_______________________________________________________

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, 2006
                                                                  OR
                     [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
                                          For the transition period from ________ to ________


Commission File Number: 000-30406

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

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

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

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

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

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

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

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

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




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

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

          State the aggregate market value of the voting and non-voting  common equity held by  non-affiliates  computed by reference to the
price at which the common  equity was sold,  or the average bid and asked price of such common  equity,  as of the last business day of
the registrants most recently completed second fiscal quarter.Aggregate Market Value at June 30, 2006: $ 217,851,000
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

February 28, 2007
35,379,831
| | --------------------------------------------------- |  | -------------------------------------------------------------

DOCUMENTS INCORPORATED BY REFERENCE

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



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

# ITEM 1.    

BUSINESS

# General

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

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

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

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

# Urology

|Our  lithotripsy  services  are  provided  principally  through  limited  partnerships  or other  entities  that we  manage,  which use
lithotripsy  devices.  In  2006,  physicians  who are  affiliated  with us used  our  lithotripters  to  perform  approximately  51,000
procedures in the U.S.  We do not render any medical services.  Rather, the physicians do.

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

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|Although the non-physician fee under both retail and wholesale  contracts varies widely based on geographical  markets and the identity
of the  third  party  payor,  we  estimate  that  nationally,  on  average,  our share of the  non-physician  fee was  roughly  $2,000,
respectively,  for both 2006 and 2005.  At this  time,  we do not  anticipate  a  material  shift  between  our  retail  and  wholesale
arrangements.

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

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

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

| |  | Fees for urology  services.


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


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

# Medical Products

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

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

|3
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# Specialty Vehicle Manufacturing

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

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

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

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

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

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

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

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

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

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

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

| |  | the federal False Claims Act;                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | the federal Medicare and Medicaid Anti-Kickback Law, and state anti-kickback prohibitions;                                                             
|
| |  | federal and state billing and claims submission laws and regulations;                                                                                  
|
| |  | the federal Health Insurance Portability and Accountability Act of 1996 and state laws relating to patient privacy;                                    
|
| |  | the federal physician  self-referral  prohibition commonly known as the Stark Law and the state law equivalents of the Stark
           Law;           
|
| |  | state laws that  prohibit the practice of medicine by  non-physicians,  and prohibit  fee-splitting  arrangements  involving
           physicians; and
|
| |  | federal and state laws  governing the equipment we use in our business  concerning  patient  safety and equipment  operating
           specifications.

|Practices  prohibited by these statutes  include,  but are not limited to, the payment,  receipt,  offer,  or  solicitation of money or
other  consideration  in connection  with the referral of patients for services  covered by a federal or state health care program.  We
contract with physicians under a variety of financial  arrangements,  and physicians have ownership interests in some entities in which
we also  have an  interest.  If our  operations  are found to be in  violation  of any of the laws and  regulations  to which we or our
Customers  are subject,  we may be subject to the  applicable  penalty  associated  with the  violation,  including  civil and criminal
penalties,  damages,  fines, exclusion from the Medicare,  Medicaid, and other governmental  healthcare programs, loss of licenses, and
the  curtailment of our  operations.  While we believe that we are in compliance  with all  applicable  laws, we cannot assure that our
activities will be found to be in compliance with these laws if scrutinized by regulatory  authorities.  Any penalties,  damages, fines
or curtailment of our  operations,  individually or in the aggregate,  could  adversely  affect our ability to operate our business and
our financial  results.  The risks of us being found in violation of these laws and  regulations  is increased by the fact that many of
them have not been fully  interpreted by the regulatory  authorities  or in the courts,  and their  provisions are open to a variety of
interpretations.  Any action brought  against us for violation of these laws or  regulations,  even if we were to  successfully  defend
against it, could cause us to incur  significant  legal expenses and divert our  managements  attention from the operation of our
business.
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|As  previously  reported on a Form 8-K filed by Prime on  September 28,  2004,  we  concluded an internal  investigation  of a business
transaction  involving our manufacturing  division,  which transaction may have violated the federal anti-kickback laws. We voluntarily
reported the  transaction  to the U.S.  General  Services  Administration,  or GSA. The GSA has assigned a government  investigator  in
response  to our  voluntary  disclosure  and we intend to fully  cooperate  with any GSA  investigation.  Based on the  findings of our
outside legal  counsel,  we (1) believe  this was an isolated  incident,  and (2) do not believe the pending  resolution of this matter
will materially and adversely affect our financial condition, results of operation, or business.Equipment

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

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

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

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

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

Third party payors are  increasingly  attempting to contain health care costs by limiting both coverage and the level of  reimbursement
of medical procedures and treatments.  In addition,  significant  uncertainty  exists as to the reimbursement  status of newly approved
health care  products.  Lithotripsy  treatments  are  reimbursed  under  various  federal and state  programs,  including  Medicare and
Medicaid, as well as under private health care programs,  primarily at fixed rates.  Governmental programs are subject to statutory and
regulatory changes,  administrative rulings,  interpretations of policy and governmental funding restrictions, and private programs are
subject to policy changes and commercial  considerations,  all of which may have the effect of decreasing program payments,  increasing
costs or requiring us to modify the way in which we operate our business. These changes could have a material adverse effect on us.New and proposed  federal and state laws and  regulatory  initiatives  relating to various  initiatives  in health care reform (such as
improving  privacy and the security of patient  information  and combating  health care fraud) could  require us to expend  substantial
sums to  appropriately  respond  to and  comply  with this broad  variety  of  legislation  (such as  acquiring  and  implementing  new
information systems for privacy and security protection), which could negatively impact our financial results.

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

The provisions of HIPAA criminalize  situations that previously were handled  exclusively  civilly through  repayments of overpayments,
offsets and fines by creating new federal  health care fraud crimes.  Further,  as with the federal laws,  general state  criminal laws
may be used to prosecute  health care fraud and abuse.  We believe that our business  arrangements  and practices  comply with existing
health care fraud law. However,  a violation could subject us to penalties,  fines and/or possible exclusion from Medicare or Medicaid.
Such sanctions could significantly reduce our revenue or profits.
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|A number of  proposals  for health care reform  have been made in recent  years,  some of which have  included  radical  changes in the
health care system.  Health care reform could result in material  changes in the financing and  regulation of the health care business,
and we are unable to predict  the effect of such change on our future  operations.  It is  uncertain  what  legislation  on health care
reform,  if any, will ultimately be implemented or whether other changes in the  administration  of or  interpretation of existing laws
involving  governmental  health care  programs  will occur.  There can be no assurance  that future  health care  legislation  or other
changes in the administration of or interpretation of existing  legislation  regarding  governmental health care programs will not have
a material adverse effect on our business or the results of our operations.We face  intense  competition  and rapid  technological  change that could  result in  products  that are  superior to the  products we
manufacture or superior to the products on which our current or proposed services are based.

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

Our  urology  services  and  manufacturing  business  exposes  us to  potential  product  liability  risks that are  inherent  in these
industries.  All medical procedures  performed in connection with our business  activities are performed by or under the supervision of
physicians who are not our employees.  We do not perform  medical  procedures.  However,  we may be held liable if patients  undergoing
urology  treatments  using our  devices are  injured.  We may also face  product  liability  claims as a result of our  medical  device
manufacturing.  We cannot ensure that we will be able to avoid product liability  exposure.  Product  liability  insurance is generally
expensive,  if  available  at all.  We cannot  ensure that our present  insurance  coverage is adequate or that we can obtain  adequate
insurance coverage at a reasonable cost in the future.Our success will depend partly on our ability to operate without infringing on or utilizing the proprietary rights of others.

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

|8
|-



---

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

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

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

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

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

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

|9
|-



---

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

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

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

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

|10
|--



---

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

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

|Our indebtedness may limit our financial and operating flexibility.

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

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

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

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

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

| |  | increase our vulnerability to general adverse economic and industry conditions;
| | - | -------------------------------------------------------------------------------

|11
|--



---

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

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

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

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

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

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

|12
|--



---

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

|The foregoing does not include  positions held in our  subsidiaries.  Our officers are elected for annual periods.  There are no family
relationships between any of our executive officers and/or directors.Mr.  Humphries  was  appointed as our President and Chief  Executive  Officer  effective on May 11, 2006. In joining us, Mr.  Humphries
resigned from his position as President and Chief Executive Officer of Uroplasty,  Inc., a publicly-traded  medical device company,  in
which positions he served since January 2005. He was previously a partner of Ascent Medical  Technology  Fund,  L.P., a venture capital
fund founded in 1995. Mr. Humphries has over 25 years experience in the healthcare and medical device  industry,  including  serving as
President and Chief Executive Officer of American Medical Systems,  Inc., a  publicly-traded  manufacturer of medical devices primarily
for the urology market.  Mr.  Humphries  serves on the Board of Directors of Uroplasty,  Inc.,  Criticare  Systems,  Inc. and Universal
Hospital Services, Inc.Mr. Goolsby  joined us as our Chief  Financial  Officer  and Senior  Vice  President  on January  8, 2007.  Prior to such  appointment,
Mr. Goolsby  served as the Chief  Financial  Officer,  Vice  President of Finance and  Secretary of SigmaTel,  Inc., a  publicly-traded
semiconductor  company,  from September 2001 to December 2006. From 1999 until 2001,  Mr. Goolsby  served as Chief Financial Officer of
Utiliserve,  Inc., an electrical utility products distributor,  and was responsible for Utiliserves finance, accounting and human
resources functions.  From 1993 until 1999,  Mr. Goolsby served as a Vice President and Controller of Cameron Ashley Building Products,
Inc., a publicly-traded  building products distributor,  where he was responsible for finance and accounting and was involved in merger
and acquisition  transactions and preparing periodic filings with the Securities and Exchange Commission.  Mr. Goolsby holds a Bachelor
of Business Administration in Accounting from the University of Houston.Mr. Whittenburg  was named President of our Urology Division in June 2006. Prior to this time, Mr.  Whittenburg  served as President of
our Specialty  Vehicle  Manufacturing  Division  from December 2005 until its sale in July 2006 and was our General  Counsel and Senior
Vice  PresidentDevelopment  from March 2004 until June 2006.  Previously  Mr. Whittenburg  practiced law at Akin Gump Strauss  Hauer &
Feld LLP, where he specialized in corporate and securities law. Mr. Whittenburg, a CPA, is licensed to practice law in Texas.Mr.  Schneider  joined us as Vice President of Sales and Marketing in August 2004 and was named President of the  newly-formed  Medical
Products division in May 2005. Prior to joining us,  Mr. Schneider was Vice President of U.S. Sales and Marketing for Carbomedics,  the
cardiac  surgery  division of the Sorin Group,  from June 2001 through July 2004.  His  experience  also  includes ten years in various
sales, marketing and general management positions for General Electric Medical Systems.Mr. Rusk  joined us in August 2000 as our Corporate  Controller  and was named Vice  President in June 2002. In June 2006, Mr. Rusk was
named our Treasurer and in September  2006, Mr. Rusk was named our Secretary.  Before  joining us,  Mr. Rusk,  a CPA, was with KPMG LLP
for approximately seventeen years, the last ten years as a senior audit manager.Available Information

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

|13
|--



---

|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
|--



---

|PART II
|-------

# ITEM 5.    

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

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

|               | 2006 | 2005
|-------------- | ---- | ----
|
|First Quarter  |      |     
|Second Quarter |      |     
|Third Quarter  |      |     
|Fourth Quarter |      |     

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

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

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

|                                    | (a) | (b) | (c)
|----------------------------------- | --- | --- | ---
|
|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
|--



---

|Performance Graph

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

| | 
| | 

# ITEM 6.
    
SELECTED FINANCIAL DATA

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

|16
|--



---

|(In thousands, except per share data) | Years Ended December 31,
|------------------------------------- | ------------------------
|
|Revenues:                             |                         
|Urology Services                      |                         
|Medical Products                      |                         
|RVC                                   |                         
|Other                                 |                         
|                                      |                         
|Revenues from continuing operations   |                         
|                                      |                         
|Income (loss) from:                   |                         
|Continuing Operations                 |                         
|Discontinued Operations               |                         
|                                      |                         
|Net income                            |                         
|                                      |                         
|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                          |              
|Per share amounts (basic):          |              
|Net income                          |              
|Weighted average shares outstanding |              
|Per share amounts (diluted):        |              
|Net income                          |              
|Weighted average shares outstanding |              
|                                    |              

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

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

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

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

|Forward-Looking Statements

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

|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 2006,  physicians who are affiliated with us used our lithotripters to perform  approximately 51,000
procedures in the U.S. We do not render any medical services. Rather, the physicians do.

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

Although the non-physician fee under both retail and wholesale  contracts varies widely based on geographical  markets and the identity
of the third party payor,  we estimate that  nationally,  on average,  our share of the  non-physician  fee was roughly $2,000 for both
2006 and 2005. At this time, we do not anticipate a material shift between our retail and wholesale arrangements.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| |  | Fees for urology services.

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

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

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

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

|Recent Developments

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

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

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

Management has identified the following critical accounting policies and estimates:

Impairments of goodwill and other intangible  assets are both a critical  accounting  policy and estimate that requires judgment and is
based on assumptions of future  operations.  We are required to test for impairments at least annually or if circumstances  change that
would  reduce the fair value of a reporting  unit below its  carrying  value.  We test for  impairment  of  goodwill  during the fourth
quarter.  We now have two reporting units,  urology services and medical products.  The fair value of each reporting unit is calculated
using  estimated  discounted  future cash flow  projections.  In the fourth  quarter of 2006, we recorded an impairment to our goodwill
totaling  $12.2  million  related to our  urology  services  segment and $8.4  million  related to our medical  products  segment.  The
impairment to our urology services segment is due primarily to a decrease in the number of overall  procedures  during 2006,  primarily
across our western region  partnerships,  combined with the loss of certain  partnerships and contracts late in 2006. The impairment in
our medical  products  segment  relates  primarily to our decision to reduce or exit certain product lines during the fourth quarter of
2006.  As of December 31, 2006, we had goodwill of $229 million.

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


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

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

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

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

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

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

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

|22
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---

|Provision for income taxes in 2006 decreased  $11,065,000  compared to 2005 due to a decrease in taxable income,  primarily  related to
our  goodwill  impairment  recorded in 2006.  Our  effective  tax rate  significantly  increased  in 2006 as  compared  to 2005,  since
approximately half of our goodwill impairment was not deductible for tax purposes.Year ended December 31, 2005 compared to the year ended December 31, 2004

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

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

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

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

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

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|2007 Outlook

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

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

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

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

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

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

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|Senior Credit Facility

Our senior credit  facility is comprised of a five-year $50 million  revolver and a $125 million  senior  secured term loan B due 2011.
We entered into this senior credit  facility in March 2005.  The loan bears  interest at a variable rate equal to LIBOR + 1.25 to 2.25%
or prime + .25 to 1.25%.  On July 31, 2006,  we used a portion of the proceeds  from the sale of our  specialty  vehicle  manufacturing
segment to repay the term loan B in full.  As of December 31, 2006,  there were no amounts  drawn on the  revolver.  Our senior  credit
facility contains  covenants that, among other things,  limit our ability to incur debt,  create liens, make investments,  sell assets,
pay dividends,  make capital expenditures,  make restricted payments,  enter into transactions with affiliates,  and make acquisitions.
In addition,  our facility  requires us to maintain certain financial ratios. We were in compliance with the covenants under our senior
credit facility as of December 31, 2006.8.75% Notes

In April  2005,  our $125  million  term loan B referred  to above was funded and we used the  proceeds  to redeem the $100  million of
unsecured  senior  subordinated  notes.  The notes were subject to an 8.75% rate of interest and interest was payable  semi-annually on
April 1st and October 1st.  Principal was due April 2008.OtherInterest Rate Swap. In August 2002,  we entered into an interest rate swap which was  designated as a fair value hedge  pursuant to the
provisions of FAS No. 133,  Accounting for  Derivative  Instruments  and Hedging  Activities,  and FAS No. 138,  Accounting for Certain
Derivative  Instruments and Certain Hedging Activities,  An Amendment of FASB Statement No. 133.  This swap was executed to convert $50
million of the 8.75% notes from a fixed to floating rate  instrument.  The floating rate was based on LIBOR plus 4.56%.  In March 2003,
we amended our  interest  rate swap  agreement to add an  additional  $25 million  with a floating  rate based on LIBOR plus 5.11%.  We
terminated  the swaps in May 2003.  In August 2003,  we entered  into two new interest  rate swaps for $25 million each which were also
designated  as fair value hedges.  The floating  rates of these two interest  rate swap  agreements  were based on LIBOR plus 4.72% and
4.97%,  respectively.  In  January  2004,  we  terminated  these  swaps for  approximately  $150,000.  In the  second  quarter of 2005,
approximately $564,000 in proceeds from these swaps were recognized when the 8.75% notes were redeemed as described above.Other long term debt.  On July 31,  2006,  we used a portion  of the  proceeds  from the sale of our  specialty  vehicle  manufacturing
segment to repay  approximately  $3.5 million of mortgage  debt related to our building in Austin,  Texas.  As of December 31, 2006, we
had notes totaling $11.4 million related to equipment purchased by our limited  partnerships.  These notes are paid from the cash flows
of the related partnerships. They bear interest at LIBOR or prime plus a certain premium and are due over the next three years.Other long term  obligations.  At December 31,  2006, we had an obligation  totaling $375,000 related to payments to the previous owner
of one of our  subsidiaries  for $75,000 per quarter until March 31,  2008 as consideration  for a  noncompetition  agreement.  Also at
December 31,  2006, as part of our Medstone acquisition,  we had an obligation totaling $142,000 related to payments to an employee for
$20,833 a month  until  February 28,  2007 and  $4,167 a month  beginning  March 1,  2007 and  continuing  until  February 28,  2009 as
consideration for a noncompetition  agreement.  We also had as part of the Prime-HSS merger, two obligations  totaling $125,000 related
to payments to two previous  employees of HSS. One  obligation  is for $8,333 a month until  October 31,  2007 as  consideration  for a
noncompetition  agreement.  The other obligation is for $4,167 a month until  October 31,  2007 as  consideration  for a noncompetition
agreement.
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|General

The following table presents our contractual obligations as of December 31, 2006 (in thousands):
|---------------------------------------------------------------------------------------------------------

|                          | Payments due by period
|------------------------- | ----------------------
|
|Long Term Debt (1)        |                       
|Operating Leases
 (2)     |                       
|Non-compete contracts (3) |                       
|                          |                       
|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 $375  due to the  previous  owner of one of our  subsidiaries,  at a rate of $75 per  quarter,  an
      obligation of $142 due to an employee of Medstone,  at a rate of $21 per month until February 28,  2007 and $4 beginning March 1,
      2007 and continuing until  February 28,  2009, an obligation of $83 due to a previous employee of HealthTronics,  at a rate of $8
      per month until  October 31,  2007 and an  obligation  of $42 due to a previous  employee of  HealthTronics,  at a rate of $4 per
      month until October 31, 2007.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | ($ in thousands)
| | ----------------
| | 2007            
| | 2008            
| | 2009            
| | 2010            
| | 2011            
| | 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.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|26
|--



---

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

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

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

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

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

|27
|--



---

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

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

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

|Interest Rate Risk

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

# ITEM 8.
    
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

|None.
|-----

# ITEM 9A.
    
CONTROLS AND PROCEDURES

|(a)      Disclosure Controls and Procedures

As of December 31, 2006,  under the supervision and with the  participation  of our management,  including our Chief Executive  Officer
(our principal  executive officer) and our Chief Financial Officer (our principal  financial  officer),  we evaluated the effectiveness
of our disclosure  controls and  procedures  (as defined under Rule  13a-15(e) of the Securities  Exchange Act of 1934, as amended (the
Exchange  Act)).  Based on this evaluation,  our Chief Executive Officer and our Chief Financial Officer concluded that, as
of December 31, 2006, our disclosure controls and procedures were effective.(b)      Managements Report on Internal Control Over Financial Reporting

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

|28
|--



---

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

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

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

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

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

# ITEM 9B.
    
OTHER INFORMATION

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

|29
|--



---

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

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

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

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

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

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

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

|30
|--



---

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

|31
|--



---

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

# ITEM 10.
    
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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

# ITEM 11.
    
EXECUTIVE COMPENSATION

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

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

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

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

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

# ITEM 14.
    
     PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

|32
|--



---

|PART IV
|-------

# ITEM 15.
    
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

(b) Exhibits. (1)

| | 3.1    
     
     
 3.2    
      
 4.1    
     
 10.1    
     
 10.2   
      
 10.3*  
      
 10.4*  
      
 10.5*  
     
 10.6*   
     
 10.7*   
     
 10.8*  
     
 10.9*  
     
 10.10* 
     
 10.11* 
 10.12* 
 10.13 | Amended and  Restated  Articles of  Incorporation  of the Company  (Incorporated  by
 reference to Annex D to the Rule 424(b)(3) joint proxy statement/prospectus,  dated
 October 6, 2004, filed by HealthTronics with the SEC on October 7, 2004)

Amended and Restated  Bylaws of the Company  (Incorporated  by reference to Annex E
 to the Rule 424(b)(3) joint proxy statement/prospectus, dated October 6, 2004, filed by
 HealthTronics with the SEC on October 7, 2004)

Specimen  of  Common  Stock  Certificate  (Filed  as an  Exhibit  to the  HSS  Registration
  Statement  on  Form  S-4 (Registration No. 33-56900))

Form of  Indemnification  Agreement  dated  October 11, 1993  between  the  Company  and
certain of its  officers  and directors (Filed as an Exhibit to the Current Report on Form 8-
K of Prime dated October 18, 1993)

Release and Severance  Agreement  dated  December 30, 2001 by and between Prime
Medical  Services Inc. and Kenneth S. Shifrin (Filed as an Exhibit to the Annual Report
 on Form 10-K of Prime for the year ended December 31, 2001)

Amended and Restated  1993 Stock Option Plan,  as amended June 18, 2002 (Filed as an
 Exhibit to the Annual  Report on Form 10-K of Prime for the year ended December 31,
 2002) 

Prime Medical  Services,  Inc.,  2003 Stock Option Plan  (Incorporated  by reference to
 Annex D of the Rule 424(b)(3) joint proxy statement/prospectus, dated January 7, 2004,
 filed by Prime with the SEC on January 8, 2004)

HealthTronics  2004 Equity Incentive Plan (Incorporated by reference to Exhibit 10.2 to
  HealthTronics  current report on Form 8-K filed on January 25, 2005)

Form of Board  Service and Release  Agreement by and between  HealthTronics  and Argil
 J.  Wheelock,  M.D.  (Filed as Exhibit 10.22 to the HSS Registration Statement on Form S-
4 (Registration No. 333-117102))

Board Service,  Amendment and Release Agreement by and between  HealthTronics and
 Kenneth S. Shifrin (Incorporated by reference to the HSS Registration Statement on
 Form S-4 (Registration No. 333-117102))

HSS Stock Option Plan - 2002  (Incorporated  by reference to Exhibit 10.1 of
  HealthTronics  Current  Report on Form 8-K filed on January 25, 2005)

HSS Stock Option Plan - 2001  (Incorporated  by reference to Appendix A to HSS  proxy
  statement filed with the SEC on April 18, 2001)

HSS Stock Option Plan - 2000  (Incorporated  by reference to Appendix A to HSS  proxy  
statement filed with the SEC on April 25, 2000)

Form of Incentive Stock Option Agreement

Form of Nonstatutory Stock Option Agreement

Credit Agreement,  dated as of March 23, 2005, among HealthTronics,  Inc. the lenders
 party thereto, Bank of America, N.A., as Syndication Agent, and JPMorgan Chase Bank,
 National  Association,  as Administrative  Agent for the lenders (Incorporated  by  reference
  to Exhibit  10.1 of the  Companys  10-Q filed with the  Securities  and  Exchange
Commission on November 8, 2005).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|33
|--



---

| | 10.1410.1510.1610.17*10.1810.1910.2010.2110.2210.2310.2410.2510.2610.2710.28 | Consulting  and  Non-Competition  Agreement,  dated  September  21, 2005, by and between 
 HealthTronics,  Inc. and Brad A. Hummel
                  (incorporated  by reference to  Exhibit 99.2  to 
the  Companys  Form 8-K filed with the Securities and Exchange
                  Commission on September 27, 2005).

         Executive  Employment  Agreement,  effective  October 1, 2005,  by and between
  HealthTronics,  Inc.  and James S. B.
         Whittenburg  (incorporated by reference to
 Exhibit 99.4 to the Companys  Form 8-K filed with the Securities and
         Exchange 
Commission on September 27, 2005).

         Executive  Employment  Agreement,  effective October 1, 2005, by and between
  HealthTronics,  Inc. and Christopher B.
         Schneider  (incorporated  by reference to Exhibit
 99.5 to the  Companys  Form 8-K filed with the Securities and
         Exchange Commission on
 September 27, 2005.

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

|34
|--



---

| | 21.123.123.231.131.232.132.2 | 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.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|35
|--



---

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

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

| | HEALTHTRONICS, INC.By: /s/ Sam B. Humphries
       Sam B. Humphries
       Chief Executive Officer and 
        President (Principal Executive Officer)
       Date: March 15, 2007
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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


March 15, 2007/s/

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

March 15, 2007/s/
R. Steven Hicks 
         R. Steven Hicks, Non-executive Chairman of the Board

March 15, 2007/s/
         Donny R. Jackson 
         Donny R. Jackson, Director

March 15, 2007/s/
         Timothy J. Lindgren 
         Timothy J. Lindgren, Director

March 15, 2007
/s/
Kevin A. Richardson II 
Kevin A. Richardson II, Director

March 15, 2007
|----------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|36
|--



---

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

        William A. Searles 
        William A. Searles, Director
March 15, 2007/s/

         Kenneth S. Shifrin 
         Kenneth S. Shifrin, Director

March 15, 2007/s/
                 Perry M. Waughtal 
         Perry M. Waughtal, Directorr

March 15, 2007/s/
Argil J. Wheelock, M.D. 
Argil J. Wheelock, M.D., Director

March 15, 2007
/s/
         Mark G. Yudof 
         Mark G. Yudof, Director

March 15, 2007
|--------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|37
|--



---

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

|INDEX
|-----

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

     Notes to Consolidated Financial Statements. | A-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 sheet of HealthTronics,  Inc. and subsidiaries as of December 31, 2006, and the
related  consolidated  statements  of income,  stockholders  equity,  and cash flows for the year then  ended.   These  financial
statements are the  responsibility of the  Companys  management.  Our  responsibility is to express an opinion on these financial
statements and based on our audit.

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

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

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

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

|A-2
|---



---

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

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

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

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

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

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

|A-3
|---



---

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

|($ in thousands, except per share data)                   | Years Ended December 31,
|--------------------------------------------------------- | ------------------------
|
|Revenue:                                                  |                         
|Urology Services                                          |                         
|Medical Products                                          |                         
|Other                                                     |                         
|                                                          |                         
|Total revenue                                             |                         
|                                                          |                         
|Cost of services and general and administrative expenses: |                         
|Salaries, wages and benefits                              |                         
|Other costs of services                                   |                         
|General and administrative                                |                         
|Legal and professional                                    |                         
|Manufacturing costs                                       |                         
|Advertising                                               |                         
|Other                                                     |                         
|Goodwill impairment                                       |                         
|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                                                |                         
|                                                          |                         
|Basic earnings per share:                                 |                         
|Income (loss) from continuing operations                  |                         
|Income (loss) from discontinued operations                |                         
|                                                          |                         
|Net income                                                |                         
|                                                          |                         
|Weighted average shares outstanding                       |                         
|                                                          |                         
|Diluted earnings per share:                               |                         
|Income (loss) from continuing operations                  |                         
|Income (loss) from discontinued operations                |                         
|                                                          |                         
|Net income                                                |                         
|                                                          |                         
|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 $2,166 in 2006 and $1,491 in 2005    |             
|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: 35,475,236 issued and 35,379,831 |             
|outstanding in 2006; 35,010,656 issued and 34,866,735 outstanding in 2005           |             
|Accumulated earnings                                                                |             
|Treasury stock, at cost, 95,405 shares in 2006 and 143,921 shares in 2005           |             
|                                                                                    |             
|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, 2006, 2005 and 2004
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|($ in thousands, except share data)  | Issued Common Stock | Capital in
Excess of | Accumulated | Treasury Stock |  
|------------------------------------ | ------------------- | -------------------- | ----------- | -------------- | -
|
|Balance, December 31, 2003           |                     |                      |             | 17,324,585     |  
|Net income                           |                     |                      |             | --             |  
|Purchase of treasury stock           |                     |                      |             | --             |  
|Retirement of treasury stock         |                     |                      |             | (382,966       | )
|Value of stock options assumed in    |                     |                     
|acquisition                          |                     |                      |             | --             |  
|Conversion to no par common stock    |                     |                      |             | --             |  
|Issuance of stock for acquisition    |                     |                      |             | 16,107,279     |  
|Exercise of stock options, including |                     |                     
|tax benefit totaling $295            |                     |                      |             | 114,677        |  
|Exercise of stock warrants           |                     |                      |             | 32,990         |  
|                                     |                     |                     
|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     |  
|                                     |                     |                     

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

|A-7
|---



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                                CONDENSED 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) refunded                                         |                         
|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 equipment                              |                         
|Distributions from investments                                |                         
|Other                                                         |                         
|Discontinued Operations                                       |                         
|                                                              |                         
|Net cash provided by (used in) investing activities           |                         
|                                                              |                         
|CASH FLOWS FROM FINANCING ACTIVITIES:                         |                         
|Payments on notes payable, exclusive of interest              |                         
|Borrowings on notes payable                                   |                         
|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 IN CASH AND CASH EQUIVALENTS                     |                         
|                                                             
|Cash and cash equivalents, beginning of period, includes cash |                         
|from discontinued operations of $4,650, $2,292                |                         
|and $2,427 for 2006, 2005 and 2004, respectively              |                         
|                                                              |                         
|Cash and cash equivalents, end of period, includes cash       |                         
|from discontinued operations of $(198), $4,650 and $2,292     |                         
|for 2006, 2005 and 2004 respectively                          |                         
|                                                              |                         

|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                                           |                         
|Adjustments to reconcile net income 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 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 decreased by                                         |                         
|Goodwill increased by                                                  |                         
|Current liabilities increased by                                       |                         
|Other long-term obligations increased by                               |                         
|Stockholders' equity increased by                                      |                         
|                                                                      
|In 2004, the Company acquired two lithotripsy companies                |                         
|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                               |                         
|Deferred income taxes 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

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

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

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

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

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

B.      SUMMARY OF SIGNIFICANT ACCOUNTING 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), the Company has determined that one of our consolidated
partnerships,  acquired in the HSS Merger and in which we have a 20% interest,  has related party  relationships  with two VIEs and has
consolidated  those  entities.  Investments  in  entities  in  which  our  investment  is less  than 50%  ownership  and we do not have
significant  control are  accounted  for by the equity  method if ownership is between  20%50%,  or by the cost method if ownership is
less than 20%. All significant intercompany accounts and transactions have been eliminated.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-11
|----



---

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

|Cash Equivalents

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

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

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

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

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

|A-12
|----



---

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

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

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

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

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

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

|A-13
|----



---

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

|Accounts Receivable

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

|($ in thousands)                 | Balance at
Beginning of
Year | Costs and
Expenses | Deductions | Other | Balance at
End of Year
|-------------------------------- | ---------------------------- | ------------------ | ---------- | ----- | ----------------------
|Allowance for Doubtful Accounts:
|2006                             |                              |                    | $          | 1,491 |                       
|2005                             |                              |                    | $          | 812   |                       
|2004                             |                              |                    | $          | 402   |                       

|(a)         Amounts acquired in acquisitions.Inventory

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

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

| | 2006           | 2005
| | -------------- | ----
| | Raw Materials  |     
| | 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.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-14
|----



---

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

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

We expense debt issuance costs as incurred.Advertising costs.

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

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

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

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

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

|A-15
|----



---

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

|(In thousands, except per share data) | Net Income | No. of Shares | Per Share Amounts
|------------------------------------- | ---------- | ------------- | -----------------
|For the year ended December 31, 2006  |            |               |                  
|Basic                                 |            |               | $                
|Effect of dilutive securities:        |            |              
|Options                               |            |               |                  
|                                      |            |               |                  
|Diluted                               |            |               | $                
|                                      |            |               |                  
|For the year ended December 31, 2005  |            |              
|Basic                                 |            |               | $                
|Effect of dilutive securities:        |            |              
|Options                               |            |               |                  
|                                      |            |               |                  
|Diluted                               |            |               | $                
|                                      |            |               |                  
|For the year ended December 31, 2004  |            |              
|Basic                                 |            |               | $                
|Effect of dilutive securities:        |            |              
|Options and warrants                  |            |               |                  
|                                      |            |               |                  
|Diluted                               |            |               | $                
|                                      |            |               |                  

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

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

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

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

|A-16
|----



---

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

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

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

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

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

|                           | Total | Urology Services | Medical Products
|-------------------------- | ----- | ---------------- | ----------------
|Balance, December 31, 2004 |       |                  | $               
|Additions                  |       |                  |                 
|Deletions                  |       |                  |                 
|                           |       |                  |                 
|Balance, December 31, 2005 |       |                  | $               
|Additions                  |       |                  |                 
|Deletions                  |       |                  |                 
|Impairments                |       |                  |                 
|                           |       |                  |                 
|Balance, December 31, 2006 |       |                  | $               
|                           |       |                  |                 

|A-17
|----



---

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

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

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

|                  | Gross Carrying Amount | Accumulated Amortization | Net
|----------------- | --------------------- | ------------------------ | ---
|December 31, 2006 |                       |                          |    
|Urology Services  |                       |                          | $  
|Medical Products  |                       |                          |    
|                  |                       |                          |    
|Total             |                       |                          | $  
|                  |                       |                          |    
|December 31, 2005 |                       |                         
|Urology Services  |                       |                          | $  
|Medical Products  |                       |                          |    
|                  |                       |                          |    
|Total             |                       |                          | $  
|                  |                       |                          |    

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

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

|D.       ACQUISITIONS

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

|A-18
|----



---

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

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

| | ($ in thousands, except per share data) | 2005
| | --------------------------------------- | ----
| |                                         |     
| |                                         |     
| |                                         |     
| |                                        
| |                                         |     
| |                                        
| |                                         |     
| |                                        

|E.      FAIR VALUE OF FINANCIAL INSTRUMENTS

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

|                            | 2006 | 2005
|--------------------------- | ---- | ----
|
|Financial assets:           |      |     
|Cash and cash equivalents   |      |     
|Warrants                    |      |     
|                           
|Financial liabilities:      |      |     
|Debt                        |      |     
|Other long-term obligations |      |     

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

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

The carrying value of the debt at December 31, 2006 and 2005 approximates fair value.Other Long-Term Obligations

At December 31, 2006, we had an obligation totaling $375,000 related to payments to the previous owner of one of
our subsidiaries for $75,000 per quarter until March 31, 2008 as consideration for a noncompetition agreement.
Also at December 31, 2006, as part of our Medstone acquisition, we had an obligation totaling $142,000 related to
payments to an employee for $20,833 a month until February 28, 2007 and $4,167 a month beginning March 1, 2007
and continuing until February 28, 2009 as consideration for a noncompetition agreement. We also had as part of
our HSS merger, two obligations totaling $125,000 related to payments to two previous employees. One obligation
is for $8,333 a month until October 31, 2007 as consideration for a noncompetition agreement. The other
obligation is for $4,167 a month until October 31, 2007 as consideration for a noncompetition agreement.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-19
|----



---

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

|Warrants

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

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

F.       ACCRUED EXPENSES

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

|                                         | December 31,
|---------------------------------------- | ------------
|
|Accrued group insurance costs            |             
|Compensation and payroll related expense |             
|Accrued interest                         |             
|Accrued taxes                            |             
|Accrued severance payments               |             
|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 |  |            
|                                       |  |            
|                                       |  |            
|                                       |  |            

|A-20
|----



---

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

|Senior Credit Facility

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

This new loan bore  interest  at a variable  rate  equal to LIBOR + 1.25 to 2.25% or prime + .25 to 1.25%.  We were
required to make quarterly  principal  payments in connection with the term loan B of $312,500 until February 2010,
when  quarterly  payments  would  have  increased  to $29.7  million.  On July 31,  2006,  we used a portion of the
proceeds  from the sale of our  specialty  vehicle  manufacturing  segment  to repay  the term  loan B in full.  At
December 31, 2006,  there were no amounts drawn on the  revolver.  Our senior credit  facility  contains  covenants
that,  among other  things,  limit our ability to incur debt,  create liens,  make  investments,  sell assets,  pay
dividends, make capital expenditures,  make restricted payments, enter into transactions with affiliates,  and make
acquisitions.  In addition,  our facility  requires us to maintain  certain  financial  ratios.  Our assets and the
stock of our subsidiaries  collateralize  the revolving  credit facility.  We were in compliance with the covenants
under our senior credit facility as of December 31, 2006.8.75% Notes

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

On July 31, 2006, we used a portion of the proceeds from the sale of our specialty  vehicle  manufacturing  segment
to repay  approximately  $3.5 million of mortgage  debt related to our  building in Austin,  Texas.  As of December
31, 2006, we had notes totaling $11.3 million  related to equipment  purchased by our limited  partnerships.  These
notes  are paid from the cash  flows of the  related  partnerships.  They bear  interest  at LIBOR or prime  plus a
certain  premium  and are due over the next  three  years.  These  notes  include  two  revolvers  at two  separate
partnerships which total $4.8 million.  As of December 31, 2006, $1,579,000 was drawn on these two revolvers.Interest Rate Swap

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

|A-21
|----



---

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

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

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

|H.       COMMITMENTS AND CONTINGENCIES

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

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

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

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

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

|A-22
|----



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

|I.STOCK BASED COMPENSATION

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

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

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

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

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

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

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

|A-23
|----



---

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

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

|                                    | (a) | (b) | (c)
|----------------------------------- | --- | --- | ---
|
|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:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|A-24
|----



---

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

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

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

|                                  | 2006 | 2005 | 2004
|--------------------------------- | ---- | ---- | ----
|
|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, 2006, the total  intrinsic  value of options  exercised to purchase common stock
was approximately $353,000 and the total fair value of shares vested during 2006 was $1.7 million.

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

|A-25
|----



---

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

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

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

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

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


J.      INCOME TAXES

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

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

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

|A-26
|----



---

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

|                            | Years Ended December 31,
|--------------------------- | ------------------------
|
|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, 2006 and 2005 are presented below:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|($ in thousands)                                                                           | 2006 | 2005
|------------------------------------------------------------------------------------------ | ---- | ----
|Deferred tax assets:                                                                       |      |     
|Net operating loss carryforward                                                            |      |     
|Capital loss carryforward                                                                  |      |     
|Allowance for bad debts                                                                    |      |     
|FAS 123(R) expense                                                                         |      |     
|AMT Credit                                                                                 |      |     
|Capitalized costs                                                                          |      |     
|Loan origination fees amortizable for tax purposes                                         |      |     
|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-27
|----



---

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

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

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

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

K.       SEGMENT REPORTING

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

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

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

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

|A-28
|----



---

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

|($ in thousands)                | Urology Services | Medical Products
|------------------------------- | ---------------- | ----------------
|2006                            |                  |                 
|Revenue from external customers |                  |                 
|Intersegment revenues           |                  |                 
|Interest income                 |                  |                 
|Interest expense                |                  |                 
|Depreciation and amortization   |                  |                 
|Impairment of Goodwill          |                  |                 
|Segment profit                  |                  |                 
|Segment assets                  |                  |                 
|Capital expenditures            |                  |                 
|                               
|2005                            |                  |                 
|Revenue from external customers |                  |                 
|Intersegment revenues           |                  |                 
|Interest income                 |                  |                 
|Interest expense                |                  |                 
|Depreciation and amortization   |                  |                 
|Segment profit                  |                  |                 
|Segment assets                  |                  |                 
|Capital expenditures            |                  |                 
|                               
|2004                            |                  |                 
|Revenue from external customers |                  |                 
|Intersegment revenues           |                  |                 
|Interest income                 |                  |                 
|Interest expense                |                  |                 
|Depreciation and amortization   |                  |                 
|Segment profit                  |                  |                 
|Segment assets                  |                  |                 
|Capital expenditures            |                  |                 

|A-29
|----



---

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

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

|($ in thousands)                       | 2006 | 2005 | 2004
|-------------------------------------- | ---- | ---- | ----
|Total revenues for reportable segments |      |      | $   
|Corporate revenue                      |      |      |     
|Elimination of intersegment revenues   |      |      |     
|                                       |      |      |     
|Total consolidated revenues            |      |      | $   
|                                       |      |      |     

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

|($ in thousands)                            | 2006 | 2005 | 2004
|------------------------------------------- | ---- | ---- | ----
|Total profit (loss) for reportable segments |      |      | $   
|Corporate revenue                           |      |      |     
|Unallocated corporate expenses:             |      |     
|General and administrative                  |      |      |     
|Net interest expense                        |      |      |     
|Other, net                                  |      |      |     
|                                            |      |      |     
|Unallocated corporate expenses total        |      |      |     
|                                            |      |      |     
|Income (loss) before income taxes           |      |      | $   
|                                            |      |      |     

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

|($ in thousands)                     | 2006 | 2005 | 2004
|------------------------------------ | ---- | ---- | ----
|Total assets for reportable segments |      |      | $   
|Unallocated corporate assets         |      |      |     
|                                     |      |      |     
|Consolidated total                   |      |      | $   
|                                     |      |      |     

|A-30
|----



---

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

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

|($ in thousands)              | Segments | Corporate | Eliminating Entries | Consolidated
|----------------------------- | -------- | --------- | ------------------- | ------------
|2006                          |          |           |                     |             
|Interest and dividends        |          |           | $                   | 349         
|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      
|                             
|2004                          |          |          
|Interest and dividends        |          |           | $                   | 170         
|Interest expense              |          |           |                     | 373         
|Depreciation and amortization |          |           |                     | 6,159       
|Capital expenditures          |          |           |                     | 6,580       

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

K.      DISCONTINUED OPERATIONS

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

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

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

|A-31
|----



---

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

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

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

|                                        |  |  |  
|--------------------------------------- |  |  | -
|
|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 from discontinued operations     |  |  | $
|                                        |  |  |  

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

|A-32
|----



---

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

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

|Consolidated Balance Sheet
|--------------------------

|($ in thousands)                          | Specialty Vehicle Manufacturing | CryoSurgery | Rocky Mountain Prostate Thermotherapies
|----------------------------------------- | ------------------------------- | ----------- | ---------------------------------------
|Cash                                      |                                 |             | $                                      
|Accounts receivable                       |                                 |             |                                        
|Prepaid expenses and other current assets |                                 |             |                                        
|Inventory                                 |                                 |             |                                        
|Deferred income taxes                     |                                 |             |                                        
|Property plant and equipment (net)        |                                 |             |                                        
|Goodwill                                  |                                 |             |                                        
|Other non-current assets                  |                                 |             |                                        
|                                          |                                 |             |                                        
|Total assets                              |                                 |             | $                                      
|                                          |                                 |             |                                        
|Accounts payable                          |                                 |             | $                                      
|Accrued expenses                          |                                 |             |                                        
|Customer deposits                         |                                 |             |                                        
|Long-term debt                            |                                 |             |                                        
|Other long-term obligations               |                                 |             |                                        
|Deferred income taxes                     |                                 |             |                                        
|                                          |                                 |             |                                        
|Total liabilities                         |                                 |             | $                                      
|                                          |                                 |             |                                        

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

|($ in thousands)                                        | Year Ended December 31,
|------------------------------------------------------- | -----------------------
|
|Gain on sale of specialty vehicle manufacturing         |                        
|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 from discontinued operations, net of tax         |                        
|                                                        |                        

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

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

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

We purchased  debt of HMT AG in the first  quarter of 2005.  We paid $1.3 million and incurred  certain  contingent
obligations  in the amount of $350,000 in return for  assignment  of a $5.1 million  claim against HMT AG held by a
foreign bank. In addition to the claim,  we also received an assignment  from the bank of a pledge of HMT AGs
accounts  receivable  that  secured  the  $5.1  million  claim.  Through   December 31,   2006,  we  had  recovered
approximately $1.8 million. Any additional recoveries in the future will be recorded as income when received.

K.       VARIABLE INTEREST ENTITIES

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

|N.     RELATED PARTY TRANSACTIONS

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

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

O.      SUBSEQUENT EVENTS

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