Segments of an Enterprise and Related Information).

5. Stock-Based Compensation

On January 1, 2006, we adopted ASC 718, Stock Compensation (“ASC 718”), (formerly SFAS 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. ASC 718 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 ASC 718, we accounted for share-based awards to employees and directors using the intrinsic value method. 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.

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HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)

Under ASC 718, 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).

As of September 30, 2009, total unrecognized share-based compensation cost related to unvested stock options was approximately $577,000, which is expected to be recognized over a weighted average period of approximately 1.2 years. We also had $2.1 million of unrecognized compensation costs related to nonvested stock awards as of September 30, 2009, which is expected to be recognized over a weighted average period of approximately 1.5 years. For the nine months ended September 30, 2009 and 2008, we have included approximately $2.3 million and $2.5 million, respectively, for share-based compensation cost in the accompanying condensed consolidated statements of income.

Share-based compensation expense recognized during the quarterly periods ended September 30, 2009 and 2008 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 nonvested 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 nonvested stock awards, fair value is based on the fair value at the grant date.

6. Inventory

As of September 30, 2009 and December 31, 2008, inventory consisted of the following:

($ In thousands)	September 30, 2009		December 31, 2008
Raw Materials	$	7,392	$	5,993
Work in process		525		--
Finished Goods		5,465		2,850
	$	13,382	$	8,843

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HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)

7. New Pronouncements

In October 2009, the FASB updated FASB ASC 605, Revenue Recognition (“ASC 605”) that amended the criteria for separating consideration in multiple-deliverable arrangements. The amendments establish a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third–party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The amendments will eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price. This update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We are currently evaluating the requirements of this update and have not yet determined the impact on our consolidated financial statements.

In June 2009, the FASB issued Accounting Standards Codification (“ASC”) 105, Generally Accepted Accounting Principles (“ASC 105”), (formerly SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles). ASC 105 establishes the FASB ASC as the single source of authoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”). The standard is effective for interim and annual periods ending after September 15, 2009. The adoption of ASC 105 did not have a material impact on our financial statements.

In June 2009, the FASB issued accounting guidance contained within ASC 810, Consolidation (“ASC 810”), regarding the consolidation of variable interest entities (formerly SFAS No. 167, Amendments to FASB Interpretation No. 46(R) ). ASC 810 is intended to improve financial reporting by providing additional guidance to companies involved with variable interest entities and by requiring additional disclosures about a company’s involvement in variable interest entities. This standard is effective for interim and annual periods ending after November 15, 2009. The adoption of this standard is not expected to have a material impact on our financial statements.

In June 2009, the FASB issued ASC 860, Transfers and Servicing (“ASC 860”), (formerly SFAS No. 166, Accounting for Transfers of Financial Assets). ASC 860 requires more information about transfers of financial assets and where companies have continuing exposure to the risk related to transferred financial assets. It eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosure. This standard is effective for interim and annual periods ending after November 15, 2009. We will adopt this standard on January 1, 2010. The adoption of this standard is not expected to have a material impact on our financial statements.

In May 2009, the FASB issued ASC No. 855, Subsequent Events (“ASC 855”), (formerly SFAS No. 165, Subsequent Events). ASC 855 should be applied to the accounting for and disclosure of subsequent events. This Statement does not apply to subsequent events or transactions that are within the scope of other applicable GAAP that provide different guidance on the accounting treatment for subsequent events or transactions. ASC 855 would apply to both interim financial statements and annual financial statements. The objective of ASC 855 is to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Statement sets forth: 1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; 2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and, 3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. ASC 855 is effective for interim or annual financial periods ending after June 15, 2009. We adopted ASC 855 during the second quarter of 2009 and its application did not affect our consolidated financial position, results of operations, or cash flows. We evaluated subsequent events through the date the accompanying financial statements were issued, which was November 4, 2009.

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HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)

In April 2009, the FASB issued ASC 825, Financial Instruments (“ASC 825”), (formerly FASB Staff Position 107-1, Interim Disclosures about Fair Value of Financial Instruments). ASC 825 requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This standard also requires those disclosures in summarized financial information at interim reporting periods beginning after March 15, 2009. The adoption of this ASC did not affect our consolidated financial position, results of operations, or cash flows.

In June 2008, the FASB issued ASC 260, Earnings Per Share (“ASC 260”), (formerly FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities). ASC 260 concluded that instruments containing rights to nonforfeitable dividends granted in share-based payment transactions are participating securities prior to vesting and, therefore, should be included in the earnings allocations in computing basic earnings per share (EPS) under the two-class method. This ASC is effective for financial statements issued for fiscal years beginning after December 15, 2008, with prior period retrospective application. Our adoption of this ASC on January 1, 2009 had no material impact on our consolidated financial statements.

In April 2008, the FASB issued ASC 350-30, General Intangibles Other Than Goodwill (“ASC 350-30”), (formerly FSP No. 142-3, Determination of the Useful Life of Intangible Assets). ASC 350-30 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. ASC 350-30 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. The adoption of ASC 350-30 did not have a material impact on our financial position or results of operations.

In December 2007, the FASB issued ASC No. 805, Business Combinations (“ASC 805”), (formerly SFAS 141R, Business Combinations). ASC 805 will significantly change current practices regarding business combinations. Among the more significant changes, ASC 805 expands the definition of a business and a business combination; requires the acquirer to recognize the assets acquired, liabilities assumed and noncontrolling interests (including goodwill), measured at fair value at the acquisition date; requires acquisition-related expenses and restructuring costs to be recognized separately from the business combination; and requires in-process research and development to be capitalized at fair value as an indefinite-lived intangible asset. ASC 805 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The impact of adopting ASC 805 will continue to be dependent on the future business combinations that we may pursue after its effective date. We expensed approximately $1.2 million in the third quarter of 2009 and approximately $1.9 million year to date in 2009, of costs related to acquisitions.

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HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)

In December 2007, the FASB issued accounting guidance contained within ASC 810, Consolidation (“ASC 810-10-65”), (formerly SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements) regarding noncontrolling interests. ASC 810-10-65 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The adoption of ASC 810-10-65 revised our presentation of consolidated financial statements and further impact will continue to be dependent on our future changes in ownership in subsidiaries after the effective date.

8. Acquisitions

On July 27, 2009, we completed our acquisition of Endocare, Inc. (“Endocare”), pursuant to the Agreement and Plan of Merger (“Merger Agreement”), dated as of June 7, 2009, among us, HT Acquisition, Inc., a wholly-owned subsidiary of ours, and Endocare. Endocare is a medical device company focused on developing, manufacturing and selling cryoablation products which have the potential to assist physicians in improving and extending life by use in the treatment of cancer and other tumors. In accordance with the terms and conditions of the Merger Agreement, Endocare shareholders had the option to receive the following consideration for each share of Endocare common stock they owned: (i) $1.35 in cash, without interest, or (ii) 0.7764 of a share of our common stock, in each case subject to proration. The aggregate amount of cash paid was approximately $4.2 million and the aggregate number of shares of our common stock issued was approximately 7.3 million shares. Based upon our allocation of the purchase price, we recognized $6.8 million of goodwill related to this transaction, none of which is tax deductible.

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.

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HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)

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 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 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. The first earn-out payment was paid in May 2009, totaling $219,000 in cash and 134,356 shares of HealthTronics stock valued at $219,000. Based upon our allocation of the purchase price, we recognized $12.7 million of goodwill related to this transaction, none of which is tax deductible.

On September 25, 2009, we acquired US Surgical Services, LLC (“US Surgical”) for $400,000 in cash and an earn-out provision pursuant to which we could issue up to $1,350,000 in shares of our common stock. The actual number of shares issued, if any, cannot be determined until it is determined whether the earn-out provision requirements are met. Randy Wheelock, who is the brother of Argil Wheelock, one of the members of our Board of Directors, was one of the two 50% owners of US Surgical. Thus, in exchange for his 50% ownership interest in US Surgical, Randy Wheelock was paid $200,000 in cash and will be entitled to 50% of any earn-out consideration paid. In addition, in connection with this acquisition, we entered into a consulting agreement with Randy Wheelock pursuant to which he will provide consulting services to us for 15 months following closing in exchange for a payment of $10,000 per month.

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.

Our unaudited proforma combined income data for the periods ended September 30, 2009 and 2008, assuming the acquisitions were effective January 1 of each period, is as follows:

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HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)

	Nine Months Ended September 30,
($ in thousands, except per share data)	2009			2008
Total revenues	$	147,260		$	152,364
Total expenses		(154,997	)		(151,651	)
Net income (loss) attributable to HealthTronics, Inc.	$	(7,737	)	$	713
Diluted earnings per share	$	(0.17	)	$	0.02

9. Fair Value of Financial Instruments

The carrying amounts and estimated fair values of our significant financial instruments as of September 30, 2009 and December 31, 2008 are as follows:

	September 30, 2009				December 31, 2008
( $ in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Cash and cash equivalents	$	11,154	$	11,154	$	22,854	$	22,854
Warrants/common stock		--		--		290		290
Financial liabilities:
Debt	$	49,027	$	49,027	$	46,387	$	46,387
Other long-term obligations		2,853		2,803		1,765		1,727

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 and approximately $47 million is due in less than one year. Therefore, the carrying value of the debt at September 30, 2009 and December 31, 2008 approximates fair value.

Other Long-Term Obligations

At September 30, 2009, we had $1,333,000 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 through December 2009. Beginning January 2010, when the lease amendment for the increased space takes effect, we will amortize the remaining balance at a rate of $22,569 per month. At September 30, 2009, we had a long term obligation totaling $171,000 for restructuring costs related to the vacating of a leased property. Lease payments will continue until October 3, 2010. We estimated the fair value of lease payments based on discounted cash flows, which is a level three analysis. At September 30, 2009, we had a long-term obligation of $1,350,000 representing our best estimate of an earn-out payment due in December of 2010 relating to an acquisition.

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HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(Unaudited)

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 resulted 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. During 2007, we exercised these warrants and in the third quarter of 2009 we sold these shares. The stock had been valued based on a quoted market price, which was a level one analysis.

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.

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

Forward-Looking Statements

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

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

• 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.

Segment Reporting

In the fourth quarter of 2008, our Medical Products division relocated from Kennesaw, Georgia to our corporate headquarters in Austin, Texas. Concurrent with this relocation, we made certain changes within our Medical Products management team so that these operations now report to the President of our Urology Services operations. After making these changes, we redesigned our internal financial reporting materials provided to our chief operating decision maker, as well as our executive management team. As of the first quarter of 2009, we do not have any operating segments, except our Urology Services operations, that meet the quantitative requirements of ASC 280, Segment Reporting (“ASC 280”), (formerly Statement of Financial Accounting Standards (“SFAS”) 131, Disclosures about Segments of an Enterprise and Related Information).

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

General

We provide healthcare services and medical devices, primarily to the urology community.

Lithotripsy services. We provide lithotripsy services, which is a medical procedure where a device called a lithotripter transmits high energy shockwaves through the body to break up kidney stones. Our lithotripsy services are provided principally through limited partnerships and other entities that we manage, which use lithotripters. 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 each of the first nine months of 2009 and 2008. 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.

Prostate treatment services. 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. For treating prostate and other cancers, we use a procedure called cryosurgery, a process which uses lethal ice to destroy tissue such as tumors for therapeutic purposes. In April 2008, we acquired Advanced Medical Partners, Inc. (“AMPI”), which significantly expanded our cryosurgery partnership base. In July 2009, we acquired Endocare, Inc. (“Endocare”), which manufactures both the medical devices and related consumables utilized by our cryosurgery operations, and also provides cryosurgery treatments. Our prostate treatment services are provided principally by us using equipment that we lease from limited partnerships and other entities that we manage. 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.

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

Radiation therapy services. We 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.

Anatomical pathology services. 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.

Medical products manufacturing, sales and maintenance. We, through our Endocare acquisition, manufacture and sell medical devices focused on minimally invasive technologies for tissue and tumor ablation through cryoablation, which is the use of lethal ice to destroy tissue, such as tumors, for therapeutic purposes. We develop and manufacture devices for the treatment of prostate and renal cancers and we believe that our proprietary technologies have broad applications across a number of markets, including the ablation of tumors in the lung and liver and palliative intervention (treatment of pain associated with metastases). We also manufacture the related spare parts and consumables.

We also sell and maintain lithotripters and related spare parts and consumables. We are the exclusive U.S. distributor of the Revolix branded laser.

Revenue Recognition

We recognize revenue primarily from the following sources:

• Fees for urology treatments . A substantial majority of our 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.

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

• 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.

• 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 manufacture and sell medical devices focused on minimally invasive technologies for tissue and tumor ablation through cryosurgery, and their related consumables. We also 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

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

On July 27, 2009, we completed our acquisition of Endocare, pursuant to the Agreement and Plan of Merger (“Merger Agreement”), dated as of June 7, 2009, among us, HT Acquisition, Inc., a wholly-owned subsidiary of ours, and Endocare. Endocare is a medical device company focused on developing, manufacturing and selling cryoablation products which have the potential to assist physicians in improving and extending life by use in the treatment of cancer and other tumors. In accordance with the terms and conditions of the Merger Agreement, Endocare shareholders had the option to receive the following consideration for each share of Endocare common stock they owned: (i) $1.35 in cash, without interest, or (ii) 0.7764 of a share of our common stock, in each case subject to proration. In the acquisition, we paid approximately $4.2 million in cash and issued approximately 7.3 million shares of our common stock to acquire Endocare.

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

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. Prior to 2009 we had two reporting units, urology services and medical products. The fair value of each reporting unit was 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 in our Annual Report on Form 10-K for the year ended December 31, 2008.

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 governing agreements provide us with broad powers. The other parties do not participate in the management of the entity and do not have the substantial ability to remove us. Investment in entities in which our investment is less than 50% ownership and we do not have significant control are accounted for by the equity method if ownership is between 20%–50%, or by the cost method if ownership is less than 20%. We have reviewed each of the underlying agreements and determined we have effective control; however, if it was determined this control did not exist, these investments would be reflected on the equity method of accounting. Although this would change individual line items within our consolidated financial statements, it would have no effect on our net income and/or total stockholders’ equity.

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

Nine months ended September 30, 2009 compared to the nine months ended September 30, 2008

Our total revenues for the nine months ended September 30, 2009 increased $13,746,000 as compared to the same period in 2008. Revenues from our lithotripsy business increased $1,292,000 for the first nine months of 2009 as compared to the same period in 2008, and revenues from our prostate business increased $3,414,000 for the first nine months of 2009 as compared to the same period in 2008. Prostate revenues from our AMPI operations were a significant driver of the increased prostate revenues in 2009, as we acquired AMPI in April 2008. Lithotripsy revenues on a same store basis in 2009 were consistent with revenues from the same period in 2008. Manufacturing and consumable revenues for the period ending September 30, 2009 increased $1,714,000 from the same period in 2008. This increase is entirely driven by sales to external customers from our new Endocare subsidiary. Contract service revenues increased $152,000 in the first nine months of 2009 over the same period in 2008. Revenues from our laboratory operations increased $3,330,000 for the nine months ended September 30, 2009 as compared to the same period in 2008. This increase resulted primarily from our Uropath operations, as we acquired Uropath in July 2008. Our IGRT operations resulted in $3,491,000 of increased revenues in 2009 primarily from our Ocean acquisition in late 2008.

Our cost of revenues increased $10,758,000 (20%) in the first nine months of 2009 as compared to the same period in 2008. The primary causes of this increase relate to: 1) increased cost of revenues attributable to our AMPI and IGRT operations totaling $3,512,000 due to a full nine months of operations in 2009, 2) increased costs related to our lab operations totaling $3,773,000 related primarily to a full nine months of Uropath activities, and 3) our new Endocare subsidiary’s operations, the costs from which have totaled $4,347,000 since we acquired Endocare. Approximately $2.6 million of Endocare’s costs of revenue related to incremental cost of goods sold from our write up of Endocare’s inventory to fair value as part of our purchase accounting. Our selling, general and administrative costs for the nine months ended September 30, 2009 increased $2,520,000 over the same period in 2008. This increase was primarily driven by acquisition costs related to our Endocare acquisition, which are now required to be expensed when incurred.

Net income attributable to noncontrolling interest for the nine month period ended September 30, 2009 increased $1,161,000 compared to the same period in 2008, as a result of increases in income at our existing partnerships and from having a full nine months of activity from our AMPI partnerships. Noncontrolling interest in our AMPI operations increased $794,000 in the first nine months of 2009 as compared to the same period in 2008.

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

Provision for income taxes in the first nine months of 2009 increased $237,000 compared to the same period in 2008 although our taxable net income during the same periods significantly decreased. Our income tax expense for 2009 reflects $1,967,000 of expense even though we have a loss for financial statement purposes because we recorded a full valuation allowance for all deferred tax assets since we are in a cumulative loss position for the last three years due to non-cash goodwill impairments recorded in prior years. For the next several years, we will only be an alternative minimum tax payer as we will utilize our existing net operating loss carryforwards to offset any current taxes payable.

Three months ended September 30, 2009 compared to the three months ended September 30, 2008

Our total revenues for the three months ended September 30, 2009 increased $2,512,000 as compared to the same period in 2008 primarily driven by revenues of $2,675,000 from our new Endocare subsidiary. Revenues from our lithotripsy business decreased $409,000 (1%) for the third quarter of 2009 as compared to the same period in 2008, and revenues from our prostate business decreased $672,000 in the third quarter of 2009 as compared to the same period in 2008. Prostate revenues from cryosurgery treatments decreased $470,000 for the quarter ended September 30, 2009 and were the primary driver of the total decrease in prostate revenues in the quarter. Revenues from our cryo operations have been consistent for the last three quarters. Litho procedure revenues on a same store basis were down 2.6% in 2009 as compared to the same period in 2008. Manufacturing and consumable revenues for the period ended September 30, 2009 increased $1,802,000 from the same period in 2008. This increase is entirely driven by sales to external customers from our new Endocare subsidiary. Contract service revenues remained consistent in the third quarter of 2009 with the same period in 2008. Revenues from our laboratory operations increased $652,000 in the period ended September 30, 2009 over the same period in 2008. This increase resulted primarily from our Uropath operations, which had increased revenues of $520,000 in the third quarter of 2009 as compared with the same period in 2008. Our IGRT operations resulted in $1,116,000 of increased revenues in 2009 primarily from our Ocean acquisition in late 2008.

Our cost of revenues increased $2,498,000 (12.5%) in the third quarter of 2009 as compared to the same period in 2008. The primary causes of this increase relate to the cost of revenues attributable to our new Endocare subsidiary, the costs from which totaled $4,347,000, our IGRT operations the costs from which increased $671,000, and our lab operations, which had increased costs totaling $634,000 in the third quarter of 2009, $722,000 of which was attributable to our new Uropath operations. Approximately $2.6 million of Endocare’s costs related to incremental cost of goods sold from our write up of Endocare’s inventory as part of our purchase accounting. Offsetting these increases, we had approximately $1,387,000 in cost savings in our cryosurgery operations primarily related to lower consumable costs, which is consistent with lower revenues, and significant synergies from eliminating duplicate AMPI corporate functions. Our selling, general and administrative costs for the quarter ended September 30, 2009 increased $2,690,000 over the same period in 2008. This increase was primarily driven by acquisition costs related to our Endocare acquisition, which are now required to be expensed when incurred, as well as approximately $1.5 million in increased costs for Endocare’s sales and marketing efforts.

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

Net income attributable to noncontrolling interest for the three month period ended September 30, 2009 decreased $1,080,000 compared to the same period in 2008, primarily related to a decrease in income at one of our existing partnerships combined with repurchases of noncontrolling interests.

Provision for income taxes in the third quarter of 2009 increased $459,000 compared to the same period in 2008 although our taxable net income during the same periods significantly decreased. Our income tax expense for 2009 reflects $1,348,000 of expense even though we have a loss for financial statement purposes because we recorded a full valuation allowance for all deferred tax assets since we are in a cumulative loss position for the last three years due to non-cash goodwill impairments recorded in prior years. For the next several years, we will only be an alternative minimum tax payer as we will utilize our existing net operating loss carryforwards to offset any current taxes payable.

Liquidity and Capital Resources

Cash Flows

Our cash and cash equivalents were $11,154,000 and $22,854,000 at September 30, 2009 and December 31, 2008, respectively. Beginning in 2009, our subsidiaries began distributing available cash on a monthly basis, after establishing reserves for estimated capital expenditures and working capital. Prior to 2009, they generally distributed all of their available cash quarterly, which lead to an accumulated cash balance at the end of each quarter. For the periods ended September 30, 2009 and 2008, our subsidiaries distributed cash of approximately $47,103,000 and $42,797,000, respectively, to noncontrolling interest holders.

Cash provided by our operating activities, after noncontrolling interest, was $44,312,000 for the period ended September 30, 2009 and $51,305,000 for the period ended September 30, 2008. From 2008 to 2009, fee and other revenue collected increased by $15,042,000 due primarily to increased revenues from our acquisitions as well as timing of the collections of accounts receivable. Cash paid to employees, suppliers of goods and others increased by $11,542,000 in 2009. This fluctuation is primarily attributable to increased operating expenses from our acquisitions and timing of payments. Cash paid for acquisition related costs totaled $9,922,000 in 2009, primarily related to our Endocare acquisition. Per ASC No. 805, Business Combinations (“ASC 805”), (formerly SFAS 141R, Business Combinations), these acquisition related costs are now included in operating activities beginning January 1, 2009. In prior years, prior to the implementation of ASC 805, these costs were included in purchase of entities which is an investing activity.

Cash used by our investing activities for the nine months ended September 30, 2009, was $8,792,000. We purchased equipment and leasehold improvements totaling $5,712,000 in the first nine months of 2009. We used $3,427,000 to acquire Endocare and certain smaller acquisitions. Cash used by our investing activities for the period ended September 30, 2008, was $17,513,000. We used approximately $17 million to acquire our interest in AMPI and Uropath, as well as increase other partnership interests in certain litho partnerships. In addition, we purchased equipment and leasehold improvements totaling $8,762,000 in 2008, $3.1 million of which were for additional Revolix lasers.

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

Cash used in our financing activities for the nine months ended September 30, 2009, was $47,220,000, primarily due to distributions to noncontrolling interests of $47,103,000 and payments on notes payable of $10,144,000 partially offset by borrowings on notes payable of $12,672,000. Cash used in our financing activities for the nine months ended September 30, 2008, was $40,556,000, primarily due to distributions to noncontrolling interests of $42,797,000 and payments on notes payable of $10,561,000 partially offset by borrowings on notes payable of $13,547,000.

Accounts receivable as of September 30, 2009 has increased $3,602,000 from December 31, 2008. This increase relates primarily to our Endocare acquisition, which increased accounts receivable by approximately $2.7 million, and approximately $1 million increase at our Uropath and Claripath labs related to significant growth across our lab operations.

Inventory as of September 30, 2009 totaled $13,382,000 and increased $4,539,000 from December 31, 2008, entirely related to our Endocare acquisition.

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 September 30, 2009, we had drawn $44 million on the revolver. Although we plan to either extend the maturity date of our senior credit facility or enter into a new credit facility prior to its maturity in March 2010, we have reflected all amounts outstanding as current in the accompanying condensed consolidated balance sheet. 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 September 30, 2009.

Other

Other long term debt. As of September 30, 2009, we had notes totaling $5 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 five to nine percent or LIBOR or prime plus a certain premium and are due over the next four years.

Other long term obligations. At September 30, 2009, we had an obligation totaling $30,000 related to payments of $3,333 a month until June 15, 2010 as consideration for a noncompetition agreement with a previous employee. As part of our acquisition of Endocare in July of 2009, we had an obligation totaling $316,000 related to payments of $10,533 a month from January 2010 through December 2011 as consideration for a consulting and noncompetition agreement.

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

On November 8, 2005, Endocare entered into a commercialization agreement with CryoDynamics, LLC to design and develop a cryoablation system utilizing nitrogen gas. The parties will jointly own all inventions made or conceived by CryoDynamics in performing the commercialization agreement. To assist CryoDynamics in its research and development efforts, Endocare advances CryoDynamics $42,500 per month until such time as either party enters into a license agreement based upon the nitrogen system with an independent third party that results in CryoDynamics receiving an amount sufficient to repay the advances and fund CryoDynamics’ monthly operating expenses of $42,500.

The commercialization agreement will continue until the later of (a) December 31, 2015, or (b) expiration of the parties’ obligations to pay royalties or until the commercialization agreement is terminated because of breach, insolvency or bankruptcy.

Since repayment of amounts advanced under the commercialization agreement is contingent upon the successful development, commercialization and licensing of the technology and is not reasonably assured, these advances are expensed as incurred.

General

The following table presents our contractual obligations as of September 30, 2009 (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)	$	49,027	$	46,958	$	1,665	$	19	$	385
Operating leases (2)		10,438		2,452		4,149		2,770		1,067
Other contracts (3)		3,024		698		1,178		1,020		128
Total	$	62,489	$	50,108	$	6,992	$	3,809	$	1,580

(1)	Represents long term debt as discussed above.
(2)	Represents operating leases in the ordinary course of our business.
(3)	Represents non-compete obligations of $346 and payments due per the terms of a commercialization agreement totaling $2,678, as described above.

In addition, the scheduled principal repayments for all long term debt as of September 30, 2009 are payable as follows:

($ in thousands)
2010	$	46,958
2011		1,266
2012		399
2013		19
2014		-
Thereafter		385
Total	$	49,027

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

Our primary sources of cash are cash flows from operations and borrowings under our senior credit facility 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” in our most recent Annual Report on Form 10-K. 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 plan to strengthen cryoablation’s position in the prostate and renal cancer markets, and further develop and increase the acceptance of our technology in the interventional radiology and oncology markets for treatment of liver and lung cancers and palliative intervention (treatment of pain associated with metastases). At the same time, we seek to achieve penetration across additional markets with our proprietary cryoablation technology.

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.

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 October 2009, the FASB updated FASB ASC 605, Revenue Recognition (“ASC 605”) that amended the criteria for separating consideration in multiple-deliverable arrangements. The amendments establish a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third–party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The amendments will eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price. This update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. We are currently evaluating the requirements of this update and have not yet determined the impact on our consolidated financial statements.

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

In June 2009, the FASB issued Accounting Standards Codification (“ASC”) 105, Generally Accepted Accounting Principles (“ASC 105”), (formerly SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles). ASC 105 establishes the FASB ASC as the single source of authoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”). The standard is effective for interim and annual periods ending after September 15, 2009. The adoption of ASC 105 did not have a material impact on our financial statements.

In June 2009, the FASB issued accounting guidance contained within ASC 810, Consolidation (“ASC 810”), regarding the consolidation of variable interest entities (formerly SFAS No. 167, Amendments to FASB Interpretation No. 46(R)). ASC 810 is intended to improve financial reporting by providing additional guidance to companies involved with variable interest entities and by requiring additional disclosures about a company’s involvement in variable interest entities. This standard is effective for interim and annual periods ending after November 15, 2009. The adoption of this standard is not expected to have a material impact on our financial statements.

In June 2009, the FASB issued ASC 860, Transfers and Servicing (“ASC 860”), (formerly SFAS No. 166, Accounting for Transfers of Financial Assets). ASC 860 requires more information about transfers of financial assets and where companies have continuing exposure to the risk related to transferred financial assets. It eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosure. This standard is effective for interim and annual periods ending after November 15, 2009. We will adopt this standard on January 1, 2010. The adoption of this standard is not expected to have a material impact on our financial statements.

In May 2009, the FASB issued ASC No. 855, Subsequent Events (“ASC 855”), (formerly SFAS No. 165, Subsequent Events). ASC 855 should be applied to the accounting for and disclosure of subsequent events. This Statement does not apply to subsequent events or transactions that are within the scope of other applicable GAAP that provide different guidance on the accounting treatment for subsequent events or transactions. ASC 855 would apply to both interim financial statements and annual financial statements. The objective of ASC 855 is to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, this Statement sets forth: 1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; 2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and 3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. ASC 855 is effective for interim or annual financial periods ending after June 15, 2009. We adopted ASC 855 during the second quarter of 2009 and its application did not affect our consolidated financial position, results of operations, or cash flows. We evaluated subsequent events through the date the accompanying financial statements were issued, which was November 4, 2009.

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

In April 2009, the FASB issued ASC 825, Financial Instruments (“ASC 825”), (formerly FASB Staff Position 107-1, Interim Disclosures about Fair Value of Financial Instruments ). ASC 825 requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This standard also requires those disclosures in summarized financial information at interim reporting periods beginning after March 15, 2009. The adoption of this ASC did not affect our consolidated financial position, results of operations, or cash flows.

In June 2008, the FASB issued ASC 260, Earnings Per Share (“ASC 260”), (formerly FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities ). ASC 260 concluded that instruments containing rights to nonforfeitable dividends granted in share-based payment transactions are participating securities prior to vesting and, therefore, should be included in the earnings allocations in computing basic earnings per share (EPS) under the two-class method. This ASC is effective for financial statements issued for fiscal years beginning after December 15, 2008, with prior period retrospective application. Our adoption of this ASC on January 1, 2009 had no material impact on our consolidated financial statements.

In April 2008, the FASB issued ASC 350-30, General Intangibles Other Than Goodwill (”ASC 350-30“), (formerly FSP No. 142-3, Determination of the Useful Life of Intangible Assets ). ASC 350-30 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. ASC 350-30 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. The adoption of ASC 350-30 did not have a material impact on our financial position or results of operations.

In December 2007, the FASB issued ASC No. 805, Business Combinations (”ASC 805“), (formerly SFAS 141R, Business Combinations ). ASC 805 will significantly change current practices regarding business combinations. Among the more significant changes, ASC 805 expands the definition of a business and a business combination; requires the acquirer to recognize the assets acquired, liabilities assumed and noncontrolling interests (including goodwill), measured at fair value at the acquisition date; requires acquisition-related expenses and restructuring costs to be recognized separately from the business combination; and requires in-process research and development to be capitalized at fair value as an indefinite-lived intangible asset. ASC 805 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The impact of adopting ASC 805 will continue to be dependent on the future business combinations that we may pursue after its effective date. We expensed approximately $1.2 million in the third quarter of 2009 and approximately $1.9 million year to date in 2009, of costs related to acquisitions.

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

In December 2007, the FASB issued accounting guidance contained within ASC 810, Consolidation (“ASC 810-10-65”), (formerly SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements ) regarding noncontrolling interests. ASC 810-10-65 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The adoption of ASC 810-10-65 revised our presentation of consolidated financial statements and further impact will continue to be dependent on our future changes in ownership in subsidiaries after the effective date.

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Item 3 – Quantitative and Qualitative Disclosures
About Market Risk

Interest Rate Risk

As of September 30, 2009, we had long-term debt (including current portion) totaling $49,027,000, of which $4,243,000 had fixed rates of 5% to 9%, and $44,784,000 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 $44,784,000. We make monthly or quarterly payments of principal and interest on $151,000 of the floating rate debt. An increase in interest rates of 1% would result in a $448,000 annual increase in interest expense on this existing principal balance.

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Item 4 – Controls and Procedures

As of September 30, 2009, under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), we evaluated the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of September 30, 2009, our disclosure controls and procedures were effective.

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

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PART II

OTHER INFORMATION

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Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Risk Factors” in Part I, Item 1 in our Annual Report on Form 10-K for the year ended December 31, 2008, which could materially affect our business, financial condition or future results. There are no material changes from the risk factors disclosed in our Form 10-K for the year ended December 31, 2008, except for the following additional risk factors resulting from our acquisition of Endocare:

If we fail to obtain or maintain necessary regulatory clearances or approvals for the medical products we manufacture, or if approvals are delayed or withdrawn, we will be unable to commercially distribute and market our products or any product modifications.

Government regulation has a significant impact on our business. Government regulation in the United States and other countries is a significant factor affecting the research and development, manufacture and marketing of the products we manufacture. In the United States, the Food and Drug Administration (the “FDA”) has broad authority under the Federal Food, Drug and Cosmetic Act (the “FD&C Act”) to regulate the development, distribution, manufacture and sale of medical devices. Foreign sales of drugs and medical devices are subject to foreign governmental regulation and restrictions, which vary from country to country. The process of obtaining FDA and other required regulatory clearances and approvals (collectively, “regulatory approvals”) is lengthy and expensive. We may not be able to obtain or maintain necessary regulatory approvals for clinical testing or for the manufacturing or marketing of the medical products we manufacture. Failure to comply with applicable regulatory approvals can, among other things, result in fines, suspension or withdrawal of regulatory approvals, product recalls, operating restrictions and criminal prosecution. In addition, new or additional governmental regulations may be established that could prevent, delay, modify or rescind regulatory approval of our medical products. Any of these actions by the FDA or foreign regulatory authority, or change in FDA regulations or those of a foreign regulatory authority, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Regulatory approvals, if granted, may include significant limitations on the indicated uses for which the medical products we manufacture may be marketed. In addition, to obtain such regulatory approvals, the FDA and foreign regulatory authorities may impose numerous other requirements on us. FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses. In addition, regulatory approvals can be withdrawn for failure to comply with regulatory standards or as a result of unforeseen problems following initial marketing. We may not be able to obtain or maintain regulatory approvals for our products on a timely basis, or at all, and delays in receipt of or failure to receive such regulatory approvals, the loss of previously obtained regulatory approvals or failure to comply with existing or future regulatory requirements could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our manufactured medical products may be subject to product recalls even after receiving FDA clearance or approval, which would harm our reputation and our business.

The FDA and similar governmental authorities in other countries have the authority to request and, in some cases, require the recall or similar actions for the medical products we manufacture in the event of material deficiencies or defects in design, manufacture or labeling or in the event of patient injury. A governmental mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors or design defects. Any recall of product would divert managerial and financial resources and harm our reputation with customers and our business, impact our ability to distribute the recalled product in the future, require costly redesign or manufacturing changes and leave us vulnerable to additional regulatory sanctions and product liability litigation.

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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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On September 25, 2009, we acquired US Surgical Services, LLC (“US Surgical”) for $400,000 in cash and an earn-out provision pursuant to which we could issue up to $1,350,000 in shares of our common stock. The actual number of shares issued, if any, cannot be determined until it is determined whether the earn-out provision requirements are met. Randy Wheelock, who is the brother of Argil Wheelock, one of the members of our Board of Directors, was one of the two 50% owners of US Surgical. Thus, in exchange for his 50% ownership interest in US Surgical, Randy Wheelock was paid $200,000 in cash and will be entitled to 50% of any earn-out consideration paid. In addition, in connection with this acquisition, we entered into a consulting agreement with Randy Wheelock pursuant to which he will provide consulting services to us for 15 months following closing in exchange for a payment of $10,000 per month.

On September 30, 2009, in connection with our acquisition of INnMED, LLC, we entered into consulting agreements with the two principals of INnMED pursuant to which we agreed to pay each of them up to 93,073 shares of our common stock (in addition to cash) in exchange for consulting services. The actual number of shares issued cannot be determined until the requirements of such consulting services payment are met. The issuance is exempt from registration under the Securities Act of 1933 in reliance on Section 4(2) and Rule 506 of the Securities Act of 1933.

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.

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Item 6. Exhibits.

         10.1*
         
         10.2*

         
         31.1*

         31.2*

         32.1*

         32.2* Executive Employment Agreement, effective July 30, 2009, by and between HealthTronics, Inc. and Clint B. Davis.

Second Amendment to Lease Agreement, dated as of August 20, 2009, between HEP-Davis Spring, L.P. as landlord and HealthTronics, Inc. as tenant.

Certification of Chief Executive Officer

Certification of Chief Financial Officer

Certification of Chief Executive Officer

Certification of Chief Financial Officer

*    Filed herewith.

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SIGNATURES

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

                                                     



Date: November 6, 2009



                                                     
                                                     
                                                      HEALTHTRONICS, INC.







By: /s/ Richard A. Rusk                                
      Richard A. Rusk
       Chief Financial Officer

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EX-10

Exhibit 10.1

EXECUTIVE EMPLOYMENT AGREEMENT

        This Executive Employment Agreement (this “Agreement”) is by and between HealthTronics, Inc., a Georgia corporation (“Employer”), and Clint B. Davis, an individual (“Executive”), and shall be effective as of July 30, 2009 (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

        Section1.1.    Term. Employer hereby hires Executive and Executive accepts such employment for an initial term of eighteen (18) months commencing on the Effective Date and ending on February 6, 2011.

        Section1.2.    Termination Upon Expiration. The term of this Agreement shall automatically renew for successive one year periods immediately following the expiration of the initial eighteen-month 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.

        Section1.3.    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.

        Section1.4.    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;

        (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; or

        (c)     Executive does not permanently relocate to Austin, Texas by September 30, 2009.

        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.

        Section1.5.    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 permanently relocate to a city other than Austin, Texas;

2

        (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

        (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.

        Section1.6.    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.

        Section1.7.    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 III hereof.

        Section1.8.    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 such 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.

3

        (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 such termination, Executive (i) shall receive a lump-sum payment (the amount of such payment, the “Severance Amount”) 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 twelve months preceding such termination, 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. The Severance Amount shall be paid to Executive on the first day of the seventh month following the effective date of such termination. For example, if the effective date of termination is August 10, 2010, then the Severance Amount would be paid to Executive on February 11, 2011. 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).

        Section1.9.    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.

        Section1.10.    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. For the avoidance of doubt, that certain Employment Agreement, effective as of January 17, 2006, by and between Endocare, Inc. and Executive (as amended) is hereby terminated and shall be of no further force or effect.

        Section1.11.     “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 Exchange Act of 1934 (as amended, 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;

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        (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;

        (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.

        Section1.12.    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.

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        (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.

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 Senior Vice President and General Counsel. 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

        Section3.1.    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 $20,416.67 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.

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        Section3.2.    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 Equity Incentive Plan (if any), but all equity awards thereunder shall be subject to the sole discretion of the Board.

        Section3.3.    Bonuses. 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.

        Section3.4.    Expenses. Employer shall reimburse all reasonable out-of-pocket travel and business expenses incurred by Executive in connection with the performance of Executive’s duties pursuant to this Agreement. Executive shall provide Employer with documentation of Executive’s expenses, in a form acceptable to Employer and which satisfies applicable federal income tax reporting and record keeping requirements.

        Section3.5.    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.

        Section3.6.    Relocation Allowance. Executive shall receive the relocation allowance described in Schedule 1 hereto.

ARTICLE IV.
Executive’s Restrictive Covenants

        Section4.1.    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.

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        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 or entity 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 and any documents in electronic or digital form, 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.

        Section4.2.    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.

        Section4.3.    Noncompetition Agreement. In consideration of the substantial benefits that Executive is receiving under this Agreement and the Proprietary Information already provided to and 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.

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        (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.

        (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 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.

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        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.

        Section4.4.    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.

ARTICLE V.
Miscellaneous

        Section5.1.    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 or entity 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.

        Section5.2.    Amendments. This Agreement cannot be modified or amended except by a written agreement executed by all parties hereto.

        Section5.3.    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.

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        Section5.4.    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.

        Section5.5.    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.

        Section5.6.    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.

        Section5.7.    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.

        Section5.8.    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.

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        Section5.9.    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):

If to Employer:
                                       
                                       
                                       
                                       

If to Executive:
                                       
                                       
                                        HealthTronics, Inc.
 9825 Specrum Drive, Building 3
 Austin, TX 78717
 Attention: President and Chief Executive Officer
 Facsimile Transmission: (512) 314-4503

 Clint B. Davis
 P.O. Box 3081
 Rancho Santa Fe, CA 92067
 Facsimile Transmission: ______________

        Section5.10.    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.

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        Section5.11.    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 and Chief Executive Officer


/s/ Clint B. Davis                 
Clint B. Davis

S-1

Schedule 1

Relocation Allowance

Employer shall reimburse Executive for reasonable actual expenses incurred in connection with his relocation to Austin, Texas; provided, that Employer shall not reimburse Executive for any commission paid related to purchasing a home and for temporary housing costs. In addition, Employer shall reimburse Executive for the amount of sales commission actually incurred by Executive in selling his home in California in an amount of up to 5% of the selling price of the home; provided, that such reimbursement shall not exceed $50,000.

S-1

EX-10

Exhibit 10.2

SECOND AMENDMENT TO LEASE AGREEMENT BETWEEN
HEP DAVIS SPRING, L.P. AS LANDLORD
AND
HEALTHTRONICS, INC. AS TENANT

        THIS SECOND AMENDMENT TO LEASE AGREEMENT (this “Second Amendment”) is made and entered into by and between HEP DAVIS SPRING, L.P., a Texas limited partnership, as “Landlord”, and HEALTHTRONICS, INC., a Georgia corporation, as “Tenant”.

        WHEREAS, Landlord and Tenant entered into that certain Lease Agreement dated May 19, 2008, (the “Original Lease”), covering 56,423 square feet of space (the “Original Premises”) in the building known as Davis Spring Corporate Center 3 (the “Building 3”) located at 9825 Spectrum Drive, Austin, Texas.

        WHEREAS, Landlord and Tenant amended the Original Lease by the First Amendment dated August 21, 2008, where a scrivener’s error in the Premises zip code was corrected.

        WHEREAS, the Original Lease was supplemented by that certain Notice of Commencement dated as of September 5, 2008 (the Original Lease, as amended and supplemented, the “Lease”).

        WHEREAS, Tenant desires to lease from Landlord an additional 10,982 square feet of space known as suite 275 as shown on the attached Exhibit A (the “Expansion Premises”) in the building known as Davis Spring Corporate Center 2 (the “Building 2”) located at 9825 Spectrum Drive, Austin, Texas.

        WHEREAS, Landlord and Tenant desire to amend the Lease to reflect their agreements as to the terms and conditions governing Tenant’s lease of the Expansion Premises.

        NOW THEREFORE, for and in consideration of the premises hereinabove set forth, Landlord and Tenant agree as follows:

        1.       Premises. Commencing January 1, 2010 (the “Expansion Date”), Landlord shall lease the Expansion Premises to Tenant and Tenant shall lease the Expansion Premises from Landlord, and the Premises, as defined in the Lease, shall mean, collectively, the Original Premises and the Expansion Premises for a total area of approximately 67,405 square feet of space. The Expansion Premises shall be subject to all the terms and conditions of the Lease except as expressly modified herein and except that Tenant shall not be entitled to receive any allowances, abatements or other financial concessions that were granted with respect to the Original Premises unless such concessions are expressly provided for herein with respect to the Expansion Premises. Effective as of the Expansion Date, Exhibit A attached hereto shall be added to and incorporated into Exhibit A to the Lease.

        2.       Base Rent. Commencing on the Expansion Date, in addition to the Base Rent payable with respect to the Original Premises, Tenant shall pay monthly Base Rent for the Expansion Premises as follows:

01/01/10 - 03/31/10
04/01/10 - 09/14/10
09/15/10 - 09/14/11
09/15/11 - 09/14/12
09/15/12 - 09/14/13
09/15/13 - 09/14/14
09/15/14 - 09/14/15 $0.00* psf
$0.9785 psf
$1.0079 psf
$1.0381 psf
$1.0692 psf
$1.1013 psf
$1.1343 psf $0.00* monthly
$10,745.89 monthly
$11,068.76 monthly
$11,400.41 monthly
$11,741.95 monthly
$12,094.48 monthly
$12,456.88 monthly

*Tenant shall pay its Proportionate Share of Operating Expenses during the free Base Rent periods, in accordance with the terms of the Lease, as amended hereby.

1

        3.       Operating Expenses.

        (a)        Commencing on the Expansion Date, in addition to Tenant’s Proportionate Share of Operating Expenses payable for the Original Premises, Tenant shall pay Tenant’s Proportionate Share of Operating Expenses for the Expansion Premises in accordance with the terms of the Lease, as amended hereby. Tenant’s Proportionate Share of Operating Expenses for the Expansion Premises are currently estimated to be $0.2599 per square foot per month (i.e., $2,854.22 monthly). Such amount is an estimate only and subject to actual costs and expenses according to the provisions of the Lease.

        (b)        Effective as of the Expansion Date, all references in the Lease to the “Building” shall mean collectively, Building 2 and Building 3, unless otherwise explicitly specified. Additionally, effective as of the Expansion Date, all references in the Lease to “Proportionate Share” shall mean (i) with respect to the Original Premises, 100%, and (ii) with respect to the Expansion Premises, 23.15%.

        (c)        Effective as of the Expansion Date, the term “Building’s Proportionate Share” as defined in Section 4(c) of the Original Lease, shall be amended to mean (i) with respect to Building 3, a fraction which is determined by dividing the number of square feet contained in Building 3 (56,423) by the number of square feet then contained in the Project, and (ii) with respect to Building 2, a fraction which is determined by dividing the number of square feet contained in Building 2 (47,442) by the number of square feet then contained in the Project. Currently there are 261,582 square feet in the Project, and therefore the initial Building’s Proportionate Share for Building 3 is 21.57% and the initial Building’s Proportionate Share for Building 2 is 18.14%.

        4.       Security Deposit. Upon Tenant’s execution hereof, Tenant shall pay Landlord the sum of Thirteen Thousand Six Hundred and 11/100 Dollars ($13,600.11), which is added to and becomes part of the Security Deposit held by Landlord as provided under Section 2(f) of the Original Lease as security for Tenant’s obligations under the Lease, as amended hereby. Accordingly, the Security Deposit is hereby increased from $81,531.24 to $95,131.35.

        5.       Acceptance of Expansion Premises. Landlord shall provide an Expansion Allowance of $303,693.00 for Tenant’s construction of the Expansion Improvements, subject to and in accordance with the terms of Exhibit B attached hereto. Landlord and Tenant acknowledge and agree that $3,693.00 of such Expansion Allowance is a reimbursement by Landlord to Tenant of an overpayment previously made by Tenant in connection with the Initial Improvements performed in the Original Premises. TENANT ACKNOWLEDGES THAT UPON OCCUPANCY OF THE EXPANSION PREMISES (1) IT HAS INSPECTED AND ACCEPTS THE EXPANSION PREMISES IN AN “AS IS, WHERE IS” CONDITION, (2) THE BUILDING 2‘S IMPROVEMENTS ARE SUITABLE FOR THE PURPOSE FOR WHICH THE EXPANION PREMISES ARE LEASED AND LANDLORD HAS MADE NO WARRANTY REPRESENTATION, COVENANT, OR AGREEMENT WITH RESPECT TO THE MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF THE EXPANSION PREMISES, (3) THE EXPANION PREMISES ARE IN GOOD AND SATISFACTORY CONDITION, (4) NO REPRESENTATIONS AS TO THE REPAIR OF THE EXPANION PREMISES, NOR PROMISES TO ALTER, REMODEL OR IMPROVE THE EXPANION PREMISES HAVE BEEN MADE BY LANDLORD (UNLESS AND EXCEPT AS MAY BE SET FORTH IN EXHIBIT B ATTACHED TO THIS SECOND AMENDMENT, OR AS IS OTHERWISE EXPRESSLY SET FORTH IN THE LEASE), AND (5) NO WARRANTIES, EXPRESS OR IMPLIED, ARE MADE REGARDING THE CONDITION OR SUITABILITY OF THE EXPANSION PREMISES ON THE EXPANSION DATE (UNLESS AND EXCEPT AS MAY BE EXPRESSLY SET FORTH IN EXHIBIT B ATTACHED TO THIS SECOND AMENDMENT, OR AS IS OTHERWISE EXPRESSLY SET FORTH IN THE LEASE). FURTHER, TO THE EXTENT PERMITTED BY LAW, TENANT WAIVES ANY IMPLIED WARRANTY OF SUITABILITY OR OTHER IMPLIED WARRANTIES THAT LANDLORD WILL MAINTAIN OR REPAIR THE EXPANSION PREMISES OR ITS APPURTENANCES EXCEPT AS MAY BE CLEARLY AND EXPRESSLY PROVIDED IN THE LEASE.

2

        6.       Termination Option. For purposes of Tenant’s Termination Option contained in Exhibit G to the Lease, the “Premises” shall not include the Expansion Premises, and Tenant’s Termination Option shall apply only to the Original Premises. If Tenant is entitled to and properly exercises Tenant’s Termination Option with respect to the Original Premises only, Landlord and Tenant shall execute an amendment (the “Termination Amendment”) to reflect changes in the Premises, Proportionate Share, Building, Building’s Proportionate Share and other appropriate terms; provided that an otherwise valid exercise of the Tenant’s Termination Option shall be fully effective whether or not the Termination Amendment is executed.

        7.       Building Sign. The right to install a sign on the exterior of Building 3 set forth in Section 7 of the Original Lease shall only apply with respect to the Original Premises and Building 3 and Tenant shall have no such right to install a sign on the exterior of Building 2; provided, however, that Tenant may install signage on the outside front door leading to the Expansion Premises.

        8.       Brokers. Landlord and Tenant each warrant to the other that it has not dealt with any broker or agent in connection with this Second Amendment, other than HPI Real Estate, Inc. and HPI Corporate Services, Inc. (collectively, the “Brokers”). Tenant and Landlord shall each indemnify the other against all costs, attorneys’ fees, and other liabilities for commissions or other compensation claimed by any broker or agent (other than the Brokers) claiming the same by, through, or under the indemnifying party. Landlord shall pay commissions to the Brokers in connection with this Second Amendment pursuant to separate written agreements between Landlord and the Brokers.

        9.       Defined Terms. All terms not otherwise defined herein shall have the same meaning assigned to them in the Lease.

        10.       Ratification of Lease. Except as amended hereby, the Lease shall remain in full force and effect in accordance with its terms and is hereby ratified. In the event of a conflict between the Lease and this Second Amendment, this Second Amendment shall control.

        11.       No Representations. Landlord and Landlord’s agents have made no representations or promises, express or implied, in connection with this Second Amendment except as expressly set forth herein.

        12.       Exhibits. Each Exhibit attached hereto is made a part hereof for all purposes.

        13.       Entire Agreement. This Second Amendment, together with the Lease, contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Second Amendment or the Lease, and no prior agreement, understanding or representation pertaining to any such matter shall be effective for any purpose.

        14.       Section Headings. The section headings contained in this Second Amendment are for convenience only and shall in no way enlarge or limit the scope or meaning of the various and several sections hereof.

        15.       Successors and Assigns. The terms and provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.

        16.       Severability. A determination that any provision of this Second Amendment is unenforceable or invalid shall not affect the enforceability or validity of any other provision hereof and any determination that the application of any provision of this Second Amendment to any person or circumstance is illegal or unenforceable shall not affect the enforceability or validity of such provision as it may apply to any other persons or circumstances.

        17.       Governing Law. This Second Amendment shall be governed by the laws of the State of Texas.

        18.       Submission of Amendment Not Offer. The submission by Landlord to Tenant of this Second Amendment for Tenant’s consideration shall have no binding force or effect, shall not constitute an option, and shall not confer any rights upon Tenant or impose any obligations upon Landlord irrespective of any reliance thereon, change of position or partial performance. This Second Amendment is effective and binding on Landlord only upon the execution and delivery of this Second Amendment by Landlord and Tenant.

3

         Executed by Landlord on the 20th day of August, 2009.

                                                     LANDLORD:

                                                     HEP DAVIS SPRING, L.P.,
                                                     a Texas limited partnership

                                                     By:    IND-HP GP, Inc.,
                                                              a Texas corporation,
                                                              its General Partner


                                                     By:       /s/ Richard E. Anderson     
                                                     Name:  Richard E. Anderson
                                                     Title:    President
 

         Executed by Tenant on the 19th day of August, 2009.

                                                     TENANT:

                                                     HEALTHTRONICS, INC.,
                                                     a Georgia corporation


                                                     By:       /s/ James Whittenburg     
                                                     Name:  James Whittenburg
                                                     Title:    President & CEO
 

4

EXHIBIT A

EXPANSION PREMISES

A-1

EXHIBIT B

WORK LETTER

        1.        Following the delivery of possession of the Expansion Premises to Tenant and Tenant’s payment of the increase in the Security Deposit required under this Second Amendment, Tenant shall have the right to perform certain alterations and improvements in the Expansion Premises (the “Expansion Improvements”). Notwithstanding the foregoing, Tenant and its contractors shall not have the right to perform Expansion Improvements in the Expansion Premises unless and until Tenant has complied with all of the terms and conditions of Section 6 of the Lease, including, without limitation, approval by Landlord of the final plans for the Expansion Improvements, in accordance with the procedure set forth in Section 6 of the Lease. Landlord shall also have the right to approve the contractors to be retained by Tenant to perform such Expansion Improvements, the form of construction contract with Tenant’s general contractor, and the insurance coverage obtained by Tenant and its contractors in connection with the Expansion Improvements, in accordance with the procedure set forth in Section 6 of the Lease. Tenant shall be responsible for all elements of the plans for the Expansion Improvements (including, without limitation, compliance with law, functionality of design, the structural integrity of the design, the configuration of the Expansion Premises and the placement of Tenant’s furniture, appliances and equipment), and Landlord’s approval of such plans shall in no event relieve Tenant of the responsibility therefor. Landlord’s approval of the contractors to perform the Expansion Improvements shall not be unreasonably withheld. Landlord’s approval of the general contractor to perform the Expansion Improvements shall not be considered to be unreasonably withheld if any such general contractor (i) does not have trade references reasonably acceptable to Landlord, (ii) does not maintain insurance as reasonably required by Landlord, (iii) does not provide current financial statements reasonably acceptable to Landlord, or (iv) is not licensed as a contractor in the state and municipality in which the Expansion Premises is located. Tenant acknowledges the foregoing is not intended to be an exclusive list of the reasons why Landlord may reasonably withhold its consent to a general contractor.

        2.        Promptly after obtaining Landlord’s approval of the plans for the Expansion Improvements and before commencing construction of the Expansion Improvements, Tenant shall deliver to Landlord a reasonably detailed estimate of the cost of the Expansion Improvements. If such estimated cost exceeds the Expansion Allowance (hereinafter defined), Tenant shall be responsible for such excess. In addition, within ten (10) days after receipt of a written request from Landlord, provided that the Expansion Improvements have been substantially completed in the opinion of the architect involved, Tenant shall pay to Landlord a construction fee equal to 3% of the Expansion Construction Costs (hereinafter defined) to compensate Landlord for reviewing the plans for the Expansion Improvements and for costs incurred by Landlord in facilitating completion of the Expansion Improvements. Landlord reserves the right to deduct such fee from the Expansion Allowance if the Expansion Allowance has not been completely distributed at the time such fee comes due.

        3.        Tenant shall pay all costs incurred in designing and constructing the Expansion Improvements, provided that so long as Tenant is not in default, Landlord agrees to contribute $303,693.00 (the “Expansion Allowance”) toward the cost of designing and constructing the Expansion Improvements.

        4.        The Expansion Allowance may only be used for the cost of preparing design and construction documents and mechanical and electrical plans for the Expansion Improvements and for hard costs in connection with the Expansion Improvements (collectively, “Expansion Construction Costs”). The Expansion Allowance less a 10% retainage (which retainage shall be payable as part of the final draw), shall be paid to Tenant in periodic disbursements within thirty (30) days after receipt of the following documentation: (i) an application for payment and sworn statement of contractor substantially in the form of AIA Document G-702 covering all work for which disbursement is to be made to a date specified therein; (ii) a certification from an AIA architect substantially in the form of the Architect’s Certificate for Payment which is located on AIA Document G702, Application and Certificate of Payment; (iii) contractor’s, subcontractor’s and material supplier’s waivers of liens which shall cover all Expansion Improvements for which disbursement is being requested and all other statements and forms required for compliance with the mechanics’ lien laws of the state in which the Expansion Premises is located, together with all such invoices, contracts, or other supporting data as Landlord or Landlord’s mortgagee may reasonably require; (iv) a cost breakdown for each trade or subcontractor performing the Expansion Improvements; (v) plans and specifications for the Expansion Improvements, together with a certificate from an AIA architect that such plans and specifications comply in all material respects with all laws affecting the Expansion Building, Project and Expansion Premises; (vi) copies of all construction contracts for the Expansion Improvements, together with copies of all change orders, if any; and (vii) a request to disburse from Tenant containing an approval by Tenant of the work done and a good faith estimate of the cost to complete the Expansion Improvements. Upon completion of the Expansion Improvements, and prior to final disbursement of the Expansion Allowance, Tenant shall furnish Landlord with: (1) general contractor and architect’s completion affidavits, (2) full and final waivers of lien, (3) receipted bills covering all labor and materials expended and used, (4) as-built plans of the Expansion Improvements, (5) the certification of Tenant and its architect that the Expansion Improvements have been installed in a good and workmanlike manner in accordance with the approved plans, and in accordance with applicable laws, codes and ordinances, and (6) a certificate of occupancy for the Expansion Premises. In no event shall Landlord be required to disburse the Expansion Allowance more than one time per month. Notwithstanding anything herein to the contrary, Landlord shall not be obligated to disburse any portion of the Expansion Allowance during the continuance of an uncured default under the Lease, and Landlord’s obligation to disburse shall only resume when and if such default is cured.

B-1

        5.        In no event shall the Expansion Allowance be used for the purchase of equipment, furniture or other items of personal property of Tenant, except as otherwise expressly provided herein. In the event the Expansion Construction Costs are less than the Expansion Allowance, such unexpended Expansion Allowance shall be Landlord’s sole property. In the event Tenant does not submit to Landlord a written request for payment of the entire Expansion Allowance (together with all of the documents and certificates required for such payment) within twelve (12) months after the Expansion Date, any portion of the Expansion Allowance not disbursed to Tenant shall accrue to the sole benefit of Landlord, it being understood that Tenant shall not be entitled to any credit, abatement or other concession in connection therewith. Tenant shall be responsible for all applicable state sales or use taxes, if any, payable in connection with the Expansion Improvements and/or Expansion Allowance.

        6.        Tenant agrees to accept the Expansion Premises in its “as-is” condition and configuration, without representation or warranty by Landlord or anyone acting on Landlord’s behalf, it being agreed that Landlord shall not be required to perform any work or, except as provided above with respect to the Expansion Allowance, incur any costs in connection with the construction or demolition of any improvements in the Expansion Premises.

        7.        This Work Letter shall not be deemed applicable to any space other than Expansion Premises or any additional space added to the Original Premises or Expansion Premises at any time or from time to time, whether by any options under the Lease or otherwise, or to any portion of the Original Premises or Expansion Premises or any additions to the Original Premises or Expansion Premises in the event of a renewal or extension of the original Term, whether by any options under the Lease or otherwise, unless expressly so provided in the Lease or any amendment or supplement to the Lease. All capitalized terms used in this Work Letter but not defined herein shall have the same meanings ascribed to such terms in the Lease, as amended hereby.

B-2

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 quarterly report on Form 10-Q of HealthTronics, Inc.;

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

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

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

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

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

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

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

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

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

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

Date: November 6, 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, Chief Financial Officer of HealthTronics, Inc., certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: November 6, 2009
                                         
                                          By: /s/ Richard A. Rusk          
       Richard A. Rusk
      Chief Financial Officer
      

EX-32

Exhibit 32.1

Certification of
Chief Executive Officer
of HealthTronics, Inc.

This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies the quarterly report on Form 10-Q (the “Form 10-Q”) for the quarter ended September 30, 2009 of HealthTronics, Inc., a Georgia corporation (the “Issuer”).

I, James S. B. Whittenburg, President and Chief Executive Officer of the Issuer, certify that to the best of my knowledge:

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

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

Dated: November 6, 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-Q or as a separate disclosure document.

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

EX-32

Exhibit 32.2

Certification of
Chief Financial Officer
of HealthTronics, Inc.

This certification is provided pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and accompanies the quarterly report on Form 10-Q (the “Form 10-Q”) for the quarter ended September 30, 2009 of HealthTronics, Inc., a Georgia corporation (the “Issuer”).

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

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

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

Dated: November 6, 2009

/s/ Richard A. Rusk          
Richard A. Rusk
Chief Financial Officer
HealthTronics, Inc.

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

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