_______________________________________________________

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, 2009
                                                                  OR
                     [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
                                          For the transition period from ________ to ________


Commission File Number: 000-30406

_____________________________

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

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

| | 9825 Spectrum Drive, Building 3, Austin, Texas
    (Address of principal executive office) | 78717   
 (Zip Code) | (512) 328-2892
(Registrants telephone number,
including area code)
| | ------------------------------------------------------------------------------------------ | -------------------- | -------------------------------------------------------------------

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

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

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

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

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

          Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405 of Regulation  S-K  (§ 229.405) is not contained  herein,  and
will not be contained,  to the best of the  registrants  knowledge,  in definitive  proxy or information  statements  incorporated  by
reference in Part III of the Form 10-K or any amendment to this Form 10-K. X 




     

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

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

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

     
    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 last 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.
For purposes of this  computation,  all officers,  directors and ten percent  beneficial owners of the registrants
common stock are deemed to be affiliates.  This  determination  should not be deemed an admission that such persons
are in fact affiliates.Aggregate Market Value at June 30, 2009: $ 61,728,000
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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, 2010
45,587,235
| | --------------------------------------------------- |  | -------------------------------------------------------------

DOCUMENTS INCORPORATED BY REFERENCE

|Selected  portions of the  Registrants  definitive proxy material for the 2010 annual meeting of stockholders are incorporated by
reference into Part III of the Form 10-K.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

|HEALTHTRONICS, INC.
                                            ANNUAL REPORT ON FORM 10-K
                                    FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
                                                      PART I
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# ITEM 1.    

BUSINESS

|General

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

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

In this document,  references to  we,  us,  our  and  HealthTronics
shall mean HealthTronics and its consolidated subsidiaries.Lithotripsy  services.  We provide  lithotripsy  services,  which is a medical  procedure  where a device  called a
lithotripter  transmits  high  energy  shockwaves  through  the body to break up  kidney  stones.  Our  lithotripsy
services are provided  principally  through  limited  partnerships  and other  entities  that we manage,  which use
lithotripters.  In 2009,  physicians who are affiliated  with us used our  lithotripters  to perform  approximately
50,000 procedures in the U.S.  We do not render any medical services.  Rather, the physicians do.

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

Although the  non-physician  fee under both retail and  wholesale  contracts  varies  widely based on  geographical
markets and the  identity of the third party  payor,  we estimate  that  nationally,  on average,  our share of the
non-physician  fee was roughly $2,100,  respectively,  for both 2009 and 2008. At this time, we do not anticipate a
material  shift  between  our  retail  and  wholesale  arrangements,  or a  material  change  in our  share  of the
non-physician fee.

As the  general  partner  of limited  partnerships  or the  manager of other  types of  entities,  we also  provide
services relating to operating our lithotripters,  including  scheduling,  staffing,  training,  quality assurance,
regulatory compliance, and contracting with payors, hospitals, and surgery centers.Prostate  treatment  services.  We provide  treatments  for benign and cancerous  conditions  of the  prostate.  In
treating benign prostate disease,  we deploy three technologies:  (1) photo-selective  vaporization of the prostate
(PVP),  (2) trans-urethral needle ablation (TUNA), and (3) trans-urethral microwave therapy
(TUMT)  in certain  partnerships.  All three technologies apply an energy source which reduces the size
of the prostate gland. For treating prostate and other cancers,  we use a procedure called  cryosurgery,  a process
which uses  lethal ice to destroy  tissue  such as tumors for  therapeutic  purposes.  In April  2008,  we acquired
Advanced Medical  Partners,  Inc.  (AMPI),  which  significantly  expanded our cryosurgery  partnership
base.  In July 2009,  we  acquired  Endocare,  Inc.  (Endocare),  which  manufactures  both the medical
devices  and  related  consumables  utilized  by  our  cryosurgery   operations,   and  also  provides  cryosurgery
treatments.  Our prostate  treatment  services are provided  principally  by us using  equipment that we lease from
limited  partnerships and other entities that we manage.  Benign prostate disease and cryosurgery  cancer treatment
services are billed in the same manner as our  lithotripsy  services  under either  retail or wholesale  contracts.
We also provide services relating to operating the equipment,  including scheduling,  staffing,  training,  quality
assurance, regulatory compliance, and contracting.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2
|-



---

|Radiation therapy services.  We provide image guided radiation therapy  (IGRT)  technical  services for
cancer  treatment  centers.  Our IGRT  technical  services may relate to providing  the  technical  (non-physician)
personnel to operate a physician  practice  groups  IGRT  equipment,  leasing  IGRT  equipment to a physician
practice  group,  providing  services  related to helping a physician  practice  group  establish an IGRT treatment
center, or managing an IGRT treatment center.Anatomical   pathology  services.   We  also  provide  anatomical  pathology  services  primarily  to  the  urology
community.  We have one  pathology  lab  located in  Georgia,  Claripath  Laboratories,  that  provides  laboratory
detection  and  diagnosis  services to  urologists  throughout  the United  States.  In addition,  in July 2008, we
acquired Uropath LLC, which managed pathology  laboratories  located at Uropath sites for physician practice groups
located in Texas,  Florida and Pennsylvania.  Through Uropath,  we continue to provide  administrative  services to
in-office  pathology labs for practice  groups and provide  pathology  services to physicians  and practice  groups
with our lab equipment and personnel at our Uropath laboratory sites.Medical  products  manufacturing,  sales and  maintenance.  We, through our Endocare  acquisition,  manufacture and
sell  medical  devices  focused  on  minimally  invasive   technologies  for  tissue  and  tumor  ablation  through
cryoablation,  which is the use of lethal ice to destroy  tissue,  such as tumors,  for  therapeutic  purposes.  We
develop and  manufacture  these  devices for the  treatment of prostate  and renal  cancers and we believe that our
proprietary  technologies have broad applications  across a number of markets,  including the ablation of tumors in
the  lung  and  liver  and  palliative  intervention  (treatment  of  pain  associated  with  metastases).  We also
manufacture  the related spare parts and  consumables  for these devices.  We also sell and maintain  lithotripters
and related spare parts and consumables.Revenue Recognition

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

| |  | Fees for urology  treatments.


A substantial majority of our revenue is derived from fees related to lithotripsy treatments performed using our
lithotripters.  For lithotripsy and prostate treatment services, we, through our partnerships and other entities,
facilitate the use of our equipment and provide other support services in connection with these treatments at
hospitals and other health care facilities.  The professional fee payable to the physician performing the
procedure is generally billed and collected by the physician.  We recognize revenue for these services when the
services are provided.  IGRT technical services are billed monthly and the related revenues are recognized as the
related services are provided.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Fees for managing the operation of our lithotripters and prostate treatment devices.
Through our partnerships and otherwise directly by us, we provide services related to operating our lithotripters
and prostate treatment equipment and receive a management fee for performing these services.  We recognize
revenue for these services as the services are provided.                                                                                                                                                                                                                                                                                                                                                                                 

|3
|-



---

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

|Revenues and Industry Segments

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

We rely on third party  suppliers to provide  certain  critical  components and consumables for the medical devices
we manufacture and certain  services we provide.  In certain cases, the suppliers are our sole source of supply for
these components and consumables.  Our policy is to enter into long-term supply  agreements that require  suppliers
to maintain adequate  inventory levels and which contain other terms and conditions  designed to protect us against
unforeseen  interruptions in their  production.  We endeavor to maintain adequate stock levels at our own locations
to ensure an uninterrupted  source of supply.  We typically seek to establish  secondary sources of supply or other
manufacturing  alternatives.  Nevertheless,  despite  these  efforts,  it is  possible  that we may  experience  an
interruption  in supply  of one or more of our  critical  components  resulting  in  backorders  to our  customers.
However,  we  believe  that we could  locate  alternative  sources  of supply  upon such  terms and  within  such a
timeframe as would not result in a material adverse effect on our business.Patents and Intellectual Property

We have rights to United States patents relating to cryoablation and lithotripsy technology.  Our policy is to
secure and protect intellectual property rights relating to our technology through patenting inventions and
licensing others when necessary. While we believe that the protection of patents and licenses is important to our
business, we also rely on trade secrets, know-how and continuing technological innovation to maintain our
competitive position. Given our technology and patent portfolio, we do not consider the operation of our business
to be materially dependent upon any one patent, group of patents or single technological innovation.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4
|-



---

|Our policy is to sell our products and services under trademarks and to secure  trademark  protection in the United
States and elsewhere where we deem such protection important.

No assurance can be given that our processes or products will not infringe patents or other  intellectual  property
rights of others or, if they are held to infringe,  that any license  required  would be made  available  under any
such patents or intellectual  property  rights,  on terms acceptable to us or at all. In the past, we have received
correspondence  alleging  infringement of intellectual  property rights of third parties. No assurance can be given
that any relevant claims of third parties would not be upheld as valid and  enforceable,  and therefore we could be
prevented from  practicing  the subject  matter claimed or could be required to obtain  licenses from the owners of
any such intellectual property rights to avoid infringement.

We seek to preserve the  confidentiality  of our technology by entering into  confidentiality  agreements  with our
employees,  consultants,  customers and key vendors and by other means.  No assurance can be given,  however,  that
these measures will prevent the unauthorized disclosure or use of such technology.Competition

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

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

In our manufacturing  operations,  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, Direx and Galil Medical, Ltd.

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

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

|5
|-



---

|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 $25,000
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 for our
employees.  The plan is designed to provide a specified level of coverage,  with stop-loss  coverage  provided by a
commercial insurer. Our maximum claim exposure is limited to $110,000 per person per policy year.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 of
states in which we conduct business, including:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the federal Medicare and Medicaid anti-kickback law, and state anti-kickback prohibitions;                                                         
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | the  federal  physician  self-referral  prohibition  commonly  known as the  Stark  Law and the  state law
     equivalents of the Stark Law;      
|
| |  | the federal False Claims Act;                                                                                                                      
|
| |  | 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;                   
|
| |  | state  laws that  prohibit  the  practice  of  medicine  by  non-physicians,  and  prohibit  fee-splitting
     arrangements involving physicians; 
|
| |  | state and federal laws  affecting  the  ownership  and operation of the equipment we use and the manner in
     which we provide services; and     
|
| |  | federal and state laws  governing  the  equipment we use in our  business  concerning  patient  safety and
     equipment operating specifications.
|

|The federal  anti-kickback  law prohibits the knowing and willful offer,  payment,  solicitation  or receipt of any
form of  remuneration  in return for, or in order to induce,  (i) the  referral of a person for services,  (ii) the
furnishing  or  arranging  for the  furnishing  of items or  services,  or  (iii) the  purchase,  lease or order or
arranging or recommending  purchasing,  leasing or ordering any item or service,  in each case,  reimbursable under
any federal  health  care  program.  The Stark Law  prohibits a  physician  from  referring a Medicare  patient for
designated  health  services,  or DHS, to an entity with which the  physician  has a direct or indirect
financial  relationship,  whether in the nature of an ownership  interest or a  compensation  arrangement,  subject
only to limited  exceptions.  The Stark Law also prohibits the recipient of a prohibited  referral from billing for
the DHS provided  pursuant  thereto.  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 the laws and  regulations  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.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6
|-



---

|The Centers for Medicare & Medicaid  Services  (CMS)  recently  issued a rule that amended  regulations
that  implement the Stark Law.  Under the rule,  which went into effect  October 1, 2009,  certain  physician-owned
ventures (e.g.,  laser,  cryotherapy,  and TUMT partnerships) are not able to contract with hospitals for the lease
of  space or  equipment  under a  per-procedure  or  per-click  payment  arrangement.  Also  under  the  rule,  CMS
acknowledged  that  lithotripsy  services  performed  under  arrangements at hospitals is not a DHS under the Stark
Law.  However,  to the extent a physician  with an ownership  or  compensation  interest in one of our  lithotripsy
partnerships  otherwise  refers  patients to the  hospital  for DHS  services,  the Stark Law still  applies and an
exception  must be met. CMS has also issued an answer in the form of a  Frequently  Asked  Question  on
its website,  where it indicates  that the provision of lithotripsy  services may be considered a service  contract
and not a lease of space or equipment.  Thus,  according to the FAQ advice from CMS, our  lithotripsy  partnerships
may continue to contract  with  hospitals  on a  per-procedure  payment  basis so long as the contract is a service
arrangement  rather than a leasing  arrangement  and the  physician  partners in the  partnership  do not otherwise
refer   designated   health  services   to  the  contracting  hospitals  (unless  under  an  applicable
exception).  If the partnership provides a technician and related support when providing  lithotripsy  services, we
believe  such  arrangement  is a  service  arrangement.  If a  lithotripsy  arrangement  is  considered  a  leasing
arrangement  or if any of the physician  partners in the  lithotripsy  arrangement  refer  designated  health
services  to a contracting hospital,  then the fee arrangements between the partnership and the hospitals are
required  to be in  compliance  with the new rule  effective  as of October  1, 2009.  In  addition,  our  prostate
treatment  partnerships  were  required to be in compliance  with the new rule  effective as of October 1, 2009. We
restructured our prostate  partnerships  and/or their hospital contracts to comply with the amended  regulations as
of October 1,  2009.  Although we believe the prostate  partnerships  as  restructured  are in compliance  with the
amended  regulations,  no assurance can be made that the prostate  partnerships as restructured will be found to be
in  compliance  with the amended  Stark law  regulations  if  reviewed by  regulatory  authorities.  If  regulatory
authorities  were to conclude that our prostate  partnerships  were not in  compliance,  any  resulting  penalties,
damages,  fines or curtailment of our  operations,  individually or in the aggregate,  could  adversely  effect our
ability to operate our business and affect our financial results.

In light of these amended  regulations and the resulting  effects on our operations as described  above,  physician
investment  in our  partnerships  may become  less  attractive.  As a result,  it may be more  difficult  to retain
physician  partners in our partnerships  and attract new physician  partners to our  partnerships.  At this time we
are unable to assess  the extent to which the  amended  regulation  will  affect  relationships  with our  existing
physician partners and our ability to attract new physician  partners.  However,  if the amended regulations have a
negative  effect on our physician  partner  relationships,  then our operations and results of operations  could be
materially adversely affected.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7
|-



---

|Generally,  physician  ownership and contracts with entities that provide  ancillary medical services are a subject
of intensive  legislative  and regulatory  attention.  It is likely that  additional  legislation may be passed and
additional  regulations  will be  promulgated  that will further  affect our business  and our  relationships  with
physicians.  The  recently-passed  American  Recovery and  Reinvestment Act of 2009 (commonly known as the Stimulus
Bill) contains a number of provisions  affecting  healthcare entities like us, including new requirements  relating
to information  technology,  privacy,  and data  security.  The U.S.  President has stated that his  administration
will  make  health  care  reform  a  major  initiative,  which  may  impact  our  provision  of  services  and  our
reimbursement.  Potential  changes that have been  considered  include  controls on health care  spending and price
controls.  Any health care reform  could have a material  adverse  effect on  reimbursement  for our  services  and
products and could  negatively  affect the commercial  acceptance of our services and products,  which could have a
material  adverse effect on our  operations  financial  position and results of operations.  We are unable to state
with certainty the effect of any such pending legislation or regulation on our business.

Governmental  regulation in the United States and other  countries is a significant  factor  affecting the research
and development,  manufacture and marketing of medical devices,  including our products.  In the United States, the
U.S. Food and Drug Administration  (FDA)  has broad authority under the Federal Food, Drug and Cosmetic
Act (FD&C Act) to regulate the development,  distribution,  manufacture,  marketing and sale of medical
devices.  Foreign sales of medical devices are subject to foreign  governmental  regulation and  restrictions  that
vary from  country to country.  We can provide no assurance  that we will be able to obtain or maintain  clearances
or approvals for clinical testing or for  manufacturing  and sales of our existing products for all applications in
all targeted  markets,  or that we will be able to obtain or maintain  clearances or approvals  needed to introduce
new products and technologies.  After a device is placed on the market,  numerous  regulatory  requirements  apply.
These include, but are not limited to:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | quality system regulation, which requires manufacturers to follow design, testing, control, documentation and
other quality assurance procedures during the manufacturing process;                                                                                                                           
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | labeling regulations, which require specific information on product labels and in labeling, prohibit certain
information, prohibit the promotion of products for unapproved or off-label uses and impose other
restrictions on labeling; and                                                               
|
| |  | medical device reporting  regulations,  which require that manufacturers report to the FDA if their device
         may have caused or contributed to a death or serious  injury or  malfunctioned  in a way that would likely
         cause or contribute to a death or serious injury if it were to recur.
|

|Failure to comply with applicable  regulatory  requirements can result in enforcement  action by the FDA, which may
include, but is not limited to, any of the following sanctions:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | fines, injunctions, and civil penalties;                                         
| | - | ---------------------------------------------------------------------------------
|
| |  | recall or seizure of our products;                                               
|
| |  | operating restrictions, partial suspension or total shutdown of production;      
|
| |  | refusing our request for 510(k) clearance or premarket approval of new products; 
|
| |  | withdrawing 510(k) clearance or premarket approvals that are already granted; and
|
| |  | criminal prosecution.                                                            
|

|8
|-



---

|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 truck,  usually for a term up to five years, and purchase the trailer
or a self contained coach. We are not dependent on any one manufacturer of medical equipment.Employees

As of  February 28,  2010,  we employed  approximately  619  full-time  employees  and  approximately  39 part-time
employees.Risk Factors

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

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

We are subject to extensive  regulation by both the federal  government  and the  governments of 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.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|9
|-



---

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

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

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

A number of proposals  for health care reform have been made in recent years,  some of which have included  radical
changes in the health care system.  We anticipate  that federal  legislation  will be enacted in the next few years
that will  significantly  reform health care.  Health care reform could result in material changes in the financing
and regulation of the health care  business,  and we are unable to predict the effect of such changes on our future
operations.  It is uncertain  what  legislation  on health care reform,  if any, will  ultimately be implemented or
whether other changes in the  administration of or interpretation  of existing laws involving  governmental  health
care  programs  will  occur.  Future  health  care  legislation  or  other  changes  in  the  administration  of or
interpretation of existing  legislation  regarding  governmental  health care programs could have an adverse effect
on our business and the results of our operations.If we fail to obtain or  maintain  necessary  regulatory  clearances  or  approvals  for the  medical  products  we
manufacture,  or if approvals are delayed or withdrawn,  we will be unable to  commercially  distribute  and market
our products or any product modifications.

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

|10
|--



---

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

The FDA and similar  governmental  authorities in other countries have the authority to request and, in some cases,
require  the  recall  or  similar  actions  for the  medical  products  we  manufacture  in the  event of  material
deficiencies  or defects in design,  manufacture  or labeling  or in the event of patient  injury.  A  governmental
mandated or voluntary recall by us could occur as a result of component  failures,  manufacturing  errors or design
defects.  Any recall of product would divert  managerial  and  financial  resources  and harm our  reputation  with
customers and our business,  impact our ability to distribute  the recalled  product in the future,  require costly
redesign  or  manufacturing  changes  and leave us  vulnerable  to  additional  regulatory  sanctions  and  product
liability litigation.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  operations  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.  These developments could have a material adverse effect on our business,  financial  condition and
result of operation.  Our business is also  impacted by  competition  between  lithotripsy  and prostate  treatment
services,  on the one hand, and surgical and other established methods for treating urological  conditions,  on the
other hand.

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

|11
|--



---

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

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

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

Our  success  will  depend to a degree on our ability to secure and  protect  intellectual  property  rights and to
enforce  patent  and  trademark  protections  relating  to our  technology.  From time to time,  litigation  may be
advisable  to protect  our  intellectual  property  position.  However,  these  legal  means  afford  only  limited
protection and may not adequately  protect our rights or permit us to gain or keep any competitive  advantage.  Any
litigation in this regard could be costly,  and it is possible that we will not have sufficient  resources to fully
pursue litigation or to protect our other  intellectual  property rights.  Litigation could result in the rejection
or invalidation of our existing and future patents.  Any adverse outcome in litigation  relating to the validity of
our  patents,  or any failure to pursue  litigation  or  otherwise  to protect our patent  positions,  could have a
material adverse effect on our business,  financial condition, and results of operations.  Also, even if we prevail
in  litigation,  the  litigation  would be costly in terms of  management  distraction  as well as in terms of cash
resources. In addition,  confidentiality  agreements with our employees,  consultants,  customers,  and key vendors
may not prevent the  unauthorized  disclosure or use of our technology.  It is possible that these agreements could
be breached or that they might not be enforceable in every instance,  and that we might not have adequate  remedies
for any such breach.  Enforcement of these  agreements may be costly and time consuming.  Furthermore,  the laws of
foreign  countries may not protect our  intellectual  property  rights to the same extent as the laws of the United
States.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12
|--



---

|We may be  required  to modify our  agreements,  operations,  marketing  and  expansion  strategies  in response to
changes in the statutory and regulatory environment.

We regularly  monitor  developments  in statutes  and  regulations  relating to our  business.  However,  we may be
required to modify our  agreements,  operations,  marketing and expansion  strategies from time to time in response
to changes in the statutory and regulatory  environment.  We plan to structure all of our  agreements,  operations,
marketing  and  strategies  in  accordance  with  applicable  law,  although we can provide no  assurance  that our
arrangements  will not be challenged  successfully or that required  changes may not have a material adverse effect
on our business, financial condition, and results of operations.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;                                                        
|
| |  | general economic conditions;                                                                           
|
| |  | economic conditions within our industry;                                                               

|13
|--



---

| |  | acquisitions and financings in our industry; and
| | - | ------------------------------------------------
|
| |  | overall volatility of the stock market.         

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

We have  followed an  acquisition  strategy  that has resulted in rapid growth in our  business.  This  acquisition
strategy  includes  acquiring  healthcare  services  businesses and is dependent on the continued  availability  of
suitable acquisition  candidates and our ability to finance and complete any particular  acquisition  successfully.
Moreover,  the U.S. Federal Trade Commission,  or FTC,  initiated an investigation in 1991 to determine whether the
limited  partnerships  in which  Lithotripters,  Inc., now one of our  wholly-owned  subsidiaries,  was the general
partner  posed  an  unreasonable  threat  to  competition  in the  healthcare  field.  While  the  FTC  closed  its
investigation  and took no action,  the FTC or another  governmental  authority  charged  with the  enforcement  of
federal  or  state  antitrust  laws or a  private  litigant  might,  due to our  size  and  market  share,  seek to
(1) restrict our future growth by prohibiting or restricting the acquisition of additional  lithotripsy  operations
or  (2) require  that we divest  certain  of our  lithotripsy  operations.  Furthermore,  acquisitions  such as our
acquisition of Endocare in July 2009,  involve a number of risks and challenges, including:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | diversion of managements attention;                                                                                                                                              
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | the need to integrate acquired operations;                                                                                                                                        
|
| |  | the risk  that the  expected  cost  savings  and other  synergies  from the  acquisition  may not be fully
  realized, realized at all or take longer to realize than anticipated;
|
| |  | 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, 2009,  we had goodwill of $103
million.  If we  determine  in the  future  that the fair value of any of our  reporting  units does not exceed the
carrying  value of the  related  reporting  unit,  goodwill  in that  reporting  unit 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  unit.  The  amount of the  reduction  will be  deducted  from  earnings  during  the period in which the
impairment  occurs. An impairment will also reduce  stockholders  equity in the period incurred by the amount
of the  impairment.  In the fourth  quarter of 2008, in connection  with our annual  goodwill  impairment  test, we
recorded an impairment to our urology services  reporting unit goodwill  totaling $144 million.   Although our core
operations  remain  stable  and  reflect  growth  over the prior  year,  we  adjusted  certain  assumptions  in our
discounted  cash flow model to address the declines in our market  capitalization,  which had fallen  significantly
below our  consolidated  net assets.  In addition,  the market  comparables  component of our  impairment  test was
negatively  impacted  by the  current  global  economic  crisis and global  decline  in the stock  markets.  In the
fourth quarter of 2007, in connection  with our annual goodwill  impairment  test, we recorded an impairment to our
urology  services  reporting unit goodwill  totaling $20.8  million.  This  impairment was due to a decrease in our
estimated  future  discounted  cash flows from this  reporting  unit.  This decrease was primarily  caused by lower
projected  growth  rates for our laser  operations  as well as the  timing of  certain  future  growth for our IGRT
operations.   For  further  discussion  of  our  2008  and  2007  goodwill  impairments,  see  footnote  C  to  our
consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|14
|--



---

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

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

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

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

|Our indebtedness may limit our financial and operating flexibility.

As of December 31, 2009, we had  indebtedness of approximately  $4.5 million related to equipment  purchased by our
limited  partnerships,  which  indebtedness we believe will be repaid from the cash flows of the  partnerships.  We
also have a  revolving  line of credit  with a  borrowing  limit of $60.0  million  pursuant  to our senior  credit
facility.  As of December 31, 2009, we have drawn $44 million on the revolver.

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:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15
|--



---

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

|We  currently  have $44  million  drawn on our $60 million  revolving  line of credit,  which could have  important
consequences to you. For example, it could:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|In  addition,  if we fail to  comply  with  the  terms of any of our  debt,  our  lenders  will  have the  right to
accelerate the maturity of that debt and foreclose upon the  collateral,  if any,  securing that debt.  Realization
of any of these factors could adversely affect our business, financial condition and results of operations.Our lenders may be unable or unwilling to fund their commitments under our senior credit facility.

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

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

|16
|--



---

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

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

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

|Executive Officers

As of March 6, 2010, our executive officers were as follows:
|--------------------------------------------------------------------------------

|Name                   | Age |  | Position                                            
|---------------------- | --- |  | ----------------------------------------------------
|                      
|James S.B. Whittenburg | 38  |  | Chief Executive Officer and President               
|                      
|Richard A. Rusk        | 48  |  | Chief Financial Officer and Treasurer               
|                      
|Clint B. Davis         | 37  |  | Senior Vice President, General Counsel and Secretary
|                      
|Clayton H. Duncan      | 37  |  | Vice President-Radiation Therapy                    
|                      
|Scott A. Herz          | 33  |  | Vice President-Corporate Development                
|                      
|Laura A. Miller        | 40  |  | President of Pathology Services                     
|                      

|The foregoing does not include  positions held in our  subsidiaries.  Our officers are elected for annual  periods.
There are no family relationships between any of our executive officers and/or directors.Mr. Whittenburg was appointed as our President and Chief Executive Officer on August 13, 2007. From June 2006
until August 13, 2007, Mr. Whittenburg served as President of our Urology Division, and he was our acting
President and Chief Executive Officer from May 2007 until August 2007.  He served as President of our Specialty
Vehicle Manufacturing Division from December 2005 until its sale in July 2006 and was our General Counsel and
Senior Vice PresidentDevelopment from March 2004 until June 2006. Previously Mr. Whittenburg practiced law at
Akin Gump Strauss Hauer & Feld LLP, where he specialized in corporate and securities law. Mr. Whittenburg, a CPA,
is licensed to practice law in Texas.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|17
|--



---

|Mr. Rusk  was  appointed  Chief  Financial  Officer in  November  2009.  Mr.  Rusk  joined us in August 2000 as our
Corporate  Controller  and was named Vice  President in June 2002.  In June 2006,  Mr. Rusk was named our Treasurer
and in September  2006,  Mr. Rusk was named our  Secretary.  In September of 2008, Mr. Rusk was named Interim Chief
Financial  Officer.  Before joining us, Mr. Rusk,  a CPA, was with KPMG LLP for approximately  seventeen years, the
last ten years as a senior audit manager.Mr.  Davis joined us in July 2009 as Senior Vice  President  and General  Counsel.  From January 2006 to July 2009,
Mr. Davis was employed by Endocare where he served as Senior Vice  President,  Legal Affairs,  General  Counsel and
Secretary.  From August 2000 to January  2006,  Mr. Davis was a corporate  attorney  with the  San Diego  office of
Morrison &  Foerster  LLP.  While at  Morrison &  Foerster,  Mr. Davis  represented  a number of life  sciences and
technology  companies  in  a  wide  variety  of  business  transactions,  contractual  arrangements  and  corporate
governance matters.  Prior to his employment with Morrison & Foerster,  Mr. Davis was a corporate attorney with law
firms in Boston and Los Angeles. Mr. Davis holds a B.A. from Rice University and a J.D. from Harvard Law School.Mr. Duncan joined us in August 2007 as Vice  President  Radiation  Therapy.   From August 2002 to August 2007, Mr.
Duncan was employed by McKesson Provider  Technologies,  where he most recently held the position of Vice President
of Corporate  Accounts for the Automation  Solutions  division.   Prior to that time, Mr. Duncan served in numerous
development  and sales  leadership  positions in the healthcare and  technology  industries.   Mr. Duncan began his
professional  career by practicing law at Strasburger & Price LLP in the  International  Franchise and Distribution
section.   Mr.  Duncan  obtained his J.D.  from  Southern  Methodist  University,  holds a Master of  International
Management from Thunderbird, The American Graduate School of International  Management,  and also holds a B.B.A. in
Finance from Texas Tech University. Mr. Duncan is licensed to practice law in Texas.Mr. Herz joined us in February 2005 in our Specialty  Vehicles  division as Associate  Vice  President-Finance.  In
June 2006,  Mr. Herz was appointed  Associate Vice  President  Corporate  Development  and in December 2007 he was
appointed  Vice  President    Corporate  Development.  Prior to  joining  us,  Mr.  Herz  served  as an  associate
investment  banker at RSM Equico from 2004 to 2005.  Prior to that time,  Mr. Herz worked as a mechanical  engineer
at  Colorado  MEDtech,  Inc.  from 1999 to 2002.  From 2002 to 2004,  Mr.  Herz  obtained  his MBA from  Pepperdine
University and also holds a BS in Mechanical Engineering from Michigan State University.Ms.  Miller joined us in December 2009 as President of Pathology  Services.   From November 2008 to December  2009,
Ms. Miller served as an  independent  consultant to  HealthTronics.  From May 2007 to November 2008, Ms. Miller was
employed by Lakewood  Pathology  Associates  where she most recently held the position of Senior Vice  President of
Pathology  Solutions.  From  January  2006 to May  2007,  Ms.  Miller  served  as  General  Manager  for  Strategic
Development  for Dianon  Systems,  Inc.  From July 2003 to December  2005,  Ms.  Miller was  employed by LabCorp as
National  Sales  Manager.  Ms.  Miller  has  spent  twelve  years  in  the  anatomical  pathology  and  diagnostics
industries,  serving in numerous development and sales leadership positions.  Prior to entering the business world,
Ms. Miller served in the U.S. Army, where she achieved the rank of Captain  Military Intelligence.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.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|18
|--



---

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


ITEM 1A.          RISK FACTORS

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



ITEM 1B.          UNRESOLVED STAFF COMMENTS

None.ITEM 2.           PROPERTIES

Our  principal  executive  office is located in Austin,  Texas.  On June 16, 2008,  we sold the office  building in
which our principal  executive offices were located for  approximately  $6,750,000.  We subsequently  relocated our
principal  executive  offices in late  September  2008. In December  2008, we also  relocated our Medical  Products
operations  from leased  facilities in Kennesaw,  Georgia to warehouse space that occupies the same leased building
as our  principal  executive  offices  in  Austin,  Texas.  By March  2010,  we intend  to  relocate  our  Endocare
manufacturing  operations  from Irvine,  California to warehouse  space  adjoining  our executive  space in Austin,
Texas.

ITEM 3.           LEGAL PROCEEDINGS

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

ITEM 4.           RESERVED
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|19
|--



---

|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, 2009 and 2008 (NASDAQ Symbol HTRN).
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2009           | 2008
| | -------------- | ----
|
| | First Quarter  |     
| | Second Quarter |     
| | Third Quarter  |     
| | Fourth Quarter |     

|On February 20, 2010, we had 669 holders of record of our common stock.

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

|Period                           | Total Number of Shares
Purchased | Average Price Paid
Per Share | Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs | Maximum Number (or
Approximate Dollar
Value) of Shares That
May Yet to be Purchased
Under the Plans or
Programs
|-------------------------------- | -------------------------------- | ---------------------------- | -------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------
|Month 1 (10/1/2009  10/31/2009) |                                  |                              |                                                                                  | 11,292                                                                                                         
|Month 2 (11/1/2009  11/30/2009) |                                  |                              |                                                                                  | 31,581                                                                                                         
|Month 3 (12/1/2009  12/31/2009) |                                  |                              |                                                                                  | --                                                                                                             
|Total                            |                                  |                              |                                                                                  | 42,873                                                                                                         

|_____________________
|---------------------

| | (a) | On October 6, 2008,  our Board of Directors  authorized  the  repurchase  of up to $10 million of our common stock.
         We anticipate  that the stock will be  repurchased  through  privately-negotiated  transactions  or on the
         open market.  We intend to comply with the SECs  Rule 10b-18,  and the  repurchases  will be subject
         to  market  conditions,  applicable  legal  requirements,  and  other  factors.  We are not  obligated  to
         repurchase  shares under the program,  and our Board of Directors  may suspend or terminate the program at
         any time.  The  repurchase  program has no expiration  date. We have no repurchase  plans or programs that
         expired  during the period  covered by the above table,  and we have no repurchase  plans or programs that
         we intend to terminate prior to expiration or under which we no longer intend to make further purchases.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) | Represents  shares used by 5 employees to pay their federal tax  withholding  obligation  related to the vesting of
         certain restricted stock awards in October and November 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|20
|--



---

|Equity Compensation Plan Information

At  December 31,  2009,  we had seven  separate  equity  compensation  plans:  the  Prime  Medical  Services,  Inc.
(Prime)  1993 and 2003 stock option plans, the HealthTronics Surgical Services, Inc.  (HSS)
general,  2000,  2001 and 2002 stock option  plans,  and the HSS 2004 equity  incentive  plan.  The plans,  and all
amendments  thereto,  had been  approved  by  Primes  and  HSS  shareholders,  as the  case may be.  On
November  10,  2004,  Prime  completed  a merger with HSS  pursuant  to which  Prime  merged with and into HSS with
HealthTronics,  Inc. as the  surviving  corporation.  The  following  table sets forth  certain  information  as of
December 31, 2009 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    |     |    

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

|21
|--



---

|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, 2005
through December 31, 2009.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 
| | 

# 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,
2009, 2008, 2007, 2006 and 2005, (b) our audited consolidated  balance sheets as of December 31,  2009, 2008, 2007,
2006,  and 2005,  and  (c) our  unaudited  consolidated  statements  of income and cash flows for each of the three
months ended December 31,  September 30,  June 30, and March 31,  for 2009 and 2008. 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.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|22
|--



---

|(In thousands, except per share data)                   | Years Ended December 31,
|------------------------------------------------------- | ------------------------
|
|Revenues from continuing operations                     |                         
|Income (loss) attributable to HealthTronics, Inc. from: |                         
|Continuing Operations                                   |                         
|Discontinued Operations                                 |                         
|Net income (loss)                                       |                         
|                                                       
|Diluted earnings (loss) per share                       |                         
|attributable to HealthTronics, Inc.:                    |                         
|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) attibutable to HealthTronics, Inc. |              
|                                                    
|Per share amounts (basic):                           |              
|Net income (loss)                                    |              
|Weighted average shares outstanding                  |              
|                                                    
|Per share amounts (diluted):                         |              
|Net income (loss)                                    |              
|Weighted average shares outstanding                  |              

|23
|--



---

|Quarterly Data                                        | Quarter Ended
|----------------------------------------------------- | -------------
|
|
|Revenues                                              |              
|Net income (loss) attributable to HealthTronics, Inc. |              
|                                                     
|Per share amounts (basic):                            |              
|Net income (loss)                                     |              
|Weighted average shares outstanding                   |              
|                                                     
|Per share amounts (diluted):                          |              
|Net income (loss)                                     |              
|Weighted average shares outstanding                   |              

|_____________________
|---------------------

|(1)    In the third quarter of 2009, in connection with our acquisition of Endocare, we booked approximately $3.9
million in acquisition related costs which are required to be expensed when incurred beginning in 2009.  In the
fourth quarter of 2009, we booked an additional $4.8 million in costs related to the Endocare acquisition and the
restructuring of our partnerships as noted in the discussion of government regulation and supervision in Item 1. 

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

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

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

# 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.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|24
|--



---

|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;                                        
|
| |  | the integration of acquired business; and                                                                              
|
| |  | general economic, market or business conditions.                                                                       

|General

We provide healthcare services and medical devices, primarily to the urology marketplace.Lithotripsy  services.  We provide  lithotripsy  services,  which is a medical  procedure  where a device  called a
lithotripter  transmits  high  energy  shockwaves  through  the body to break up  kidney  stones.  Our  lithotripsy
services are provided  principally  through  limited  partnerships  and other  entities  that we manage,  which use
lithotripters.  In 2009,  physicians who are affiliated  with us used our  lithotripters  to perform  approximately
50,000 procedures in the U.S.  We do not render any medical services.  Rather, the physicians do.

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

Although the  non-physician  fee under both retail and  wholesale  contracts  varies  widely based on  geographical
markets and the  identity of the third party  payor,  we estimate  that  nationally,  on average,  our share of the
non-physician  fee was roughly $2,100,  respectively,  for both 2009 and 2008. At this time, we do not anticipate a
material  shift  between  our  retail  and  wholesale  arrangements,  or a  material  change  in our  share  of the
non-physician fee.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|25
|--



---

|As the  general  partner  of limited  partnerships  or the  manager of other  types of  entities,  we also  provide
services relating to operating our lithotripters,  including  scheduling,  staffing,  training,  quality assurance,
regulatory compliance, and contracting with payors, hospitals, and surgery centers.Prostate  treatment  services.  We provide  treatments  for benign and cancerous  conditions  of the  prostate.  In
treating benign prostate disease,  we deploy three technologies:  (1) photo-selective  vaporization of the prostate
(PVP),  (2) trans-urethral needle ablation (TUNA), and (3) trans-urethral microwave therapy
(TUMT)  in certain  partnerships.  All three technologies apply an energy source which reduces the size
of the prostate gland. For treating prostate and other cancers,  we use a procedure called  cryosurgery,  a process
which uses  lethal ice to destroy  tissue  such as tumors for  therapeutic  purposes.  In April  2008,  we acquired
Advanced Medical  Partners,  Inc.  (AMPI),  which  significantly  expanded our cryosurgery  partnership
base.  In July 2009,  we  acquired  Endocare,  Inc.  (Endocare),  which  manufactures  both the medical
devices  and  related  consumables  utilized  by  our  cryosurgery   operations,   and  also  provides  cryosurgery
treatments.  Our prostate  treatment  services are provided  principally  by us using  equipment that we lease from
limited  partnerships and other entities that we manage.  Benign prostate disease and cryosurgery  cancer treatment
services are billed in the same manner as our  lithotripsy  services  under either  retail or wholesale  contracts.
We also provide services relating to operating the equipment,  including scheduling,  staffing,  training,  quality
assurance, regulatory compliance, and contracting.Radiation therapy services.  We provide image guided radiation therapy  (IGRT)  technical  services for
cancer  treatment  centers.  Our IGRT  technical  services may relate to providing  the  technical  (non-physician)
personnel to operate a physician  practice  groups  IGRT  equipment,  leasing  IGRT  equipment to a physician
practice  group,  providing  services  related to helping a physician  practice  group  establish an IGRT treatment
center, or managing an IGRT treatment center.Anatomical   pathology  services.   We  also  provide  anatomical  pathology  services  primarily  to  the  urology
community.  We have one  pathology  lab  located in  Georgia,  Claripath  Laboratories,  that  provides  laboratory
detection  and  diagnosis  services to  urologists  throughout  the United  States.  In addition,  in July 2008, we
acquired Uropath LLC, which managed pathology  laboratories  located at Uropath sites for physician practice groups
located in Texas,  Florida and Pennsylvania.  Through Uropath,  we continue to provide  administrative  services to
in-office  pathology labs for practice  groups and provide  pathology  services to physicians  and practice  groups
with our lab equipment and personnel at our Uropath laboratory sites.Medical  products  manufacturing,  sales and  maintenance.  We, through our Endocare  acquisition,  manufacture and
sell  medical  devices  focused  on  minimally  invasive   technologies  for  tissue  and  tumor  ablation  through
cryoablation,  which is the use of lethal ice to destroy  tissue,  such as tumors,  for  therapeutic  purposes.  We
develop and  manufacture  these  devices for the  treatment of prostate  and renal  cancers and we believe that our
proprietary  technologies have broad applications  across a number of markets,  including the ablation of tumors in
the  lung  and  liver  and  palliative  intervention  (treatment  of  pain  associated  with  metastases).  We also
manufacture  the related spare parts and  consumables  for these devices.  We also sell and maintain  lithotripters
and related spare parts and consumables.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|26
|--



---

|Revenue Recognition

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

| |  | Fees for urology treatments.

        A substantial  majority of our revenue is derived from fees related to  lithotripsy  treatments  performed
         using our  lithotripters.  For lithotripsy and prostate treatment  services,  we, through our partnerships
         and other entities,  facilitate the use of our equipment and provide other support  services in connection
         with these  treatments  at hospitals and other health care  facilities.  The  professional  fee payable to
         the physician  performing the procedure is generally  billed and collected by the physician.  We recognize
         revenue for these  services when the services are provided.  IGRT  technical  services are billed  monthly
         and the related revenues are recognized as the related services are provided.                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Fees for managing the operation of our lithotripters and prostate treatment devices.  Through our partnerships
and otherwise directly by us, we provide services related to operating our lithotripters and prostate treatment
equipment and receive a management fee for performing these services.  We recognize revenue for these services as
the services are provided.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Fees for maintenance services.

We provide equipment maintenance services to our partnerships as well as outside parties.  These services are
billed either on a time and material basis or at a fixed contractual rate, payable monthly, quarterly, or
annually.  Revenues from these services are recorded when the related maintenance services are performed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Fees for equipment sales, consumable sales and licensing applications.  We manufacture and sell medical devices
focused on minimally invasive technologies for tissue and tumor ablation through cryosurgery, and their related
consumables.  We also sell and maintain lithotripters and manufacture and sell consumables related to the
lithotripters.  We distribute the Revolix laser and consumables related to the laser.  With respect to some
lithotripter sales, in addition to the original sales price, we receive a licensing fee from the buyer of the
lithotripter for each patient treated with such lithotripter.  In exchange for this licensing fee, we provide the
buyer of the lithotripter with certain consumables.  All the sales for equipment and consumables are recognized
when the related items are delivered.  Revenues from licensing fees are recorded when the patient is treated.  In
some cases, we lease certain equipment to our partnerships as well as third parties.  Revenues from these leases
are recognized on a monthly basis or as procedures are performed.
|
| |  | Fees for anatomical pathology services.  We provide anatomical pathology services primarily to the urology
community.  Revenues from these services are recorded when the related laboratory procedures are performed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|

|Recent Developments

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

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

|27
|--



---

|Critical Accounting Policies and Estimates

Management has identified the following critical accounting policies and estimates:

Impairments  of goodwill  and other  intangible  assets are both a critical  accounting  policy and  estimate  that
require  judgment and are based on assumptions  of future  operations.  We are required to test for  impairments at
least annually or if  circumstances  change that would reduce the fair value of a reporting unit below its carrying
value.  We test for  impairment  of goodwill  during the fourth  quarter.  As of  December  31,  2009,  we have two
reporting  units,  urology  services  and  anatomical  pathology  services.  As of December  31,  2008,  we had two
reporting units,  urology services and medical  products.  The fair value of each reporting unit is estimated using
a  combination  of the  income,  or  discounted  cash  flows,  approach  and the market  approach,  which  utilizes
comparable  companies  data.  Because we have recognized  goodwill based solely on our controlling  interest,
the fair value of each reporting unit also relates only to our  controlling  interest.  If the carrying amount of a
reporting  unit  exceeds its fair value,  the second step of the goodwill  impairment  test is performed to measure
the amount of impairment  loss, if any. The second step of the goodwill  impairment  test compares the implied fair
value of the reporting  units  goodwill with the carrying value of that goodwill.  If the carrying  amount of
the  reporting  units  goodwill  exceeds the  implied  fair value of that  goodwill,  an  impairment  loss is
recognized  in an amount  equal to that  excess.  The  implied  fair value of goodwill  is  determined  in the same
manner as the amount of goodwill  recognized  in a business  combination.  That is, the fair value of the reporting
unit is allocated to all of the assets and  liabilities  of that unit as if the reporting unit had been acquired in
a business  combination  and the fair  value of the  reporting  unit was the  purchase  price  paid to acquire  the
reporting  unit.  Both the income approach and the market  approach  require  significant  assumptions to determine
the fair value of each reporting unit. The significant  assumptions used in the income approach  include  estimates
of our future revenues,  profits,  capital expenditures,  working capital  requirements,  operating plans, industry
data and other  relevant  factors.  The  significant  assumptions  utilized  in the  market  approach  include  the
determination of appropriate  market  comparables,  the estimated  multiples of revenue,  EBIT and EBITDA a willing
buyer is likely to pay, and the  estimated  control  premium a willing  buyer is likely to pay. For a discussion of
our 2008 goodwill  impairment  and the specific  assumptions  used in the income and market  approaches in the 2009
and 2008  analyses,  see footnote C to our  consolidated  financial  statements  included  elsewhere in this Annual
Report on Form 10-K.

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

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

|28
|--



---

|Year ended December 31, 2009 compared to the year ended December 31, 2008

Our total  revenues for the year ended  December 31, 2009  increased  $19,388,000 as compared to the same period in
2008.  Revenues from our lithotripsy  business increased  $1,615,000 in 2009 as compared to 2008, and revenues from
our prostate business  increased  $5,262,000 for the year ended December 31, 2009 as compared to the same period in
2008.  Prostate  revenues  from a full year of our AMPI  operations  were a  significant  driver  of the  increased
prostate  revenues in 2009, as we acquired AMPI in April 2008.  Lithotripsy  revenues on a same store basis in 2009
were  consistent  with revenues from the same period in 2008.  Manufacturing  and consumable  revenues for the year
ending  December 31, 2009 increased  $4,965,000  from the same period in 2008.  This increase is driven entirely by
sales to external customers from our new Endocare  subsidiary.  Revenues from our laboratory  operations  increased
$3,769,000  in 2009 as compared to the same  period in 2008.  This  increase  resulted  primarily  from our Uropath
operations,  as we acquired  Uropath in July 2008.  Revenues  from our IGRT  operations  increased by $3,512,000 in
2009, primarily from our Ocean acquisition in late 2008.

Our cost of revenues  increased  $14,981,000  (20%) in 2009 as  compared  to the same  period in 2008.  The primary
causes of this  increase  relate to: 1) increased  cost of revenues  attributable  to our AMPI and IGRT  operations
totaling  $3,580,000  due to a full year of operations in 2009,  2) increased  costs related to our lab  operations
totaling  $4,268,000  related primarily to a full year of Uropath  activities,  and 3) cost of revenues  associated
with  our new  Endocare  subsidiarys  operations,  which  totaled  $7,586,000  since  we  acquired  Endocare.
Approximately $3.8 million of  Endocares  costs of revenue related to incremental cost of goods sold from our
write up of Endocares  inventory to fair value as part of our purchase accounting.  Our selling,  general and
administrative  costs for the year ended  December  31,  2009  increased  $4,040,000  over the same period in 2008.
This increase was primarily  driven by acquisition  costs related to our Endocare  acquisition,  which are required
to be expensed when incurred beginning in 2009.

Depreciation  and  amortization  expense  increased  $2,181,000  in 2009  compared  to 2008,  primarily  due to the
Endocare  acquisition and a full year of amortization on an IGRT services  agreement which was acquired in November
of 2008.

Net income  attributable  to  noncontrolling  interest for the year ended  December 31, 2009  increased  $1,425,000
compared to the same period in 2008,  as a result of increases in income at our  existing  partnerships,  primarily
as a result  of  having a full  year of  activity  from  our AMPI  partnerships,  which  was  partially  offset  by
noncontrolling  interest  expense of $986,000  related to the  restructuring  of our  partnerships  as noted in the
discussion on government regulation and supervision in Item 1.

Provision for income taxes for the year ended December 31, 2009 increased  $14,353,000  compared to the same period
in 2008.  The  variance is primarily  related to the tax effect of the  impairment  charge in 2008.  Our income tax
expense for 2009 reflects the expense  related to the recording of a full valuation  allowance for all deferred tax
assets  since we have  been in a  cumulative  loss  position  for the last  three  years due to  non-cash  goodwill
impairments  recorded in prior  years.  For the next  several  years,  we will only be an  alternative  minimum tax
payer as we will  utilize our  existing net  operating  loss  carryforwards  to offset any current  taxes  payable.
Accordingly,  we expect our effective tax rate and our provision for income taxes in future  periods to decrease as
compared to 2009.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|29
|--



---

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

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

Our cost of revenues  increased  $10,964,000  (17%) in 2008 as  compared  to the same  period in 2007.  The primary
causes  of this  increase  relate  to:  1) the cost of  services  at our new AMPI  entities,  whose  costs  totaled
$12,964,000  in 2008,  partially  offset by an overall  decrease  in cost of  services  attributed  to our  organic
urology  business.  This decrease in our organic business costs is primarily  related to the write off of a certain
payable at one of our  partnerships  in the first  quarter of 2008 of  approximately  $700,000  which was  recorded
against operating  expenses and $250,000 of insurance  reimbursements  received at one of our partnerships  related
to damages  suffered  during  hurricane  Katrina;  2) our cost of services  associated with our  manufacturing  and
consumables  sales for 2008,  which  decreased  as compared to 2007  primarily  due to lower cost of sales on fewer
device sales in the period,  which was partially offset by  approximately  $1 million in  restructuring  and moving
costs related to moving our manufacturing and service  operations from Kennesaw,  Georgia to Austin,  Texas; and 3)
our cost of services  associated  with our anatomical  pathology lab operations  increased  $2,658,000 in 2008 over
2007.  We  had  approximately  $740,000  in  increased  expenses  at  our  Claripath  lab,  which  has  experienced
significant growth year over year, and $1,888,000 in expenses at our new Uropath labs.

Our selling,  general and administrative  costs for the year ended December 31, 2008 increased  $4,122,000 compared
to the same period in 2007.  This increase  primarily  relates to increased  compensation  expenses of $1.8 million
related to restricted  stock grants to employees  which vested as performance  goals were reached in the second and
third quarters of 2008 and  approximately $1 million in increases in sales and marketing  expenses  associated with
our  Claripath  lab in 2008.  In  addition,  we received  approximately  $900,000  as a result of our former  Swiss
manufacturing  subsidiarys  insolvency  proceedings in 2007, which was recorded against selling,  general and
administrative expenses.

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

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

|30
|--



---

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

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

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

Our cash and cash equivalents were $8,412,000 and $22,854,000 at December 31, 2009 and 2008, respectively.
Beginning in 2009, our subsidiaries began distributing available cash on a monthly basis, after establishing
reserves for estimated capital expenditures and working capital. Prior to 2009, they generally distributed all
of their available cash quarterly, which lead to an accumulated cash balance at the end of each quarter. For the
years ended December 31, 2009 and 2008, our subsidiaries distributed cash of approximately $62,020,000 and
$53,757,000, respectively, to noncontrolling interest holders.

Cash provided by our operating activities, after noncontrolling interest, was $61,940,000 for the period ended
December 31, 2009 and $70,845,000 for the period ended December 31, 2008. From 2008 to 2009, fee and other
revenue collected increased by $19,963,000 due primarily to increased revenues from our acquisitions as well as
timing of the collections of accounts receivable. Cash paid to employees, suppliers of goods and others
increased by $16,679,000 in 2009. This fluctuation is primarily attributable to increased operating expenses from
our acquisitions and timing of payments. Cash paid for acquisition related costs totaled $10,458,000 in 2009,
primarily related to our Endocare acquisition. Per ASC No. 805, Business Combinations (ASC 805),
(formerly SFAS 141R, Business Combinations), these acquisition related costs are now included in operating
activities beginning January 1, 2009. In prior years, prior to the implementation of ASC 805, these costs were
included in purchase of entities which is an investing activity.

Cash used by our investing activities for the year ended December 31, 2009, was $14,136,000. We purchased
equipment and leasehold improvements totaling $11,702,000 in 2009. We used $3,528,000 to acquire Endocare (which
is net of cash acquired) and to complete certain smaller acquisitions. Cash used by our investing activities for
the year ended December 31, 2008, was $52,311,000. We used approximately $17 million to acquire our interest in
AMPI and Uropath, as well as increase other partnership interests in certain litho partnerships and we used
approximately $35 million to acquire the Ocean services contract. In addition, we purchased equipment and
leasehold improvements totaling $11,779,000 in 2008.

Cash used in our financing activities for the year ended December 31, 2009, was $62,246,000, primarily due to
distributions to noncontrolling interests of $62,020,000 and payments on notes payable of $10,986,000 partially
offset by borrowings on notes payable of $12,997,000. Cash used in our financing activities for the year ended
December 31, 2008, was $20,878,000, primarily due to distributions to noncontrolling interests of $53,757,000 and
payments on notes payable of $14,508,000 partially offset by borrowings on our revolving line of credit of $50
million and on notes payable of $1,747,000.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|31
|--



---

|Accounts  receivable  as of December 31, 2009 has  increased  $4,893,000  from  December 31,  2008.  This  increase
relates primarily to our Endocare  acquisition,  which increased accounts receivable by approximately $3.4 million,
and significant  growth across our Uropath and Claripath lab operations,  as well as increases related primarily to
higher revenues and the timing of collections.

Inventory as of December 31, 2009 totaled $12,498,000 and increased $3,655,000 from December 31, 2008, entirely
related to our Endocare acquisition.Senior Credit Facility

In March 2005,  we  refinanced  our then  existing  revolving  credit  facility  with a $175 million  senior credit
facility  comprised of a five year $50 million  revolver due in March 2010 and a $125 million  senior  secured term
loan B (term  loan  B),  due 2011.  This loan bore interest at a variable rate equal to LIBOR + 1.25 to
2.25% or prime + .25 to 1.25%.  We repaid the term loan B in July 2006 in full.  In April 2008,  we  increased  the
revolving  line of credit from $50 million to $60  million.  In December  2009,  we amended and restated our senior
credit facility.

The amended and  restated  credit  agreement  extended  the maturity  date of the  revolver to  December 31,  2012,
increased the borrowing rate,  eliminated the interest  coverage ratio covenant and replaced it with a fixed charge
coverage  ratio  covenant,  increased the dollar limit on stock  repurchases  by us from $10 million to $20 million
(but  making  repurchases  subject to our  maintaining  a total  leverage  ratio of 2.00 to 1.00),  and other minor
amendments.  Except as described  above,  the terms of our original  senior credit  facility remain in effect under
the amended and restated credit agreement.

As of  December  31,  2009,  we have  drawn $44  million  on the  revolver.  Our senior  credit  facility  contains
covenants that, among other things,  limit our ability to incur debt, create liens, make investments,  sell assets,
pay dividends,  make capital expenditures,  make restricted payments, enter into transactions with affiliates,  and
make  acquisitions.  In addition,  our facility requires us to maintain certain  financial  ratios.  Our assets and
the  stock of our  subsidiaries  collateralize  the  revolving  credit  facility.  We were in  compliance  with the
covenants under our senior credit facility as of December 31, 2009.OtherOther long term debt. As of December 31, 2009, we had notes  totaling $4.5 million  related to equipment  purchased
by our  limited  partnerships.  These  notes are paid from the cash flows of the  related  partnerships.  They bear
interest  at either a fixed rate  ranging  from four to nine  percent or LIBOR or prime plus a certain  premium and
are due over the next four years.Other long term  obligations.  At December 31, 2009, we had a long term obligation of $252,000  related to payments
of $10,534 a month until December 2011 as  consideration  for a noncompetition  agreement with a previous  employee
of our Endocare  division and an  obligation  totaling  $22,000  related to payments of $3,333 per month until July
15, 2010 as consideration for a noncompetition agreement with a previous employee.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|32
|--



---

|General

The following table presents our contractual obligations as of December 31, 2009 (in thousands):
|---------------------------------------------------------------------------------------------------------

| |  | Payments due by period
| |  | ----------------------
|
| |  |                       
| |  |                       
| |  |                       
| |  |                       

|_____________________
|---------------------

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

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

| | (3) | Represents non-compete obligations of $274, as described above.
| | --- | ---------------------------------------------------------------

|In addition, the scheduled principal repayments for all long term debt as of December 31, 2009 are payable as
follows:
|----------------------------------------------------------------------------------------------------------------------

| | ($ in thousands)
| | ----------------
| | 2010            
| | 2011            
| | 2012            
| | 2013            
| | 2014            
| | 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  partnerships in new
markets,  expanding our IGRT customer base and by acquisitions.  We seek opportunities to grow our medical products
operations by expanding our anatomical  pathology lab operations and  acquisitions.  We intend to fund the purchase
price for future  acquisitions  and  developments  using borrowings under our senior credit facility and cash flows
from our  operations.  In  addition,  we may use  shares of our  common  stock in such  acquisitions  where we deem
appropriate.

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

|33
|--



---

|Inflation



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

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

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

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

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

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

|34
|--



---

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

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

In April 2008,  the FASB issued ASC 350-30,  General  Intangibles  Other Than  Goodwill  (ASC  350-30),
(formerly FSP  No. 142-3,  Determination  of the Useful Life of Intangible  Assets).  ASC 350-30 amends the factors
that should be  considered in developing  renewal or extension  assumptions  used to determine the useful life of a
recognized  intangible  asset. ASC 350-30 is effective for financial  statements  issued for fiscal years beginning
after  December 15,  2008,  and interim  periods  within those fiscal  years.  Early  adoption is  prohibited.  The
adoption of ASC 350-30 did not have a material impact on our financial position or results of operations.

In December  2007,  the FASB issued ASC 805,  Business  Combinations  (ASC  805),  (formerly SFAS 141R,
Business  Combinations).   ASC 805 will significantly  change current practices  regarding  business  combinations.
Among the more  significant  changes,  ASC 805 expands the  definition  of a business  and a business  combination;
requires  the  acquirer  to  recognize  the assets  acquired,  liabilities  assumed  and  noncontrolling  interests
(including  goodwill),  measured at fair value at the acquisition date; requires  acquisition-related  expenses and
restructuring  costs to be recognized  separately from the business  combination;  and requires in-process research
and development to be capitalized at fair value as an  indefinite-lived  intangible asset. ASC 805 is effective for
financial  statements  issued for fiscal years  beginning  after  December 15, 2008. The impact of adopting ASC 805
will continue to be dependent on the future  business  combinations  that we may pursue after its  effective  date.
In 2009, we expensed approximately $2.4 million, of transaction costs related to acquisitions.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|35
|--



---

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

|36
|--



---

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

|Interest Rate Risk
As of December 31,  2009,  we had  long-term  debt  (including  current  portion)  totaling  $48,519,000,  of which
$3,928,000 had fixed rates of 4% to 9%, and $44,591,000  incurred  interest at a variable rate equal to a specified
prime  rate.  We are  exposed  to some  market  risk due to the  remaining  floating  interest  rate debt  totaling
$44,591,000.  We make monthly or  quarterly  payments of  principal  and  interest on $14,000 of the floating  rate
debt. An increase in interest rates of 1% would result in a $446,000  annual  increase in interest  expense on this
existing principal balance.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# ITEM 8.
    
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

|None.
|-----

# ITEM 9A.
    
CONTROLS AND PROCEDURES

|(a)        Disclosure Controls and Procedures



As of December 31, 2009, under the supervision and with the  participation  of our management,  including our Chief
Executive  Officer (our principal  executive  officer) and our Chief  Financial  Officer (our  principal  financial
officer),  we evaluated  the  effectiveness  of our  disclosure  controls  and  procedures  (as defined  under Rule
13a-15(e)  of the  Securities  Exchange  Act of 1934,  as amended (the  Exchange  Act)).  Based on this
evaluation,  our Chief Executive  Officer and our Chief Financial  Officer concluded that, as of December 31, 2009,
our disclosure controls and procedures were effective.
(b)        Managements Report on Internal Control Over Financial Reporting

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

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

Our management  assessed the  effectiveness  of our internal  control over financial  reporting as of  December 31,
2009 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, 2009,  our internal  control over
financial reporting was effective based on those criteria.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|37
|--



---

|Managements assessment of and conclusion on the effectiveness of internal control over financial reporting
did not include the internal controls of Endocare, Inc., which is included in the 2009 consolidated financial
statements of HealthTronics, Inc. and constituted 8% of total assets as of December 31, 2009 and 4% of revenues
for the year then ended.

Ernst & Young,  LLP, our independent  registered  public  accounting firm,  has audited our internal  controls over
financial reporting.  The attestation report of Ernst & Young, LLP is included herein.
(c)        Changes in Internal Control over Financial Reporting

There have been no changes in our internal  control over financial  reporting that occurred during the three months
ended  December 31, 2009 that have  materially  affected,  or are  reasonably  likely to  materially  affect,  such
internal control over financial reporting.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|38
|--



---

|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|-------------------------------------------------------

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

We have audited  HealthTronics,  Inc. and subsidiaries internal control over financial reporting as of December 31,
2009,  based  on  criteria  established  in  Internal  ControlIntegrated  Framework  issued  by the  Committee  of
Sponsoring Organizations of the Treadway Commission (the COSO criteria).  HealthTronics,  Inc.s management is
responsible for maintaining  effective  internal  control over financial  reporting,  and for its assessment of the
effectiveness of internal control over financial  reporting included in the accompanying  Managements  Report
on Internal Control over Financial  Reporting.  Our  responsibility is to express an opinion on the  companys
internal control over financial reporting based on our audit.

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

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

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

As  indicated  in  the  accompanying  Managements  Report  on  Internal  Control  over  Financial  Reporting,
managements  assessment of and conclusion on the  effectiveness of internal control over financial  reporting
did not include the  internal  controls of Endocare,  Inc.,  which is included in the 2009  consolidated  financial
statements of HealthTronics,  Inc. and subsidiaries and constituted 8% of total assets as of December 31,  2009 and
4% of revenues for the year then ended.  Our audit of internal control over financial  reporting of  HealthTronics,
Inc. and  subsidiaries  also did not include an  evaluation  of the internal  control over  financial  reporting of
Endocare, Inc.

In our opinion,  HealthTronics,  Inc. and subsidiaries  maintained,  in all material  respects,  effective internal
control over financial reporting as of December 31, 2009, based on the COSO criteria.

We also have audited,  in accordance  with the standards of the Public Company  Accounting  Oversight Board (United
States),  the  consolidated  balance sheets of  HealthTronics,  Inc. and  subsidiaries  as of December 31, 2009 and
2008, and the related  consolidated  statements of income,  stockholders  equity,  and cash flows for each of
the three years in the period  ended  December 31, 2009 of  HealthTronics,  Inc.  and  subsidiaries  and our report
dated March 8, 2010 expressed an unqualified opinion thereon.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|/s/ Ernst & Young LLP
|---------------------

|Austin, Texas
March 8, 2010
|---------------------------

|39
|--



---

|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 2010 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 2010 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 2010 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 2010 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 2010 annual meeting of stockholders and is incorporated herein by reference.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|40
|--



---

|PART IV
|-------

# ITEM 15.
    
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

(b) Exhibits. (1)

|3.1          
             
             
3.2          
             
             
3.3          
             
4.1          
             
4.2
             
4.3
             
10.1
             
             
10.2         
             
             
10.3*        
             
10.4*        
             
             
10.5*        
             
10.6*        
             
             
10.7*        
             
             
10.8*        
             
10.9*        
             
10.10*       
             
10.11* | Amended and Restated  Articles of  Incorporation  of the Company  (incorporated by
reference to           Annex D to the Rule 424(b)(3) joint proxy  statement/prospectus,  dated
 October 6,  2004, filed
          by HealthTronics with the SEC on October 7, 2004).
          Amended  and  Restated  Bylaws of the  Company  (incorporated  by  reference  to Annex E to the
          Rule 424(b)(3) joint proxy statement/prospectus,  dated October 6, 2004, filed by HealthTronics
          with the SEC on October 7, 2004).
          First Amendment to Bylaws of HealthTronics,  Inc.  (incorporated by reference to Exhibit 3.1 of
          HealthTronics Current Report Form 8-K filed on December 17, 2007).
          Specimen of Common Stock Certificate (filed as an Exhibit to the HSS Registration  Statement on
          Form S-4 (Registration No. 33-56900)).
Form of Series A Warrant (incorporated by reference to Exhibit 4.1 to Endocare, Inc.s Current Report on Form 8-K
filed on March 16, 2005).

Form of Series B Warrant (incorporated by reference to Exhibit 4.2 to Endocare, Inc.s Current Report on Form 8-K
filed on March 16, 2005).

          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).
          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).
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|41
|--



---

|10.12       
10.13*        
             
             

10.14*      
            
            
10.15      
            
            
10.16       
            
            
10.17*      
            
            
10.18      
            
            
10.19      
            
            
10.20      
            
            
            
10.21*       
            
            
            

10.22       
            
            
            
10.23*       
            
            
            
10.24* | Form  of  Indemnification  Agreement  for  directors  and  certain  officers  of  HealthTronics
          (incorporated  by reference to Exhibit 99.1 to  HealthTronics  Current Report on Form 8-K
          filed on June 1, 2005).
          First  Amendment to Board  Service and Release  Agreement,  dated as of March 2,  2006,  by and
          between  HealthTronics and Argil J. Wheelock,  M.D.  (incorporated by reference to Exhibit 10.1
          of HealthTronics Current Report on Form 8-K filed on March 8, 2006).
          Second Amendment to the  Companys  2004 Equity Incentive Plan  (incorporated by reference
          to Exhibit 10.1 to the Companys  Current Report on Form 8-K filed with the Securities and
          Exchange Commission on June 14, 2006).
          Amended and  Restated  Distribution  Agreement,  dated as of  February 28,  2007,  by and among
          HealthTronics,  Inc.,  Lisa Laser USA,  Inc.,  and LISA laser  products  OHG  (incorporated  by
          reference to  Exhibit 10.1  to the  Companys  Current  Report on Form 8-K  filed with the
          Securities and Exchange Commission on March 6, 2007).
          Stock Purchase Agreement,  dated as of March 18, 2008, by and among HealthTronics,  Inc., Litho
          Management,  Inc.,  Advanced  Medical  Partners,  Inc. and the stockholders of Advanced Medical
          Partners,  Inc. (incorporated by reference to Exhibit 10.1 to the Companys Current Report
          on Form 8-K filed with the Securities and Exchange Commission on March 20, 2008).
          Third Amendment to the 2004 Equity  Incentive Plan  (incorporated  by reference to Exhibit 10.1
          to the  Companys  Current  Report on  Form 8-K  filed with the  Securities  and  Exchange
          Commission on May 14, 2008).
          Earnest Money ContractCommercial  Improved Property (Office Condominiums) dated as of April 1,
          2008 (as  amended on each of  April 15,  2008 and May 12,  2008) by and between  HealthTronics,
          Inc. and HPI  Acquisition  Company,  LLC.  (incorporated  by reference to  Exhibit 10.1  to the
          Companys  Current Report on Form 8-K filed with the Securities and Exchange Commission on
          June 20, 2008).
          Lease Agreement dated May 19,  2008, by and between  HealthTronics,  Inc. and HEP-Davis Spring,
          L.P.  (incorporated  by reference  to  Exhibit 10.2  to the  Companys  Current  Report on
          Form 8-K filed with the Securities and Exchange Commission on June 20, 2008).
          Stock Purchase Agreement, dated as of October 10, 2008, by and between HealthTronics,  Inc. and
          Atlantic  Urological  Associates,  P.A  (incorporated  by  reference  to  Exhibit 10.1  to  the
          Companys  Current Report on Form 8-K filed with the Securities and Exchange Commission on
          October 15, 2008).
          Executive Employment Agreement,  effective August 15, 2007, by and between HealthTronics,  Inc.
          and Clayton H. Duncan  (incorporated by reference to Exhibit 10.35 of the  Companys  10-K
          filed with the Securities and Exchange Commission on March 10, 2009).
          Agreement  and Plan of Merger,  dated as of  June 7,  2009,  by and among  Endocare,  Inc.,  HT
          Acquisition,  Inc., and  HealthTronics,  Inc.  (incorporated by reference to Exhibit 2.1 to the
          Companys  Current Report on Form 8-K filed with the Securities and Exchange Commission on
          June 8, 2009).
          Termination and Consulting Agreement,  dated June 16, 2009, by and between HealthTronics,  Inc.
          and Robert A. Yonke  (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 17, 2009).
          Executive Employment Agreement,  effective July 30,  2009, by and between  HealthTronics,  Inc.
          and Clint B. Davis  (incorporated by reference to Exhibit 10.1 of the Companys 10-Q filed
          with the Securities and Exchange Commission on November 6, 2009).
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|42
|--



---

|10.25      
            
            
            
10.26*       
            
            

10.27*       
            
            
            
10.28       
            
            
            
            
            
10.29*       
            

10.30*       
            
10.31*
            
10.32*
            
10.33*
            
10.34*
            

21.1        
23.1        
31.1        
31.2        
32.1        
32.2 | Second Amendment to Lease Agreement,  dated as of August 20,  2009,  between  HEP-Davis Spring,
          L.P. as landlord and HealthTronics,  Inc. as tenant  (incorporated by reference to Exhibit 10.2
          of the  Companys  10-Q filed with the Securities  and Exchange  Commission on November 6,
          2009).
          Amended and Restated  Executive  Employment  Agreement,  dated as of  November 5,  2009, by and
          between  HealthTronics,  Inc. and James Whittenburg  (incorporated by reference to Exhibit 10.1
          to the  Companys  Current  Report on  Form 8-K  filed with the  Securities  and  Exchange
          Commission on November 5, 2009).
          Executive Employment Agreement,  dated as of November 30,  2009, by and between  HealthTronics,
          Inc.  and Richard A. Rusk  (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  November 30,
          2009).
          Credit Agreement, dated as of December 29,  2009, among HealthTronics,  Inc., the lenders party
          thereto,  JPMorgan Chase Bank,  National  Association,  as  Administrative  Agent,  J.P. Morgan
          Securities,  Inc., as Arranger,  and Bank of America,  N.A., as Syndication Agent (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 29, 2009).
          Executive Employment  Agreement,  effective  November 23,  2009, by and between  HealthTronics,
          Inc. and Scott Herz (filed herewith).
          Executive Employment  Agreement,  effective  December 21,  2009, by and between  HealthTronics,
          Inc. and Laura Miller (filed herewith).
          Form of Incentive Stock Option Agreement (filed herewith).
          Form of Nonstatutory Stock Option Agreement (filed herewith).
          Form of Restricted Stock Award Agreement (filed herewith).
          Form of Director Restricted Stock Award Agreement (filed herewith).
          List of subsidiaries of the Company (filed herewith).
          Consent of Independent Registered Public Accounting Firm (filed herewith).
          Certification of Chief Executive Officer (filed herewith).
          Certification of Chief Financial Officer (filed herewith).
          Certification of Chief Executive Officer (filed herewith).
          Certification of Chief Financial Officer (filed herewith).
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | (1) | The exhibits  listed above will be furnished to any security  holder upon written request for such exhibit to
           Richard A. Rusk,  HealthTronics,  Inc., 9825 Spectrum  Drive,  Austin,  Texas 78717.  The Securities and
           Exchange  Commission  (the  SEC)  maintains  a  website  that  contains  reports,  proxy and
           information  statements and other information  regarding  registrants that file  electronically with the
           SEC at http://www.sec.gov.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|43
|--



---

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

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

| | HEALTHTRONICS, INC.By: /s/ James S. B. Whittenburg
        James S. B. Whittenburg,
       Chief Executive Officer and 
        President (Principal Executive Officer)
       Date: March 8, 2010
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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


March 8, 2010/s/

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

March 8, 2010/s/
R. Steven Hicks 
         R. Steven Hicks, Non-executive Chairman of the Board

March 8, 2010/s/
         Donny R. Jackson 
         Donny R. Jackson, Director

March 8, 2010/s/
         Timothy J. Lindgren 
         Timothy J. Lindgren, Director

March 8, 2010
/s/
Ken S. Shifrin 
Ken S. Shifrin, Director

March 8, 2010
|----------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|44
|--



---

|By:          
Date: | /s/


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

March 8, 2010
|------------------- | -------------------------------------------------------------------------------

|45
|--



---

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

|INDEX
|-----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Page               
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------
|
|Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:    
     Consolidated Statements of Income for the years ended December 31, 2009, 2008     and 2007.    
     Consolidated Balance Sheets at December 31, 2009 and 2008.    
     Consolidated  Statements  of  Stockholders  Equity for the years ended  December 31, 2009,    
     2008 and 2007.    
     Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007.    
     Notes to Consolidated Financial Statements. | A-2A-3A-4A-6A-7A-10

|A-1
|---



---

|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|-------------------------------------------------------

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

We have audited the accompanying consolidated balance sheets of HealthTronics, Inc. and subsidiaries as of
December 31, 2009 and 2008, and the related consolidated statements of income, stockholders equity, and
cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of HealthTronics, Inc. and subsidiaries at December 31, 2009 and 2008, and the
consolidated results of their operations and their cash flows for each of the three years in the period ended
December 31, 2009, in conformity with U.S. generally accepted accounting principles.

As discussed in Note B to the consolidated financial statements, the Company changed its method of accounting for
business combinations with the adoption of the guidance originally issued in FASB Statement No. 141(R), Business
Combinations (codified in FASB ASC Topic 805, Business Combinations) effective January 1, 2009.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), HealthTronics, Inc. and subsidiaries internal control over financial reporting as of December 31,
2009, 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, 2010, expressed an unqualified
opinion thereon.


/s/: Ernst & Young LLPAustin, Texas
March 8, 2010
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-2
|---



---

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

|($ in thousands, except per share data)                         | Years Ended December 31,
|--------------------------------------------------------------- | ------------------------
|
|Revenues                                                        |                         
|Cost of revenues (exclusive of depreciation and                 |                         
|amortization shown separately below)                            |                         
|Gross profit                                                    |                         
|                                                               
|Operating expenses:                                             |                         
|Selling, general and administrative                             |                         
|Impairment charges                                              |                         
|Depreciation and amortization                                   |                         
|Total operating expenses                                        |                         
|                                                               
|Operating income (loss)                                         |                         
|                                                               
|Other income (expenses):                                        |                         
|Interest and dividends                                          |                         
|Interest expense                                                |                         
|                                                                |                         
|Income (loss) from continuing operations before provision       |                         
|for income taxes                                                |                         
|                                                               
|Provision for income taxes                                      |                         
|                                                               
|Consolidated net income (loss) from continuing operations       |                         
|                                                               
|Loss from discontinued operations, net of tax                   |                         
|                                                               
|Consolidated net income (loss)                                  |                         
|                                                               
|Less:  Net income attributable to noncontrolling interest       |                         
|                                                               
|Net loss attributable to HealthTronics, Inc.                    |                         
|                                                               
|Basic earnings per share attributable to HealthTronics, Inc.:   |                         
|Loss from continuing operations                                 |                         
|Loss from discontinued operations                               |                         
|Net loss attributable to HealthTronics, Inc.                    |                         
|Weighted average shares outstanding                             |                         
|                                                               
|Diluted earnings per share attributable to HealthTronics, Inc.: |                         
|Loss from continuing operations                                 |                         
|Loss from discontinued operations                               |                         
|Net loss attributable to HealthTronics, Inc.                    |                         
|Weighted average shares outstanding                             |                         

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

|A-3
|---



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES

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

|                                                 | December 31,
|------------------------------------------------ | ------------
|
|ASSETS                                           |             
|                                                
|Current assets:                                  |             
|Cash and cash equivalents                        |             
|Accounts receivable, less allowance for doubtful |             
|accounts of $2,722 in 2009 and $2,485 in 2008    |             
|Other receivables                                |             
|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                      |             
|                                                
|Other investments                                |             
|Goodwill                                         |             
|Intangible assets, net                           |             
|Other noncurrent assets                          |             
|                                                 |             

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

|A-4
|---



---

|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 expenses                                                                |             
|Total current liabilities                                                       |             
|                                                                               
|Long-term debt, net of current portion                                          |             
|Other long term obligations                                                     |             
|Deferred income taxes                                                           |             
|Total liabilities                                                               |             
|                                                                               
|STOCKHOLDERS' EQUITY                                                            |             
|Preferred stock, $.01 par value, 30,000,000 shares authorized: none outstanding |             
|Common stock, no par value, 70,000,000 shares authorized: 47,556,430 shares     |             
|issued and 45,584,108 shares outstanding in 2009 and 39,494,314 shares          |             
|issued and 37,618,206 shares outstanding in 2008                                |             
|Accumulated deficit                                                             |             
|Treasury stock, at cost, 1,972,322 shares in 2009 and 1,876,108 shares in 2008  |             
|Total HealthTronics, Inc. shareholders' equity                                  |             
|Noncontrolling interest                                                         |             
|Total Equity                                                                    |             
|                                                                                |             

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

|A-5
|---



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                               For the years ended December 31, 2009, 2008 and 2007
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|($ in thousands, except share data)           | Issued Common Stock |  | Treasury Stock |           
|--------------------------------------------- | ------------------- |  | -------------- | ----------
|
|Balance, December 31, 2006                    |                     |  |                | 35,475,236
|Net Income (loss)                             |                     |  |                | --        
|Distributions paid to noncontrolling interest |                     |  |                | --        
|Sale of subsidiary interest to                |                     | 
|noncontrolling interest                       |                     |  |                | --        
|Purchase of subsidiary interest from          |                     | 
|noncontrolling interest                       |                     |  |                | --        
|Contribution of treasury stock                |                     |  |                | --        
|Share-based compensation                      |                     |  |                | 135,000   
|                                             
|Balance, December 31, 2007                    |                     |  |                | 35,610,236
|Net Income (loss)                             |                     |  |                | --        
|Distributions paid to noncontrolling interest |                     |  |                | --        
|Sale of subsidiary interest to                |                     | 
|noncontrolling interest                       |                     |  |                | --        
|Purchase of subsidiary interest from          |                     | 
|noncontrolling interest                       |                     |  |                | --        
|Issuance of stock for acquisitions            |                     |  |                | 1,987,486 
|Purchase of treasury stock                    |                     |  |                | --        
|Share-based compensation                      |                     |  |                | 1,896,592 
|                                             
|Balance, December 31, 2008                    |                     |  |                | 39,494,314
|Net Income (loss)                             |                     |  |                | --        
|Distributions paid to noncontrolling interest |                     |  |                | --        
|Sale of subsidiary interest to                |                     | 
|noncontrolling interest                       |                     |  |                | --        
|Purchase of subsidiary interest from          |                     | 
|noncontrolling interest                       |                     |  |                | --        
|Issuance of stock for acquisitions            |                     |  |                | 7,398,396 
|Purchase of treasury stock                    |                     |  |                | --        
|Share-based compensation                      |                     |  |                | 663,720   
|                                             
|Balance, December 31, 2009                    |                     |  |                | 47,556,430

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

|A-6
|---



---

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

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

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

|A-7
|---



---

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

|($ in thousands)                                                                  | Years Ended December 31,
|--------------------------------------------------------------------------------- | ------------------------
|
|Reconciliation of net income (loss) to net cash provided by operating activities: |                         
|Net income (loss)                                                                 |                         
|Adjustments to reconcile net income (loss) to cash provided                       |                         
|by operating activities:                                                          |                         
|Depreciation and amortization                                                     |                         
|Provision for uncollectible accounts                                              |                         
|Provision for deferred income taxes                                               |                         
|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                                                                 |                         
|Inventory                                                                         |                         
|Other assets                                                                      |                         
|Accounts payable                                                                  |                         
|Accrued expenses                                                                  |                         
|Total adjustments                                                                 |                         
|Net cash provided by operating activities                                         |                         

|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,
|---------------------------------------------------------------------------- | ------------------------
|
|SUPPLEMENTAL INFORMATION OF NON-CASH                                         |                         
|INVESTING AND FINANCING ACTIVITIES:                                          |                         
|At December 31, the Company had accrued distributions payable                |                         
|to noncontrolling interests.  The effect of this transaction was as follows: |                         
|Current liabilities increased by                                             |                         
|Noncontrolling interest decreased by                                         |                         
|                                                                            
|In 2009, the Company acquired three cryosurgical partnerships                |                         
|and a company that manufactures devices, consumables and                     |                         
|provides related services for the cryosurgical industry.  The net assets     |                         
|and liabilities acquired were as follows:                                    |                         
|Current assets increased by                                                  |                         
|Noncurrent assets increased by                                               |                         
|Goodwill increased by                                                        |                         
|Current liabilities increased by                                             |                         
|Other long-term obligations increased by                                     |                         
|                                                                            
|In 2008, the Company acquired three lithotripsy partnerships,                |                         
|a cryosurgical company, a pathology lab and an IGRT                          |                         
|services operation.  The net assets and                                      |                         
|liabilities acquired were as follows:                                        |                         
|Current assets increased by                                                  |                         
|Noncurrent assets increased by                                               |                         
|Goodwill increased by                                                        |                         
|Current liabilities increased by                                             |                         
|Other long-term obligations increased by                                     |                         
|Noncontrolling interest increased by                                         |                         
|                                                                            
|In 2007, the Company acquired two lithotripsy partnerships and sold          |                         
|three lithotripsy partnerships.  The net assets and                          |                         
|liabilities acquired/sold were as follows:                                   |                         
|Current assets increased by                                                  |                         
|Noncurrent assets increased by                                               |                         
|Goodwill increased by                                                        |                         
|Current liabilities increased by                                             |                         
|Other long-term obligations decreased by                                     |                         
|Noncontrolling interest increased by                                         |                         

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

|A-9
|---



---

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

|A.  ORGANIZATION AND OPERATION OF THE COMPANY

We provide healthcare services and medical devices, primarily for the urology community.Lithotripsy  Services.  Our lithotripsy  services are provided  principally through limited  partnerships and other
entities that we manage,  which use lithotripsy  devices.  In 2009,  physicians who are affiliated with us used our
lithotripters  to perform  approximately  50,000  procedures  in the U.S.  We do not render any  medical  services.
Rather, the physicians do.

As the  general  partner  of limited  partnerships  or the  manager of other  types of  entities,  we also  provide
services relating to operating our lithotripters,  including  scheduling,  staffing,  training,  quality assurance,
regulatory compliance, and contracting with payors, hospitals, and surgery centers.Prostate  treatment  services.  We provide  treatments  for benign and cancerous  conditions  of the  prostate.  In
treating benign prostate disease,  we deploy three technologies:  (1) photo-selective  vaporization of the prostate
(PVP),  (2) trans-urethral  needle ablation  (TUNA),  and  (3) trans-urethral  microwave  therapy (TUMT) in certain
partnerships.  All three  technologies  apply an energy  source which reduces the size of the prostate  gland.  For
treating prostate and other cancers,  we use a procedure called  cryosurgery,  a process which uses a double freeze
thaw  cycle  to  destroy   cancer   cells.   In  April  2008,  we  acquired   Advanced   Medical   Partners,   Inc.
(AMPI),  which  significantly  expanded our  cryosurgery  partnership  base.  In July 2009, we acquired
Endocare, Inc.  (Endocare)  which is a medical device company focused on developing,  manufacturing and
selling  cryoablation  products.  Our prostate  treatment  services are also provided  principally  through limited
partnerships  and other entities that we manage,  which use equipment to perform the  treatments.  Benign  prostate
disease and cryosurgery cancer treatment  services are billed in the same manner as our lithotripsy  services under
either retail or wholesale  contracts.  We also provide  services  relating to operating the  equipment,  including
scheduling, staffing, training, quality assurance, regulatory compliance and contracting.Radiation  therapy services.  We also provide image guided radiation  therapy (IGRT) technical  services for cancer
treatment centers. Our IGRT technical services may relate to providing the technical  (non-physician)  personnel to
operate a physician  practice  groups IGRT equipment,  leasing IGRT equipment to a physician  practice group,
providing  services related to helping a physician  practice group establish an IGRT treatment  center, or managing
an IGRT treatment center.Anatomical  pathology services.  We also provide anatomical  pathology services primarily to the urology community.
We have one pathology  lab located in Georgia,  Claripath  Laboratories,  that  provides  laboratory  detection and
diagnosis  services to urologists  throughout the United  States.  In addition,  in July 2008, we acquired  Uropath
LLC,  which  managed  pathology  laboratories  located at Uropath sites for physician  practice  groups  located in
Texas,  Florida and  Pennsylvania.  Through Uropath,  we continue to provide  administrative  services to in-office
pathology labs for practice  groups and provide  pathology  services to physicians and practice groups with our lab
equipment and personnel at our Uropath laboratory sites.Medical  products  manufacturing,  sales and  maintenance.  We, through our Endocare  acquisition,  manufacture and
sell  medical  devices  focused  on  minimally  invasive   technologies  for  tissue  and  tumor  ablation  through
cryoablation,  which is the use of lethal ice to destroy  tissue,  such as tumors,  for  therapeutic  purposes.  We
develop and  manufacture  these  devices for the  treatment of prostate  and renal  cancers and we believe that our
proprietary  technologies have broad applications  across a number of markets,  including the ablation of tumors in
the  lung  and  liver  and  palliative  intervention  (treatment  of  pain  associated  with  metastases).  We also
manufacture  the related spare parts and  consumables  for these devices.  We also sell and maintain  lithotripters
and related spare parts and consumables.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-10
|----



---

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

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

In December 2007, the Financial Accounting Standards Board (FASB) issued accounting guidance
contained within ASC 810, Consolidation, (ASC 810), regarding noncontrolling interests, (formerly
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements). As a result of the adoption of ASC
810, certain reclassifications have been made to 2008 and 2007 information to be consistent with the 2009
presentation. ASC 810 requires companies to report a noncontrolling interest in a subsidiary as equity.
Additionally, companies are required to include amounts attributable to both the parent and the noncontrolling
interest in the consolidated net income and provide disclosure of net income attributable to the parent and to
the noncontrolling interest on the face of the consolidated statement of income. 

B.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESConsolidation

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

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

Property and equipment are stated at cost. Major betterments are capitalized while normal maintenance and repairs
are charged to operations. Depreciation is computed by the straight-line method using estimated useful lives of
three to twenty years. Leasehold improvements are generally amortized over ten years or the term of the lease,
whichever is shorter. When assets are sold or retired, the corresponding cost and accumulated depreciation or
amortization are removed from the related accounts and any gain or loss is credited or charged to operations.
Depreciation expense for property and equipment was $11,678,000, $11,076,000 and $10,079,000 for the years ended
December 31, 2009, 2008 and 2007, respectively.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-11
|----



---

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

|Impairment of long-lived assets

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

Impairments  of goodwill  and other  intangible  assets are both a critical  accounting  policy and  estimate  that
require  judgment and are based on assumptions  of future  operations.  We are required to test for  impairments at
least annually or if  circumstances  change that would reduce the fair value of a reporting unit below its carrying
value.  We test for  impairment of goodwill  during the fourth  quarter.  The fair value of each reporting unit was
estimated using a combination of the income,  or discounted  cash flows,  approach and the market  approach,  which
utilizes  comparable  companies  data.  Because we have  recognized  goodwill based solely on our controlling
interest,  the fair value of each reporting  unit also relates only to our  controlling  interest.  If the carrying
amount of a reporting  unit exceeds its fair value,  the second step of the goodwill  impairment  test is performed
to measure the amount of  impairment  loss,  if any. The second step of the goodwill  impairment  test compares the
implied  fair  value of the  reporting  units  goodwill  with the  carrying  value of that  goodwill.  If the
carrying  amount of the  reporting  units  goodwill  exceeds  the  implied  fair value of that  goodwill,  an
impairment  loss is  recognized  in an  amount  equal  to that  excess.  The  implied  fair  value of  goodwill  is
determined  in the same manner as the amount of goodwill  recognized in a business  combination.  That is, the fair
value of the  reporting  unit is allocated to all of the assets and  liabilities  of that unit as if the  reporting
unit had been acquired in a business  combination  and the fair value of the reporting  unit was the purchase price
paid to  acquire  the  reporting  unit.  Both the  income  approach  and the market  approach  require  significant
assumptions to determine the fair value of each  reporting  unit. The  significant  assumptions  used in the income
approach include estimates of our future revenues,  profits,  capital  expenditures,  working capital requirements,
operating plans,  industry data, and other relevant  factors.  The significant  assumptions  utilized in the market
approach include the determination of appropriate  market  comparables,  the estimated  multiples of revenue,  EBIT
and EBITDA, and the estimated control premium a willing buyer is likely to pay.Revenue Recognition

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 $1,566,000, $1,508,000 and $1,321,000 in 2009, 2008 and 2007, 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.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-12
|----



---

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

|We provide anatomical  pathology  services primarily to the urology market place.  Revenues from these services are
recorded when the related  laboratory  procedures  are performed.  IGRT  technical  services are billed monthly and
the related revenues are recognized as the related services are provided.Major Customers and Credit Concentrations

For the years  ending  December 31,  2009,  2008 and 2007,  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,  2009,
approximately  18% relate to units in New York, 10% of accounts  receivable  relate to units operating in Texas, 8%
relate to units  operating in Georgia,  6% relate to units  operating in Florida,  6% relate to units  operating in
Indiana, 6% relate to units operating in Pennsylvania,  5% relate to units in Louisiana,  and 5% relate to units in
Minnesota.  At December 31,  2008,  approximately 16% of accounts receivable relate to units operating in New York,
6% relate to units in  Florida,  5%  relate  to units  operating  in  Virginia,  5%  relate to units  operating  in
Minnesota, 5% related to units in Louisiana, and 5% relate to units in Indiana.Income Tax

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

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

|A-13
|----



---

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

| | ($ in thousands) | Balance at
Beginning of
Year | Costs and
Expenses | Deductions | Other | Balance at
End of Year
| | ---------------- | ---------------------------- | ------------------ | ---------- | ----- | ----------------------
|
| |                  |                              | 2009               |            |       | $                     
| |                  |                              | 2008               |            |       | $                     
| |                  |                              | 2007               |            |       | $                     

|Inventory

Inventory  is stated at the lower of cost or market.  Cost is  determined  using the  average  cost  method and the
first-in,  first-out  method  in 2009 and the  average  cost  method  in 2008.  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, 2009 and 2008, inventory consists of the following:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ($ in thousands) | December 31, 2009 | December 31,2008
| | ---------------- | ----------------- | ----------------
| |                  |                   | Raw Materials   
| |                  |                   | Work in process 
| |                  |                   | Finished Goods  
| |                  |                   |                 

|Stock-Based Compensation



On January  1,  2006,  we adopted  ASC 718,  Stock  Compensation  (ASC  718),  (formerly  SFAS  123(R),
Share-Based  Payment),  which requires the measurement and recognition of compensation  expense for all share-based
payment awards made to employees and directors  including  stock option grants based on estimated fair values.  ASC
718  requires  companies  to estimate the fair value of  share-based  payment  awards on the date of grant using an
option-pricing  model. The value of the awards  portion that is ultimately  expected to vest is recognized as
expense  over the  requisite  service  periods.  Prior to the  adoption of ASC 718, we  accounted  for  share-based
awards  to  employees  and  directors  using  the  intrinsic  value  method.  Under  the  intrinsic  value  method,
share-based  compensation  expense was only  recognized  by us if the  exercise  price of the stock option was less
than the fair market value of the underlying stock at the date of grant.

Under ASC 718,  nonvested  stock  awards are awards that the  employee has not yet earned the right to sell and are
subject to  forfeiture  if the terms of service are not  satisfied.  These awards  should be measured  based on the
market prices of otherwise  identical (i.e.,  identical except for the vesting condition) common stock at the grant
date.  A nonvested  equity  share  awarded to an employee  shall be measured at its fair value as if it were vested
and issued on the grant date.  The vesting  restrictions  are taken into account by recognizing  compensation  cost
only for awards for which the employee has rendered the requisite service (i.e., vested).

We have elected to use the modified  prospective  application method whereby ASC 718 applies to new awards,
the  unvested  portion of existing  awards and to awards  modified,  repurchased  or canceled  after the  effective
date.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-14
|----



---

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

|Debt Issuance Costs

We expense debt issuance costs as incurred.Advertising costs

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

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

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

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

| | (In thousands, except per share data) | Net Loss | Wtd. Avg.No. of Shares               | Per Share Amounts
| | ------------------------------------- | -------- | ------------------------------------ | -----------------
| |                                       |          | For the year ended December 31, 2009 |                  
|
| |                                       |          | Basic                                |                  
| |                                       |          | Effect of dilutive securities:       |                  
| |                                       |          | Options and non-vested shares        |                  
| |                                       |          | Diluted                              |                  
|
| |                                       |          | For the year ended December 31, 2008 |                  
|
| |                                       |          | Basic                                |                  
| |                                       |          | Effect of dilutive securities:       |                  
| |                                       |          | Options and non-vested shares        |                  
| |                                       |          | Diluted                              |                  
| |                                       |         
|
| |                                       |          | For the year ended December 31, 2007 |                  
|
| |                                       |          | Basic                                |                  
| |                                       |          | Effect of dilutive securities:       |                  
| |                                       |          | Options and non-vested shares        |                  
| |                                       |          | Diluted                              |                  

|Unexercised  employee stock options and non-vested shares to purchase 3,699,000,  2,783,000 and 3,329,000 shares of
our common stock as of December 31,  2009, 2008 and 2007,  respectively,  were not included in the  computations of
diluted EPS because the exercise  prices were greater than the average  market price of our common stock during the
respective periods or we had a net loss in the respective period.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-15
|----



---

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

|Recently Issued Pronouncements

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

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

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

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

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

|A-16
|----



---

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

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

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

In April 2008, the FASB issued ASC 350-30, General Intangibles Other Than Goodwill (ASC 350-30),
(formerly FSP No. 142-3, Determination of the Useful Life of Intangible Assets). ASC 350-30 amends the factors
that should be considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset. ASC 350-30 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The
adoption of ASC 350-30 did not have a material impact on our financial position or results of operations.

In December 2007, the FASB issued ASC 805, Business Combinations (ASC 805), (formerly SFAS 141R,
Business Combinations).  ASC 805 will significantly change current practices regarding business combinations.
Among the more significant changes, ASC 805 expands the definition of a business and a business combination;
requires the acquirer to recognize the assets acquired, liabilities assumed and noncontrolling interests
(including goodwill), measured at fair value at the acquisition date; requires acquisition-related expenses and
restructuring costs to be recognized separately from the business combination; and requires in-process research
and development to be capitalized at fair value as an indefinite-lived intangible asset. ASC 805 is effective for
financial statements issued for fiscal years beginning after December 15, 2008. The impact of adopting ASC 805
will continue to be dependent on the future business combinations that we may pursue after its effective date.
In 2009, we expensed approximately $2.4 million, of transaction costs related to acquisitions.

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

|A-17
|----



---

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

|C.    GOODWILL AND OTHER INTANGIBLE ASSETSWe adopted ASC 350, Goodwill and Other Intangible Assets (ASC 350), (formerly, 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.

The net carrying value of goodwill as of December 31, 2009 and 2008 is comprised of the following:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (in thousands) | Total
| | -------------- | -----
| |                |      
| |                |      
| |                |      
| |                |      
| |                |      
| |                |      
| |                |      
| |                |      
| |                |      

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

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.  As of December 31, 2009, we have two
reporting  units,  urology  services  and  anatomical  pathology  services.  As of December  31,  2008,  we had two
reporting  units,  urology  services and medical  products.  We test for impairment of goodwill at least  annually,
during the fourth  quarter,  at the reporting unit level by comparing the reporting  units  carrying  amount,
including  goodwill,  to the fair  value of the  reporting  unit.  The fair  values  of the are  estimated  using a
combination of the income, or discounted cash flows,  approach and the market approach,  which utilizes  comparable
companies  data. Because we have recognized goodwill based only on our controlling  interest,  the fair value
also relates only to our controlling interest.

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

|A-18
|----



---

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

|Our discounted  cash flow  projections  for each reporting unit were based on five-year  financial  forecasts.  The
five-year  forecasts  and all amounts and  assumptions  used in preparing  the  financial  forecasts  were based on
annual financial  forecasts  developed  internally by management for use in managing our business.  Our independent
valuation  firm  utilized  this  information  to assist us in  calculating  the fair value of the company.  For our
December 31, 2009 forecast,  the  significant  assumptions of these  five-year  forecasts  included  annual revenue
growth rates  ranging from 3.5% to 8.2% and from 5.0% to 116% for the urology  services  and  anatomical  pathology
reporting  units,  respectively.   The  future  cash  flows  were  discounted  to  present  value  using a mid-year
convention  and a discount rate of 13% for the urology  services and 15.0% for the anatomical  pathology  reporting
unit.  Terminal values for the reporting units were calculated  using a Gordon growth  methodology with a long-term
growth  rate of 3.0% for the  urology  services  reporting  unit and 4.0% for the  anatomical  pathology  reporting
unit.  The future  terminal  values of the urology  services and  anatomical  pathology  reporting  units were $253
million and $39 million respectively at December 31, 2009.

For our December 31, 2008 forecast,  the  significant  assumptions of these  five-year  forecasts  included  annual
revenue  growth  rates  ranging  from  2.9% to 4.5% and from  10.4% to 20% for the  urology  services  and  medical
products  reporting units,  respectively.   The future cash flows were discounted to present value using a mid-year
convention  and a  discount  rate of 13% for the  urology  services  and the  medical  products  reporting  units.
Terminal  values for both  reporting  units were  calculated  using a Gordon  growth  methodology  with a long-term
growth rate of 3.0%.  The future  terminal  values of the urology  services and medical  products  reporting  units
were $153 million and $61 million respectively at December 31, 2008.

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

As of  December  31,  2009 and 2008,  we had $4  million  in  indefinite  life  intangible  assets  related  to the
HealthTronics  brand name.  Other  intangible  assets as of  December 31,  2009 and 2008,  subject to  amortization
expense, are comprised of the following (in thousands):
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-19
|----



---

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

|                                 | Weighted Average Life(years) | GrossCarrying Amount | Accumulated Amortization | Net
|-------------------------------- | ---------------------------- | -------------------- | ------------------------ | ---
|December 31, 2009                |                              |                      |                          |    
|Finite life intangibles:         |                              |                     
|IGRT services contract           |                              |                      |                          | 20 
|Endocare brand name,             |                              |                     
|patents, and other               |                              |                      |                          | 12 
|Non-compete agreements, hospital |                              |                     
|contracts, and patents           |                              |                      |                          | 2  
|Total                            |                              |                      |                          |    
|                                
|December 31, 2008                |                              |                     
|Finite life intangibles:         |                              |                     
|IGRT services contract           |                              |                      |                          | 20 
|Non-compete agreements, hospital |                              |                     
|contracts, and patents           |                              |                      |                          | 4  
|Total                            |                              |                      |                          |    

|Amortization  expense for other intangible  assets with finite lives was $2,866,000,  $1,286,000 and $1,028,000 for
the years ended December 31,  2009, 2008 and 2007,  respectively.  We estimate annual amortization expense for each
of the five succeeding fiscal years as follows (in thousands):
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|D.         ACQUISITIONS

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

Endocares  revenues from the date the  acquisition  closed to December 31, 2009 were $7.4  million.  Endocare
had a pre-tax loss of $1 million for the same period.  As a result of the acquisition,  we recognized the following
assets and liabilities:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-20
|----



---

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

| | (in thousands) | Endocare
| | -------------- | --------
| |                |         
| |                |         
| |                |         
| |                |         
| |                |         
| |                |         
|
| |                |         
| |                |         
| |                |         
| |                |         

|The factors  contributing to the recognition of goodwill are based upon several strategic and synergistic  benefits
that are expected to be realized from the combination of  HealthTronics  and Endocare.  These benefits  include the
expectation that  HealthTronics  complementary  products and  technologies  will broaden the urology platform
and increase  prominence in the urology market and increase  HealthTronics  position as a leading provider of
urology services.  HealthTronics  also expects to realize  substantial  synergies and operating  efficiencies.  The
combination  should  enable the  combined  company to operate on a more cost  efficient  and  effective  basis with
anticipated cost reductions in administration,  facilities,  and services.  The acquisition provides  HealthTronics
broader coverage within the United States,  as well as increased scale and scope for further  expanding  operations
through product development and complementary strategic transactions.

On September 25, 2009, we acquired US Surgical  Services,  LLC (US  Surgical)  for $400,000 in cash and
an  earn-out  provision  pursuant  to which we could  issue up to  $1,350,000  in shares of our common  stock.  The
actual  number of  shares  issued,  if any,  cannot be  determined  until it is  determined  whether  the  earn-out
provision  requirements  are met. Randy Wheelock,  who is the brother of Argil Wheelock,  one of the members of our
Board of  Directors,  was one of the two 50%  owners  of US  Surgical.  Thus,  in  exchange  for his 50%  ownership
interest in US  Surgical,  Randy  Wheelock  was paid  $200,000 in cash and will be entitled to 50% of any  earn-out
consideration  paid.  In addition,  in connection  with this  acquisition,  we entered into a consulting  agreement
with Randy Wheelock  pursuant to which he will provide  consulting  services to us for 15 months following  closing
in exchange for a payment of $10,000 per month.  Based on our  allocation  of the  purchase  price,  we  recognized
$1,750,000 of goodwill related to this transaction, all of which is tax deductible.

On September  30,  2009,  we acquired  INnMED,  LLC  (INnMED)  for  $784,000.  INnMED is a company that
provides  cryoablation-related  services to urologists and cryosurgical partnerships.  Based upon our allocation of
the  purchase  price,  we  recognized  $350,000  of  goodwill  related  to this  transaction,  all of  which is tax
deductible.

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

|A-21
|----



---

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

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

On April 17, 2008, we completed the acquisition of Advance Medical Partners,  Inc.  (AMPI)  pursuant to
the Stock Purchase  Agreement dated March 18, 2008 between us, Litho  Management,  Inc., AMPI and the  stockholders
of AMPI.  Founded  in 2003,  AMPI is a  leading  provider  of  urological  cryosurgery  services  in the U.S.  with
operations in 46 states.  We acquired the  outstanding  shares of capital stock of AMPI (other than shares  already
held by us) for an aggregate  purchase price of approximately  $13 million,  consisting of $6.9 million in cash and
approximately  1.8  million  shares of our common  stock,  plus a two-year  earn-out  based on the  achievement  of
EBITDA.  We  determined  the value of our common stock by using an average  closing  price for the two trading days
prior to and after  the  public  announcement  of the  merger.  The first  earn-out  payment  was paid in May 2009,
totaling  $219,000  in cash  and  134,356  shares  of  HealthTronics  stock  valued  at  $219,000.  Based  upon our
allocation of the purchase  price, we recognized  $12.7 million of goodwill  related to this  transaction,  none of
which is tax deductible.

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

Our  unaudited  proforma  combined  income data for the periods  ended  December  31, 2009 and 2008,  assuming  the
acquisitions were effective January 1 of each period, is as follows:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ($ in thousands, except per share data) | 2009 | 2008                                        
| | --------------------------------------- | ---- | --------------------------------------------
| |                                         |      | Total revenues                              
| |                                         |      | Total expenses                              
| |                                         |      | Net loss attributable to HealthTronics, Inc.
| |                                         |      | Diluted earnings per share                  

|E.  FAIR VALUE OF FINANCIAL INSTRUMENTS

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

| |  | 2009 | 2008                       
| |  | ---- | ---------------------------
|
| |  |      | Financial assets:          
| |  |      | Cash and cash equivalents  
| |  |      | Warrants/Common Stock      
|
| |  |      | 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.
|--------------------------------------------------------------------------------------------------------------------------------

|A-22
|----



---

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

|Cash and Cash EquivalentsThe 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.DebtThe carrying amount of our debt approximates fair value because it has a floating interest rate which reflects
market changes in interest rates and contains variable interest premiums based on certain debt compliance ratios.Other Long-Term Obligations

At December 31, 2009, we had $1,569,000 in long term deferred rent related to leaseholds at our new corporate
office space in Austin, Texas. We are amortizing this deferred rent at a rate of $22,569 per month. At December
31, 2009, we had a long term obligation totaling $328,000 for restructuring costs related to the vacating of a
leased property. Lease payments, net of the projected sublease income, totaling approximately $560,000 will
continue until February 2013. At December 31, 2009, we had a long-term obligation of $1,350,000 representing our
best estimate of an earn-out payment due in January of 2011 relating to an acquisition. At December 31, 2009, we
had a long term obligation of $126,000 related to payments of $10,534 a month until December 2011 as
consideration for a noncompetition agreement with a previous employee of our Endocare division. Leases have been
recorded at fair value. We estimated the fair value of our long term obligations based on discounted cash flows,
which is a level three analysis.Warrants

In November, 2006, we announced our decision to discontinue our involvement in the clinical trials of the
Ablatherm device manufactured by EDAP TMS S.A. (EDAP). This decision results in our forfeiting the exclusive
rights to distribute such device in the United States, when and if a Pre-Market Approval of such device is
granted by the FDA and forfeits our rights to vest in additional warrants to EDAP common stock. During 2007, we
exercised these warrants and in the third quarter of 2009 we sold these shares. The stock had been valued based
on a quoted market price, which was a level one analysis.Limitations

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

|A-23
|----



---

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

|F.   ACCRUED EXPENSES

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

| |  | December 31,
| |  | ------------
|
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             
| |  |             

|G.  INDEBTEDNESS

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

| | ($ in thousands) |  | December 31,                           | 
| | ---------------- |  | -------------------------------------- | 
|
| |                  |  | Floating                               | 
| |                  |  | 4%-9%                                  | 
| |                  |  |                                        | 
| |                  |  | Less current portion of long-term debt | 
| |                  |  |                                        | 

|Senior Credit Facility

In March 2005, we refinanced our then existing revolving credit facility with a $175 million senior credit
facility comprised of a five year $50 million revolver due in March 2010 and a $125 million senior secured term
loan B (term loan B), due 2011. This loan bore interest at a variable rate equal to LIBOR + 1.25 to
2.25% or prime + .25 to 1.25%. We repaid the term loan B in July of 2006 in full. In April of 2008, we increased
the revolving line of credit from $50 million to $60 million. In December 2009, we amended and restated our
senior credit facility.

The amended and restated credit agreement extended the maturity date of the revolver to December 31, 2012,
increased the borrowing rate, eliminated the interest coverage ratio covenant and replaced it with a fixed charge
coverage ratio covenant, increased the dollar limit on stock repurchases by us from $10 million to $20 million
(but making repurchases subject to our maintaining a total leverage ratio of 2.00 to 1.00), and other minor
amendments. Except as described above, the terms of our original senior credit facility remain in effect under
the amended and restated credit agreement.

As of December 31, 2009, we have drawn $44 million on the revolver. Our senior credit facility contains
covenants that, among other things, limit our ability to incur debt, create liens, make investments, sell assets,
pay dividends, make capital expenditures, make restricted payments, enter into transactions with affiliates, and
make acquisitions. In addition, our facility requires us to maintain certain financial ratios. Our assets and
the stock of our subsidiaries collateralize the revolving credit facility. We were in compliance with the
covenants under our senior credit facility as of December 31, 2009.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-24
|----



---

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

|Other long term debt

As of December 31, 2009, we had notes totaling $4.5 million related to equipment purchased by our limited
partnerships, which indebtedness we believe will be repaid from the cash flows of the partnerships. They bear
interest at either a fixed rate of four to nine percent or LIBOR or prime plus a certain premium and are due over
the next four years.

The stated principal repayments for all indebtedness as of December 31, 2009 are payable as follows (in
thousands):
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.

We sponsor a partially  self-insured  group  medical  insurance  plan.  The plan is designed to provide a specified
level of  coverage,  with  stop-loss  coverage  provided by a commercial  insurer.  Our maximum  claim  exposure is
limited to $110,000 per person per policy year. At  December 31,  2009, we had 350 employees  enrolled in the plan.
The  plan  provides  non-contributory  coverage  for  employees  and  contributory  coverage  for  dependents.  Our
contributions totaled $3,722,000, $2,781,000 and $2,852,000, in 2009, 2008 and 2007 respectively.

We lease office space in several  locations.  Rent expense  totaled  $2,714,000,  $2,445,000 and $1,757,000 for the
years ended  December 31,  2009,  2008 and 2007.  Future  annual rent  expense  under all  noncancelable  operating
leases are as follows:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|I. STOCK BASED COMPENSATION



On January 1, 2006, we adopted ASC 718, Stock Compensation (ASC 718), (formerly SFAS 123(R),
Share-Based Payment), which requires the measurement and recognition of compensation expense for all share-based
payment awards made to employees and directors including stock option grants based on estimated fair values. ASC
718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an
option-pricing model. The value of the awards portion that is ultimately expected to vest is recognized as
expense over the requisite service periods. Prior to the adoption of ASC 718, we accounted for share-based
awards to employees and directors using the intrinsic valued method. Under the intrinsic value method,
share-based compensation expense was only recognized by us if the exercise price of the stock option was less
than the fair market value of the underlying stock at the date of grant. We have elected to use the modified
prospective application method such that ASC 718 applies to new awards, the unvested portion of existing awards
and to awards modified, repurchased or canceled after the effective date.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-25
|----



---

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

|Under ASC 718, nonvested stock awards are awards that the employee has not yet earned the right to sell, and are
subject to forfeiture if the terms of service are not satisfied. These awards should be measured based on the
market prices of otherwise identical (i.e., identical except for the vesting condition) common stock at the grant
date. A nonvested equity share awarded to an employee shall be measured at its fair value as if it were vested
and issued on the grant date. The vesting restrictions are taken into account by recognizing compensation cost
only for awards for which the employee has rendered the requisite service (i.e., vested).

Share-based compensation expense recognized during the years ended December 31, 2009, 2008, and 2007 is related
to awards granted prior to, but not yet fully vested as of, January 1, 2006 and awards granted subsequent to
December 31, 2005. We have historically and continue to estimate the fair value of stock options using the
Black-Scholes-Merton (Black Scholes) option-pricing model. For our performance-based non-vested
stock awards, we relied upon a closed-form barrier option valuation model, which is a derivation of the Black
Scholes model to determine the fair value of the awards and utilized a lattice model to analyze the appropriate
service period. For our service-based non-vested stock awards, fair value is based on the fair value at the
grant date.Equity Incentive Plans

At December 31, 2009, we had seven separate equity compensation plans: the Prime Medical Services, Inc.
(Prime) 1993 and 2003 stock option plans, the HealthTronics Surgical Services, Inc. (HSS)
general, 2000, 2001 and 2002 stock option plans, and the HSS 2004 equity incentive plan. The plans, and all
amendments thereto, had been approved by Primes and HSS shareholders, as the case may be. On
November 10, 2004, Prime completed a merger with HSS pursuant to which Prime merged with and into HSS with
HealthTronics, Inc. as the surviving corporation. Options granted under the plans shall terminate no later than
ten years from the date the option is granted, unless the option terminates sooner by reason of termination of
employment, disability or death. Options may vest immediately or over one to five years.

The following table sets forth certain information as of December 31, 2009 about our equity compensation plans:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-26
|----



---

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

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

|To calculate the compensation cost that was recognized under ASC 718 for the three years ended December 31, 2009,
2008, and 2007, we used the Black-Scholes option-pricing model with the following weighted-average assumptions
for equity awards granted. For December 31, 2009 and 2007, respectively: risk-free interest rates were 0.65% and
4.6%; dividend yields were 0%; volatility factors of the expected market price of our common stock were 65% and
47%; and a weighted-average expected life of the option of 6 years. There were no options granted in the year
ended December 31, 2008.

The risk-free interest rate is based on the implied yield available on U.S. Treasury issues with an equivalent
expected term. We have not paid dividends in the past and do not plan to pay any dividends in the future. We
utilized the guidelines of Staff Accounting Bulletin No. 107 (SAB 107) of the Securities and Exchange Commission,
(the SEC Staffs interpretation of ASC 718) 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.

As of December 31, 2009, total unrecognized share-based compensation cost related to unvested stock options was
approximately $1.2 million, which is expected to be recognized over a weighted average period of approximately
2.0 years. We also had $2.2 million of unrecognized compensation costs related to non-vested stock awards as of
December 31, 2009, which is expected to be recognized over a weighted average period of approximately 1.5
years. For the years ended December 31, 2009, 2008, and 2007, we have included approximately $3,000,000,
$2,881,000, and $1,108,000, respectively, for share-based compensation cost in the accompanying consolidated
statement of income.

In 2009, we granted a total of 619,733 of non-vested shares under our 2004 Equity Incentive Plan. 386,975 shares
vest 25% on each of the first four anniversaries of the grant date. 151,293 shares vest based on the achievement
of the performance targets outlined below. 81,465 shares vest 25% on each of the first four anniversaries of the
grant date; however, their vesting can be accelerated if the following performance targets are reached. All of
the shares granted in 2009 that vest per the performance targets below have a two year service requirement
regardless of the performance targets being met. In 2009, 43,987 shares were issued to board members for board
related fees.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-27
|----



---

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

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

| | Percent of
Grant Vesting | Performance Target
(% increase over grant price)
| | ------------------------ | ------------------------------------------------
| |                          |                                                 
| |                          |                                                 
| |                          |                                                 
| |                          |                                                 

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

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

|                                  | 2009 | 2008 | 2007
|--------------------------------- | ---- | ---- | ----
|
|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,  2009,  there were no  exercises  of options to purchase  common stock and the
total fair value of shares  vested during 2009 was $793,000.  During the year ended  December 31, 2008,  there were
no  exercises  of options to  purchase  common  stock and the total fair  value of shares  vested  during  2008 was
$1,153,000.  During the year ended December 31, 2007,  there were no exercises of options to purchase  common stock
and the total fair value of shares vested during 2007 was $966,000.

During the year ended December 31, 2009, 2008, and 2007 there was no financing cash generated from share-based
compensation arrangements for the purchase of shares upon exercise of options.  We issue new shares upon exercise
of options to purchase our common stock.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-28
|----



---

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

|Additional information regarding options outstanding for all plans as of December 31, 2009, is as follows:
|----------------------------------------------------------------------------------------------------------

|                                         | Outstanding Options | Exercisable Options
|---------------------------------------- | ------------------- | -------------------
|
|$0.00 - $4.24                            |                     |                    
|$4.25 - $6.49                            |                     |                    
|$6.50 - $6.99                            |                     |                    
|$7.00 - $7.50                            |                     |                    
|$7.51 - $9.50                            |                     |                    
|$9.51 - $13.69                           |                     |                    
|                                         |                     |                    
|Aggregate intrinsic value (in thousands) |                     |                    

|The  aggregate  intrinsic  value in the table  above is based on our  closing  stock price of $2.64 per share as of
December 31, 2009.

A summary of the status of our nonvested shares as of December 31, 2009 and changes during the years ended
December 31, 2009, 2008 and 2007 is as follows:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Nonvested Shares |  | Shares (000)                   |  | Weighted-Average
Grant-Date Fair Value | 
| | ---------------- |  | ------------------------------ |  | -------------------------------------- | 
| |                  |  | Nonvested at January 1, 2007   |  |                                        | 
| |                  |  | Granted                        |  |                                        | 
| |                  |  | Vested                         |  |                                        | 
| |                  |  | Forfeited                      |  |                                        | 
| |                  |  | Nonvested at December 31, 2007 |  |                                        | 
| |                  |  | Granted                        |  |                                        | 
| |                  |  | Vested                         |  |                                        | 
| |                  |  | Forfeited                      |  |                                        | 
| |                  |  | Nonvested at December 31, 2008 |  |                                        | 
| |                  |  | Granted                        |  |                                        | 
| |                  |  | Vested                         |  |                                        | 
| |                  |  | Forfeited                      |  |                                        | 
| |                  |  | Nonvested at December 31, 2009 |  |                                        | 

|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 noncontrolling  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.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-29
|----



---

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

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

| |  | Years Ended December 31,
| |  | ------------------------
|
| |  |                         
| |  |                         
| |  |                         
| |  |                         
| |  |                         
| |  |                         
| |  |                         
| |  |                         
| |  |                         
| |  |                         

|A  reconciliation  between the statutory  rate and the effective tax rate on income from  operations  for the years
ended December 31, 2009, 2008 and 2007 is as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Years Ended December 31,
| |  | ------------------------
|
| |  |                         
| |  |                         
| |  |                         
| |  |                         
| |  |                         
| |  |                         
| |  |                         
| |  |                         
| |  |                         

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

|                                                                                           | December 31,
|------------------------------------------------------------------------------------------ | ------------
|
|Deferred tax assets:                                                                       |             
|Net operating loss carryforward                                                            |             
|Capital loss carryforward                                                                  |             
|Allowance for bad debts                                                                    |             
|State deferred taxes                                                                       |             
|FAS 123(R) expense                                                                         |             
|AMT Credit                                                                                 |             
|HTRN acquired built-in losses                                                              |             
|Capitalized costs                                                                          |             
|Accrued expenses deductible for tax purposes when paid                                     |             
|Total gross deferred tax assets                                                            |             
|Less valuation allowance                                                                   |             
|Net deferred tax assets                                                                    |             
|                                                                                          
|Deferred tax liabilities:                                                                  |             
|Property and equipment, principally due to differences in depreciation                     |             
|Intangible assets, principally due to differences in amortization periods for tax purposes |             
|Total gross deferred tax liability                                                         |             
|Net deferred tax liability                                                                 |             

|A-30
|----



---

|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 not be  realized.  The ultimate  realization  of deferred
tax assets is dependent upon the  generation of future  taxable income during the periods in which those  temporary
differences  become  deductible.   Management  considers  the  scheduled  reversals  of  deferred  tax  liabilities
(including the impact of available carry back and carry forward  periods),  projected future taxable income and tax
planning  strategies  in  making  this  assessment.  In the  fourth  quarter  of 2008,  primarily  as a result of a
goodwill  impairment  charge,  the Company  incurred a cumulative  book loss for the most recent three year period.
Management  considers a cumulative loss for the most recent three year period to be a negative  indicator as to the
realizability  of deferred tax assets based upon future taxable  income.  In 2009, the Company  continued to have a
cumulative book loss for the most recent three year period.  Based on these criteria,  management  believes it will
not  realize  the  benefits  of these  deductible  differences;  accordingly,  we have  recorded  a full  valuation
allowance at December 31, 2009 and 2008.

At  December  31,  2009  and  2008,  we have  federal  net  operating  loss  carry  forwards  of  $112,245,000  and
$107,544,000,  respectively,  which are available to offset future  taxable  income,  if any,  through 2029.  These
federal  net  operating  losses are a  combination  of losses that we acquired  through  the  acquisition  of other
companies and through our own  operations.  In addition,  we have an  alternative  minimum tax credit carry forward
at December 31, 2009 of $511,000,  which is available to offset future federal  regular income taxes,  if any, over
an  indefinite  period.  We also have state net operating  loss carry  forwards that are available to offset future
state taxable income, if any.

In 2009,  we  acquired  Endocare,  Inc.  As a part of the  acquisition,  we  acquired  Endocares  federal net
operating  loss of $145  million.  Due to the change in ownership,  our  utilization  of the net operating  loss is
limited under Section 382 of the Internal  Revenue Code.  When applying the Section 382 limits,  our utilization of
Endocares net operating loss is limited to $771,000 per year through 2029.

In 2004, we acquired  HealthTronics  Surgical  Services,  Inc.  (HealthTronics).  As a part of the acquisition,  we
acquired  HealthTronics  federal net operating  losses and other built-in  losses.  At December 31, 2009, the
federal net operating  losses and other built-in losses were $20.6 million and $7.7 million,  respectively.  Due to
the change in ownership in 2004, our  utilization of the net operating loss and other built-in  losses were limited
under  Section 382 of the  Internal  Revenue  Code.  When  applying  the Section 382  limits,  our  utilization  of
HealthTronics net operating losses is limited to $2,014,500 per year through 2027.

The federal net operating  losses that we have  generated  through our own operations  total $91.4  million.  These
net operating losses are available to offset future taxable income, if any, through 2029.

In 2008,  the Internal  Revenue  Service  completed  examinations  of our income tax returns for 2000 to 2006.  The
examination  of these  returns was the result of an  examination  of refund  claims we  submitted  to the  Internal
Revenue  Service  totaling  $4.3 million  related to  HealthTronics  filings.  In October  2008,  we received  $5.2
million  from the  Internal  Revenue  Service  representing  $4.3  million for our refund claim and $0.9 million in
interest  income.  The tax refund of $4.3 million and  interest  income of $0.2 million was recorded as a reduction
of goodwill  while the interest  income  earned  subsequent  to the  acquisition  of  HealthTronics,  totaling $0.7
million,  was  recorded  as  interest  income  in the  income  statement.  As a  result  of the  completion  of the
examination  of these  returns in 2008,  we recorded tax  benefits of $31.70  million in net  operating  losses and
built-in losses with a corresponding valuation allowance related to HealthTronics.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-31
|----



---

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

|Effective January 1, 2007, we adopted ASC 740-10, Accounting for Uncertainty in Income Taxes (ASC
740-10), (formerly FIN No. 48 Accounting for Uncertainty in Income Taxes). ASC 740-10 specifies the way
public companies are to account for uncertainties in income tax reporting, and prescribes a methodology for
recognizing, reversing, and measuring the tax benefits of a tax position taken, or expected to be taken, in a tax
return. Adoption of ASC 740-10 on January 1, 2007 did not result in a cumulative effect adjustment to our
retained earnings.

At January1, 2008, we had an unrecognized tax benefit of $2.3 million. As a result of the Internal Revenue
Service examination in 2008, this amount was settled. Accordingly, there were no unrecognized tax benefits at
December 31, 2009 or 2008.

Our continuing practice is to recognize interest and penalty expense in operating expenses. We expensed no
penalties and interest for the years ended December 31, 2009 and 2008. Our federal returns for 2007, 2008 and
2009 are subject to examination by the Internal Revenue Service. Additionally, various state income tax returns
are subject to examinations for years 2006, 2007, 2008, and 2009.

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 $87,000 would be provided
for in 2009 and 2008, respectively.

K.   SEGMENT REPORTING

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

L.  DISCONTINUED OPERATIONS

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

In the fourth quarter of 2006, we committed to a plan to sell our Rocky Mountain Prostate Thermotherapies
(RMPT) business. In July 2007, we entered into a purchase agreement to sell the RMPT business for
$1.35 million. This sale closed on September 28, 2007. Accordingly, we have included its results from
operations in discontinued operations.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-32
|----



---

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

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

| | Consolidated Statements of Income | 
| | --------------------------------- | 
|
| |                                   | 
|
| |                                   | 
| |                                   | 
| |                                   | 
| |                                   | 
| |                                   | 
| |                                   | 
| |                                   | 
| |                                   | 
| |                                   | 
| |                                   | 

| |  | 
| |  | 
|
| |  | 
| |  | 
| |  | 
| |  | 

|The gain on sale of Rocky Mountain Prostate Thermotherapy, noted above, includes a charge to goodwill of $3.25
million.

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, 2009, we had recovered
approximately $2.8 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 ASC 810, has consolidated those entities. As a result of consolidating the VIEs, of which the
partnership is the primary beneficiary, we have recognized noncontrolling interest of approximately $800,000 on
our consolidated balance sheets at December 31, 2009 and 2008, which represents the difference between the assets
and the liabilities recorded upon the consolidation of the VIEs. The liabilities recognized as a result of
consolidating the VIEs do not represent additional claims on our general assets. Rather, they represent claims
against the specific assets of the consolidated VIEs. Conversely, assets recognized as a result of consolidating
these VIEs do not represent additional assets that could be used to satisfy claims against our general assets.
Reflected on our consolidated balance sheet as of December 31, 2009 and 2008 are $4.3 million and $4 million,
respectively, of VIE assets, representing all of the assets of the VIEs. The VIEs assist the partnership in
providing urological services, minimally invasive prostate treatments, and other services in the Greater New York
metropolitan area.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-33
|----



---

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

|N.   RELATED PARTY TRANSACTIONS

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

|A-34
|----



---