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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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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, 2003

or

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 000-30406

HealthTronics Surgical Services, 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.)
|                                                                 |  |                                       
|1841 WEST OAK PARKWAY, SUITE A
  MARIETTA, GEORGIA               |  | 30062                                 
|(Address of principal executive offices)                         |  | (Zip Code)                            

(770) 419-0691
(Registrants telephone number, including area code)

Securities registered under section 12(b) of
the Exchange Act:

NONE

Securities registered under section 12(g) of
the Exchange Act:

Common Stock, no par value

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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 o

Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.  
o

Check whether the issuer is an accelerated filer (as defined in Rule
12b-2 of the Act).

YES x     
NO o

The aggregate market value of the voting and non-voting common equity
held by non-affiliates (assuming for these purposes, but without conceding that
all executive officers and Directors are affiliates of the Registrant) on
December 31, 2003, valued at the closing price on June 30, 2003 was
$84,666,000.

The Registrant has 12,384,000 Shares of No Par Value Common Stock as of
March 12, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the issuers Proxy Statement for the Annual Meeting of
Shareholders to be held May 21, 2004 are incorporated by reference in Part III.

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Table of
Contents

|          |  |                                                                                               
|--------- |  | ----------------------------------------------------------------------------------------------
|          |  |                                                                                               
|Part I.   |  |                                                                                               
|Item 1.   |  | Business                                                                                      
|Item 2.   |  | Properties                                                                                    
|Item 3.   |  | Legal Proceedings                                                                             
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                           
|          |  |                                                                                               
|Part II.  |  |                                                                                               
|Item 5.   |  | Market for Registrants Common Equity and Related Stockholder Matters                         
|Item 6.   |  | Selected Financial Data                                                                       
|Item 7.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations         
|Item 7A.  |  | Quantitative and Qualitative Disclosure About Market Risk                                     
|Item 8.   |  | Financial Statements and Supplementary Data                                                   
|Item 9.   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure          
|Item 9A.  |  | Controls and Procedures                                                                       
|          |  |                                                                                               
|Part III. |  |                                                                                               
|Item 10.  |  | Directors and Executive Officers of the Registrant                                            
|Item 11.  |  | Executive Compensation                                                                        
|Item 12.  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|Item 13.  |  | Certain Relationships and Related Transactions                                                
|Item 14.  |  | Principal Accountant Fees and Services                                                        
|          |  |                                                                                               
|Part IV   |  |                                                                                               
|Item 15.  |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                               

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Cautionary Statements

This report contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements involve known and unknown risks,
uncertainties or other factors which may cause actual results, performance or
achievements of HealthTronics Surgical Services to be materially different from
any future results, performance or achievements express or implied by such
forward-looking statements.  As always,
these expectations and projections are based on currently available
competitive, financial, and economic data, along with operating plans, and are
subject to future events and uncertainties. 
Among the events and uncertainties which could adversely affect future
periods are: inability to establish or maintain relationships with physicians
and hospitals; health care regulatory developments that prevent certain
transactions with health care professionals or facilities; inability of the
Company or health care providers to obtain reimbursement for use of the
Companys current or future products; competition or technological change that
impacts the market for the Companys products; difficulty integrating HMT and
realizing projected cost savings; unanticipated regulatory and clinical costs
related to FDA approval of HIFU; and difficulty in managing the Companys
growth.  Additional factors that might
cause such a difference, include, but are not limited to those discussed in the
Managements Discussion and Analysis of Financial Condition and Results of
Operations in this report and the items identified under the caption Risk
Factors in Item 1 of this report.

Part I

Item 1: 
Business.

General

HealthTronics
Surgical Services, Inc. (may be referred to as, HealthTronics, the Company,
we, us or our and shall include all subsidiaries where appropriate) is a
leading provider of non-invasive surgical treatments for the urology and
orthopaedic markets and as a result of our recent acquisition of HMT Holding AG
and controlling interest in HMT High Medical Technologies AG, a manufacturer of
medical devices.

The primary
component of our urology business is lithotripsy, a medical procedure in which a device
called a lithotripter transmits high-energy shock waves through the body to
break up kidney stones.  Also in the urology
sector, we provide treatments for benign and cancerous conditions of the
prostate.  In treating benign prostate
disease, we use a technology called transurethral microwave therapy, a process
in which heat therapy is used to treat the enlarged prostate, and other
technologies.  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
orthopaedics, we provide non-invasive surgical solutions for a wide variety of
orthopaedic conditions such as chronic plantar fasciitis and chronic lateral
epicondylitis, more commonly known as heel pain and tennis elbow,
respectively.  We provide these services with our device called the OssaTron®, which is an evolution of the
lithotripsy

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technology.  The OssaTron is
approved by the FDA for the two previously stated indications and has been
demonstrated to be effective through several clinical studies.

Much of our
business consists of partnerships with urologists, orthopaedic surgeons and
podiatrists or as a mobile service provider. 
The Company employs an extensive network of clinical technicians who
assist doctors with the operation of the equipment during procedures and
electronic service technicians who maintain the medical devices in good working
order.

We were
formed in December 1995 and began offering lithotripsy services in early
1997.  In October 2000, we received FDA
approval to market the OssaTron orthopaedic extracorporeal shock wave device
for the treatment of chronic plantar fasciitis, a sometimes debilitating
condition characterized by chronic heel pain. 
On March 14, 2003, we also received FDA approval for the treatment of
chronic lateral epicondylitis, more commonly known as tennis elbow, with the
OssaTron extracorporeal shock wave device. Other possible applications are
under review.

Our
services are provided principally through limited partnerships or other
entities that we manage.  Many of these
partnerships were formed by us, and we maintain an equity interest ranging from
5% to 100% of the partnership while selling any remaining interests primarily
to physicians.  We generally retain the
sole managing interest in the entities.  We also provide equipment
maintenance services to some of the partnerships and supply them with various
consumables used in lithotripsy and Orthotripsy® orthopaedic
extracorporeal shock wave surgery procedures. 
To date we have expanded our operations by forming partnerships in new
geographic markets and acquiring interests in partnerships from unaffiliated
parties, and we expect to continue to do so in the future.

In recent
years our urology business has grown significantly.  As of December 31, 2003, we had approximately 90 lithotripsy devices and 20
prostate treatment devices operating in North America.  In orthopaedics, as of December 31, 2003, we
had approximately 57 OssaTron brand extracorporeal shock wave devices operating in North
America.

In December
2001, we acquired Litho Group, Inc., the second largest provider of lithotripsy
services in the U.S., for a total purchase price of $46.8 million including
acquisition costs.  Litho Group, Inc.
was a non-debtor subsidiary of Integrated Health Services, Inc. which had filed
for bankruptcy.

In
July 2002, Litho Management, Inc., a wholly owned subsidiary of the Company,
sold its general and limited partnership interests in U.S. Lithotripsy, L.P., a
consolidated entity, to U.S. Medical Development, Inc. for $6.8 million,
resulting in a gain of approximately $3.7 million.  U.S. Lithotripsy, L.P.
provided us with approximately $5.6 million in net revenues in 2002 through the
sale date.

In
August 2002 and November 2002, the Company purchased a collective 61% interest
in a Colorado limited liability company that provides treatment for benign
prostatic

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hyperplasia in nine western states for a total of $2.8 million in
cash and the Companys stock. The Company has consolidated the financial
statements of this new subsidiary since the date of purchase.  In October 2003, the Company
purchased the remaining 39% interest in this subsidiary for approximately $1.1
million.

In early
March 2004, the Company purchased HMT Holding AG (HMT Holding).  HMT Holding owns a controlling interest in
HMT High Medical Technologies, AG (HMT), the manufacturer and supplier of the
OssaTron.  HMT also manufactures the LithoTron®,
 the LithoDiamond®, a new generation renal lithotripter, and the VersaTron®, a shock wave device
for veterinary applications.

Industry Overview

Health care
related expenditures constitute a large and growing segment of the U.S.
economy.  In 2002, total health care
expenditures in the United States were estimated at $1.6 trillion, representing
approximately 14.9% of the U.S. gross domestic product, according to the
Centers for Medicare & Medicaid Services. 
Over the next decade, an aging U.S. population and advances in medical
technology are expected to drive increases in hospital patient populations and
the consumption of health care services.

Government
programs, private insurance companies, managed care organizations and
self-insured employers have sought to limit the growth of health care
expenditures.  At the same time,
technological advances in areas such as endoscopy, interventional radiology and
extracorporeal shock wave treatment have provided minimally invasive
alternatives to open surgery for many conditions.  These alternatives are less costly to perform than open surgery,
typically involve fewer complications and, as a result, have a better safety
profile and are more convenient for the patient because they can often be
performed on an outpatient basis.

Urology Market

The
Companys core business in the urology market is renal lithotripsy.  During 2003, the Company significantly increased the number of procedures for
 benign prostatic hyperplasia (BPH) and
prostate cancer.

Lithotripsy

| | According
  to the American Foundation for Urologic Disease, nearly 10% of Americans are
  afflicted with kidney stones during their lifetime.  Most kidney stones occur within the 40-60 year old age
  group.  According to the U.S. Census
  Bureau, this age segment should increase by 5.9 million people by the year
  2010.                                                                                                                                                                                          
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The
  two primary forms of treatment of kidney stones are lithotripsy and
  endoscopic extraction, a form of invasive surgery.  Of the approximate 600,000 kidney stone cases each year,
  250,000 are treated with lithotripsy. 
  Lithotripsy uses extracorporeal
  shock waves to break up kidney stones into small pieces, which can pass
  naturally through the bodys urinary tract. 
  This procedure is non-invasive and typically requires only local
  anesthesia.  Alternative treatments
  include drug therapy

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| | and open surgery.                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                             
| | BPH Treatment and Prostate Cancer                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                             
| | Our
  primary treatment modality for benign prostatic hyperplasia (BPH) utilizes
  the Prostatron®.  The
  Prostatron is used to treat BPH using transurethral microwave therapy defined
  later.  For prostate cancer, we
  utilize cryosurgical devices as primary treatment modalities.

Orthopaedic
Market

Our core
business in the orthopaedic market is minimally invasive orthopaedic
extracorporeal shock wave surgery utilizing the OssaTron.  Our treatment method for plantar fasciitis
is primarily utilized by podiatrists and a smaller number of orthopaedic
surgeons.  Our treatment method for
lateral epicondylitis or tennis elbow is primarily utilized by orthopaedic
surgeons.  Orthopaedic surgeons will be
a primary source of growth as new bone and soft tissue indications are approved
by the FDA for treatment with the OssaTron.

| | Orthopaedic Extracorporeal Shock Wave Surgery                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Based
  on numerous discussions with health care professionals and other evidence, we
  believe that 6.5-7.0 million cases of plantar fasciitis, a sometimes
  debilitating condition characterized by chronic heel pain, are diagnosed
  annually in the U.S.  Of these cases,
  we estimate that approximately 10% of patients choose to have invasive
  surgery performed.                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The
  potential market for high-energy orthopaedic extracorporeal shock wave
  surgery includes all patients who are candidates for open invasive surgery to
  treat plantar fasciitis, lateral epicondylitis, Achilles tendonitis, patellar
  (knee) tendonitis and shoulder tendonitis. 
  The potential market for high-energy orthopaedic extracorporeal shock
  wave surgery may include patients who are treated for other soft tissue
  conditions, as well as bone indications such as non-union fractures.                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Currently
  high-energy orthopaedic extracorporeal shock wave surgery is being utilized
  to treat chronic plantar fasciitis and chronic lateral epicondylitis.  High-energy orthopaedic extracorporeal
  shock wave surgery uses shock waves to stimulate new blood vessel formation
  around the injury to allow tissue-healing cells to repair the condition.
  Alternative treatments include rest, massage, stretching, anti-inflammatory
  medication, orthotics, physical therapy and invasive surgery.  Minimally invasive surgery with our device
  is contrasted with low-energy and non-shock wave physical therapy
  devices.

Benefits of Extracorporeal Shock Wave Surgery

Our two
core treatment modalities, lithotripsy and orthopaedic shock wave surgery use
extracorporeal shock waves for the minimally invasive surgical treatment of
certain medical conditions. 
Extracorporeal shock wave surgery treats medical conditions by

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focusing
shock waves on a specific point in the human body to break up kidney stones or
cause micro trauma.  An electrode or
other energy source generates a spark to initiate the shock wave.  The shock wave reflects off an elliptical
surface to focus the energy to the point of treatment.  These minimally invasive surgical medical
treatments are more effective, and often safer and less costly, than
traditional treatment alternatives. 
Lithotripsy has been routinely performed in the U.S. for over a
decade.  While orthopaedic
extracorporeal shock wave surgery is relatively new in the U.S., it has been
performed in Europe for over ten years.

Extracorporeal
shock wave surgery offers the following advantages over current alternative
treatments:

| |  | Cost effectiveness.  Lithotripsy is generally less expensive
  than invasive surgery because it requires less time to perform and involves
  a shorter recovery period.  Typically
  no overnight hospital stay is required. 
  Orthopaedic extracorporeal shock wave surgery is less costly than
  invasive surgery due to fewer potential complications and has a shorter
  recovery time.                                                                                                                                                                                                                                                           
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Safety.  Both lithotripsy and orthopaedic surgeries
  that employ extracorporeal shock wave technology are minimally invasive,
  resulting in fewer complications than traditional surgery.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Quick recovery.  Patients treated with lithotripsy
  typically return to normal activity one or two days after treatment, as
  compared to invasive surgery which can regularly require up to 2 weeks to
  return to normal activity.  Patients
  treated with orthopaedic extracorporeal shock wave surgery typically must avoid
  strenuous activity for 2 to 4 weeks, compared to 8 to 11 weeks after invasive
  surgery.  Additionally, unlike
  patients of invasive surgery, extracorporeal shock wave treatment patients
  can typically return to basic activity such as going to work or walking
  unassisted the day following the treatment.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | Advances in technology.  Recent improvements in lithotripsy
  technology have made this procedure appropriate to treat kidney stones that
  previously could have been removed only by invasive surgery. Clinical trials
  have demonstrated that orthopaedic extracorporeal shock wave surgery provides
  an effective treatment for chronic plantar fasciitis and lateral
  epicondylitis that has not responded to conservative treatment. Orthopaedic
  extracorporeal shock wave surgery presents a broad upside in the ability to
  safely and cost-effectively treat multiple other soft tissue indications.                                    

Hospitals
and other providers typically choose not to buy extracorporeal shock wave
devices because of capital budget constraints and space allocation concerns,
given that a device may not be needed in one location on a continuous basis.  A single mobile device can serve numerous
hospitals and other facilities across a broad geographic area.

Our Strategy

We believe
that we are one of the leaders in providing minimally invasive medical

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services
in the urologic and orthopaedic communities in the United States.  We intend to leverage this established
leadership position to continue to grow our current procedure offerings and introduce
additional modalities.  Our recent
acquisition of HMT Holding AG will expand our medical device research and
development, increase our worldwide sales force and increase resources for
clinical trials and education for current medical devices.  The key components of our strategy are to:

| |  | Increase recognition and use of our Orthotripsy extracorporeal shock
  wave services.We intend to establish ourselves as
  the market leader in orthopaedic extracorporeal shock wave surgery services
  and increase demand accordingly.  We
  plan to take advantage of our first-mover position in the orthopaedic
  extracorporeal shock wave surgery market and leverage the relationships we
  have established with a wide array of physicians, hospitals and surgery
  centers through our lithotripsy services.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Consolidate position as leading lithotripsy
  provider.We intend to consolidate our
  position within the lithotripsy market by securing new facility contracts in
  existing markets, developing new lithotripsy partnerships and acquiring
  independent lithotripsy service providers in markets where we do not
  currently provide service.                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Expand awareness of clinical trials and
  outcomes.We intend to devote additional
  resources to completing and publicizing our FDA studies for additional
  clinical applications for the OssaTron brand extracorporeal shock wave
  device.                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | Introduce additional modalities utilizing
  our current network of physicians.We plan to use our expertise with the FDA
  to seek approval for new devices and treatment modalities and introduce such
  devices or treatments to the medical community through our network of
  physicians.  Our recent distribution
  agreement with EDAP TMS S.A. for high intensity focused ultrasound (HIFU)
  treatment of prostate cancer is an example of our execution of this strategy.                                     

Operations

We are one
of the nations leading providers of equipment, technical and administrative
services to physicians, hospitals and surgery centers performing lithotripsy
and orthopaedic extracorporeal shock wave surgery.  We provide our customers with a turnkey solution, including
trained technicians, state-of-the-art equipment and all ancillary services and
supplies necessary to perform these treatments.  We provide our services at pre-scheduled times to meet the
physicians and health care facilitys needs. 
By utilizing our services on a procedure-by-procedure basis, physicians
and health care facilities can provide their patients with high quality clinical treatments while minimizing
their investment in technology, human resources and other systems.  Additionally, the ongoing need for
purchasing and maintenance of equipment as well as the hiring and training of
skilled technicians and other personnel is reduced.

We use state-of-the-art
medical devices, which include lithotripsy and other extracorporeal shock wave
devices, as well as x-ray and ultrasound equipment.  As of

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December 31, 2003, we had approximately 90 lithotripsy devices, 57
orthopaedic extracorporeal shock wave surgery devices and 20 prostate treatment
devices in operation in 47 states.  Our
devices have been designed to be mobile, and many of them serve multiple health
care facilities.  We have contributed
several innovations to engineering and transporting devices to maximize
convenience, safety, and ease of use.

We source
our lithotripsy machines, orthopaedic extracorporeal shock wave surgery
devices, x-ray equipment and other urologic products from third party
manufacturers.  We currently source the
LithoTron kidney lithotripter and the OssaTron brand orthopaedic extracorporeal
shock wave surgery system from HMT, a Swiss company in which we recently
purchased controlling interest, pursuant to an agreement that grants us
exclusive distribution, marketing and sales rights for these products in North
America. We source our x-ray systems from Philips, a leading provider of high
quality x-ray and other imaging systems. 
We source substantially all of our electrodes and other consumables from
HMT.

We provide
our lithotripsy and orthopaedic extracorporeal shock wave surgery services
through our partnership subsidiaries, which generally are owned in part by
physician investors.  Typically, we act
as the general partner and manager of the partnerships.  Pursuant to contracts with these
partnerships or pursuant to partnership agreements, we manage their daily
operations and also provide them with equipment, maintenance and
consumables.  Our physician partners
acquire their partnership interests for a cash payment.

Generally
when a procedure is scheduled, we transport the device to the health care
facility by specially designed vans or trucks accompanied by a trained
technician and necessary consumables. 
At the health care facility the device is typically transported to and
installed in a designated suite.  The
physician can then perform the procedure, assisted by our technician.  Once the procedure has been completed, the
device is transported back to the van and then on to the next facility, thus
allowing one device to service numerous health care facilities.

Although we
provide the devices and technicians, and sometimes nursing care, to assist the physician, the physician is
solely responsible for administering the treatment and separately bills the
appropriate payor for the applicable professional fee.  The health care facility is responsible for
providing space for the physician to perform the procedure and maintaining all
patient files and records.

We contract
with health care facilities to provide our services either on a retail or
wholesale basis.  Under a retail
billing arrangement, the contract with the facility allows us access to the
premises for providing our services, and we pay the facility a flat fee per procedure.  Most of our
orthopaedic extracorporeal shock wave contracts, and a minority of our
lithotripsy contracts, provide for retail billing.  Under a wholesale billing arrangement, the facility pays us a fee
for providing our services.  The
facility then bills the third party payor or other responsible party.  Our fee might be a set fee per procedure, a
set fee per month based on a specified number of days of service at the
facility per month, or a percentage of revenue collected by the facility from
payors in respect of procedures performed using our services.

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Lithotripsy
and orthopaedic extracorporeal shock wave surgery devices must be serviced
regularly and we provide this equipment maintenance to our partnerships on a
periodic or an on-call basis.  We also
procure and provide the electrodes and other consumables that are necessary to
operate these devices.  We provide these
services to third party lithotripsy service companies on a fee basis as well as
to our subsidiary partnerships.

We perform
billing and collection services for many of our orthopaedic partnerships.  When billing under the retail billing model,
we work for our physicians and patients to obtain pre-approval of procedures by
the patients insurance companies.  We
also negotiate with insurance companies and other third party payors for
regional or national reimbursement contracts for our orthopaedic extracorporeal
shock wave surgery procedures.

In 2003, we
completed the FDA Post Approval clinical study of the HealthTronics OssaTron
brand orthopaedic extracorporeal shock wave device for the treatment of chronic
plantar fasciitis.  Post approval
studies are routinely required by the FDA. 
This study consisted of 300 open-label treatments for this condition,
obtaining occurrence of complications related to the treatment.  The results of this study were filed with
the FDA on February 6, 2003 and are consistent with the results of our initial
pre-market approval study.

We also
recently received FDA approval for the OssaTron brand orthopaedic extracorporeal
shock wave device for the treatment of chronic lateral epicondylitis, commonly
known as tennis elbow.  The final report
which includes long term follow-up of 225 treated subjects for this multi-site,
double blind, randomized, placebo controlled study was filed with the FDA on
April 22, 2003 and the results are consistent with the results of our
pre-market approval study.

The
HealthTronics OssaTron brand orthopaedic extracorporeal shock wave device is
also currently being studied for the treatment of nonunion or delayed healing
of fractures in metatarsals (bones on the top of the foot). There have been a
small subset of subjects treated under an FDA approved clinical study for the
treatment of chronic Achilles tendonitis and chronic supraspinatus
tendonitis.  These subjects will
continue to be followed to one year post treatment or as outlined in the study
protocols.  The Company is also
currently funding two additional clinical studies, scheduled to begin in
2004.  These studies should provide
additional clinical evidence to the orthopaedic community and insurers
regarding the efficacy of minimally invasive shock wave surgery utilizing the
OssaTron.

Other
urologic treatments we provide are transurethral microwave therapy (TUMT) for
benign prostatic hyperplasia, where a probe is inserted into the urethra and
the tip of the probe generates microwaves, utilizing heat therapy, to treat the
enlarged prostate.  TUMT procedures are
typically performed in the urologists office. 
The urologist performs the procedure supported by a TUMT clinical
technician.  We generally charge a fee
to the urologist for our services and the urologist bills the patient or third
party payor.

Cryosurgery
is utilized for the treatment of prostate and other cancers.  It is performed, using ultrasound guidance,
by inserting temperature-controlled probes into the

8

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affected area and applying
a double freeze thaw cycle to kill the cancerous tissue.  Argon and helium gases are used to control
the freeze thaw process and allow for individual probe temperature
monitoring.  Cryosurgery is performed in
an operating room. A cryosurgical technician operates the equipment and assists the
physician during the procedure. 
Cryosurgery procedures may be billed on a wholesale basis to the
facility or through other arrangements.

Both the
Prostatron® and Targis® (TUMT), distributed by Urologix, and the cryosurgical devices,
manufactured by Endocare and Oncura (Galil Medical), are FDA approved for the
specific procedures performed by our partners. 
Additional procedures might be performed utilizing the cryosurgical
devices.

Seasonality

Our results
of operations have been, and can be expected to be, subject to quarterly
fluctuations.  Historically, our
lithotripsy business has generated higher treatment volumes in the second and
third quarters because there tends to be a higher incidence of kidney stone
patients during warmer weather.  Our
Orthotripsy business historically has generated higher treatment volume in the
third and fourth quarters because patients elect to receive treatments since
they have fulfilled insurance deductibles at year end.  Our quarterly results can also fluctuate as
a result of a number of other factors including the timing and transition of
new acquisitions, sales of interests in partnerships or joint ventures,
completion or commencement of significant contracts and weather related
effects.

Reimbursement

While
patients occasionally pay for lithotripsy procedures, most patients depend upon
third party payors, including Medicare, Medicaid, TriCare, and other federal
health care programs, as well as private insurers, to pay for their procedures.
Some patients also pay directly for orthopaedic extracorporeal shock wave
surgery procedures, but most patients depend upon private insurers to pay for
their procedures (most federal health care programs do not yet reimburse for
this new procedure).  Accordingly, a
significant portion of our revenue depends on third party reimbursement.

Reimbursement
for lithotripsy services is well established. Reimbursement for Medicare
beneficiaries is in accordance with the Hospital Outpatient Prospective Payment System (HOPPS). Under HOPPS, reimbursement is made on a per procedure
basis. The physician is paid a professional fee and the hospital, surgery
center or partnership, depending on the facility contract, is paid a technical
fee.  The technical fee paid to the hospital,
surgery center or partnership includes the per procedure share of the cost for
any depreciable equipment and the provision of consumables, such as the
NewTrode®.

The
reimbursement for high-energy orthopaedic extracorporeal shock wave surgery has
not been firmly established.  Establishment
of permanent codes for orthopaedic extracorporeal
shock wave surgery could facilitate reimbursement because the American
Medical Associations issuance of permanent CPT Codes substantiates widespread
usage and

9

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acceptance of the procedure by the medical community.  We have dedicated several full-time
employees to monitoring and directing reimbursement strategies for our
subsidiary partnerships.

Future
devices, technology and new indications that we develop would have to go
through a similar process with government and private insurers as with our
current technology post-FDA approval. The Medicare approval process is lengthy
and there is no assurance that Medicare approval would be granted. Each insurer
makes its own determination whether to cover a device or procedure and sets its
own reimbursement rate.

To date, we
have worked with physicians and private insurers to gain local, individual
payor approval in the United States and have obtained favorable reimbursement
decisions from a number of these insurers for high-energy orthopaedic extracorporeal shock wave surgical procedures.  As of December 31, 2003 we had secured
favorable reimbursement contracts with private insurers covering approximately 92 million lives.  It is important to note that individuals may
be covered under multiple benefit programs and therefore could be counted
several times in the previous calculation of total covered lives.  We have also entered into several network
contracts with private insurance companies and other insurance carriers for
established reimbursement rates for high-energy orthopaedic extracorporeal shock wave services.  We work with physicians, practice groups,
surgery centers and hospitals to do the following with respect to efforts to
receive reimbursement for orthopaedic extracorporeal
shock wave services:

| |  | Assist
  physicians, practice groups, surgery centers and hospitals with obtaining
  pre-authorizations of procedures from insurers;                       
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                            
| |  | Provide
  criteria to physicians to determine whether the procedure is appropriate for
  the patients condition; and                                      
| |   |                                                                                                                                                            
| |  | Provide
  insurers the necessary data in order to establish coverage for the
  orthopaedic extracorporeal shock wave surgical procedures for their members.

In
obtaining reimbursement for high-energy orthopaedic extracorporeal shock wave services, we
have an added challenge in that currently most of our facility contracts with
hospitals and surgery centers are retail or provide that the partnership pays
a set fee to the hospital or surgery center per procedure and then the partnership seeks
reimbursement from the patient or third party payor.  The added challenge to obtaining reimbursement is establishing
each individual partnership as a provider that is recognized by the third party
payors.

To obtain
favorable reimbursement decisions in the future, we will need to overcome a
number of challenges.  One such
challenge is that managed care providers that share a common concern of
increased utilization with non-invasive procedures are attempting to control
the cost of health care.  Another
challenge is the damage caused by competing firms conducting orthopaedic shock
wave services with other devices and billing unreasonably high or low fees to
patients and third party payors.  A
third challenge is to differentiate ourselves from the low-energy and other device
competition especially regarding how they attempt to treat similar ailments.

10

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The
reimbursement climate for TUMT is positive with recent increases being
recognized.  TUMT has recently been
moved from a surgery center procedure to one generally performed in the
urologists office.  With this move, and
the increase in reimbursement, our procedure volume should continue to grow as
we move forward.  These office-based
procedures are billed by the physicians office and we are paid by the
physician.

Cryosurgery
reimbursement has remained fairly constant but with a recent decrease due to
the elimination of pass-throughs.  CPT
codes are established for both prostate and renal cases, and most are performed
on an outpatient basis.  While
cryosurgery has slowly gained acceptance by urologists, it is gaining ground as
a recognized treatment modality for prostate and renal cancers.  The learning curve is longer because of the
skilled clinical nature of the procedure, but as more physicians are trained,
the volume of procedures is expected to increase.  Cryosurgical procedures are billed in one of three ways:

| |  | under
  service agreements whereby we provide contracted services for a flat fee;                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                               
| |  | direct
  contracts with facilities under which we provide services and are paid a fee
  for service (these facilities bill third party payors and others); and
| |   |                                                                                                                                                               
| |  | equipment
  leases and sales of consumables to partnerships (these partnerships take all
  billing responsibility).                                           

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.  We compete with Prime Medical
Services, Inc., a national provider of lithotripsy services, as well as with
smaller regional and local lithotripsy service providers.  Certain of our current and potential
competitors have substantial financial resources and may compete with us for
acquisitions and development of operations in markets targeted by us.  Additionally, while we believe that
lithotripsy has emerged as the superior treatment for kidney stone disease, we also compete with hospitals, clinics and
individual medical practitioners that offer alternative treatments for kidney
stones.

The
orthopaedic extracorporeal shock wave surgery services market is in its
infancy, with the first device, the OssaTron, being approved in October
2000.  Two other orthopaedic
extracorporeal shock wave devices have been approved.  In early 2002, Dornier Medical Systems received FDA approval for
an orthopaedic shock wave device for the treatment of plantar fasciitis.  In mid 2002, Siemens Medical Solutions USA,
Inc. received FDA approval for an orthopaedic shock wave device for the
treatment of lateral epicondylitis (tennis elbow).  We do not know what either Dorniers or Siemens strategy is for
marketing their devices, however we anticipate that these products will compete
against our orthopaedic extracorporeal shock wave surgery device for the
treatment of heel pain and tennis elbow.

11

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We also expect to face competition from hospitals, clinics and
individual medical practitioners offering surgical and other established
treatments for orthopaedic conditions. 
It is also likely that other shock wave devices have been submitted for
FDA approval to treat orthopaedic conditions.

We compete
in the lithotripsy market on the basis of what we believe to be superior
products and exceptional clinical and technical support.  We compete in the orthopaedic extracorporeal
shock wave surgery market on the basis of our first to market position, our
superior device, training, and our quality service.

As a result
of our purchase of controlling interest in HMT, we will now directly compete
with other manufacturers of minimally invasive medical devices in our
markets.  The primary competitors
include Dornier MedTech GmbH, Siemens AG, Storz Medical, Richard Wolf GmbH and
Direx.

Government Regulation

We are
subject to regulation by both the federal government and the states in which we
conduct our business. The following is a listing of some, but not all, of these
regulations:  the Anti-Kickback Statute
(42 U.S.C. Section 1320a-7b(b)), the Stark Self-Referral Law (42 U.S.C. Section
1395nn), and the Health Insurance Portability and Accountability Act of 1996
(Pub. L. No. 104-191, 110 Stat. 1936 (1996)).

The federal
Anti-Kickback Statute establishes criminal penalties with respect to any person
who knowingly and willfully offers, pays, solicits, or receives any
remuneration to induce or in return for: 
(1) referring an individual to a person for the furnishing or arranging
for the furnishing of any item or service payable in whole or in part under a
federal health care program; or (2) purchasing, leasing, ordering, or arranging
for, or recommending purchasing, leasing or ordering any good, facility,
service, or item payable under a federal health care program.  Remuneration is defined broadly to include
the transfer of anything of value, in cash or in kind, directly or indirectly,
overtly or covertly.

The federal
government provides statutory and regulatory exceptions or safe harbors for certain legitimate business arrangements or transactions.
Arrangements that are structured to meet all safe harbor requirements are
deemed not to violate the Anti-Kickback Statute and will receive safe harbor
protection. We contract with hospitals and other health care facilities under a
variety of financial arrangements, and physicians have investment relationships
with some entities in which we have an ownership interest. We strive to seek
safe harbor protection, when available, and believe that we comply with these
regulations by not making payments in exchange for patient referrals. However,
we can give no assurances or guarantees that our activities will be found to
comply with these laws if scrutinized by governmental authorities.

The federal
Stark Self-Referral Law prohibits a physician from referring a patient to an
entity with which the physician (or a family member) has a financial
relationship if the referral involves a designated health service
reimbursable under the Medicare or Medicaid

12

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programs, unless the arrangement
meets a specific exception.  A financial
relationship may be established between hospitals and physicians who lease to
hospitals the necessary equipment and staff to provide such services.

Although
neither lithotripsy or orthopaedic extracorporeal shock wave surgery are listed
as designated health services, the Health Care Financing Administration
(HCFA, the predecessor to the Centers for Medicare and Medicaid Services or
CMS) has previously taken the position that such services, when provided as
inpatient or outpatient hospital services, constitute designated health
services. A decision in 2002 by the United States District Court for the
District of Columbia held that lithotripsy services provided in a hospital did
not constitute designated health services and therefore referrals for such
services are not subject to the Stark Self-Referral Law. Although CMS did not
appeal this ruling, CMS may argue that the courts decision is applicable only
in the District of Columbia.

Even if
referrals for hospital-provided lithotripsy services are not subject to the
Stark Self-Referral Law, referrals for other hospital services may be covered
by the prohibition unless the financial relationship meets an exception to the
law. The final regulations for the Stark Self-Referral Law provided needed
clarity and certain opportunities for our lithotripsy subsidiaries to operate
in compliance with Stark II.  For
example, the regulations clarify that physician-owned lithotripsy vendors
providing services under arrangements with hospitals can comply with Stark II
by either structuring the arrangements so that they are not compensation
arrangements, as defined in the final regulations, or by qualifying under a
compensation exception (but not an ownership interest exception as well).  The regulations also broadened certain
existing Stark II statutory exceptions by redefining standards to allow per-use
lithotripsy payments, as long as such payments are at fair market value.

In addition
to these federal laws, many states have adopted similar laws.  Some of these laws apply even if the payment
for care does not come from the government. 
While there is little precedent for interpretation or enforcement of
these state laws, we cannot assure you that these laws will not be enforced
against us or that our attempts to structure our financial relationships with
physicians and other health care providers in light of these state laws will be
effective.

Also, some
states have regulations that require facilities or devices such as mobile
lithotripters or orthopaedic shock wave devices to be licensed and to have
appropriate emergency care resources and qualified staff meeting specified
educational and experience criteria. 
The motor vehicles we use to transport our mobile equipment are subject
to safety regulation by the U.S. Department of Transportation and the states in
which we conduct our business.

If we were
found to have failed to comply with any of the above-described state or federal
laws, then we could potentially suffer criminal and civil penalties, possible
license revocation, and/or exclusion from participating in Medicare, Medicaid
or other federally funded health care programs.

Title II,
Subtitle F (titled Administrative Simplification) of the Health Insurance
Portability and Accountability Act of 1996 (HIPAA) was enacted to improve the
efficiency

13

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and effectiveness of the health care system through the
establishment of standards and requirements for the electronic transmission of
certain health information.  To achieve
that end, Congress required the Secretary of the United States Department of
Health and Human Services (DHHS) to promulgate a set of interlocking
regulations establishing standards and protections for health information
systems, including standards for the following:

| |  | the
  development of electronic transactions and code sets to be used in those
  transactions;          
| | - | --------------------------------------------------------------------------------------------------------
| |   |                                                                                                         
| |  | the
  development of unique health identifiers for employers, health plans, and
  health care providers;
| |   |                                                                                                         
| |  | the security
  of electronic protected health information;                                              
| |   |                                                                                                         
| |  | the
  transmission and authentication of electronic signatures; and                                     
| |   |                                                                                                         
| |  | the privacy
  of individually identifiable health information.                                          

Final
rules setting forth standards for electronic transactions and code sets were
published on August 17, 2000, for the privacy of individually identifiable
health information on December 28, 2000, and for the security of electronic
protected health information on February 20, 2003, all of which apply to health
plans, health care clearinghouses and health care providers who transmit any
health information in electronic form in connection with certain administrative
and financial health care transactions, including claims enrollment,
eligibility, payment and coordination of benefits.  Compliance with the privacy regulations and with the electronic
transactions and code sets regulations was required by April 14, 2003 and by
October 16, 2003, respectively. 
Compliance with the rules for security standards is required by April
21, 2005.

To the
extent that the standards for electronic transactions and code sets and for
privacy of individually identifiable health information apply to us, we have made
substantial efforts to be HIPAA compliant. 
It is possible, however, that certain potential changes in our business
(such as modifications in our billing practices) could require further HIPAA
compliance efforts.  We are currently
evaluating the effect of the final security regulations that were published
most recently and have developed a task force to address the standards set
forth in those rules and their effect on our business.  Given the complexity of these regulations,
we cannot estimate at this time the cost of compliance.

HIPAA also
has implemented the most sweeping amendments to the federal health care fraud
laws to date.  Specifically, HIPAA has
created five new health care related crimes and has granted authority to the
Secretary of the DHHS to impose certain civil and criminal penalties.  HIPAA encourages the reporting of health
care fraud by allowing reporting individuals to share in any recovery made by
the government.  HIPAA also requires new
programs, investigations, audits and inspections to control fraud and abuse.

New crimes
under HIPAA include (but are not limited to) the following:

14

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| |  | knowingly
  and willfully committing a federal health care offense (such as defrauding,
  embezzling or stealing) relating to a health care benefit program; and                                                                                                                    
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                     
| |  | knowingly
  and willfully falsifying, concealing, or covering up a material fact or
  making any materially false or fraudulent statements in connection with the
  delivery of or claims or payment for health care benefits, items or services
  by a health care benefit program.

These
provisions of HIPAA criminalize situations that previously were handled
exclusively civilly through repayments of overpayments, offsets and fines.  We believe that our business arrangements
and practices comply with the new health care criminal statutes of HIPAA.  However, a violation could subject us to
penalties, fines and/or possible exclusion from Medicare or Medicaid.  Such sanctions could reduce our revenue or
profits.

A number of
proposals for health care reform have been made in recent years, some of which
have included radical changes in the health care system. Health care reform
could result in material changes in the financing and regulation of the health
care business, and we are unable to predict the effect of such 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. There can be no assurance that future health
care legislation or other changes in the administration of or interpretation of
existing legislation regarding governmental health care programs will not have
a material adverse effect on the results of our operations.

Our
lithotripsy, orthopaedic and other urologic equipment is subject to regulation
by the Food and Drug Administration (FDA). 
The current and future pre-clinical and clinical testing, manufacturing,
labeling, distribution and promotion of our medical devices are subject to
extensive and rigorous government regulation by the FDA in the United States
and by comparable regulatory bodies in other countries.  Noncompliance with applicable regulatory
requirements can lead to enforcement action by the FDA or comparable foreign
regulatory bodies that may result in, among other things, warning letters,
fines, injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, refusal by the government to grant pre-market
clearance or pre-market approval for devices, withdrawal of marketing approvals
and criminal prosecution.

We were
required to obtain pre-market approval by the FDA for our medical devices, the
LithoTron and OssaTron, to ensure their safety and effectiveness.

Even after
obtaining from the FDA regulatory clearance or approval to market our devices,
the Company may be required to make further filings with the FDA under certain
circumstances.  FDA regulations require
agency approval for certain changes to a marketed device.

Any
products manufactured or distributed by us are subject to pervasive and
continuing review and regulation by the FDA and certain state agencies.  We are subject to

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routine inspections by the
FDA and state agencies and must comply with the host of regulatory requirements
that usually apply to medical devices in the United States, including but not
limited to the following: labeling regulations; elaborate testing, control,
documentation, and other quality assurance procedures; reporting to the FDA
certain adverse events involving devices; and prohibitions against promoting or
marketing products for unapproved or off-label uses.

Several of
our products currently under development will require clinical trials to
determine their safety and efficacy in humans with various medical conditions.

We believe
we comply in all material respects with the foregoing laws, regulations, and
all other applicable regulatory requirements; however, these laws are complex
and courts and governmental enforcement agencies have broadly construed them.
Thus, there can be no assurance that we will not be required to change our
practices or relationships with treating physicians who are investors in our
subsidiaries or with facilities in which the shock wave procedures are
performed, or that we will not experience material adverse effects as a result
of any investigations or enforcement actions by any federal or state regulatory
agencies.

Employees

We had 321
employees, including those employed by our consolidated subsidiaries, as of
December 31, 2003.  We believe that
relations with the employees are good.

Risk Factors

Each of the
following risk factors could adversely affect our business, financial condition
and operating results, as well as the value of an investment in our common
stock.

If we are not able to establish or maintain relationships
with physicians and hospitals, our ability to successfully commercialize our
current or future products will be materially harmed.

We are
dependent on health care providers in two respects.  First, if physicians and hospitals or other health care
facilities determine that our services are not of sufficiently high quality or
reliability, or if facilities determine that our services are not cost
effective, then they might not utilize our services.  Second, physicians generally own equity interests (and in some
cases majority 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 our financial results could be adversely
affected, if these physician partners become dissatisfied with our services or
if we become involved in disputes with our partners.

Because of extensive health care regulation, we may not be
able to enter into certain transactions with health care professionals or
facilities to place our products in service.

Our
operations and those of health care professionals and facilities with which we
do business are subject to extensive regulation by federal and state
governments.  Such

16

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regulations may force us to delay, modify or avoid certain
transactions that would otherwise benefit us.

The
federal Anti-Kickback Statute (Anti-Kickback Statute) prohibits certain
business practices and relationships under Medicare, Medicaid and other federal
health care programs. Prohibited practices include the payment, receipt, offer
or solicitation of money in connection with the referral of patients for
services covered by a federal or state health care program.  We contract with physicians and health care
facilities under a variety of financial arrangements, and physicians have
ownership interests in some entities in which we too have an interest.

The
Stark Self-Referral Law prohibits a physician from referring a patient to an
entity with which he or she (or a family member) has a financial relationship
if the referral involves a designated health service reimbursable under the
Medicare or Medicaid programs. Our partnerships and their contracts may create
a financial relationship with physicians. 
Regulations under the Stark Self-Referral Law do provide that a rental
arrangement that otherwise satisfies the lease exception may provide for
payment on a per-treatment or usage basis, even if physicians own the equipment
and refer their patients for treatments using the equipment.

In
addition to these federal laws, many states have adopted similar laws. Some of
these laws apply even if the payment for care does not come from the
government. While there is little precedent for the interpretation or
enforcement of these state laws, we cannot assure you that these laws will not
be enforced against us or that our attempts to structure our financial
relationships with physicians and other health care providers in light of these
state laws will be effective.  For
example, although we typically consult with local counsel before
entering a market, it is possible that, based on recent developments or
differing interpretations of state law, state regulatory officials could take
exception to our retail model facility contracts.

If
we are found to have failed to comply with any of the above-described federal
or state laws, we could suffer criminal and civil penalties, possible license
revocation, and/or exclusion from participating in Medicare, Medicaid or other
governmental health care programs.

Third party payors could refuse to reimburse health care
providers for use of our current or future 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

17

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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 and adverse effect on us.

Orthopaedic
extracorporeal shock wave surgery
is a relatively new procedure in the U.S., and reimbursement policies are still
evolving.  Medicare has not yet
established final reimbursement rates for such surgery, although some
Healthcare Common Procedure Coding System (HCPCS) codes have been established. 
There is also no permanent CPT code designated
for the procedure by the American Medical Association.  Reimbursement
by private third party payors has been made on a case-by-case basis. We cannot
assure you that third party payors will establish and maintain price levels
sufficient for us to realize an appropriate return on our investment.
Furthermore, if physicians, hospitals and other health care providers do not
receive sufficient reimbursement for the cost of these procedures, then they
may be reluctant to perform these procedures and therefore may not utilize our
services.  Competing orthopaedic
shock wave devices that use low energy protocols and are marketed to physicians
for use in office settings, or for treatment use by technicians or physical
therapists may also cause a material decrease in reimbursement by third party payors
as a result of confusion in the market regarding high energy and low energy
devices or protocols.

New federal and state legislation and
regulatory initiatives relating to patient privacy could require us to expend
substantial sums acquiring and implementing new information systems, which
could negatively impact our financial results.

There is
recent legislation and several regulatory initiatives at the state and federal
levels addressing patient privacy concerns. 
New federal legislation will extensively regulate 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.

We face intense competition and rapid technological change
that could result in products that are superior to the products on which our
current or proposed services are based.

Competition
in our industry is intense.  We compete
with national, regional and local providers of lithotripsy and orthopaedic
extracorporeal shock wave surgical services. This competition could lead to a
decrease in our profitability. 
Moreover, if our customers determine that our competitors offer better
quality services or are more cost effective, we

18

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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 the
products on which our services are based, which could render our services
obsolete or noncompetitive.  Our
business is also impacted by competition from other lithotripsy and orthopaedic
extracorporeal shock wave surgery services, on the one hand, and surgical and
other established methods for treating urological and orthopaedic conditions,
on the other hand.

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

Our
business exposes us to potential product liability risks that are inherent in
the medical device and medical services industry, including those which may arise from misuse or
malfunction of, or design flaws in, the extracorporeal shock wave treatment
devices or other medical devices we use. We may be held liable if patients are injured when undergoing
lithotripsy, orthopaedic extracorporeal shock wave or prostate surgery
procedures where our devices are used. Treatment with the extracorporeal shock
wave device may result in a variety of complications, in particular,
post-treatment pain and neurological symptoms. We cannot ensure that we will be
able to avoid product or professional liability exposure. Product and professional 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.

The failure to integrate HMT Holding AG and its subsidiary
HMT High Medical Technologies, AG successfully may result in our not achieving
the anticipated benefits of the acquisition.

We acquired HMT Holding AG (HMT Holding) and
a controlling interest in HMT High Medical Technologies AG (HMT) in March
2004.  HMT had revenues in 2003 of
approximately $20 million prior to the acquisition, compared to our 2003
revenues of approximately $88 million. 
Approximately $10 million of the revenue of HMT in 2003 was from the
Company.  In integrating HMT, we face
challenges in consolidating functions, integrating its organizations,
procedures and operations in a timely and efficient manner, and retaining key
personnel. These challenges will result principally because HMT:

| |  | conducts operations based
  from its home office in Switzerland and sells products worldwide;                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                             
| |  | manufactures and assembles
  medical equipment which are functions we have never before performed;                                                          
| |   |                                                                                                                                                             
| |  | has different management
  policies and financial software which will need to be converted to our
  standards;                                              
| |   |                                                                                                                                                             
| |  | previously did not utilize
  US generally accepted accounting principles in preparation of its financial
  statements (which will need to be converted); and
| |   |                                                                                                                                                             

19

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| |  | has some different employment
  and compensation arrangements for its employees.
| | - | --------------------------------------------------------------------------------

As
a result, the integration will be complex and will require additional attention
from members of management. The diversion of management attention and any
difficulties encountered in the transition and integration process could have a
material adverse effect on our revenues, level of expenses and operating
results.  The failure to exploit
synergies and cost savings may also create a financial strain on the Company.

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 has claimed that any
of our medical devices infringe on their intellectual property rights; however,
it is possible that we may have unintentionally infringed on the patents or
other intellectual property rights of others. Intellectual property litigation is
costly. If we do not prevail in any future litigation, in addition to any
damages we might have to pay, we could be required to stop the infringing
activity or to obtain a license. Any required license may not be available to
us on acceptable terms. If we fail to obtain a required license or are unable
to design around a patent, we may be unable to sell some of our products, which
would reduce our revenues and net income.

If we fail to attract and retain key personnel and principal
members of our management staff, then 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. Our Chairman, Dr. Argil Wheelock, is a
urologist whose management ability and relationships with our physician
partners are extremely important to us. 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, then our business, financial condition and operating results
could be materially harmed.

We have incurred a significant amount of indebtedness.

We
incurred debt to finance the acquisition of Litho Group, Inc. and our recent
acquisition of controlling interest in HMT. 
To comply with the debt covenants, we must use a significant portion of
our operating cash flows to meet scheduled payment terms. At December 31, 2003,
we had debt outstanding of approximately $23.0
million and shareholders equity of approximately $40.4 million.  We may continue to borrow funds to finance
acquisitions as well as for other purposes.

Such
a large amount of debt could have negative consequences for us, including

20

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---

without limitation:

| |  | restricting our ability to
  obtain financing in the future;                                                                                        
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                     
| |  | making a substantial
  portion of our cash flow dedicated to interest and principal obligations and
  unavailable for other purposes;               
| |   |                                                                                                                                                     
| |  | limiting our flexibility to
  successfully address changing economic, business and competitive conditions;
  and                                    
| |   |                                                                                                                                                     
| |  | making us more vulnerable
  to an increase in interest rates, a downturn in our operating performance or
  a decline in general economic conditions.

The
failure to comply with the covenants in the agreement governing the terms of
our indebtedness could be an event of default and could accelerate the payment
obligations. Certain covenants also limit our ability to take certain actions
without lender approval.

We may not be able to achieve market acceptance of
extracorporeal shock wave surgery for orthopaedic indications.

We
anticipate that most of our near-term growth will come from our orthopaedic
operations.  However, orthopaedic
extracorporeal shock wave surgery is a new medical procedure in the U.S. with
no established market.  There are
established alternatives to treating the indications for which we intend to
promote orthopaedic extracorporeal shock wave
surgery.  Moreover, physicians may not
utilize the OssaTron device until they receive long-term clinical evidence to
convince them to alter their existing treatment methods.  Physicians may also resist using the OssaTron
device until we have demonstrated that it is well established that most third
party payors will reimburse them for procedures using it.

We cannot commercialize the use of the OssaTron for any
additional orthopaedic indications until we have obtained regulatory approval
for such indications.

Medical
devices like the OssaTron device must be approved by the U.S. Food and Drug
Administration (FDA) prior to their marketing for commercial use.  The FDA often grants approval only for a
particular indication or disease, and in these cases, the device may not be
marketed for use in treating other conditions, unless the FDA grants additional
approvals.  The process of attempting to
obtain regulatory approvals is unpredictable, is often lengthy, and requires
the expenditure of substantial resources. 
The FDA can delay, limit or deny approval for several reasons,
including:

| |  | danger or ineffectiveness
  of the product;                       
| | - | ------------------------------------------------------------------
| |   |                                                                   
| |  | disagreements with us over
  interpretations of clinical data; and
| |   |                                                                   
| |  | new or revised approval
  policies.                               

21

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---

On
October 13, 2000, the FDA granted us approval to market the OssaTron
device to treat chronic plantar fasciitis.  On
March 14, 2003, the FDA granted us approval to market the OssaTron device for
treatment of chronic lateral epicondylitis or tennis elbow.  Our
orthopaedic business may not be successful and our long-term growth prospects
may not be realized without FDA approval for the use of the OssaTron device in
indications other than chronic plantar fasciitis and chronic lateral epicondylitis.  Furthermore, any delay in receiving
approval, any failure to receive approval, or any failure to comply with
existing or future regulatory requirements would likely harm our ability to
conduct our business.

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 both fallen and risen dramatically in recent
years.  Both company-specific and
industry-wide developments may cause this volatility.  During 2003, our stock price ranged from $5.10 to $11.67.  Factors that could impact the market price
of our common stock include the following:

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

Furthermore,
stock prices for many companies fluctuate widely for reasons that may be
unrelated to their operating results. 
These fluctuations, coupled with changes in the results of operations
and general economic, political and market conditions of the Company, may adversely
affect the market price of our common stock.

22

---

---

Clinical costs to obtain FDA approval of HIFU
may be higher than anticipated by the Company

The
recently signed distribution agreement with EDAP TMS S.A. provides that the
Company will start a clinical trial for the submission of high intensity
focused ultrasound (HIFU) treatment of prostate cancer to the FDA for
pre-market approval.  In the event the
costs of the clinical trial are greater than those budgeted by the Company, the
Company could be forced to increase debt or to limit spending on the
development of other projects.

We are dependent upon Urologix, Endocare and
Oncura for Supply of Certain of our Urologic Medical Devices

We primarily use the
Prostatron to provide transurethral microwave therapy services to treat benign
prostatic hyperplasia.  The Prostatron
is distributed solely by Urologix, Inc. in the United States.  Our ability to grow this market would be
limited in the event that Urologix, Inc. were unable to supply consumables, maintenance service, or
additional devices.

We
primarily use the CryoCare cryoablation device to provide cryosurgical services
for prostate and other cancers.  In
addition, we use the Oncura (an Amersham Company) SeedNet System to provide
cryosurgical services.  The CryoCare
device is manufactured and distributed by Endocare, Inc.  Public filings reveal certain regulatory
investigations of Endocares business. 
Our ability to grow this market could be limited in the event Endocare or Oncura become unable to supply devices, service or consumables for
existing devices.

For More Information About Us

As a public
company, we regularly file reports and proxy statements with the Securities and
Exchange Commission.  These reports are
required by the Securities Exchange Act of 1934 and include:

| |  | annual reports on Form 10-K (such as this report); | 
| | - | -------------------------------------------------- | 
| |   |                                                    | 
| |  | quarterly
  reports on Form 10-Q;                  | 
| |   |                                                    | 
| |  | current
  reports on Form 8-K;                     | 
| |   |                                                    | 
| |  | proxy
  statements on Schedule 14A.                | 

Anyone
may read and copy any of the materials we file with the SEC at the SECs Public
Reference Room at 450 Fifth Street, Washington, DC, 20549.  You may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  You may also visit the internet site maintained
by the SEC that contains our reports, proxy and information statements, and our
other SEC filings.  The address of that
site is http://www.sec.gov.

Also, we
make certain of our SEC filings available on our own internet site as

23

---

---

reasonably
practicable after we have filed with the SEC. 
Our internet address is http://www.healthtronics.com.

Item 2: 
Properties.

In January
2000, we negotiated a seven-year lease on a 28,000 square foot facility in
Marietta, Georgia.  We took occupancy of
the new facility in April 2000.  In
February 2003, we negotiated an amendment to our seven-year lease to include an
additional 15,000 square feet adjacent to our current facility.  The adjusted monthly rental is calculated on
a graduating scale beginning at $26,800 per month for the first year and ending
with $29,400 per month for the last year. 
The new straight-line expense is $28,000 per month for the life of the
lease. The property is in good condition and is sufficient to meet our current
operating needs.

The
Companys consolidated subsidiaries generally lease office or clinical space
around the United States.  Lease terms
are typically for five to ten years. 
The Company believes that its current facilities are suitable and
adequate to support the current level of its present operations.

Item 3: 
Legal Proceedings.

In the
ordinary course of its business, the Company is periodically involved as a
plaintiff or defendant in various legal actions.  Management believes that those claims in which the Company is a
defendant are without merit or that the ultimate liability, if any, resulting
from them will not materially affect the Companys financial condition.   The Company is aware that certain class
action lawsuits have been filed against it alleging securities fraud.  The Company believes the claims alleged in
each lawsuit are without merit. The Company will vigorously defend against
these claims.  Given the early stage of
the litigation, the Company is not in a position to determine any potential
liability but it currently does not believe the lawsuits will have a
significant financial impact on the Company.

Item 4: 
Submission of Matters to a Vote of Security Holders.

No matters
were submitted to a vote of shareholders of the Company during the fourth
quarter of the Companys fiscal year ended December 31, 2003.

24

---

---

Part II

Item 5: 
Market for Registrants Common Equity and Related Stockholder Matters.

We began
trading on the Nasdaq Stock Market on November 16, 1999 under the symbol
HTRN.  The following table sets forth
the high and low sales price for our Common Stock for the quarters indicated as
reported.

|Fiscal Year
  ended December 31, 2003 |                  |  |      |       |    
|------------------------------------- | ---------------- |  | ---- | ----- | ---
|                                      |                  |  |      |       |    
|                                      |                  |  | High |       | Low
|                                      |                  |  |      |       |    
|                                      | First
  Quarter  |  | $    | 10.00 |    
|                                      | Second
  Quarter |  | $    | 9.74  |    
|                                      | Third
  Quarter  |  | $    | 11.67 |    
|                                      | Fourth
  Quarter |  | $    | 7.53  |    

|Fiscal Year
  ended December 31, 2002 |                  |  |      |       |     |   |     
|------------------------------------- | ---------------- |  | ---- | ----- | --- | - | ----
|                                      |                  |  |      |       |     |   |     
|                                      |                  |  | High |       | Low |  
|                                      |                  |  |      |       |     |  
|                                      | First
  Quarter  |  | $    | 12.30 |     | $ | 7.60
|                                      | Second
  Quarter |  | $    | 17.50 |     | $ | 9.25
|                                      | Third
  Quarter  |  | $    | 17.75 |     | $ | 7.41
|                                      | Fourth
  Quarter |  | $    | 9.94  |     | $ | 6.04

The
stock markets have experienced extreme price and volume fluctuations during
certain periods. These broad market fluctuations and other factors may
adversely affect the market price of our common stock. Any shortfall in revenue
or earnings from levels expected by securities analysts could have an immediate
and significant adverse effect on the trading price of our common stock in any
given period. Additionally, we may not learn of such shortfalls until late in
the fiscal quarter, which could result in an even more immediate and adverse
effect on the trading price of our common stock. Finally, we participate in a
highly dynamic industry, which often results in significant volatility of the
common stock price.

At February
29, 2004, there were approximately 181 shareholders of record.

We have not
paid dividends on common stock since our inception in December 1995. Our Board
of Directors does not anticipate that any cash dividends will be paid in the
foreseeable future.

During the fiscal year
ended December 31, 2003, the following equity securities of the Company were issued
by the Company which were not registered under the Securities Act of 1933, as amended:

On November 1, 2002,
we purchased a 12% interest in Rocky Mountain Prostate Thermotherapy LLC
(RMPT) for 88,496 shares of our common stock in a transaction exempt from registration under Section 4(2)
of the Securities Act of 1933.

On April 9, 2003, the
Company issued 122,059 shares of common stock for the purchase of a 56.44%
interest in Advanced Urology Systems, LLC in a transaction exempt from registration under Section 4(2)
of the Securities Act of 1933.

On April 30, 2003, the
Company acquired a 28% interest in Rocky Mountain Prostate Center, LLC
(RMPC) for cash and the issuance of 3,245 shares of our common stock in a transaction exempt from
registration under Section 4(2) of the Securities Act of 1933.

Item 6: Selected Financial Data

The following table sets forth selected consolidated financial data
which has been derived from our consolidated financial statements for the five
years ended December 31, 2003, 2002, 2001, 2000 and 1999.  All the information set forth below should
be read in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations, and the consolidated financial statements
and related notes included elsewhere herein. 
See Index to Financial Statements.

25

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|Consolidated income statement data:                         |      | Year ended December 31,                  |        
|----------------------------------------------------------- | ---- | ---------------------------------------- | -------
|                                                            |      |                                         
|                                                            | 2003 |                                          | 2002   
|                                                            |      |                                          |        
|                                                            |      | (in thousands, except per share amounts) |        
|                                                            |      |                                          |        
|Net revenue                                                 |      | $                                        | 88,406 
|Operating
  income                                          |      |                                          | 22,556 
|Minority
  interest                                         |      |                                          | (19,273
|Interest
  expense, net                                     |      |                                          | (1,747 
|Net income                                                  |      | $                                        | 5,261  
|                                                            |      |                                          |        
|Net income
  per common share  
     diluted               |      | $                                        | 0.45   
|                                                            |      |                                          |        
|Weighted
  average number of shares   outstanding  diluted |      |                                          | 11,751 

|                                                       |  | As of December 31, |        
|------------------------------------------------------ |  | ------------------ | -------
|                                                       |  |                    |        
|Consolidated balance sheet data:                       |  | 2003               |        
|                                                       |  |                    |        
|                                                       |  | (000s omitted)    |        
|Cash and
  cash equivalents                            |  | $                  | 9,040  
|Working
  capital                                      |  |                    | 2,918  
|Total assets                                           |  |                    | 106,883
|Long-term
  debt and other long-term 
     obligations |  |                    | 13,903 
|Minority
  interest                                    |  |                    | 28,085 
|Shareholders
  equity                                 |  |                    | 40,378 

Item
7:  Managements Discussion and Analysis
of Financial Condition and Results of Operations.

Forward-Looking Statements

This report
contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. 
Such forward-looking statements involve known and unknown risks,
uncertainties or other factors which may cause actual results, performance or
achievements of HealthTronics Surgical Services to be materially different from
any future results, performance or achievements express or implied by such
forward-looking statements.  As always,
these expectations and projections are based on currently available competitive,
financial, and economic data, along with operating plans, and are subject to
future events and uncertainties.  Among
the events and uncertainties which could adversely affect future periods are:
inability to establish or maintain relationships with physicians and hospitals;
health care regulatory developments that prevent certain transactions with
health care professionals or facilities; inability of the Company or health
care providers to obtain reimbursement for use of the Companys current or
future products; competition or technological change that impacts the market
for the Companys products; difficulty integrating HMT and realizing projected
cost savings; unanticipated regulatory and clinical costs related to FDA
approval of HIFU; and difficulty in managing the Companys growth.  Additional factors that might cause such a
difference, include, but are not limited to those discussed in the Managements
Discussion and Analysis of Financial Condition and

26

---

---

Results of Operations in this report and the items identified under the
caption Risk Factors in Item 1 of this report.

Overview

We provide
equipment as well as technical and administrative services to physicians,
hospitals, and surgery centers performing minimally invasive surgical
procedures in the urologic and orthopaedic markets, including lithotripsy and
orthopaedic extracorporeal shock wave surgery. 
We were formed in December 1995 and began offering lithotripsy services
in mid-1997.  In October 2000, we received
FDA approval to market an orthopaedic extracorporeal shock wave surgery device,
the OssaTron, and since then we have invested significant resources in
developing our orthopaedic services network while expanding our lithotripsy
operations.

Our
services are provided principally through limited partnerships or other
entities that we manage which use lithotripsy devices or the OssaTron
orthopaedic shock wave device.  Many of
these partnerships were formed by us, and we have retained an equity interest
ranging from 5% to 100% while selling any remaining interests primarily to
physicians.  We generally retain the
sole managing interest in the entities and manage their daily
operations.  We also provide equipment
maintenance services to some of the partnerships and supply them with various
consumables used in lithotripsy and Orthotripsy extracorporeal shock wave
surgery procedures.  To date we have
expanded our operations by securing additional facility contracts in our existing
partnerships and forming partnerships in new geographic markets and acquiring
interests in partnerships from third parties, and we expect to continue to do
so in the future.

As a result
of the control we exert over those entities by virtue of our sole managing interest, management contract and otherwise, for financial
reporting purposes we consolidate the results of operations of the partnerships
with our own even though we own less than all (and in many cases less than 50%)
of their outstanding equity interests. 
We reflect the equity of third party partners in the partnerships
results of operations in our consolidated statements of income and on our
consolidated balance sheet as minority interest.

In certain
instances, we do not control partnerships or other entities in which we have
ownership interests.  We account for our
interests in these entities either on the equity or cost basis, depending on
the degree of influence we exert over the entity.

We recognize
revenue in our consolidated statements of income from the following three
principal sources:

| |  | Fees for clinical services provided by the
  Company or partnerships.  A substantial majority of our consolidated revenues is derived
  from technical fees relating to treatments performed using our equipment and
  related services.  We bill for these
  fees under two different models. 
  Under the wholesale billing model, we charge a fee to the hospital
  or other surgery center at which the treatment is performed.  Our
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

27

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| |   | fee might be a set fee per procedure, a
  set fee per month based on a specified number of days of service at the
  facility per month, or set as a percentage of revenue derived. Under the
  retail billing model, we charge the patients insurer, HMO or other
  responsible party, and we pay a fee to the health care facility for access to
  its premises.  Under either model, the
  professional fee payable to the physician performing the procedure is
  generally billed and collected by the physician.  The billing and collection cycle for wholesale fees is
  typically significantly shorter than for retail fees, although the gross
  margin for retail billing is moderately higher than for wholesale
  billing.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Technical services, equipment maintenance
  and sale of consumables to affiliated and unaffiliated third parties.  We charge fees to third parties who own or
  operate lithotripsy and orthopaedic shock wave surgical devices for equipment
  maintenance, technical support and related services. We also sell a variety
  of consumables used in lithotripsy, orthopaedic extracorporeal shock wave
  surgery, transurethral microwave therapy and cryosurgery procedures to
  unaffiliated third parties.                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | Equipment sales to third parties.  We generate revenue from the sale of shock
  wave devices to third parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

We
measure results in each of our areas in part based upon the number of
procedures performed.  The number of total kidney
stone procedures in the United States should grow slightly with the aging
population.  Growth for the Company in
lithotripsy procedures will come from new facility contracts in existing
partnerships and the acquisition or affiliation of partners or
partnerships.  Procedures performed with
the OssaTron for orthopaedic conditions have significant potential for growth
as many patients currently are treated with invasive surgery or continue to
suffer pain without receiving treatment. 
The Company believes procedures for chronic plantar fasciitis and
chronic lateral epicondylitis will continue to grow as the modality is accepted
by patients, physicians, and third party payors.  The procedure growth for treatment of benign prostatic
hyperplasia has potential for growth due to the aging population and the fact
that many patients currently are treated with drugs or other alternative
treatments.  The number of procedures
for cryosurgical treatment of prostate and other cancers should increase during
the year, but such growth will be tempered by the slow process of educating and
training physicians on the treatment.

We are
dependent, both directly in the case of retail billing and indirectly in the
case of wholesale billing, on the reimbursement policies of governmental and
private third party payors.  While the
reimbursement status of lithotripsy is well established, orthopaedic
extracorporeal shock wave surgery is a relatively new procedure in the U.S., and
the reimbursement policies of third party payors for this treatment are still
developing.  Reimbursement for
transurethral microwave treatment (TUMT) of benign prostatic hyperplasia
(BPH) is currently established and favorable for in-office treatments.
Cryosurgery for prostate cancer is a hospital-based procedure and reimbursement
is established but was recently adjusted by Medicare to exclude certain
pass-through charges.  Our results of operations could be significantly affected by changes in
reimbursement

28

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---

policies regarding lithotripsy or by decisions made regarding the
reimbursement status of orthopaedic extracorporeal shock wave surgery.

Results of Consolidated Operations

Revenues
for 2003 totaled $88.4 million, up 1.4% from $87.2 million for the year ended
2002.  Lithotripsy revenue for 2003 was
$55.8 million compared to $62.2 million in 2002, which included approximately
$5.6 million from the sold subsidiary. 
This is a 1.4% decrease from 2002 revenues after excluding the sold subsidiarys
revenues.  Consolidated lithotripsy
procedures increased 4.5% over 2002 after excluding 2,290 procedures performed
in 2002 by the sold subsidiary.  Certain
partnerships underperformed in the early part of the year, but the fourth
quarter was strong and showed marked improvement in revenues, consolidated
treatments and unconsolidated treatments compared to prior year periods.  Even with this growth, we expect the
earnings contribution from this segment to decline in 2004 because we own less
equity in some of our larger partnerships. 
We anticipate our lithotripsy business to remain strong and to continue
to generate good cash flow for the Company. 
Our orthopaedic business demonstrated strong growth year over year in
both procedures and revenues.  In what
remains a challenging reimbursement climate, we performed 8,075 orthopaedic
procedures during 2003, a 72.2% increase over the 4,690 procedures performed in
2002.  Revenues for the Orthotripsy
business in 2003 increased 60.7% to $18.8 million from $11.7 million in
2002.  We continue to make progress in
training physicians and educating insurance companies.  Revenue from the equipment sales and service
division was $9.0 million for 2003 compared to $12.4 million for 2002, a
decrease of 27.4%.   The decline in 2003
was due in large part to a decrease in sales of lithotripters to third parties
as the Company focused more on generating revenues from patient
procedures.  However, we anticipate this
will be a growth area for the Company going forward as we expand our sales
efforts with the acquisition of HMT Holding AG.

Our
revenues increased 98.6% to $87.2 million in 2002 compared to $43.9 million in
2001.  Lithotripsy revenue for 2002 was
$62.2 million, up 119.0% compared to $28.4 million in 2001.  The significant increase in lithotripsy
revenues is due primarily to the acquisition of the Litho Group partnerships in
December of 2001.  Revenues for the
Orthotripsy business in 2002 increased 82.8% to $11.7 million from $6.4 million
in 2001.  Orthopaedic revenues were
driven by a 2,200 procedure increase from the preceding year.  Revenue from the equipment sales and service
division was up 40.9% to $12.4 million for 2002 compared to $8.8 million for
2001.  In 2002, we recognized previously
deferred revenues related to device sales. 
This, coupled with the sale of two additional medical devices, caused the
increase.

As our
Company has grown, our salaries, general and administrative expenses have
increased year over year from $19.1 million for the year ended December 31,
2001 to $37.5 million for the year ended December 31, 2002.  Salaries, general and administrative
expenses further increased to $42.1 million for the year ended December 31,
2003.  The 96.3% increase in 2002 was
due primarily to the acquisition of the Litho Group partnerships December of
2002.  The expansion of our orthopaedic
business has required increased resources in marketing and management causing the 12.3% increase in
2003.

29

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---

With the
acquisition of the Litho Group in December 2001 our depreciation and
amortization expense increased from $4.4 million to $5.7 million in 2002, an
increase of 29.5%.  However, the sale of
US Lithotripsy in July of 2002 caused a 1.8% decrease to $5.6 million in 2003.

As we
continue to build and strengthen our partnership base, we buy and sell
investment interest in our subsidiaries. 
In 2001, these sales were primarily sales of Orthotripsy partnership
investment interest which generated $3.4 million in gain on sale of subsidiary
and investment interest.  In 2002, sales
including the U.S. Lithotripsy sale resulted in gains on sale of subsidiary and
investment interest of $4.4 million. 
The gains on sale of subsidiary and investment interest in 2003 of $4.5
million were generated primarily by the sales of investment interest in the
Litho Group entities.

Our
subsidiary partners equity in the current year net income is represented by
the minority interest in consolidated subsidiaries.  This minority interest will grow in total as we continue to sell
interest in our subsidiaries.  Our
partners minority interest in consolidated subsidiaries grew from $10.2
million to $16.6 million to $19.3 million from 2001 to 2002 to 2003,
respectively.

30

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Results of Operations

The
following table shows certain income statement items expressed as a
percentage of net revenues for the years ended December 31, 2003, 2002 and 2001:

| |                                                           |                                                  | Year ended December 31, |       
| | --------------------------------------------------------- | ------------------------------------------------ | ----------------------- | ------
| |                                                           |                                                  |                         |       
| |                                                           |                                                  | 2003                    |       
| |                                                           |                                                  |                         |       
| | Net revenue                                               |                                                  |                         | 100.0 
| | Operating
  expenses:                                     |                                                  |                         |       
| |                                                           | Cost of
  devices, service parts and consumables |                         |       
| |                                                           | Salaries,
  general and administrative expenses  |                         |       
| |                                                           | Depreciation
  and amortization                  |                         |       
| |                                                           |                                                  |                         |       
| |                                                           | Total
  operating expenses                       |                         |       
| |                                                           |                                                  |                         |       
| | Operating income                                          |                                                  |                         | 25.5  
| | Equity in
  earnings of unconsolidated entities           |                                                  |                         | 1.3   
| | Partnership
  distributions from cost basis   investments |                                                  |                         | 0.6   
| | Gain on sale
  of subsidiary and investment interest      |                                                  |                         | 5.1   
| | Gain on sale
  of fixed assets                            |                                                  |                         | 0.9   
| | Interest
  expense                                        |                                                  |                         | (2.2  
| | Interest
  income                                         |                                                  |                         | 0.2   
| |                                                           |                                                  |                         |       
| | Income
  before minority interest and income taxes        |                                                  |                         | 31.4  
| | Minority
  interest of consolidated subsidiaries          |                                                  |                         | (21.8)
| |                                                           |                                                  |                         |       
| | Income
  before income taxes                              |                                                  |                         | 9.6   
| | Provision
  for income taxes                              |                                                  |                         | 3.6   
| |                                                           |                                                  |                         |       
| | Net income                                                |                                                  |                         | 6.0   
| |                                                           |                                                  |                         |       

Quarterly Statement of Earnings Data

The
following table presents certain quarterly statement of earnings data for the
years ended December 31, 2003 and 2002. 
The quarterly statement of earnings data set forth below was derived
from our unaudited financial statements and includes all adjustments,
consisting of normal recurring adjustments, which we consider necessary for a
fair presentation thereof.  Results of
operations for any particular quarter are not necessarily indicative of results
of operations for a full year or predictive of future periods.

31

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|                                        |  | Quarterly Statement of Earnings Data     |       
|--------------------------------------- |  | ---------------------------------------- | ------
|                                        |  |                                          |       
|                                        |  | 2003                                     |       
|                                        |  |                                          |       
|                                        |  | Q1                                       |       
|                                        |  |                                          |       
|                                        |  | (000s omitted except per share amounts) |       
|                                        |  |                                          |       
|Revenues                                |  | $                                        | 20,888
|Earnings,
  before
    income taxes     |  |                                          | 3,498 
|Net income                              |  |                                          | 2,129 
|Diluted
  earnings
    per common share |  |                                          | 0.18  

Earnings
per common share amounts are calculated on a quarterly basis and may not total
to the annual amount.

Critical Accounting Policies

Our
consolidated financial statements are based on the selection and application of
accounting principles generally accepted in the United States of America, which
require us to make estimates and assumptions about future events that affect
the amounts reported in our financial statements and the accompanying
notes.  Future events and their effects
cannot be determined with absolute certainty. 
Therefore, the determination of estimates requires the exercise of judgment.  Estimates and assumptions are reviewed
periodically and the effects of the revisions are reflected in the consolidated
financial statements in the period they are determined to be necessary.  Actual results could differ from those
estimates, and any such differences may be material to the financial
statements.  If different assumptions or
conditions were to prevail, the results could be materially different from our
reported results.

Consolidation

Our consolidated financial statements include
the accounts of those significant subsidiaries that we control.  They also include our undivided interests in
these subsidiaries assets and liabilities. Amounts representing our percentage
interest in the underlying net assets of other significant affiliates that we
do not control, but over which we exercise significant influence, are included
in Investments in unconsolidated entities; our share of the net income of
these companies is included in the consolidated statement of income caption
Equity in earnings of unconsolidated entities.  The accounting for these non-consolidated companies is referred
to as the equity method of accounting. 
Our investments in other companies that we do not control and for which
we do not have the ability to exercise significant influence as discussed above
are carried at cost or fair value, as appropriate.

32

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Revenue Recognition, Gain Recognition and
Allowance for Doubtful Accounts

Net revenue
includes treatment fees for medical devices in the clinical setting.  Treatment revenue is primarily wholesale
or retail.  Wholesale revenue is
generated primarily from fixed fee contracts with various medical facilities
and is recorded in the month the related treatments are performed.  Retail revenue, generated when we bill third
party payors for medical facility and technical fees, is recorded at the time
services are rendered.  These third
party billings may or may not be contractual. Adjustments which reduce revenue
from established contractual or estimated non-contractual billing rates to
amounts estimated to be reimbursable are recognized in the period the services
are rendered.  Differences in estimates
recorded and final settlements are reported during the period final settlements
are made.  We believe adequate
provisions for these final settlements have been reflected in the financial
statements, however, in the event that the settlement provisions are inadequate,
the results of operations and financial condition could be adversely impacted.

We may sell
medical devices to certain entities in which we have an interest and may have
guaranteed a portion of the long-term obligations related to such
purchases.  We eliminate profits on such
transactions where the purchaser is a consolidated subsidiary of ours.  A pro rata portion of the profit will be
deferred on sales to unconsolidated subsidiaries where we have accounted for
our investment interest using the equity or cost basis methods of accounting
(depending on our ability to exercise significant influence over the operating
and financial policies of the joint venture).

Revenue is
recognized upon acceptance and delivery at the customers destination for sales
of medical devices to unaffiliated entities.

Revenue
generated from service contracts is recognized ratably over the life of the
related contract.

We form
wholly owned limited partnerships in which we are the general partner and then
contribute a medical device to the partnership.  We may sell interests in these partnerships to physicians or
other investors.  We generally recognize
a gain on the interest sold as non-operating income at the time the
subscription agreement is signed. 
Certain gains on the sale of partnership interests are deferred when
payment terms exceed one year.

In order to
record our accounts receivable at their net realizable value, we must assess
their collectibility.  A considerable
amount of judgment is required in order to make this assessment including the
analysis of historical bad debts and other adjustments, a review of the aging
of our receivables and the current creditworthiness of our customers.  We have recorded allowances for receivables
which we believe are uncollectible, including amounts for the resolution of
potential credit and other collection issues. However, depending upon how such
potential issues are resolved, or if the financial condition of any of our
customers was to deteriorate and their ability to make required payments became
impaired, increases in these allowances may be required.

33

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Inventory

We are
required to state our inventories at the lower of cost or market.  Our inventories include medical devices,
parts for servicing the medical equipment and consumables for medical equipment.  We
continually evaluate the inventory for excess and obsolescence. At this time we
believe that no inventory reserve is required to reduce the carrying value of
our inventory to its net realizable value. 
However, if the demand for our product were to decline we might be
required to establish such reserves.

Long-Lived Assets

We have
recorded property, plant and equipment and intangible assets at cost less
accumulated depreciation and amortization. 
The determination of useful lives and whether or not these assets are
impaired involves significant judgment. 
We review long-lived assets, including intangible assets and goodwill
for impairment annually, or sooner whenever events or changes in circumstances
indicate the carrying amounts of such assets may not be recoverable.  Goodwill is the excess of the purchase price
over the fair value of identifiable net assets acquired in business combinations
accounted for as purchases.  Goodwill
and certain other intangible assets having indefinite lives, which were
previously amortized on a straight line basis over the periods benefited, are
no longer being amortized to earnings, but instead are subject to periodic
testing for impairment.  Intangible
assets determined to have definite lives are amortized over their remaining
useful lives.  Goodwill of a reporting
unit is tested for impairment on an annual basis or between annual tests if an
event occurs or circumstances change that would reduce the fair value of a
reporting unit below its carrying amount.  Our management uses historical experience, current
market appraisals and various other assumptions to form the basis for making judgments about the impairment
of our assets. Under different assumptions or conditions, the asset impairment analysis may yield a different
outcome, which would alter the impairment recognized and the gain or loss on the eventual disposition of the asset.

Income Taxes

We account
for income taxes in accordance with Statement of Financial Accounting Standards
No. 109,Accounting for Income Taxes.  Under this method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax bases of assets and liabilities. 
They are measured using the enacted tax rates and laws that are expected
to be in effect when the differences are expected to be recovered or settled.

We
regularly review our deferred tax assets for recoverability and establish a
valuation allowance based upon projected future taxable income and the expected
timing of the reversals of existing temporary differences.  A valuation allowance is required when it is
more likely than not that all or a portion of a deferred tax asset will not be
realized.  Based on our continued
profitability, we have determined that it is likely that we will realize a
portion of the deferred tax asset. 
In connection with our acquisition of Litho Group in 2001, we acquired deferred tax assets relating primarily to
built in losses and net operating losses. We have recently completed our Section 382 analysis and have
determined that it is not more likely than not that these deferred tax assets will be realized. Therefore
we have established a valuation allowance for the portion of the deferred tax asset acquired in the purchase
of Litho Group.

34

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Derivative
Instruments and Hedging

We manage
risks associated with interest rates and we may use derivative instruments to
hedge these risks. As a matter of policy, we do not use derivative instruments
unless there is an underlying exposure and, therefore, we do not use derivative
instruments for trading or speculative purposes. The evaluation of hedge
effectiveness is subject to assumptions based on the terms and timing of the
underlying exposures. All derivative instruments are recognized in our
Consolidated Balance Sheet at fair value. The fair value of our derivative
instruments is generally based on quoted market prices.

Related Party Transactions

Transactions
between related parties occur in the normal course of business.  We provide services and products to our
subsidiaries; our subsidiaries provide services and products to other
subsidiaries.  We eliminate transactions
with our consolidated subsidiaries and appropriately disclose other significant
related party transactions.

Recently Issued Accounting Standards

In May
2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS No.
150).  SFAS No. 150 improves the
accounting for certain financial instruments that under the previous guidance,
issuers could account for as equity. 
SFAS No. 150 requires that those instruments be classified as
liabilities in statements of financial position.  SFAS No. 150 is effective for financial instruments entered into
or modified after May 31, 2003.  On
October 29, 2003, the FASB deferred for an indefinite period the application of
the guidance in SFAS No. 150 until it could consider some of the resulting
implementation issues associated with the measurement and recognition
issues.  We have not determined the
resulting impact of the adoption of this statement on our consolidated
financial position, results of operations or cash flows.

In April 2003,
the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities (SFAS No. 149), which is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. 
SFAS No. 149 amends and clarifies accounting and reporting for
derivative instruments.  In particular,
this statement amends certain other pronouncements and clarifies the
circumstances under which a contract with an initial investment meets the
characteristics of a derivative and when a derivative contains a financial
component.  The guideline should be
applied prospectively.  The adoption of
SFAS 149 did not have a material impact on our consolidated financial position,
results of operations or cash flows.

In
January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51
(FIN 46), which addresses the consolidation of entities whose equity
holders have either (a) not provided sufficient equity

35

---

---

at risk to allow
the entity to finance its own activities or (b) do not possess certain
characteristics of a controlling financial interest.  FIN 46 sets forth a model to evaluate potential
consolidation of these entities, known as variable interest entities (VIEs),
based on an assessment of which party to the VIE, if any, absorbs a majority of
the exposure to its expected losses, receives a majority of its expected
residual returns, or both (the primary beneficiary).  FIN 46 also requires disclosures about
VIEs that a company is not required to consolidate but in which it has a
significant variable interest. 
FIN 46 is effective for all new VIEs created or acquired after
January 31, 2003.  For VIEs created
or acquired prior to February 1, 2003, the provisions of FIN 46 must
be applied for the first interim or annual period beginning after
March 15, 2004 except for companies with special purpose entities which
must apply the provisions of FIN 46 to those special purpose entities no
later than the first reporting period ending after December 15, 2003.  We are currently evaluating the impact of
adopting FIN 46, but do not expect it to have a material impact on our results
of operations or our financial condition. 
We do not consolidate any VIEs and we do not have any significant
variable interests in a VIE.

Liquidity and Capital Resources

We have
funded our working capital requirements and capital expenditures from net cash
provided by operating activities and borrowings under bank credit
facilities.  In conjunction with the
purchase of Litho Group, Inc., we obtained a $50,000,000 credit facility.  At December 31, 2003 and 2002, we had
$17,737,000 and $33,495,000, respectively, outstanding under the credit facility
and additional debt of $5,291,000 and $4,583,000, respectively, primarily at
the subsidiary level.  Included in the
credit facility is a $15,000,000 line of credit under which $4,000,000 was
available at December 31, 2003.  Debt at
the subsidiary level is typically related to equipment purchased and operated
by that subsidiary and is secured by that equipment.  Cash and cash equivalents decreased from $16,808,000 at December
31, 2002 to $9,040,000 at December 31, 2003.

Concurrent with the acquisition
of HMT Holding, AG, on March 5, 2004, the Company amended and restated its $50,000,000 bank term loan and line of credit
facility. The amended and restated credit facility consists of a $25,000,000 revolving line of credit. We will continue
to fund our working capital requirements and capital expenditures from net cash provided by operating activities and
borrowings under this bank credit facility. On March 5, 2004, we had $19,700,000 outstanding, and $5,300,000 available
under the new revolving credit facility.

Net cash
provided by operating activities decreased from $22,674,000 in 2002 to $784,000
in 2003 as a result of a decrease in earnings before depreciation, amortization
and minority interest.  Included in the
2002 change in accrued expenses and other liabilities is a $7,885,000 liability
related to cash received pending the sale of lithotripsy partnership
interests.  This sale of partnership
interests was completed in the first quarter of 2003.  Net cash provided by investing activities was $4,492,000 in 2003
compared to cash used in investing activities of $3,943,000 in 2002.  The investment activity in 2002 included
approximately $6,000,000 provided by the sale of U.S. Lithotripsy, L.P., while
the 2003 investment activity included approximately $14,144,000 provided by the
sales of equity interest in several subsidiary partnerships.   Net cash of $11,828,000 was used by 2002 financing activities
including approximately $16,000,000 used to pay down debt related to the 2001
purchase of Litho Group, Inc. compared to the $13,044,000 net cash used by 2003
financing activities including approximately $17,000,000 used to pay down debt
related to

36

---

---

the 2001 purchase of LGI.

Our capital
expenditures totaled approximately $6,834,000 in 2003, primarily for the
purchase of mobile medical equipment put in service.  We currently estimate that our capital expenditures will total
approximately $4,000,000 to $5,000,000 in 2004 for the purchase of additional
medical equipment for our consolidated subsidiaries, which may be secured by
additional debt at the related partnership.

We
continuously review new investment opportunities and believe that our financial
position can support higher levels of capital expenditures, if justified by
opportunities to increase revenue or decrease recurring costs.  Accordingly, it is possible that our capital
expenditures in 2003 could be higher than anticipated.   We plan to use our cash generated from
operations and borrowings under our revolving credit facility to fund these
expenditures.

We believe
that our cash generated from operations and borrowings under our revolving
credit facility will be sufficient to meet our liquidity and capital spending
needs at least through the end of 2004.

This and
other significant contractual obligations are as follows:

|Contractual Obligations              |  | Payments Due by Period |       
|------------------------------------ |  | ---------------------- | ------
|                                     |  |                        |       
|                                     |  | (000s omitted)        |       
|                                     |  |                        |       
|                                     |  | Total                  |       
|                                     |  |                        |       
|Short-Term
  Borrowings              |  | $                      | 11,714
|Long-Term
  Debt (1)                 |  |                        | 10,624
|Capital
  Lease Obligations          |  |                        | 690   
|Operating
  Leases                   |  |                        | 8,511 
|Purchase
  Obligations (2)           |  |                        | 20,000
|Total
  Contractual Cash Obligations |  | $                      | 51,539

| | (1) | On March 5, 2004, we amended and restated our primary bank
term loan. The revised agreement provides for a $25.0 million line of credit.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Pursuant to
  our distribution agreement with HMT we have an ongoing commitment to purchase
  certain medical devices.  Based upon
  current market prices, this commitment is approximately $6.4 million in
  2004.  Note, however, that we have
  acquired controlling interest in HMT since the end of 2003.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cautionary Statements

This report
contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. 
Such forward-looking statements involve known and unknown risks,
uncertainties or other factors which may cause actual results, performance or
achievements of HealthTronics Surgical Services to be materially different from
any future results, performance or achievements express or implied by such
forward-looking statements.  As always,
these expectations and projections are based on currently available
competitive, financial, and economic data, along with operating plans, and are
subject to future events and uncertainties. 
Among the events and uncertainties which could adversely affect future
periods are: inability to establish or maintain relationships with

37

---

---

physicians
and hospitals; health care regulatory developments that prevent certain
transactions with health care professionals or facilities; inability of the
Company or health care providers to obtain reimbursement for use of the
Companys current or future products; competition or technological change that
impacts the market for the Companys products; difficulty integrating HMT and
realizing projected cost savings; unanticipated regulatory and clinical costs
related to FDA approval of HIFU; and difficulty in managing the Companys
growth.  Additional factors that might
cause such a difference, include, but are not limited to those discussed in the
Managements Discussion and Analysis of Financial Condition and Results of
Operations in this report and the items identified under the caption Risk
Factors in Item 1 of this report.

Item 7A: Quantitative and Qualitative
Disclosure About Market Risk.

We are
subject to market risk from exposure to changes in interest rates on our
variable rate debt.  Although there can
be no assurances that interest rates will not change significantly, we do not
expect changes in interest rates to have a material effect on income or cash
flows in 2004.  As of December 31, 2003
and 2002, our corporate-level fixed-rate debt was $12.6 million and $17.5
million, respectively, and our corresponding corporate-level variable-rate debt
was $5.1 million and $16.0 million, respectively.  Based on our variable-rate debt at December 31, 2003, in the
absence of the swaps discussed below, a one-percent change in interest rates
would result in an annual change in interest rate expense calculated on a
simple interest basis of approximately $51,000.

In order to
protect the Company from interest rate volatility, effective February 12, 2002,
the Company entered into two two-year interest rate swap agreements (the
swaps), with a total notional amount of $12.6 million and $17.5 million at
December 31, 2003 and 2002, respectively. 
The swaps effectively convert a portion of the Companys floating rate
debt to a fixed-rate basis through February 12, 2004, thus reducing the impact
of interest rate changes on future interest expense.  This fixed rate is 3.2525% plus the applicable percentage (2.25%
and 2.5% at December 31, 2003 and 2002, respectively), based on the previous
quarter leverage ratio, within the credit facility agreement. The swaps qualify
as cash flow hedges under Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities, and expired on
February 12, 2004.  The Company believes
that its hedge is effective with changes in fair value to be reported in other
comprehensive income or loss.  As of December
31, 2003 and 2002, the market value of the derivatives was a liability of
$32,000 and $312,000, respectively, which is included on the accompanying
balance sheet.  The related
comprehensive loss of $312,000 and the related comprehensive gain of $280,000
have been recorded during 2003 and 2002, respectively.

The
counterparty to the interest rate swap agreements is a major commercial
bank.  The Company is exposed to
counterparty credit risk for nonperformance and, in the event of
nonperformance, to market risk for changes in interest rates. The Company does
not anticipate nonperformance of the counterparty.

38

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Item 8: 
Financial Statements and Supplementary Data.

HealthTronics Surgical Services, Inc. and
Subsidiaries

Consolidated Financial StatementsYears ended
December 31, 2003, 2002 and 2001with
Report of Independent Auditors

Contents

|Report
  of Independent Auditors                  | F-1
|------------------------------------------------- | ---
|                                                  |    
|Consolidated
  Financial Statements               |    
|                                                  |    
|Consolidated
  Balance Sheets                     | F-2
|Consolidated
  Statements of Income               | F-4
|Consolidated
  Statements of Shareholders Equity | F-5
|Consolidated
  Statements of Cash Flows           | F-6
|Notes
  to Consolidated Financial Statements      | F-8

39

---

---

Report of Independent
Auditors

The Board of Directors and Shareholders
HealthTronics Surgical Services, Inc. and Subsidiaries

We have
audited the accompanying consolidated balance sheets of HealthTronics Surgical
Services, Inc. and Subsidiaries as of December 31, 2003 and 2002, and
the related consolidated statements of income, shareholders equity, and cash
flows for each of the three years in the period ended December 31, 2003.  Our audits also included the financial
statement schedule listed in the index at Item 15.  These financial statements and schedule are the responsibility of
the Companys management.  Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

We conducted
our audits in accordance with auditing standards generally accepted in the
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
Surgical Services, Inc. and Subsidiaries at December 31, 2003 and
2002, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States.  Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

As
discussed in Notes 2 and 14 to the Consolidated Financial Statements, in 2002
the Company changed its method of accounting for goodwill.

| | /s/ ERNST & YOUNG LLP
| | ---------------------

Atlanta, Georgia
February 25, 2004,
except for Note 23, as to which the date is March 5, 2004

F-1

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Consolidated Balance Sheets

(000s omitted)

|                                         |                                                                                                                                              | December 31, |        
|---------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | -------
|                                         |                                                                                                                                              |              |        
|                                         |                                                                                                                                              | 2003         |        
|                                         |                                                                                                                                              |              |        
|Assets                                   |                                                                                                                                              |              |        
|Current assets:                          |                                                                                                                                              |              |        
|                                         | Cash and
  cash equivalents                                                                                                                  |              | $      
|                                         | Trade
  accounts receivable, less allowance for doubtful accounts of 
       $1,669 and $1,264 at December 31, 2003 and
  2002, respectively |              |        
|                                         | Other
  receivables                                                                                                                          |              |        
|                                         | Inventory                                                                                                                                    |              |        
|                                         | Prepaid
  expenses and other current assets                                                                                                  |              |        
|                                         | Deferred
  income taxes                                                                                                                      |              |        
|                                         |                                                                                                                                              |              |        
|Total current assets                     |                                                                                                                                              |              | 33,341 
|                                         |                                                                                                                                              |              |        
|Property and
  equipment, at cost:       |                                                                                                                                              |              |        
|                                         | Land                                                                                                                                         |              |        
|                                         | Building and
  leasehold improvements                                                                                                        |              |        
|                                         | Medical
  devices placed in service                                                                                                          |              |        
|                                         | Office
  equipment, furniture and fixtures                                                                                                   |              |        
|                                         | Vehicles and
  accessories                                                                                                                   |              |        
|                                         |                                                                                                                                              |              |        
|                                         |                                                                                                                                              |              | 31,201 
|                                         | Less accumulated
  depreciation                                                                                                              |              |        
|                                         |                                                                                                                                              |              |        
|Net property
  and equipment             |                                                                                                                                              |              | 19,433 
|                                         |                                                                                                                                              |              |        
|Investments
  in unconsolidated entities |                                                                                                                                              |              | 2,207  
|Goodwill                                 |                                                                                                                                              |              | 48,317 
|Other assets                             |                                                                                                                                              |              | 3,585  
|                                         |                                                                                                                                              |              |        
|Total assets                             |                                                                                                                                              | $            | 106,883
|                                         |                                                                                                                                              |              |        

F-2

---

---

|                                                                                                  |                                                                                                                                                                                                                                     | December 31, |        
|------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | -------
|                                                                                                  |                                                                                                                                                                                                                                     |              |        
|                                                                                                  |                                                                                                                                                                                                                                     | 2003         |        
|                                                                                                  |                                                                                                                                                                                                                                     |              |        
|Liabilities and shareholders equity                                                              |                                                                                                                                                                                                                                     |              |        
|Current
  liabilities:                                                                            |                                                                                                                                                                                                                                     |              |        
|                                                                                                  | Trade
  accounts payable                                                                                                                                                                                                            |              | $      
|                                                                                                  | Income taxes
  payable                                                                                                                                                                                                              |              |        
|                                                                                                  | Other
  accrued expenses                                                                                                                                                                                                            |              |        
|                                                                                                  | Deferred
  profit on service contracts and sales of 
       partnership interests                                                                                                                                                   |              |        
|                                                                                                  | Short-term
  borrowings                                                                                                                                                                                                             |              |        
|                                                                                                  | Current
  portion of capital lease obligations                                                                                                                                                                                      |              |        
|                                                                                                  | Current
  portion of long-term debt                                                                                                                                                                                                 |              |        
|                                                                                                  |                                                                                                                                                                                                                                     |              |        
|Total
  current liabilities                                                                       |                                                                                                                                                                                                                                     |              | 30,423 
|                                                                                                  |                                                                                                                                                                                                                                     |              |        
|Deferred
  profit on medical device sales to related parties (subject to debt 
       guarantees) |                                                                                                                                                                                                                                     |              | 248    
|Noncurrent
  deferred income taxes                                                                |                                                                                                                                                                                                                                     |              | 669    
|Capital
  lease obligations, less current portion                                                 |                                                                                                                                                                                                                                     |              | 409    
|Long-term
  debt, less current portion                                                            |                                                                                                                                                                                                                                     |              | 4,718  
|Minority
  interest in consolidated subsidiaries                                                  |                                                                                                                                                                                                                                     |              | 28,085 
|Other
  liabilities                                                                               |                                                                                                                                                                                                                                     |              | 1,953  
|                                                                                                  |                                                                                                                                                                                                                                     |              |        
|Total
  liabilities                                                                               |                                                                                                                                                                                                                                     |              | 66,505 
|                                                                                                  |                                                                                                                                                                                                                                     |              |        
|Shareholders
  equity:                                                                           |                                                                                                                                                                                                                                     |              |        
|                                                                                                  | Common stock  no par value, voting:                                                                                                                                                                                                |              |        
|                                                                                                  | Authorized 
  30,000 shares at December 31,
  2003 and 2002; Issued  11,639 and 11,345 
  shares at December 31, 2003 and 2002,
  respectively; Outstanding  11,584 and
  11,292 
  at December 31, 2003 and 2002, respectively. |              |        
|                                                                                                  | Accumulated
  other comprehensive loss                                                                                                                                                                                              |              |        
|                                                                                                  | Retained
  earnings                                                                                                                                                                                                                 |              |        
|                                                                                                  |                                                                                                                                                                                                                                     |              |        
|                                                                                                  |                                                                                                                                                                                                                                     |              | 40,378 
|                                                                                                  |                                                                                                                                                                                                                                     |              |        
|Total
  liabilities and shareholders equity                                                      |                                                                                                                                                                                                                                     | $            | 106,883
|                                                                                                  |                                                                                                                                                                                                                                     |              |        
|                                                                                                  |                                                                                                                                                                                                                                     |              |        

See accompanying
notes.

F-3

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Consolidated Statements of Income

(000s omitted except per share information)

|                                                        |         | Year ended December 31, |        
|------------------------------------------------------- | ------- | ----------------------- | -------
|                                                        |         |                         |        
|                                                        |         | 2003                    |        
|                                                        |         |                         |        
|                                                        |         |                         |        
|Net revenue                                             |         | $                       | 88,406 
|Cost of
  devices, service parts and consumables        |         |                         | 18,188 
|Salaries, general
  and administrative expenses         |         |                         | 42,060 
|Depreciation
  and amortization                         |         |                         | 5,602  
|                                                        |         |                         |        
|                                                        |         |                         | 22,556 
|Equity in
  earnings of unconsolidated entities         |         |                         | 1,079  
|Partnership
  distributions from cost basis investments |         |                         | 542    
|Gain on sale
  of subsidiary and investment interest    |         |                         | 4,542  
|Gain on sale
  of fixed assets                          |         |                         | 786    
|Interest
  expense                                      |         |                         | (1,938 
|Interest
  income                                       |         |                         | 191    
|                                                        |         |                         |        
|Income
  before minority interest and income taxes      |         |                         | 27,758 
|Minority
  interest of consolidated subsidiaries        |         |                         | (19,273
|                                                        |         |                         |        
|Income
  before income taxes                            |         |                         | 8,485  
|Provision
  for income taxes                            |         |                         | 3,224  
|                                                        |         |                         |        
|Net income                                              |         | $                       | 5,261  
|                                                        |         |                         |        
|Net income
  per common share:                          |         |                         |        
|                                                        | Basic   |                         | $      
|                                                        |         |                         |        
|                                                        | Diluted |                         | $      
|                                                        |         |                         |        
|Weighted
  average common shares outstanding:           |         |                         |        
|                                                        | Basic   |                         |        
|                                                        |         |                         |        
|                                                        | Diluted |                         |        
|                                                        |         |                         |        

See accompanying
notes.

F-4

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Consolidated Statements of
Shareholders Equity

(000s omitted)

|                               |                                                                                              | Common Stock       |        | Accumulated
  Other Comprehensive
  Loss |   | Retained
  Earnings |       | Total
  Shareholders
  Equity |     
|------------------------------ | -------------------------------------------------------------------------------------------- | ------------------ | ------ | ---------------------------------------- | - | ------------------- | ----- | ------------------------------ | ----
|                               |                                                                                              |                    |        |                                          |   |                    
|                               |                                                                                              | Number of
  Shares |        | Amount                                   |   |                     |       |                               
|                               |                                                                                              |                    |        |                                          |   |                     |       |                                |     
|Balance at
  January 1, 2001   |                                                                                              |                    | 10,972 |                                          | $ | 13,745              |       | $                              |    
|                               | Common stock
  issued on exercise of 
       stock options including tax benefit             |                    |        | 27                                       |   |                     | 161   |                                |     
|                               | Common stock
  issued to employees                                                           |                    |        | 105                                      |   |                     | 675   |                                |     
|                               | Repurchase
  of treasury stock                                                               |                    |        | (53                                      | ) |                     | (277  | )                              |     
|                               | Net income                                                                                   |                    |        |                                         |   |                     |      |                                |     
|                               |                                                                                              |                    |        |                                          |   |                     |       |                                |     
|Balance at
  December 31, 2001 |                                                                                              |                    | 11,051 |                                          | $ | 14,304              |       | $                              |    
|                               | Common stock
  issued on exercise of 
       stock options including tax benefit             |                    |        | 147                                      |   |                     | 2,063 |                                |     
|                               | Common stock
  issued to employees                                                           |                    |        | 5                                        |   |                     | 52    |                                |     
|                               | Common stock
  issued to consultants                                                         |                    |        | 1                                        |   |                     | 9     |                                |     
|                               | Common stock
  issued for acquisition 
       of partnership interest                        |                    |        | 88                                       |   |                     | 600   |                                |     
|                               | Other
  comprehensive loss: net change 
       in fair value of interest rate swap           |                    |        |                                         |   |                     |      |                                |     
|                               | Net income                                                                                   |                    |        |                                         |   |                     |      |                                |     
|                               |                                                                                              |                    |        |                                          |   |                     |       |                                |     
|Balance at
  December 31, 2002 |                                                                                              |                    | 11,292 |                                          | $ | 17,028              |       | $                              | (312
|                               | Common stock
  issued on exercise of 
       stock options including tax benefit             |                    |        | 158                                      |   |                     | 892   |                                |     
|                               | Common stock
  issued to employees                                                           |                    |        | 10                                       |   |                     | 53    |                                |     
|                               | Common stock
  issued for acquisition 
       of partnership interest                        |                    |        | 126                                      |   |                     | 1,076 |                                |     
|                               | Repurchase
  of treasury stock                                                               |                    |        | (2                                       | ) |                     | (15   | )                              |     
|                               | Other
  comprehensive income: net 
       change in fair value of interest rate 
       swap |                    |        |                                         |   |                     |      |                                |     
|                               | Net income                                                                                   |                    |        |                                         |   |                     |      |                                |     
|                               |                                                                                              |                    |        |                                          |   |                     |       |                                |     
|Balance at
  December 31, 2003 |                                                                                              |                    | 11,584 |                                          | $ | 19,034              |       | $                              | (32 
|                               |                                                                                              |                    |        |                                          |   |                     |       |                                |     
|                               |                                                                                              |                    |        |                                          |   |                     |       |                                |     

See accompanying
notes.

F-5

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Consolidated Statements of Cash
Flows

(000s omitted)

|                                                                                        |                                                                                                      | Year ended December 31, |      
|--------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ----------------------- | -----
|                                                                                        |                                                                                                      |                         |      
|                                                                                        |                                                                                                      | 2003                    |      
|                                                                                        |                                                                                                      |                         |      
|Operating activities                                                                    |                                                                                                      |                         |      
|Net income                                                                              |                                                                                                      | $                       | 5,261
|Adjustments
  to reconcile net income to cash provided by 
       operating activities: |                                                                                                      |                         |      
|                                                                                        | Net change
  in fair value of interest rate swap                                                     |                         |      
|                                                                                        | Depreciation
  and amortization                                                                      |                         |      
|                                                                                        | Amortization
  of loan costs                                                                         |                         |      
|                                                                                        | Provision
  for doubtful accounts                                                                    |                         |      
|                                                                                        | Deferred
  income taxes                                                                              |                         |      
|                                                                                        | Deferred
  profit                                                                                    |                         |      
|                                                                                        | Equity in
  earnings of unconsolidated entities, net of 
       distributions                        |                         |      
|                                                                                        | Minority
  interest in consolidated subsidiaries, net of 
       distributions to minority interests |                         |      
|                                                                                        | Gain on sale
  of subsidiary                                                                         |                         |      
|                                                                                        | Gain on sale
  of fixed assets                                                                       |                         |      
|                                                                                        | Changes in
  operating assets and liabilities, net of 
       businesses acquired/disposed of:       |                         |      
|                                                                                        | Trade
  accounts receivable                                                                          |                         |      
|                                                                                        | Other
  receivables                                                                                  |                         |      
|                                                                                        | Prepaid
  expenses and other assets                                                                  |                         |      
|                                                                                        | Income taxes
  receivable                                                                            |                         |      
|                                                                                        | Inventory                                                                                            |                         |      
|                                                                                        | Trade
  accounts payable                                                                             |                         |      
|                                                                                        | Income taxes
  payable                                                                               |                         |      
|                                                                                        | Accrued expenses
  and other liabilities                                                             |                         |      
|                                                                                        |                                                                                                      |                         |      
|Net cash
  provided by operating activities                                             |                                                                                                      |                         | 784  
|                                                                                        |                                                                                                      |                         |      

F-6

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Consolidated Statements of Cash Flows
(continued)

(000s omitted)

|                                                                      |  | Year ended December 31, |        
|--------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                      |  |                         |        
|                                                                      |  | 2003                    |        
|                                                                      |  |                         |        
|Investing activities                                                  |  |                         |        
|Purchases of
  property and equipment, net of businesses     acquired |  |                         | (6,834 
|Dispositions
  of property and equipment                              |  |                         | 1,698  
|Net proceeds
  from sale of subsidiary                                |  |                         | 14,144 
|Acquisition
  of partnership interest, net of distributions           |  |                         | (493   
|Acquisition
  of businesses, net of cash acquired                     |  |                         | (4,023 
|                                                                      |  |                         |        
|Net cash
  provided by (used in) investing activities                 |  |                         | 4,492  
|                                                                      |  |                         |        
|Financing activities                                                  |  |                         |        
|Proceeds
  from issuance of common stock                              |  |                         | 2,021  
|Purchase of
  treasury stock                                          |  |                         | (15    
|Proceeds
  from issuance of long-term debt                            |  |                         | 4,167  
|Principal
  payments on long-term debt and capital leases             |  |                         | (21,431
|Proceeds
  from short-term borrowings                                 |  |                         | 7,014  
|Principal
  payments on short-term borrowings                         |  |                         | (4,800 
|                                                                      |  |                         |        
|Net cash
  provided by (used in) financing activities                 |  |                         | (13,044
|                                                                      |  |                         |        
|                                                                      |  |                         |        
|Net increase
  (decrease) in cash and cash equivalents                |  |                         | (7,768 
|Cash and
  cash equivalents at beginning of year                      |  |                         | 16,808 
|                                                                      |  |                         |        
|Cash and
  cash equivalents at end of year                            |  | $                       | 9,040  
|                                                                      |  |                         |        
|                                                                      |  |                         |        
|Supplemental disclosures of cash flow information                     |  |                         |        
|Cash paid
  for interest                                              |  | $                       | 1,938  
|                                                                      |  |                         |        
|Cash paid
  for income taxes                                          |  | $                       | 3,903  
|                                                                      |  |                         |        

See accompanying
notes.

F-7

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial
Statements

December 31, 2003

1.  
Description of the Business and Basis of Presentation

HealthTronics
Surgical Services, Inc. (the Company) was incorporated in the State of
Georgia in 1995.  In mid-1997, the
Company received FDA approval to market the LithoTron®, a kidney
lithotripsy device manufactured by HMT High Medical Technologies AG
(HMT).  On October 12, 2000, the
Company received FDA approval to market the OssaTron®, an HMT manufactured
orthopaedic shock wave medical device, for treatment of chronic plantar
fasciitis.  On March 13, 2003
HealthTronics also received FDA approved to market the OssaTron® for
treatment of chronic lateral epicondylitis. The Company is currently establishing
additional test sites for OssaTron FDA clinical trials for additional
applications.

In 1996,
HMT granted to the Company the right to purchase limited manufacturing rights
to the OssaTron medical device.  The
Company also operates under the terms of distribution agreements with HMT that
grant the Company the exclusive right to use, sell and lease the LithoTron and
OssaTron and related devices and parts in the United States, Canada and
Mexico.  Subsequent to December 31, 2003, the Company
purchased the outstanding capital stock of HMT Holding AG which holds a 72.4%
voting interest in HMT (see Note 23).

With each
FDA approval, it is the Companys intent to generate revenues from four
sources: 1) fees for clinical services provided by consolidated subsidiaries;
2) recurring revenues from leasing, licensing fees, sales of consumable
products and maintenance of equipment; 3) sales of medical devices including
related accessories; and 4) investment income generated from partnerships
and joint ventures with physicians, dealerships and hospitals that purchase
equipment from the Company, as well as management fees from such entities.  The Company also generates gains from sales
of partnership interests.

HealthTronics
was the sole shareholder of Litho Management, Inc., which held a 1% general
partner interest and a 39.6% limited partnership interest in U.S. Lithotripsy,
L.P. (USL), a Texas limited partnership through June 2002.  USL is the sole general partner in several
separate partnerships with equity interests ranging from 10% to 99% (the
second tier partnerships), formed for the purpose of purchasing, owning and
operating certain medical devices utilizing shock wave therapies.  As sole general partner, USL consolidates
the second tier partnerships.  In July
2002, the Company sold its interest in USL for $6,800,000 (see note 4).

In December
2001, the Company purchased 100% of the outstanding stock of Litho Group, Inc.
(LGI) for $42,500,000 in cash. 
Through its various 100% subsidiaries, LGI is the sole general partner
of several separate second and third tier lithotripsy partnerships with

F-8

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

1.   Description
of the Business and Basis of Presentation (continued)

equity interests ranging from 15% to 100%, operating in the northern,
eastern and southern United States.  As
sole general partner, LGI consolidates the second and third tier partnerships.
The Company is also general partner or managing partner in various separate
lithotripsy partnerships, which it controls and, therefore, consolidates.

In October
2000, with the FDA approval of the OssaTron the Company began establishing
Orthotripsy partnerships for the purpose of purchasing, owning and operating
OssaTron devices. HealthTronics contributed certain capital to partnerships and
offered equity interests to third parties. 
As sole general partner, through its subsidiary, HT Orthotripsy Management
Company, LLC, the Company maintains control and, therefore, consolidates the
second tier Orthotripsy partnerships. 
The Company has equity interests in these partnerships ranging from 5%
to 100%.

The
accompanying consolidated financial statements include the accounts of each of
the Companys subsidiaries.  All
significant intercompany accounts and transactions have been eliminated in
consolidation.  See Note 6 for
discussion of minority interests.

2.  
Summary of Significant Accounting Policies

Cash Equivalents

The Company
considers all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents.

Reclassifications

Certain
prior year balances have been reclassified to conform to the 2003 presentation.

Revenue Recognition, Gain Recognition and
Allowance for Doubtful Accounts

Net revenue
includes treatment fees for medical procedures in the clinical setting.  Treatment revenue is primarily wholesale
or retail.  Wholesale revenue is
generated primarily from fixed fee contracts with various medical facilities
and is recorded in the month the related treatments are performed.  Retail revenue, when third party payors are
billed directly for medical facility and technical fees, is recorded at the
time services are rendered.  These third
party billings may or may not be contractual. 
Adjustments that reduce

F-9

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

2.  
Summary of Significant Accounting Policies (continued)

Revenue Recognition, Gain Recognition and
Allowance for Doubtful Accounts (continued)

revenue from established contractual or estimated non-contractual
billing rates to amounts estimated to be reimbursable are recognized in the
period the services are rendered. 
Differences in estimates recorded and final settlements are reported
during the period final settlements are made. 
The Company has certain negotiated agreements with third party payors
that provide for payments to the Company or its subsidiaries.  These payment arrangements may be based upon
negotiated rates or per diem payments. 
Revenues are reported at the estimated net realizable amounts from
medical facilities, contracted and non-contracted third party payors and
individual patients for services rendered.

For sales
of medical devices to unaffiliated entities, revenue is recognized upon
delivery at the customers destination.

Revenue
generated from service contracts is recognized ratably over the life of the
related contract.

During 2002
and 2001, the Company sold medical devices to certain limited partnerships and
limited liability corporations in which the Company has a minority interest and
has guaranteed a portion of the long-term obligations related to the purchase
of the medical devices.  The Company has
accounted for these minority interests using the equity or cost basis methods
of accounting (depending upon the Companys ability to exercise significant
influence over the operating and financial policies of the investment
partnership) and deferred a pro-rata portion of the profit, $66,000 and
$43,000, on sales of the medical devices to these entities for the years ended
December 31, 2002 and 2001, respectively.

During
2003, 2002 and 2001, the Company formed wholly owned limited partnerships in
which it is the general partner and then contributed an OssaTron into the
partnership.  The Company may sell
interests in these partnerships to physicians or other investors.  The Company generally recognizes a gain on
the interest sold at the time the subscription agreement is consummated and
payment is due.  Included in other
receivables on the accompanying December 31, 2002 balance sheets is $750,000
relating to sales of partnership interests. 
Certain gains on the sale of partnership interests totaling $407,000 and $646,000 have been deferred in
the accompanying 2002 and 2001 respective financial statements due to extended
payment terms of greater than one year.

F-10

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

2.  
Summary of Significant Accounting Policies (continued)

Revenue Recognition, Gain Recognition and
Allowance for Doubtful Accounts (continued)

Accounts
receivable consist primarily of amounts due from the medical facilities or
partnerships, managed care health plans, commercial insurance companies and
individual patients.  The Company does not charge interest on its accounts receivable. Estimated
provisions for doubtful accounts are recorded to the extent it is probable that
a portion or all of a particular account will not be collected.  In evaluating the collectibility of accounts
receivable, the Company considers a number of factors, including the age of the
accounts, changes in collection patterns, the composition of accounts by payor
type, the status of ongoing negotiations with third party payors and general
industry conditions.  Changes in these
estimates are charged or credited to the results of operations in the period of
the change.  The Company writes off accounts receivable when all collection efforts have been exhausted.

Inventory

Inventory
is carried at the lower of historical cost (first-in, first-out) or market and
consists of medical devices, spare parts and consumables.

Consolidation and Partnership Investments

Historically,
the Company has made a number of investments in various entities including
general and limited partnerships.  The
majority of these investments are consolidated (see Note 6) based upon the
Companys ability to exercise control.  The remaining investments are recorded using the cost or equity
method of accounting, depending upon the Companys ability to exercise
significant influence over the operating and financial policies of the partnership.

Impairment of Long-Lived Assets

In accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, management reviews long-lived assets used
in operations for impairment when there is an event or change in circumstances
that indicates the carrying amount of the asset may not be recoverable and the
future undiscounted cash flows expected to be generated by the asset are less
than its carrying amount.  If such
assets are considered to be impaired, the Company records impairment losses and
reduces the carrying amount of impaired assets to an amount that reflects the
fair value of the assets at the time impairment is evident.  The Companys impairment review process
relies on

F-11

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

2.  
Summary of Significant Accounting Policies (continued)

Impairment of Long-Lived Assets (continued)

managements judgment regarding the indicators of impairment, the remaining
lives of assets used to generate assets undiscounted cash flows, and the fair
value of assets at a particular point in time. 
Management uses historical experience, current market appraisals and
various other assumptions to form the basis for making judgments about the
impairment of its assets.  Under
different assumptions or conditions, the asset impairment analysis may yield a
different outcome, which would alter the impairment recognized and the gain or loss on the eventual disposition
of the asset.

Property and Equipment

Property
and equipment is stated at cost. 
Depreciation (which includes amortization of assets under capital
leases) is computed based on the straight-line method over three to seven years
based on the estimated useful lives of the related equipment or over the term
of the related lease or over 39 years for buildings.

Income Taxes

The Company
accounts for income taxes in accordance with Statement of Financial Accounting
Standards No. 109,Accounting for Income
Taxes.  Under this method,
deferred tax assets and liabilities are determined based on differences between
the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that are expected to be in effect
when the differences are expected to be recovered or settled.

The Company
recognizes deferred tax assets and liabilities based on the differences between
the financial statement carrying amounts and the tax bases of assets and
liabilities.  The Company regularly reviews
its deferred tax assets for recoverability and establishes a valuation
allowance based upon projected future taxable income and the expected timing of
the reversals of existing temporary differences.  A significant portion of the deferred tax asset arose as a result
of the acquisition of Litho Group.

Warranty Accrual

The Company
accrues service and parts warranty expense on the sale of each medical device
sold with a warranty.  This amount is
reflected in other current liabilities in the accompanying consolidated
financial statements.

F-12

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

2.  
Summary of Significant Accounting Policies (continued)

Stock Based Compensation

The Company
has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
and related Interpretations in accounting for employee stock options and
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock
Based Compensation (SFAS 123) as amended by Statements of
Financial Accounting Standards No. 148, Accounting
for Stock-Based Compensation  Transitional Disclosure, an Amendment to SFAS
No. 123, (SFAS 148) for option grants to employees.  The Company generally grants stock options
for a fixed number of shares to employees with an exercise price equal to the
fair value of the shares at the date of grant and, accordingly, recognizes no
compensation expense for the employee stock option grants.

The
following table illustrates the effect on net income and earnings per share as
if the Company had applied the fair value recognition provisions of SFAS 123 as
amended by SFAS 148.

|                                                                                                                                                               |         | Year Ended December 31,                       |       
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | --------------------------------------------- | ------
|                                                                                                                                                               |         |                                               |       
|                                                                                                                                                               |         | 2003                                          |       
|                                                                                                                                                               |         |                                               |       
|                                                                                                                                                               |         | (000s omitted, except per share information) |       
|                                                                                                                                                               |         |                                               |       
|Net income  as reported                                                                                                                                       |         | $                                             | 5,261 
|Deduct:  Total stock-based employee compensation 
       expense determined under fair value based
  method for 
       all awards, net of related tax effects |         |                                               | (1,138
|                                                                                                                                                               |         |                                               |       
|Net income  pro forma                                                                                                                                         |         | $                                             | 4,123 
|                                                                                                                                                               |         |                                               |       
|                                                                                                                                                               |         |                                               |       
|Earnings per share  as
  reported:                                                                                                                            |         |                                               |       
|                                                                                                                                                               | Basic   |                                               | $     
|                                                                                                                                                               | Diluted |                                               | $     
|Earnings per share  pro
  forma:                                                                                                                              |         |                                               |       
|                                                                                                                                                               | Basic   |                                               | $     
|                                                                                                                                                               | Diluted |                                               | $     
|                                                                                                                                                               |         |                                               |       

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. 
Actual results could differ from those estimates and such differences
may be material.

F-13

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

2.  
Summary of Significant Accounting Policies (continued)

Related Party Transactions

Transactions
between related parties and between different subsidiaries of the Company occur
in the normal course of business.  The
Company eliminates transactions with its consolidated subsidiaries and
appropriately discloses significant related party transactions.

Concentrations of Credit Risk

The Company
sells its products primarily in the United States, Canada and Mexico.  Credit is extended based on an evaluation of
the customers financial condition and collateral is generally not
required.  Accounts receivable are
generally receivable from medical facilities, insurance companies or patients.

Fair Value of Financial Instruments

The
Companys financial instruments are comprised principally of cash and cash
equivalents, trade accounts receivable, amounts due from affiliated
partnerships, trade accounts payable, customer deposits, short-term borrowings
and long-term debt, which is primarily variable debt.  The carrying
amounts of these financial instruments approximate their fair values.

Long-Lived Assets

The Company
has recorded its long-lived assets at cost less
accumulated depreciation and amortization. 
The determination of useful lives and whether or not these assets are
impaired involves significant judgment. 
The Company reviews long-lived assets, whenever events or changes in circumstances indicate the carrying
amounts of such assets may not be recoverable. 
Goodwill is the excess of the purchase price over the fair value of
identifiable net assets acquired in business combinations accounted for as
purchases.  Goodwill was previously
amortized on a straight-line basis over the periods benefited.  Goodwill is now no longer being amortized to
earnings, but instead is subject to annual testing for impairment at the
reporting unit level unless events or circumstances indicate the carrying
amount is impaired.

F-14

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

2.  
Summary of Significant Accounting Policies (continued)

Other Comprehensive Income/Loss

Effective
February 12, 2002, the Company entered into two two-year interest rate swap
agreements which qualify as cash flow hedges. 
These hedges are effective and, thus, the change in fair value of
$280,000 is reported as other comprehensive gain for the year ended December
31, 2003 and the change in fair value of $312,000 is reported as other
comprehensive loss for the year ended December 31, 2002.  The market value of the derivatives, a
liability of $32,000 and $312,000 as of December 31, 2003 and 2002,
respectively, is included on the accompanying consolidated balance sheets.

Basic and Diluted Income Per Common Share

The
Companys per share amounts for all periods have been presented in accordance
with the provisions of Statement of Financial Accounting Standards No. 128, Earnings per Share.  Basic and diluted net income per share is
computed based on the weighted average number of common shares
outstanding.  Common share equivalents
(which may consist of options, warrants and convertible debentures) are
excluded from the computation of diluted net income per share if the effect
would be antidilutive.

Recently Issued Accounting Standards

In May
2003, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity (SFAS 150).  SFAS
150 improves the accounting for certain financial instruments that under the
previous guidance, issuers could account for as equity.  SFAS 150 requires that those instruments be
classified as liabilities in statements of financial position.  SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003.  On October 29, 2003, the FASB deferred for
an indefinite period the application of the guidance in SFAS 150 until it could
consider some of the resulting implementation issues associated with the
measurement and recognition issues.  The
Company has not determined the resulting impact of the adoption of this
statement on its consolidated financial position, results of operations or cash
flows.

In April
2003, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities
(SFAS 149), which is effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated after June 30,

F-15

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

2.  
Summary of Significant Accounting Policies (continued)

Recently Issued Accounting Standards
(continued)

2003.  SFAS 149 amends and
clarifies accounting and reporting for derivative instruments.  In particular, this statement amends certain
other pronouncements and clarifies the circumstances under which a contract
with an initial investment meets the characteristics of a derivative and when a
derivative contains a financial component. 
The guideline should be applied prospectively.  The adoption of SFAS 149 did not have a material impact on the
consolidated financial position, results of operations or cash flows of the
Company.

In
January 2003, the Financial Accounting Standards Board issued Interpretation No. 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51 (FIN 46), which addresses the consolidation of entities
whose equity holders have either (a) not provided sufficient equity at
risk to allow the entity to finance its own activities or (b) do not
possess certain characteristics of a controlling financial interest.  FIN 46 sets forth a model to evaluate
potential consolidation of these entities, known as variable interest entities
(VIEs), based on an assessment of which party to the VIE, if any, absorbs a
majority of the exposure to its expected losses, receives a majority of its
expected residual returns, or both (the primary beneficiary).  FIN 46 also requires disclosures about
VIEs that a company is not required to consolidate but in which it has a
significant variable interest. 
FIN 46 is effective for all new VIEs created or acquired after
January 31, 2003.  For VIEs created
or acquired prior to February 1, 2003, the provisions of FIN 46 must
be applied for the first interim or annual period beginning after
March 15, 2004 except for companies with special purpose entities which
must apply the provisions of FIN 46 to those special purpose entities no
later than the first reporting period ending after December 15, 2003.  The Company is currently evaluating the
impact of adopting FIN 46, but does not expect it to have a material impact on
its results of operations or its financial condition.  The Company does not consolidate any VIEs and the Company does
not have any significant variable interests in a VIE.

F-16

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

3.  
Inventory

Inventory
consists of the following at December 31:

| |                                     |  | 2003            |       | 2002 |  
| | ----------------------------------- |  | --------------- | ----- | ---- | -
| |                                     |  |                 |       |      |  
| |                                     |  | (000s omitted) |      
| |                                     |  |                 |       |      |  
| | Medical
  devices / other equipment |  | $               | 5,994 |      | $
| | Spare parts                         |  |                 | 738   |      |  
| | Consumables                         |  |                 | 1,087 |      |  
| |                                     |  |                 |       |      |  
| |                                     |  | $               | 7,819 |      | $
| |                                     |  |                 |       |      |  

4.  
Business Acquisitions and Dispositions

During the
year ended December 31, 2003, the Company separately and individually purchased
controlling interests ranging from 25.0% to 56.4% in two lithotripsy
partnerships, three prostate thermotherapy partnerships and four cryosurgery
partnerships for aggregate purchase prices totaling $6,930,000 which included
cash and issuance of 125,304 shares of common stock.  The results of operations for these entities have been included
since the dates of acquisition.  The results of operations of these partnerships prior to their acquisition by the
Company were not material to the operations of the Company. The Company
recorded additions to goodwill of $3,830,000 and $1,306,000 related to the
Lithotripsy and Other segments, respectively.  The purchase price of each acquisition has been allocated on a
preliminary basis to assets and liabilities based on managements estimate of
their fair values.  These allocations
are subject to change pending the completion of the final analysis of the total
purchase price and fair values of the assets acquired and liabilities
assumed.

Rocky Mountain Prostate Thermotherapy LLC

In
August 2002, the Company purchased a 49% interest in Rocky Mountain Prostate
Thermotherapy LLC (RMPT), a Colorado limited liability corporation, for
approximately $2,200,000.  RMPT provides
treatment for benign prostatic hyperplasia in nine western states. On November
1, 2002, the Company purchased an additional 12% interest in RMPT for 88,496
shares of Company stock valued at $600,000. 
As a result of the second acquisition, the Company consolidated its 61%
controlling interest.  The results of operations of RMPT prior to its acquisition by the
Company were not material to the operations of the Company. In October 2003,
the Company purchased the remaining 39% interest in RMPT for approximately $1,100,000.

F-17

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

4.  
Business Acquisitions and Dispositions (continued)

Rocky Mountain Prostate Thermotherapy LLC
(continued)

The purchase price of the remaining 39% of RMPT has been allocated on a preliminary
basis to assets and liabilities based on managements estimate of their fair
values.  These allocations are subject
to change pending the completion of the final analysis of the total purchase
price and fair values of the assets acquired and liabilities assumed.

U.S. Lithotripsy, L.P.

On
July 13, 2002, the Company, through its wholly owned subsidiary, Litho Management,
Inc., sold all of its general partner and limited partnership interests in U.S.
Lithotripsy, L.P. (USL), a Texas limited partnership for $6,800,000,
resulting in a gain of $3,654,000.  USL
held general partnership and limited partnership interests in approximately 26
active lithotripsy partnerships. The Companys indirect ownership in each of
the active lithotripsy
partnerships in which USL held an interest was approximately 5%. As a result of
this sale, the Company recognized previously deferred profits of $1,055,000
relating to sales of medical devices to USL and its consolidated subsidiaries.

Litho Group, Inc. and Heritage Medical
Services of Texas, Inc. and HSC of Gulf Coast, Inc.

On December
11, 2001, the Company purchased all of the issued and outstanding capital stock
of Litho Group, Inc. (LGI) for $42,500,000 in cash, pursuant to a Stock
Purchase Agreement with Integrated Health Services, Inc.  The results of LGIs operations have been included
in the consolidated financial statements since that date. The Company also
assumed certain assets and certain liabilities of LGI, which includes debt that
is secured by equipment in operating partnerships and funded from the operating
cash flows generated by the partnerships. 
The purchase was a result of the Companys bid which was approved by the
United States Bankruptcy Court.

The
purchase price was determined and negotiated by the parties based on the
expected annual cash flow to be generated by LGI.  The Company financed the acquisition through a $50 million senior
credit facility.  Since the acquisition,
the Company has sold approximately 65% of its acquired interest in the
operating partnerships of LGI to physician limited partners.  The proceeds of the sale of this ownership
interest were used to reduce debt used in financing the acquisition.

F-18

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

4.  
Business Acquisitions and Dispositions (continued)

Litho Group, Inc. and Heritage Medical
Services of Texas, Inc. and HSC of Gulf Coast, Inc. (continued)

In
connection with this acquisition, the Company paid fees totaling $450,000 to a
company owned by a former Board member of the Company.  In 2001, the Company paid $10,000 per month
to this related party for ongoing consulting services.

In 2002,
management completed its evaluation and recorded adjustments totaling
$3,172,000 resulting in a net reduction of goodwill primarily related to the
adjustment of the fair value of the deferred tax assets acquired.  See Note 12 for discussion of deferred tax
assets acquired.

On May 17,
2001, HealthTronics purchased all of the issued and outstanding capital stock
of Heritage Medical Services of Texas, Inc. (Heritage) and HSC of Gulf Coast,
Inc. (collectively the Corporations) for $565,000 in cash, pursuant to a
Stock Purchase Agreement with HEALTHSOUTH Corporation and Surgical Health
Corporation.  The acquisitions are given
financial effect as of April 1, 2001. 
The Corporations own a 52.07% interest in and Heritage is the general
partner of Gulf Coast Lithotripsy Associates, L.P. (GCLA).  GCLA owns a 70% interest in and is the
general partner of Lithotripsy Associates of Texas, Limited Partnership.

The table
below represents pro forma financial information for the year ended December
31, 2001 as if LGI and the Corporations had been acquired on January 1, 2001.

|                  |         | Year ended December 31, 2001 |  
|----------------- | ------- | ---------------------------- | -
|                  |         |                              |  
|                  |         | As Reported                  |  
|                  |         |                              |  
|                  |         | (000s omitted)              |  
|                  |         |                              |  
|Net sales         |         |                              | $
|Net income        |         |                              |  
|                  |         |                              |  
|Per share
  data: |         |                              |  
|                  | Basic   |                              |  
|                  | Diluted |                              |  

F-19

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

4.  
Business Acquisitions and Dispositions (continued)

The
above acquisitions were accounted for using the purchase method of accounting,
and the purchase price was allocated to the tangible and intangible assets
acquired and liabilities
assumed on the basis of their respective fair values on the date of
acquisition.  The financial results of
the acquisitions have been included in the consolidated financial statements of
the Company from the date of acquisition.

5.  
Gain on Sale of Subsidiary and Investment Interest

The Company
sold a portion of the partnership interests of certain limited liability
partnerships and recognized gains of $4,542,000, $4,363,000 and $3,397,000 in
2003, 2002 and 2001, respectively.  The
gains represent the excess of the sales price over the Companys investment
basis in the partnership interest.  At
December 31, 2002 the Company had deferred a gain of $407,000 related to sale
of partnership interests due to extended payment terms of one year.

6.  
Partnership Investments

As
discussed in Note 1, the Company is the sole general partner of certain
entities that maintain the sole general partnership
interest in second and third tier partnerships. Based upon the Companys
ability to exercise control over the operating and financial policies of these
entities and the second and third tier partnerships, the Company has
consolidated the financial position and results of operations of the individual
entities subsequent to the dates of acquisition.

The Company
maintains investments in certain other limited partnerships and limited
liability corporations in which the Company has a minority interest as a
limited partner.  The Company has
accounted for these minority interests, totaling $2,207,000 and $1,866,000 at
December 31, 2003 and 2002, respectively, using the equity or cost basis method
of accounting depending upon the Companys ability to exercise significant
influence over the operating and financial policies of the partnership.

7.  
Related Party Transactions

During the
years ended December 31, 2002 and 2001, the Company recorded sales of
medical devices to certain partnerships accounted for on the cost or equity
basis of accounting.  The partnerships
obtained third party financing, payable generally over five years or less, to
satisfy their obligations to the Company under these sales.  The Company, as

F-20

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

7.  
Related Party Transactions (continued)

a minority partner, has guaranteed its proportionate interest in the
related partnership debt based upon the Companys ownership percentage in the
partnership. As a result, the Company has deferred approximately $248,000 of gross profit as of December 31, 2003 and 2002, related to these sales.

Trade
accounts payable due to the Companys supplier, HMT, totaled $919,000 and
$952,000 as of December 31, 2003 and 2002, respectively.  During 2003, 2002 and 2001, the Company made
payments totaling $10,601,000, $8,091,000 and $9,119,000, respectively, to HMT
for purchases of medical devices, related parts and consumables. Subsequent to December 31, 2003, the Company purchased the outstanding capital stock of HMT Holding AG which holds a 72.4% voting interest in HMT (see Note 23).

During the
year ended December 31, 2001 the Company sold an interest in certain
Orthotripsy partnerships totaling $2,600,000 to an entity of which a
shareholder and former Board member was a minority shareholder and recognized a
gain of $1,500,000.  In addition, the
Company acquired from this same entity certain machines totaling $1,300,000. The
Company believes such transactions were carried out at arms length.

A
subsidiary of the Company which was acquired in December 2001 provides management and administrative services and
leases equipment and facilities to a professional corporation owned through a
common group of individual members. 
Because of the nature of this relationship, the amounts charged may have
been different had the parties not been related.  Total fees charged to this affiliate for all the services
provided was $14,365,000 and $14,699,000 for the years ended December 31, 2003
and 2002, respectively.  Total accounts
receivable for these services were $1,238,000 and $1,145,000 as of December 31,
2003 and 2002, respectively.

As of
December 31, 2002, the Company has notes receivable from a related party
totaling $1,240,000 relating to the purchase of partnership interest in a Litho
Group, Inc. affiliate.

8.  
Short-Term Borrowings

In December
2001, the Company obtained bank financing to fund the $42,500,000 acquisition
of Litho Group, Inc.  The funding
consists of a $35,000,000 5-year term loan and a $15,000,000 line of
credit.  The $15,000,000 line of credit,
which is renewable every 90 days and matures on December 11, 2006, is secured
with the term loan by certain accounts receivable, inventory and equipment and
bears interest at the stated bank rate (3.39% and 3.89% at December 31, 2003
and 2002, respectively).  Outstanding
borrowings under the line

F-21

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

8.  
Short-Term Borrowings (continued)

of credit were $11,000,000 and $9,500,000 as of December 31, 2003 and
2002, respectively.

The Company
may borrow an amount not to exceed the borrowing base as defined in the loan
agreement, which is principally based on accounts receivable and
equipment.  Available borrowings under
the line of credit were $4,000,000 and $5,500,000 at December 31, 2003 and
2002, respectively. Subsequent to
December 31, 2003, the Company amended and restated its line of credit and term loan (see Note 23).

In December
2003, a subsidiary of the Company obtained a $2,500,000 line of credit.  The $2,500,000 line of credit matures on
 June 30, 2004 and is secured by certain
accounts receivable, inventory and equipment and bears interest at the Prime
Rate plus 0.5% (4.5% at December 31, 2003). 
Outstanding borrowings under the line of credit were $714,000 as of
December 31, 2003.

F-22

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

9.   Long-Term Debt

Long-term
debt consists of the following at December 31:

|                                                                                                                                                                                                                                                                                                                                                                                   |  | 2003            |        | 2002 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------ | ---- | -
|                                                                                                                                                                                                                                                                                                                                                                                   |  |                 |        |      |  
|                                                                                                                                                                                                                                                                                                                                                                                   |  | (000s omitted) |       
|Term note
  payable to bank; bearing interest at the stated bank
       rate (3.39% and 3.89% at December 31, 2003 and
  2002,
       respectively); payable in quarterly
  installments ranging from
       $1,250,000 to $2,813,000 beginning September
  2002 through
       December 2006, secured by the assets of the
  Company and
       subject to certain debt covenants |  | $               | 6,737  |      | $
|                                                                                                                                                                                                                                                                                                                                                                                   |  |                 |        |      |  
|Notes
  payable to various institutional lenders; bearing interest at
       3.85% to 9.5%; payable in monthly installments
  of principal
       and interest ranging from $685 to $15,170; due
  at various
       dates through 2007, secured by medical
  equipment and related
       assets                                                                                  |  |                 | 711    |      |  
|                                                                                                                                                                                                                                                                                                                                                                                   |  |                 |        |      |  
|Term note
  payable; bearing interest at 5.3%; payable in monthly
       installments of principal and interest of
  $62,730 beginning
       October 2003 through September 2008; secured by
  
       certain assets of the Company and
  subject to
       certain debt covenants                                                                                               |  |                 | 3,176  |      |  
|                                                                                                                                                                                                                                                                                                                                                                                   |  |                 |        |      |  
|Term notes
  payable; bearing interest at 7.5% to 10.5%; payable
       in monthly and quarterly installments of
  principal and interest
       ranging from $8,236 to $24,414; due at various
  dates through
       2007, secured by medical equipment and related
  assets                                                                                                     |  |                 |       |      |  
|                                                                                                                                                                                                                                                                                                                                                                                   |  |                 |        |      |  
|Mortgage
  payable to bank; interest at 9.5%; payable in monthly
       installments of principal and interest of
  $5,083 through 2007,
       secured by land and buildings                                                                                                                                                                                                      |  |                 |       |      |  
|                                                                                                                                                                                                                                                                                                                                                                                   |  |                 |        |      |  
|                                                                                                                                                                                                                                                                                                                                                                                   |  |                 | 10,624 |      |  
|                                                                                                                                                                                                                                                                                                                                                                                   |  |                 |        |      |  
|Less amounts
  due within one year                                                                                                                                                                                                                                                                                                                                                 |  |                 | 5,906  |      |  
|                                                                                                                                                                                                                                                                                                                                                                                   |  |                 |        |      |  
|                                                                                                                                                                                                                                                                                                                                                                                   |  | $               | 4,718  |      | $
|                                                                                                                                                                                                                                                                                                                                                                                   |  |                 |        |      |  

F-23

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

9.   Long-Term Debt (continued)

Future
maturities of long-term debt at December 31, 2003 are as follows:

|                      |  | (000s omitted) |  
|--------------------- |  | --------------- | -
|                      |  |                 |  
|Fiscal Year           |  |                 |  
|2004                  |  |                 | $
|2005                  |  |                 |  
|2006                  |  |                 |  
|2007                  |  |                 |  
|2008
  and thereafter |  |                 |  
|                      |  |                 |  
|                      |  |                 | $
|                      |  |                 |  

10.   Interest Rate Swaps

In order to
protect the Company from interest rate volatility, effective February 12, 2002,
the Company entered into two two-year interest rate swap agreements (the
swaps), with a total notional amount of $12.6 million and $17.5 million at
December 31, 2003 and 2002, respectively. 
The swaps effectively convert a portion of the Companys floating rate
debt to a fixed-rate basis through February 12, 2004, thus reducing the impact
of interest rate changes on future interest expense.  This fixed rate is 3.2525% plus the applicable percentage (2.25%
and 2.5% at December 31, 2003 and 2002, respectively), based on the previous
quarter leverage ratio, within the credit facility agreement. The swaps qualify
as cash flow hedges under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, and expire on February 12, 2004.  The Company believes that its hedge is
effective with changes in fair value to be reported in other comprehensive
loss.  As of December 31, 2003 and 2002,
the market value of the derivatives was a liability of $32,000 and $312,000,
respectively, which is included on the accompanying balance sheet.  Included in 2003 other comprehensive income
is a non-cash gain of $280,000 and in the 2002 other comprehensive loss is a
non-cash charge of $312,000 representing the aggregate change in the market
value for the years ended December 31, 2003 and 2002, respectively.

The
counterparty to the interest rate swap agreements is a major commercial
bank.  The Company is exposed to
counterparty credit risk for nonperformance and, in the event of nonperformance,
to market risk for changes in interest rates. The Company does not anticipate
nonperformance of the counterparty.

F-24

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

11.
  Capital Leases

From time
to time, the Company enters into various capital lease agreements to finance
equipment.  The capital leases bear
interest ranging from 0% to 11% per annum and have terms ranging from 38 to 60
months.  The related equipment secures
the capital leases.

Future
minimum lease payments under capital leases at December 31, 2003 are as
follows:

|                                                                    |  | (000s omitted) |  
|------------------------------------------------------------------- |  | --------------- | -
|                                                                    |  |                 |  
|Fiscal Year                                                         |  |                 |  
|2004                                                                |  |                 | $
|2005                                                                |  |                 |  
|2006                                                                |  |                 |  
|2007                                                                |  |                 |  
|2008
  and thereafter                                               |  |                 |  
|                                                                    |  |                 |  
|                                                                    |  |                 |  
|Less:
  imputed interest                                            |  |                 |  
|                                                                    |  |                 |  
|Present
  value of minimum capital lease payments                   |  |                 |  
|Less:
  current portion of obligations under capital leases         |  |                 |  
|                                                                    |  |                 |  
|Long-term
  obligations under capital lease, net of current portion |  |                 | $
|                                                                    |  |                 |  

Assets under
capital leases at December 31, 2003 are as follows:

|                                            |  | (000s omitted) |  
|------------------------------------------- |  | --------------- | -
|                                            |  |                 |  
|Medical
  devices placed in service         |  |                 | $
|Vehicles
  and accessories                  |  |                 |  
|                                            |  |                 |  
|                                            |  |                 |  
|Accumulated
  depreciation and amortization |  |                 |  
|                                            |  |                 |  
|                                            |  |                 | $
|                                            |  |                 |  

12.   Income Taxes

A
reconciliation of the provision for income taxes to the federal statutory rate
for 2003, 2002 and 2001 is:

|                                             |  | 2003            |       | 2002 |   | 2001  | 
|-------------------------------------------- |  | --------------- | ----- | ---- | - | ----- | 
|                                             |  |                 |       |      |   |       | 
|                                             |  | (000s omitted) |      
|Statutory
  federal income tax expense       |  | $               | 2,885 |      | $ | 4,812 | 
|State income
  taxes, net of federal benefit |  |                 | 315   |      |   | 556   | 
|Other                                        |  |                 | 24    |      |   | 123   | 
|                                             |  |                 |       |      |   |       | 
|                                             |  | $               | 3,224 |      | $ | 5,491 | 
|                                             |  |                 |       |      |   |       | 

F-25

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

12.   Income Taxes (continued)

Minority
interest is not subject to income tax because the minority interest is attributable
to entities all of which are partnerships or limited liability corporations and, as such, are not subject to
income tax.

Income tax
expense consists of the following:

| |                     |  | 2003            |       | 2002 |   | 2001  | 
| | ------------------- |  | --------------- | ----- | ---- | - | ----- | 
| |                     |  |                 |       |      |   |       | 
| |                     |  | (000s omitted) |      
| | Current
  federal   |  | $               | 1,652 |      | $ | 4,242 | 
| | Current
  state     |  |                 | 194   |      |   | 748   | 
| |                     |  |                 |       |      |   |       | 
| | Total
  current     |  |                 | 1,846 |      |   | 4,990 | 
| |                     |  |                 |       |      |   |       | 
| | Deferred
  federal  |  |                 | 1,233 |      |   | 426   | 
| | Deferred
  state    |  |                 | 145   |      |   | 75    | 
| |                     |  |                 |       |      |   |       | 
| | Total
  deferred    |  |                 | 1,378 |      |   | 501   | 
| |                     |  |                 |       |      |   |       | 
| | Total tax
  expense |  | $               | 3,224 |      | $ | 5,491 | 
| |                     |  |                 |       |      |   |       | 

Significant
components of the Companys deferred tax assets and liabilities as of December
31 are as follows:

| |                                      |  | 2003            |         | 2002 |   |         |   | 
| | ------------------------------------ |  | --------------- | ------- | ---- | - | ------- | - | 
| |                                      |  |                 |         |      |   |         |   | 
| |                                      |  | (000s omitted) |         |      |   |        
| | Deferred tax
  assets:               |  |                 |         |      |   |         |   | 
| | Deferred
  revenue                   |  | $               | 237     |      | $ | 290     |   | 
| | Accrued
  liabilities and other      |  |                 | 188     |      |   | 338     |   | 
| | Bad
  debt allowance                 |  |                 | 634     |      |   | 480     |   | 
| | Net
  operating loss carryforwards   |  |                 | 9,082   |      |   | 9,082   |   | 
| | Capital
  loss carryforward          |  |                 | 10,625  |      |   |        |   | 
| | Built-in
  losses                    |  |                 | 24,945  |      |   | 35,570  |   | 
| |                                      |  |                 |         |      |   |         |   | 
| |                                      |  |                 | 45,711  |      |   | 45,760  |   | 
| | Deferred tax
  liabilities:          |  |                 |         |      |   |         |   | 
| | Property
  and equipment             |  |                 | (299    | )    |   | (497    | ) | 
| | Net
  partnership income             |  |                 | (655    | )    |   | (601    | ) | 
| |                                      |  |                 |         |      |   |         |   | 
| |                                      |  |                 | (954    | )    |   | (1,098  | ) | 
| |                                      |  |                 |         |      |   |         |   | 
| |                                      |  |                 | 44,757  |      |   | 44,662  |   | 
| | Valuation
  allowance                |  |                 | (44,652 | )    |   | (43,123 | ) | 
| |                                      |  |                 |         |      |   |         |   | 
| | Net deferred
  tax asset (liability) |  | $               | 105     |      | $ | 1,539   |   | 
| |                                      |  |                 |         |      |   |         |   | 

F-26

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

12.   Income Taxes (continued)

The
acquisition of the stock of LGI resulted in the addition of a deferred tax
asset of $45,355,000 in December 2001. 
A full valuation allowance was established against this asset at
December 31, 2001 as the Company determined it was not more likely than not
that the asset would be realized.  During 2003, the Company completed its Section 382
analysis of its deferred tax assets and, as a result, reclassified certain of its deferred tax
assets and its valuation allowance.

The Company
has net operating loss carryforwards available to offset future taxable income
of approximately $23,926,000 at December 31, 2003 and 2002.  These net operating loss carryforwards
expire in 2021.  As of December 31, 2003 and 2002, the Company has
approximately $65,670,000 and $93,704,000, respectively, of built-in losses available to
offset future taxable income.  In
addition, the Company has capital loss carryforwards of $28,034,000 at December
31, 2003.  These capital loss
carryforwards were generated through sales of limited partnership interests in
2003 and expire in 2008.  These net
operating losses, built-in losses and capital loss carryforwards were acquired
through the purchase of LGI and are reflected as a reduction of goodwill when
utilized.  Previous changes in
ownership, as defined by section 382 of the Internal Revenue Code, have limited
the amount of net operating loss carryforwards and built-in losses the Company
can utilize in any one year.

The Company
has recorded a tax benefit to equity relating to the exercise of nonqualified
employee stock options of $122,000, $294,000 and $61,000 during the years ended
December 31, 2003, 2002 and 2001, respectively.

13.  
Employee Benefit Plans

The Company
sponsors six defined contribution 401(k) plans for all eligible employees.  The plans cover all employees who meet the
eligibility requirements of the plans. 
The total expense charged to the Companys operations relating to these
plans was approximately $200,000, $301,000 and $200,000 for the years ended
December 31, 2003, 2002 and 2001, respectively.

14.  
Goodwill and Other Intangible Assets

The Company
fully adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
(SFAS 142) effective January 1, 2002 (the Company had implemented the
transition provisions of SFAS 142 relating to its acquisition of LGI effective
December 11, 2001).   Under the
provisions of SFAS 142, goodwill and intangible assets with indefinite lives
are no longer amortized.  Following is a
summary of the 2001 impact on the Companys earnings relating to the adoption
of SFAS 142:

F-27

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

14.   Goodwill and Other Intangible Assets
(continued)

| |                                   |  | Year ended December 31, |      
| | --------------------------------- |  | ----------------------- | -----
| |                                   |  |                         |      
| |                                   |  | 2003                    |      
| |                                   |  |                         |      
| |                                   |  | (000s omitted)         |      
| | Reported net
  income             |  | $                       | 5,261
| | Add back:
  goodwill amortization |  |                         |     
| |                                   |  |                         |      
| | Adjusted net
  income             |  | $                       | 5,261
| |                                   |  |                         |      
| |                                   |  |                         |      
| | Basic income
  per share:         |  |                         |      
| | Reported
  net income             |  | $                       | 0.46 
| | Goodwill
  amortization           |  |                         |     
| |                                   |  |                         |      
| | Adjusted
  net income             |  | $                       | 0.46 
| |                                   |  |                         |      
| |                                   |  |                         |      
| | Diluted
  earnings per share:     |  |                         |      
| | Reported
  net income             |  | $                       | 0.45 
| | Goodwill
  amortization           |  |                         |     
| |                                   |  |                         |      
| | Adjusted
  net income             |  | $                       | 0.45 
| |                                   |  |                         |      

SFAS
142 requires companies with goodwill to perform annual impairment tests.  The Company completed the impairment test of
its goodwill in 2002 and 2003 and did not identify an asset impairment as a
result of the impairment test.  The Company
will continue to review its goodwill annually for impairment, or more frequently if indicators of impairment are present.

15.  
Other Comprehensive Income

The
components of comprehensive income are as follows for the year ended December
31, 2003 and 2002 are as follows:

| |                                                  |  | Year ended December 31, |      
| | ------------------------------------------------ |  | ----------------------- | -----
| |                                                  |  |                         |      
| |                                                  |  | 2003                    |      
| |                                                  |  |                         |      
| |                                                  |  | (000s omitted)         |      
| | Net income                                       |  | $                       | 5,261
| | Net change
  in fair value of interest rate swap |  |                         | 280  
| |                                                  |  |                         |      
| |                                                  |  |                         |      
| | Other
  comprehensive income                     |  | $                       | 5,541
| |                                                  |  |                         |      

16.   Earnings Per Share

Basic and
diluted income per share are computed based on the weighted average number of
common shares outstanding.  Common share
equivalents (which consist of

F-28

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

16.   Earnings Per Share (continued)

options) are excluded from the computation of diluted income per share
if the effect would be antidilutive.

The
following table sets forth the computation of earnings per share:

|                                                       |  | Year Ended December 31,                   |  
|------------------------------------------------------ |  | ----------------------------------------- | -
|                                                       |  |                                           |  
|                                                       |  | 2003                                      |  
|                                                       |  |                                           |  
|                                                       |  | (000s omitted, except per share amounts) |  
|                                                       |  |                                           |  
|Numerator:
  Net income                                |  |                                           | $
|                                                       |  |                                           |  
|Effect of
  dilutive securities:                       |  |                                           |  
|Weighted
  average shares
                 outstanding |  |                                           |  
|Stock
  options                                        |  |                                           |  
|                                                       |  |                                           |  
|Denominator
  for diluted
       earnings per share    |  |                                           |  
|                                                       |  |                                           |  
|Basic
  earnings per share                             |  |                                           | $
|Diluted
  earnings per share                           |  |                                           | $

17.   Shareholders Equity

The Company
issued 104,652 shares as incentives to employees during the year ended December
31, 2001.  The per share price at the
time of issuance was $6.45 per share. 
The Company recognized expense of $675,006 on issuance of these shares.

During the
year ended December 31, 2002, the Company issued 5,000 shares as incentives to
employees.  The per share price at the
time of issuance was $10.50 per share. 
The Company recognized expense of $52,500 on issuance of these
shares.  The Company also issued 1,000
shares to consultants for services rendered. 
The per share price at the time of issuance was $8.99 per share.  The Company recognized expense of $8,990 on
issuance of these shares.

During the
year ended December 31, 2003, the Company issued 10,000 shares as incentives to
employees.  The per share price at the
time of issuance was $6.75 per share. 
The Company recognized expense of $52,500 on issuance of these shares.

F-29

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

17.   Shareholders Equity (continued)

Stock
warrants for 100,000 shares of common stock with an exercise price of $9.90 per
share of common stock were issued to the placement agent for services rendered
during the Companys initial public offering. 
The warrants were exercisable as of May 2000 and have an estimated life
of five years.

18.  
Stock Options

Under the
HealthTronics Surgical Services, Inc. Stock Option Plan, 2,800,000 options to
purchase the Companys common stock have been approved as of December 31, 2003
and 2002.

At December
31, 2003, 2002 and 2001, options to acquire 1,282,000, 993,000 and 761,000
shares, respectively, were exercisable.

A summary
of stock option activity under the HealthTronics Surgical Services, Inc. Stock
Option Plan follows:

|                                   |  | Shares |           | Price Range |  | Weighted
  Average Price | 
|---------------------------------- |  | ------ | --------- | ----------- |  | ------------------------ | 
|                                   |  |        |           |             |  |                          | 
|Outstanding
  at January 1, 2001   |  |        | 684,000   |             |  | $  1.00  15.4375        | 
|Granted                            |  |        | 890,000   |             |  | 5.50  11.00             | 
|Exercised                          |  |        | (28,000   | )           |  | 1.00  10.50             | 
|Canceled                           |  |        | (37,000   | )           |  | 3.00  14.75             | 
|                                   |  |        |           |             |  |                          | 
|Outstanding
  at December 31, 2001 |  |        | 1,509,000 |             |  | 1.00  15.4375           | 
|Granted                            |  |        | 467,000   |             |  | 6.25  14.55             | 
|Exercised                          |  |        | (147,000  | )           |  | 1.00  14.75             | 
|Canceled                           |  |        | (47,000   | )           |  | 5.50  15.4375           | 
|                                   |  |        |           |             |  |                          | 
|Outstanding
  at December 31, 2002 |  |        | 1,782,000 |             |  | 1.00  14.625            | 
|Granted                            |  |        | 492,000   |             |  | 5.87  11.03             | 
|Exercised                          |  |        | (158,000  | )           |  | 1.00  8.95              | 
|Canceled                           |  |        | (96,000   | )           |  | 5.87  14.625            | 
|                                   |  |        |           |             |  |                          | 
|Outstanding at December 31, 2003   |  |        | 2,020,000 |             |  | $  5.099  14.55         | 
|                                   |  |        |           |             |  |                          | 

The
following table summarizes information concerning outstanding and exercisable
options under the HealthTronics Surgical Services, Inc. Stock Option Plan.

F-30

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

18.   Stock Options (continued)

|Exercise Price |  | Number 
  Outstanding |           | Weighted Average
  Remaining
  Contractual Life |  | Weighted
  Average
  Exercise
  Price |      | Number
  Exercisable |   | Weighted
  Average
  Exercise Price | 
|-------------- |  | --------------------- | --------- | ----------------------------------------------- |  | ------------------------------------- | ---- | -------------------- | - | ----------------------------------- | 
|               |  |                       |           |                                                 |  |                                       |      |                      |   |                                     | 
|$5.00  6.50   |  |                       | 720,000   |                                                 |  |                                       | 7.58 |                      | $ | 6.34                                | 
|6.51  10.50   |  |                       | 1,074,000 |                                                 |  |                                       | 7.04 |                      |   | 8.22                                | 
|$10.69  14.55 |  |                       | 226,000   |                                                 |  |                                       | 7.45 |                      | $ | 11.97                               | 
|               |  |                       |           |                                                 |  |                                       |      |                      |   |                                     | 
|               |  |                       | 2,020,000 |                                                 |  |                                       |      |                      |   |                                     | 
|               |  |                       |           |                                                 |  |                                       |      |                      |   |                                     | 

For
the Company, pro forma information regarding net income is required by SFAS
123, as amended by SFAS 148, and has been determined as if the Company had
accounted for its employee stock options granted under the fair value method of
that Statement. The fair value for these options was estimated at the date of
grant using the Black-Scholes option pricing model with the following
weighted-average assumptions for 2003, 2002 and 2001: risk-free interest rate
of 2.86%, 2.55% and 4.47%, expected life of the option of three to ten years,
volatility of 41%, 45% and 38% and no dividend yield.  The weighted-average fair value of options
granted under the HealthTronics Surgical Services, Inc. Stock Option Plan was
$4.31, $6.14 and $5.16 for 2003, 2002 and 2001, respectively.  Had the employee option grants been accounted
for under the fair value method of SFAS 123, as amended by SFAS 148, net income would be $4,123,000
($0.36 per share  basic, $0.35 per share  diluted), $6,317,000 ($0.57 per
share  basic, $0.54 per share  diluted) and $846,000 ($0.08 per share  basic
and diluted) for the years ended December 31, 2003, 2002 and 2001,
respectively.

The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable.  In addition, option
valuation models require the input of highly subjective assumptions including
the expected stock price volatility. 
Because the Companys employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in managements opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.

19.  
Operating Leases

The Company
leases certain of its office facilities under operating leases which may
include renewal options.  Certain of the
Companys office facilities are rented on a month-to-month basis.  Rent expense for 2003, 2002 and 2001 was $1,365,000,
$1,380,000 and $196,000, respectively.

F-31

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

19.  
Operating Leases (continued)

Aggregate
future minimum lease payments under operating lease agreements for terms
greater than one year as of December 31, 2003 are as follows:

|                      |  | (000s omitted) |  
|--------------------- |  | --------------- | -
|                      |  |                 |  
|Fiscal Year           |  |                 |  
|2004                  |  |                 | $
|2005                  |  |                 |  
|2006                  |  |                 |  
|2007                  |  |                 |  
|2008
  and thereafter |  |                 |  
|                      |  |                 |  
|                      |  |                 | $
|                      |  |                 |  

20.   Commitments and Contingencies

In
connection with the original distributorship agreements between the Company and
HMT, the Company committed to purchase medical devices over the five-year life
of the agreements.  Funding needed for
these commitments is approximately $6,400,000, $5,600,000, $4,000,000 and
$4,000,000 over the next four years, respectively.  Subsequent to December 31, 2003, the Company purchased the outstanding capital
stock of HMT Holding AG which holds a 72.4% voting interest in HMT (see Note
23).

Physicians
and technicians who use the Companys products are subject to the risk of
liability and malpractice claims.  Those
claims could also name the Company, based on a theory of malpractice or claim
liability.  Although the Company has not
experienced any malpractice or product liability claims, an award for such
damages could exceed the limits of its applicable insurance coverage.  Successful liability claims asserted against
the Company, to the extent not covered by insurance, could affect the Companys
ability to operate profitably.  While
management believes the Companys current level of insurance is adequate, there
can be no assurance of this.

21.  
Segment Information

The Company
applies the disclosure provisions of SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. 
Effective April 1, 2003, the Company internally reorganized its
operating structure and as a result the Companys business units have been
aggregated into three reportable operating segments: Lithotripsy, Orthotripsy
and Sales and Service.  The factors for
determining the reportable segments were based on the

F-32

---

---

HealthTronics Surgical Services, Inc. and Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

21.   Segment Information (continued)

distinct nature of their operations. 
They are disclosed as separate operating segments because these business
units each have different marketing strategies due to differences in types of
consumers, different market conditions and different capital requirements.  Asset information by segment, including
capital expenditures, and net income beyond operating margins are not provided
to the Companys chief operating decision maker.  In fiscal 2003, the Company changed from one reportable segment
to three reportable segments.  For all
periods presented, the corresponding items of segment information have been
reclassified to reflect this change.

The
Lithotripsy segment provides lithotripsy services to physicians and medical
facilities.  The Orthotripsy segment
provides non-invasive surgical solutions for a variety of orthopaedic
conditions.  The Sales & Service
segment represents sales and service of medical devices and related
products.  The Other category includes
corporate and the Companys non-reportable segments.

The Company
primarily evaluates segment performance based on the income or loss before
income taxes from its operating segments, which do not include unallocated
corporate overhead and intersegment eliminations.

|                                                   |  | For the Year Ended December 31, 2003 |       
|-------------------------------------------------- |  | ------------------------------------ | ------
|                                                   |  | (000s omitted)                      |       
|                                                   |  |                                      |       
|                                                   |  | Lithotripsy                          |       
|                                                   |  |                                      |       
|Net revenue
  from segment                         |  | $                                    | 57,046
|Less
  intersegment revenue                        |  |                                      | 1,274 
|                                                   |  |                                      |       
|Total
  consolidated net revenues by segment       |  | $                                    | 55,772
|                                                   |  |                                      |       
|                                                   |  |                                      |       
|Segment
  depreciation and amortization            |  | $                                    | 3,257 
|Plus
  unallocated depreciation and amortization   |  |                                      |       
|                                                   |  |                                      |       
|Total
  consolidated depreciation and amortization |  |                                      |       
|                                                   |  |                                      |       
|                                                   |  |                                      |       
|Equity in
  earnings of unconsolidated entities    |  | $                                    | 1,154 
|                                                   |  |                                      |       
|                                                   |  |                                      |       
|Segment
  income (loss) before income taxes        |  | $                                    | 15,188
|                                                   |  |                                      |       
|Less
  unallocated corporate expenses              |  |                                      |       
|                                                   |  |                                      |       
|Total
  consolidated income before income taxes    |  |                                      |       
|                                                   |  |                                      |       

F-33

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

21.  
Segment Information (continued)

|                                                   |  | For the Year Ended December 31, 2002(000s
  omitted) |       
|-------------------------------------------------- |  | ----------------------------------------------------- | ------
|                                                   |  |                                                       |       
|                                                   |  | Lithotripsy                                           |       
|                                                   |  |                                                       |       
|Net revenue
  from segment                         |  | $                                                     | 63,053
|Less
  intersegment revenue                        |  |                                                       | 858   
|                                                   |  |                                                       |       
|Total
  consolidated net revenues by segment       |  | $                                                     | 62,195
|                                                   |  |                                                       |       
|                                                   |  |                                                       |       
|Segment
  depreciation and amortization            |  | $                                                     | 3,608 
|Plus
  unallocated depreciation and amortization   |  |                                                       |       
|                                                   |  |                                                       |       
|Total
  consolidated depreciation and amortization |  |                                                       |       
|                                                   |  |                                                       |       
|                                                   |  |                                                       |       
|Equity in
  earnings of unconsolidated entities    |  | $                                                     | 608   
|                                                   |  |                                                       |       
|                                                   |  |                                                       |       
|Segment
  income (loss) before income taxes        |  | $                                                     | 20,778
|                                                   |  |                                                       |       
|Less
  unallocated corporate expenses              |  |                                                       |       
|                                                   |  |                                                       |       
|Total
  consolidated income before income taxes    |  |                                                       |       
|                                                   |  |                                                       |       
|                                                   |  |                                                       |       
|                                                   |  | For the Year Ended December 31, 2001(000s
  omitted) |       
|                                                   |  |                                                       |       
|                                                   |  | Lithotripsy                                           |       
|                                                   |  |                                                       |       
|Net revenue
  from segment                         |  | $                                                     | 29,560
|Less
  intersegment revenue                        |  |                                                       | 1,119 
|                                                   |  |                                                       |       
|Total
  consolidated net revenues by segment       |  | $                                                     | 28,441
|                                                   |  |                                                       |       
|                                                   |  |                                                       |       
|Segment
  depreciation and amortization            |  | $                                                     | 3,139 
|Plus
  unallocated depreciation and amortization   |  |                                                       |       
|                                                   |  |                                                       |       
|Total
  consolidated depreciation and amortization |  |                                                       |       
|                                                   |  |                                                       |       
|                                                   |  |                                                       |       
|Equity in
  earnings of unconsolidated entities    |  | $                                                     | 194   
|                                                   |  |                                                       |       
|                                                   |  |                                                       |       
|Segment
  income before income taxes               |  | $                                                     | 5,344 
|Less
  unallocated corporate expenses              |  |                                                       |       
|                                                   |  |                                                       |       
|Total
  consolidated income before income taxes    |  |                                                       |       
|                                                   |  |                                                       |       

F-34

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

22. 
Quarterly Financial Data (unaudited)

The
following is a summary of the unaudited quarterly financial information for the
years ended December 31, 2003 and 2002.

|Year ended December 31, 2003                            |         |                                           |        |         |   |          |      |         |        |      |   |        |     
|------------------------------------------------------- | ------- | ----------------------------------------- | ------ | ------- | - | -------- | ---- | ------- | ------ | ---- | - | ------ | ----
|                                                        |         | Three Months Ended                        |       
|                                                        |         |                                           |       
|Quarters ended                                          |         | March 31                                  |        | June 30 |   | Sept. 30 |      | Dec. 31 |       
|                                                        |         |                                           |        |         |   |          |      |         |       
|                                                        |         | (000s omitted, except per share amounts) |       
|Net revenues                                            |         | $                                         | 20,888 |         | $ | 21,455   |      | $       | 22,963 |      | $ | 23,100 |     
|                                                        |         |                                           |        |         |   |          |      |         |        |      |   |        |     
|Cost of
  devices, service
      parts and consumables  |         |                                           | 4,260  |         |   | 4,553    |      |         | 5,074  |      |   | 4,301  |     
|                                                        |         |                                           |        |         |   |          |      |         |        |      |   |        |     
|Net income                                              |         | $                                         | 2,129  |         | $ | 698      |      | $       | 1,766  |      | $ | 668    |     
|                                                        |         |                                           |        |         |   |          |      |         |        |      |   |        |     
|Basic and
  diluted earnings     per share:             |         |                                           |        |         |   |          |      |         |        |      |   |        |     
|                                                        | Basic   |                                           | $      | 0.19    |   | $        | 0.06 |         | $      | 0.15 |   | $      | 0.06
|                                                        |         |                                           |        |         |   |          |      |         |        |      |   |        |     
|                                                        | Diluted |                                           | $      | 0.18    |   | $        | 0.06 |         | $      | 0.15 |   | $      | 0.06
|                                                        |         |                                           |        |         |   |          |      |         |        |      |   |        |     
|                                                        |         |                                           |        |         |   |          |      |         |        |      |   |        |     
|Year ended December 31, 2002                            |         |                                           |        |         |   |          |      |         |        |      |   |        |     
|                                                        |         | Three Months Ended                        |       
|                                                        |         |                                           |       
|Quarters ended                                          |         | March 31                                  |        | June 30 |   | Sept. 30 |      | Dec. 31 |       
|                                                        |         |                                           |        |         |   |          |      |         |       
|                                                        |         | (000s omitted, except per share amounts) |       
|Net revenues                                            |         | $                                         | 21,050 |         | $ | 22,777   |      | $       | 23,071 |      | $ | 20,294 |     
|                                                        |         |                                           |        |         |   |          |      |         |        |      |   |        |     
|Cost of
  devices, service 
      parts and consumables |         |                                           | 3,041  |         |   | 3,976    |      |         | 5,739  |      |   | 4,119  |     
|                                                        |         |                                           |        |         |   |          |      |         |        |      |   |        |     
|Net income                                              |         | $                                         | 1,538  |         | $ | 1,613    |      | $       | 3,774  |      | $ | 1,618  |     
|                                                        |         |                                           |        |         |   |          |      |         |        |      |   |        |     
|Basic and
  diluted earnings     per share:             |         |                                           |        |         |   |          |      |         |        |      |   |        |     
|                                                        | Basic   |                                           | $      | 0.14    |   | $        | 0.14 |         | $      | 0.34 |   | $      | 0.14
|                                                        |         |                                           |        |         |   |          |      |         |        |      |   |        |     
|                                                        | Diluted |                                           | $      | 0.14    |   | $        | 0.14 |         | $      | 0.32 |   | $      | 0.14
|                                                        |         |                                           |        |         |   |          |      |         |        |      |   |        |     
|                                                        |         |                                           |        |         |   |          |      |         |        |      |   |        |     

Certain
quarterly amounts were reclassified to conform to year-end presentation.

23. 
Subsequent Events

On March 3,
2004, HealthTronics formed a wholly owned Swiss corporation, HealthTronics GmbH
(HTRN GmbH).  On March 5, 2004,
pursuant to the February 18, 2004 Sale and Purchase Agreement, the Company,
through HTRN GmbH, purchased all of the issued and outstanding capital stock of
HMT Holding AG (HMT Holding) for $1,000 and 800,000 shares of the Companys
common stock.  HMT Holding owns a 39.7%
equity interest and a 72.4% voting interest in HMT High Medical Technologies
AG, the Companys

F-35

---

---

HealthTronics Surgical Services, Inc. and
Subsidiaries

Notes to Consolidated Financial Statements
(Continued)

December 31, 2003

23. 
Subsequent Events (continued)

primary device supplier.

On March 5,
2004 the Company amended and restated its primary bank term loan and line of credit
facility.  The revised agreement
provides for a $25.0 million line of credit, which is renewable every 90 days,
matures on March 5, 2007 and is secured by certain accounts receivable,
inventory and equipment and the Companys equity interest in its subsidiaries
and bears interest at the stated bank rate (3.35% at March 5, 2004).

F-36

---

---

|Item 9: | Changes in
  and Disagreements with Accountants on Accounting and Financial Disclosure.
|------- | ---------------------------------------------------------------------------------------

Not
applicable.

|Item 9A: | Controls
  and Procedures.
|-------- | --------------------------

(a)     Evaluation
of Disclosure Controls and Procedures.

Our Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of our disclosure controls and procedures (as such terms are defined in Rules
13(a)-15(e) and 15(d)-15(e)) under the Securities Exchange Act of 1934, as
amended (the Exchange Act) as of December 31, 2003 of this Form 10-K (the
Evaluation Date).  Based on such
evaluation, such officers have concluded that, as of the Evaluation Date, our
disclosure controls and procedures are effective in alerting them on a timely
basis to material information relating to us(including our consolidated
subsidiaries) required to be included in our periodic filings under the Exchange
Act.

(b)     Changes
in Disclosure Controls and Procedures.

Since the
Evaluation Date, there have not been any significant changes in our disclosure
controls and procedures or in other factors that could significantly affect
such controls.

Part III

|Item 10: | Directors
  and Executive Officers of the Registrant.
|-------- | -----------------------------------------------------

Information
about the directors of the Company is in Election of Directors - Information
Concerning the Nominees and the Incumbent Directors of the Companys 2004
Proxy Statement and is incorporated into this report by reference. Information
about the executive officers of the Company is in Executive Officers of the
Company of the Companys 2004 Proxy Statement and is incorporated into this
report by reference. Information about compliance with Section 16(a) of the
Exchange Act of 1934, as amended, by the Companys executive officers and
directors, persons owning more than 10% of the Companys common stock, and
their affiliates who are required to comply with such reporting requirements,
is in Election of Directors - Section 16(a) Beneficial Ownership Reporting Compliance
of the Companys 2004 Proxy Statement, and is incorporated into this report by
reference. Information about the audit committee under the heading Audit of the Companys
2004 Proxy Statement is incorporated by reference into this report.

The Company has
adopted a code of business conduct and ethics applicable to the Companys Directors,
officers (including the Companys principal executive officer, principal financial officer and controller)
and employees, known as the Code of Business Conduct & Ethics. The Code of Business Conduct & Ethics is available
on the Companys website. In the event that we amend or waive any of the provisions of the Code of
Business Conduct & Ethics applicable to our principal executive officer, principal financial officer or
controller, we intend to disclose the same on the Companys website at www.healthtronics.com.

|Item 11: | Executive
  Compensation.
|-------- | -------------------------

Information
about director compensation is in Election of Directors - Compensation of
Directors of the Companys 2004 Proxy Statement, and information about
executive compensation is in Executive Compensation in the Companys 2004
Proxy Statement, all of which is incorporated into this report by reference.

42

---

---

|Item 12: | Security
  Ownership of Certain Beneficial Owners and Management and Related Stockholder
  Matters.
|-------- | ---------------------------------------------------------------------------------------------------

Information
about ownership of the Companys common stock by certain persons is in General
Information about Voting - Principal Shareholders and Election of Directors -
Security Ownership of Directors and Officers of the Companys 2004 Proxy
Statement, all of which is incorporated into this report by reference.

|Item 13: | Certain
  Relationships and Related Transactions.
|-------- | -------------------------------------------------

Information
about certain transactions is in Certain Relationships and Related
Transactions of the Companys 2004 Proxy Statement, all of which is
incorporated into this report by reference.

|Item 14: | Principal
  Accountant Fees and Services.
|-------- | -----------------------------------------

The
information under the heading Audit Fees and All Other Fees in the Companys
2004 Proxy Statement is incorporated herein by reference.

|         | Part IV                                                           
|-------- | ------------------------------------------------------------------
|         |                                                                   
|         |                                                                   
|         |                                                                   
|         |                                                                   
|Item 15: | Exhibits,
  Financial Statement Schedules and Reports on Form 8-K.

(a)     1.     Financial
Statements.

The
following consolidated financial statements of our company and our consolidated
subsidiaries and the Report of the Independent Auditors are included in Part
II, Item 8 of this report:

|Report of Independent Auditors                  | F-1
|----------------------------------------------- | ---
|Consolidated Balance Sheets                     | F-2
|Consolidated Statements of Income               | F-4
|Consolidated Statements of Shareholders Equity | F-5
|Consolidated Statements of Cash Flows           | F-6
|Notes to Consolidated Financial Statements      | F-8

2.     Financial
Statement Schedule.

The
following financial statement schedule is included in Part IV of this report:

43

---

---

Schedule II - Valuation and Qualifying
Accounts and Reserves

|                                |                                             | Balance
  Beginning
  of Period |   | Charged
  to
  Income |  | Deduction
  from
  Reserve |     | Other |  | Balance
  End of
  Period |  
|------------------------------- | ------------------------------------------- | ------------------------------- | - | --------------------- |  | -------------------------- | --- | ----- |  | ------------------------- | -
|                                |                                             |                                 |   |                       |  |                            |     |       |  |                           |  
|                                |                                             | (000s omitted)                 |  
|Year Ended December 31,
  2003: |                                             |                                 |   |                       |  |                            |     |       |  |                           |  
|                                | Allowance for Doubtful
  Accounts           |                                 | $ | 1,264                 |  |                            | 515 |       |  |                          |  
|                                |                                             |                                 |   |                       |  |                            |     |       |  |                           |  
|                                | Income Tax Asset Valuation 
      Allowance |                                 | $ | 43,123                |  |                            |    |       |  |                          |  
|                                |                                             |                                 |   |                       |  |                            |     |       |  |                           |  
|Year Ended December 31,
  2002: |                                             |                                 |   |                       |  |                            |     |       |  |                           |  
|                                | Allowance for Doubtful
  Accounts           |                                 | $ | 1,455                 |  |                            | 533 |       |  | (398                      | )
|                                |                                             |                                 |   |                       |  |                            |     |       |  |                           |  
|                                | Income Tax Asset Valuation 
      Allowance |                                 | $ | 45,866                |  |                            |    |       |  |                          |  
|                                |                                             |                                 |   |                       |  |                            |     |       |  |                           |  
|Year Ended December 31,
  2001: |                                             |                                 |   |                       |  |                            |     |       |  |                           |  
|                                | Allowance for Doubtful
  Accounts           |                                 | $ | 701                   |  |                            | 491 |       |  |                          |  
|                                |                                             |                                 |   |                       |  |                            |     |       |  |                           |  
|                                | Income Tax Asset Valuation 
      Allowance |                                 | $ |                      |  |                            |    |       |  |                          |  
|                                |                                             |                                 |   |                       |  |                            |     |       |  |                           |  

All
other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and, therefore, have been
omitted.

44

---

---

3.     Exhibits.

| | Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                
| | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |             |  |                                                                                                                                                                                                                                                                                                                            
| |             |  |                                                                                                                                                                                                                                                                                                                            
| | 2.1         |  | Stock Purchase Agreement
  dated December 11, 2001 by and among the Company, IHS and LGI, incorporated
  by reference to Exhibit 2.1 to Form 8-K dated December 26, 2001 (Reg. No.
  000-30406)                                                                                                                            
| |             |  |                                                                                                                                                                                                                                                                                                                            
| | 2.2         |  | Sale and Purchase Agreement
  regarding HMT Holding AG dated February 18, 2003 by and among the Company,
  HealthTronics GmbH and Dr. Andreas Baenziger, Norbert Brill, Thomas Fischer,
  Wilfred Thom and Roland Germann, incorporated by reference to Exhibit 2.1 to
  Form 8-K dated March 12, 2004 (Reg. No. 000-30406)
| |             |  |                                                                                                                                                                                                                                                                                                                            
| | 3.1         |  | Amended Articles of
  Incorporation of HealthTronics Surgical Services, Inc., incorporated by
  reference to Exhibit 3.1 to the Companys Annual Report on Form 10-KSB filed
  April 1, 2002 (Reg. No. 000-30406)                                                                                                          
| |             |  |                                                                                                                                                                                                                                                                                                                            
| | 3.2         |  | Restated Bylaws of
  HealthTronics Surgical Services, Inc., incorporated by reference to Exhibit
  3.2 to the Companys Annual Report on Form 10-KSB filed April 1, 2002 (Reg.
  No. 000-30406)                                                                                                                            
| |             |  |                                                                                                                                                                                                                                                                                                                            
| | 10.1        |  | Entity Interest Agreement
  between HealthTronics, Inc. and USL, incorporated by reference to Exhibit
  10.2 to the Companys Registration Statement on Form SB-2 (Reg. No.
  333-66977)                                                                                                                                   
| |             |  |                                                                                                                                                                                                                                                                                                                            
| | 10.2        |  | Distributorship Agreement
  between HealthTronics, Inc. and USL and amendments thereto, incorporated by
  reference to Exhibit 10.3 to the Companys Registration Statement on Form
  SB-2 (Reg. No. 333-66977)                                                                                                            
| |             |  |                                                                                                                                                                                                                                                                                                                            
| | 10.3        |  | Patent License Agreement
  dated June 3, 1995 between OssaTronics, Inc. and HMT High Medical
  Technologies GmbH along with amendments thereto, incorporated by reference to
  Exhibit 10.4 to the Companys Registration Statement on Form SB-2 (Reg. No.
  333-66977)                                                    
| |             |  |                                                                                                                                                                                                                                                                                                                            
| | 10.3 (a)    |  | Patent Purchase Agreement
  between VISSH Voennomedicinsky Institute and HMT, incorporated by reference
  to Exhibit 10.4 (a) to the Companys Registration Statement on Form SB-2
  (Reg. No. 333-66977)                                                                                                                  

45

---

---

| | Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                          
| | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |             |  |                                                                                                                                                                                                                                                                                                                                                      
| |             |  |                                                                                                                                                                                                                                                                                                                                                      
| | 10.3 (b)    |  | U.S. Patent Number
  4,979,501 for a method and an apparatus for medical treatment of the
  pathological state of bones, incorporated by reference to Exhibit 10.4 (b) to
  the Companys Registration Statement on Form SB-2 (Reg. No. 333-66977)                                                                                                   
| |             |  |                                                                                                                                                                                                                                                                                                                                                      
| | 10.3 (c)    |  | Provisional Patent
  Application for the use of acoustic shock waves in the treatment of medical,
  dental and veterinary conditions, incorporated by reference to Exhibit 10.4
  (c) to the Companys Registration Statement on Form SB-2 (Reg. No. 333-66977)                                                                                      
| |             |  |                                                                                                                                                                                                                                                                                                                                                      
| | 10.3 (d)    |  | U.S. Patent Number
  5,595,178 for a system and an apparatus for treatment of degenerative bone,
  incorporated by reference to Exhibit 10.4 (d) to the Companys Registration
  Statement on Form SB-2 (Reg. No. 333-66977)                                                                                                                         
| |             |  |                                                                                                                                                                                                                                                                                                                                                      
| | 10.3 (e)    |  | Second Amendment to Patent
  License Agreement, incorporated by reference to Exhibit 10.4 (e) to the
  Companys Registration Statement on Form SB-2 (Reg. No. 333-66977)                                                                                                                                                                            
| |             |  |                                                                                                                                                                                                                                                                                                                                                      
| | 10.4        |  | Distributorship and
  Manufacturing Agreements between HealthTronics and HMT for both the
  OssaTron(R) (11/22/94) and the LithoTron(R) (1/24/96) and amendments to both
  agreements dated March 1, 1996 and August 7, 1996, incorporated by reference
  to Exhibit 10.5 to the Companys Registration Statement on Form SB-2 (Reg.
  No. 333-66977)
| |             |  |                                                                                                                                                                                                                                                                                                                                                      
| | 10.5        |  | HealthTronics 401(k) plan,
  incorporated by reference to Exhibit 10.6 to the Companys Registration
  Statement on Form SB-2 (Reg. No. 333-66977)                                                                                                                                                                                                  
| |             |  |                                                                                                                                                                                                                                                                                                                                                      
| | 10.6        |  | Agreement dated February
  15, 1995 between OssaTronics, Inc., John Warlick, Argil Wheelock, MD,
  Karl-Heinz Restle and Scott A. Cochran, incorporated by reference to Exhibit
  10.7 to the Companys Registration Statement on Form SB-2 (Reg. No.
  333-66977)                                                                                   
| |             |  |                                                                                                                                                                                                                                                                                                                                                      
| | 10.7        |  | Manufacturing Agreement
  dated June 20, 1996 between HealthTronics and HMT, incorporated by reference
  to Exhibit 10.8 of Form SB-2 (Reg. No. 333-66977)                                                                                                                                                                                           
| |             |  |                                                                                                                                                                                                                                                                                                                                                      
| | 10.8        |  | Employment Agreement with
  Ms. Beck, incorporated by reference to Exhibit 10.11 of Form SB-2 (Reg. No.
  333-66977)*                                                                                                                                                                                                                                

---

46

---

---

| | Exhibit No. |  | Description                                                                                                                                                                                                                                                         
| | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |             |  |                                                                                                                                                                                                                                                                     
| |             |  |                                                                                                                                                                                                                                                                     
| | 10.9        |  | Employment Agreement with
  Dr. Wheelock, incorporated by reference to Exhibit 10.9 to the Companys
  Annual Report on Form 10-KSB filed April 1, 2002 (Reg. No. 000-30406)*                                                                                       
| |             |  |                                                                                                                                                                                                                                                                     
| | 10.10       |  | Employment Agreement with
  Mr. McGahan, incorporated by reference to Exhibit 10.11 to the Companys
  Annual Report on Form 10-KSB filed April 1, 2002 (Reg. No. 000-30406)*                                                                                       
| |             |  |                                                                                                                                                                                                                                                                     
| | 10.11       |  | Employment Agreement with
  Mr. Biderman, incorporated by reference to Exhibit 10.11 to the Companys
  Annual Report on Form 10-K filed March 26, 2003 (Reg. No. 000-30406)*                                                                                       
| |             |  |                                                                                                                                                                                                                                                                     
| | 10.12       |  | Credit Agreement between
  HealthTronics Surgical Services, Inc. and Bank of America, N.A.,
  incorporated by reference to Exhibit 10.12 to the Companys Annual Report on
  Form 10-KSB filed April 1, 2002 (Reg. No. 000-30406)                                   
| |             |  |                                                                                                                                                                                                                                                                     
| | 10.12 (a)   |  | Amended Credit Agreement
  dated March 5, 2004 by and among HealthTronics Surgical Services, Inc.,
  SunTrust Bank and Regions Bank                                                                                                                                 
| |             |  |                                                                                                                                                                                                                                                                     
| | 10.13       |  | Lease Agreement between
  HealthTronics, Inc. and Prucrow Industrial Properties, L.P. dated January 27, 2000, incorporated by
  reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-QSB
  filed May 15, 2000 (Reg. No. 000-30406)                
| |             |  |                                                                                                                                                                                                                                                                     
| | 10.14       |  | First Amendment to Lease
  Agreement dated December 30, 2002 between HealthTronics, Inc. and LIT
  PC, L.P., incorporated by
  reference to Exhibit 10.14 to the Companys Annual Report on Form 10-K filed
  March 26, 2003 (Reg. No. 000-30406)                   
| |             |  |                                                                                                                                                                                                                                                                     
| | 10.15       |  | Second Amendment to Lease
  Agreement dated February 21, 2003 between HealthTronics Surgical Services,
  Inc. and LIT PC, L.P., incorporated
  by reference to Exhibit 10.15 to the Companys Annual Report on Form 10-K
  filed March 26, 2003 (Reg. No. 000-30406)
| |             |  |                                                                                                                                                                                                                                                                     
| | 10.16       |  | Deferred Compensation Plan
  for HealthTronics Surgical Services, Inc., incorporated by reference to
  Exhibit 10.16 to the Companys Annual Report on Form 10-K filed March 26,
  2003 (Reg. No. 000-30406)*                                                       
| |             |  |                                                                                                                                                                                                                                                                     
| | 10.17       |  | Amended and Restated
  Employment Agreement with Dr. Wheelock*                                                                                                                                                                                                      

---

47

---

---

| | Exhibit No. |  | Description                                                                                                                                                                                                                                                                                  
| | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |             |  |                                                                                                                                                                                                                                                                                              
| |             |  |                                                                                                                                                                                                                                                                                              
| | 10.18       |  | Amended and Restated
  Employment Agreement with Mr. McGahan*                                                                                                                                                                                                                                
| |             |  |                                                                                                                                                                                                                                                                                              
| | 10.19       |  | Amended and Restated
  Employment Agreement with Mr. Biderman*                                                                                                                                                                                                                               
| |             |  |                                                                                                                                                                                                                                                                                              
| | 10.20       |  | Employment Agreement with
  Dr. Bänziger*                                                                                                                                                                                                                                                    
| |             |  |                                                                                                                                                                                                                                                                                              
| | 10.20 (a)   |  | First Amendment to
  Employment Agreement with Dr. Bänziger*                                                                                                                                                                                                                                 
| |             |  |                                                                                                                                                                                                                                                                                              
| | 10.20 (b)   |  | Second Amendment to
  Employment Agreement with Dr. Bänizger*                                                                                                                                                                                                                                
| |             |  |                                                                                                                                                                                                                                                                                              
| | 10.21       |  | Deferred Compensation Plan
  for HealthTronics Surgical Services, Inc. adopted January 1, 2004*                                                                                                                                                                                              
| |             |  |                                                                                                                                                                                                                                                                                              
| | 21.1        |  | Subsidiaries                                                                                                                                                                                                                                                                                 
| |             |  |                                                                                                                                                                                                                                                                                              
| | 23.1        |  | Consent of Independent
  Auditors                                                                                                                                                                                                                                                            
| |             |  |                                                                                                                                                                                                                                                                                              
| | 31.1        |  | Rule 13a-14(a) / 15d-14(a)
  Certification of Chief Executive Officer                                                                                                                                                                                                                        
| |             |  |                                                                                                                                                                                                                                                                                              
| | 31.2        |  | Rule 13a-14(a) / 15d-14(a)
  Certification of Chief Financial Officer                                                                                                                                                                                                                        
| |             |  |                                                                                                                                                                                                                                                                                              
| | 32.1        |  | Certifications required by
  Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18
  of the United States Code (18 U.S.C. 1350) of Chief Executive Officer and
  Chief Financial Officer                                                                               
| |             |  |                                                                                                                                                                                                                                                                                              
| | 99.1        |  | Letter from FDA dated
  7/21/97 approving the PMA for the LithoTron(R) Lithotripsy System, subject to
  certain conditions, incorporated by reference to Exhibit 99.1 of Form SB-2
  (Reg. No. 333-66977)                                                                                    
| |             |  |                                                                                                                                                                                                                                                                                              
| | 99.2        |  | Letter from FDA dated
  10/12/00 approving the PMA for the OssaTron(R) Orthopaedic Extracorporeal
  Shock Wave System, subject to certain conditions, incorporated by reference
  to Exhibit 99.2 to the Companys Annual Report on Form 10-KSB40 filed March
  28, 2001 (Reg. No. 000-30406)

---

48

---

---

| | Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                         
| | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |             |  |                                                                                                                                                                                                                                                                                                                     
| |             |  |                                                                                                                                                                                                                                                                                                                     
| | 99.3        |  | Letter from FDA dated
  3/14/03 approving the PMA for the OssaTron(R) Orthopaedic Extracorporeal
  Shock Wave System for the treatment of lateral epicondylitis or tennis elbow,
  incorporated by reference to Exhibit 99.3 to the Companys Annual Report on
  Form 10-K filed March 26, 2003 (Reg. No. 000-30406)

(b)     Reports
on Form 8-K

| | During the
  fourth quarter of 2003, the Company filed the following current report on
  Form 8-K:
| | --------------------------------------------------------------------------------------------------

| | Date of Report      |  | Description                                                                                                 
| | ------------------- |  | ------------------------------------------------------------------------------------------------------------
| |                     |  |                                                                                                             
| | November 10,
  2003 |  | Furnished
  text of press release reporting the Companys financial results for the third
  quarter of 2003.

(c)     See Item 15(A)(3) and separate Exhibit
Index attached hereto.

(d)     Not applicable.

49

---

---

Signatures

Pursuant
to the requirements of Section 13 or 15(d) of 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 SURGICAL
  SERVICES, INC.
| |  | ---------------------------------------
| |  |                                        
| |  | By:                                    
| |  |                                        
| |  |                                        

Dated:
March 15, 2004

50

---

---

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 indicated on March 15, 2004.

|Signature |                     | Title                           
|--------- | ------------------- | --------------------------------
|          |                     |                                 
|          |                     |                                 
|/s/       | Argil J. Wheelock   |                                 
|          |                     | Chief Executive Officer         
|          | Argil J. Wheelock   |                                 
|          |                     | (Principal Executive
  Officer) 
|          |                     |                                 
|/s/       | Martin J. McGahan   |                                 
|          |                     | (Principal Financial
  Officer) 
|          | Martin J. McGahan   |                                 
|          |                     |                                 
|/s/       | Victoria W. Beck    |                                 
|          |                     | (Principal Accounting
  Officer)
|          | Victoria W. Beck    |                                 
|          |                     |                                 
|/s/       | James R. Andrews    |                                 
|          |                     |                                 
|          | James R. Andrews    |                                 
|          |                     |                                 
|/s/       | Scott A. Cochran    |                                 
|          |                     |                                 
|          | Scott A. Cochran    |                                 
|          |                     |                                 
|/s/       | Donny R. Jackson    |                                 
|          |                     |                                 
|          | Donny R. Jackson    |                                 
|          |                     |                                 
|/s/       | Timothy J. Lindgren |                                 
|          |                     |                                 
|          | Timothy J. Lindgren |                                 
|          |                     |                                 
|/s/       | Russell H. Maddox   |                                 
|          |                     |                                 
|          | Russell H. Maddox   |                                 

51

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| |          |  | Exhibit Index                                                                                                                                                                                                                                                                                                              
| | -------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |          |  |                                                                                                                                                                                                                                                                                                                            
| |          |  |                                                                                                                                                                                                                                                                                                                            
| | 2.1      |  | Stock Purchase Agreement
  dated December 11, 2001 by and among the Company, IHS and LGI, incorporated
  by reference to Exhibit 2.1 to Form 8-K dated December 26, 2001 (Reg. No.
  000-30406)                                                                                                                            
| |          |  |                                                                                                                                                                                                                                                                                                                            
| | 2.2      |  | Sale and Purchase Agreement
  regarding HMT Holding AG dated February 18, 2003 by and among the Company,
  HealthTronics GmbH and Dr. Andreas Baenziger, Norbert Brill, Thomas Fischer,
  Wilfred Thom and Roland Germann, incorporated by reference to Exhibit 2.1 to
  Form 8-K dated March 12, 2004 (Reg. No. 000-30406)
| |          |  |                                                                                                                                                                                                                                                                                                                            
| | 3.1      |  | Amended Articles of
  Incorporation of HealthTronics Surgical Services, Inc., incorporated by
  reference to Exhibit 3.1 to the Companys Annual Report on Form 10-KSB filed
  April 1, 2002 (Reg. No. 000-30406)                                                                                                          
| |          |  |                                                                                                                                                                                                                                                                                                                            
| | 3.2      |  | Restated Bylaws of
  HealthTronics Surgical Services, Inc., incorporated by reference to Exhibit
  3.2 to the Companys Annual Report on Form 10-KSB filed April 1, 2002 (Reg.
  No. 000-30406)                                                                                                                            
| |          |  |                                                                                                                                                                                                                                                                                                                            
| | 10.1     |  | Entity Interest Agreement
  between HealthTronics, Inc. and USL, incorporated by reference to Exhibit
  10.2 to the Companys Registration Statement on Form SB-2 (Reg. No.
  333-66977)                                                                                                                                   
| |          |  |                                                                                                                                                                                                                                                                                                                            
| | 10.2     |  | Distributorship Agreement
  between HealthTronics, Inc. and USL and amendments thereto, incorporated by
  reference to Exhibit 10.3 to the Companys Registration Statement on Form
  SB-2 (Reg. No. 333-66977)                                                                                                            
| |          |  |                                                                                                                                                                                                                                                                                                                            
| | 10.3     |  | Patent License Agreement
  dated June 3, 1995 between OssaTronics, Inc. and HMT High Medical
  Technologies GmbH along with amendments thereto, incorporated by reference to
  Exhibit 10.4 to the Companys Registration Statement on Form SB-2 (Reg. No.
  333-66977)                                                    
| |          |  |                                                                                                                                                                                                                                                                                                                            
| | 10.3 (a) |  | Patent Purchase Agreement
  between VISSH Voennomedicinsky Institute and HMT, incorporated by reference
  to Exhibit 10.4 (a) to the Companys Registration Statement on Form SB-2
  (Reg. No. 333-66977)                                                                                                                  
| |          |  |                                                                                                                                                                                                                                                                                                                            
| | 10.3 (b) |  | U.S. Patent Number
  4,979,501 for a method and an apparatus for medical treatment of the
  pathological state of bones, incorporated by reference to Exhibit 10.4 (b) to
  the Companys Registration Statement on Form SB-2 (Reg. No. 333-66977)                                                                         

52

---

---

| | 10.3 (c) |  | Provisional Patent
  Application for the use of acoustic shock waves in the treatment of medical,
  dental and veterinary conditions, incorporated by reference to Exhibit 10.4
  (c) to the Companys Registration Statement on Form SB-2 (Reg. No. 333-66977)                                                                                      
| | -------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |          |  |                                                                                                                                                                                                                                                                                                                                                      
| | 10.3 (d) |  | U.S. Patent Number
  5,595,178 for a system and an apparatus for treatment of degenerative bone,
  incorporated by reference to Exhibit 10.4 (d) to the Companys Registration
  Statement on Form SB-2 (Reg. No. 333-66977)                                                                                                                         
| |          |  |                                                                                                                                                                                                                                                                                                                                                      
| | 10.3 (e) |  | Second Amendment to Patent
  License Agreement, incorporated by reference to Exhibit 10.4 (e) to the
  Companys Registration Statement on Form SB-2 (Reg. No. 333-66977)                                                                                                                                                                            
| |          |  |                                                                                                                                                                                                                                                                                                                                                      
| | 10.4     |  | Distributorship and
  Manufacturing Agreements between HealthTronics and HMT for both the
  OssaTron(R) (11/22/94) and the LithoTron(R) (1/24/96) and amendments to both
  agreements dated March 1, 1996 and August 7, 1996, incorporated by reference
  to Exhibit 10.5 to the Companys Registration Statement on Form SB-2 (Reg.
  No. 333-66977)
| |          |  |                                                                                                                                                                                                                                                                                                                                                      
| | 10.5     |  | HealthTronics 401(k) plan,
  incorporated by reference to Exhibit 10.6 to the Companys Registration
  Statement on Form SB-2 (Reg. No. 333-66977)                                                                                                                                                                                                  
| |          |  |                                                                                                                                                                                                                                                                                                                                                      
| | 10.6     |  | Agreement dated February
  15, 1995 between OssaTronics, Inc., John Warlick, Argil Wheelock, MD,
  Karl-Heinz Restle and Scott A. Cochran, incorporated by reference to Exhibit
  10.7 to the Companys Registration Statement on Form SB-2 (Reg. No.
  333-66977)                                                                                   
| |          |  |                                                                                                                                                                                                                                                                                                                                                      
| | 10.7     |  | Manufacturing Agreement
  dated June 20, 1996 between HealthTronics and HMT, incorporated by reference
  to Exhibit 10.8 of Form SB-2 (Reg. No. 333-66977)                                                                                                                                                                                           
| |          |  |                                                                                                                                                                                                                                                                                                                                                      
| | 10.8     |  | Employment Agreement with
  Ms. Beck, incorporated by reference to Exhibit 10.11 of Form SB-2 (Reg. No.
  333-66977)*                                                                                                                                                                                                                                
| |          |  |                                                                                                                                                                                                                                                                                                                                                      
| | 10.10    |  | Employment Agreement with
  Dr. Wheelock, incorporated by reference to Exhibit 10.9 to the Companys
  Annual Report on Form 10-KSB filed April 1, 2002 (Reg. No. 000-30406)*                                                                                                                                                                        
| |          |  |                                                                                                                                                                                                                                                                                                                                                      
| | 10.10    |  | Employment Agreement with
  Mr. McGahan, incorporated by reference to Exhibit 10.11 to the Companys
  Annual Report on Form 10-KSB filed April 1, 2002 (Reg. No. 000-30406)*                                                                                                                                                                        

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53

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| | 10.11     |  | Employment Agreement with
  Mr. Biderman, incorporated by reference to Exhibit 10.11 to the Companys
  Annual Report on Form 10-K filed March 26, 2003 (Reg. No. 000-30406)*                                                                                       
| | --------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |           |  |                                                                                                                                                                                                                                                                     
| | 10.12     |  | Credit Agreement between
  HealthTronics Surgical Services, Inc. and Bank of America, N.A., incorporated
  by reference to Exhibit 10.12 to the Companys Annual Report on Form 10-KSB
  filed April 1, 2002 (Reg. No. 000-30406)                                   
| |           |  |                                                                                                                                                                                                                                                                     
| | 10.12 (a) |  | Amended Credit Agreement
  dated March 5, 2004 by and among HealthTronics Surgical Services, Inc.,
  SunTrust Bank and Regions Bank                                                                                                                                 
| |           |  |                                                                                                                                                                                                                                                                     
| | 10.13     |  | Lease Agreement between
  HealthTronics, Inc. and Prucrow Industrial Properties, L.P. dated January 27, 2000, incorporated by
  reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-QSB
  filed May 15, 2000 (Reg. No. 000-30406)                
| |           |  |                                                                                                                                                                                                                                                                     
| | 10.14     |  | First Amendment to Lease
  Agreement dated December 30, 2002 between HealthTronics, Inc. and LIT
  PC, L.P., incorporated by
  reference to Exhibit 10.14 to the Companys Annual Report on Form 10-K filed
  March 26, 2003 (Reg. No. 000-30406)                   
| |           |  |                                                                                                                                                                                                                                                                     
| | 10.15     |  | Second Amendment to Lease
  Agreement dated February 21, 2003 between HealthTronics Surgical Services,
  Inc. and LIT PC, L.P., incorporated
  by reference to Exhibit 10.15 to the Companys Annual Report on Form 10-K
  filed March 26, 2003 (Reg. No. 000-30406)
| |           |  |                                                                                                                                                                                                                                                                     
| | 10.16     |  | Deferred Compensation Plan
  for HealthTronics Surgical Services, Inc., incorporated by reference to
  Exhibit 10.16 to the Companys Annual Report on Form 10-K filed March 26,
  2003 (Reg. No. 000-30406)*                                                       
| |           |  |                                                                                                                                                                                                                                                                     
| | 10.17     |  | Amended and Restated
  Employment Agreement with Dr. Wheelock*                                                                                                                                                                                                      
| |           |  |                                                                                                                                                                                                                                                                     
| | 10.18     |  | Amended and Restated
  Employment Agreement with Mr. McGahan*                                                                                                                                                                                                       
| |           |  |                                                                                                                                                                                                                                                                     
| | 10.19     |  | Amended and Restated
  Employment Agreement with Mr. Biderman*                                                                                                                                                                                                      
| |           |  |                                                                                                                                                                                                                                                                     
| | 10.20     |  | Employment Agreement with
  Dr. Bänziger*                                                                                                                                                                                                                           
| |           |  |                                                                                                                                                                                                                                                                     
| | 10.20 (a) |  | First Amendment to
  Employment Agreement with Dr. Bänziger*                                                                                                                                                                                                        
| |           |  |                                                                                                                                                                                                                                                                     
| | 10.20 (b) |  | Second Amendment to
  Employment Agreement with Dr. Bänizger*                                                                                                                                                                                                       

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54

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| | 10.21 |  | Deferred Compensation Plan
  for HealthTronics Surgical Services, Inc. adopted January 1, 2004*                                                                                                                                                                                                                     
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |  |                                                                                                                                                                                                                                                                                                                     
| | 21.1  |  | Subsidiaries                                                                                                                                                                                                                                                                                                        
| |       |  |                                                                                                                                                                                                                                                                                                                     
| | 23.1  |  | Consent of Independent
  Auditors                                                                                                                                                                                                                                                                                   
| |       |  |                                                                                                                                                                                                                                                                                                                     
| | 31.1  |  | Rule 13a-14(a) / 15d-14(a)
  Certification of Chief Executive Officer                                                                                                                                                                                                                                               
| |       |  |                                                                                                                                                                                                                                                                                                                     
| | 31.2  |  | Rule 13a-14(a) / 15d-14(a)
  Certification of Chief Financial Officer                                                                                                                                                                                                                                               
| |       |  |                                                                                                                                                                                                                                                                                                                     
| | 32.1  |  | Certifications required by
  Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18
  of the United States Code (18 U.S.C. 1350) of Chief Executive Officer and
  Chief Financial Officer                                                                                                      
| |       |  |                                                                                                                                                                                                                                                                                                                     
| | 99.1  |  | Letter from FDA dated
  7/21/97 approving the PMA for the LithoTron(R) Lithotripsy System, subject to
  certain conditions, incorporated by reference to Exhibit 99.1 of Form SB-2
  (Reg. No. 333-66977)                                                                                                           
| |       |  |                                                                                                                                                                                                                                                                                                                     
| | 99.2  |  | Letter from FDA dated
  10/12/00 approving the PMA for the OssaTron(R) Orthopaedic Extracorporeal
  Shock Wave System, subject to certain conditions, incorporated by reference
  to Exhibit 99.2 to the Companys Annual Report on Form 10-KSB40 filed March
  28, 2001 (Reg. No. 000-30406)                       
| |       |  |                                                                                                                                                                                                                                                                                                                     
| | 99.3  |  | Letter from FDA dated
  3/14/03 approving the PMA for the OssaTron(R) Orthopaedic Extracorporeal
  Shock Wave System for the treatment of lateral epicondylitis or tennis elbow,
  incorporated by reference to Exhibit 99.3 to the Companys Annual Report on
  Form 10-K filed March 26, 2003 (Reg. No. 000-30406)

55

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