_______________________________________________________

UNITED STATESSECURITIES AND EXCHANGE
COMMISSIONWASHINGTON, D.C. 20549

_____________________________

FORM 10-K

[X]                          Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
                                              For the fiscal year ended December 31, 2007
                                                                  OR
                     [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
                                          For the transition period from ________ to ________


Commission File Number: 000-30406

_____________________________

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

| | GEORGIA                                                        |  |  |  | 58-2210668                          
| | -------------------------------------------------------------- |  |  |  | ------------------------------------
| | (State or other jurisdiction of
incorporation or organization) |  |  |  | (I.R.S. Employer
Identification No.)

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

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

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

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

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

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

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




           Indicate by check mark whether the registrant is a large  accelerated  filer, an accelerated  filer, or a  non-accelerated  filer.
See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (check one):Large accelerated filer ̈Accelerated filer  x                
Non-accelerated filer ̈
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

          State the aggregate market value of the voting and non-voting  common equity held by  non-affiliates  computed by reference to the
price at which the common  equity was sold,  or the average bid and asked price of such common  equity,  as of the last business day of
the registrants most recently completed second fiscal quarter.Aggregate Market Value at June 30, 2007: $ 125,167,000
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Indicate the number of shares outstanding of each of the registrants classes of common stock, as of the latest practicable date.
|---------------------------------------------------------------------------------------------------------------------------------

| | Title of Each Class
     Common Stock, no par value |  | Number of Shares Outstanding at

February 28, 2008
35,783,811
| | --------------------------------------------------- |  | -------------------------------------------------------------

DOCUMENTS INCORPORATED BY REFERENCE

|Selected  portions of the  Registrants  definitive proxy material for the 2008 annual meeting of stockholders are incorporated by
reference into Part III of the Form 10-K.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|HEALTHTRONICS, INC.
                                                      ANNUAL REPORT ON FORM 10-K
                                              FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
                                                                PART I
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# ITEM 1.    

BUSINESS

|General

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

For a  discussion  of  recent  developments,  see  Managements  Discussion  and  Analysis  of  Financial
Condition and Results of OperationsRecent Developments.

On  November 10,  2004,  Prime Medical  Services,  Inc.  (Prime)  completed a merger with  HealthTronics
Surgical  Services,  Inc.  (HSS)  pursuant to which Prime merged with and into HSS, with  HealthTronics,
Inc.  (HealthTronics)  as the  surviving  corporation.  Under the terms of the  merger  agreement,  as a
result of the merger,  Primes  stockholders  received  one share of  HealthTronics  common stock for each
share of Prime common stock they owned.  Immediately  following  the merger,  Primes  stockholders  owned
approximately  62% of the outstanding  shares of  HealthTronics  common stock,  and Primes  directors and
senior management  represented a majority of the combined companys directors and senior management.  As a
result,  Prime  was  deemed to be the  acquiring  company  for  accounting  purposes  and the  merger  was
accounted for as a reverse  acquisition under the purchase method of accounting for business  combinations
in accordance with accounting  principles  generally accepted in the United States. The consideration paid
(purchase  price) was  allocated  to the  tangible  and  intangible  net assets of HSS based on their fair
values,  and the net assets of HSS were  recorded at their fair values as of the  completion of the merger
and added to those of Prime.  The assets  acquired  and  liabilities  assumed  were  deemed to be those of
HealthTronics because HealthTronics was the surviving legal entity.

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

Our lithotripsy  services are provided  principally through limited partnerships or other entities that we
manage,  which  use  lithotripsy  devices.  In  2007,  physicians  who are  affiliated  with  us used  our
lithotripters  to perform  approximately  48,000  procedures  in the U.S.  We do not  render  any  medical
services.  Rather, the physicians do.

We have two types of contracts, retail and wholesale, that we enter into in providing our lithotripsy
services.  Retail contracts are contracts where we contract with the hospital and private insurance
payors.  Wholesale contracts are contracts where we contract only with the hospital.  The two approaches
functionally differ in that, under a retail contract, we generally bill for the entire non-physician fee
for all patients other than governmental pay patients, for which the hospital bills the non-physician
fee.  Under a wholesale contract, the hospital generally bills for the entire non-physician fee for all
patients.  In both cases, the billing party contractually bears the costs associated with the billing
service, including pre-certification, as well as non-collection.  The non-billing party is generally
entitled to its fees regardless of whether the billing party actually collects the non-physician fee.
Accordingly, under the wholesale contracts where we are the non-billing party, the hospital generally
receives a greater proportion of the total non-physician fee to compensate for its billing costs and
collection risk.  Conversely, under the retail contracts where we generally provide the billing services
and bear the collection risk, we receive a greater proportion of the total non-physician fee.
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|Although  the  non-physician  fee under  both  retail  and  wholesale  contracts  varies  widely  based on
geographical  markets and the identity of the third party payor, we estimate that nationally,  on average,
our share of the  non-physician  fee was roughly  $2,100,  respectively,  for both 2007 and 2006.  At this
time, we do not anticipate a material shift between our retail and wholesale arrangements.

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

Also in the urology segment,  we provide  treatments for benign and cancerous  conditions of the prostate.
In treating benign prostate disease,  we deploy three technologies:  (1) trans-urethral  microwave therapy
(TUMT),  (2) photo-selective  vaporization of the prostate (PVP), and  (3) trans-urethral  needle ablation
(TUNA).  All three  technologies  apply an energy source which reduces the size of the prostate  gland. In
September 2007, we completed the sale of our Rocky Mountain Prostate  business,  which represented  almost
our entire TUMT  treatment  operations.  For  treating  prostate and other  cancers  prior to November 30,
2006, we used a procedure called  cryosurgery,  a process which uses a double freeze thaw cycle to destroy
cancer  cells.  We sold  our  cryosurgery  business  on  November  30,  2006  and  have  classified  it as
discontinued operations in the accompanying consolidated financial statements.

We recognize urology revenue primarily from the following sources:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Fees for urology  services.


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


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

|Medical Products


We manufacture, sell and maintain lithotripters and their related consumables.  We also manufacture,
sell and maintain intra-operative X-ray imaging systems and other mobile patient management tables, and
are the exclusive U.S. distributor of the Revolix branded laser.  The operations of our Claripath
pathology laboratory are also included in our medical products segment at this time.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Fees for maintenance  services.
We provide equipment maintenance services to our partnerships as well as outside parties.  These
services are billed either on a time and material basis or at a fixed monthly contractual rate.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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| |  | Fees for equipment sales,  consumable sales and licensing  applications.
We manufacture, sell and maintain lithotripters and certain medical tables, we distribute the Revolix
laser and we also manufacture and sell consumables related to the lithotripters.  With respect to some
lithotripter sales, in addition to the original sales price, we receive a licensing fee from the buyer
of the lithotripter for each patient treated with such lithotripter.  In exchange for this licensing
fee, we provide the buyer of the lithotripter with certain consumables.  All the sales for equipment and
consumables are recognized when the related items are delivered.  Revenues from licensing fees are
recorded when the patient is treated.  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 Claripath anatomical pathology services.  We provide anatomical pathology services primarily to
the urology marketplace.  Revenues from these services are recorded when the related laboratory
procedures are performed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|Specialty Vehicle Manufacturing

Before July 31, 2006, we designed,  constructed  and  engineered  mobile  trailers,  coaches,  and special
purpose mobile units that transport high technology  medical devices such as magnetic  resonance  imaging,
or MRI, cardiac  catheterization  labs, CT scanware,  lithotripters and positron emission  tomography,  or
PET, and equipment  designed for mobile command and control centers,  and broadcasting and  communications
applications.

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

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

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

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

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

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

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

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

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

We are directly, or indirectly through physicians and hospitals and other health care facilities, which
we will refer to as Customers, subject to extensive regulation by both the federal government and the
governments in states in which we conduct business, including:
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| |  | the federal False Claims Act;                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------
|
| |  | the federal Medicare and Medicaid Anti-Kickback Law, and state anti-kickback prohibitions;                         
|
| |  | federal and state billing and claims submission laws and regulations;                                              
|
| |  | the federal Health Insurance Portability and Accountability Act of 1996 and state laws relating to
patient privacy;
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| |  | the federal physician self-referral prohibition commonly known as the Stark Law and the state law
equivalents of the Stark Law;        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
|
| |  | state laws that prohibit the practice of medicine by non-physicians, and prohibit fee-splitting
arrangements involving physicians; and 
|
| |  | federal and state laws governing the equipment we use in our business concerning patient safety and
equipment operating specifications.

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

In July 2007, the Centers for Medicare & Medicaid Services proposed new regulations under which
physician ownership of interests in our non-lithotripsy partnerships might be deemed a prohibited
financial relationship under the physician self-referral prohibitions under the Stark Law.  If the
proposed rules were to go into effect, the proposed rules might require us to significantly change our
partnership model for those of our partnerships and limited liability companies that provide services to
treat benign prostatic hyperplasia and prostate cancer.  We cannot predict with any certainty whether or
when these proposed regulations might be finalized and, if finalized, whether physician-owned interests
in our non-lithotripsy partnerships would become prohibited financial relationships.  If that were to
occur, we might be required to, among other things, repurchase the ownership interests of such
physicians in such partnerships or otherwise dissolve such partnerships.  This in turn could impair our
relationships with the physicians or the hospitals at which our non-lithotripsy partnerships provide
services.  We can give you no assurances that, if the proposed regulations are finalized, the final
rules would not have a material adverse effect on our operations, financial condition or results of
operations.

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

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

As of February 28, 2008, we employed approximately 413 full-time employees and approximately 6 part-time
employees.
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|Risk Factors

In addition to the other information set forth in this report,  you should carefully  consider the factors
discussed below, which could materially affect our business, financial condition or future results.If we are not able to establish or maintain  relationships  with physicians and hospitals,  our ability to
successfully commercialize our current or future service offerings will be materially harmed.

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

We are subject to extensive  regulation by both the federal  government  and the  governments in states in
which we conduct  business.  See  Government  Regulation and  Supervision  under this Part I for further
discussion on these regulations.Third party  payors  could  refuse to  reimburse  health care  providers  for use of our current or future
service offerings and products, which could make our revenues decline.

Third party payors are  increasingly  attempting  to contain  health care costs by limiting  both coverage
and  the  level  of  reimbursement  of  medical  procedures  and  treatments.  In  addition,   significant
uncertainty  exists as to the  reimbursement  status of newly approved  health care products.  Lithotripsy
treatments are reimbursed under various federal and state programs,  including  Medicare and Medicaid,  as
well as under private health care programs,  primarily at fixed rates.  Governmental  programs are subject
to statutory and regulatory changes,  administrative  rulings,  interpretations of policy and governmental
funding  restrictions,  and private programs are subject to policy changes and commercial  considerations,
all of which may have the effect of  decreasing  program  payments,  increasing  costs or  requiring us to
modify the way in which we operate our business.  These changes  could have a material  adverse  effect on
us.New and proposed federal and state laws and regulatory initiatives relating to various initiatives in
health care reform (such as improving privacy and the security of patient information and combating
health care fraud) could require us to expend substantial sums to appropriately respond to and comply
with this broad variety of legislation (such as acquiring and implementing new information systems for
privacy and security protection), which could negatively impact our financial results.
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|Recent  legislation  and several  regulatory  initiatives at the state and federal levels address  patient
privacy concerns.  New federal  legislation  extensively  regulates the use and disclosure of individually
identifiable   health-related   information  and  the  security  and   standardization  of  electronically
maintained or  transmitted  health-related  information.  We do not yet know the total  financial or other
impact of these  regulations on our business.  Continuing  compliance with these  regulations  will likely
require us to spend  substantial  sums,  including,  but not limited to,  purchasing new computer systems,
which could negatively impact our financial results.  Additionally,  if we fail to comply with the privacy
regulations,  we could suffer civil  penalties of up to $25,000 per calendar year per standard  (with well
over fifty  standards  with which to comply)  and  criminal  penalties  with fines of up to  $250,000  for
willful and knowing  violations.  In addition,  health care  providers  will continue to remain subject to
any state laws that are more  restrictive  than the federal privacy  regulations.  These privacy laws vary
by state and could impose additional penalties.

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

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

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

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

|8
|-



---

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

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

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

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

| |  | future  announcements  concerning  us,  our  competition  or  the  health  care  services  market
         generally; 
| | - | ----------------------------------------------------------------------------------------------------------------------
|
| |  | developments  relating to our  relationships  with hospitals,  other health care  facilities,  or
         physicians;
|
| |  | developments relating to our sources of supply;                                                                       
|
| |  | claims made or litigation filed against us;                                                                           
|
| |  | changes in, or new interpretations of, government regulations;                                                        
|
| |  | changes in operating results from quarter to quarter;                                                                 
|
| |  | sales of stock by insiders;                                                                                           
|

|9
|-



---

| |  | news reports relating to trends in our markets; 
| | - | ------------------------------------------------
|
| |  | acquisitions and financings in our industry; and
|
| |  | overall volatility of the stock market.         

|Furthermore,  stock prices for many companies  fluctuate widely for reasons that may be unrelated to their
operating  results.  These  fluctuations,  coupled with changes in our results of  operations  and general
economic, political and market conditions, may adversely affect the market price of our common stock.Our  acquisition  strategy  could fail or present  unanticipated  problems for our business in the future,
which could adversely affect our ability to make acquisitions or realize  anticipated  benefits from those
acquisitions.

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

| |  | diversion of managements attention;                          
| | - | --------------------------------------------------------------
|
| |  | the need to integrate acquired operations;                    
|
| |  | potential loss of key employees of the acquired companies; and
|
| |  | an increase in our expenses and working capital requirements. 

|Any of these factors could adversely affect our ability to achieve  anticipated  levels of cash flows from
our acquired businesses or realize other anticipated benefits from those acquisitions.Our results of operations could be adversely affected as a result of goodwill impairments.

Goodwill represents the excess of the purchase price paid for a company over the fair value of that
companys tangible and intangible net assets acquired. As of December 31, 2007, we had goodwill of
$217.5 million. If we determine in the future that the fair value of any of our reporting segments does
not exceed the carrying value of the related reporting segment, goodwill in that reporting segment will
be deemed impaired. If impaired, the amount of goodwill will be reduced to the value determined by us to
be the fair value of the reporting segment. The amount of the reduction will be deducted from earnings
during the period in which the impairment occurs.  An impairment will also reduce stockholders equity
in the period incurred by the amount of the impairment.  In the fourth quarter of 2007, in connection
with our annual goodwill impairment test, we recorded an impairment to our urology services segment
goodwill totaling $20.8 million. This impairment was due to a decrease in our estimated future
discounted cash flows from this segment. This decrease was primarily caused by lower projected growth
rates for our laser operations as well as the timing of certain future growth for our IGRT operations.
In the fourth quarter of 2006, we recorded an impairment to our goodwill totaling $12.2 million related
to our urology services segment and $8.4 million related to our medical products segment.  The
impairment to our urology services segment was due primarily to a decrease in the number of overall
procedures during 2006, primarily across our western region partnerships, combined with the loss of
certain partnerships and contracts late in 2006 to competitors.  The impairment in our medical products
segment relates primarily to our decision to reduce or exit certain product lines, specifically patient
management tables and orthopedic consumables during the fourth quarter of 2006 along with the closing of
our European operations.  For further discussion of our 2007 and 2006 goodwill impairments, see footnote
C to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10
|--



---

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

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

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

| |  | the need to comply with applicable federal Food and Drug  Administration and foreign  regulations
       relating to good  manufacturing  practices and medical  device  approval  requirements,  and with
       state licensing requirements;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | the  need  for  special  non-governmental  certifications  and  registrations  regarding  product
       safety,  product  quality  and  manufacturing  procedures  in order  to  market  products  in the
       European Union;              
|
| |  | potential product liability claims for any defective goods that are distributed; and                                                                                                                                                           
|
| |  | the need for research and  development  expenditures  to develop or enhance  products and compete
       in the equipment markets.                                                                                                             

|Our indebtedness may limit our financial and operating flexibility.

As of  December  31,  2007,  we had  indebtedness  of  approximately  $8.5  million  related to  equipment
purchased  by our  limited  partnerships,  which  indebtedness  will be repaid  from the cash flows of the
partnerships.  We also have a revolving  line of credit with a borrowing  limit of $50.0 million  pursuant
to a senior  credit  facility  we entered  into in March  2005.  As of December  31,  2007,  there were no
amounts  drawn on the  revolver.  Prior to July 31,  2006,  we had  outstanding  a $125.0  million  senior
secured  term  loan B due  2011.  This term  loan B was  repaid  on July 31,  2006  with a portion  of the
proceeds we received from the sale of our specialty vehicles manufacturing division.

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

|11
|--



---

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

| |  | incur additional debt or liens;                                                  
| | - | ---------------------------------------------------------------------------------
|
| |  | make payments in respect of or redeem or acquire any debt or equity issued by us;
|
| |  | sell assets;                                                                     
|
| |  | make loans or investments;                                                       
|
| |  | acquire or be acquired by other companies; and                                   
|
| |  | amend some of our contracts.                                                     

|Although we have no monies drawn on our revolving line of credit, that could change and the level of
indebtedness could have important consequences to you. For example, it could:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | increase our vulnerability to general adverse economic and industry conditions;                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | limit our ability to fund future working  capital and capital  expenditures,  to engage in future
       acquisitions,  or to otherwise  realize the value of our assets and  opportunities  fully because
       of the need to  dedicate a portion of our cash flow from  operations  to  payments on our debt or
       to comply with any restrictive terms of our debt;
|
| |  | limit our  flexibility  in  planning  for, or reacting  to,  changes in the  industry in which we
         operate; and                                                                                                                                                                                                                                                     
|
| |  | place us at a competitive disadvantage as compared to our competitors that have less debt.                                                                                                                                                                                                                                                                                  

|In  addition,  if we fail to comply with the terms of any of our debt,  our lenders will have the right to
accelerate  the maturity of that debt and  foreclose  upon the  collateral,  if any,  securing  that debt.
Realization of any of these factors could adversely affect our business,  financial  condition and results
of operations.We have in the past identified material weaknesses in our internal control over financial  reporting,  and
the identification of any significant  deficiencies or material  weaknesses in the future could affect our
ability to ensure timely and reliable financial reports.

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

|12
|--



---

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

As of February 28, 2008, our executive officers were as follows:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Name                   | Age |  | Position                                                     
|---------------------- | --- |  | -------------------------------------------------------------
|                      
|James S.B. Whittenburg | 36  |  | Chief Executive Officer and President                        
|                      
|Ross A. Goolsby        | 40  |  | Chief Financial Officer and Senior Vice President            
|                      
|Richard A. Rusk        | 46  |  | Vice President, Corporate Controller, Treasurer and Secretary

|The foregoing  does not include  positions held in our  subsidiaries.  Our officers are elected for annual
periods. There are no family relationships between any of our executive officers and/or directors.Mr.  Whittenburg was appointed as our President and Chief Executive  Officer on August 13, 2007. From June
2006 until August 13, 2007,  Mr. Whittenburg  served as President of our Urology Division,  and he was our
acting  President and Chief  Executive  Officer from May 2007 until August 2007. He served as President of
our Specialty  Vehicle  Manufacturing  Division from December 2005 until its sale in July 2006 and was our
General  Counsel  and Senior  Vice  PresidentDevelopment  from  March  2004  until June 2006.  Previously
Mr. Whittenburg  practiced law at Akin Gump Strauss  Hauer & Feld LLP,  where he  specialized in corporate
and securities law. Mr. Whittenburg, a CPA, is licensed to practice law in Texas.Mr. Goolsby  joined us as our Chief Financial  Officer and Senior Vice President on January 8, 2007. Prior
to such  appointment,  Mr. Goolsby  served as the Chief Financial  Officer,  Vice President of Finance and
Secretary of SigmaTel,  Inc., a  publicly-traded  semiconductor  company,  from September 2001 to December
2006.  From 1999 until  2001,  Mr. Goolsby  served as Chief  Financial  Officer of  Utiliserve,  Inc.,  an
electrical  utility products  distributor.  From 1993 until 1999,  Mr. Goolsby  served as a Vice President
and  Controller  of  Cameron  Ashley  Building  Products,   Inc.,  a  publicly-traded   building  products
distributor.  Mr. Goolsby  holds a Bachelor of Business  Administration  in Accounting from the University
of Houston.Mr. Rusk  joined us in August  2000 as our  Corporate  Controller  and was named  Vice  President  in June
2002.  In June 2006,  Mr.  Rusk was named our  Treasurer  and in  September  2006,  Mr. Rusk was named our
Secretary.  Before joining us, Mr. Rusk,  a CPA, was with KPMG LLP for approximately  seventeen years, the
last ten years as a senior audit manager.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13
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---

|Available Information

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

We also make  available  free of charge  on or  through  our  website  (http://www.healthtronics.com)  our
Annual  Report on Form 10-K,  Quarterly  Reports  on Form  10-Q,  Current  Reports  on Form 8-K,  and,  if
applicable,  amendments to those reports filed or furnished  pursuant to Section 13(a) of the Exchange Act
as soon as reasonably  practicable after we electronically  file such material with, or furnish it to, the
SEC.ITEM 1A.          RISK FACTORS

The information required by this item is set forth under Risk Factors in Part I, Item 1.ITEM 1B.          UNRESOLVED STAFF COMMENTS

None.ITEM 2.           PROPERTIES

Our  principal  executive  office  is  located  in  Austin,  Texas in an office  building  owned by us. In
addition,  in May 2005,  we entered into a five-year  lease on a 41,000  square foot facility in Kennesaw,
Georgia related to our Medical Products operations for approximately $23,000 a month.ITEM 3.           LEGAL PROCEEDINGS

We are involved in various  claims and legal actions that have arisen in the ordinary  course of business.
We believe that any  liabilities  arising from these  actions will not have a material  adverse  effect on
our financial condition, results of operations or cash flows.ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|14
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---

|PART II
|-------

# ITEM 5.    

MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
           
       
 MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

|The following table sets forth the high and low closing prices per share for our common stock on the
Nasdaq Global Select Market for the years ended December 31, 2007 and 2006 (NASDAQ Symbol HTRN).
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2007           | 2006
| | -------------- | ----
|
| | First Quarter  |     
| | Second Quarter |     
| | Third Quarter  |     
| | Fourth Quarter |     

|On February 12, 2008, we had 617 holders of record of our common stock.

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

At December 31, 2007, we had seven separate equity compensation plans: the Prime 1993 and 2003 stock
option plans, the HSS general, 2000, 2001 and 2002 stock option plans, and the HSS 2004 equity incentive
plan. The plans, and all amendments thereto, had been approved by Primes and HSS shareholders, as the
case may be. The following table sets forth certain information as of December 31, 2007 about our equity
compensation plans:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (a)                                 | (b) | (c)
| | ----------------------------------- | --- | ---
|
| | Prime 1993 stock option plan        |     |    
|
| | Prime 2003 stock option plan        |     |    
|
| | HSS equity incentive plan and stock |     |    
| | option plans                        |     |    
|
| | Other equity compensation plans     |     |    
| | approved by our security holders    |     |    

|15
|--



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|Performance Graph

The  following  graph  compares  our  cumulative  total  shareholder  return  with  the  cumulative  total
shareholder  returns of the Nasdaq Market Index and the Nasdaq Health Services Index,  for the period from
December 31, 2003 through December 31, 2007.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 
| | 

# ITEM 6.
    
SELECTED FINANCIAL DATA

|The following tables set forth our summary  consolidated  historical  financial  information that has been
derived  from  (a) our  audited  consolidated  statements  of income  and cash flows for each of the years
ended  December 31,  2007, 2006, 2005, 2004 and 2003,  (b) our audited  consolidated  balance sheets as of
December 31,  2007, 2006, 2005, and 2004, (c) our unaudited  consolidated balance sheet as of December 31,
2003,  and  (d) our  unaudited  consolidated  statements  of income  and cash  flows for each of the three
months ended  December 31,  September 30,  June 30,  and March 31,  for 2007 and 2006. As discussed  under
Business-General  under Part I, Item 1 of this Annual  Report on Form 10-K,  the merger of Prime and HSS
was  accounted  for as a  reverse  acquisition  under  the  purchase  method of  accounting  for  business
combinations  in  accordance  with  U.S.  generally  accepted  accounting  principles.  As a  result,  the
financial  information  presented  below  reflects  the  results  of  operations  of  Prime  and  HSS on a
consolidated  basis after  November 10,  2004 and the results of operations of Prime for the periods prior
to  November 10,  2004. In addition,  the financial  information  presented  below  reflects our financial
condition on a consolidated  basis as of  December 31,  2007,  2006,  2005 and 2004 and Primes  financial
condition  as of  December 31,  2003.  You should read this  financial  information  in  conjunction  with
Managements  Discussion  and  Analysis  of  Financial  Condition  and  Results  of  Operations  and our
historical  financial  statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
The historical results are not necessarily indicative of results to be expected in any future period.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|16
|--



---

|(In thousands, except per share data) | Years Ended December 31,
|------------------------------------- | ------------------------
|
|Revenues:                             |                         
|Urology Services                      |                         
|Medical Products                      |                         
|Other                                 |                         
|                                      |                         
|Revenues from continuing operations   |                         
|                                      |                         
|Income (loss) from:                   |                         
|Continuing Operations                 |                         
|Discontinued Operations               |                         
|                                      |                         
|Net income (loss)                     |                         
|                                      |                         
|Diluted earnings (loss) per share:    |                         
|Continuing Operations                 |                         
|Discontinued Operations               |                         
|                                      |                         
|Total                                 |                         
|                                      |                         
|Dividends per share                   |                         
|Total assets                          |                         
|                                      |                         
|Long-term obligations (a)             |                         
|                                      |                         

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

|Quarterly Data                      | Quarter Ended
|----------------------------------- | -------------
|
|
|                                   
|Revenues                            |              
|Net income (loss)                   |              
|Per share amounts (basic):          |              
|Net income (loss)                   |              
|Weighted average shares outstanding |              
|Per share amounts (diluted):        |              
|Net income (loss)                   |              
|Weighted average shares outstanding |              

|17
|--



---

|Quarterly Data                      | Quarter Ended
|----------------------------------- | -------------
|
|
|Revenues                            |              
|Net income (loss)                   |              
|Per share amounts (basic):          |              
|Net income (loss)                   |              
|Weighted average shares outstanding |              
|Per share amounts (diluted):        |              
|Net income (loss)                   |              
|Weighted average shares outstanding |              
|                                    |              

|(1)  In the fourth quarter of 2007, in connection  with our annual goodwill  impairment  test, we recorded
     an impairment to our urology services  segment goodwill  totaling $20.8 million. This impairment was
     due to a decrease in our estimated  future  discounted  cash flows for this  segment.  This decrease
     was primarily  caused by lower projected  growth rates for our laser operations as well as the timing
     of certain future growth for our IGRT operations.

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

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

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

|Forward-Looking Statements

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

|18
|--



---

|Statements  that are  predictive  in nature,  that depend upon or refer to future events or  conditions,  or that include words such as
will,    would,     should,     plans,     likely,     expects,
anticipates,  intends,  believes,  estimates,  thinks, may, and
similar expressions,  are forward-looking  statements. The following important factors, in addition to those discussed under Risk
Factors  under Part I, Item 1, could affect the future results of the health care industry in general, and us in particular,  and
could cause those results to differ materially from those expressed in such forward-looking statements.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | uncertainties in our establishing or maintaining relationships with physicians and hospitals;                     
| | - | ------------------------------------------------------------------------------------------------------------------
|
| |  | the impact of current and future laws and governmental regulations;                                               
|
| |  | uncertainties inherent in third party payors attempts to limit health care coverages and levels of reimbursement;
|
| |  | the effects of competition and technological changes;                                                             
|
| |  | the availability (or lack thereof) of acquisition or combination opportunities; and                               
|
| |  | general economic, market or business conditions.                                                                  

|General

We provide  healthcare  services and manufacture  medical  devices,  primarily for the urology  community.
Prior to July 31, 2006,  we also  designed and  manufactured  trailers  and coaches  that  transport  high
technology  medical  devices  and  equipment  for mobile  command  and  control  centers and the media and
broadcast industry.Urology  Services.  Our lithotripsy  services are provided  principally  through  limited  partnerships or
other  entities that we manage,  which use  lithotripsy  devices.  In 2007,  physicians who are affiliated
with us used our  lithotripters to perform  approximately  48,000  procedures in the U.S. We do not render
any medical services. Rather, the physicians do.

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

Although the non-physician fee under both retail and wholesale contracts varies widely based on
geographical markets and the identity of the third party payor, we estimate that nationally, on average,
our share of the non-physician fee was roughly $2,100 for both 2007 and 2006. At this time, we do not
anticipate a material shift between our retail and wholesale arrangements.
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|As the general partner of the limited  partnerships,  we also provide  services  relating to operating our
lithotripters,  including scheduling,  staffing,  training, quality assurance,  regulatory compliance, and
contracting with payors, hospitals and surgery centers.

Also in the urology segment,  we provide  treatments for benign and cancerous  conditions of the prostate.
In treating benign prostate disease,  we deploy three technologies:  (1) trans-urethral  microwave therapy
(TUMT),  (2) photo-selective  vaporization of the prostate (PVP), and  (3) trans-urethral  needle ablation
(TUNA).  All three  technologies  apply an energy source which reduces the size of the prostate  gland. In
September 2007, we completed the sale of our Rocky Mountain Prostate  business,  which represented  almost
our entire TUMT  treatment  operations.  For treating  prostate and other  cancers,  prior to November 30,
2006, we used a procedure called  cryosurgery,  a process which uses a double freeze thaw cycle to destroy
cancer cells.

We recognize urology revenue primarily from the following sources:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Fees for urology services.

A substantial majority of our urology revenue is derived from fees related to lithotripsy treatments
performed using our lithotripters. We, through our partnerships or other entities, facilitate the use of
our equipment and provide other support services in connection with these treatments at hospitals and
other health care facilities. (For a further discussion on our partnerships, see Urology and
Government Regulation and Supervision in Part I.) The professional fee payable to the physician
performing the procedure is generally billed and collected by the physician. Benign prostate disease and
prostate cancer treatment services are billed in the same manner as our lithotripsy services under
either retail or wholesale contracts. These services are also primarily performed through limited
partnerships, which we manage.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Fees for operating our lithotripters.  Through our partnerships and otherwise directly by us, we provide services related to operating our
lithotripters and receive a management fee for performing these services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|Medical  Products.  We  manufacture,  sell and maintain  lithotripters  and their related  consumables.  We also  manufacture,
sell and maintain  intra-operative  X-ray imaging systems and other mobile patient  management tables, and
are the  exclusive  U.S.  distributor  of the Revolix  branded  laser.  The  operations  of our  Claripath
pathology laboratory are also included in our medical products segment at this time.

We recognize medical products revenue from the following sources:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Fees for maintenance services.

We provide equipment maintenance services to our partnerships as well as outside parties. These services
are billed either on a time and material basis or at a fixed monthly contractual rate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Fees for equipment sales, consumable sales and licensing applications.  We manufacture, sell and maintain lithotripters and certain medical tables, we distribute the Revolix
laser and we also manufacture and sell consumables related to the lithotripters.  With respect to some
lithotripter sales, in addition to the original sales price, we receive a licensing fee from the buyer
of the lithotripter for each patient treated with such lithotripter.  In exchange for this licensing
fee, we provide the buyer of the lithotripter with certain consumables.  All the sales for equipment and
consumables are recognized when the related items are delivered.  Revenues from licensing fees are
recorded when the patient is treated.  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.

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| |  | Fees for Claripath  anatomical  pathology  services.  We provide  anatomical  pathology  services
         primarily  to the  urology  marketplace.  Revenues  from these  services  are  recorded  when the
         related laboratory procedures are performed.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

|Recent Developments

Effective  April 28, 2007, we acquired all of the outstanding  capital stock of Keystone ABG, Inc.,  which
owns a 21%  general  partner  interest in Keystone  Mobile  Partners,  L.P.  (the  Partnership),  and an
approximate 14% limited  partner  interest in the  Partnership  from the owners thereof,  for an aggregate
purchase price of $6.8 million,  plus certain  additional cash  consideration  to be paid depending on the
number of limited  partner  units sold by us in a  post-closing  offering of such units,  plus an earnout.
In  August  2007,  we  completed  our  post-closing  offering  of the  limited  partner  units and paid an
additional $934,000.

On August 7, 2007,  Sam B.  Humphries,  our President  and Chief  Executive  Officer,  died as a result of
complications  from a May 21, 2007 cardiac  event.  Mr.  Humphries had been on medical leave since May 21,
2007.

On August 13, 2007, our Board of Directors  appointed  James S. B.  Whittenburg as our President and Chief
Executive  Officer and as a member of our Board of Directors.  Mr.  Whittenburg had been serving as acting
President and Chief Executive  Officer since late May, 2007. Prior to that  appointment,  Mr.  Whittenburg
served as President-Urology Services.

On September 28, 2007,  we completed  the sale of our Rocky  Mountain  Prostate  business.  As a result of
this  sale we  received  proceeds  totaling  $1.35  million  in cash and  recognized  a gain of  $450,000.
Accordingly,  all  activities  related to our Rocky  Mountain  Prostate  business  have been  included  in
discontinued operations in the accompanying condensed consolidated financial statements.Critical Accounting Policies and Estimates

Management has identified the following critical accounting policies and estimates:

Impairments of goodwill and other intangible assets are both a critical accounting policy and estimate
that require judgment and are based on assumptions of future operations. We are required to test for
impairments at least annually or if circumstances change that would reduce the fair value of a reporting
unit below its carrying value. We test for impairment of goodwill during the fourth quarter. We now have
two reporting units, urology services and medical products. The fair value of each reporting unit is
estimated using a combination of the income, or discounted cash flows, approach and the market approach,
which utilizes comparable companies data.  Because we have recognized goodwill based solely on our
controlling interest, the fair value of each reporting unit also relates only to our controlling
interest.  If the carrying amount of a reporting unit exceeds its fair value, the second step of the
goodwill impairment test is performed to measure the amount of impairment loss, if any.  The second step
of the goodwill impairment test compares the implied fair value of the reporting units goodwill with
the carrying value of that goodwill.  If the carrying amount of the reporting units goodwill exceeds
the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that
excess.  The implied fair value of goodwill is determined in the same manner as the amount of goodwill
recognized in a business combination.  That is, the fair value of the reporting unit is allocated to all
of the assets and liabilities of that unit as if the reporting unit had been acquired in a business
combination and the fair value of the reporting unit was the purchase price paid to acquire the
reporting unit.  Both the income approach and the market approach require significant assumptions to
determine the fair value of  each reporting unit.  The significant assumptions used in the income
approach include estimates of our future revenues, profits, capital expenditures, working capital
requirements, operating plans, industry data and other relevant factors.  The significant assumptions
utilized in the market approach include the determination of appropriate market comparables, the
estimated multiples of revenue, EBIT and EBITDA a willing buyer is likely to pay, and the estimated
control premium a willing buyer is likely to pay.  For a discussion of our 2007 and 2006 goodwill
impairments and the specific assumptions used in the income and market approaches in the 2007 and 2006
analyses, see footnote C to our consolidated financial statements included elsewhere in this Annual
Report on Form 10-K.
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|A second critical  accounting  policy and estimate which requires  judgment of management is the estimated
allowance for doubtful  accounts and  contractual  adjustments.  We have based our estimates on historical
collection  amounts,  current  contracts  with  payors,  current  changes  of the facts and  circumstances
relating to these matters and certain negotiations with related payors.

A third  critical  accounting  policy is  consolidation  of our  investment  in  partnerships  or  limited
liability  companies  (LLCs)  where we, as the general  partner or  managing  member,  exercise  effective
control,  even though our ownership is less than 50%. The consolidated  financial  statements  include our
accounts,  our  wholly-owned  subsidiaries,  and entities more than 50% owned and limited  partnerships or
LLCs where we, as the general partner or managing  member,  exercise  effective  control,  even though our
ownership is less than 50%. The related  agreements  provide us with broad  powers.  The other  parties do
not  participate  in the  management of the entity and do not have the  substantial  ability to remove us.
Investment in entities in which our  investment is less than 50% ownership and we do not have  significant
control are accounted for by the equity method if ownership is between  20%50%,  or by the cost method if
ownership is less than 20%. We have  reviewed each of the  underlying  agreements  and  determined we have
effective  control;  however,  if it was determined this control did not exist, these investments would be
reflected on the equity  method of  accounting.  Although this would change  individual  line items within
our  consolidated  financial  statements,  it  would  have  no  effect  on our  net  income  and/or  total
stockholders equity.Year ended December 31, 2007 compared to the year ended December 31, 2006

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

Our costs of services and general and administrative expenses for 2007 decreased $7,726,000 (6%)
compared to 2006.  Our cost of services associated with our urology services operations increased
$2,228,000 (4%) in 2007 as compared with 2006.  The cause of this increase relates primarily to
increased rental expenses paid on Revolix units leased from our medical products division of $1,500,000
and a decrease in gains resulting from sales of various partnership interests in 2007 as compared to
2006 of $969,000 which are recorded against operating expenses.  This was partially offset by lower
laser supply costs of $1,087,000, which corresponds to more partnerships utilizing the Revolix laser as
compared to the greenlight laser.  Our cost of services associated with our medical products operations
for 2007 decreased $5,572,000 (33%) compared to 2006.  The primary cause of this decrease relates to
significant decreases in external sales of lithotripters and tables in 2007, a cost reduction recorded
as a result of the receipt of lease payments from our urology services division on Revolix units noted
above, partially offset by approximately $900,000 in increased expenses at our new lab.  A significant
portion of medical products costs relate to providing maintenance services to our urology services
segment and are allocated to the urology services segment.  In the future we expect margins in medical
products to continue to vary significantly from period to period based on the mix of intercompany and
third-party sales.  Our selling, general and administrative costs decreased $4,414,000 (22%) in 2007 as
compared to 2006.  This is primarily attributable to approximately $1,850,000 in costs paid to strategic
consultants, $1 million in severance payments, $500,000 in higher share based compensation costs which
were incurred in 2006 compared to 2007, as well as approximately $516,000 in decreased personnel,
insurance, marketing, recruiting and other costs.  In addition we received approximately $900,000 as a
result of our former Swiss manufacturing subsidiarys insolvency proceedings in 2007, which was recorded
against selling, general and administrative expenses.
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|In the fourth  quarter of 2007, in connection  with our annual  goodwill  impairment  test, we recorded an
impairment to our urology services  segment  goodwill  totaling $20.8 million.  This impairment was due to
a decrease in our estimated  future  discounted  cash flows for this segment.  This decrease was primarily
caused by lower  projected  growth rates for our laser  operations as well as the timing of certain future
growth  for our IGRT  operations.  In the  fourth  quarter  of 2006,  we  recorded  an  impairment  to our
goodwill  totaling $12.2 million related to our urology  services  segment and $8.4 million related to our
medical  products  segment.  The  impairment  to our  urology  services  segment  was due  primarily  to a
decrease  in  the  number  of  overall  procedures  during  2006,  primarily  across  our  western  region
partnerships,  combined with the loss of certain  partnerships  and contracts late in 2006 to competitors.
The  impairment  in our medical  products  segment  relates  primarily  to our  decision to reduce or exit
certain  product lines,  specifically  patient  management  tables and orthopedic  consumables  during the
fourth quarter of 2006 along with the closing of our European operations.

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

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

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

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

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|Year ended December 31, 2006 compared to the year ended December 31, 2005

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

Our costs of  services  and general and  administrative  expenses  for 2006  increased  $33,907,000  (39%)
compared  to  2005.  Our cost of  services  associated  with our  urology  services  operations  increased
$98,000  (0.2%) in 2006 as compared with 2005.  The primary  cause of this  increase  relates to increased
salaries and benefits  costs of $640,000  related to annual merit  increases,  increased  rental  expenses
paid to our  medical  products  segment on Revolix  units of  approximately  $900,000,  and an increase in
expenses  related to a new entity of  approximately  $811,000  in 2006.  This was  partially  offset by an
increase in capital gains of $938,000  resulting  from sales of various  partnership  interests,  which is
recorded  against  divisional  expenses  and  decreases  in  laser  supply  costs  of  $1,013,000,   which
corresponds  to our  shift  from  the  greenlight  laser  to the  Revolix  laser.  Our  cost  of  services
associated  with our medical  products  operations for 2006 increased  $7,572,000  (82%) compared to 2005.
The primary causes of this increase  relate to  approximately  $4 million in increased costs of goods sold
related  to  increased  sales to  outside  customers  as well as  certain  inventory  write  downs  due to
discontinued  product  lines in late 2006,  $1.2 million in increased  costs at our new lab,  increases in
salaries and benefits  expenses of $600,000  primarily related to increased head count in our sales force,
increased legal expenses of $400,000 and increased  expenses of $750,000  related to increased  insurance,
consulting and  professional  fees and bad debt expense.  A significant  portion of medical products costs
relate to  providing  maintenance  services  to our urology  services  segment  and are  allocated  to the
urology  segment.  In the future we expect margins in medical products to vary  significantly  from period
to  period  based  on  the  mix  of  intercompany  and  third-party   sales.  Our  selling,   general  and
administrative  costs  increased  $5,806,000  (40%)  in 2006  as  compared  to  2005.  This  is  primarily
attributable  to  increases  in 2006 in salaries  and benefit  expenses of $700,000  primarily  related to
increases in our marketing head count,  costs related to severance  payments of  approximately $1 million,
$1.5  million  in new  costs  related  to share  based  compensation  expense,  and $1.8  million  paid to
strategic consultants in 2006.

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

On June 22, 2006, we entered into an agreement to sell our specialty vehicle manufacturing segment.
Accordingly, in 2005 we have classified this segment as held for sale in the accompanying consolidated
financial statements.  The sale was completed on July 31, 2006.  As a result of the sale we realized a
gain of $53.6 million, which is included in discontinued operations in the accompanying financial
statements.  This gain utilized approximately $20.4 million of our deferred tax assets.
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|Depreciation and amortization expense decreased $169,000 in 2006 compared to 2005.

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

Provision  for income taxes in 2006  decreased  $11,065,000  compared to 2005 due to a decrease in taxable
income,  primarily  related  to  our  goodwill  impairment  recorded  in  2006.  Our  effective  tax  rate
significantly  increased in 2006 as compared to 2005, since  approximately half of our goodwill impairment
was not deductible for tax purposes.2008 Outlook

As discussed above under Recent  Developments,  the urology services  segment  experienced a decrease in
overall  lithotripsy  procedures  during 2007 (as compared to 2006),  primarily  across our western region
partnerships,  combined with loss of certain  partnerships  and  contracts in the fourth  quarter of 2006.
In addition,  we exited or reduced sales efforts in certain product lines in the medical  products segment
in the fourth  quarter of 2006.  The numbers of  procedures  performed  have  remained  relatively  stable
over the third and  fourth  quarters  of 2007.  We intend to  increase  our  urology  services  operations
primarily  through  forming  new  operating  partnerships  in new markets as well as by  acquisitions.  We
intend to grow our medical  products  operations  by offering new  equipment  and  expanding  our customer
base.  As of the date of filing  this  Annual  Report  on Form  10-K,  we  anticipate  that the  levels of
revenues  and income from  continuing  operations  (exclusive  of goodwill  impairments)  for 2008 will be
materially  consistent  with the reported  financial  results for 2007, but we cannot  provide  assurances
that  the  2008  results  will be  materially  consistent  with our 2007  results.  See  Forward  Looking
Statements under this Item 7 and Risk Factors under Part I, Item 1.Liquidity and Capital ResourcesCash Flows

Our  cash  and  cash  equivalents  were  $25,198,000  and  $27,857,000  at  December 31,  2007  and  2006,
respectively.  Our  subsidiaries  generally  distribute  all of  their  available  cash  quarterly,  after
establishing  reserves  for  estimated  capital  expenditures  and  working  capital.  For the years ended
December 31,   2007  and  2006,  our  subsidiaries  distributed  cash  of  approximately  $42,736,000  and
$46,969,000, respectively, to minority interest holders.

Cash  provided  by  our  operations,   after  minority  interest,  was  $61,877,000  for  the  year  ended
December 31,  2007 and $48,892,000 for the year ended December 31,  2006. From 2006 to 2007, fee and other
revenue  collected  decreased by $1,837,000 due primarily to decreased  revenues.  Cash paid to employees,
suppliers of goods and others  decreased by $874,000 in 2007.  This  fluctuation  is  attributable  to the
significant payoff of accrued expenses in 2007 partially offset by a decrease in our overall expenses.

Cash used by our investing activities for the year ended December 31, 2007, was $18,757,000. We used
approximately $8 million in cash to acquire our interests in the new Keystone partnership and we used $4
million to acquire increased ownership in two other partnerships.  We purchased equipment and leasehold
improvements totaling $9,469,000 in 2007. Cash used by our investing activities for the year ended
December 31, 2006, was $128,409,000, primarily due to cash from discontinued operations which was
$138,971,000 and represents the sales proceeds from the sale of our specialty vehicle manufacturing
segment, partially offset by $11,902,000 in equipment and leasehold improvements purchases.
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|Cash used in our financing  activities for the year ended  December 31,  2007, was $45,581,000,  primarily
due to  distributions  to minority  interests of  $42,736,000  and payments on notes payable of $5,760,000
partially offset by borrowings on notes payable of $2,546,000.  Cash used in our financing  activities for
the year ended December 31,  2006, was $175,369,000,  primarily due to distributions to minority interests
of $46,969,000 and net payments on notes payable of $129,600,000  which included  repayment in full of our
term loan B.  We also received $1,907,000 in proceeds from the exercise of stock options in 2006.

Accounts receivable as of December 31,  2007 has decreased $863,000 from December 31,  2006. This decrease
relates primarily to lower revenues as well as to the timing of collections.

Inventory as of December 31, 2007 totaled $10,221,000 and decreased $1,253,000 from December 31, 2006.Senior Credit Facility

Our senior  credit  facility is comprised of a five-year  $50 million  revolver and a $125 million  senior
secured  term loan B due 2011.  We entered  into this  senior  credit  facility  in March  2005.  The loan
bears  interest  at a variable  rate  equal to LIBOR + 1.25 to 2.25% or prime + .25 to 1.25%.  On July 31,
2006, we used a portion of the proceeds from the sale of our specialty  vehicle  manufacturing  segment to
repay the term loan B in full.  As of December  31,  2007,  there were no amounts  drawn on the  revolver.
Our senior credit facility contains  covenants that, among other things,  limit our ability to incur debt,
create liens, make investments,  sell assets, pay dividends,  make capital  expenditures,  make restricted
payments,  enter into  transactions  with affiliates,  and make  acquisitions.  In addition,  our facility
requires us to maintain  certain  financial  ratios.  We were in compliance  with the covenants  under our
senior credit facility as of December 31, 2007.8.75% Notes

In April  2005,  our $125  million  term loan B referred  to above was funded and we used the  proceeds to
redeem the $100 million of unsecured  senior  subordinated  notes. The notes were subject to an 8.75% rate
of interest and interest was payable semi-annually on April 1st and October 1st.OtherOther long term debt.  As of December 31, 2007, we had notes  totaling  $8.5 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 LIBOR or prime  plus a certain  premium  and are due over the next
three years.Other long term obligations. At December 31, 2007, we had an obligation totaling $75,000 related to
payments to the previous owner of Aluminum Body Corporation, a wholly owned subsidiary of ours that we
sold as part of the sale of our specialty vehicles manufacturing segment (ABC), for $75,000 per
quarter until March 31, 2008 as consideration for a noncompetition agreement. Also at December 31, 2007,
as part of our acquisition of Medstone International Inc. in February 2004, we had an obligation
totaling $58,338 related to payments to an employee for $4,167 a month continuing until February 28,
2009 as consideration for a noncompetition agreement. We have an obligation totaling $100,000 related to
payments of $3,333 a month until June 15, 2010 as consideration for a noncompetition agreement with a
previous employee of our Medical Products division.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|26
|--



---

|Unrecognized  Tax  Benefits:  As of December 31, 2007, we had $2.3 million of  unrecognized  tax benefits.
This  represents the tax benefits  associated  with various tax positions  taken, or expected to be taken,
on domestic and  international  tax returns that have not been recognized in our financial  statements due
to uncertainty  regarding their  resolution.  The resolution or settlement of these tax positions with the
taxing  authorities  is at various  stages and therefore we are unable to make a reliable  estimate of the
eventual  cash flows by period that will be required to settle  these  matters.  In  addition,  certain of
these  matters  may not  require  cash  settlement  due to the  existence  of credit  and  operating  loss
carryforwards  as well as other offsets,  including the indirect  benefit from other taxing  jurisdictions
that may be available.General

The following table presents our contractual obligations as of December 31, 2007 (in thousands):
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                             | Payments due by period
|---------------------------- | ----------------------
|
|Long Term Debt (1)           |                       
|Operating Leases
 (2)        |                       
|Non-compete contracts (3)    |                       
|Unrecognized tax benefit (4) |                       
|                             |                       
|Total                        |                       
|                             |                       

| | (1) | Represents long term debt as discussed above.
| | --- | ---------------------------------------------

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

| | (3) | Represents an obligation of $75 due to the previous owner of one of our subsidiaries, at a rate of $75
per quarter until March 2008, an obligation of $58 due to an employee of Medstone, at a rate of $4 per
month continuing until February 28, 2009, and an obligation of $100 due to a previous employee of ours,
at a rate of $3 per month until June 15, 2010.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Represents unrecognized tax benefits as discussed above.
| | --- | --------------------------------------------------------

|In addition, the scheduled principal repayments for all long term debt as of December 31, 2007 are
payable as follows:
|----------------------------------------------------------------------------------------------------------------------

| | ($ in thousands)
| | ----------------
| | 2008            
| | 2009            
| | 2010            
| | 2011            
| | 2012            
| | Thereafter      
| |                 
| | Total           
| |                 

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

We intend to increase our urology services operations primarily through forming new operating
subsidiaries in new markets as well as by acquisitions. We seek opportunities to grow our medical
products operations by offering new equipment and expanding our customer base. We intend to fund the
purchase price for future acquisitions and developments using borrowings under our senior credit
facility and cash flows from our operations. In addition, we may use shares of our common stock in such
acquisitions where we deem appropriate.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|27
|--



---

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

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

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

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

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

|28
|--



---

|In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures
about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. In December 2007, the FASB released a proposed FASB Staff
Position (FSP FAS 157-b-Effective Date of FASB Statement No. 157) which, if adopted as proposed, would
delay the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the financial statements on a recurring basis
(at least annually). Based on our current operations, we do not expect that the adoption of SFAS 157
will have a material impact on our financial position or results of operations.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|29
|--



---

# ITEM 7A.
    
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

|Interest Rate Risk

As of December 31, 2007, we had long-term debt (including current portion) totaling $8,526,000, of which
$6,132,000 had fixed rates of 1% to 11%, and $2,394,000 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 $2,394,000.  We make monthly or quarterly payments of principal and interest on $1,201,000
of the floating rate debt.  An increase in interest rates of 1% would result in a $12,000 annual
increase in interest expense on this existing principal balance
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# ITEM 8.
    
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

|None.
|-----

# ITEM 9A.
    
CONTROLS AND PROCEDURES

|(a)      Disclosure Controls and Procedures

As of December 31, 2007,  under the supervision and with the  participation  of our management,  including
our Chief  Executive  Officer  (our  principal  executive  officer) and our Chief  Financial  Officer (our
principal  financial  officer),  we evaluated the effectiveness of our disclosure  controls and procedures
(as defined  under Rule  13a-15(e)  of the  Securities  Exchange Act of 1934,  as amended  (the  Exchange
Act)).  Based on this evaluation,  our Chief Executive  Officer and our Chief Financial Officer concluded
that, as of December 31, 2007, our disclosure controls and procedures were effective.(b)      Managements Report on Internal Control Over Financial Reporting

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

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

Our  management  assessed  the  effectiveness  of our  internal  control  over  financial  reporting as of
December 31,  2007 based on the criteria set forth by the  Committee of  Sponsoring  Organizations  of the
Treadway Commission (COSO) in its report entitled Internal ControlIntegrated Framework.

Based on this  assessment,  our management  concluded that, as of December 31, 2007, our internal  control
over financial reporting was effective based on those criteria.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|30
|--



---

|Ernst & Young,  LLP, our  independent  registered  public  accounting  firm, has issued an audit report on
managements  assessment of our internal  control over financial  reporting.  The report of Ernst & Young,
LLP is included herein.(c)      Changes in Internal Control over Financial Reporting

There have been no changes in our internal  control over  financial  reporting  that  occurred  during the
three  months  ended  December  31,  2007 that  have  materially  affected,  or are  reasonably  likely to
materially affect, such internal control over financial reporting.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# ITEM 9B.
    
OTHER INFORMATION

|In the fourth  quarter of 2007, in connection  with our annual  goodwill  impairment  test, we recorded an
impairment to our urology services  segment  goodwill  totaling $20.8 million. This impairment was due to
a decrease in our estimated  future  discounted  cash flows for this segment. This decrease was primarily
caused by lower  projected  growth rates for our laser  operations as well as the timing of certain future
growth  for our IGRT  operations.  For  further  discussion  of this  impairment,  see  footnote  C to our
consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|31
|--



---

|Report of Independent Registered Public Accounting Firm
|-------------------------------------------------------

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


We have audited  HealthTronics,  Inc.s internal control over financial reporting as of December 31, 2007,
based on  criteria  established  in  Internal  ControlIntegrated  Framework  issued by the  Committee  of
Sponsoring  Organizations  of  the  Treadway  Commission  (the  COSO  criteria).   HealthTronics,   Inc.s
management is responsible for maintaining  effective  internal control over financial  reporting,  and for
its  assessment  of the  effectiveness  of  internal  control  over  financial  reporting  included in the
accompanying  Managements Report on Internal Control over Financial  Reporting.  Our responsibility is to
express an opinion on the companys internal control over financial reporting based on our audit.

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

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

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

In our opinion,  HealthTronics,  Inc.  maintained,  in all material  respects,  effective internal control
over financial reporting as of December 31, 2007, based on the COSO criteria.

We also have audited,  in accordance with the standards of the Public Company  Accounting  Oversight Board
(United States), the consolidated  balance sheets of HealthTronics,  Inc. as of December 31, 2007, and the
related consolidated  statements of operations,  shareholders  equity, and cash flows for year then ended
of HealthTronics, Inc. and our report dated March 6, 2008, expressed an unqualified opinion thereon./s/: Ernst & Young LLP
Austin, Texas
March 6, 2008
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|32
|--



---

|PART III
|--------

# ITEM 10.
    
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

|The information  required by this item will be contained in our definitive  proxy statement to be filed in
connection  with our 2008  annual  meeting of  stockholders,  except  for the  information  regarding  our
executive  officers,  which is presented  in Part I of this Form 10-K.  The  information  required by this
item contained in our definitive proxy statement is incorporated herein by reference.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# ITEM 11.
    
EXECUTIVE COMPENSATION

|The information  required by this item will be contained in our definitive  proxy statement to be filed in
connection with our 2008 annual meeting of stockholders and is incorporated herein by reference.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|The information  required by this item will be contained in our definitive  proxy statement to be filed in
connection with our 2008 annual meeting of stockholders and is incorporated herein by reference.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|The information  required by this item will be contained in our definitive  proxy statement to be filed in
connection with our 2008 annual meeting of stockholders and is incorporated herein by reference.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# ITEM 14.
    
     PRINCIPAL ACCOUNTANT FEES AND SERVICES

|The information  required by this item will be contained in our definitive  proxy statement to be filed in
connection with our 2008 annual meeting of stockholders and is incorporated herein by reference.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|33
|--



---

|PART IV
|-------

# ITEM 15.
    
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

|(a) 1. Financial Statements.         
The information required by this item is contained in Appendix A attached hereto.
|-----------------------------------------------------------------------------------------------------------------------

(b) Exhibits. (1)

| | 3.1    
     
     
 3.2    
     
 
 3.3    
     
 4.1    
     
 10.1   
 
     
 10.2   
     
 
 10.3*  
     
 
 10.4*  
     
 
 10.5*  
     
 10.6*  
 
     
 10.7*  
 
     
 10.8*  
     
 10.9*  
     
 10.10* 
     
 10.11* 
 10.12* 
 10.13 | Amended  and  Restated  Articles  of  Incorporation  of  the  Company  (Incorporated  by
          reference  to Annex D to the Rule  424(b)(3)  joint  proxy  statement/prospectus,  dated
          October 6, 2004, filed by HealthTronics with the SEC on October 7, 2004)
          Amended and  Restated  Bylaws of the Company  (Incorporated  by  reference to Annex E to
          the Rule 424(b)(3) joint proxy  statement/prospectus,  dated  October 6,  2004, filed by
          HealthTronics with the SEC on October 7, 2004)
          First  Amendment  to  Bylaws  of  HealthTronics,  Inc.  (incorporated  by  reference  to
          Exhibit 3.1 of HealthTronics Current Report Form 8-K filed on December 17, 2007.)
          Specimen  of Common  Stock  Certificate  (Filed as an  Exhibit  to the HSS  Registration
          Statement on Form S-4 (Registration No. 33-56900))
          Form of  Indemnification  Agreement  dated  October  11,  1993  between  the Company and
          certain of its  officers  and  directors  (Filed as an Exhibit to the Current  Report on
          Form 8-K of Prime dated October 18, 1993)
          Release and  Severance  Agreement  dated  December 30, 2001 by and between Prime Medical
          Services  Inc. and Kenneth S. Shifrin  (Filed as an Exhibit to the Annual Report on Form
          10-K of Prime for the year ended December 31, 2001)
          Amended and  Restated  1993 Stock  Option  Plan,  as amended  June 18, 2002 (Filed as an
          Exhibit  to the  Annual  Report on Form 10-K of Prime for the year  ended  December  31,
          2002)
          Prime  Medical  Services,  Inc.,  2003 Stock Option Plan  (Incorporated  by reference to
          Annex D of the Rule 424(b)(3) joint proxy  statement/prospectus,  dated January 7, 2004,
          filed by Prime with the SEC on January 8, 2004)
          HealthTronics  2004 Equity Incentive Plan  (Incorporated by reference to Exhibit 10.2 to
          HealthTronics current report on Form 8-K filed on January 25, 2005)
          Form of Board Service and Release  Agreement by and between  HealthTronics  and Argil J.
          Wheelock,  M.D. (Filed as Exhibit 10.22  to the HSS  Registration  Statement on Form S-4
          (Registration No. 333-117102))
          Board  Service,  Amendment  and  Release  Agreement  by and  between  HealthTronics  and
          Kenneth S.  Shifrin  (Incorporated  by reference  to the HSS  Registration  Statement on
          Form S-4 (Registration No. 333-117102))
          HSS  Stock  Option  Plan  -  2002   (Incorporated   by  reference  to  Exhibit  10.1  of
          HealthTronics Current Report on Form 8-K filed on January 25, 2005)
          HSS Stock  Option Plan - 2001  (Incorporated  by  reference  to Appendix A to HSS proxy
          statement filed with the SEC on April 18, 2001)
          HSS Stock  Option Plan - 2000  (Incorporated  by  reference  to Appendix A to HSS proxy
          statement filed with the SEC on April 25, 2000)
          Form of Incentive Stock Option Agreement
          Form of Nonstatutory Stock Option Agreement
          Credit  Agreement,  dated as of March 23, 2005,  among  HealthTronics,  Inc. the lenders
          party thereto,  Bank of America,  N.A., as Syndication  Agent,  and JPMorgan Chase Bank,
          National  Association,   as  Administrative  Agent  for  the  lenders  (Incorporated  by
          reference to Exhibit 10.1 of the Companys  10-Q filed with the  Securities and Exchange
          Commission on November 8, 2005).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|34
|--



---

| | 10.14*
10.15*
10.16
10.17*
10.18*
10.19*
10.20*
10.21*
10.22
10.23
10.24
10.25
10.26*
10.27* | Executive Employment Agreement,  effective October 1, 2005, by and between  HealthTronics,  Inc. and
                  James S. B.  Whittenburg  (incorporated  by reference to  Exhibit 99.4  to the Companys
                  Form 8-K filed with the Securities and Exchange Commission on September 27, 2005).
        First Amendment to the  HealthTronics,  Inc. 2004 Equity Incentive Plan (incorporated by
        reference  to  Exhibit  10.1 to  HealthTronics  Quarterly  Report  on Form 10-Q for the
        quarter ended June 30, 2005, filed on August 5, 2005).
        Form of  Indemnification  Agreement for directors and certain  officers of HealthTronics
        (incorporated  by  reference to Exhibit 99.1 to  HealthTronics  Current  Report on Form
        8-K filed on June 1, 2005).
        First  Amendment to Board Service and Release  Agreement,  dated as of March 2, 2006, by
        and between  HealthTronics  and Argil J. Wheelock,  M.D.  (incorporated  by reference to
        Exhibit 10.1 of HealthTronics Current Report Form 8-K filed on March 8, 2006.)
        Second  Amendment  to  the  Companys  2004  Equity  Incentive  Plan   (incorporated  by
        reference to Exhibit  10.1 to the  Companys  Current  Report on Form 8-K filed with the
        Securities and Exchange Commission on June 14, 2006.)
        Form of  Restricted  Stock Award  Agreement  (incorporated  by reference to Exhibit 10.2
        to the  Companys  Current  Report on Form 8-K filed with the  Securities  and  Exchange
        Commission on June 14, 2006).
        Executive   Employment   Agreement,   effective   January  8,  2007,   by  and   between
        HealthTronics  and Ross A.  Goolsby  (incorporated  by  reference to Exhibit 10.1 to the
        Companys  Current Report on Form 8-K filed with the Securities and Exchange
  Commission         on December 11, 2006).
        Second  Amendment to Executive  Employment  Agreement,  dated as of October 26, 2007, by
        and between HealthTronics,  Inc. and James S. B. Whittenburg  (incorporated by reference
        to  Exhibit 10.1  to the  Companys  Form 8-K filed  with the  Securities  and  Exchange
        Commission on November 1, 2007).
        Stock  Purchase  Agreement,  dated as of February 13, 2007, by and among  HealthTronics,
        Inc.,  Lithotripters,  Inc.,  Keystone ABG Inc.,  Keystone Kidney Associates,  PC, David
        Arsht, D.O., P. Kenneth Brownstein,  M.D., Larry E. Goldstein,  M.D. and Michael Dernoga
        (incorporated  by reference to Exhibit 10.1 to the Companys  Current Report on Form 8-K
        filed with the Securities and Exchange Commission on February 20, 2007).
        Interest   Purchase   Agreement,   dated  as  of  February  13,   2007,   by  and  among
        HealthTronics,  Inc.,  Lithotripters,  Inc., David Arsht,  D.O., P. Kenneth  Brownstein,
        M.D.,  Larry E.  Goldstein,  M.D.  and Michael  Dernoga  (incorporated  by  reference to
        Exhibit 10.2 to the Companys  Current  Report on Form 8-K filed with the Securities and
        Exchange Commission on February 20, 2007).
        Amended and Restated  Distribution  Agreement,  dated as of February  28,  2007,  by and
        among  HealthTronics,   Inc.,  Lisa  Laser  USA,  Inc.,  and  LISA  laser  products  OHG
        (incorporated  by reference to Exhibit 10.1 to the Companys  Current Report on Form 8-K
        filed with the Securities and Exchange Commission on March 6, 2007).
        First Amendment to Interest Purchase  Agreement,  dated as of May 25, 2007, by and among
        HealthTronics,  Inc.,  Lithotripters,  Inc., David Arsht,  D.O., P. Kenneth  Brownstein,
        M.D.,  Larry E.  Goldstein,  M.D.  and Michael  Dernoga  (incorporated  by  reference to
        Exhibit 10.2 to the Companys  Current  Report on Form 8-K filed with the Securities and
        Exchange Commission on May 31, 2007).
        Termination   and   Consulting   Agreement,   dated  July  9,  2007,   by  and  between
        HealthTronics,  Inc.  and  Christopher  B.  Schneider.  (incorporated  by  reference  to
        Exhibit 10.2 to the Companys  Current  Report on Form 8-K filed with the Securities and
        Exchange Commission on July 12, 2007).
        First Amendment to Executive Employment  Agreement,  dated as of August 10, 2007, by and
        between  HealthTronics,  Inc. and James S. B. Whittenburg  (incorporated by reference to
                  Exhibit 10.1 to the Companys  Current  Report on Form 8-K filed with the Securities and
                  Exchange Commission on August 15, 2007).
| | -------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|35
|--



---

| | 21.123.123.231.131.232.132.2 | List of subsidiaries of the Company.  (Filed herewith)
   Consent of Independent Registered Public Accounting Firm.   (Filed herewith)
   Consent of Independent Registered Public Accounting Firm.   (Filed herewith)
   Certification of Chief Executive Officer.  (Filed herewith)
   Certification of Chief Financial Officer.  (Filed herewith)
   Certification of Chief Executive Officer.  (Filed herewith)
Certification of Chief Financial Officer.  (Filed herewith)
| | ---------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|_____________________
*    Executive compensation plans and arrangements.
|-------------------------------------------------------------------------

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

|36
|--



---

|SIGNATURES
|----------

|Pursuant  to the  requirements  of  Section  13 or  15(d) of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this report to be signed on its behalf by the  undersigned,  thereunto  duly
authorized.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | HEALTHTRONICS, INC.By: /s/ James S. B. Whittenburg
        James S. B. Whittenburg,
       Chief Executive Officer and 
        President (Principal Executive Officer)
       Date: March 11, 2008
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|By:          
Date: 
By:          Date: 
By:          Date: 
By:          Date: 
By:          Date: 
By:          Date: | /s/
James S. B. Whittenburg 
James S. B. Whittenburg,

         Chief Executive Officer and
         President (Principal Executive Officer)
         and Director


March 11, 2008/s/

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

March 11, 2008/s/
R. Steven Hicks 
         R. Steven Hicks, Non-executive Chairman of the Board

March 11, 2008/s/
         Donny R. Jackson 
         Donny R. Jackson, Director

March 11, 2008/s/
         Timothy J. Lindgren 
         Timothy J. Lindgren, Director

March 11, 2008
/s/
Kevin A. Richardson II 
Kevin A. Richardson II, Director

March 11, 2008
|----------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|37
|--



---

|By:          
Date: 
By:          Date: 
By:          Date: 
By:          Date: | /s/

         Kenneth S. Shifrin 
         Kenneth S. Shifrin, Director

March 11, 2008/s/
                 Perry M. Waughtal 
         Perry M. Waughtal, Director

March 11, 2008/s/
Argil J. Wheelock, M.D. 
Argil J. Wheelock, M.D., Director

March 11, 2008
/s/
         Mark G. Yudof 
         Mark G. Yudof, Director

March 11, 2008
|------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|38
|--



---

|APPENDIX A
|----------

|INDEX
|-----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Page               
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------
|
|Reports of Independent Registered Public Accounting Firms
Consolidated Financial Statements:    
     Consolidated Statements of Income for the years ended December 31, 2007, 2006     and 2005.    
     Consolidated Balance Sheets at December 31, 2007 and 2006.    
     Consolidated  Statements  of  Stockholders  Equity for the years ended  December 31, 2007,    
     2006 and 2005.    
     Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005.    
     Notes to Consolidated Financial Statements. | A-2A-4A-5A-7A-8A-11

|A-1
|---



---

|Report of Independent Registered Public Accounting Firm
|-------------------------------------------------------

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

We have audited the accompanying  consolidated  balance sheets of HealthTronics,  Inc. and subsidiaries as
of December 31, 2007 and 2006, and the related consolidated  statements of income,  stockholders'  equity,
and cash  flows  for each of the two  years in the  period  ended  December  31,  2007.  These  financial
statements  are the  responsibility  of the Company's  management.  Our  responsibility  is to express an
opinion on these financial statements and based on our audits.

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

In our opinion, the financial statements  referred to above present fairly, in all material respects,  the
consolidated  financial  position of  HealthTronics,  Inc. and subsidiaries at December 31, 2007 and 2006,
and the  consolidated  results  of its  operations  and its cash  flows  for each of the two  years in the
period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in Note I to the consolidated  financial  statements,  effective January 1, 2006, the Company
changed its method of  accounting  for  stock-based  compensation  to conform to  Statement  of  Financial
Accounting  Standards  No.  123(R),  Share-Based  Payment.  As  discussed  in  Note J to the  consolidated
financial  statements,  effective January 1, 2007, the Company changed its method of accounting for income
taxes to conform to Financial  Accounting  Board  Interpretation  No. 48,  Accounting  for  Uncertainty in
Income Taxes.

We also have audited,  in accordance with the standards of the Public Company  Accounting  Oversight Board
(United  States),  the  effectiveness  of  HealthTronics,  Inc. and  subsidiaries  internal  control over
financial   reporting   as  of   December   31,   2007,   based  on  criteria   established   in  Internal
Control-Integrated  Framework  issued  by the  Committee  of  Sponsoring  Organizations  of  the  Treadway
Commission and our report dated March 6, 2008, expressed an unqualified opinion thereon./s/: Ernst & Young LLP  
Austin, Texas
March 6, 2008
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-2
|---



---

|Report of Independent Registered Public Accounting Firm
|-------------------------------------------------------

|The Board of Directors and Stockholders
HealthTronics, Inc:

We have audited the accompanying  consolidated statements of income,  stockholders equity, and cash flows
of  HealthTronics,  Inc.  and  subsidiaries  for the year ended  December  31,  2005.  These  consolidated
financial  statements  are the  responsibility  of the  Companys  management.  Our  responsibility  is to
express an opinion on these consolidated financial statements based on our audit.

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

In our opinion,  the consolidated  financial  statements referred to above present fairly, in all material
respects,  the results of operations and the cash flows of  HealthTronics,  Inc. and  subsidiaries for the
year ended December 31, 2005, in conformity with U.S. generally accepted accounting principles./s/: KPMG LLP
Austin, Texas

April 13, 2006, except as to Note L, 2005 information related
to Specialty Vehicles Manufacturing, CryoSurgery, Rocky Mountain Prostate
Thermotherapies, and HIFU discontinued operations, which is as of March 12, 2007
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-3
|---



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF INCOME
|-------------------------------------------------------------------------------------

|($ in thousands, except per share data)                   | Years Ended December 31,
|--------------------------------------------------------- | ------------------------
|
|Revenue:                                                  |                         
|Urology Services                                          |                         
|Medical Products                                          |                         
|Other                                                     |                         
|                                                          |                         
|Total revenue                                             |                         
|                                                          |                         
|Cost of services and general and administrative expenses: |                         
|Urology Services                                          |                         
|Medical Products                                          |                         
|Selling, general and administrative                       |                         
|Impairment charges                                        |                         
|Depreciation and amortization                             |                         
|                                                          |                         
|                                                          |                         
|                                                          |                         
|Operating income                                          |                         
|                                                         
|Other income (expenses):                                  |                         
|Interest and dividends                                    |                         
|Interest expense                                          |                         
|                                                          |                         
|                                                          |                         
|                                                          |                         
|Income from continuing operations before provision        |                         
|for income taxes and minority interest                    |                         
|                                                         
|Minority interest in consolidated income                  |                         
|Provision (benefit) for income taxes                      |                         
|                                                          |                         
|Income (loss) from continuing operations                  |                         
|Income (loss) from discontinued operations, net of tax    |                         
|                                                          |                         
|Net income (loss)                                         |                         
|                                                          |                         
|Basic earnings per share:                                 |                         
|Income (loss) from continuing operations                  |                         
|Income (loss) from discontinued operations                |                         
|                                                          |                         
|Net income (loss)                                         |                         
|                                                          |                         
|Weighted average shares outstanding                       |                         
|                                                          |                         
|Diluted earnings per share:                               |                         
|Income (loss) from continuing operations                  |                         
|Income (loss) from discontinued operations                |                         
|                                                          |                         
|Net income (loss)                                         |                         
|                                                          |                         
|Weighted average shares outstanding                       |                         
|                                                          |                         

|See accompanying notes to consolidated financial statements.
|------------------------------------------------------------

|A-4
|---



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
|-----------------------------------------------------------------

|($ in thousands)                                 | December 31,
|------------------------------------------------ | ------------
|
|ASSETS                                           |             
|                                                
|Current assets:                                  |             
|Cash and cash equivalents                        |             
|Accounts receivable, less allowance for doubtful |             
|accounts of $2,368 in 2007 and $2,166 in 2006    |             
|Other receivables                                |             
|Deferred income taxes                            |             
|Prepaid expenses and other current assets        |             
|Inventory                                        |             
|                                                 |             
|Total current assets                             |             
|                                                 |             
|Property and equipment:                          |             
|Equipment, furniture and fixtures                |             
|Building and leasehold improvements              |             
|                                                 |             
|                                                 |             
|Less accumulated depreciation and                |             
|amortization                                     |             
|                                                 |             
|Property and equipment, net                      |             
|                                                 |             
|Assets held for sale                             |             
|Other investments                                |             
|Goodwill, at cost                                |             
|Intangible assets                                |             
|Other noncurrent assets                          |             
|                                                 |             
|                                                 |             
|                                                 |             

|See accompanying notes to consolidated financial statements.
|------------------------------------------------------------

|A-5
|---



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)
|-----------------------------------------------------------------------------

|($ in thousands, except share data)                                             | December 31,
|------------------------------------------------------------------------------- | ------------
|
|LIABILITIES                                                                     |             
|                                                                               
|Current liabilities:                                                            |             
|Current portion of long-term debt                                               |             
|Accounts payable                                                                |             
|Accrued distributions to minority interests                                     |             
|Accrued expenses                                                                |             
|                                                                                |             
|Total current liabilities                                                       |             
|                                                                               
|Liabilities held for sale                                                       |             
|Long-term debt, net of current portion                                          |             
|Other long term obligations                                                     |             
|Deferred income taxes                                                           |             
|                                                                                |             
|Total liabilities                                                               |             
|                                                                               
|Minority interest                                                               |             
|                                                                               
|STOCKHOLDERS' EQUITY                                                            |             
|                                                                               
|Preferred stock, $.01 par value, 30,000,000 shares authorized: none outstanding |             
|Common stock, no par value, 70,000,000 authorized: 35,610,236 issued            |             
|and 35,560,097 outstanding in 2007; 35,475,236 issued and 35,379,831            |             
|outstanding in 2006                                                             |             
|Accumulated earnings                                                            |             
|Treasury stock, at cost, 50,139 shares in 2007 and 95,405 shares in 2006        |             
|                                                                                |             
|Total stockholders' equity                                                      |             
|                                                                                |             
|                                                                                |             
|                                                                                |             

|See accompanying notes to consolidated financial statements.
|------------------------------------------------------------

|A-6
|---



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES


                      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                   For the years ended December 31, 2007, 2006 and 2005
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|($ in thousands, except share data)  | Issued Common Stock | Accumulated | Treasury Stock |           
|------------------------------------ | ------------------- | ----------- | -------------- | ----------
|
|Balance, December 31, 2004           |                     |             |                | 33,196,565
|Net income                           |                     |             |                | --        
|Purchase of treasury stock           |                     |             |                | --        
|Issuance of stock for acquisitions   |                     |             |                | 89,200    
|Exercise of stock options, including |                     |            
|tax benefit totaling $2,509          |                     |             |                | 1,675,207 
|Exercise of stock warrants           |                     |             |                | 49,684    
|                                     |                     |            
|Balance, December 31, 2005           |                     |             |                | 35,010,656
|Net income                           |                     |             |                | --        
|Purchase of treasury stock           |                     |             |                | --        
|Contribution of treasury stock       |                     |             |                | --        
|Issuance of stock for acquisitions   |                     |             |                | 166,666   
|Exercise of stock options, including |                     |            
|tax benefit totaling $69             |                     |             |                | 297,914   
|Share-based compensation             |                     |             |                | --        
|                                     |                     |            
|Balance, December 31, 2006           |                     |             |                | 35,475,236
|Net loss                             |                     |             |                | --        
|Contribution of treasury stock       |                     |             |                | --        
|Share-based compensation             |                     |             |                | 135,000   
|                                     |                     |            
|Balance, December 31, 2007           |                     |             |                | 35,610,236
|                                     |                     |            

|See accompanying notes to consolidated financial statements.
|------------------------------------------------------------

|A-7
|---



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                                CONSOLIDATED STATEMENTS OF CASH FLOWS
|--------------------------------------------------------------------------------------------------------------------------

|($ in thousands)                                              | Years Ended December 31,
|------------------------------------------------------------- | ------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                         |                         
|Fee and other revenue collected                               |                         
|Cash paid to employees, suppliers of goods and others         |                         
|Interest received                                             |                         
|Interest paid                                                 |                         
|Taxes paid                                                    |                         
|Discontinued operations                                       |                         
|                                                              |                         
|Net cash provided by operating activities                     |                         
|                                                              |                         
|CASH FLOWS FROM INVESTING ACTIVITIES:                         |                         
|Purchase of entities, net of cash acquired                    |                         
|Purchases of equipment and leasehold improvements             |                         
|Proceeds from sales of assets                                 |                         
|Distributions from investments                                |                         
|Other                                                         |                         
|Discontinued operations                                       |                         
|                                                              |                         
|Net cash (used in) provided by investing activities           |                         
|                                                              |                         
|CASH FLOWS FROM FINANCING ACTIVITIES:                         |                         
|Borrowings on notes payable                                   |                         
|Payments on notes payable, exclusive of interest              |                         
|Distributions to minority interest                            |                         
|Contributions by  minority interest, net of buyouts           |                         
|Exercise of stock options                                     |                         
|Purchase of treasury stock                                    |                         
|Discontinued operations                                       |                         
|                                                              |                         
|Net cash used in financing activities                         |                         
|                                                              |                         
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS          |                         
|                                                             
|Cash and cash equivalents, beginning of period, includes cash |                         
|from discontinued operations of $(198), $4,650                |                         
|and $2,292 for 2007, 2006 and 2005, respectively              |                         
|                                                              |                         
|Cash and cash equivalents, end of period, includes cash       |                         
|from discontinued operations of $(198) and $4,650             |                         
|for 2006 and 2005 respectively                                |                         
|                                                              |                         

|See accompanying notes to consolidated financial statements.
|------------------------------------------------------------

|A-8
|---



---

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

|($ in thousands)                                            | Years Ended December 31,
|----------------------------------------------------------- | ------------------------
|
|Reconciliation of net income to net cash                    |                         
|provided by operating activities:                           |                         
|Net income (loss)                                           |                         
|Adjustments to reconcile net income (loss) to cash provided |                         
|by operating activities:                                    |                         
|Minority interest in consolidated income                    |                         
|Depreciation and amortization                               |                         
|Provision for uncollectible accounts                        |                         
|Equity in earnings of affiliates                            |                         
|Provision for deferred income taxes                         |                         
|Proceeds from termination of interest rate swap             |                         
|Non-cash share-based compensation                           |                         
|Impairment charges                                          |                         
|Other                                                       |                         
|Discontinued Operations                                     |                         
|Changes in operating assets and liabilities,                |                         
|net of effect of purchase transactions:                     |                         
|Accounts receivable                                         |                         
|Other receivables                                           |                         
|Other assets                                                |                         
|Accounts payable                                            |                         
|Accrued expenses                                            |                         
|                                                            |                         
|Total adjustments                                           |                         
|                                                            |                         
|Net cash provided by operating activities                   |                         
|                                                            |                         

|See accompanying notes to consolidated financial statements.
|------------------------------------------------------------

|A-9
|---



---

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

|($ in thousands)                                                       | Years Ended December 31,
|---------------------------------------------------------------------- | ------------------------
|
|SUPPLEMENTAL INFORMATION OF NON-CASH                                   |                         
|INVESTING AND FINANCING ACTIVITIES:                                    |                         
|                                                                      
|At December 31, the Company had accrued distributions payable          |                         
|to minority interests.  The effect of this transaction was as follows: |                         
|Current liabilities increased by                                       |                         
|Minority interest decreased by                                         |                         
|                                                                      
|In 2007, the Company acquired two lithotripsy partnerships and sold    |                         
|three lithotripsy partnerships.  The net assets and                    |                         
|liabilities acquired/sold were as follows:                             |                         
|Current assets increased by                                            |                         
|Noncurrent assets increased by                                         |                         
|Goodwill increased by                                                  |                         
|Current liabilities increased by                                       |                         
|Other long-term obligations decreased by                               |                         
|Minority interest increased by                                         |                         
|                                                                      
|In 2005, the Company acquired two lithotripsy partnerships and made    |                         
|residual adjustments for 2004 acquisitions.  The acquired              |                         
|assets and liabilities were as follows:                                |                         
|Current assets increased by                                            |                         
|Noncurrent assets increased by                                         |                         
|Goodwill increased by                                                  |                         
|Current liabilities increased by                                       |                         
|Other long-term obligations increased by                               |                         
|Stockholders' equity increased by                                      |                         

|See accompanying notes to consolidated financial statements.
|------------------------------------------------------------

|A-10
|----



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|-----------------------------------------------------------------------------------------------------------------------------

|A.  ORGANIZATION AND OPERATION OF THE COMPANY

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

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

On  November 10,  2004,  Prime  Medical  Services,  Inc.  (Prime)  completed a merger  with  HealthTronics
Surgical Services,  Inc. (HSS) pursuant to which Prime merged with and into HSS, with HealthTronics,  Inc.
(HealthTronics)  as the  surviving  corporation.  Under  the terms of that  agreement,  as a result of the
merger,  Primes  stockholders  received one share of HealthTronics common stock for each share of Primes
common stock.  Because  Primes  stockholders  now own  approximately  62% of the shares of  HealthTronics
common stock due to the merger,  and because Primes directors and senior management  represent a majority
of the combined companys  directors and senior  management,  Prime was deemed to be the acquiring company
for  accounting  purposes and the merger was  accounted  for as a reverse  acquisition  under the purchase
method of accounting for business  combinations  in accordance  with U.S.  generally  accepted  accounting
principles.  The  consideration  paid  (purchase  price) was allocated to the tangible and  intangible net
assets of HSS based on their  fair  values,  and the net assets of HSS were  recorded  at fair value as of
the  completion of the merger and added to those of Prime.  The assets  acquired and  liabilities  assumed
were deemed to be those of HealthTronics because HealthTronics is the surviving legal entity.

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

During the fourth quarter of 2006, we also sold our  cryosurgery  operations,  committed to a plan to sell
our Rocky  Mountain  Prostate  business and announced our decision to discontinue  our  involvement in the
clinical  trials of the Ablatherm  device.  Accordingly,  all of these  activities  have been reflected as
discontinued  operations in the  accompanying  consolidated  financial  statements.  In September 2007, we
completed the sale of our Rocky Mountain Prostate business.

B.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESConsolidation

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

|A-11
|----



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

|Cash Equivalents

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

Property and equipment are stated at cost. Major betterments are capitalized  while normal  maintenance and repairs
are charged to operations.  Depreciation is computed by the  straight-line  method using estimated  useful lives of
three to twenty years.  Leasehold  improvements  are generally  amortized  over ten years or the term of the lease,
whichever is shorter.  When assets are sold or retired,  the  corresponding  cost and  accumulated  depreciation or
amortization  are removed  from the  related  accounts  and any gain or loss is credited or charged to  operations.
Depreciation  expense for property and equipment was  $10,079,000,  $9,844,000 and  $10,183,000 for the years ended
December 31, 2007, 2006 and 2005, respectively.Impairment of long-lived assets

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

We record as goodwill the excess of the purchase price over the fair value of the net assets associated with
acquired businesses. Goodwill and intangible assets with indefinite useful lives are not amortized, but instead
are tested for impairment at least annually. Intangible assets with definite useful lives are amortized over
their respective estimated useful lives to their estimated residual values.  We now have two reporting units,
urology services and medical products.  We test for impairment of goodwill at least annually, during the fourth
quarter, at the reporting unit level by comparing the reporting units carrying amount, including goodwill, to
the fair value of the reporting unit.  The fair value of the reporting units are estimated using a combination of
the income, or discounted cash flows approach and the market approach, which utilizes comparable companies
data.  Because we have recognized goodwill based only on our controlling interest, the fair value of each
reporting unit also relates only to our controlling interest.  If the carrying amount of a reporting unit exceeds
its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment
loss, if any.  The second step of the goodwill impairment test compares the implied fair value of the reporting
units goodwill with the carrying amount of that goodwill.  If the carrying amount of the reporting units
goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to
that excess.  The implied fair value of goodwill is determined in the same manner as the amount of goodwill
recognized in a business combination.  That is, the fair value of the reporting unit is allocated to all of the
assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the
fair value of the reporting unit was the purchase price paid to acquire the reporting unit.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-12
|----



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|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

|Revenue Recognition

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

Our fees for urology  services are recorded  when the procedure is performed and are based on a contracted
rate with a  hospital  (wholesale  contract)  or based on a  contractual  rate with  commercial  insurance
carriers (retail contract),  individual or state and federal health care agencies,  net of contractual fee
reduction.  Management  fees from limited  partnerships  are recorded  monthly when earned.  Distributions
from cost basis  investments  are recorded when received and totaled  $1,321,000,  $1,005,000 and $987,000
in 2007, 2006 and 2005, respectively.

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

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

For the years ending December 31, 2007, 2006 and 2005, we had no customers who exceeded 10% of
consolidated revenues. Concentrations of credit risk with respect to cash relate to deposits held with
banks in excess of insurance provided. Generally, these deposits may be redeemed upon demand and,
therefore, in the opinion of management, bear minimal risk. Concentrations of credit risk with respect
to receivables are limited due to the wide variety of customers, as well as their dispersion across many
geographic areas. Other than as disclosed below, we do not consider ourselves to have any significant
concentrations of credit risk. At December 31, 2007, approximately 28% of accounts receivable relate to
units operating in New York, 7% relate to units in Louisiana, 6% relate to units operating in Florida,
6% related to units in Indiana, and 5% each relate to units in Texas and Minnesota. At December 31,
2006, approximately 23% of accounts receivable relate to units operating in New York, 7% relate to units
operating in Florida, 7% relate to units in Louisiana, 6% related to units in Texas, and 5% each relate
to units in Georgia, Indiana and Minnesota.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-13
|----



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|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

|Income Tax

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

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

|($ in thousands)                 | Balance at
Beginning of
Year | Costs and
Expenses | Deductions | Other | Balance at
End of Year
|-------------------------------- | ---------------------------- | ------------------ | ---------- | ----- | ----------------------
|Allowance for Doubtful Accounts:
|2007                             |                              |                    | $          | 2,166 |                       
|2006                             |                              |                    | $          | 1,491 |                       
|2005                             |                              |                    | $          | 812   |                       

|Inventory

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

|A-14
|----



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|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

|As of December 31, 2007 and 2006, inventory consists of the following (in thousands):
|-------------------------------------------------------------------------------------

| | 2007           | 2006
| | -------------- | ----
| | Raw Materials  |     
| | Finished Goods |     
| |                |     
| |                |     
| |                |     

|Stock-Based Compensation

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

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

We expense debt issuance costs as incurred.Advertising costs

Costs related to advertising are expensed as incurred.Research and Development

Research  and  development  costs are  expensed  as  incurred  and are not  material in any of the periods
presented.Estimates Used to Prepare Consolidated Financial Statements

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

|A-15
|----



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|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

|Reclassification

Certain  reclassifications  have  been  made to  expense  catagories  presented  in  previous  years to be
consistent  with  the  2007   presentation.   In  2006,  we  classified  our  operating  expenses  in  the
accompanying  consolidated  statements  of income by nature  using the  following  categories:  Salaries,
wages  and  benefits;  Other  cost of  services;  General  and  administrative;  Legal  and  professional;
Manufacturing  costs;  Advertising;  and  Other. In 2007,  in order to more  closely  match each class of
revenue we have reclassified our operating  expense  categories by function as follows: Urology services,
Medical products,  and Sales, general & administrative.  These  reclassifications  were between operating
expense categories and did not change total operating expense in any period.Earnings Per Share

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

|(In thousands, except per share data) | Net Income (loss) | No. of Shares | Per Share Amounts
|------------------------------------- | ----------------- | ------------- | -----------------
|For the year ended December 31, 2007  |                   |               |                  
|Basic                                 |                   |               | $                
|Effect of dilutive securities:        |                   |              
|Options                               |                   |               |                  
|                                      |                   |               |                  
|Diluted                               |                   |               | $                
|                                      |                   |               |                  
|For the year ended December 31, 2006  |                   |              
|Basic                                 |                   |               | $                
|Effect of dilutive securities:        |                   |              
|Options                               |                   |               |                  
|                                      |                   |               |                  
|Diluted                               |                   |               | $                
|                                      |                   |               |                  
|For the year ended December 31, 2005  |                   |              
|Basic                                 |                   |               | $                
|Effect of dilutive securities:        |                   |              
|Options                               |                   |               |                  
|                                      |                   |               |                  
|Diluted                               |                   |               | $                
|                                      |                   |               |                  

|Unexercised  employee  stock options and warrants to purchase  3,329,000,  3,223,000 and 751,000 shares of
our  common  stock as of  December 31,  2007,  2006 and  2005,  respectively,  were  not  included  in the
computations  of diluted EPS because the exercise  prices were  greater  than the average  market price of
our common stock during the respective periods.Recently Issued Pronouncements

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

|A-16
|----



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|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

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

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

In  September  2006,  the FASB issued SFAS  No. 157,  Fair Value  Measurements  (SFAS  157).  SFAS 157
defines fair value,  establishes  a framework  for  measuring  fair value in GAAP and expands  disclosures
about fair value  measurements.  SFAS 157 is effective for fiscal years beginning after November 15,  2007
and interim  periods within those fiscal years.  In December 2007, the FASB released a proposed FASB Staff
Position (FSP  FAS 157-bEffective  Date of FASB Statement  No. 157) which, if adopted as proposed,  would
delay the effective date of SFAS 157 for all  nonfinancial  assets and  nonfinancial  liabilities,  except
those that are  recognized  or disclosed at fair value in the financial  statements  on a recurring  basis
(at least  annually).  Based on our current  operations,  we do not expect  that the  adoption of SFAS 157
will have a material impact on our financial position or results of operations.

C.         GOODWILL AND OTHER INTANGIBLE ASSETS

We adopted SFAS No. 142 Goodwill and Other Intangible Assets effective January 1, 2002. Under this
standard, we no longer amortize goodwill and indefinite life intangible assets, but those assets are
subject to annual impairment tests. As of December 31, 2007, we had $4 million in indefinite life
intangible assets related to the HealthTronics brand name. Other intangible assets with finite lives
consisted primarily of non-compete agreements, hospital contracts and patents at December 31, 2007 and
2006. The agreements will continue to be amortized over their useful lives.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-17
|----



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|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

|The net carrying value of goodwill as of December 31, 2007 and 2006 is comprised of the following:
|--------------------------------------------------------------------------------------------------

|                           | Total | Urology Services | Medical Products
|-------------------------- | ----- | ---------------- | ----------------
|Balance, December 31, 2005 |       |                  | $               
|Additions                  |       |                  |                 
|Deletions                  |       |                  |                 
|Impairments                |       |                  |                 
|                           |       |                  |                 
|Balance, December 31, 2006 |       |                  | $               
|Additions                  |       |                  |                 
|Deletions                  |       |                  |                 
|Impairments                |       |                  |                 
|                           |       |                  |                 
|Balance, December 31, 2007 |       |                  | $               
|                           |       |                  |                 

|In the fourth  quarter of 2007, in connection  with our annual  goodwill  impairment  test, we recorded an
impairment to our urology services  segment  goodwill  totaling $20.8 million.  This impairment was due to
a decrease in our estimated  future  discounted  cash flows for this segment.  This decrease was primarily
caused by lower  projected  growth rates for our laser  operations as well as the timing of certain future
growth  for our IGRT  operations.  In the  fourth  quarter  of 2006,  we  recorded  an  impairment  to our
goodwill  totaling $12.2 million related to our urology  services  segment and $8.4 million related to our
medical  products  segment.  The  impairment  to our  urology  services  segment  was due  primarily  to a
decrease  in  the  number  of  overall  procedures  during  2006,  primarily  across  our  western  region
partnerships,  combined with the loss of certain  partnerships  and contracts late in 2006 to competitors.
The  impairment  in our medical  products  segment  relates  primarily  to our  decision to reduce or exit
certain product lines,  specifically  patient  management  tables and orthopedic  consumables,  during the
fourth quarter of 2006 along with the closing of our European operations.

We record as goodwill  the excess of the purchase  price over the fair value of the net assets  associated
with acquired  businesses.  Goodwill and intangible assets with indefinite useful lives are not amortized,
but instead are tested for  impairment at least  annually.  Intangible  assets with definite  useful lives
are amortized over their  respective  estimated useful lives to their estimated  residual  values.  We now
have two reporting  units,  urology services and medical  products.  We test for impairment of goodwill at
least annually,  during the fourth quarter,  at the reporting unit level by comparing the reporting units
carrying  amount,  including  goodwill,  to the fair value of the reporting  unit.  The fair values of the
reporting  units are estimated using a combination of the income,  or discounted cash flows,  approach and
the market  approach,  which utilizes  comparable  companies  data.  Because we have recognized  goodwill
based only on our  controlling  interest,  the fair value of each  reporting unit also relates only to our
controlling interest.

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

|A-18
|----



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|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

|Our  discounted  cash  flow  projections  for  each  reporting  unit  were  based on  five-year  financial
forecasts.  The five-year  forecasts  were based on annual  financial  forecasts  developed  internally by
management for use in managing our business and through  discussions  with an  independent  valuation firm
engaged by us. The  significant  assumptions of these five-year  forecasts  included annual revenue growth
rates  ranging from -5.0% to 8.1% and from -19.3% to 23.5% for the urology  services and medical  products
reporting  units,  respectively.  The future cash flows were  discounted to present value using a mid-year
convention  and a  discount  rate of 11.0%  for the  urology  services  reporting  unit and  12.0% for the
medical  products  reporting  unit.  Terminal  values for both  reporting  units were  calculated  using a
Gordon  growth  methodology  with a  long-term  growth  rate of 5.0%.  The future  terminal  values of the
urology services and medical products  reporting units were $283,660 and $45,158  respectively at December
31, 2007. The future terminal  values of the urology  services and medical  products  reporting units were
$299,995 and $51,547 respectively at December 31, 2006.

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

Other intangible assets as of December 31, 2007 and 2006, subject to amortization expense, are comprised
of the following:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                  | Gross Carrying Amount | Accumulated Amortization | Net
|----------------- | --------------------- | ------------------------ | ---
|December 31, 2007 |                       |                          |    
|Urology Services  |                       |                          | $  
|Medical Products  |                       |                          |    
|                  |                       |                          |    
|Total             |                       |                          | $  
|                  |                       |                          |    
|December 31, 2006 |                       |                         
|Urology Services  |                       |                          | $  
|Medical Products  |                       |                          |    
|                  |                       |                          |    
|Total             |                       |                          | $  
|                  |                       |                          |    

|Amortization  expense for other  intangible  assets  with  finite  lives was  $1,028,000,  $1,431,000  and
$1,261,000  for the years  ended  December 31,  2007,  2006 and 2005,  respectively.  We  estimate  annual
amortization expense for each of the five succeeding fiscal years as follows:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year | Amount
| | ---- | ------
| |      |       
| |      |       
| |      |       
| |      |       
| |      |       

|A-19
|----



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|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

|D.        ACQUISITIONS

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

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

Unaudited proforma combined income data for the years ended December 31, 2007 and 2006 of the Company
assuming the acquisitions were effective January 1, of each year is as follows:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ($ in thousands, except per share data) | 2007 |  | 2006 |         |  
| | --------------------------------------- | ---- |  | ---- | ------- | -
| |                                         |      |  |      |        
| | Total revenues                          |      |  | $    | 145,387 |  
| | Total expenses                          |      |  |      | 158,921 |  
| | Discontinued Operations                 |      |  |      | (147    | )
| |                                         |      |  |      |        
| | Net income (loss)                       |      |  | $    | (13,681 | )
| |                                         |      |  |      |        
| | Diluted earnings per share              |      |  | $    | (0.39)  | $
| |                                         |      |  |      |        

|E.      FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of our significant financial instruments as of
December 31, 2007 and 2006 are as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                            | 2007 | 2006
|--------------------------- | ---- | ----
|
|                            |      |     
|Financial assets:           |      |     
|Cash and cash equivalents   |      |     
|Warrants/Common Stock       |      |     
|Financial liabilities:      |      |     
|Debt                        |      |     
|Other long-term obligations |      |     

|A-20
|----



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

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

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

The carrying value of the debt at December 31, 2007 and 2006 approximates fair value.Other Long-Term Obligations

At December 31, 2007, as part of our acquisition of Medstone  International  Inc. in February 2004, we had
an  obligation  totaling  $58,338  related to  payments  to an employee  for $4,167 per month continuing  until
February 28,  2009 as  consideration  for a  noncompetition  agreement.  We have  an  obligation  totaling
$100,000 related to payments of $3,333 a month until June 15, 2010 as  consideration  for a noncompetition
agreement with a previous employee of our Medical Products division.Warrants

In November,  2006, we announced our decision to discontinue  our  involvement  in the clinical  trials of
the Ablatherm  device  manufactured by EDAP TMS S.A.  (EDAP).  This decision results in our forfeiting the
exclusive  rights to distribute  such device in the United  States,  when and if a Pre-Market  Approval of
such device is granted by the FDA and  forfeits our rights to vest in  additional  warrants to EDAP common
stock. We have  accordingly  included our costs related to the clinical  trials of High Intensity  Focused
Ultrasound (HIFU) in discontinued  operations in the accompanying condensed  consolidated  statements of
income.  At December 31, 2006,  we had 200,000  warrants to purchase EDAP TMS S.A.  common  stock.  During
2007, we exercised these warrants and now own 200,000 shares of EDAP common stock.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.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-21
|----



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

|F.      ACCRUED EXPENSES

Accrued expenses consist of the following:
|--------------------------------------------------------------------

| |                                          | December 31,
| | ---------------------------------------- | ------------
|
| | Accrued group insurance costs            |             
| | Compensation and payroll related expense |             
| | Accrued interest                         |             
| | Accrued taxes                            |             
| | Accrued professional fees                |             
| | Unearned revenues                        |             
| | Other                                    |             
| |                                          |             
| |                                          |             
| |                                          |             

|G.      INDEBTEDNESS

Long-term debt is as follows:
|---------------------------------------------------

|($ in thousands)                       |  | December31,
|-------------------------------------- |  | -----------
|
|Floating                               |  |            
|1%-11%                                 |  |            
|                                       |  |            
|                                       |  |            
|Less current portion of long-term debt |  |            
|                                       |  |            
|                                       |  |            
|                                       |  |            

|Senior Credit Facility

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

This loan bore interest at a variable rate equal to LIBOR + 1.25 to 2.25% or prime + .25 to 1.25%. We
were required to make quarterly principal payments in connection with the term loan B of $312,500 until
February 2010, when quarterly payments would have increased to $29.7 million.  On July 31, 2006, we used
a portion of the proceeds from the sale of our specialty vehicle manufacturing segment to repay the term
loan B in full.  At December 31, 2007, there were no amounts drawn on the revolver.  Our senior credit
facility contains covenants that, among other things, limit our ability to incur debt, create liens,
make investments, sell assets, pay dividends, make capital expenditures, make restricted payments, enter
into transactions with affiliates, and make acquisitions. In addition, our facility requires us to
maintain certain financial ratios.  Our assets and the stock of our subsidiaries collateralize the
revolving credit facility.  We were in compliance with the covenants under our senior credit facility as
of December 31, 2007.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-22
|----



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

|8.75% Notes

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

On July 31, 2006, we used a portion of the proceeds from the sale of our specialty  vehicle  manufacturing
segment to repay  approximately  $3.5 million of mortgage  debt related to our building in Austin,  Texas.
As of December  31,  2007,  we had notes  totaling  $8.5  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 LIBOR or prime plus a certain  premium  and are due over the next three  years.  These  notes
include a revolver  at one of our  partnerships  which  totals $1.8  million.  As of  December  31,  2007,
$1,193,000 was drawn on this revolver.Interest Rate Swap

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

The stated principal repayments for all indebtedness as of December 31, 2007 are payable as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year | Amount
| | ---- | ------
| |      |       
| |      |       
| |      |       
| |      |       
| |      |       
| |      |       

|H.       COMMITMENTS AND CONTINGENCIES

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

|A-23
|----



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

|We sponsor a  partially  self-insured  group  medical  insurance  plan.  The plan is designed to provide a
specified level of coverage,  with stop-loss coverage provided by a commercial insurer.  Our maximum claim
exposure is limited to $100,000 per person per policy year.  At  December 31,  2007,  we had 244 employees
enrolled  in the  plan.  The plan  provides  non-contributory  coverage  for  employees  and  contributory
coverage for dependents.  Our contributions totaled $2,852,000,  $2,351,000 and $2,586,000,  in 2007, 2006
and 2005 respectively.

We lease office space in several  locations.  Rent expense totaled  $1,757,000,  $1,491,000 and $2,665,000
for the years ended  December 31,  2007,  2006 and 2005.  Future annual  minimum lease  payments under all
noncancelable operating leases are as follows:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ($ in thousands)Year | Amount
| | -------------------- | ------
| |                      |       
| |                      |       
| |                      |       
| |                      |       
| |                      |       
| |                      |       

|I.STOCK BASED COMPENSATION

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

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

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

|A-24
|----



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

|As of December  31, 2007,  total  unrecognized  share-based  compensation  cost related to unvested  stock
options  was  approximately  $2.8  million,  which is expected to be  recognized  over a weighted  average
period of  approximately  1.8 years.  As of December  31, 2007,  there was $612,000 of total  unrecognized
compensation  cost related to nonvested  share-based  compensation  arrangements  granted  under the Plan.
That cost is expected to be  recognized  over a  weighted-average  period of 4 years.  For the years ended
December 31, 2007 and 2006, we have included approximately  $1,108,000 and $1,788,000,  respectively,  for
share-based  compensation cost (in 2006 $167,000 of cost were included in discontinued  operations) in the
accompanying consolidated statement of income.

Share-based  compensation  expense  recognized  during the years ended  December 31, 2007 and December 31,
2006 is related to awards  granted  prior to, but not yet fully  vested as of,  January 1, 2006 and awards
granted  subsequent  to December 31, 2005. We have  historically,  and continue to estimate the fair value
of share-based awards using the Black-Scholes-Merton (Black Scholes) option-pricing model.

Our income  before  income taxes for the years ended  December 31, 2007 and 2006,  was lower by $1,108,000
and $1,788,000,  respectively,  and net income was lower by $978,000 and $1,450,000 respectively,  than if
we had continued to account for  share-based  compensation  under APB Opinion No. 25. For the same period,
basic  earnings  per share was $0.03 and $0.04 lower,  and diluted  earnings per share was $0.03 and $0.04
lower for the years ended December 31, 2007 and 2006 due to our adopting SFAS 123R.Stock Option Plans

At December 31, 2007,  we had seven  separate  equity  compensation  plans:  the Prime 1993 and 2003 stock
option plans,  the HSS general,  2000, 2001 and 2002 stock option plans, and the HSS 2004 equity incentive
plan. The plans, and all amendments  thereto,  had been approved by Primes and HSS shareholders,  as the
case may be. Since  November 2004, the only active plan has been our 2004 equity  incentive  plan,  which,
as amended,  authorized  the grant of up to  2,950,000  shares to  purchase  our common  stock,  including
2,000,000 shares approved in June 2006.

Options  granted  under the plans  shall  terminate  no later  than ten years  from the date the option is
granted,  unless the option  terminates  sooner by reason of  termination  of  employment,  disability  or
death.  Options may vest  immediately or over one to five years. In the third quarter of 2006, we modified
the vesting terms of  approximately  87,000 options related to employees of our specialty  vehicle segment
which was sold July 31, 2006, and recognized  $167,000 in  discontinued  operations in 2006. In the second
half of 2005, we modified the vesting terms of  approximately  50,000 options  related to employees of our
orthotripsy segment which was sold, and recognized  approximately  $116,000 in discontinued  operations in
2005.

The following table sets forth certain information as of December 31, 2007 about our equity compensation
plans:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-25
|----



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

|                                    | (a) | (b) | (c)
|----------------------------------- | --- | --- | ---
|
|Prime 1993 stock option plan        |     |     |    
|                                   
|Prime 2003 stock option plan        |     |     |    
|                                   
|HSS equity incentive plan and stock |     |    
|option plans                        |     |     |    
|                                   
|Other equity compensation plans     |     |    
|approved by our security holders    |     |     |    

|Share-Based Compensation Cost under SFAS No. 123

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

| | ($ in thousands)                              | December 31, 2005
| | --------------------------------------------- | -----------------
| | Net income, as reported                       |                  
| | Share-based compensation recorded, net of tax |                  
| | Share-based compensation proforma, net of tax |                  
| |                                               |                  
| | Pro forma net income                          |                  
| |                                               |                  
| | Pro forma earnings per share:                 |                  
| | Basic                                         |                  
| |                                               |                  
| | Diluted                                       |                  
| |                                               |                  

|To estimate  compensation  expense which would have been recognized  under SFAS No. 123 for the year ended
December 31, 2005 and to calculate the  compensation  cost that was  recognized  under SFAS No. 123(R) for
the years  ended  December  31, 2007 and 2006,  we used the  Black-Scholes  option-pricing  model with the
following  weighted-average  assumptions for equity awards granted.  For December 31, 2007, 2006 and 2005,
respectively:  risk-free  interest  rates were 4.6%,  4.9% and 3.9%;  dividend  yields were 0%, 0% and 0%;
volatility  factors  of the  expected  market  price of our  common  stock  were 47%,  47% and 46%;  and a
weighted-average expected life of the option of 6 years, 6 years and 4 years.

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

|A-26
|----



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

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

|                                  | 2007 | 2006 | 2005
|--------------------------------- | ---- | ---- | ----
|
|Outstanding at beginning of year  |      |      |     
|Granted                           |      |      |     
|Exercised                         |      |      |     
|Cancelled                         |      |      |     
|Forfeited                         |      |      |     
|                                  |      |      |     
|Outstanding at end of year        |      |      |     
|                                  |      |      |     
|Exercisable at end of year        |      |      |     
|Weighted-average fair value of   
|options granted during the period |      |      |     

|During the year ended December 31, 2007,  there were no exercises of options to purchase  common stock and
the total fair value of shares  vested  during  2007 was  $966,000.  During  the year ended  December  31,
2006, the total intrinsic value of options exercised to purchase common stock was  approximately  $353,000
and the total fair value of shares vested during 2006 was $1.7 million.

During  the year  ended  December  31,  2007,  there was no  financing  cash  generated  from  share-based
compensation  arrangements  for the  purchase  of shares upon  exercise of options.  During the year ended
December 31, 2006,  financing  cash  generated  from  share-based  compensation  arrangements  amounted to
$1,908,000  for the  purchase of shares upon  exercise  of options.  We issue new shares upon  exercise of
options to purchase our common stock.


Additional information regarding options outstanding for all plans as of December 31, 2007, is as
follows:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-27
|----



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

|                                         | Outstanding Options | Exercisable Options
|---------------------------------------- | ------------------- | -------------------
|
|$4.49 - $6.49                            |                     |                    
|$6.50 - $6.99                            |                     |                    
|$7.00 - $7.50                            |                     |                    
|$7.51 - $9.20                            |                     |                    
|$9.21 - $14.25                           |                     |                    
|                                         |                     |                    
|                                         |                     |                    
|                                         |                     |                    
|Aggregate intrinsic value (in thousands) |                     |                    
|                                         |                     |                    

|The  aggregate  intrinsic  value in the table above is based on our closing stock price of $4.59 per share
as of December 31, 2007.

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

| | Nonvested Shares               | Shares (000) | Weighted-Average
Grant-Date Fair Value
| | ------------------------------ | ------------ | --------------------------------------
| | Nonvested at January 1, 2007   |              |                                       
| | Granted                        |              |                                       
| | Vested                         |              |                                       
| | Forfeited                      |              |                                       
| |                                |              |                                       
| | Nonvested at December 31, 2007 |              |                                       
| |                                |              |                                       

|J.      INCOME TAXES

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

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

| |               | Years Ended December 31,
| | ------------- | ------------------------
|
| | United States |                         
| | Foreign       |                         
| |               |                         
| |               |                         
| |               |                         

|A-28
|----



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

|Income tax expense (benefit) consists of the following:
|-------------------------------------------------------

| | Years Ended December 31,
| | ------------------------
|
| | Federal:                
| | Current                 
| | Deferred                
| | State:                  
| | Current                 
| | Deferred                
| | Foreign                 
| | Current                 
| | Deferred                
| |                         
| |                         
| |                         

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

| | Years Ended December 31,   
| | ---------------------------
|
| | Expected federal income tax
| | State taxes                
| | Foreign rate differential  
| | Goodwill impairment        
| | Other                      
| |                            
| |                            
| |                            

|The tax effects of temporary differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities at December 31, 2007 and 2006 are presented below:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|($ in thousands)                                                                           | 2007 | 2006
|------------------------------------------------------------------------------------------ | ---- | ----
|Deferred tax assets:                                                                       |      |     
|Net operating loss carryforward                                                            |      |     
|Allowance for bad debts                                                                    |      |     
|FAS 123(R) expense                                                                         |      |     
|AMT Credit                                                                                 |      |     
|Capitalized costs                                                                          |      |     
|Accrued expenses deductible for tax purposes when paid                                     |      |     
|                                                                                           |      |     
|Total gross deferred tax assets                                                            |      |     
|Less valuation allowance                                                                   |      |     
|                                                                                           |      |     
|Net deferred tax assets                                                                    |      |     
|                                                                                           |      |     
|Deferred tax liabilities:                                                                  |      |     
|Property and equipment, principally due to differences in depreciation                     |      |     
|Intangible assets, principally due to differences in amortization periods for tax purposes |      |     
|                                                                                           |      |     
|Total gross deferred tax liability                                                         |      |     
|                                                                                           |      |     
|Net deferred tax liability                                                                 |      |     
|                                                                                           |      |     

|A-29
|----



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

|In assessing  the  realizablity  of deferred tax assets,  management  considers  whether it is more likely
than not that some portion or all of the deferred  tax assets will be realized.  The ultimate  realization
of deferred tax assets is dependent  upon the  generation of future  taxable  income during the periods in
which those temporary  differences  become  deductible.  Management  considers the scheduled  reversals of
deferred tax  liabilities,  projected  future  taxable  income and tax planning  strategies in making this
assessment.  In order to fully realize the deferred tax assets,  we will need to generate  future  taxable
ordinary  income  approximating  $26.1 million prior to the  expiration  of net operating  loss.  Based on
projections  of future  taxable  income over the periods in which the deferred  tax assets are  deductible
and tax  planning  strategies,  management  believes it is more  likely than not that we will  realize the
benefits of these  deductible  differences  at December  31, 2007.  At December 31, 2007,  we have federal
net operating  loss carry  forwards of  approximately  $26.1 million which are available to offset federal
taxable income in future years through 2027.

As a result of our merger with  HealthTronics  in 2004,  we acquired  certain tax  benefits,  a portion of
which are  subject  to  limitations  imposed  by  Section  382 of the  Internal  Revenue  Code.  These tax
benefits  include  built-in  losses,  which are available to offset future taxable income of approximately
$57.9  million,  capital loss carry  forwards  which are  available to offset  future  capital gain income
through 2008 of  approximately  $28 million,  and net operating loss carry forwards which are available to
offset future taxable income through 2021 of  approximately  $27.6 million.  Due to the uncertainty of our
ability to realize  these tax benefits,  there was no  recognition  of them in our purchase  accounting at
the time of our acquisition.  Accordingly,  these tax benefits are not reflected as deferred tax assets in
our schedules above.

With regards to a portion of these tax benefits,  in October 2005,  we filed  amended  federal  income tax
returns for the years ended  December 31, 2000,  2001,  2002 and 2003  requesting  refunds  totaling  $4.3
million.  Additionally,  we have  utilized a portion of these tax  benefits to  determine  our federal and
state income tax  liabilities  for the years ended  December 31, 2004,  2005, and 2006. Due to the amounts
of our refund  requests,  we are currently  under audit or review by the Internal  Revenue Service for the
2000, 2001, 2002, 2003, 2004, 2005, and 2006 tax years.

Notwithstanding  the  likelihood of completion in 2008,  management,  at this time, is unable to determine
with any level of  certainty  that any of these tax  benefits  will be  realized;  accordingly,  these tax
benefits have not been recognized for any purpose in these financial  statements.  Future recognition,  if
any, of these tax benefits,  net of a valuation allowance,  will be credited to goodwill.  Interest income
received  as the  result of our  refund  requests  with the  Internal  Revenue  Service,  if any,  will be
reported  as  interest  income in the  period in which the  Internal  Revenue  Service  determines  we are
entitled to the refunds.

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

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

|A-30
|----



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|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

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

|Our  continuing  practice  is to  recognize  interest  accrued  related to  unrecognized  tax  benefits in
interest expense and penalties in operating  expenses.  We had approximately  $153,000 of accrued interest
and no accrued  penalties  at December 31,  2007.  The accrued  interest is included as a component of the
deferred tax liabilities noted above.

As previously  stated above,  we are under audit or review by the Internal  Revenue  Service for the 2000,
2001, 2002,  2003,  2004, 2005, and 2006 tax years. It is reasonable to expect that the examination  phase
of the  Internal  Revenue  Service  audit  may  conclude  in the  next 12  months  and  that  the  related
unrecognized  tax benefits for the tax  positions  taken in  previously  filed tax returns may differ from
recorded  liabilities  for  uncertain  tax  positions  in our  financial  statements  at  January 1, 2007.
However,  based on the current status of the  examination it is not possible to estimate the effect of any
such change to previously recorded uncertain tax positions.

Deferred taxes are not provided on undistributed  earnings of foreign  subsidiaries  because such earnings
are  expected  to be  indefinitely  reinvested  outside  the  United  States.  If these  amounts  were not
considered  permanently  reinvested,  a  cumulative  deferred  tax  liability  approximating  $118,000 and
$50,000 would be provided for in 2007 and 2006, respectively.


K.         SEGMENT REPORTING

We now have two  reportable  segments:  urology  services  and medical  products.  Our  specialty  vehicle
manufacturing  division,  which was sold on July 31, 2006 was also  considered a reportable  segment prior
to  its  sale.  The  urology  services  segment  provides   services  related  to  the  operation  of  the
lithotripters,  including  scheduling,  staffing,  training,  quality assurance,  maintenance,  regulatory
compliance and contracting  with payors,  hospitals and surgery centers.  Also in the urology segment,  we
provide  treatments  for benign and  cancerous  conditions of the prostate.  In treating  benign  prostate
disease,  we deploy three technologies:  (1) trans-urethral  microwave therapy (TUMT), (2) photo-selective
vaporization  of  the  prostate  (PVP),  and  (3)   trans-urethral   needle  ablation  (TUNA).  All  three
technologies  apply an energy source which reduces the size of the prostate  gland.  Our medical  products
segment  manufactures,  sells  and  maintains  lithotripters  and  their  related  consumables.  They also
manufacture,  sell and maintain  intra-operative X-ray imaging systems and other mobile patient management
tables,  and are the exclusive  U.S.  distributor  of the Revolix  branded  laser.  The  operations of our
Claripath pathology laboratory are also included in our medical products segment at this time.

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

|A-31
|----



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|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

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

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

|($ in thousands)                | Urology Services |  | Medical Products |        
|------------------------------- | ---------------- |  | ---------------- | -------
|
|2007                            |                  |  |                  |        
|Revenue from external customers |                  |  | $                | 122,736
|Intersegment revenues           |                  |  |                  | --     
|Interest income                 |                  |  |                  | 523    
|Interest expense                |                  |  |                  | 767    
|Depreciation and amortization   |                  |  |                  | 8,116  
|Impairment of Goodwill          |                  |  |                  | 20,800 
|Segment profit (loss)           |                  |  |                  | (10,991
|Segment assets                  |                  |  |                  | 285,239
|Capital expenditures            |                  |  |                  | 3,321  
|                               
|2006                            |                  | 
|Revenue from external customers |                  |  | $                | 123,265
|Intersegment revenues           |                  |  |                  | --     
|Interest income                 |                  |  |                  | 294    
|Interest expense                |                  |  |                  | 872    
|Depreciation and amortization   |                  |  |                  | 8,535  
|Impairment of Goodwill          |                  |  |                  | 12,200 
|Segment profit (loss)           |                  |  |                  | 1,346  
|Segment assets                  |                  |  |                  | 293,119
|Capital expenditures            |                  |  |                  | 8,743  
|                               
|2005                            |                  | 
|Revenue from external customers |                  |  | $                | 133,360
|Intersegment revenues           |                  |  |                  | --     
|Interest income                 |                  |  |                  | 230    
|Interest expense                |                  |  |                  | 834    
|Depreciation and amortization   |                  |  |                  | 9,707  
|Segment profit                  |                  |  |                  | 18,233 
|Segment assets                  |                  |  |                  | 314,887
|Capital expenditures            |                  |  |                  | 10,207 

|A-32
|----



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

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

|($ in thousands)                       | 2007 |  | 2006 |         | 2005 |  
|-------------------------------------- | ---- |  | ---- | ------- | ---- | -
|
|Total revenues for reportable segments |      |  | $    | 148,876 |      | $
|Corporate revenue                      |      |  |      | 581     |      |  
|Elimination of intersegment revenues   |      |  |      | (9,039  | )    |  
|                                       |      |  |      |         |      |  
|Total consolidated revenues            |      |  | $    | 140,418 |      | $
|                                       |      |  |      |         |      |  

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

|($ in thousands)                            | 2007 |  | 2006 |         | 2005 |  
|------------------------------------------- | ---- |  | ---- | ------- | ---- | -
|
|Total profit (loss) for reportable segments |      |  | $    | (10,253 | )    | $
|Corporate revenue                           |      |  |      | 581     |      |  
|Unallocated corporate expenses:             |      | 
|General and administrative                  |      |  |      | (7,519  | )    |  
|Net interest expense                        |      |  |      | 522     |      |  
|Other, net                                  |      |  |      | (670    | )    |  
|                                            |      |  |      |         |      |  
|Unallocated corporate expenses total        |      |  |      | (7,667  | )    |  
|                                            |      |  |      |         |      |  
|Income (loss) before income taxes           |      |  | $    | (17,339 | )    | $
|                                            |      |  |      |         |      |  

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

|($ in thousands)                     | 2007 |  | 2006 |         | 2005 |  
|------------------------------------ | ---- |  | ---- | ------- | ---- | -
|
|Total assets for reportable segments |      |  | $    | 322,971 |      | $
|Unallocated corporate assets         |      |  |      | 13,085  |      |  
|                                     |      |  |      |         |      |  
|Consolidated total                   |      |  | $    | 336,056 |      | $
|                                     |      |  |      |         |      |  

|A-33
|----



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

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

|($ in thousands)              | Segments | Corporate | Eliminating Entries | Consolidated
|----------------------------- | -------- | --------- | ------------------- | ------------
|2007                          |          |           |                     |             
|Interest and dividends        |          |           | $                   | 561         
|Interest expense              |          |           |                     | 767         
|Depreciation and amortization |          |           |                     | 10,438      
|Capital expenditures          |          |           |                     | 9,096       
|                             
|2006                          |          |          
|Interest and dividends        |          |           | $                   | 349         
|Interest expense              |          |           |                     | 873         
|Depreciation and amortization |          |           |                     | 10,507      
|Capital expenditures          |          |           |                     | 13,058      
|                             
|2005                          |          |          
|Interest and dividends        |          |           | $                   | 294         
|Interest expense              |          |           |                     | 834         
|Depreciation and amortization |          |           |                     | 10,562      
|Capital expenditures          |          |           |                     | 10,589      

|The amounts in 2007,  2006 and 2005 for interest income and expense,  depreciation  and  amortization  and
capital expenditures  represent amounts recorded by the operations of our corporate functions,  which have
not been allocated to the segments.


L.         DISCONTINUED OPERATIONS

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

In  the  fourth  quarter  of  2006,  we  committed  to  a  plan  to  sell  our  Rocky  Mountain   Prostate
Thermotherapies  (RMPT)  business.  In July 2007, we entered into a purchase  agreement to sell the RMPT
business  for $1.35  million.  This sale closed on September  28, 2007.  We  classified  this  business as
held  for sale in the  accompanying  2006  consolidated  balance  sheet  and  included  its  results  from
operations in discontinued operations.

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

|A-34
|----



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

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

The following table details selected financial information included in income (loss) from discontinued
operations in the consolidated statements of income for December 31, 2007, 2006 and 2005.Consolidated Statements of Income
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                           |  |  |  
|------------------------------------------ |  |  | -
|
|For the Year Ended December 31             |  |  |  
|Revenue                                    |  | 
|Specialty Vehicles Manufacturing           |  |  | $
|CryoSurgery                                |  |  |  
|Rocky Mountain Prostate Thermotherapies    |  |  |  
|Orthotripsy                                |  |  |  
|HIFU                                       |  |  |  
|Cost of services                           |  | 
|Specialty Vehicles Manufacturing           |  |  |  
|CryoSurgery                                |  |  |  
|Rocky Mountain Prostate Thermotherapies    |  |  |  
|Orthotripsy                                |  |  |  
|HIFU                                       |  |  |  
|Depreciation and amortization              |  | 
|Specialty Vehicles Manufacturing           |  |  |  
|CryoSurgery                                |  |  |  
|Rocky Mountain Prostate Thermotherapies    |  |  |  
|Orthotripsy                                |  |  |  
|HIFU                                       |  |  |  
|Other                                      |  | 
|Specialty Vehicles Manufacturing           |  |  |  
|CryoSurgery                                |  |  |  
|Rocky Mountain Prostate Thermotherapies    |  |  |  
|Orthotripsy                                |  |  |  
|HIFU                                       |  |  |  
|                                           |  |  |  
|Income (loss) from discontinued operations |  |  | $
|                                           |  |  |  

|A-35
|----



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|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

|($ in thousands)                                        | Year Ended December 31,
|------------------------------------------------------- | -----------------------
|
|Gain on sale of specialty vehicle manufacturing         |                        
|Gain on Sale of Rocky Mountain Prostate Thermotherapy   |                        
|Loss from disposal of cryosurgery operations            |                        
|Impairment of Rocky Mountain Prostate Thermotherapy     |                        
|Income from discontinued operations                     |                        
|Interest allocated to discontinued operations           |                        
|Income tax (expense) benefit on discontinued operations |                        
|                                                        |                        
|Income (loss) from discontinued operations, net of tax  |                        
|                                                        |                        

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

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

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

In the fourth  quarter of 2004,  we decided to divest our  orthopaedics  business  unit.  In July 2005, we
sold our  orthopaedics  business unit to SanuWave,  Inc., a company  controlled by Prides Capital Partners
L.L.C.,  a related  party.  Under the terms of the sale we received  $6.4 million in cash,  two $2 million
unsecured notes and a small passive ownership  interest in the acquiring  entity.  The notes bear interest
at 6% per annum with no payments for the first five years,  then  interest only payments for the next five
years with a balloon payment after ten years. Due to the uncertainty of future estimated  collections,  we
have  assigned  no value to the notes or the  ownership  interest.  Prior to this  divesture,  we provided
approximately  $700,000 of maintenance  services to our  orthopaedics  business unit which were eliminated
in consolidation.  Subsequent to this sale, we have provided limited assistance to SanuWave,  Inc. related
to certain  sales and service  operations.  We were paid $100,000 per month from August 2005 until January
2006 related to these services.  At  December 31,  2007 and 2006,  SanuWave,  Inc. owed us a net amount of
approximately  $52,000 and $1,000,000,  respectively.  We terminated all sales operations  effective April
30, 2006.

As part of the merger between Prime and HSS in November 2004, HSS had a minority owned Swiss subsidiary,
HMT Holding AG (HMT), which was in a net liability position at the date of acquisition. In December
2004, we decided to no longer fund the operations of HMT as part of our plan to rationalize its acquired
manufacturing activities. Also in December 2004, the directors of HMT received a letter from their
external auditors informing them HMT was over-indebted. Based on this action, the directors had a
statutory obligation to initiate insolvency proceedings and in January 2005 filed for relief under Swiss
insolvency laws. We deconsolidated the operations of HMT in December 2004.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-36
|----



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
|------------------------------------------------------------------------------------------------------------------------------------

|We  purchased  debt of HMT AG in the first  quarter of 2005.  We paid $1.3  million and  incurred  certain
contingent  obligations  in the  amount of  $350,000  in return for  assignment  of a $5.1  million  claim
against HMT AG held by a foreign bank. In addition to the claim,  we also received an assignment  from the
bank  of a  pledge  of HMT  AGs  accounts  receivable  that  secured  the  $5.1  million  claim.  Through
December 31,  2007, we had recovered approximately  $2.8 million.  Any additional recoveries in the future
will be recorded as income when received.

M.  VARIABLE INTEREST ENTITIES

We have determined that one of our consolidated  partnerships,  acquired in the HSS merger and in which we
have a 20% interest,  has certain related party  relationships  with two Variable Interest Entities (VIE),
and in accordance with FIN 46(R),  has  consolidated  those  entities.  As a result of  consolidating  the
VIEs,  of which the  partnership  is the primary  beneficiary,  we have  recognized  minority  interest of
approximately  $1  million  on our  consolidated  balance  sheets at  December  31,  2007 and 2006,  which
represents the difference  between the assets and the liabilities  recorded upon the  consolidation of the
VIEs.  The  liabilities  recognized  as a result of  consolidating  the VIEs do not  represent  additional
claims  on our  general  assets.  Rather,  they  represent  claims  against  the  specific  assets  of the
consolidated  VIEs.  Conversely,  assets  recognized  as a  result  of  consolidating  these  VIEs  do not
represent  additional  assets that could be used to satisfy claims against our general  assets.  Reflected
on our  consolidated  balance  sheet are $4 million and $3.6 million in both 2007 and 2006,  respectively,
of VIE assets,  representing  all of the assets of the VIEs. The VIEs assist the  partnership in providing
urological services,  minimally invasive prostate  treatments,  and other services in the Greater New York
metropolitan area.


N.        RELATED PARTY TRANSACTIONS

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

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

|A-37
|----



---