_______________________________________________________

UNITED STATESSECURITIES AND EXCHANGE
COMMISSIONWASHINGTON, D.C. 20549

_____________________________

FORM 10-K

[X]                          Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
                                              For the fiscal year ended December 31, 2008
                                                                  OR
                     [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
                                          For the transition period from ________ to ________


Commission File Number: 000-30406

_____________________________

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

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

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

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

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

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

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

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




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

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

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

          State the aggregate market value of the voting and non-voting  common equity held by  non-affiliates  computed by reference to the
price at which the common  equity was sold,  or the average bid and asked price of such common  equity,  as of the last business day of
the registrants most recently completed second fiscal quarter.Aggregate Market Value at June 30, 2008: $ 87,066,000
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

February 28, 2009
37,619,384
| | --------------------------------------------------- |  | -------------------------------------------------------------

DOCUMENTS INCORPORATED BY REFERENCE

|Selected  portions of the  Registrants  definitive proxy material for the 2009 annual meeting of stockholders are incorporated by
reference into Part III of the Form 10-K.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

|HEALTHTRONICS, INC.
                                            ANNUAL REPORT ON FORM 10-K
                                    FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
                                                      PART I
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# ITEM 1.    

BUSINESS

|General

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

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

In  this  document,  references  to  we,  us,  our  and  HealthTronics
shall  mean  HealthTronics  and its
consolidated subsidiaries.Urology Services

In our urology services  segment,  we provide services related to lithotripsy  services,  treatments for benign and
cancerous conditions of the prostate, and image guided radiation therapy (IGRT).

Our lithotripsy  services are provided  principally through limited partnerships and other entities that we manage,
which use lithotripsy  devices.  In 2008,  physicians who are affiliated with us used our  lithotripters to perform
approximately 50,000 procedures in the U.S.  We do not render any medical services.  Rather, the physicians do.

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

Although the  non-physician  fee under both retail and  wholesale  contracts  varies  widely based on  geographical
markets and the  identity of the third party  payor,  we estimate  that  nationally,  on average,  our share of the
non-physician  fee was roughly $2,100,  respectively,  for both 2008 and 2007. At this time, we do not anticipate a
material  shift  between  our  retail  and  wholesale  arrangements,  or a  material  change  in our  share  of the
non-physician fee.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2
|-



---

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

Also in the urology  segment,  we provide  treatments  for benign and  cancerous  conditions  of the  prostate.  In
treating benign prostate disease,  we deploy three technologies:  (1) photo-selective  vaporization of the prostate
(PVP),  (2) trans-urethral  needle ablation  (TUNA),  and  (3) trans-urethral  microwave  therapy (TUMT) in certain
partnerships.  All three  technologies  apply an energy  source which  reduces the size of the prostate  gland.  In
September  2007,  we completed the sale of our Rocky  Mountain  Prostate  business,  which  represented  almost our
entire  TUMT  treatment  operations.   For  treating  prostate  and  other  cancers,  we  use  a  procedure  called
cryosurgery,  a process  which  uses a double  freeze  thaw cycle to  destroy  cancers  cells.  In April  2008,  we
acquired  Advanced Medical  Partners,  Inc.  (AMPI),  which  significantly  expanded our cryosurgery  partnership
base.  Our prostate  treatment  services are also  provided  principally  through  limited  partnerships  and other
entities that we manage,  which use equipment to perform the treatments.  Benign  prostate  disease and cryosurgery
cancer  treatment  services  are billed in the same  manner as our  lithotripsy  services  under  either  retail or
wholesale  contracts.  We also  provide  services  relating  to  operating  the  equipment,  including  scheduling,
training, quality assurance, regulatory compliance and contracting.

We also provide image guided radiation  therapy (IGRT) technical  services for cancer treatment  centers.  Our IGRT
technical  services  may relate to  providing  the  technical  (non-physician)  personnel  to  operate a  physician
practice groups IGRT equipment,  leasing IGRT equipment to a physician practice group,  providing services related
to helping a physician practice group establish an IGRT treatment center, or managing an IGRT treatment center.

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

| |  | Fees for urology  treatments.


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

|Medical Products


We sell and  maintain  lithotripters  and  related  spare parts and  consumables.  We are also the  exclusive  U.S.
distributor of the Revolix branded laser. We also provide  anatomical  pathology  services primarily to the urology
community.  We have one  pathology  lab  located in  Georgia,  Claripath  Laboratories,  that  provides  laboratory
detection  and  diagnosis  services to  urologists  throughout  the United  States.  In addition,  in July 2008, we
acquired Uropath LLC, which managed pathology  laboratories  located at Uropath sites for physician practice groups
located in Texas,  Florida and Pennsylvania.  Through Uropath,  we continue to manage in-office  pathology labs for
practice  groups and provide  pathology  services to  physicians  and practice  groups with our lab  equipment  and
personnel at our Uropath laboratory sites.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3
|-



---

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

|Specialty Vehicle Manufacturing

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

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

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

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

|4
|-



---

|Competition

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

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

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

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

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

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

We currently maintain general and professional liability insurance with a total limit of $1,000,000 per loss
event and $3,000,000 policy aggregate and an umbrella excess limit of $10,000,000, with a deductible of $50,000
per occurrence. In addition, we require medical professionals who utilize our services to maintain professional
liability insurance. All of these insurance policies are subject to annual renewal by the insurer. If these
policies were to be canceled or not renewed, or failed to provide sufficient coverage for our liabilities, we
might be forced to self-insure against the potential liabilities referred to above. In that event, a single
incident might result in an award of damages that might have a material adverse effect on our results of
operations or financial condition. We sponsor a partially self-insured group medical insurance plan. The plan is
designed to provide a specified level of coverage, with stop-loss coverage provided by a commercial insurer. Our
maximum claim exposure is limited to $110,000 per person per policy year.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5
|-



---

|Government Regulation and Supervision

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

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

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

The Centers for Medicare & Medicaid Services (CMS) recently issued a rule that amended regulations that
implement the Stark Law.  Under the rule, effective October 1, 2009, certain physician-owned ventures (e.g.,
laser, cryotherapy, and TUMT partnerships) will not be able to contract with hospitals for the lease of space or
equipment under a per-procedure or per-click payment arrangement.  Also under the rule, CMS acknowledged that
lithotripsy services performed under arrangements at hospitals is not a designated health service (DHS) under
the Stark Law.  However, to the extent a physician with an ownership or compensation interest in one of our
lithotripsy partnerships refers patients to the hospital for other DHS services, the Stark Law still applies and
an exception must be met.  CMS has also issued an answer in the form of a Frequently Asked Question on its
website, where it indicates that the provision of lithotripsy services may be considered a service contract and
not a lease of space or equipment.  Thus, according to the FAQ advice from CMS, our lithotripsy partnerships may
continue to contract with hospitals on a per-procedure payment basis so long as the contract is a service
arrangement rather than a leasing arrangement and the physician partners in the partnership do not refer
designated health services to the contracting hospitals.  If the partnership provides a technician and related
support when providing lithotripsy services, we believe such arrangement is a service arrangement.  If an
arrangement is considered a leasing arrangement or if such any of the physician partners refer designated health
services to a contracting hospital, then the fee arrangements between partnership and the hospitals must comply
with the new rule by October 1, 2009.  In addition, our prostate treatment partnerships must comply with the new
rule by October 1, 2009.  We are still considering options to restructure our partnerships and/or hospital
contracts that must comply with the new rule by October 1, 2009.  Our options include restructuring ownership of
the partnerships, repurchasing or buying out the physician partners interests in the partnerships, and amending
hospital contracts to provide for a payment arrangement that is not on a per-procedure basis and otherwise
complies with the new rule.  Although we believe these restructurings will not have a material adverse affect on
us, we cannot give you any assurance that these restructurings would not have a material adverse effect on our
operations, relationships with urologists, financial condition or results of operations.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6
|-



---

|In addition,  this new rule may make physician  investment in our  partnerships  less attractive.  As a result,  it
may be more difficult to retain physician  partners in our  partnerships and attract new physician  partners to our
partnerships.  At this time we are  unable to assess  the  extent to which the new rule will  affect  relationships
with our existing physician partners and our ability to attract new physician  partners.  However,  if the new rule
has a negative effect on our physician partner  relationships,  then our operations and results of operations could
be materially adversely affected.

Furthermore,  physician  ownership  and  contracts  with entities  that provide  ancillary  medical  services are a
subject of  intensive  legislative  and  regulatory  attention.  It is likely that  additional  legislation  may be
passed and additional  regulations will be promulgated that will further affect our business and our  relationships
with  physicians.  The  recently-passed  American  Recovery and  Reinvestment  Act of 2009  (commonly  known as the
Stimulus Bill) contains a number of provisions  affecting  healthcare  entities like us, including new requirements
relating to information  technology,  privacy, and data security.  The President has stated that his administration
will  make  health  care  reform  a  major  initiative,  which  may  impact  our  provision  of  services  and  our
reimbursement.  We are unable to state with  certainty  the effect of any such  legislation  or  regulation  on our
business.

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

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

|7
|-



---

|Employees

As of  February 28,  2009,  we employed  approximately  550  full-time  employees  and  approximately  30 part-time
employees.Risk Factors

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

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

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

Third party payors are  increasingly  attempting  to contain  health care costs by limiting  both  coverage and the
level of reimbursement of medical  procedures and treatments.  In addition,  significant  uncertainty  exists as to
the  reimbursement  status of newly approved  health care  products.  Lithotripsy  treatments are reimbursed  under
various  federal  and state  programs,  including  Medicare  and  Medicaid,  as well as under  private  health care
programs,  primarily  at fixed  rates.  Governmental  programs are subject to  statutory  and  regulatory  changes,
administrative rulings,  interpretations of policy and governmental funding restrictions,  and private programs are
subject to policy changes and  commercial  considerations,  all of which may have the effect of decreasing  program
payments,  increasing  costs or  requiring  us to modify the way in which we operate our  business.  These  changes
could have a material adverse effect on us.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8
|-



---

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

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

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

A number of proposals  for health care reform have been made in recent years,  some of which have included  radical
changes in the health  care  system.  We  anticipate  that  federal  legislation  will be enacted in 2009 that will
significantly  reform  health  care.  Health care reform  could  result in material  changes in the  financing  and
regulation  of the health  care  business,  and we are unable to  predict  the effect of such  change on our future
operations.  It is uncertain  what  legislation  on health care reform,  if any, will  ultimately be implemented or
whether other changes in the  administration of or interpretation  of existing laws involving  governmental  health
care  programs  will  occur.  Future  health  care  legislation  or  other  changes  in  the  administration  of or
interpretation of existing  legislation  regarding  governmental  health care programs could have an adverse effect
on our business and the results of our operations.We face intense competition and rapid  technological  change that could result in products that are superior to the
products we manufacture or superior to the products on which our current or proposed services are based.

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

|9
|-



---

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

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

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

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

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

|10
|--



---

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

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

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

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

|11
|--



---

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

Goodwill  represents  the excess of the  purchase  price paid for a company  over the fair value of that  companys
tangible and  intangible  net assets  acquired.  As of December 31, 2008, we had goodwill of $93.6  million.  If we
determine in the future that the fair value of any of our  reporting  segments  does not exceed the carrying  value
of the related  reporting  segment,  goodwill in that reporting segment will be deemed impaired.  If impaired,  the
amount of goodwill will be reduced to the value  determined  by us to be the fair value of the  reporting  segment.
The amount of the reduction  will be deducted from earnings  during the period in which the impairment  occurs.  An
impairment will also reduce  stockholders  equity in the period  incurred by the amount of the impairment.  In the
fourth quarter of 2008, in connection  with our annual goodwill  impairment  test, we recorded an impairment to our
urology services segment goodwill  totaling $144 million.  Although our core operations  remain stable and reflect
growth over the prior year,  we  adjusted  certain  assumptions  in our  discounted  cash flow model to address the
recent declines in our market  capitalization,  which had fallen  significantly  below our consolidated net assets.
In  addition,  the market  comparables  component of our  impairment  test was  negatively  impacted by the current
global  economic  crisis and global  decline in the stock  markets.  In the fourth  quarter of 2007,  in connection
with our annual  goodwill  impairment  test,  we recorded an impairment to our urology  services  segment  goodwill
totaling $20.8 million. This impairment was due to a decrease in our estimated  future  discounted cash flows from
this  segment.  This decrease was primarily  caused by lower  projected  growth rates for our laser  operations as
well as the timing of certain  future  growth for our IGRT  operations.  For  further  discussion  of our 2008 and
2007 goodwill  impairments,  see footnote C to our consolidated  financial  statements  included  elsewhere in this
Annual Report on Form 10-K.Our operations are partially dependent upon third-party suppliers, making us vulnerable to a supply shortage.

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

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

| |  | the need to comply with applicable federal Food and Drug Administration and foreign  regulations  relating
 to good  manufacturing  practices  and medical  device  approval  requirements,  and with state  licensing
 requirements;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | the need for special  non-governmental  certifications and registrations regarding product safety, product
 quality and manufacturing procedures in order to market products in the European Union;                                  
|

|12
|--



---

| |  | potential product liability claims for any defective goods that are distributed; and                                          
| | - | ------------------------------------------------------------------------------------------------------------------------------
|
| |  | the need for  research  and  development  expenditures  to develop or enhance  products and compete in the
 equipment markets.

|Our indebtedness may limit our financial and operating flexibility.

As of December 31, 2008, we had  indebtedness of approximately  $5.4 million related to equipment  purchased by our
limited  partnerships,  which  indebtedness we believe will be repaid from the cash flows of the  partnerships.  We
also have a revolving line of credit with a borrowing  limit of $60.0 million  pursuant to a senior credit facility
we entered  into in March 2005.  As of December  31,  2008,  we have drawn $41  million on the  revolver.  Prior to
July 31, 2006,  we had  outstanding  a $125.0  million  senior  secured term loan B due 2011.  This term loan B was
repaid on July 31,  2006  with a portion  of the  proceeds  we  received  from the sale of our  specialty  vehicles
manufacturing division.

We have been assigned a B-2 senior  implied  rating by Moodys  Investor  Service Inc. We have also been assigned a
BB-  corporate  credit  rating by Standard and Poors  Ratings  Group.  All of these  ratings are below  investment
grade.  As a result,  at times we may have  difficulty  accessing  capital  markets or raising capital on favorable
terms as we will incur  higher  borrowing  costs than our  competitors  that have higher  ratings.  Therefore,  our
financial  results may be  negatively  affected by our  inability to raise capital or the cost of such capital as a
result of our credit ratings.

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

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

|We  currently  have $41  million  drawn on our $60 million  revolving  line of credit,  which could have  important
consequences to you. For example, it could:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|13
|--



---

| |  | place us at a competitive disadvantage as compared to our competitors that have less debt.
| | - | ------------------------------------------------------------------------------------------

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

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

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

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

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

|14
|--



---

|Executive Officers

As of March 6, 2009, our executive officers were as follows:
|--------------------------------------------------------------------------------

|Name                   | Age |  | Position                                                                                      
|---------------------- | --- |  | ----------------------------------------------------------------------------------------------
|                      
|James S.B. Whittenburg | 37  |  | Chief Executive Officer and President                                                         
|                      
|Richard A. Rusk        | 47  |  | Vice President, Corporate Controller, Treasurer, Secretary and Interim Chief Financial Officer
|                      
|Robert A. Yonke        | 48  |  | President, Urology Services                                                                   
|                      
|                      
|Clayton H. Duncan      | 36  |  | Vice President-Radiation Therapy                                                              
|                      
|                      
|Scott A. Herz          | 32  |  | Vice President-Corporate Development                                                          
|                      

|The foregoing does not include  positions held in our  subsidiaries.  Our officers are elected for annual  periods.
There are no family relationships between any of our executive officers and/or directors.Mr.  Whittenburg  was  appointed as our President and Chief  Executive  Officer on August 13, 2007.  From June 2006
until  August  13,  2007,  Mr. Whittenburg  served as  President  of our  Urology  Division,  and he was our acting
President  and Chief  Executive  Officer from May 2007 until August 2007.  He served as President of our  Specialty
Vehicle  Manufacturing  Division  from  December  2005 until its sale in July 2006 and was our General  Counsel and
Senior Vice  PresidentDevelopment  from March 2004 until June 2006.  Previously  Mr. Whittenburg  practiced law at
Akin Gump Strauss Hauer & Feld LLP, where he specialized in corporate and securities law.  Mr. Whittenburg,  a CPA,
is licensed to practice law in Texas.Mr. Rusk  joined us in August 2000 as our Corporate  Controller  and was named Vice President in June 2002. In June
2006, Mr. Rusk was named our Treasurer and in September  2006,  Mr. Rusk was named our  Secretary.  In September of
2008, Mr. Rusk was named Interim Chief Financial  Officer.  Before joining us,  Mr. Rusk,  a CPA, was with KPMG LLP
for approximately seventeen years, the last ten years as a senior audit manager.Mr.  Yonke  joined us in April  2008 in  connection  with our  acquisition  of AMPI.  In July 2008,  Mr.  Yonke was
appointed  as  President   Urology  Services.  Mr.  Yonke  co-founded  AMPI in 2002 and  served  as AMPIs  chief
executive  officer  from 2002 to April 2008. Prior to that time,  Mr. Yonke served as chief  executive  officer of
U.S. Medical  Development,  Inc., a Dallas based Urology company that specialized in the development and service of
Lithotripsy  partnerships  and  specialty  hospitals.  Mr. Yonke has been in the medical  business  since 1986 and
brings an extensive background to HTRN in physician practice  management,  partnership  development,  medical start
ups,  mergers and  acquisitions,  radiologic  imaging,  and physical  rehabilitation.  A graduate of Emporia State
University, Mr. Yonke holds a Bachelors degree in Business Administration, with an emphasis in Finance.Mr. Duncan joined us in August 2007 as Vice President  Radiation Therapy. From August 2002 to August 2007, Mr.
Duncan was employed by McKesson Provider Technologies, where he most recently held the position of Vice President
of Corporate Accounts for the Automation Solutions division. Prior to that time, Mr. Duncan served in numerous
development and sales leadership positions in the healthcare and technology industries. Mr. Duncan began his
professional career by practicing law at Strasburger & Price LLP in the International Franchise and Distribution
section. Mr. Duncan obtained his J.D. from Southern Methodist University, holds a Master of International
Management from Thunderbird, The American Graduate School of International Management, and also holds a B.B.A. in
Finance from Texas Tech University. Mr. Duncan is licensed to practice law in Texas.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15
|--



---

|Mr. Herz joined us in February 2005 in our Specialty  Vehicles  division as Associate  Vice  President-Finance.  In
June 2006,  Mr. Herz was appointed  Associate Vice  President  Corporate  Development  and in December 2007 he was
appointed  Vice  President    Corporate  Development.  Prior to  joining  us,  Mr.  Herz  served  as an  associate
investment  banker at RSM Equico from 2004 to 2005.  Prior to that time,  Mr. Herz worked as a mechanical  engineer
at  Colorado  MEDtech,  Inc.  from 1999 to 2002.  From 2002 to 2004,  Mr.  Herz  obtained  his MBA from  Pepperdine
University and also holds a BS in Mechanical Engineering from Michigan State University.Available Information

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

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

ITEM 1A.          RISK FACTORS

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



ITEM 1B.          UNRESOLVED STAFF COMMENTS

None.ITEM 2.           PROPERTIES

Our  principal  executive  office is located in Austin,  Texas.  On June 16, 2008,  we sold the office  building in
which our principal  executive offices were located for  approximately  $6,750,000.  We subsequently  relocated our
principal  executive  offices in late  September  2008. In December  2008, we also  relocated our Medical  Products
operations  from leased  facilities in Kennesaw,  Georgia to warehouse space that occupies the same leased building
as our principal executive offices in Austin, Texas.
ITEM 3.           LEGAL PROCEEDINGS

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

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

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

|16
|--



---

|PART II
|-------

# ITEM 5.    

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

|The  following  table sets  forth the high and low  closing  prices  per share for our  common  stock on the Nasdaq
Global Select Market for the years ended December 31, 2008 and 2007 (NASDAQ Symbol HTRN).
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2008           | 2007
| | -------------- | ----
|
| | First Quarter  |     
| | Second Quarter |     
| | Third Quarter  |     
| | Fourth Quarter |     

|On February 24, 2009, we had 568 holders of record of our common stock.

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

|Period                           | Total Number of Shares
Purchased | Average Price Paid
Per Share | Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs | Maximum Number (or
Approximate Dollar
Value) of Shares That
May Yet to be Purchased
Under the Plans or
Programs
|-------------------------------- | -------------------------------- | ---------------------------- | -------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------
|Month 1 (10/1/2008  10/31/2008) |                                  |                              |                                                                                  | 1,700,000                                                                                                      
|Month 2 (11/1/2008  11/30/2008) |                                  |                              |                                                                                  | 8,927                                                                                                          
|Month 3 (12/1/2008  12/31/2008) |                                  |                              |                                                                                  | --                                                                                                             
|Total                            |                                  |                              |                                                                                  | 1,708,927                                                                                                      

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

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

|17
|--



---

|Equity Compensation Plan Information

At December 31,  2008, we had seven separate equity compensation plans: the Prime Medical Services,  Inc. (Prime)
1993 and 2003 stock option plans, the HealthTronics  Surgical Services,  Inc. (HSS) general,  2000, 2001 and 2002
stock option plans,  and the HSS 2004 equity  incentive  plan.  The plans,  and all  amendments  thereto,  had been
approved by Primes and HSS  shareholders,  as the case may be. On November  10,  2004,  Prime  completed a merger
with HSS pursuant to which Prime merged with and into HSS with  HealthTronics,  Inc. as the surviving  corporation.
The following table sets forth certain information as of December 31, 2008 about our equity compensation plans:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|18
|--



---

|Performance Graph

The following  graph  compares our  cumulative  total  shareholder  return with the  cumulative  total  shareholder
returns of the Nasdaq  Market Index and the Nasdaq  Health  Services  Index,  for the period from December 31, 2004
through December 31, 2008.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 
| | 

# ITEM 6.
    
SELECTED FINANCIAL DATA

|The following  tables set forth our summary  consolidated  historical  financial  information that has been derived
from (a) our  audited  consolidated  statements  of income and cash flows for each of the years ended  December 31,
2008, 2007, 2006, 2005 and 2004, (b) our audited consolidated  balance sheets as of December 31,  2008, 2007, 2006,
2005,  and 2004,  and  (c) our  unaudited  consolidated  statements  of income and cash flows for each of the three
months ended December 31,  September 30,  June 30, and March 31, for 2008 and 2007. The November 10, 2004 merger of
Prime and HSS was  accounted for as a reverse  acquisition  under the purchase  method of  accounting  for business
combinations  in  accordance  with U.S.  generally  accepted  accounting  principles.  As a result,  the  financial
information  presented  below  reflects the results of  operations of Prime and HSS on a  consolidated  basis after
November 10,  2004 and the results of operations of Prime for the periods prior to  November 10,  2004.  You should
read this financial  information in conjunction with Managements  Discussion and Analysis of Financial  Condition
and Results of Operations and our historical  financial  statements and notes thereto  included  elsewhere in this
Annual Report on Form 10-K.  The  historical  results are not  necessarily  indicative of results to be expected in
any future period.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|19
|--



---

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

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

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

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

|20
|--



---

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

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

|1)     In the fourth  quarter of 2008,  in  connection  with our annual  goodwill  impairment  test,  we  recorded an
     impairment to our urology  services  segment  goodwill  totaling $144  million.  Although our core  operations
     remain stable and reflect growth over the prior year, we adjusted  certain  assumptions in our discounted cash
     flow model to address the recent declines in our market  capitalization,  which had fallen significantly below
     our  consolidated  net assets.  In  addition,  the market  comparables  component of our  impairment  test was
     negatively impacted by the current global economic crisis and global decline in the stock markets.

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

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

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

|21
|--



---

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

|Forward-Looking Statements

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

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

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

|General

We provide healthcare services and medical devices,  primarily to the urology  marketplace.  We have two reportable
segments:  urology  services and medical  products.  Prior to July 31,  2006,  we also  designed  and  manufactured
trailers and coaches that transport high  technology  medical  devices and equipment for mobile command and control
centers and the media and broadcast industry.Urology  Services.  Our  lithotripsy  services are provided  principally  through  limited  partnerships  and other
entities that we manage,  which use lithotripsy  devices.  In 2008,  physicians who are affiliated with us used our
lithotripters  to perform  approximately  50,000  procedures  in the U.S.  We do not render any  medical  services.
Rather, the physicians do.

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

|22
|--



---

|Although the  non-physician  fee under both retail and  wholesale  contracts  varies  widely based on  geographical
markets and the  identity of the third party  payor,  we estimate  that  nationally,  on average,  our share of the
non-physician  fee was roughly $2,100,  respectively,  for both 2008 and 2007. At this time, we do not anticipate a
material  shift  between  our  retail  and  wholesale  arrangements,  or a  material  change  in our  share  of the
non-physician fee.

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

Also in the urology  segment,  we provide  treatments  for benign and  cancerous  conditions  of the  prostate.  In
treating benign prostate disease,  we deploy three technologies:  (1) photo-selective  vaporization of the prostate
(PVP),  (2) trans-urethral  needle ablation  (TUNA),  and  (3) trans-urethral  microwave  therapy (TUMT) in certain
partnerships.  All three  technologies  apply an energy  source which  reduces the size of the prostate  gland.  In
September  2007,  we completed the sale of our Rocky  Mountain  Prostate  business,  which  represented  almost our
entire TUMT treatment  operations.  For treating prostate and other cancers, we use a procedure called cryosurgery,
a process which uses a double freeze thaw cycle to destroy  cancers cells.  In April 2008, we acquired AMPI,  which
significantly  expanded our  cryosurgery  partnership  base.  Our  prostate  treatment  services are also  provided
principally  through  limited  partnerships  and other entities that we manage,  which use equipment to perform the
treatments.  Benign prostate  disease and cryosurgery  cancer  treatment  services are billed in the same manner as
our  lithotripsy  services  under  either  retail or wholesale  contracts.  We also  provide  services  relating to
operating  the  equipment,   including  scheduling,   training,   quality  assurance,   regulatory  compliance  and
contracting.

We also provide image guided radiation  therapy (IGRT) technical  services for cancer treatment  centers.  Our IGRT
technical  services  may relate to  providing  the  technical  (non-physician)  personnel  to  operate a  physician
practice groups IGRT equipment,  leasing IGRT equipment to a physician practice group,  providing services related
to helping a physician practice group establish an IGRT treatment center, or managing an IGRT treatment center.

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

| |  | Fees for urology treatments.

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

|23
|--



---

|Medical  Products.  We sell and maintain  lithotripters  and related spare parts and  consumables.  We are also the
exclusive U.S.  distributor of the Revolix branded laser. We also provide  anatomical  pathology services primarily
to the urology  community.  We have one pathology  lab located in Georgia,  Claripath  Laboratories,  that provides
laboratory  detection and diagnosis  services to urologists  throughout  the United  States.  In addition,  in July
2008,  we acquired  Uropath LLC,  which  managed  pathology  laboratories  located at Uropath  sites for  physician
practice  groups located in Texas,  Florida and  Pennsylvania.  Through  Uropath,  we continue to manage  in-office
pathology labs for practice  groups and provide  pathology  services to physicians and practice groups with our lab
equipment and personnel at our Uropath laboratory sites.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Fees for maintenance services.

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

|Recent Developments

On October 10, 2008, we entered into a Stock  Purchase  Agreement  with  Atlantic  Urological  Associates  (AUA),
pursuant to which we  purchased  the  outstanding  shares of capital  stock of Ocean  Radiation  Therapy,  Inc.,  a
wholly-owned  subsidiary  of AUA  (Ocean),  for a purchase  price of  approximately  $35  million in cash.  Ocean
provides  IGRT  technical  services to AUAs IGRT cancer  treatment  center.  Also on October 10, 2008, we drew $35
million under our revolving line of credit to finance this acquisition.

We have one pathology  lab located in Georgia,  Claripath  Laboratories,  that  provides  laboratory  detection and
diagnosis  services to urologists  throughout the United  States.  In addition,  in July 2008, we acquired  Uropath
LLC,  which  managed  pathology  laboratories  located at Uropath sites for physician  practice  groups  located in
Texas,  Florida and  Pennsylvania.  Through Uropath,  we continue to manage  in-office  pathology labs for practice
groups and provide  pathology  services to physicians  and practice  groups with our lab equipment and personnel at
our Uropath laboratory sites.

On October 8, 2008,  pursuant to a  $10 million  stock  repurchase  program  adopted by our Board of  Directors  on
October 6, 2008,  in a private  transaction,  we  repurchased  1.7 million  shares of our common  stock from Prides
Capital Partners, L.L.C. for an aggregate purchase price of $3,740,000.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|24
|--



---

|Effective  September 30, 2008, Ross Goolsby resigned his position as our Chief Financial  Officer.  Richard A. Rusk
assumed the duties of interim Chief  Financial  Officer  effective on  September 30,  2008.  Mr. Rusk  continues to
retain his responsibilities as Vice President, Controller, Treasurer, and Secretary.

On July 15, 2008, we acquired  UroPath,  LLC  (UroPath) for $7.5 million in cash.  Founded in 2003,  UroPath is a
leading  provider of anatomical  pathology  laboratory  services in the U.S. with locations in Florida,  Texas, and
Pennsylvania.

On  June 16,  2008,  we sold the  office  building  in which  our  principal  executive  offices  are  located  for
approximately  $6,750,000.  We entered into a lease  agreement  for new office  space.  We relocated  our principal
executive offices in late September 2008.

On April 17, 2008, we acquired AMPI for a purchase price of  approximately  $6.9 million in cash and  approximately
1.8 million shares of our common stock, plus a two-year earn-out based on the future achievement of EBITDA.

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

Management has identified the following critical accounting policies and estimates:

Impairments  of goodwill  and other  intangible  assets are both a critical  accounting  policy and  estimate  that
require  judgment and are based on assumptions  of future  operations.  We are required to test for  impairments at
least annually or if  circumstances  change that would reduce the fair value of a reporting unit below its carrying
value.  We test for impairment of goodwill  during the fourth  quarter.  We now have two reporting  units,  urology
services and medical  products.  The fair value of each  reporting  unit is estimated  using a  combination  of the
income,  or discounted cash flows,  approach and the market approach,  which utilizes  comparable  companies data.
Because we have  recognized  goodwill based solely on our  controlling  interest,  the fair value of each reporting
unit also relates only to our  controlling  interest.  If the carrying  amount of a reporting unit exceeds its fair
value,  the second step of the goodwill  impairment test is performed to measure the amount of impairment  loss, if
any. The second step of the goodwill  impairment  test  compares  the implied  fair value of the  reporting  units
goodwill  with the  carrying  value of that  goodwill.  If the carrying  amount of the  reporting  units  goodwill
exceeds the implied  fair value of that  goodwill,  an  impairment  loss is  recognized  in an amount equal to that
excess.  The implied fair value of goodwill is determined  in the same manner as the amount of goodwill  recognized
in a business  combination.  That is, the fair value of the  reporting  unit is  allocated to all of the assets and
liabilities  of that unit as if the reporting unit had been acquired in a business  combination  and the fair value
of the reporting  unit was the purchase  price paid to acquire the  reporting  unit.  Both the income  approach and
the market  approach  require  significant  assumptions  to determine the fair value of each  reporting  unit.  The
significant  assumptions used in the income approach include  estimates of our future  revenues,  profits,  capital
expenditures,  working  capital  requirements,  operating  plans,  industry data and other  relevant  factors.  The
significant  assumptions  utilized  in  the  market  approach  include  the  determination  of  appropriate  market
comparables,  the  estimated  multiples  of  revenue,  EBIT and  EBITDA a willing  buyer is likely to pay,  and the
estimated  control  premium  a  willing  buyer is likely to pay.  For a  discussion  of our 2008 and 2007  goodwill
impairments and the specific  assumptions  used in the income and market  approaches in the 2008 and 2007 analyses,
see footnote C to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|25
|--



---

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

A third critical  accounting  policy is  consolidation  of our  investments in  partnerships  or limited  liability
companies (LLCs) where we, as the general partner or managing member,  exercise effective control,  even though our
ownership  is less than  50%.  The  consolidated  financial  statements  include  our  accounts,  our  wholly-owned
subsidiaries,  and entities more than 50% owned and limited  partnerships  or LLCs where we, as the general partner
or  managing  member,  exercise  effective  control,  even  though  our  ownership  is less than 50%.  The  related
agreements  provide us with broad powers.  The other parties do not participate in the management of the entity and
do not have the substantial  ability to remove us.  Investment in entities in which our investment is less than 50%
ownership  and we do not have  significant  control are  accounted for by the equity method if ownership is between
20%50%,  or by the cost method if ownership is less than 20%. We have reviewed each of the  underlying  agreements
and  determined  we have  effective  control;  however,  if it was  determined  this  control did not exist,  these
investments  would be reflected on the equity  method of  accounting.  Although this would change  individual  line
items  within  our  consolidated  financial  statements,  it would have no effect on our net  income  and/or  total
stockholders equity.Year ended December 31, 2008 compared to the year ended December 31, 2007

Our total  revenues  increased  $25,524,000  as  compared  to 2007.  Revenues  from our  urology  services  segment
increased  $22,529,000  (18%)  in 2008 as  compared  to 2007.  Revenues  from our  lithotripsy  business  increased
$5,193,000 (4.8%) as compared to 2007, while revenues from our prostate business  increased  $17,336,000 in 2008 as
compared to 2007.  Revenues from our AMPI  acquisition,  which was effective April 1, 2008, were the primary driver
in the  increased  prostate  revenues.  Prostate  revenues from AMPI  entities  totaled $18.4 million in 2008.  The
actual number of  lithotripsy  procedures  performed in 2008 increased by 3% compared to 2007. The average rate per
procedure  increased  by 1% in 2008 as  compared  to 2007.  Revenues  for our  medical  products  segment  for 2008
increased  $3,288,000 as compared to 2007.  Medical  products  revenues before  intersegment  eliminations  totaled
$30.6  million  for 2008 and $26.1  million for 2007.  We sold five  lithotripters  and one table in 2008.  We sold
eight  lithotripters  and 28 tables  during the same period in 2007.  We  discontinued  the sale of tables in 2007.
Revenues  from our  Claripath  laboratory  which  commenced  operations in January  2006,  totaled  $5,113,000  and
$3,418,000 for the years ended  December 31, 2008 and 2007,  respectively.  Revenues from our Uropath  acquisition,
which was effective July, 10, 2008 totaled $1,993,000 in 2008.

Our costs of services and general and administrative  expenses for 2008 increased  $139,542,000  (124%) compared to
2007. Our cost of services  associated with our urology services  operations  increased  $11,695,000  (22%) in 2008
as  compared to 2007.  The primary  cause of this  increase  relates to cost of services at our new AMPI  entities,
whose  costs  totaled  $12,964,000  in 2008,  partially  offset  by an  overall  decrease  in cost of  services  of
$1,269,000  attributed to our organic urology  business.  This decrease in our organic  business costs is primarily
related  to the  write  off of a  certain  payable  at one of our  partnerships  in the  first  quarter  of 2008 of
approximately  $700,000  which was recorded  against  operating  expenses and $250,000 of insurance  reimbursements
received at one of our  partnerships  related to damages suffered during  hurricane  Katrina.  Our cost of services
associated with our medical  products  operations for 2008 decreased  $731,000 (7%) compared to 2007. This decrease
is due to lower cost of sales on fewer device sales in the period,  partially offset by  approximately  $740,000 in
increased  expenses at our Claripath lab which has  experienced  significant  growth year over year,  $1,888,000 in
expenses at our new Uropath  labs,  and  approximately  $1 million in  restructuring  and moving  costs  related to
moving our Medical Products  operations from Kennesaw,  Georgia to Austin,  Texas. A significant portion of medical
products costs relate to providing  maintenance  services to our urology  services segment and are allocated to the
urology services segment.  In the future,  we expect margins in medical products to continue to vary  significantly
from  period  to  period  based  on the mix of  intercompany  and  third-party  sales.  Our  selling,  general  and
administrative  costs for the year ended  December  31, 2008  increased  $4,122,000  compared to the same period in
2007.  This increase  primarily  relates to increased  compensation  expenses of $1.8 million related to restricted
stock grants to employees  which vested as performance  goals were reached in the second and third quarters of 2008
and  approximately  $1 million in increases in sales and marketing  expenses  associated  with our Claripath lab in
2008.  In  addition,  we  received   approximately   $900,000  as  a  result  of  our  former  Swiss  manufacturing
subsidiarys  insolvency  proceedings  in 2007,  which was recorded  against  selling,  general and  administrative
expenses.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|26
|--



---

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

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

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

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

Provision  for income taxes in 2008  decreased  $8,662,000  compared to 2007 due to the decrease in our taxable net
income and the addition of a full  valuation  allowance  on our  deferred  tax assets  primarily as a result of the
goodwill  impairment  recorded in the fourth  quarter.  For the next several years,  we will only be an alternative
minimum tax payer as we will utilize our existing net  operating  loss carry  forwards to offset any current  taxes
payable.Year ended December 31, 2007 compared to the year ended December 31, 2006

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

|27
|--



---

|Our costs of services  and general and  administrative  expenses for 2007  decreased  $7,726,000  (6%)  compared to
2006. Our cost of services  associated with our urology services  operations  increased  $2,228,000 (4%) in 2007 as
compared  with 2006.  The cause of this increase  relates  primarily to increased  rental  expenses paid on Revolix
units leased from our medical  products  division of  $1,500,000  and a decrease in gains  resulting  from sales of
various  partnership  interests  in 2007 as compared  to 2006 of  $969,000  which are  recorded  against  operating
expenses.  This was  partially  offset  by lower  laser  supply  costs of  $1,087,000,  which  corresponds  to more
partnerships  utilizing  the Revolix laser as compared to the  greenlight  laser.  Our cost of services  associated
with our medical  products  operations for 2007 decreased  $5,572,000  (33%) compared to 2006. The primary cause of
this  decrease  relates to  significant  decreases in external  sales of  lithotripters  and tables in 2007, a cost
reduction  recorded as a result of the receipt of lease  payments  from our  urology  services  division on Revolix
units  noted  above,  partially  offset  by  approximately  $900,000  in  increased  expenses  at our  new  lab.  A
significant  portion of medical  products costs relate to providing  maintenance  services to our urology  services
segment and are allocated to the urology  services  segment.  In the future we expect  margins in medical  products
to continue to vary  significantly  from period to period based on the mix of intercompany  and third-party  sales.
Our selling,  general and  administrative  costs  decreased  $4,414,000  (22%) in 2007 as compared to 2006. This is
primarily  attributable  to  approximately  $1,850,000  in costs  paid to  strategic  consultants,  $1  million  in
severance  payments,  $500,000 in higher share based  compensation  costs which were  incurred in 2006  compared to
2007, as well as approximately $516,000 in decreased personnel,  insurance,  marketing, recruiting and other costs.
 In  addition  we  received  approximately  $900,000  as a result of our former  Swiss  manufacturing  subsidiarys
insolvency proceedings in 2007, which was recorded against selling, general and administrative expenses.

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

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

|28
|--



---

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

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

Provision  for income taxes in 2007  increased  $1,709,000  compared to 2006 due to lower taxable loss in 2007 than
2006.Liquidity and Capital ResourcesCash Flows

Our cash and cash  equivalents  were  $22,854,000  and  $25,198,000 at  December 31,  2008 and 2007,  respectively.
While our subsidiaries  generally  distribute all of their available cash quarterly,  after  establishing  reserves
for estimated capital  expenditures and working capital,  these distributions are made just after quarter end which
leads to an accumulated cash balance at the end of each quarter.  For the years ended  December 31,  2008 and 2007,
our  subsidiaries  distributed  cash of  approximately  $53,757,000  and  $42,736,000,  respectively,  to  minority
interest  holders.  In 2009, we  anticipate  that our  subsidiaries  will begin making  distributions  on a monthly
basis rather than a quarterly basis.

Cash provided by our operations,  after minority  interest,  was $70,845,000 for the year ended  December 31,  2008
and  $61,877,000  for the year  ended  December 31,  2007.  From  2007 to 2008,  fee and  other  revenue  collected
increased by  $23,044,000  due  primarily to increased  revenues  from our  acquisitions.  Cash paid to  employees,
suppliers of goods and others  increased by $13,578,000 in 2008.  This  fluctuation  is primarily  attributable  to
increased  operating  expenses from our  acquisitions  and significant pay down of certain accrued expenses related
to our AMPI acquisition.

Cash  used by our  investing  activities  for the year  ended  December 31,  2008,  was  $52,311,000.  We  utilized
$49,487,000  in 2008 to acquire  assets or interests in certain  entities.  Approximately  $35 million of that cash
was used to acquire  the Ocean  services  contract,  $10  million  was used to acquire  AMPI,  and $6.3  million to
acquire  Uropath.  In addition we  increased  our interest in certain  existing  litho  partnerships.  We purchased
equipment and leasehold  improvements  totaling  $11,779,000 in 2008. Cash used by our investing activities for the
year ended  December 31,  2007, was $18,757,000.  We used approximately $8 million in cash to acquire our interests
in the new Keystone  partnership and we used $4 million to acquire increased  ownership in two other  partnerships.
We purchased equipment and leasehold improvements totaling $9,469,000 in 2007.

Cash used in our financing  activities  for the year ended  December 31,  2008, was  $20,878,000,  primarily due to
distributions  to minority  interests of $53,757,000 and payments on notes payable of $14,508,000  partially offset
by borrowings on our revolving line of credit of $50 million and on notes payable of  $1,747,000.  Cash used in our
financing  activities for the year ended  December 31,  2007, was  $45,581,000,  primarily due to  distributions to
minority  interests of $42,736,000  and payments on notes payable of $5,760,000  partially  offset by borrowings on
notes payable of $2,546,000.

Accounts  receivable as of  December 31,  2008 has  increased  $5,798,000  from  December 31,  2007.  This increase
relates  primarily  to our  purchases  of AMPI and  Uropath,  whose  accounts  receivable  at  acquisition  totaled
$3,072,000 and  $1,040,000,  respectively,  as well as increases  related  primarily to higher  revenues and to the
timing of collections.

Inventory as of December 31, 2008 totaled $8,843,000 and decreased $1,378,000 from December 31, 2007.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|29
|--



---

|Senior Credit Facility

Our senior credit  facility is comprised of a five-year $60 million  revolving  line of credit due March 2010 and a
$125 million  senior  secured term loan B due 2011. We entered into this senior  credit  facility in March 2005 and
amended it in April and October  2008.  The loan bears  interest at a variable  rate equal to LIBOR + 1.25 to 2.25%
or prime + .25 to  1.25%.  On July 31,  2006,  we used a portion  of the  proceeds  from the sale of our  specialty
vehicle  manufacturing  segment  to repay the term loan B in full.  As of  December  31,  2008,  we have  drawn $41
million on the  revolver.  Our senior credit  facility  contains  covenants  that,  among other  things,  limit our
ability to incur debt, create liens,  make  investments,  sell assets,  pay dividends,  make capital  expenditures,
make restricted  payments,  enter into  transactions  with  affiliates,  and make  acquisitions.  In addition,  our
facility  requires us to maintain  certain  financial  ratios.  We were in compliance  with the covenants under our
senior credit facility as of December 31, 2008.

On April 14, 2008,  we amended our senior  credit  facility to (1) increase the  revolving  line of credit from $50
million to $60 million,  (2) create an exception to the restricted  payments negative covenant of the senior credit
facility to enable us to repurchase up to $10 million of our common stock,  through a stock  repurchase  program or
otherwise,  (3) increase the dollar amount of permitted  acquisitions  under the acquisitions  negative covenant of
the senior credit  facility from $25 million to $30 million  during any twelve month period  beginning  after April
14,  2008  and (4)  create  an  exception  from the  calculation  of such  permitted  acquisitions  basket  for our
acquisition of AMPI.

On  October  10,  2008,  we amended  our senior  credit  facility,  to  increase  the  dollar  amount of  permitted
acquisitions  under the  acquisitions  negative  covenant  from $30 million to $48 million  during any twelve month
period  commencing  on or after  April 18,  2008 and prior to March 31,  2009  (which  dollar  amount of  permitted
acquisitions  will decrease back to $30 million  during any twelve month period  commencing  after March 31, 2009),
provided that any such  acquisitions  will be subject to the prior  written  approval of the  administrative  agent
under the senior credit facility.OtherOther long term debt. As of December 31, 2008, we had notes  totaling $5.4 million  related to equipment  purchased
by our  limited  partnerships.  These  notes are paid from the cash flows of the  related  partnerships.  They bear
interest  at either a fixed rate  ranging  from four to nine  percent or LIBOR or prime plus a certain  premium and
are due over the next four years.Other long term  obligations.  At December 31, 2008, as part of our acquisition of Medstone  International  Inc. in
February  2004,  we had an  obligation  totaling  $8,338  related to  payments  to an  employee  for $4,167 a month
continuing  until  February 28,  2009 as  consideration  for a  noncompetition  agreement.  We  have an  obligation
totaling  $60,000 related to payments of $3,333 a month until June 15, 2010 as  consideration  for a noncompetition
agreement with a previous employee of our Medical Products division.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|30
|--



---

|General

The following table presents our contractual obligations as of December 31, 2008 (in thousands):
|---------------------------------------------------------------------------------------------------------

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

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

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

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

| | (3) | Represents  an obligation of $8 due to an employee of Medstone,  at a rate of $4 per month  continuing  until
 February 28,  2009,  and an obligation  of $60 due to a previous  employee of ours, at a rate of $3 per month
 until June 15, 2010.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In addition, the scheduled principal repayments for all long term debt as of December 31, 2008 are payable as
follows:
|----------------------------------------------------------------------------------------------------------------------

| | ($ in thousands)
| | ----------------
| | 2009            
| | 2010            
| | 2011            
| | 2012            
| | 2013            
| | Thereafter      
| |                 
| | Total           

|Our primary  sources of cash are cash flows from  operations and borrowings  under our senior credit facility which
is due in March 2010.  Our cash flows from  operations  and  therefore  our ability to make  scheduled  payments of
principal, or to pay the interest on, or to refinance,  our indebtedness,  or to fund planned capital expenditures,
will depend on our future performance,  which is subject to general economic,  financial competitive,  legislative,
regulatory and other factors  discussed  under Risk  Factors under Part I. Likewise,  our ability to borrow under
our senior  credit  facility  will  depend on these  factors,  which will  affect  our  ability to comply  with the
covenants in our facility and our ability to obtain waivers for, or otherwise  address,  any noncompliance with the
terms of our facility with our lenders.

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

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

|31
|--



---

|Inflation

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

In April 2008, the Financial  Accounting  Standards  Board (FASB) issued FASB Staff Position  (FSP)  No. 142-3,
Determination  of the Useful Life of Intangible  Assets.  FSP 142-3 amends the factors that should be considered in
developing  renewal or extension  assumptions  used to determine the useful life of a recognized  intangible  asset
under  FASB  Statement  No. 142,  Goodwill  and Other  Intangible  Assets.  FSP 142-3 is  effective  for  financial
statements  issued for fiscal years  beginning  after  December 15,  2008, and interim  periods within those fiscal
years.  Early adoption is prohibited.  Based on our current  operations,  we do not expect that the adoption of FSP
142-3 will have a material impact on our financial position or results of operations.

In May 2008,  the FASB issued Statement of Financial Accounting  Standards No. 162 (SFAS No. 162),  The Hierarchy
of Generally Accepted  Accounting  Principles.   SFAS 162  identifies the sources of accounting  principles and the
framework  for  selecting  the  principles  used in the  preparation  of financial  statements  of  nongovernmental
entities that are presented in conformity with generally accepted  accounting  principles in the United States (the
GAAP hierarchy).  SFAS 162  will become  effective  60 days  following  the SECs  approval of the Public  Company
Accounting  Oversight  Board  amendments  to  AU Section 411,  The  Meaning of Present  Fairly in  Conformity  With
Generally Accepted Accounting  Principles.  Based on our current operations,  we do not expect that the adoption of
SFAS 162 will have a material impact on our financial position or results of operations.

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

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

|32
|--



---

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

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS 157). SFAS 157 defines fair
value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value
measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. In December 2007, the FASB released a proposed FASB Staff Position (FSP FAS 157-b-Effective
Date of FASB Statement No. 157) which, if adopted as proposed, would delay the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually). In February 2008, the FASB issued FASB Staff
Position FAS 157-2, Effective Date of FASB Statement No. 157 (the FSP).  The FSP delayed, for one year, the
effective date of FAS 157 for all nonfinancial assets and liabilities, except those that are recognized or
disclosed in the financial statements on at least an annual basis. The implementation of SFAS No. 157 for
financial assets and financial liabilities, effective January 1, 2008, did not have a material impact on our
consolidated financial position and results of operations.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|33
|--



---

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

|Interest Rate Risk
As of December 31,  2008,  we had  long-term  debt  (including  current  portion)  totaling  $46,387,000,  of which
$4,859,000 had fixed rates of 4% to 9%, and $41,528,000  incurred  interest at a variable rate equal to a specified
prime  rate.  We are  exposed  to some  market  risk due to the  remaining  floating  interest  rate debt  totaling
$41,528,000.  We make monthly or  quarterly  payments of  principal  and interest on $528,000 of the floating  rate
debt. An increase in interest rates of 1% would result in a $415,000  annual  increase in interest  expense on this
existing principal balance.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# ITEM 8.
    
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

|None.
|-----

# ITEM 9A.
    
CONTROLS AND PROCEDURES

|(a)        Disclosure Controls and Procedures

As of December 31, 2008, under the supervision and with the  participation  of our management,  including our Chief
Executive  Officer  (our  principal  executive  officer) and our Interim  Chief  Financial  Officer (our  principal
financial  officer),  we evaluated the  effectiveness  of our disclosure  controls and procedures (as defined under
Rule  13a-15(e)  of the  Securities  Exchange  Act of  1934,  as  amended  (the  Exchange  Act)).  Based  on this
evaluation,  our Chief  Executive  Officer and our Interim Chief Financial  Officer  concluded that, as of December
31, 2008, our disclosure controls and procedures were effective.(b)        Managements Report on Internal Control Over Financial Reporting

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

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

Our management  assessed the  effectiveness  of our internal  control over financial  reporting as of  December 31,
2008 based on the  criteria set forth by the  Committee  of  Sponsoring  Organizations  of the Treadway  Commission
(COSO) in its report entitled Internal ControlIntegrated Framework.

Based on this  assessment,  our  management  concluded  that,  as of December 31, 2008,  our internal  control over
financial reporting was effective based on those criteria.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|34
|--



---

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

There have been no changes in our internal  control over financial  reporting that occurred during the three months
ended  December 31, 2008 that have  materially  affected,  or are  reasonably  likely to  materially  affect,  such
internal control over financial reporting.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# ITEM 9B.
    
OTHER INFORMATION

|In the fourth quarter of 2008, in connection  with our annual goodwill  impairment  test, we recorded an impairment
to our urology  services  segment goodwill  totaling $144 million.  Although our core operations  remain stable and
reflect growth over the prior year, we adjusted  certain  assumptions in our discounted  cash flow model to address
the recent  declines  in our market  capitalization,  which had fallen  significantly  below our  consolidated  net
assets.  In addition,  the market  comparables  component of our  impairment  test was  negatively  impacted by the
current  global  economic  crisis  and  global  decline  in the  stock  markets.  For  further  discussion  of this
impairment,  see footnote C to our consolidated  financial  statements  included elsewhere in this Annual Report on
Form 10-K.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|35
|--



---

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

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

We have audited  HealthTronics,  Inc.  internal control over financial  reporting as of December 31, 2008, based on
criteria established in Internal  ControlIntegrated  Framework issued by the Committee of Sponsoring Organizations
of the Treadway  Commission (the COSO criteria).  HealthTronics,  Inc.s  management is responsible for maintaining
effective  internal  control over  financial  reporting,  and for its assessment of the  effectiveness  of internal
control  over  financial  reporting  included in the  accompanying  Managements  Report on Internal  Control  over
Financial  Reporting.  Our responsibility is to express an opinion on the companys internal control over financial
reporting based on our audit.

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

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

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

In our  opinion,  HealthTronics,  Inc.  maintained,  in all  material  respects,  effective  internal  control over
financial reporting as of December 31, 2008, based on the COSO criteria.

We also have audited,  in accordance  with the standards of the Public Company  Accounting  Oversight Board (United
States), the consolidated  balance sheets of HealthTronics,  Inc. as of December 31, 2008 and 2007, and the related
consolidated  statements of income,  stockholders equity, and cash flows for each of the three years in the period
ended  December  31, 2008 of  HealthTronics,  Inc.  and our report  dated March 4, 2009  expressed  an  unqualified
opinion thereon.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|Austin, Texas
March 4, 2009
|---------------------------

|36
|--



---

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

# ITEM 10.
    
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

|The  information  required  by this  item  will be  contained  in our  definitive  proxy  statement  to be filed in
connection  with our 2009 annual  meeting of  stockholders,  except for the  information  regarding  our  executive
officers,  which is presented in Part I of this Form 10-K. The  information  required by this item contained in our
definitive proxy statement is incorporated herein by reference.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# ITEM 11.
    
EXECUTIVE COMPENSATION

|The  information  required  by this  item  will be  contained  in our  definitive  proxy  statement  to be filed in
connection with our 2009 annual meeting of stockholders and is incorporated herein by reference.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|The  information  required  by this  item  will be  contained  in our  definitive  proxy  statement  to be filed in
connection with our 2009 annual meeting of stockholders and is incorporated herein by reference.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|The  information  required  by this  item  will be  contained  in our  definitive  proxy  statement  to be filed in
connection with our 2009 annual meeting of stockholders and is incorporated herein by reference.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# ITEM 14.
    
     PRINCIPAL ACCOUNTANT FEES AND SERVICES

|The  information  required  by this  item  will be  contained  in our  definitive  proxy  statement  to be filed in
connection with our 2009 annual meeting of stockholders and is incorporated herein by reference.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|37
|--



---

|PART IV
|-------

# ITEM 15.
    
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

(b) Exhibits. (1)

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

|38
|--



---

|10.14*      
            
            
10.15*      
            
            
10.16       
            
            
10.17*      
            
            
10.18*      
            
            
10.19*      
            
            
10.20*      
            
            
            
10.21       
            
            
            
            
10.22       
            
            
            
10.23       
            
            
            
10.24       
            
            
            
            
10.25*      
            
            
            
10.26 | Executive Employment  Agreement,  effective October 1, 2005, by and between  HealthTronics,  Inc.
and James S. B. Whittenburg  (incorporated by reference to Exhibit 99.4 to the Companys  Current
Report on Form 8-K filed with the Securities and Exchange Commission on September 27, 2005).
First  Amendment  to  the  HealthTronics,  Inc.  2004  Equity  Incentive  Plan  (incorporated  by
reference to Exhibit 10.1 to  HealthTronics  Quarterly Report on Form 10-Q for the quarter ended
June 30, 2005, filed on August 5, 2005).
Form  of   Indemnification   Agreement  for  directors  and  certain  officers  of  HealthTronics
(incorporated  by reference to Exhibit 99.1 to  HealthTronics  Current  Report on Form 8-K filed
on June 1, 2005).
First  Amendment  to Board  Service  and  Release  Agreement,  dated as of March 2, 2006,  by and
between HealthTronics and Argil J. Wheelock,  M.D.  (incorporated by reference to Exhibit 10.1 of
HealthTronics Current Report on Form 8-K filed on March 8, 2006.)
Second  Amendment to the  Companys  2004 Equity  Incentive  Plan  (incorporated  by reference to
Exhibit 10.1 to the Companys  Current  Report on Form 8-K filed with the Securities and Exchange
Commission on June 14, 2006.)
Form of  Restricted  Stock Award  Agreement  (incorporated  by  reference  to Exhibit 10.2 to the
Companys  Quarterly  Report on Form 10-Q for the  quarter  ended  March 31,  2008 filed with the
Securities and Exchange Commission on May 12, 2008).
Second  Amendment  to  Executive  Employment  Agreement,  dated as of October  26,  2007,  by and
between  HealthTronics,   Inc.  and  James  S.  B.  Whittenburg  (incorporated  by  reference  to
Exhibit 10.1  to the Companys  Current Report on Form 8-K filed with the Securities and Exchange
Commission on May 12, 2008).
Stock  Purchase  Agreement,  dated as of February 13,  2007,  by and among  HealthTronics,  Inc.,
Lithotripters,  Inc.,  Keystone ABG Inc.,  Keystone Kidney Associates,  PC, David Arsht, D.O., P.
Kenneth  Brownstein,  M.D.,  Larry E.  Goldstein,  M.D.  and  Michael  Dernoga  (incorporated  by
reference to Exhibit 10.1 to the Companys  Current  Report on Form 8-K filed with the Securities
and Exchange Commission on February 20, 2007).
Interest Purchase  Agreement,  dated as of February 13, 2007, by and among  HealthTronics,  Inc.,
Lithotripters,  Inc., David Arsht, D.O., P. Kenneth  Brownstein,  M.D., Larry E. Goldstein,  M.D.
and Michael Dernoga  (incorporated  by reference to Exhibit 10.2 to the Companys  Current Report
on Form 8-K filed with the Securities and Exchange Commission on February 20, 2007).
Amended  and  Restated  Distribution  Agreement,  dated as of  February  28,  2007,  by and among
HealthTronics,  Inc.,  Lisa Laser  USA,  Inc.,  and LISA  laser  products  OHG  (incorporated  by
reference to Exhibit 10.1 to the Companys  Current  Report on Form 8-K filed with the Securities
and Exchange Commission on March 6, 2007).
First  Amendment  to  Interest  Purchase  Agreement,  dated  as of May  25,  2007,  by and  among
HealthTronics,  Inc., Lithotripters,  Inc., David Arsht, D.O., P. Kenneth Brownstein, M.D., Larry
E.  Goldstein,  M.D.  and Michael  Dernoga  (incorporated  by  reference  to Exhibit  10.2 to the
Companys  Current Report on Form 8-K filed with the  Securities  and Exchange  Commission on May
31, 2007).
First Amendment to Executive  Employment  Agreement,  dated as of August 10, 2007, by and between
HealthTronics,  Inc. and James S. B.  Whittenburg  (incorporated  by reference to Exhibit 10.1 to
the Companys  Current Report on Form 8-K filed with the  Securities  and Exchange  Commission on
August 15, 2007).
Stock Purchase  Agreement,  dated as of March 18, 2008, by and among  HealthTronics,  Inc., Litho
Management,  Inc.,  Advanced  Medical  Partners,  Inc. and the  stockholders of Advanced  Medical
Partners,  Inc.  (incorporated  by reference to Exhibit 10.1 to the Companys  Current  Report on
Form 8-K filed with the Securities and Exchange Commission on March 20, 2008).
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|39
|--



---

|10.27       
            
            
            
10.28       
            
            
            
10.29       
            
            
10.30       
            
            
            
10.31       
            
            
10.32       
            
            
10.33       
            
            
            
10.34       
            
            
            
10.35*      
            
10.36       
            
            
21.1        
23.1        
31.1        
31.2        
32.1        
32.2 | First Amendment to Credit Agreement, dated as of April 14, 2008, by and among HealthTronics,
Inc., the lenders party thereto, JPMorgan Chase Bank, National Association, and the other
parties thereto  (incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed with the Securities and Exchange Commission on April 16, 2008).
Piggy-Back Registration Rights Agreement, dated as of April 17, 2008, by and among
HealthTronics, Inc., Robert A. Yonke, Christopher J. Ringel and Kevin Bentley. (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed with the Securities
and Exchange Commission on April 22, 2008).
Third Amendment to the 2004 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to
the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on
May 14, 2008).
Earnest Money ContractCommercial Improved Property (Office Condominiums) dated as of April 1,
2008 (as amended on each of April 15, 2008 and May 12, 2008) by and between HealthTronics, Inc.
and HPI Acquisition Company, LLC. (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed with the Securities and Exchange Commission on June 20, 2008).
Lease Agreement dated May 19, 2008, by and between HealthTronics, Inc. and HEP-Davis Spring,
L.P. (incorporated by reference to Exhibit 10.2 to the Companys Current Report on Form 8-K
filed with the Securities and Exchange Commission on June 20, 2008).
Termination and Consulting Agreement, dated September 19, 2008, by and between HealthTronics,
Inc. and Ross A. Goolsby (incorporated by reference to Exhibit 10.1 to the Companys Current
Report on Form 8-K filed with the Securities and Exchange Commission on September 22, 2008).
Stock Purchase Agreement, dated as of October 10, 2008, by and between HealthTronics, Inc. and
Atlantic Urological Associates, P.A (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed with the Securities and Exchange Commission on October 15,
2008).
Second Amendment to Credit Agreement, dated as of October 10, 2008, by and among HealthTronics,
Inc., the lenders party thereto, and JPMorgan Chase Bank, National Association (incorporated by
reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed with the Securities
and Exchange Commission on October 15, 2008).
Executive Employment Agreement, effective August 15, 2007, by and between HealthTronics, Inc.
and Clayton H. Duncan (filed herewith).
Form of Director Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 to
the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2008, filed on
November 7, 2008).
List of subsidiaries of the Company.  (Filed herewith)
Consent of Independent Registered Public Accounting Firm.   (Filed herewith)
Certification of Chief Executive Officer.  (Filed herewith)
Certification of Chief Financial Officer.  (Filed herewith)
Certification of Chief Executive Officer.  (Filed herewith)
Certification of Chief Financial Officer.  (Filed herewith)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|40
|--



---

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

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

| | HEALTHTRONICS, INC.By: /s/ James S. B. Whittenburg
        James S. B. Whittenburg,
       Chief Executive Officer and 
        President (Principal Executive Officer)
       Date: March 10, 2009
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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


March 10, 2009/s/

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

March 10, 2009/s/
R. Steven Hicks 
         R. Steven Hicks, Non-executive Chairman of the Board

March 10, 2009/s/
         Donny R. Jackson 
         Donny R. Jackson, Director

March 10, 2009/s/
         Timothy J. Lindgren 
         Timothy J. Lindgren, Director

March 10, 2009
/s/
Ken S. Shifrin 
Ken S. Shifrin, Director

March 10, 2009
|----------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|41
|--



---

|By:          
Date: | /s/


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

March 10, 2009
|------------------- | --------------------------------------------------------------------------------

|42
|--



---

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

|INDEX
|-----

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Page               
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------
|
|Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:    
     Consolidated Statements of Income for the years ended December 31, 2008, 2007     and 2006.    
     Consolidated Balance Sheets at December 31, 2008 and 2007.    
     Consolidated  Statements  of  Stockholders  Equity for the years ended  December 31, 2008,    
     2007 and 2006.    
     Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006.    
     Notes to Consolidated Financial Statements. | A-2A-3A-4A-6A-7A-10

|A-1
|---



---

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

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

We have  audited the  accompanying  consolidated  balance  sheets of  HealthTronics,  Inc. and  subsidiaries  as of
December 31, 2008 and 2007,  and the related  consolidated  statements of income,  stockholders'  equity,  and cash
flows for each of the three years in the period  ended  December  31,  2008.  These  financial  statements  are the
responsibility  of the  Company's  management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our  opinion,  the  financial  statements  referred to above  present  fairly,  in all  material  respects,  the
consolidated  financial  position of  HealthTronics,  Inc. and  subsidiaries at December 31, 2008 and 2007, and the
consolidated  results of their  operations  and their cash  flows for each of the three  years in the period  ended
December 31, 2008, in conformity with U.S. generally accepted accounting principles.

As discussed in Note J to the consolidated  financial  statements,  effective  January 1, 2007, the Company changed
its  method of  accounting  for income  taxes to  conform to  Financial  Accounting  Board  Interpretation  No. 48,
Accounting for Uncertainty in Income Taxes.

We also have audited,  in accordance  with the standards of the Public Company  Accounting  Oversight Board (United
States),  HealthTronics,  Inc. and subsidiaries internal control over financial reporting as of December 31, 2008,
based on criteria  established  in Internal  Control-Integrated  Framework  issued by the  Committee of  Sponsoring
Organizations  of the Treadway  Commission  and our report dated March 4, 2009,  expressed an  unqualified  opinion
thereon.


/s/: Ernst & Young LLPAustin, Texas
March 4, 2009
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-2
|---



---

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

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

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

|A-3
|---



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES

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

|($ in thousands)                                 | December 31,
|------------------------------------------------ | ------------
|
|ASSETS                                           |             
|                                                
|Current assets:                                  |             
|Cash and cash equivalents                        |             
|Accounts receivable, less allowance for doubtful |             
|accounts of $2,485 in 2008 and $2,368 in 2007    |             
|Other receivables                                |             
|Deferred income taxes                            |             
|Prepaid expenses and other current assets        |             
|Inventory                                        |             
|Total current assets                             |             
|                                                
|Property and equipment:                          |             
|Equipment, furniture and fixtures                |             
|Building and leasehold improvements              |             
|                                                 |             
|                                                
|Less accumulated depreciation and                |             
|amortization                                     |             
|Property and equipment, net                      |             
|                                                
|Other investments                                |             
|Goodwill, at cost                                |             
|Intangible assets                                |             
|Other noncurrent assets                          |             
|                                                 |             

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

|A-4
|---



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES

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

|($ in thousands, except share data)                                             | December 31,
|------------------------------------------------------------------------------- | ------------
|
|LIABILITIES                                                                     |             
|                                                                               
|Current liabilities:                                                            |             
|Current portion of long-term debt                                               |             
|Accounts payable                                                                |             
|Accrued distributions to minority interests                                     |             
|Accrued expenses                                                                |             
|Total current liabilities                                                       |             
|                                                                               
|Long-term debt, net of current portion                                          |             
|Other long term obligations                                                     |             
|Deferred income taxes                                                           |             
|Total liabilities                                                               |             
|                                                                               
|Minority interest                                                               |             
|                                                                               
|                                                                               
|STOCKHOLDERS' EQUITY                                                            |             
|Preferred stock, $.01 par value, 30,000,000 shares authorized: none outstanding |             
|Common stock, no par value, 70,000,000 authorized: 39,494,314 issued            |             
|and 37,618,206 outstanding in 2008; 35,610,236 issued and 35,560,097            |             
|outstanding in 2007                                                             |             
|Accumulated earnings (deficit)                                                  |             
|Treasury stock, at cost, 1,876,108 shares in 2008 and 50,139 shares in 2007     |             
|                                                                               
|Total stockholders' equity                                                      |             
|                                                                                |             

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

|A-5
|---



---

|HEALTHTRONICS, INC. AND SUBSIDIARIES
                                  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                               For the years ended December 31, 2008, 2007 and 2006
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|($ in thousands, except share data)  | Issued Common Stock | Accumulated | Treasury Stock |           
|------------------------------------ | ------------------- | ----------- | -------------- | ----------
|
|Balance, December 31, 2005           |                     |             |                | 35,010,656
|Net income                           |                     |             |                | --        
|Purchase of treasury stock           |                     |             |                | --        
|Contribution of treasury stock       |                     |             |                | --        
|Issuance of stock for acquisitions   |                     |             |                | 166,666   
|Exercise of stock options, including |                     |            
|tax benefit totaling $69             |                     |             |                | 297,914   
|Share-based compensation             |                     |             |                | --        
|                                     |                     |            
|Balance, December 31, 2006           |                     |             |                | 35,475,236
|Net loss                             |                     |             |                | --        
|Contribution of treasury stock       |                     |             |                | --        
|Share-based compensation             |                     |             |                | 135,000   
|                                     |                     |            
|Balance, December 31, 2007           |                     |             |                | 35,610,236
|Net loss                             |                     |             |                | --        
|Purchase of treasury stock           |                     |             |                | --        
|Issuance of stock for acquisitions   |                     |             |                | 1,987,486 
|Share-based compensation             |                     |             |                | 1,896,592 
|                                     |                     |            
|Balance, December 31, 2008           |                     |             |                | 39,494,314

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

|A-6
|---



---

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

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

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

|A-7
|---



---

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

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

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

|A-8
|---



---

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

|($ in thousands)                                                       | Years Ended December 31,
|---------------------------------------------------------------------- | ------------------------
|
|SUPPLEMENTAL INFORMATION OF NON-CASH                                   |                         
|INVESTING AND FINANCING ACTIVITIES:                                    |                         
|                                                                      
|At December 31, the Company had accrued distributions payable          |                         
|to minority interests.  The effect of this transaction was as follows: |                         
|Current liabilities increased by                                       |                         
|Minority interest decreased by                                         |                         
|                                                                      
|In 2008, the Company acquired three lithotripsy partnerships,          |                         
|a cryosurgical company, a pathology lab and an IGRT                    |                         
|services operation.  The net assets and                                |                         
|liabilities acquired/sold were as follows:                             |                         
|Current assets increased by                                            |                         
|Noncurrent assets increased by                                         |                         
|Goodwill increased by                                                  |                         
|Current liabilities increased by                                       |                         
|Other long-term obligations decreased by                               |                         
|Minority interest increased by                                         |                         
|                                                                      
|In 2007, the Company acquired two lithotripsy partnerships and sold    |                         
|three lithotripsy partnerships.  The net assets and                    |                         
|liabilities acquired/sold were as follows:                             |                         
|Current assets increased by                                            |                         
|Noncurrent assets increased by                                         |                         
|Goodwill increased by                                                  |                         
|Current liabilities increased by                                       |                         
|Other long-term obligations decreased by                               |                         
|Minority interest increased by                                         |                         

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

|A-9
|---



---

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

|A.  ORGANIZATION AND OPERATION OF THE COMPANY


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

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

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

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

B.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation

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

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

Property and equipment are stated at cost. Major betterments are capitalized while normal maintenance and repairs
are charged to operations. Depreciation is computed by the straight-line method using estimated useful lives of
three to twenty years. Leasehold improvements are generally amortized over ten years or the term of the lease,
whichever is shorter. When assets are sold or retired, the corresponding cost and accumulated depreciation or
amortization are removed from the related accounts and any gain or loss is credited or charged to operations.
Depreciation expense for property and equipment was $11,076,000, $10,079,000 and $9,844,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-10
|----



---

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

|Impairment of long-lived assets

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

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

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

|A-11
|----



---

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

|Our fees for urology  services are recorded  when the  procedure  is performed  and are based on a contracted  rate
with a hospital  (wholesale  contract) or based on a contractual  rate with commercial  insurance  carriers (retail
contract),  individual or state and federal health care  agencies,  net of  contractual  fee reduction.  Management
fees from limited  partnerships are recorded  monthly when earned.  Distributions  from cost basis  investments are
recorded when received and totaled $1,508,000, $1,321,000 and $1,005,000 in 2008, 2007 and 2006, respectively.

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

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

For the years  ending  December 31,  2008,  2007 and 2006,  we had no customers  who  exceeded 10% of  consolidated
revenues.  Concentrations  of credit  risk with  respect to cash  relate to  deposits  held with banks in excess of
insurance  provided.  Generally,  these  deposits  may be redeemed  upon demand and,  therefore,  in the opinion of
management,  bear minimal risk.  Concentrations  of credit risk with respect to receivables  are limited due to the
wide variety of  customers,  as well as their  dispersion  across many  geographic  areas.  Other than as disclosed
below, we do not consider  ourselves to have any significant  concentrations of credit risk. At December 31,  2008,
approximately 16% of accounts  receivable relate to units operating in New York, 6% relate to units in Florida,  5%
relate  to units  operating  in  Virginia,  5% relate to units  operating  in  Minnesota,  5%  related  to units in
Louisiana,  and 5% relate to units in Indiana.  At  December 31,  2007,  approximately  28% of accounts  receivable
relate to units  operating in New York, 7% relate to units in Louisiana,  6% relate to units  operating in Florida,
6% related to units in Indiana, and 5% each relate to units in Texas and Minnesota.Income Tax

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

|A-12
|----



---

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

|Accounts Receivable

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

| | ($ in thousands) | Balance at
Beginning of
Year | Costs and
Expenses | Deductions | Other | Balance at
End of Year
| | ---------------- | ---------------------------- | ------------------ | ---------- | ----- | ----------------------
|
| |                  |                              | 2008               |            |       | $                     
| |                  |                              | 2007               |            |       | $                     
| |                  |                              | 2006               |            |       | $                     

|Inventory

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

As of December 31, 2008 and 2007, inventory consists of the following (in thousands):
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 2008 | 2007          
| |  | ---- | --------------
| |  |      | Raw Materials 
| |  |      | Finished Goods
| |  |      |               

|Stock-Based Compensation

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

|A-13
|----



---

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

|We have elected to use the modified  prospective  application method whereby SFAS No. 123(R) applies to new awards,
the  unvested  portion of existing  awards and to awards  modified,  repurchased  or canceled  after the  effective
date.Debt Issuance Costs

We expense debt issuance costs as incurred.Advertising costs

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

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

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

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

| | (In thousands, except per share data) | Net Income (loss) | Wtd. Avg.
No. of Shares              | Per Share
Amounts
| | ------------------------------------- | ----------------- | ------------------------------------ | -----------------
| |                                       |                   | For the year ended December 31, 2008 |                  
| |                                       |                   | Basic                                |                  
| |                                       |                   | Effect of dilutive securities:       |                  
| |                                       |                   | Options and non-vested shares        |                  
| |                                       |                   | Diluted                              |                  
|
| |                                       |                   | For the year ended December 31, 2007 |                  
| |                                       |                   | Basic                                |                  
| |                                       |                   | Effect of dilutive securities:       |                  
| |                                       |                   | Options and non-vested shares        |                  
| |                                       |                   | Diluted                              |                  
|
| |                                       |                   | For the year ended December 31, 2006 |                  
| |                                       |                   | Basic                                |                  
| |                                       |                   | Effect of dilutive securities:       |                  
| |                                       |                   | Options                              |                  
| |                                       |                   | Diluted                              |                  

|A-14
|----



---

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

|Unexercised  employee stock options and non-vested shares to purchase 2,783,000,  3,329,000 and 3,223,000 shares of
our common stock as of December 31,  2008, 2007 and 2006,  respectively,  were not included in the  computations of
diluted EPS because the exercise  prices were greater than the average  market price of our common stock during the
respective periods or we had a net loss in the respective period.Recently Issued Pronouncements

In April 2008, the Financial  Accounting  Standards  Board (FASB) issued FASB Staff Position  (FSP)  No. 142-3,
Determination  of the Useful Life of Intangible  Assets.  FSP 142-3 amends the factors that should be considered in
developing  renewal or extension  assumptions  used to determine the useful life of a recognized  intangible  asset
under  FASB  Statement  No. 142,  Goodwill  and Other  Intangible  Assets.  FSP 142-3 is  effective  for  financial
statements  issued for fiscal years  beginning  after  December 15,  2008, and interim  periods within those fiscal
years.  Early adoption is prohibited.  Based on our current  operations,  we do not expect that the adoption of FSP
142-3 will have a material impact on our financial position or results of operations.

In May 2008,  the FASB issued  Statement of Financial  Accounting  Standards No. 162 (SFAS 162), The Hierarchy of
Generally  Accepted  Accounting  Principles.  SFAS 162  identifies  the sources of accounting  principles  and the
framework  for  selecting  the  principles  used in the  preparation  of financial  statements  of  nongovernmental
entities that are presented in conformity with generally accepted  accounting  principles in the United States (the
GAAP hierarchy).  SFAS 162  will become  effective  60 days  following  the SECs  approval of the Public  Company
Accounting  Oversight  Board  amendments  to  AU Section 411,  The  Meaning of Present  Fairly in  Conformity  With
Generally Accepted Accounting  Principles. Based on our current operations,  we do not expect that the adoption of
SFAS 162 will have a material impact on our financial position or results of operations.

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

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

|A-15
|----



---

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

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

In September 2006, the FASB issued SFAS No. 157,  "Fair Value  Measurements"  (SFAS 157).  SFAS 157  defines fair
value,  establishes  a  framework  for  measuring  fair  value in GAAP and  expands  disclosures  about  fair value
measurements.  SFAS 157 is effective for fiscal years beginning after November 15,  2007 and interim periods within
those fiscal years.  In December 2007,  the FASB released a proposed FASB Staff  Position (FSP  FAS 157-b-Effective
Date of FASB Statement  No. 157) which, if adopted as proposed,  would delay the effective date of SFAS 157 for all
nonfinancial  assets and nonfinancial  liabilities,  except those that are recognized or disclosed at fair value in
the financial  statements on a recurring basis (at least annually).  In  February 2008,  the FASB issued FASB Staff
Position FAS 157-2,  Effective  Date of FASB Statement  No. 157 (the FSP).  The FSP delayed,  for one year, the
effective  date of FAS 157 for all  nonfinancial  assets  and  liabilities,  except  those that are  recognized  or
disclosed  in the  financial  statements  on at least an annual  basis.  The  implementation  of SFAS  No. 157  for
financial  assets and financial  liabilities,  effective  January 1,  2008,  did not have a material  impact on our
consolidated financial position and results of operations.

C.         GOODWILL AND OTHER INTANGIBLE ASSETS

We adopted SFAS No. 142 Goodwill and Other Intangible Assets effective January 1,  2002. Under this standard,  we
no longer  amortize  goodwill  and  indefinite  life  intangible  assets,  but those  assets are  subject to annual
impairment  tests. As of December 31, 2008, we had $4 million in indefinite  life intangible  assets related to the
HealthTronics  brand name.  Intangible  assets with finite lives  consisted  primarily of $34.6 million  related to
our IGRT  services  contract,  and $1.7 million  related to two  non-compete  agreements,  hospital  contracts  and
patents at December 31, 2008. The agreements will continue to be amortized over their useful lives.

The net carrying value of goodwill as of December 31, 2008 and 2007 is comprised of the following:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (in thousands) | Total | Urology Services           | Medical Products | 
| | -------------- | ----- | -------------------------- | ---------------- | 
| |                |       | Balance, December 31, 2006 |                  | 
| |                |       | Additions                  |                  | 
| |                |       | Deletions                  |                  | 
| |                |       | Impairments                |                  | 
| |                |       | Balance, December 31, 2007 |                  | 
| |                |       | Additions                  |                  | 
| |                |       | Deletions                  |                  | 
| |                |       | Impairments                |                  | 
| |                |       | Balance, December 31, 2008 |                  | 

|A-16
|----



---

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

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

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

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

Our discounted  cash flow  projections  for each reporting unit were based on five-year  financial  forecasts. The
five-year  forecasts  were based on annual  financial  forecasts  developed  internally  by  management  for use in
managing our business and through  discussions with an independent  valuation firm engaged by us. For our December
31, 2008 forecast,  the significant  assumptions of these five-year  forecasts included annual revenue growth rates
ranging from 2.9% to 4.5% and from 10.4% to 20% for the urology  services  and medical  products  reporting  units,
respectively.  The future cash flows were  discounted to present value using a mid-year  convention and a discount
rate of 13% for the  urology  services  and the  medical  products  reporting  units.  Terminal  values  for  both
reporting  units were  calculated  using a Gordon  growth  methodology  with a long-term  growth rate of 3.0%.  The
future  terminal  values of the urology  services and medical  products  reporting  units were $153 million and $61
million respectively at December 31, 2008.

For our December 31, 2007 forecast, the significant assumptions of the five-year forecasts included annual
revenue growth rates ranging from 5.6% to 11% and from 9.8% to 18.3% for the urology services and medical
products reporting units, respectively. The future cash flows for 2007 were discounted to present value using a
mid-year convention and a discount rate of 11% for the urology services reporting unit and 12.0% for the medical
products reporting unit. Terminal values for both reporting units were calculated using a Gordon growth
methodology with a long-term growth rate of 5.0%. The future terminal values of the urology services and medical
products reporting units were $284 million and $45 million respectively at December 31, 2007.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-17
|----



---

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

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

Other intangible assets as of December 31, 2008 and 2007, subject to amortization expense, are comprised of the
following (in thousands):
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Gross
Carrying
Amount | Accumulated
Amortization | Net
| |  | --------------------- | ------------------------ | ---
| |  |                       | December 31, 2008        |    
| |  |                       | Urology Services         |    
| |  |                       | Medical Products         |    
| |  |                       | Total                    |    
|
| |  |                       | December 31, 2007        |    
| |  |                       | Urology Services         |    
| |  |                       | Medical Products         |    
| |  |                       | Total                    |    

|Amortization expense for other intangible assets with finite lives was $1,286,000, $1,028,000 and $1,431,000 for
the years ended December 31, 2008, 2007 and 2006, respectively. We estimate annual amortization expense for each
of the five succeeding fiscal years as follows (in thousands):
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|D.         ACQUISITIONS

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

|A-18
|----



---

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

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

On April 17, 2008, we completed the acquisition of Advance Medical  Partners,  Inc.  (AMPI) pursuant to the Stock
Purchase  Agreement dated March 18, 2008 between us, Litho  Management,  Inc.,  AMPI and the  stockholders of AMPI.
Founded in 2003, AMPI is a leading  provider of urological  cryosurgery  services in the U.S. with operations in 46
states.  We acquired the  outstanding  shares of capital  stock of AMPI (other than shares  already held by us) for
an aggregate purchase price of approximately $13 million,  consisting of $6.9 million in cash and approximately 1.8
million  shares of our  common  stock,  plus a two-year  earn-out  based on the future  achievement  of EBITDA.  We
determined  the value of our common stock by using an average  closing  price for the two trading days prior to and
after the public  announcement  of the merger.  Based upon our  preliminary  allocation of the purchase  price,  we
recognized $12.3 million of goodwill related to this transaction, all of which is not tax deductible.

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

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

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

Our unaudited proforma combined income data for the periods ended December 31, 2008 and 2007, assuming the
acquisitions were effective January 1, of each year, is as follows:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ($ in thousands, except per share data) | 2008 | 2007                      
| | --------------------------------------- | ---- | --------------------------
| |                                         |      | Total revenues            
| |                                         |      | Total expenses            
| |                                         |      | Discontinued Operations   
| |                                         |      | Net income (loss)         
| |                                         |      | Diluted earnings per share

|A-19
|----



---

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

|E.  FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying  amounts and estimated fair values of our significant  financial  instruments as of December 31,  2008
and 2007 are as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 2008 | 2007                       
| |  | ---- | ---------------------------
|
| |  |      | Financial assets:          
| |  |      | Cash and cash equivalents  
| |  |      | Warrants/Common Stock      
| |  |      | Financial liabilities:     
| |  |      | Debt                       
| |  |      | Other long-term obligations

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

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

The  debt  has a  floating  rate,  therefore,  the  carrying  value  of the  debt at  December 31,  2008  and  2007
approximates fair value.Other Long-Term Obligations

At December 31,  2008,  as part of our  acquisition  of Medstone  International  Inc. in February  2004,  we had an
obligation  totaling $8,334 related to payments to an employee for $4,167 per month continuing  until  February 28,
2009 as consideration for a noncompetition  agreement.  We have an obligation  totaling $60,000 related to payments
of $3,333 a month until June 15, 2010 as consideration  for a noncompetition  agreement with a previous employee of
our Medical  Products  division.  At December  31, 2008 we had  $1,242,000  in long term  deferred  rent related to
leaseholds at our new corporate  office space in Austin,  Texas.  We are amortizing this deferred rent at a rate of
$18,136 per month. At December 31, 2008, we had an obligation  totaling  $500,000 for  restructuring  costs related
to the  vacating  of two  leased  properties.  Lease  payments,  net of the  projected  sublease  income,  totaling
$100,000 will continue  until  September 30, 2010.  Lease  payments,  net of projected  sublease  income,  totaling
$400,000  will  continue  until  October 3, 2010.  Leases have been  recorded at fair value.  We estimated the fair
value of the noncompete payments based on discounted cash flows, which is a level three analysis.Warrants

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

|A-20
|----



---

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

|Limitations

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

F.   ACCRUED EXPENSES

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

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

|G.  INDEBTEDNESS

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

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

|Senior Credit Facility

In March 2005, we refinanced our  then existing revolving  credit facility with a $175 million senior credit
facility comprised of a five year $50 million revolver due in March 2010 and a $125 million senior secured term
loan B (term loan B), due 2011.  In April 2005, we used the proceeds from the new term loan B to redeem our
$100 million of 8.75% unsecured senior subordinated notes and reduce the amounts outstanding under our new
revolving credit facility.  On April 14, 2008, we amended our senior credit facility to increase the revolving
line of credit from $50 million to $60 million.  On October 10, 2008, we amended our senior credit facility, to
increase the dollar amount of permitted acquisitions under the acquisitions negative covenant from $30 million to
$48 million during any twelve month period commencing on or after April 18, 2008 and prior to March 31, 2009.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-21
|----



---

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

|This  loan  bore  interest  at a  variable  rate  equal to LIBOR + 1.25 to 2.25% or prime + .25 to  1.25%.  We were
required to make quarterly  principal  payments in connection with the term loan B of $312,500 until February 2010,
when  quarterly  payments  would  have  increased  to $29.7  million.  On July 31,  2006,  we used a portion of the
proceeds  from the sale of our  specialty  vehicle  manufacturing  segment to repay the term loan B in full.  As of
December 31,  2008,  we have drawn $41 million on the  revolver.  Our senior  credit  facility  contains  covenants
that,  among other  things,  limit our ability to incur debt,  create liens,  make  investments,  sell assets,  pay
dividends, make capital expenditures,  make restricted payments, enter into transactions with affiliates,  and make
acquisitions.  In addition,  our facility  requires us to maintain  certain  financial  ratios.  Our assets and the
stock of our subsidiaries  collateralize  the revolving  credit facility.  We were in compliance with the covenants
under our senior credit facility as of December 31, 2008.Other long term debt

As of December  31,  2008,  we had notes  totaling  $5.4  million  related to  equipment  purchased  by our limited
partnerships,  which  indebtedness  we believe  will be repaid from the cash flows of the  partnerships.  They bear
interest at either a fixed rate of four to nine  percent or LIBOR or prime plus a certain  premium and are due over
the next four years.


The stated principal repayments for all indebtedness as of December 31, 2008 are payable as follows (in
thousands):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|H.       COMMITMENTS AND CONTINGENCIES

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

We sponsor a partially  self-insured  group  medical  insurance  plan.  The plan is designed to provide a specified
level of  coverage,  with  stop-loss  coverage  provided by a commercial  insurer.  Our maximum  claim  exposure is
limited to $110,000 per person per policy year. At  December 31,  2008, we had 323 employees  enrolled in the plan.
The  plan  provides  non-contributory  coverage  for  employees  and  contributory  coverage  for  dependents.  Our
contributions totaled $2,781,000, $2,852,000 and $2,351,000, in 2008, 2007 and 2006 respectively.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-22
|----



---

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

|We lease office space in several locations. Rent expense totaled $2,445,000, $1,757,000 and $1,491,000 for the
years ended December 31, 2008, 2007 and 2006.  Future annual minimum lease payments under all noncancelable
operating leases are as follows:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|I.STOCK BASED COMPENSATION



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

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

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

|A-23
|----



---

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

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

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

As of December 31, 2008, total  unrecognized  share-based  compensation  cost related to unvested stock options was
approximately  $1.3 million,  which is expected to be recognized  over a weighted  average period of  approximately
1.3 years. We also had $3.1 million of  unrecognized  compensation  costs related to non-vested  stock awards as of
December  31,  2008,  which is  expected to be  recognized  over a weighted  average  period of  approximately  1.6
years.  For the years ended December 31, 2008 and 2007, we have included  approximately  $2,881,000 and $1,108,000,
respectively, for share-based compensation cost in the accompanying consolidated statement of income.

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

At December 31,  2008, we had seven separate equity compensation plans: the Prime Medical Services,  Inc. (Prime)
1993 and 2003 stock option plans, the HealthTronics  Surgical Services,  Inc. (HSS) general,  2000, 2001 and 2002
stock option plans,  and the HSS 2004 equity  incentive  plan.  The plans,  and all  amendments  thereto,  had been
approved by Primes and HSS  shareholders,  as the case may be. On November  10,  2004,  Prime  completed a merger
with HSS pursuant to which Prime merged with and into HSS with HealthTronics, Inc. as the surviving corporation.

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

|A-24
|----



---

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

|The following table sets forth certain information as of December 31, 2008 about our equity compensation plans:
|---------------------------------------------------------------------------------------------------------------

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

|To calculate the  compensation  cost that was  recognized  under SFAS No. 123(R) for the three years ended December
31, 2008,  2007,  and 2006, we used the  Black-Scholes  option-pricing  model with the  following  weighted-average
assumptions  for equity awards  granted.  For December 31, 2007 and 2006,  respectively:  risk-free  interest rates
were 4.6% and 4.9%;  dividend yields were 0%;  volatility  factors of the expected market price of our common stock
were 47%;  and a  weighted-average  expected  life of the option of 6 years.  There were no options  granted in the
year ended December 31, 2008.

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

|A-25
|----



---

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

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

|                                  | 2008 | 2007 | 2006
|--------------------------------- | ---- | ---- | ----
|
|Outstanding at beginning of year  |      |      |     
|Granted                           |      |      |     
|Exercised                         |      |      |     
|Cancelled                         |      |      |     
|Forfeited                         |      |      |     
|Outstanding at end of year        |      |      |     
|Exercisable at end of year        |      |      |     
|Weighted-average fair value of   
|options granted during the period |      |      |     

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

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

Additional information regarding options outstanding for all plans as of December 31, 2008, is as follows:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         | Outstanding Options | Exercisable Options
|---------------------------------------- | ------------------- | -------------------
|
|$4.49 - $6.49                            |                     |                    
|$6.50 - $6.99                            |                     |                    
|$7.00 - $7.50                            |                     |                    
|$7.51 - $9.50                            |                     |                    
|$9.51 - $13.69                           |                     |                    
|                                         |                     |                    
|Aggregate intrinsic value (in thousands) |                     |                    

|The aggregate intrinsic value in the table above is based on our closing stock price of $2.25 per share as of
December 31, 2008.
|--------------------------------------------------------------------------------------------------------------------------------

|A-26
|----



---

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

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

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

|J.  INCOME TAXES

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

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

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

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

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

|A-27
|----



---

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

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

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

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

|($ in thousands)                                                                           | 2008 | 2007
|------------------------------------------------------------------------------------------ | ---- | ----
|Deferred tax assets:                                                                       |      |     
|Net operating loss carryforward                                                            |      |     
|Allowance for bad debts                                                                    |      |     
|State deferred tax                                                                         |      |     
|FAS 123(R) expense                                                                         |      |     
|AMT Credit                                                                                 |      |     
|HTRN acquired built-in losses                                                              |      |     
|Capitalized costs                                                                          |      |     
|Accrued expenses deductible for tax purposes when paid                                     |      |     
|Total gross deferred tax assets                                                            |      |     
|Less valuation allowance                                                                   |      |     
|Net deferred tax assets                                                                    |      |     
|Deferred tax liabilities:                                                                  |      |     
|Property and equipment, principally due to differences in depreciation                     |      |     
|Intangible assets, principally due to differences in amortization periods for tax purposes |      |     
|Total gross deferred tax liability                                                         |      |     
|Net deferred tax liability                                                                 |      |     

|In assessing  the  realizablity  of deferred tax assets,  management  considers  whether it is more likely than not
that some  portion or all of the deferred tax assets will not be  realized.  The ultimate  realization  of deferred
tax assets is dependent upon the  generation of future  taxable income during the periods in which those  temporary
differences  become  deductible.   Management  considers  the  scheduled  reversals  of  deferred  tax  liabilities
(including the impact of available carry back and carry forward  periods),  projected future taxable income and tax
planning  strategies in making this assessment.  Based on these criteria,  management  believes it will not realize
the  benefits  of these  deductible  differences;  accordingly,  we have  recorded a full  valuation  allowance  at
December 31, 2008.  The valuation allowance was zero at December 31, 2007.

At December 31, 2008 and 2007, we have federal net operating loss carry forwards, for federal income tax
purposes, of $97,988,000 and $84,344,000, respectively, which are available to offset federal taxable income, if
any, through 2028.  In addition, we have alternative minimum tax credit carry forwards at December 31, 2008 of
$511,000, which is available to reduce future federal regular income taxes, if any, over an indefinite period.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-28
|----



---

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

|As a result  of the  merger in 2004 in which  Prime  Medical  Services,  Inc.  (Prime)  completed  a merger  with
HealthTronics  Surgical  Services,   Inc.  (HSS)  pursuant  to  which  Prime  merged  with  and  into  HSS,  with
HeathTronics,  Inc. as the  surviving  corporation,  we  acquired  certain  tax  benefits,  a portion of which were
subject to  limitations  imposed  by Section  382 of the  Internal  Revenue  Code.  Due to the  uncertainty  of our
ability to realize these tax benefits, there was no recognition of them in our purchase accounting at that time.

In October,  2005,  we filed tax refund claims  related to HSSs  previously  filed 2000  2003 federal  income tax
returns.  In late September,  2008, the Internal Revenue Service (IRS) completed  examinations of our 2000  2006
federal  income  tax  returns.  As a result of the  examinations,  $2.3  million  of  previously  unrecognized  tax
benefits were  recognized  and recorded as a reduction of goodwill in the third quarter of 2008. In October,  2008,
we  received  $5.2  million  from the IRS,  a  portion  representing  tax  refunds  of $4.3  million  and a portion
representing  interest  income of  $856,000.  The tax refund of $4.3  million and  interest  income of $165,000 was
recorded  as a reduction  of  goodwill  while the  interest  income  earned  subsequent  to the  merger,  totaling,
$691,000, has been recorded as interest income in our income statement.

The tax benefits  acquired in the merger  included  built-in  losses that are  available to offset  future  taxable
income of  approximately  $12.4 million and net operating  loss carry  forwards that are available to offset future
taxable income through 2027 of  approximately  $67.9 million.  As a result of the completion of the IRS examination
during the third quarter of 2008, the tax affected  amount of these tax benefits,  which total $31.7  million,  has
been recorded as deferred tax asset on our balance  sheet. A valuation  allowance of $30.6 million was  established
in the third quarter of 2008 and an additional  $1.1 million was  established  in the fourth quarter of 2008 due to
the uncertainty in our ability to realize these tax benefits.

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

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

| | ($ in thousands) | 
| | ---------------- | 
| |                  | 
| |                  | 
| |                  | 
| |                  | 
| |                  | 
| |                  | 
| |                  | 

|Our continuing  practice is to recognize  interest and penalty expense in operating  expenses.  For the years ended
December  31, 2008 and 2007,  we expensed no  penalties  and  interest  and  $153,000 of  penalties  and  interest,
respectively.  The  $153,000 of interest  expensed in 2007 was  reversed in 2008 due to the  completion  of the IRS
examination.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-29
|----



---

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

|Deferred  taxes are not  provided on  undistributed  earnings of foreign  subsidiaries  because  such  earnings are
expected  to be  indefinitely  reinvested  outside  the  United  States.  If  these  amounts  were  not  considered
permanently  reinvested,  a cumulative deferred tax liability  approximating $87,000 and $118,000 would be provided
for in 2008 and 2007, respectively.


K.  SEGMENT REPORTING

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

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

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

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

|A-30
|----



---

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

|($ in thousands)                | Urology Services | Medical Products
|------------------------------- | ---------------- | ----------------
|2008                            |                  |                 
|                               
|Revenue from external customers |                  |                 
|Intersegment revenues           |                  |                 
|Interest income                 |                  |                 
|Interest expense                |                  |                 
|Depreciation and amortization   |                  |                 
|Impairment of Goodwill          |                  |                 
|Segment profit (loss)           |                  |                 
|Segment assets                  |                  |                 
|Capital expenditures            |                  |                 
|                               
|2007                            |                  |                 
|                               
|Revenue from external customers |                  |                 
|Intersegment revenues           |                  |                 
|Interest income                 |                  |                 
|Interest expense                |                  |                 
|Depreciation and amortization   |                  |                 
|Impairment of Goodwill          |                  |                 
|Segment profit (loss)           |                  |                 
|Segment assets                  |                  |                 
|Capital expenditures            |                  |                 
|                               
|2006                            |                  |                 
|                               
|Revenue from external customers |                  |                 
|Intersegment revenues           |                  |                 
|Interest income                 |                  |                 
|Interest expense                |                  |                 
|Depreciation and amortization   |                  |                 
|Impairment of Goodwill          |                  |                 
|Segment profit (loss)           |                  |                 
|Segment assets                  |                  |                 
|Capital expenditures            |                  |                 

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

| | ($ in thousands) | 2008 | 2007                                   | 2006
| | ---------------- | ---- | -------------------------------------- | ----
| |                  |      | Total revenues for reportable segments |     
| |                  |      | Corporate revenue                      |     
| |                  |      | Elimination of intersegment revenues   |     
| |                  |      | Total consolidated revenues            |     

|A-31
|----



---

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

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

| | ($ in thousands) | 2008 | 2007                                        | 2006
| | ---------------- | ---- | ------------------------------------------- | ----
| |                  |      | Total profit (loss) for reportable segments |     
| |                  |      | Corporate revenue                           |     
| |                  |      | Unallocated corporate expenses:             |     
| |                  |      | General and administrative                  |     
| |                  |      | Net interest expense                        |     
| |                  |      | Other, net                                  |     
| |                  |      | Unallocated corporate expenses total        |     
| |                  |      | Income (loss) before income taxes           |     

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

| | ($ in thousands) | 2008 | 2007                                 | 2006
| | ---------------- | ---- | ------------------------------------ | ----
| |                  |      | Total assets for reportable segments |     
| |                  |      | Unallocated corporate assets         |     
| |                  |      | Consolidated total                   |     

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

|($ in thousands)              | Segments | Corporate | Eliminating Entries | Consolidated
|----------------------------- | -------- | --------- | ------------------- | ------------
|2008                          |          |           |                     |             
|                             
|Interest and dividends        |          |           | $                   | 346         
|Interest expense              |          |           |                     | 530         
|Depreciation and amortization |          |           |                     | 11,939      
|Capital expenditures          |          |           |                     | 10,058      
|                             
|2007                          |          |          
|                             
|Interest and dividends        |          |           | $                   | 561         
|Interest expense              |          |           |                     | 767         
|Depreciation and amortization |          |           |                     | 10,438      
|Capital expenditures          |          |           |                     | 9,096       
|                             
|2006                          |          |          
|                             
|Interest and dividends        |          |           | $                   | 349         
|Interest expense              |          |           |                     | 873         
|Depreciation and amortization |          |           |                     | 10,507      
|Capital expenditures          |          |           |                     | 13,058      

|A-32
|----



---

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

|The amounts in 2008,  2007 and 2006 for interest  income and expense,  depreciation  and  amortization  and capital
expenditures  represent  amounts  recorded  by the  operations  of our  corporate  functions,  which  have not been
allocated to the segments.


L.   DISCONTINUED OPERATIONS

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

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

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

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

|A-33
|----



---

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

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

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

| |  | Year Ended December 31,
| |  | -----------------------
|
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        
| |  |                        

|Pursuant to EITF 87-24  Allocation of Interest to  Discontinued  Operations, we have allocated  certain  interest
and the related fees incurred to refinance  our senior  credit  facility that was required to be repaid as a result
of the disposal of our specialty  vehicle  manufacturing  segment.  Accordingly,  we have included in  discontinued
operations interest expense totaling $4,830,000 for the year ended December 31, 2006.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A-34
|----



---

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

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

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

We purchased  debt of HMT AG in the first  quarter of 2005.  We paid $1.3 million and incurred  certain  contingent
obligations  in the amount of $350,000 in return for  assignment  of a $5.1 million  claim against HMT AG held by a
foreign  bank.  In addition to the claim,  we also  received  an  assignment  from the bank of a pledge of HMT AGs
accounts  receivable  that  secured  the  $5.1  million  claim.  Through   December 31,   2008,  we  had  recovered
approximately $2.8 million. Any additional recoveries in the future will be recorded as income when received.


M.         VARIABLE INTEREST ENTITIES

We have determined  that one of our  consolidated  partnerships,  acquired in the HSS merger and in which we have a
20%  interest,  has  certain  related  party  relationships  with two  Variable  Interest  Entities  (VIE),  and in
accordance with FIN 46(R), has  consolidated  those entities.  As a result of consolidating  the VIEs, of which the
partnership is the primary  beneficiary,  we have recognized  minority  interest of  approximately  $800,000 on our
consolidated  balance sheets at December 31, 2008 and 2007, which represents the difference  between the assets and
the  liabilities  recorded  upon  the  consolidation  of the  VIEs.  The  liabilities  recognized  as a  result  of
consolidating  the VIEs do not represent  additional  claims on our general assets.  Rather,  they represent claims
against the specific assets of the consolidated  VIEs.  Conversely,  assets recognized as a result of consolidating
these VIEs do not represent  additional  assets that could be used to satisfy  claims  against our general  assets.
Reflected on our  consolidated  balance sheet are $4 million for both 2008 and 2007,  respectively,  of VIE assets,
representing  all of the assets of the VIEs.  The VIEs assist the  partnership  in providing  urological  services,
minimally invasive prostate treatments, and other services in the Greater New York metropolitan area.


N.  RELATED PARTY TRANSACTIONS

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

|A-35
|----



---

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

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

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

|A-36
|----



---