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

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FORM 10-KSB

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

for the fiscal year ended December 31, 2001

or

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

COMMISSION FILE NUMBER 000-30406

HealthTronics Surgical Services, Inc.(Exact name of registrant as specified in its charter)

|GEORGIA(State or other jurisdiction of
incorporation or organization)                    |  | 58-2210668(I.R.S. Employer
Identification No.)
|---------------------------------------------------------------------------------------- |  | ----------------------------------------------
|1841 WEST OAK PARKWAY, SUITE A
MARIETTA, GEORGIA(Address of principal executive offices) |  | 30062(Zip Code)                               

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

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

NONE

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

Common Stock, no par value

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Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES
ý NO o

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

State
issuer's revenues for the most recent fiscal year.

$43,882,106



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Cautionary Statements

Included in this report are forward-looking statements that reflect management's current outlook for future periods. As always, these expectations and projections
are based on currently available competitive, financial, and economic data, along with operating plans, and are subject to future events and uncertainties, including those uncertainties identified
under the caption "Risk Factors" in Item 1 of this report.

Part I

Item 1: Description of Business.

General

HealthTronics Surgical Services, Inc. (may be referred to as, "HealthTronics", the "Company", "we", "us" or "our") is a Georgia corporation founded in 1995
for the purpose of providing state-of-the-art noninvasive treatment solutions for certain orthopaedic and urologic conditions. Through exclusive distribution
agreements with HMT High Medical Technologies AG ("HMT"), the Company either forms operating partnerships with physicians or sells certain devices which are used to treat patients. These devices
include the OssaTron® orthopaedic shock wave system, the LithoTron® kidney lithotripter and the LithoTron Ultra endourology workstation. In 2000, we also began to market the
CystoTron urodiagnostic table. All of these devices have been approved by the Food and Drug Administration ("FDA") and are currently marketed throughout Europe. These products are
currently manufactured by HMT of Switzerland and Philips Medical Systems of Germany.

As
part of its strategy, the Company provides Orthotripsy® extracorporeal shock wave therapy ("ESWT") and lithotripsy services to doctors, medical facilities and,
increasingly, directly to patients. As a service provider, HealthTronics supplies the device, the technologist and the consumables required to perform lithotripsy or Orthotripsy ESWT treatment.

Through
the Company's acquisition of Litho Group, Inc. ("Litho Group") from Integrated Health Services, Inc. on December 11, 2001, the Company believes it provides
more lithotripsy treatments on an annualized basis than any other provider in the United States. In addition, as the first mover in the fast growing Orthotripsy ESWT business, HealthTronics is
currently the largest provider of this service. As of December 31, 2001, the Company had 100 lithotripsy devices and 48 OssaTron machines in operation throughout 40 states.

The
Company had 261 employees as of December 31, 2001, and management believes relations with the employees are good.

The Orthopaedic Market



The OssaTron is an extracorporeal (non-invasive) medical device, which uses high energy shock waves to treat chronic musculoskeletal injuries.
Orthotripsy ESWT, the Company's name for this procedure, is the process by which shock waves are transmitted into the site of a chronic musculoskeletal injury. Most chronic injuries are characterized
by scar and inflammatory tissue. When shock waves are applied to these tissues, controlled microscopic injuries are created within the already damaged tissues. Clinical studies by the Company and data
currently available in Europe show that the resulting microscopic injuries stimulate the formation and growth of new blood vessels into the area. These new blood vessels bring with them
bone-healing and tissue-healing cells which stimulate the healing process. The result is a physiologic repair of the musculoskeletal problem. The benefits to the patient are less
associated pain, fewer complications, faster recovery and lower costs.

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HealthTronics'
OssaTron device has been used successfully in Europe since 1995 to treat a variety of orthopaedic disorders such as plantar fasciitis (heel pain), lateral epicondylitis
(tennis elbow), Achilles tendonitis, patellar tendonitis, avascular necrosis, shoulder calcification and nonunion fractures. On
October 12, 2000, the FDA granted a Class III pre-market approval ("PMA") for marketing of the OssaTron for the treatment of plantar fasciitis.



HealthTronics is the first company to market orthopaedic shock wave technology in North America. Our OssaTron orthopaedic shock wave device was approved by the
FDA on October 12, 2000 for the treatment of plantar fasciitis (commonly known as heel spurs or heel pain syndrome). There is no verifiable data on the number of cases of plantar fasciitis, but
we estimate that about six and a half million new patients each year are afflicted with this condition. HealthTronics believes that up to 10% of these patients could be candidates for Orthotripsy ESWT
with the OssaTron rather than undergo invasive surgery as a treatment.

HealthTronics
believes the OssaTron can be used to treat a variety of additional orthopaedic disorders. Other soft tissue indications for the OssaTron include lateral epicondylitis (also
known as tennis elbow, for which we have completed an FDA study), Achilles tendonitis, patellar tendonitis and shoulder tendonitis. Although the Company is still compiling verifiable incidence data
for these indications, we estimate that between three and four million people annually suffer from these conditions. The Company recently submitted a pre-market approval application to the
FDA for the treatment of lateral epicondylitis. Future studies include the treatment of Achilles tendonitis, patellar tendonitis and shoulder tendonitis. The OssaTron has also exhibited the potential
to stimulate healing of nonunion fractures and other pathologic conditions of the bone.

Our
preferred marketing strategy is to place OssaTron devices into limited partnerships of which HT Orthotripsy Management Company, LLC, a wholly owned subsidiary of the Company, is the
general partner. The Company capitalizes each partnership with an OssaTron and, at times, a truck and cash. We then negotiate with hospitals and surgery centers to provide Orthotripsy ESWT services
within their facilities. We pay the hospital or surgery center a fee for access to their facility. The Company then bills the third party payors for the facility fee and the technical fee. A
percentage of the limited partnership interest may be sold to physicians or other partners. Our goal with this arrangement is to generate recurring revenue for the Company for as long as the device is
operational.



On January 29, 2002, Dornier Medical Systems received FDA approval for an orthopaedic shock wave device for the treatment of plantar fasciitis. The Company
does not know what Dornier's strategy is for marketing its device, however we anticipate that this product will compete against the OssaTron orthopaedic shock wave device for the treatment of heel
pain. We believe that Siemens GmbH is also in the process of conducting clinical studies with an orthopaedic shock wave device for the treatment of chronic orthopaedic injuries.

The Urology Market



HealthTronics' primary urology product is the LithoTron lithotripter. The LithoTron was developed by HMT of Switzerland. Since 1996, HealthTronics has had the
exclusive right to market this device in the United States, Canada, and Mexico.

A
lithotripter breaks kidney and ureter stones into pieces small enough to be passed from the body through the normal flow of urine. The LithoTron does this by sending precisely focused,
high-energy

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shock waves through the body to the kidney and ureter stones, pulverizing the stones into sandlike granules, which can be eliminated from the body normally.

HealthTronics
received FDA approval for the LithoTron on July 21, 1997, after completion of a four-site Investigational Device Exemption (IDE) study. Since that time,
we believe HealthTronics has become one of the leading providers of new lithotripsy equipment in North America.

One
of the reasons for the overwhelming popularity of the LithoTron is its effectiveness. Our studies show that the LithoTron has one of the highest success rates (86.1%) and one of the
lowest retreatment rates (4.1%) of any lithotripter on the market. In addition, the LithoTron is very safe for patients, easy for physicians and technologists to operate, and cost effective for
healthcare facilities. These factors have also helped to make the LithoTron one of the top-selling lithotripters in North America.

The
LithoTron is small, modular and easy to move. Most LithoTrons are shared by several hospitals and surgery centers and are transported among them in small trucks. This high degree of
mobility enables a LithoTron to serve multiple facilities. We estimate that approximately 50,000 patients were treated on LithoTron lithotripters in 2001.



The LithoTron Ultra endourology workstation was developed jointly by HMT of Switzerland and Philips Medical Systems of Germany. HealthTronics has the exclusive
right to market this product in the United States, Canada and Mexico. We received supplemental approval from the FDA to begin marketing the device in 1999.

The
LithoTron Ultra was designed for fixed site installation at hospitals and large surgery centers. To date, five of the largest lithotripsy centers in North America have installed the
LithoTron Ultra. This device not only has the ability to disintegrate kidney stones in the same manner as the LithoTron but also has significant diagnostic capabilities. This multifunctional device
can be used to perform a variety of urologic examinations, procedures and treatments.

Among
its many features, the LithoTron Ultra has a state of the art x-ray system, which produces better images than conventional x-ray techniques. In addition to
its superb imaging, the x-ray system significantly reduces the amount of radiation exposure experienced by patients and medical staff. In some cases, radiation exposure can be decreased by
as much as 95%.



The CystoTron diagnostic urology table was developed by Philips Medical Systems of Germany. HealthTronics has the exclusive right to sell this device in the
United States, Canada and Mexico, and began marketing this device in 2000. The CystoTron can be used to perform various urologic examinations, procedures and treatments. Like all of HealthTronics'
products, the CystoTron provides comfort and safety for patients and physicians. The CystoTron is versatile, easy to operate and has the same state of the art x-ray system as the LithoTron
Ultra.

Market Overview

It is estimated by healthcare providers that approximately 600,000 patients per year are diagnosed with kidney stones in the United States. Of these, about
250,000 will be treated with lithotripsy, a non-surgical therapy for the disintegration of kidney stones that was developed in Germany in the late 1970's and early 1980's. At the end of
2001, it is estimated that approximately 550 to 600 lithotripter systems were in operation in the United States. These lithotripters either were installed in hospitals or outpatient centers or were
operating as mobile/transportable devices. The majority of these lithotripsy devices were distributed by companies other than HealthTronics.

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At
the end of 2001, there were approximately 100 HealthTronics urology devices operating in North America.



The kidney lithotripsy market is extremely competitive and, therefore, we have a multifaceted marketing strategy. Our primary focus is the creation of lithotripsy
partnerships with urologists. Within these partnerships we may be the manager, general partner or minority partner. These partnerships generally either act as a vendor of lithotripsy services to
hospitals and surgery centers on a per patient charge basis.

The
Company also leases equipment to hospitals and doctors with whom we have no affiliation. Additionally, we sell equipment directly to non-affiliates.



Our competitors in the field of kidney lithotripsy include companies such as Dornier Medical Systems, Siemens GmbH, Medstone International, Inc., Storz
Medical Systems, Prime Medical Services, Inc. and American Kidney Stone Management. All of these companies have been operating in the kidney lithotripsy business longer than HealthTronics.

Technology Services

HealthTronics formed its own Technology Services Division ("HTSD") in 1999. Since that time, HTSD has been providing installation, maintenance, service and
technical support for our products. The service provided includes warranty work on new equipment as well as post-warranty service. Post-warranty service is provided on either a
contractual or a time and materials basis.

All
HTSD service engineers meet the stringent certification prerequisites of the manufacturer HMT and HealthTronics. Their certification aids in compliance with all Good Manufacturing
Practice ("GMP") requirements of HMT. Annual re-certification of our engineers ensures they have the most current knowledge of our products and that all service performed meets the
manufacturer's conditions for GMP.

Through
the acquisition of Litho Group, the Company also acquired ServiceTrends, Inc. ServiceTrends provides service, maintenance, installation and technical support for many of
Litho Group's devices as well as for additional machines that are not related to the Company. We will continue to operate ServiceTrends and will continue services to all parties, related and
non-related, for the foreseeable future.

The
equipment service business is very competitive, and it is entirely possible that other national or local medical device service companies will also attempt to capture a share of this
business.

Risk Factors

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

We are entirely dependent on HMT to manufacture certain products we distribute. If HMT ceased operations we might not find a suitable alternative
manufacturer.

Our
main products are manufactured by HMT, a privately held company that is not required to publish any financial information. If HMT experiences financial, manufacturing or development
difficulties or if there are adverse developments in our relationship with HMT, we may be required to find an alternative manufacturer or to manufacture our products on our own. We may not be able to

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find an alternative source to develop or manufacture our products on a timely basis or on terms acceptable to us. We do not own or operate any manufacturing facilities.

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

Our
success in developing and assisting in the operation of lithotripsy and Orthotripsy partnerships in which we hold an interest will depend on our ability to develop and maintain
relationships with
physician groups and hospitals, consistent with government regulations affecting these relationships. We cannot ensure that we will be successful in identifying and establishing relationships with
physicians or hospitals, nor can we ensure that affiliated physician groups will maintain successful medical practices or that any particular key member of a physician group will continue to practice
with an affiliated partnership. Furthermore, disputes may arise periodically between physicians or hospitals and us regarding the management or operation of any of the partnerships in which we have an
interest. Other factors that could interfere with our relationships with physicians include dissatisfaction with our medical devices, regulatory changes, retirement of physician investors and efforts
by our competitors.

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

Our
operations and those of healthcare professionals and facilities with which we do business are subject to extensive regulation by federal and state governments. Such regulations may
force us to delay, modify or avoid certain transactions that would otherwise benefit the Company.

The
Medicare and Medicaid Anti-Kickback Statute ("Anti-Kickback Statute") prohibits certain business practices and relationships under Medicare, Medicaid and
other federal healthcare programs. Prohibited practices include the payment, receipt, offer or solicitation of money in connection with the referral of patients for services covered by a federal or
state healthcare program. We contract with physicians under a variety of financial arrangements, and physicians have ownership interests in some entities in which we too have an interest. If we are
found to have failed to comply with any of these laws, we could suffer criminal and civil penalties and/or exclusion from participating Medicare, Medicaid or other governmental healthcare programs and
possible license revocation.

The
Federal Self-Referral Law prohibits a physician from referring a patient to an entity with which he or she (or a family member) has a financial relationship if the
referral involves a "designated health service" reimbursable under the Medicare or Medicaid programs. The term "designated health services" does not specifically include orthopaedic ESWT. However,
lithotripsy procedures are currently required to be billed to Medicare as hospital services. Inpatient and outpatient hospital services are expressly included among designated health services covered
under the statute. Accordingly, lithotripsy could be covered under the Federal Self-Referral Law as well. If orthopaedic ESWT procedures are performed under arrangements with hospitals,
then they may be covered under the Federal Self-Referral Law as well. If orthopaedic ESWT is deemed covered under the statute because such services are required to be billed through a
hospital or on some other basis and no exception is provided, referrals of Medicare and Medicaid patients by physicians with an ownership interest in, or a compensation arrangement with, a
partnership, or with a hospital or ambulatory surgery center ("ASC") with which the Partnership had leasing arrangements, may be prohibited. The final regulations do provide that a rental arrangement
that otherwise satisfies a lease exception may provide for payment on a per-treatment or usage basis, even if physicians own the equipment and refer their patients for treatments using the
equipment.

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

Third-party payors could refuse to reimburse healthcare providers for use of our current or future products, which could make our revenues decline.

Third-party
payors are increasingly attempting to contain healthcare costs by limiting both coverage and the level of reimbursement of new medical procedures and treatments.
Consequently, significant uncertainty exists as to the reimbursement status of newly approved healthcare products. The hospitals and surgery centers to which we currently provide lithotripsy services
are reimbursed for lithotripsy services under various federal and state programs, including Medicare and Medicaid, primarily at fixed rates. These programs are subject to statutory and regulatory
changes, administrative rulings, interpretations of policy and governmental funding restrictions, all of which may have the effect of decreasing program payments, increasing costs or requiring us to
modify the way in which we operate our business. These changes could have a material and adverse effect on us.

With
respect to the OssaTron, we cannot ensure that third-party payors will establish and maintain price levels sufficient for us to realize an appropriate return on our investment.
Furthermore, physicians, hospitals and other healthcare providers may be reluctant to purchase our products if they do not receive sufficient reimbursement for the cost of the procedures using our
products.

We face intense competition and rapid technological change that could result in products that are superior to the products we are commercializing or
developing.

The
medical device industry is subject to rapid and significant technological change. Our competitors may develop technologies and products that are more effective or less costly than
any of our current or future products or that could render our products obsolete or noncompetitive. Many of these competitors have substantially greater resources and marketing capabilities than we
do.

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

Our
business exposes us to potential product liability risks that are inherent in the testing, manufacturing, marketing and selling of medical devices, including those which may arise
from misuse or malfunction of, or design flaws in, our products. We may be held liable if any of our products causes injury or is found otherwise unsuitable during product testing, manufacturing,
marketing or sale. Treatment with ESWT may result in a variety of complications, in particular, post-treatment pain and neurological symptoms. We cannot ensure that we will be able to
avoid product liability exposure. Product liability insurance for the medical technology industry is generally expensive, if available at all. We cannot assure that our present insurance coverage is
adequate or that we can obtain adequate insurance coverage at a reasonable cost in the future.

The failure to integrate Litho Group, Inc. and its subsidiary partnerships successfully may result in the Company not achieving the anticipated benefits of the
merger.

In
integrating Litho Group, the Company will face challenges in consolidating functions, integrating its organizations, procedures, and operations in a timely and efficient manner and
retaining key personnel. These challenges will result principally because Litho Group, Inc.:



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As
a result, the integration will be complex and will require additional attention from members of management. The diversion of management attention and any difficulties encountered in
the transition and integration process could have a material adverse effect on the Company's revenues, level of expenses and operating results.

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

The
medical device industry is characterized by a substantial amount of litigation over patent and other intellectual property rights. No one has claimed that any of our medical devices
infringe on their intellectual property rights; however, it is possible that we may have unintentionally infringed on 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. Our Chairman, Dr. Argil Wheelock, is a urologist whose management ability and relationships with our physician partners are extremely important to the Company. The loss of services of
any of these persons could adversely affect the commercialization of our current products and our ability to develop and commercialize future products. There is intense competition for qualified
staff, and we cannot assure 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.

We have incurred a significant amount of indebtedness.

The Company has incurred debt to finance the acquisition of Litho Group, Inc. In order to comply with the debt covenants, the Company must use a
significant portion of its ongoing income to meet scheduled payment terms. At December 31, 2001, we had debt outstanding of approximately $53,000,000 and shareholders' equity of $21,900,000.
The Company may continue to borrow funds to finance acquisitions as well as for other purposes.

Such
a large amount of debt could have negative consequences for us, including without limitation:



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

Item 2: Description of Property.

In January 2000, we negotiated a seven-year lease on a 28,000 square foot facility located in Marietta, Georgia. We took occupancy of the new
facility in April 2000. The monthly rental is calculated on a graduating scale beginning at $8,500 per month for the first year and ending with $18,600 per month for the last year. The
straight-line expense is $17,800 per month for the life of the lease. The property is in good condition and is sufficient to meet our current operating needs.

Item 3: Legal Proceedings.

The Company is periodically involved as a plaintiff or defendant in various legal actions, in the ordinary course of its business. Management believes that those
claims in which the Company is a defendant are without merit or that the ultimate liability, if any, resulting from them will not materially affect the Company's financial condition.

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

No matters were submitted to a vote of shareholders of the Company during the fourth quarter of the Company's fiscal year ended December 31, 2001.

Part II

Item 5: Market for Common Equity and Related Shareholder Matters.

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

Fiscal Year ended December 31, 2000

High

LowFirst Quarter

$
20.94

$
8.31Second Quarter

$
19.81

$
11.38Third Quarter

$
21.00

$
12.25Fourth Quarter

$
15.25

$
5.00


Fiscal Year ended December 31, 2001

High

LowFirst Quarter

$
13.75

$
6.19Second Quarter

$
11.35

$
6.63Third Quarter

$
10.25

$
4.45Fourth Quarter

$
9.55

$
5.30


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

At
March 25, 2002, there were approximately 236 shareholders of record.

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

Item 6: Management's Discussion and Analysis or Plan of Operation.

Overview

HealthTronics Surgical Services, Inc. was incorporated in the State of Georgia in December 1995 to address market opportunities in the fields of
urology and orthopaedics. We commenced operations in May 1996. In July 1997, we received FDA approval to market the LithoTron and began selling LithoTron devices, consumables and
services. The Company also began forming partnerships with physicians to treat patients with the LithoTron.

On
October 12, 2000, we received FDA approval to market the OssaTron for treatment of plantar fasciitis. We have completed our OssaTron FDA clinical trial for the treatment of
lateral epicondylitis (commonly known as tennis elbow). We are establishing test sites for OssaTron FDA clinical trials for additional applications.

In
1996, HMT granted us the right to purchase the manufacturing rights to the LithoTron and OssaTron medical devices. We also operate under the terms of a distribution agreement with HMT
that grants us the exclusive right to make, use, sell and lease the LithoTron and OssaTron and related parts in the United States, Canada and Mexico. Both products are also being used outside North
America.

With
each FDA approval, it is our intent to generate revenues from three sources: 1) sales of medical devices including related accessories; 2) recurring revenues from
leasing, licensing fees, sales of consumable products and maintenance of equipment; and 3) investment income generated from partnerships and joint ventures with physicians, dealerships and
hospitals that purchase equipment from us, as well as management fees from those entities.

HealthTronics
is the sole shareholder of Litho Management, Inc. which has a 1% general partner interest and a 39.6% limited partnership interest in U.S. Lithotripsy ("USL"), a Texas
limited partnership. USL is the sole general partner in several separate partnerships with equity interests ranging from 10% to 99% (the "second tier partnerships"), formed for the purpose of
purchasing, owning and operating certain medical devices utilizing shock wave therapies. As sole general partner, USL consolidates the second tier partnerships.

In
December 2001, we purchased 100% of the outstanding stock of Litho Group, Inc. ("LGI"). LGI is the sole general partner of several separate second and third tier lithotripsy
partnerships with equity interests ranging from 30% to 100%, operating primarily in the northern, eastern and southern United States. As sole general partner, LGI consolidates the second and third
tier partnerships.

We
are also general partner or managing partner in various separate lithotripsy partnerships, which it consolidates.

In
October 2000, with the FDA approval of the OssaTron we began establishing Orthotripsy partnerships for the purpose of purchasing, owning and operating OssaTron devices. We contributed
certain assets and capital to partnerships and offered the equity interests to third parties. As sole general partner, through its subsidiary, HT Orthotripsy Management Company, LLC, we consolidate
the second tier Orthotripsy partnerships. We have equity interests in these partnerships ranging from 14% to 100%.

In
2001, we began sustained efforts to train physicians on the use of the OssaTron for the treatment of plantar fasciitis and also placed 45 OssaTrons into the U.S. market. The Company
performed approximately 2,700 treatments on these devices.

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Management
expects to continue the growth of our Orthotripsy business which could include the placement of additional machines in the U.S. market. We also plan to integrate the
acquisition of Litho Group into our existing operations and continue to focus on increasing patient treatments throughout our lithotripsy business.

The
accompanying consolidated financial statements include the accounts of each of our subsidiaries. All significant intercompany accounts and transactions have been eliminated in
consolidation. See Note 5 to the financial statements for discussion of minority interests.

Results of Consolidated Operations

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Net Revenue:Net revenue increased from $33,846,015 for the year ended December 31, 2000 to $43,882,106 for the year
ended December 31, 2001, an increase of 30%. This increase is attributable to the increase in treatment revenues generated by lithotripsy partnerships acquired in 2001 combined with an increase
in the number of clinical procedures generated by orthopaedic and urology partnerships over 2000.

Cost of Devices, Service Parts and Consumables:Cost of devices, service parts and consumables decreased from $9,127,915 for
the year ended December 31, 2000 to $8,685,833 for the year ended December 31, 2001, a decrease of 5%. This decrease is mainly attributable to a change in the nature of net revenue from
primarily device sales in 2000 to clinical services revenues in 2001. Expenses related to clinical services revenues are included in salaries, general and administrative expenses.

Salaries, General and Administrative Expenses:Salaries, general and administrative expenses increased from $11,508,604 for
the year ended December 31, 2000 to $19,094,994 for the year ended December 31, 2001, an increase of 66%. This increase is primarily attributable to the 2001 lithotripsy partnership
acquisitions as well as the addition of (1) personnel for corporate administration, reimbursement administration and Orthotripsy partnership operations and (2) marketing and general
expenses for the expansion of reimbursement and corporate administrative functions related to the Orthotripsy business.

Depreciation and Amortization:Depreciation and amortization increased from $2,839,000 for the year ended December 31,
2000 to $4,395,956 for the year ended December 31, 2001, an increase of 55%. This increase is attributable to the 2001 addition of orthopaedic equipment and corporate office equipment.

Equity in Earnings of Unconsolidated Partnerships:Equity in earnings of unconsolidated partnerships increased from $164,516
for the year ended December 31, 2000 to $194,141 for the year ended December 31, 2001, an increase of 18%. This increase is attributable to the growth of the equity-based partnerships.

Partnership Distributions from Cost Based Investments:Partnership distributions from cost based investments increased from
$387,997 for the year ended December 31, 2000 to $488,923 for the year ended December 31, 2001, an increase of 26%. This increase is attributable to the growth in earnings of
cost-based partnerships over 2000.

Gain on Sale of Investment Interest:Gain on sale of investment interest increased from $739,851 for the year ended
December 31, 2000 to $3,396,860 for the year ended December 31, 2001, an increase of 359%. This increase is due to gains recognized in 2001 on the sale of Orthotripsy partnership
interests over 2000.

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Interest Expense:Interest expense increased from $378,523 for the year ended December 31, 2000 to $509,052 for the
year ended December 31, 2001, an increase of 34%. This increase is primarily attributable to the addition of debt to finance the fourth quarter acquisition of Litho Group, Inc.

Interest Income:Interest income decreased from $235,355 for the year ended December 31, 2000 to $173,634 for the year
ended December 31, 2001, a decrease of 26%. This decrease is due to the reduction of excess cash balances available for investment during 2001.

Minority Interest:Minority interest increased from $7,038,613 for the year ended December 31, 2000 to $10,230,481 for
the year ended December 31, 2001, an increase of 45%. This increase is attributable to the increase in the number of minority investors in the Company's consolidated subsidiaries as well as the
increase in the income growth of new and existing subsidiaries.

Provision for Income Taxes:Provision for income taxes increased from $1,860,221 for the year ended December 31, 2000
to $2,086,791 for the year ended December 31, 2001, an increase of 12%. The increase is attributable to the increase in taxable income over the prior year.

Critical Accounting Policies

Revenue Recognition, Gain Recognition and Allowance for Doubtful Accounts

Revenue
is recognized upon delivery at the customer's destination for sales of medical devices to unaffiliated entities. For miscellaneous sales of consumables, revenue is recognized at
the time of shipment by the Company.

During
2001 and 2000, we sold medical devices to certain limited partnerships and limited liability corporations in which we have a minority interest and have guaranteed a portion of the
long-term obligations related to the purchase of the medical devices. We have accounted for these minority interests using the equity or cost basis methods of accounting (depending upon
our ability to exercise significant influence over the operating and financial policies of the investment partnership). A pro-rata portion of the profit, $43,400 and $7,673, was deferred
on sales of the medical devices to these entities for the years ended December 31, 2001 and 2000, respectively.

Net
revenue includes treatment fees for medical devices used in the clinical setting. Treatment revenue is primarily "wholesale" or "retail." Wholesale revenue is generated primarily
from fixed fee contracts with various medical facilities and is recorded in the month the related treatments are performed. Retail revenue is recorded when we bill third party payors for medical
facility and technical fees at the time services are rendered. These third party billings may or may not be contractual. Adjustments which reduce revenue from established contractual or estimated
non-contractual billing rates to amounts estimated to be reimbursable are recognized in the period the services are rendered.
Differences in estimates recorded and final settlements are reporting during the period final settlements are made.

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

An
allowance for doubtful accounts is established for accounts estimated to be uncollectible. This is adjusted periodically based upon management's evaluation of current economic
conditions, historical collection experience, and other relevant factors which, in management's opinion, deserve recognition in estimating the allowance.

During
2001 and 2000, we formed wholly owned limited partnerships in which we are the general partner and then contribute an OssaTron into the partnership. We may sell interests in these
partnerships to physicians or other investors. We generally recognize gain on the interest sold at the time the subscription agreement is signed. Included in other receivables on the accompanying
December 31, 2001 balance sheets is $2,576,500 relating to sales of partnership interests. The gain on the sale of four partnership interests has been deferred in the accompanying 2001
financial statements due to extended payment terms of one year.

11

---



Income Taxes

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

We
recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. We regularly
review our deferred tax assets for recoverability and establish a valuation allowance based upon projected future taxable income and the expected timing of the reversals of existing temporary
differences. As a result of this review, we have established a full valuation allowance against our deferred tax assets (see Note 10 to the financial statements).

Related Party Transactions

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

Recently Issued Accounting Standards

In
July 2001, the FASB issued Statement of Financial Accounting Standards No. 141,Business Combinations("SFAS 141"), which
is effective for all business combinations completed after June 30, 2001. SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations except for
qualifying business combinations initiated prior to July 1, 2001. In addition, SFAS 141 further clarifies the criteria to recognize intangible assets separately from goodwill. We have
adopted this accounting standard relating to the acquisition of Litho Group, Inc. (see Note 4).

In
July 2001, the FASB issued Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets("SFAS 142"), which establishes new rules on the accounting for goodwill and other intangible assets. Under SFAS 142, goodwill and intangible assets with indefinite lives will no longer
be amortized; however, they will be subject to annual impairment tests as prescribed by the statement. Intangible assets with definite lives will continue to be amortized over their estimated useful
lives. We will adopt SFAS 142 effective January 1, 2002; however, the transition provisions of this statement preclude the amortization of goodwill acquired in a business combination for
which the acquisition date is after June 30, 2001. In accordance with these transition provisions, we did not amortize the goodwill acquired through the acquisition of Litho Group, Inc. on
December 11, 2001 (see Note 4).

Liquidity and Capital Resources

We
have funded our working capital requirements and capital expenditures from net cash provided by operating activities and borrowings under bank credit facilities. In conjunction with
the purchase of Litho Group, we obtained a $50,000,000 credit facility. At December 31, 2001, we had $46,400,000 outstanding under the credit facility and additional debt primarily at the
subsidiary level. Debt at the subsidiary level is typically related to equipment purchased and operated by that subsidiary and is secured by that equipment. Cash and cash equivalents increased from
$5,822,626 at December 31, 2000 to $9,905,210 at December 31, 2001.

Net
cash provided by operating activities for 2001 was $5,771,646 compared to $4,026,592 for 2000. This increase was primarily the result of increased earnings before depreciation and
amortization and

12

---

minority interest. Net cash used in investing activities was $47,292,353 in 2001 compared to $5,703,336 in 2000. The increase in 2001 was due primarily to the purchase of businesses and increased
capital expenditures. Net cash provided by financing activities aggregated $45,603,291 in 2001 and $2,474,480 in 2000 and consisted primarily of proceeds from short-term borrowings and long-term debt
offset by principal payments on short-term borrowings and long-term debt.

Our
capital expenditures aggregated $8,546,417 in 2001. We used those primarily for the purchase of OssaTrons and related equipment. We currently estimate that our capital expenditures
will aggregate approximately $8,000,000 to $10,000,000 in 2002 and these will be used to purchase additional medical devices for partnerships. We believe that our financial position would support
higher levels of capital expenditures, if justified by opportunities to increase revenue, decrease recurring costs, and continuously review new investment opportunities. Accordingly, it is possible
that our capital expenditures in 2002 could be higher than anticipated. We plan to use our cash generated from operations and borrowings generated from the revolving credit facility to fund these
expenditures.

We
believe that our cash generated from operations and borrowings under our revolving credit facility will be sufficient to meet our liquidity and capital spending needs at least through
the end of 2002.

We
have a commitment to purchase certain machinery from HMT which expires in August 2002, but which we may renew at our discretion. Based upon current market prices, this commitment is
approximately $7,000,000 in 2002. This and other significant contractual obligations are as follows:

|                                   |  | Payments Due by Period
|---------------------------------- |  | ----------------------
|
|Short-Term Borrowings              |  | $                     
|Long-Term Debt                     |  |                       
|Capital Lease Obligations          |  |                       
|Operating Leases                   |  |                       
|Purchase Obligations               |  |                       
|                                   |  |                       
|Total Contractual Cash Obligations |  | $                     
|                                   |  |                       

Cautionary Statements

Included in this report are forward-looking statements that reflect management's current outlook for future periods. As always, these expectations and projections
are based on currently available competitive, financial, and economic data, along with operating plans, and are subject to future events and uncertainties, including those uncertainties identified
under the caption "Risk Factors" in Item 1 of this report.

13

---

Item 7: Financial Statements.

HealthTronics Surgical Services, Inc. and Subsidiaries        Consolidated Financial StatementsYears ended December 31, 2001 and 2000  with Report of Independent
Auditors

Contents

|Report of Independent Auditors                  |  | F-1
|----------------------------------------------- |  | ---
|Consolidated Financial Statements               |  |    
|Consolidated Balance Sheets                     |  | F-2
|Consolidated Statements of Income               |  | F-4
|Consolidated Statements of Shareholders' Equity |  | F-5
|Consolidated Statements of Cash Flows           |  | F-6
|Notes to Consolidated Financial Statements      |  | F-7

14

---



Report of Independent Auditors

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

We
have audited the accompanying consolidated balance sheets of HealthTronics Surgical Services, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of income, shareholders' equity and cash flows for the years then ended. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of HealthTronics Surgical Services, Inc. and
Subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally
accepted in the United States.

As
discussed in Note 2 to the consolidated financial statements, the Company has not yet adopted Statement of Financial Accounting Standards No. 142. However, the transition provisions
of that Statement preclude the amortization of goodwill acquired in a business combination for which the acquisition date is after June 30, 2001.



Atlanta,
Georgia
March 8, 2002

F-1

---



HealthTronics Surgical Services, Inc. and Subsidiaries        Consolidated Balance Sheets

|                                                                                                                    |                                                                                                                                        | December 31 |            
|------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------- | ----------- | -----------
|
|Assets                                                                                                              |                                                                                                                                        |             |            
|Current assets:                                                                                                     |                                                                                                                                        |             |            
|                                                                                                                    | Cash and cash equivalents                                                                                                              |             | $          
|                                                                                                                    | Trade accounts receivable, less allowance for doubtful accounts of $1,455,158 and $701,134 at December 31, 2001 and 2000, respectively |             |            
|                                                                                                                    | Other receivables                                                                                                                      |             |            
|                                                                                                                    | Income taxes receivable                                                                                                                |             |            
|                                                                                                                    | Inventory                                                                                                                              |             |            
|                                                                                                                    | Due from affiliated equity partnerships                                                                                                |             |            
|                                                                                                                    | Prepaid expenses and other current assets                                                                                              |             |            
|                                                                                                                    | Deferred income taxes                                                                                                                  |             |            
|                                                                                                                    |                                                                                                                                        |             |            
|Total current assets                                                                                                |                                                                                                                                        |             | 34,861,492 
|Property and equipment, at cost:                                                                                    |                                                                                                                                        |             |            
|                                                                                                                    | Land                                                                                                                                   |             |            
|                                                                                                                    | Building and leasehold improvements                                                                                                    |             |            
|                                                                                                                    | Medical devices placed in service                                                                                                      |             |            
|                                                                                                                    | Office equipment, furniture and fixtures                                                                                               |             |            
|                                                                                                                    | Vehicles and accessories                                                                                                               |             |            
|                                                                                                                    |                                                                                                                                        |             |            
|                                                                                                                    |                                                                                                                                        |             | 28,903,690 
|                                                                                                                    | Less accumulated depreciation                                                                                                          |             |            
|                                                                                                                    |                                                                                                                                        |             |            
|Net property and equipment                                                                                          |                                                                                                                                        |             | 20,819,149 
|Partnership investments                                                                                             |                                                                                                                                        |             | 520,981    
|Goodwill (net of accumulated amortization of $860,156 and $586,793 at December 31, 2001 and 2000, respectively)     |                                                                                                                                        |             | 43,041,811 
|Patent license (net of accumulated amortization of $64,986 and $54,990 at December 31, 2001 and 2000, respectively) |                                                                                                                                        |             | 35,014     
|Other assets                                                                                                        |                                                                                                                                        |             | 2,290,344  
|                                                                                                                    |                                                                                                                                        |             |            
|Total assets                                                                                                        |                                                                                                                                        | $           | 101,568,791
|                                                                                                                    |                                                                                                                                        |             |            

F-2

---

|Liabilities and shareholders' equity                                                  |                                                                         |                                                                                                                                                                                                                                          |             |            |            |            |          
|------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ---------- | ---------- | ---------- | ---------
|Current liabilities:                                                                  |                                                                         |                                                                                                                                                                                                                                          |             |            |            |            |          
|                                                                                      | Trade accounts payable                                                  |                                                                                                                                                                                                                                          | $           | 3,297,398  |            | $          | 1,235,435
|                                                                                      | Customer deposits                                                       |                                                                                                                                                                                                                                          |             | 121,600    |            |            | 760,779  
|                                                                                      | Income taxes payable                                                    |                                                                                                                                                                                                                                          |             | 526,342    |            |            |         
|                                                                                      | Other accrued expenses                                                  |                                                                                                                                                                                                                                          |             | 3,799,110  |            |            | 1,128,741
|                                                                                      | Deferred profit on service contracts and sales of partnership interests |                                                                                                                                                                                                                                          |             | 1,065,127  |            |            | 25,417   
|                                                                                      | Short-term borrowings                                                   |                                                                                                                                                                                                                                          |             | 11,400,000 |            |            | 596,114  
|                                                                                      | Current portion of capital lease obligations                            |                                                                                                                                                                                                                                          |             | 481,269    |            |            |         
|                                                                                      | Current portion of long-term debt                                       |                                                                                                                                                                                                                                          |             | 4,883,801  |            |            | 1,521,164
|                                                                                      |                                                                         |                                                                                                                                                                                                                                          |             |            |           
|Total current liabilities                                                             |                                                                         |                                                                                                                                                                                                                                          | 25,574,647  |            |            | 5,267,650  |          
|Deferred profit on medical device sales to related parties subject to debt guarantees |                                                                         |                                                                                                                                                                                                                                          | 411,267     |            |            | 251,867    |          
|Capital lease obligations, less current portion                                       |                                                                         |                                                                                                                                                                                                                                          | 1,104,853   |            |            |           |          
|Long-term debt, less current portion                                                  |                                                                         |                                                                                                                                                                                                                                          | 35,452,966  |            |            | 1,967,859  |          
|Minority interest                                                                     |                                                                         |                                                                                                                                                                                                                                          | 14,770,327  |            |            | 3,945,355  |          
|Deferred income taxes                                                                 |                                                                         |                                                                                                                                                                                                                                          |            |            |            | 664,193    |          
|Other liabilities                                                                     |                                                                         |                                                                                                                                                                                                                                          | 2,379,030   |            |            | 151,627    |          
|                                                                                      |                                                                         |                                                                                                                                                                                                                                          |             |            |           
|Total liabilities                                                                     |                                                                         |                                                                                                                                                                                                                                          | 79,693,090  |            |            | 12,248,551 |          
|Shareholders' equity:                                                                 |                                                                         |                                                                                                                                                                                                                                          |             |            |            |            |          
|                                                                                      | Common stock - no par value, voting:                                    |                                                                                                                                                                                                                                          |             |            |            |            |          
|                                                                                      |                                                                         | Authorized - 30,000,000 shares at December 31, 2001 and 2000; Issued - 11,103,737 and 10,971,585 shares at December 31, 2001 and 2000, respectively; Outstanding - 11,050,737 and 10,971,585 at December 31, 2001 and 2000,
respectively |             |            | 14,303,581 |            |          
|                                                                                      | Retained earnings                                                       |                                                                                                                                                                                                                                          |             | 7,572,120  |            |            | 4,439,563
|                                                                                      |                                                                         |                                                                                                                                                                                                                                          |             |            |           
|                                                                                      |                                                                         |                                                                                                                                                                                                                                          | 21,875,701  |            |            | 18,184,267 |          
|                                                                                      |                                                                         |                                                                                                                                                                                                                                          |             |            |           
|Total liabilities and shareholders' equity                                            |                                                                         | $                                                                                                                                                                                                                                        | 101,568,791 |            | $          | 30,432,818 |          
|                                                                                      |                                                                         |                                                                                                                                                                                                                                          |             |            |           

See accompanying notes.

F-3

---



HealthTronics Surgical Services, Inc. and Subsidiaries        Consolidated Statements of Income

|                                                      |         | Year ended December 31 |            
|----------------------------------------------------- | ------- | ---------------------- | -----------
|
|Net revenue                                           |         | $                      | 43,882,106 
|Cost of devices, service parts and consumables        |         |                        | 8,685,833  
|Salaries, general and administrative expenses         |         |                        | 19,094,994 
|Depreciation and amortization                         |         |                        | 4,395,956  
|                                                      |         |                        |            
|                                                      |         |                        | 11,705,323 
|Equity in earnings of unconsolidated partnerships     |         |                        | 194,141    
|Partnership distributions from cost basis investments |         |                        | 488,923    
|Gain on sale of investment interest                   |         |                        | 3,396,860  
|Interest expense                                      |         |                        | (509,052   
|Interest income                                       |         |                        | 173,634    
|                                                      |         |                        |            
|Income before minority interest and income taxes      |         |                        | 15,449,829 
|Minority interest                                     |         |                        | (10,230,481
|                                                      |         |                        |            
|Income before income taxes                            |         |                        | 5,219,348  
|Provision for income taxes                            |         |                        | 2,086,791  
|                                                      |         |                        |            
|Net income                                            |         | $                      | 3,132,557  
|                                                      |         |                        |            
|Basic and diluted net income per common share:        |         |                        |            
|                                                      | Basic   |                        | $          
|                                                      |         |                        |            
|                                                      | Diluted |                        | $          
|                                                      |         |                        |            
|Weighted average common shares outstanding:           |         |                        |            
|                                                      | Basic   |                        |            
|                                                      |         |                        |            
|                                                      | Diluted |                        |            
|                                                      |         |                        |            

See accompanying notes.

F-4

---



HealthTronics Surgical Services, Inc. and Subsidiaries        Consolidated Statements of Shareholders' Equity

|                             |                                                  | Common Stock |         |   |            |           |  
|---------------------------- | ------------------------------------------------ | ------------ | ------- | - | ---------- | --------- | -
|
|Balance at January 1, 2000   |                                                  | 10,716,271   |         | $ | 12,309,181 |           | $
|                             | Common stock issued on exercise of stock options |              | 252,634 |   |            | 1,396,625 |  
|                             | Common stock issued to consultants               |              | 2,680   |   |            | 38,898    |  
|                             | Net income                                       |              |        |   |            |          |  
|                             |                                                  |              |         |   |            |           |  
|Balance at December 31, 2000 |                                                  | 10,971,585   |         |   | 13,744,704 |           |  
|                             | Common stock issued on exercise of stock options |              | 27,500  |   |            | 161,103   |  
|                             | Common stock issued to employees                 |              | 104,652 |   |            | 675,006   |  
|                             | Repurchase of treasury stock                     |              | (53,000 | ) |            | (277,232  | )
|                             | Net income                                       |              |        |   |            |          |  
|                             |                                                  |              |         |   |            |           |  
|Balance at December 31, 2001 |                                                  | 11,050,737   |         | $ | 14,303,581 |           | $
|                             |                                                  |              |         |   |            |           |  

See accompanying notes.

F-5

---



HealthTronics Surgical Services, Inc. and Subsidiaries        Consolidated Statements of Cash Flows

|                                                                              |                                                                               | Year ended December 31                    |            
|----------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ----------------------------------------- | -----------
|
|Operating activities                                                          |                                                                               |                                           |            
|Net income                                                                    |                                                                               | $                                         | 3,132,557  
|Adjustments to reconcile net income to cash provided by operating activities: |                                                                               |                                           |            
|                                                                              | Depreciation and amortization                                                 |                                           |            
|                                                                              | Provision for doubtful accounts                                               |                                           |            
|                                                                              | Deferred income taxes                                                         |                                           |            
|                                                                              | Deferred profit                                                               |                                           |            
|                                                                              | Equity in earnings of unconsolidated partnerships, net of dividends           |                                           |            
|                                                                              | Minority interest in subsidiaries, net of distributions to minority interests |                                           |            
|                                                                              | Changes in operating assets and liabilities, net of businesses acquired:      |                                           |            
|                                                                              |                                                                               | Trade accounts receivable                 |            
|                                                                              |                                                                               | Other receivables                         |            
|                                                                              |                                                                               | Other assets                              |            
|                                                                              |                                                                               | Income taxes receivable                   |            
|                                                                              |                                                                               | Inventory                                 |            
|                                                                              |                                                                               | Due from affiliated equity partnerships   |            
|                                                                              |                                                                               | Prepaid expenses and other current assets |            
|                                                                              |                                                                               | Trade accounts payable                    |            
|                                                                              |                                                                               | Customer deposits                         |            
|                                                                              |                                                                               | Income taxes payable                      |            
|                                                                              |                                                                               | Other accrued expenses                    |            
|                                                                              |                                                                               | Other liabilities                         |            
|                                                                              |                                                                               |                                           |            
|Net cash provided by operating activities                                     |                                                                               |                                           | 6,117,352  
|Investing activities                                                          |                                                                               |                                           |            
|Purchases of property and equipment, net of businesses acquired               |                                                                               |                                           | (8,546,417 
|Dispositions of property and equipment                                        |                                                                               |                                           | 743,545    
|Acquisition of partnership interest, net of distributions                     |                                                                               |                                           | (64,274    
|Acquisition of businesses, net of cash acquired                               |                                                                               |                                           | (39,770,913
|                                                                              |                                                                               |                                           |            
|Net cash used in investing activities                                         |                                                                               |                                           | (48,638,059
|Financing activities                                                          |                                                                               |                                           |            
|Proceeds from issuance of common stock                                        |                                                                               |                                           | 836,109    
|Purchase of treasury stock                                                    |                                                                               |                                           | (277,232   
|Proceeds from issuance of long-term debt                                      |                                                                               |                                           | 36,502,608 
|Principal payments on long-term debt and capital leases                       |                                                                               |                                           | (2,262,160 
|Proceeds from short-term borrowings                                           |                                                                               |                                           | 25,066,374 
|Principal payments on short-term borrowings                                   |                                                                               |                                           | (14,262,408
|                                                                              |                                                                               |                                           |            
|Net cash provided by financing activities                                     |                                                                               |                                           | 45,603,291 
|                                                                              |                                                                               |                                           |            
|Net increase in cash and cash equivalents                                     |                                                                               |                                           | 4,082,584  
|Cash and cash equivalents at beginning of year                                |                                                                               |                                           | 5,822,626  
|                                                                              |                                                                               |                                           |            
|Cash and cash equivalents at end of year                                      |                                                                               | $                                         | 9,905,210  
|                                                                              |                                                                               |                                           |            
|Supplemental disclosures of cash flow information                             |                                                                               |                                           |            
|Cash paid for interest                                                        |                                                                               | $                                         | 372,746    
|                                                                              |                                                                               |                                           |            
|Cash paid for income taxes                                                    |                                                                               | $                                         | 1,286,468  
|                                                                              |                                                                               |                                           |            

See accompanying notes.

F-6

---



HealthTronics Surgical Services, Inc. and Subsidiaries        Notes to Consolidated Financial Statements        December 31, 2001

1. Description of the Business and Basis of Presentation

HealthTronics Surgical Services, Inc. (the "Company") was incorporated in the State of Georgia in 1995. The Company was founded for the purpose of
obtaining approval (Pre-Market Approval"PMA") from the Food & Drug Administration ("FDA") for certain products manufactured by HMT High Medical Technologies AG ("HMT"),
a Swiss corporation, in particular, certain medical devices utilizing shock wave therapies, known as the LithoTron and the OssaTron. Both products are being used outside the United States and Canada.
During 1997, the Company received FDA approval to market the LithoTron. On October 12, 2000, the Company received FDA approval to market the OssaTron for treatment of plantar fasciitis. The
Company is currently establishing additional test sites for OssaTron FDA clinical trials for additional applications.

In
1996, HMT granted to the Company the right to purchase the manufacturing rights to the LithoTron and OssaTron medical devices. The Company also operates under the terms of a
distribution agreement with HMT that grants the Company the exclusive right to make, use, sell and lease the LithoTron and OssaTron and related parts in the United States, Canada and Mexico.

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

HealthTronics
is the sole shareholder of Litho Management, Inc. with a 1% general partner interest and a 39.6% limited partnership interest in U.S. Lithotripsy ("USL"), a Texas limited
partnership. USL is the sole general partner in several separate partnerships with equity interests ranging from 10% to 99% (the "second-tier partnerships"), formed for the purpose of purchasing,
owning and operating certain medical devices utilizing shock wave therapies. As sole general partner, USL consolidates the second tier partnerships.

In
December 2001, the Company purchased 100% of the outstanding stock of Litho Group, Inc. ("LGI") for $42,500,000 in cash. Through its various 100% subsidiaries, LGI is the sole general
partner of several separate second and third tier lithotripsy partnerships with equity interests ranging from 30% to 100%, operating primarily in the northern, eastern and southern United States. As
sole general partner, LGI consolidates the second and third tier partnerships. The Company is continuing to evaluate the allocation of its purchase price for certain assets and liabilities acquired.

The
Company is also general partner or managing partner in various separate lithotripsy partnerships, which it controls and, therefore, consolidates.

In
October 2000, with the FDA approval of the OssaTron the Company began establishing Orthotripsy partnerships for the purpose of purchasing, owning and operating OssaTron devices.
HealthTronics contributed certain capital to partnerships and offered equity interests to third parties. As sole general partner, through its subsidiary, HT Orthotripsy Management Company, LLC, the
Company maintains control and, therefore, consolidates the second tier Orthotripsy partnerships. The Company has equity interests in these partnerships ranging from 14% to 100%.

F-7

---

The
accompanying consolidated financial statements include the accounts of each of the Company's subsidiaries. All significant intercompany accounts and transactions have been eliminated
in consolidation. See Note 5 for discussion of minority interests.

The
Company has no items that are considered to be elements of other comprehensive income and therefore net income is equal to comprehensive income.

2. Summary of Significant Accounting Policies

Cash Equivalents

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

Reclassifications

Certain prior year balances have been reclassified to conform to the 2001 presentation.

Revenue Recognition, Gain Recognition and Allowance for Doubtful Accounts

For sales of medical devices to unaffiliated entities, revenue is recognized upon delivery at the customer's destination; for miscellaneous sales of consumables,
revenue is recognized at the time of shipment by the Company.

During
2001 and 2000, the Company sold medical devices to certain limited partnerships and limited liability corporations in which the Company has a minority interest and has guaranteed
a portion of the long-term obligations related to the purchase of the medical devices. The Company has accounted for these minority interests using the equity or cost basis methods of
accounting (depending upon the Company's ability to exercise significant influence over the operating and financial policies of the investment partnership) and deferred a pro-rata portion
of the profit, $43,400 and $7,673 on sales of the medical devices to these entities for the years ended December 31, 2001 and 2000, respectively.

Net
revenue includes treatment fees for medical devices used in the clinical setting. Treatment revenue is primarily "wholesale" or "retail." Wholesale revenue is generated primarily
from fixed fee contracts with various medical facilities and is recorded in the month the related treatments are performed. Retain revenue is recorded when the Company bills third party payors for
medical facility and technical fees at the time services are rendered. These third party billings may or may not be contractual. Adjustments which reduce revenue from established contractual or
estimated non-contractual billing rates to amounts estimated to be reimbursable are recognized in the period the services are rendered. Differences in estimates recorded and final settlements are
reported during the period final settlements are made.

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

An
allowance for doubtful accounts is established for accounts receivable estimated to be uncollectible and is adjusted periodically based upon management's evaluation of current
economic

F-8

---

conditions, historical collection experience, and other relevant factors which, in the opinion of management, deserve recognition in estimating such allowance.

During
2001 and 2000, the Company formed wholly owned limited partnerships in which it is the general partner and then contributes an OssaTron into the partnership. The Company may sell
interests in these partnerships to physicians or other investors. The Company generally recognizes a gain on the interest sold at the time the subscription agreement is consummated and payment is due.
Included in other receivables on the accompanying December 31, 2001 balance sheets is $2,576,500 relating to sales of partnership interests. The gain on the sale of four partnership interests
totaling $646,000 has been deferred in the accompanying 2001 financial statements due to extended payment terms of one year.

Inventory

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

Partnership Investments

During 2001 and 2000, the Company made a number of investments in various general and limited partnerships. The majority of these investments are consolidated
(see Note 5) based upon the Company's ability to exercise control. The remaining investments totaling $520,981 and $473,757 at December 31, 2001 and 2000, respectively, were recorded
using the cost or equity method of accounting, depending upon the Company's ability to exercise significant influence over the operating and financial policies of the partnership.

Patent License

The original cost of a patent license is being amortized on a straight-line basis over a period of ten years, which approximates the life of the
patent.

Property and Equipment

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

Warranty Accrual

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

Income Taxes

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109,Accounting for Income
Taxes. Under this method, deferred tax assets and liabilities

F-9

---

are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect
when the differences are expected to be recovered or settled.

The
Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities.

The
Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based upon projected future taxable income and the expected timing of the
reversals of existing temporary differences. The deferred tax asset arose as a result of the acquisition of Litho Group. In recording the purchase of LGI, the Company has not yet completed its
analysis of the recoverability of this asset. As a result, the Company has established a full valuation allowance against its deferred tax assets. Any change as a result of further analysis of the
valuation allowance tax position of the Company would be offset against goodwill (see Note 10).

Stock Based Compensation

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

Use of Estimates

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

Related Party Transactions

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

Concentrations of Credit Risk

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

F-10

---

Fair Value of Financial Instruments

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

Goodwill

Goodwill represents the excess of cost over the fair value of net tangible assets and identifiable intangible assets acquired and is amortized using the
straight-line method over fifteen years. The Company periodically evaluates the recoverability of non-current tangible and intangible assets. As discussed in Note 4 to
the financial statements, the goodwill generated in the acquisition of LGI has not been amortized, in accordance with the transition provisions of Statement of Financial Accounting Standards
No. 142,Goodwill and Other Intangible Assets.

Basic and Diluted Income Per Common Share

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

Recently Issued Accounting Standards

In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities("SFAS 133"). SFAS 133 establishes a new model for accounting for
derivatives, and hedging activities and supersedes several existing standards. SFAS 133, as amended by Statement of Financial Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging
ActivitiesDeferral of the Effective Date of SFAS 133,and Statement of Financial
Accounting Standards No. 138,Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of SFAS 133, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of SFAS 133 effective January 1, 2001, did not have a material impact on the
Company's financial statements.

In
July 2001, the FASB issued Statement of Financial Accounting Standards No. 141,Business Combinations("SFAS 141"), which is effective for all business combinations completed after June 30, 2001. SFAS 141 eliminates the pooling-of-interests method of
accounting for business combinations except for qualifying business combinations initiated prior to July 1, 2001. In addition, SFAS 141 further clarifies the criteria to recognize
intangible assets separately from goodwill. The Company has adopted this accounting standard relating to the acquisition of LGI (see Note 4).

In
July 2001, the FASB issued Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets("SFAS 142"), which establishes new rules on the accounting for goodwill and other intangible assets. Under SFAS 142, goodwill and intangible assets with indefinite lives will no

F-11

---

longer be amortized; however, they will be subject to annual impairment tests as prescribed by the statement. Intangible assets with definite lives will continue to be amortized over their estimated
useful lives. The Company will adopt SFAS 142 effective January 1, 2002; however, the transition provisions of this statement preclude the amortization of goodwill acquired in a business
combination for which the acquisition date is after June 30, 2001. In accordance with these transition provisions, the Company did not amortize the goodwill acquired through the acquisition of
LGI on December 11, 2001 (see Note 4).

In
October 2001, the FASB issued Statement of Financial Accounting Standards No. 144,Accounting for the Impairment or Disposal of
Long-Lived Assets("SFAS 144"). Companies are required to adopt SFAS 144 in their fiscal year beginning after December 15, 2001.
SFAS 144 changes the criteria that would have to be met to classify an asset as held-for-sale, revises the rules regarding reporting the effects of a disposal of a
segment of a business and requires expected future operating losses from discontinued operations to be displayed in discontinued operations in the periods in which the losses were incurred. The
Company does not expect there to be a material impact on its financial position, results of operations, or cash flows, as a result of adopting this accounting standard.

Segment Reporting

The Company operates in one reportable segment, as defined in Statement of Financial Accounting Standards No. 131,Disclosures
about the Segments of an Enterprise and Related Information. Substantially all of the Company's assets, revenues and income are derived from this segment.

3. Inventory

Inventory consists of the following at December 31:

2001

2000Medical devices / other equipment

$
3,618,346

$
2,466,191Spare parts


622,741


Consumables


478,926


236,201$
4,720,013

$
2,702,392


4. Business Acquisitions and Dispositions

Litho Group, Inc.

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

The
purchase price was determined and negotiated by the parties based on the expected annual cash flow to be generated by LGI. The Company financed the acquisition through a $50,000,000
senior credit facility. The Company intends to sell up to 50% of its interest in the operating partnerships of LGI to physician limited partners. The proceeds of the sale of this ownership interest
will be used to reduce debt used in financing the acquisition.

F-12

---



4. Business Acquisitions and Dispositions (Continued)

Litho Group, Inc. (Continued)

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

The
following table summarizes the estimated fair value of LGI's assets acquired and liabilities assumed at the date of acquisition. The total estimated purchase price of the acquisition
has been allocated on a preliminary basis to assets and liabilities based on management's estimate of their fair values. These allocations are subject to change pending the completion of the final
analysis of the total purchase price and fair values of the assets acquired and liabilities assumed. The impact of any of these changes could be material.

At November 30, 2001

Current assets

$
13,945,652Property and equipment


6,150,953Goodwill (not deductible for income tax purposes)


40,301,739Other noncurrent assets


1,977,513Total assets acquired


62,375,857Current liabilities


8,975,909Long term debt


2,660,176Minority interest


7,121,111Other noncurrent liabilities


1,118,661Total liabilities assumed


19,875,857Net assets acquired

$
42,500,000


See
Note 10 for discussion of deferred tax assets acquired.

F-13

---

Litho Group, Inc. (Continued)

The
table below represents pro forma financial information for the years ended December 31, 2001 and 2000 as if LGI had been acquired on January 1, 2000.

HealthTronics Surgical Services, Inc. and Subsidiaries  Pro Forma Combined Condensed Statements of Income  FOR THE YEAR ENDED DECEMBER 31, 2001  (UNAUDITED)

|                                    |  | Historical |            |  |   |           
|----------------------------------- |  | ---------- | ---------- |  | - | ----------
|
|Net revenues                        |  | $          | 43,882,106 |  | $ | 50,420,333
|Income before income taxes          |  |            | 5,219,348  |  |   | 1,663,444 
|Net income                          |  | $          | 3,132,557  |  | $ | 1,602,333 
|                                    |  |            |            |  |   |           
|Basic net income per common share   |  |            | $0.29      |  |   |           
|                                    |  |            |            |  |   |           
|Diluted net income per common share |  |            | $0.28      |  |   |           
|                                    |  |            |            |  |   |           

---

FOR THE YEAR ENDED DECEMBER 31, 2000  (UNAUDITED)

|                                    |  | Historical |            |  |   |           
|----------------------------------- |  | ---------- | ---------- |  | - | ----------
|
|
|Net revenues                        |  | $          | 33,846,015 |  | $ | 57,573,000
|Income before income taxes          |  |            | 4,481,079  |  |   | 1,823,000 
|Net income                          |  | $          | 2,620,858  |  | $ | 1,773,000 
|                                    |  |            |            |  |   |           
|Basic net income per common share   |  |            | $0.24      |  |   |           
|                                    |  |            |            |  |   |           
|Diluted net income per common share |  |            | $0.24      |  |   |           
|                                    |  |            |            |  |   |           

---

F-14

---

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

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

The
table below represents pro forma financial information for the years ended December 31, 2001 and 2000 as if the Corporations had been acquired on January 1, 2001 and
2000, respectively.

HealthTronics Surgical Services, Inc. and Subsidiaries  Pro Forma Combined Condensed Statements of Income  FOR THE YEAR ENDED DECEMBER 31, 2001  (UNAUDITED)

|                                |  | Historical |            |  |   |        
|------------------------------- |  | ---------- | ---------- |  | - | -------
|
|
|Net revenues                    |  | $          | 43,882,106 |  | $ | 585,786
|Net income before income taxes  |  |            | 5,219,348  |  |   | 122,023
|Net income                      |  | $          | 3,132,557  |  | $ | 122,023
|                                |  |            |            |  |   |        
|Basic income per common share   |  |            | $0.29      |  |   |        
|                                |  |            |            |  |   |        
|Diluted income per common share |  |            | $0.28      |  |   |        
|                                |  |            |            |  |   |        

FOR THE YEAR ENDED DECEMBER 31, 2000  (UNAUDITED)

|                                |  | Historical |            |  |   |          
|------------------------------- |  | ---------- | ---------- |  | - | ---------
|
|
|Net revenues                    |  | $          | 33,846,015 |  | $ | 4,146,936
|Net income before income taxes  |  |            | 4,481,079  |  |   | 1,369,020
|Net income                      |  | $          | 2,620,858  |  | $ | 1,369,020
|                                |  |            |            |  |   |          
|Basic income per common share   |  |            | $0.24      |  |   |          
|                                |  |            |            |  |   |          
|Diluted income per common share |  |            | $0.24      |  |   |          
|                                |  |            |            |  |   |          

The
total estimated purchase price of the acquisition has been allocated on a preliminary basis to assets and liabilities based on management's estimate of their fair values. These
allocations are subject to change pending the completion of the final analysis of the total purchase price and fair values of the assets acquired and liabilities assumed. The impact of any of these
changes could be material.

F-15

---

Health Horizons (E.S.W.L.), L.P.

On January 24, 2000, the Company completed the acquisition of the assets of Health Horizons (E.S.W.L.), L.P. for $850,000 in cash and the assumption of
certain liabilities, including a lease, accounts payable and obligations under regulatory permits. The assets purchased included a lithotripter and
related medical equipment, other furniture, equipment, patient records and other related assets used in New Jersey Kidney Stone Treatment Center. The Company pre-negotiated to sell its
interest in the assets purchased to a limited liability company, which will be managed by the Company and of which the Company owns 15%.

The
sale of the assets from Health Horizons (E.S.W.L.), L.P. to the newly established limited liability company was consummated on June 1, 2000. The remaining members will be
independent of the Company. The Company is the sole general partner and has the ability to exercise control over the operating and financial policies of the new limited liability company and
therefore, the Company has consolidated the financial position and results of operations of the new limited liability company.

HealthTronics Surgical Services, Inc. and Subsidiaries  Pro Forma Combined Condensed Statements of Income  FOR THE YEAR ENDED DECEMBER 31, 2000  (UNAUDITED)

|                                |  | Historical |            |  |   |        
|------------------------------- |  | ---------- | ---------- |  | - | -------
|
|Net revenues                    |  | $          | 33,846,015 |  | $ | 235,272
|Net income before income taxes  |  |            | 4,481,079  |  |   | 78,318 
|Net income                      |  | $          | 2,620,858  |  | $ | 78,318 
|                                |  |            |            |  |   |        
|Basic income per common share   |  |            | $0.24      |  |   |        
|                                |  |            |            |  |   |        
|Diluted income per common share |  |            | $0.24      |  |   |        
|                                |  |            |            |  |   |        

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

5. Partnership Investments

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

F-16

---

The
Company maintains investments in certain other limited partnerships and limited liability corporations in which the Company has a minority interest as a limited partner. The Company
has accounted for these minority interests using the equity or cost basis method of accounting depending upon the Company's ability to exercise significant influence over the operating and financial
policies of the partnership.

During
2001 and 2000, the Company sold a portion of the partnership interests of certain limited liability partnerships and recognized gains of $3,396,860 and $739,851, respectively,
representing the excess of the sales price over the Company's investment basis in the partnerships. The Company has a deferred gain of $646,000 related to certain sales of partnership interests during
2001 due to extended payment terms of one year.

6. Related Party Transactions

During the years ended December 31, 2001 and 2000, the Company recorded sales of medical devices to certain partnerships accounted for on the cost or
equity basis of accounting. The partnerships obtained
third party financing, payable generally over five years or less, to satisfy their obligations to the Company under these sales. The Company, as a minority partner, has guaranteed its proportionate
interest in the related partnership debt based upon the Company's ownership percentage in the partnership. As a result, the Company has deferred approximately $411,267 and $251,867 of gross profit
related to these sales for the years ended December 31, 2001 and 2000, respectively.

Several
of the Company's major shareholders are also officers of the Company's supplier, HMT. Other shareholders of the Company are also limited partners in USL and the second tier
partnerships.

Trade
accounts payable due to the Company's supplier, HMT, totaled $422,000 and $220,000 as of December 31, 2001 and 2000, respectively. During 2001 and 2000, the Company made
payments totaling $9,119,276 and $9,762,153, respectively, to HMT for purchases of medical devices, related parts and consumables.

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

A
subsidiary of the Company provides management and administrative services and leases equipment and facilities to a professional corporation owned through a common group of individual
members. Because of the nature of this relationship, the amounts charged may have been different had the parties not been related. Total fees charged to this affiliate for all the services provided
was $1,262,048 for the period from December 11, 2001 (date of acquisition of the subsidiary) through December 31, 2001. Total accounts receivable for these services are $1,262,048.

The
Company has notes receivable from a related party totaling $1,326,458 relating to the purchase of partnership interest in a Litho Group affiliate.

7. Short-Term Borrowings

The Company obtained bank financing to fund the $42,500,000 acquisition of LGI. The funding consists of a $35,000,000 5-year term loan (see
Note 8) and a $15,000,000 line of credit. The

F-17

---

$15,000,000 line of credit, which is renewable every 90 days and matures on December 11, 2006, is secured with the term loan by certain accounts receivables, inventory and equipment and
bears interest at the stated bank rate (4.78% at December 31, 2001). As of December 31, 2001 $11,400,000 is outstanding under the line of credit.

8. Long-Term Debt

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

|                                                                                                                                                                                                                         |  | 2001 |            | 2000
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ---------- | ----
|Term note payable to bank; bearing interest at the stated bank rate (4.78% at December 31, 2001); payable in quarterly installments ranging from $1,250,000 to $2,812,500 beginning September 2002 through December
2006 |  | $    | 35,000,000 |     
|Notes payable to various institutional lenders; bearing interest at 5.25% to 12%; payable in monthly installments of principal and interest ranging from $791 to $16,250; due at various dates through 2004              |  |      | 3,235,968  |     
|Term notes payable; bearing interest at 6% to 10.5%; payable in monthly and quarterly installments of principal and interest ranging from $2,498 to $24,414; due at various dates through 2007                           |  |      | 1,765,033  |     
|Mortgage payable to bank; interest at 9.5%; payable in monthly installments of principal and interest of $5,083 through 2007, secured by land and buildings                                                              |  |      | 335,766    |     
|                                                                                                                                                                                                                         |  |      |            |     
|                                                                                                                                                                                                                         |  |      | 40,336,767 |     
|Less amounts due within one year                                                                                                                                                                                         |  |      | 4,883,801  |     
|                                                                                                                                                                                                                         |  |      |            |     
|                                                                                                                                                                                                                         |  | $    | 35,452,966 |     
|                                                                                                                                                                                                                         |  |      |            |     

Future
maturities of long-term debt at December 31, 2001 are as follows:

Fiscal Year2002

$
4,883,8012003


6,605,0452004


5,639,7042005


11,635,3052006


11,517,778Thereafter


55,134$
40,336,767


F-18

---



9. Capital Leases

During the year ended December 31, 2001, the Company entered into various capital lease agreements to finance equipment. The capital leases bear interest
ranging from 8.46% to 19.84% per annum and have terms ranging from 12 to 60 months. The related equipment secures the capital leases.

Future
minimum lease payments under capital leases at December 31, 2001 are as follows:

Fiscal Year2002

$
543,6762003


388,6712004


428,0992005


317,7112006


82,394$
1,760,551Less: imputed interest


(174,429
)Present value of minimum capital lease payments


1,586,122Less: current portion of obligations under capital leases


(481,269
)Long-term obligations under capital lease, net of current portion

$
1,104,853


Assets
under capital leases at December 31, 2001 are as follows:

Medical devices placed in service

$
630,209Vehicles and accessories


96,985727,194Accumulated amortization


(389,438
)$
337,756


10. Income Taxes

A reconciliation of the provision for income taxes to the federal statutory rate of 34% for 2001 and 2000 is:

2001

2000Statutory federal income tax expense

$
5,252,942

$
3,910,301State income taxes, net of federal benefit


611,813


455,435Other


105,527


159,203Minority interest


(3,883,491
)

(2,664,718
)$
2,086,791

$
1,860,221


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

F-19

---

Income
tax expense consists of the following:

2001

2000Current federal

$
2,101,214

$
945,388Current state


370,803


166,833Total current


2,472,017


1,112,221Deferred federal


(327,442
)

635,800Deferred state


(57,784
)

112,200Total deferred


(385,226
)

748,000Total tax expense

$
2,086,791

$
1,860,221


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

2001

2000Deferred tax assets:Deferred revenue

$
567,158

$
262,254Accrued liabilities and other


581,872


229,623Bad debt allowance


990,557


57,365Net operating loss carryforwards


9,082,242


Built in losses


36,273,580


47,495,409


549,242Deferred tax liabilities:Property and equipment


(780,894
)

(511,573
)Net partnership income


(817,371
)

(418,796
)Other


(31,330
)

(4,099
)(1,629,595
)

(934,468
)45,865,814


(385,226
)Valuation allowance


(45,865,814
)

Net deferred tax asset (liability)

$


$
(385,226
)


A
valuation allowance has been provided because realization of the deferred tax assets is uncertain. The acquisition of the stock of LGI resulted in the addition of deferred tax asset of
$45,355,000. A valuation allowance has been established against this asset. The Company has not completed its evaluation of this asset in connection with its evaluation of assets acquired (see
Note 4).

The
Company has net operating loss carryforwards available to offset future taxable income of approximately $23,926,000 at December 31, 2001. The Company also has $96,079,000 of
built-in losses. These net operating losses and built-in losses were acquired through the purchase of Litho Group and will be reflected as a reduction of goodwill when utilized. These net operating
loss carryforwards expire at various dates through 2021. Previous changes in ownership, as defined by section 382 of the Internal

F-20

---

Revenue Code, have limited the amount of net operating loss carryforwards and built-in losses the Company can utilize in any one year.

The
Company has realized a tax benefit relating to the exercise of nonqualified employee stock options of $61,020 and $996,118 during the years ended December 31, 2001 and 2000,
respectively.

11. Employee Benefit Plan

The Company sponsors six defined contribution 401(k) plans for all eligible employees. The plans cover all employees who meet the eligibility requirements of the
plans. The total expense charged to the Company's operations relating to these plans was approximately $200,000 and $150,000 for the years ended December 31, 2001 and 2000, respectively.

12. Earnings Per Share

Basic and diluted income per share are computed based on the weighted average number of common shares outstanding. Common share equivalents (which consist of
options) are excluded from the computation of diluted income per share if the effect would be antidilutive.

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

Year Ended December 312001

2000Numerator: Net income

$
3,132,557

$
2,620,858Effect of dilutive securities:Weighted average shares outstanding


10,981,129


10,826,228Stock options


141,567


272,252Denominator for diluted earnings per share


11,122,696


11,098,480Basic earnings per share


$0.29


$0.24Diluted earnings per share


$0.28


$0.24


13. Shareholders' Equity

During the year ended December 31, 2000, the Company issued 2,680 shares to consultants for services rendered. The per share prices at time of issuance
ranged from $5.00 per share to $21.00 per share. The Company recognized expenses of $38,898 on issuance of shares for consulting services.

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

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

F-21

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14. Stock Options

Under the HealthTronics Surgical Services, Inc. Stock Option Plan, 2,300,000 and 1,800,000 options to purchase the Company's common stock have been
approved as of December 31, 2001 and 2000, respectively.

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

|                                 |  | Shares    |   | Price Range   |  | Weighted
Average Price
|-------------------------------- |  | --------- | - | ------------- |  | ----------------------
|Outstanding at January 1, 2000   |  | 607,006   |   | $1.00   8.50 |  | $                     
|Granted                          |  | 380,250   |   | 6.50  15.44  |  |                       
|Exercised                        |  | (252,634  | ) | 1.00   6.00  |  |                       
|Canceled                         |  | (51,000   | ) | 6.00  14.875 |  |                       
|                                 |  |           |   |               |  |                       
|Outstanding at December 31, 2000 |  | 683,662   |   | $1.00  15.44 |  |                       
|Granted                          |  | 890,000   |   | 5.50  11.00  |  |                       
|Exercised                        |  | (27,500   | ) | 1.00  10.50  |  |                       
|Canceled                         |  | (37,250   | ) | 3.00  14.75  |  |                       
|                                 |  |           |   |               |  |                       
|Outstanding at December 31, 2001 |  | 1,508,872 |   | $1.00  15.44 |  | $                     
|                                 |  |           |   |               |  |                       

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

|Exercise Price |  | Number
Outstanding |  | Weighted
Average
Remaining
Contractual Life |  | Weighted
Average
Exercise
Price |       | Number
Exercisable |         | Weighted
Average
Exercise
Price
|-------------- |  | ------------------ |  | ------------------------------------------- |  | ------------------------------- | ----- | ------------------ | ------- | -------------------------------
|1.00  3.00    |  | 103,200            |  | 2.99                                        |  | $                               | 2.74  |                    | 103,200 |                                
|5.00  6.50    |  | 659,422            |  | 9.40                                        |  |                                 | 6.40  |                    | 234,264 |                                
|6.55  10.50   |  | 519,250            |  | 8.10                                        |  |                                 | 9.12  |                    | 352,669 |                                
|10.57  15.44  |  | 227,000            |  | 8.45                                        |  |                                 | 12.13 |                    | 71,339  |                                
|               |  |                    |  |                                             |  |                                 |       |                    |         |                                
|               |  | 1,508,872          |  |                                             |  |                                 |       |                    | 761,472 |                                
|               |  |                    |  |                                             |  |                                 |       |                    |         |                                

For
the Company, pro forma information regarding net income is required by SFAS 123 and has been determined as if the Company had accounted for its employee stock options granted
under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average
assumptions for 2001 and 2000: risk-free interest rate of 4.47% and 6.06%, expected life of the option of three to ten years, and no dividend yield. The weighted-average fair value of
options granted under the HealthTronics Surgical Services, Inc. Stock Option Plan was $5.16 and $9.01 for 2001 and 2000, respectively. Had the employee option grants been accounted for under
the fair value method of FAS 123, net income would be $845,746 ($0.08 per sharebasic and diluted) and $1,472,946 ($0.14 per sharebasic, $0.13 per
sharediluted) for the years ended December 31, 2001 and 2000, respectively.

The
Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions including the expected stock price

F-22

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volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

15. Operating Leases

The Company leases certain of its office facilities under operating leases. Certain of the Company's office facilities are rented on a
month-to-month basis. Rent expense for 2001 and 2000 was $196,458 and $140,575, respectively.

Aggregate
future minimum lease payments under operating lease agreements for terms greater than one year as of December 31, 2001 are as follows:

Fiscal Year2002

$
1,181,3442003


1,063,3922004


925,0692005


915,0922006


933,484Thereafter


2,108,451$
7,126,832


16. Commitments and Contingencies

In connection with the original distributorship agreements between the Company and HMT, the Company committed to purchase ten OssaTron orthopaedic shock wave and
twelve LithoTron lithotripter units per year over the life of the agreement which expires in July 2002, but which the Company may renew at its discretion. Aggregate funding needed for this
commitment is approximately $7,000,000 per year based upon current market prices.

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

F-23

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17. Quarterly Financial Data (unaudited)

The following is a summary of the unaudited quarterly financial information for the years ended December 31, 2001 and 2000 (in thousands except per share
amounts).

Year
ended December 31, 2001

|                                               |         | Three months ended
|---------------------------------------------- | ------- | ------------------
|
|Net revenues                                   |         | $                 
|Cost of devices, service parts and consumables |         |                   
|Net income                                     |         | $                 
|                                               |         |                   
|Basic and diluted earnings per share:          |         |                   
|                                               | Basic   |                   
|                                               | Diluted |                   

Year
ended December 31, 2000

|                                               |         | Three months ended
|---------------------------------------------- | ------- | ------------------
|
|
|Net revenues                                   |         | $                 
|Cost of devices, service parts and consumables |         |                   
|Net income                                     |         | $                 
|                                               |         |                   
|Basic and diluted earnings per share:          |         |                   
|                                               | Basic   |                   
|                                               | Diluted |                   

In
connection with its year end closing, the Company recorded an adjustment relating to the deferral of gain on sale of partnership interests which affected the previously reported
quarterly financial results for the second quarter of 2001. The results for the quarter ended June 30, 2001 reflect this adjustment. Certain quarterly amounts were reclassified to conform to
year-end presentation.

F-24

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Item 8: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

Part III

Item 9:  Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.

Information about the directors of the Company is in "Election of DirectorsInformation Concerning the Nominees and the Incumbent Directors" of the
Company's 2002 Proxy Statement and is incorporated into this report by reference. Information about the executive officers of the Company is in "Executive Officers of the Company" of the Company's
2002 Proxy Statement and is incorporated into this report by reference. Information about compliance with Section 16(a) of the Exchange Act of 1934, as amended, by the Company's executive
officers and directors, persons owning more than 10% of the Company's common stock, and their affiliates who are required to comply with such reporting requirements, is in "Election of
DirectorsSection 16(a) Beneficial Ownership Reporting Compliance" of the Company's 2002 Proxy Statement, and is incorporated into this report by reference.

Item 10: Executive Compensation:

Information about director compensation is in "Election of DirectorsCompensation of Directors" of the Company's 2002 Proxy Statement, and information
about executive compensation is in "Executive Compensation" in the Company's 2002 Proxy Statement, all of which is incorporated into this report by reference.

Item 11: Security Ownership of Certain Beneficial Owners and Management.

Information about ownership of the Company's common stock by certain persons is in "General Information about VotingPrincipal Shareholders" and
"Election of DirectorsSecurity Ownership of Directors and Officers" of the Company's 2002 Proxy Statement, all of which is incorporated into this report by reference.

Item 12: Certain Relationships and Related Transactions.

Information about certain transactions is in "Certain Relationships and Related Transactions" of the Company's 2002 Proxy Statement, all of which is incorporated
into this report by reference.

Item 13: Exhibits, List and Reports on Form 8-K.

|Exhibit No. |  | Description                                                                                                                                                                       
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1         |  | Amended Articles of Incorporation of HealthTronics, Inc.                                                                                                                          
|3.2         |  | Restated Bylaws of HealthTronics, Inc.                                                                                                                                            
|9.1         |  | HMT Group Stock Voting Agreement, incorporated by reference to Exhibit 9.2 to the Company's Registration Statement on Form SB-2 (Reg. No. 333-66977)                              
|10.1        |  | Entity Interest Agreement between HealthTronics, Inc. and USL, incorporated by reference to Exhibit 10.2 to the Company's Registration Statement on Form SB-2 (Reg. No. 333-66977)
|            |  |                                                                                                                                                                                   

15

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|10.2     |  | Distributorship Agreement between HealthTronics, Inc. and USL and amendments thereto, incorporated by reference to Exhibit 10.3 to the Company's Registration Statement on Form SB-2 (Reg. No. 333-66977)                                                                                                                                  
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.3     |  | Patent License Agreement dated June 3, 1995 between OssaTronics, Inc. and HMT High Medical Technologies GmbH along with amendments thereto, incorporated by reference to Exhibit 10.4 to the Company's Registration Statement on Form SB-2 (Reg. No.
333-66977)                                                                            
|10.3 (a) |  | Patent Purchase Agreement between VISSH Voennomedicinsky Institute and HMT, incorporated by reference to Exhibit 10.4 (a) to the Company's Registration Statement on Form SB-2 (Reg. No. 333-66977)                                                                                                                                        
|10.3 (b) |  | U.S. Patent Number 4,979,501 for a method and an apparatus for medical treatment of the pathological state of bones, incorporated by reference to Exhibit 10.4 (b) to the Company's Registration Statement on Form SB-2 (Reg. No. 333-66977)                                                                                               
|10.3 (c) |  | Provisional Patent Application for the use of acoustic shock waves in the treatment of medical, dental and veterinary conditions, incorporated by reference to Exhibit 10.4 (c) to the Company's Registration Statement on Form SB-2 (Reg. No.
333-66977)                                                                                  
|10.3 (d) |  | U.S. Patent Number 5,595,178 for a system and an apparatus for treatment of degenerative bone, incorporated by reference to Exhibit 10.4 (d) to the Company's Registration Statement on Form SB-2 (Reg. No. 333-66977)                                                                                                                     
|10.3 (e) |  | Second Amendment to Patent License Agreement, incorporated by reference to Exhibit 10.4 (e) to the Company's Registration Statement on Form SB-2 (Reg. No. 333-66977)                                                                                                                                                                      
|10.4     |  | Distributorship and Manufacturing Agreements between HealthTronics and HMT for both the OssaTron(R) (11/22/94) and the LithoTron(R) (1/24/96) and amendments to both agreements dated March 1, 1996 and August 7, 1996, incorporated by reference to
Exhibit 10.5 to the Company's Registration Statement on Form SB-2 (Reg. No. 333-66977)
|10.5     |  | HealthTronics' 401(k) plan, incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form SB-2 (Reg. No. 333-66977)                                                                                                                                                                                            
|10.6     |  | Agreement dated February 15, 1995 between OssaTronics, Inc., John Warlick, Argil Wheelock, MD, Karl-Heinz Restle and Scott A. Cochran, incorporated by reference to Exhibit 10.7 to the Company's Registration Statement on Form SB-2 (Reg. No.
333-66977)                                                                                 
|10.7     |  | Manufacturing Agreement dated June 20, 1996 between HealthTronics and HMT, incorporated by reference to Exhibit 10.8 of Form SB-2 (Reg. No. 333-66977)                                                                                                                                                                                     
|10.8     |  | Employment Agreement with Ms. Beck, incorporated by reference to Exhibit 10.11 of Form SB-2 (Reg. No. 333-66977)                                                                                                                                                                                                                           
|10.9     |  | Employment Agreement with Dr. Wheelock                                                                                                                                                                                                                                                                                                     
|10.10    |  | Employment Agreement with Mr. Brown                                                                                                                                                                                                                                                                                                        
|10.11    |  | Employment Agreement with Mr. McGahan                                                                                                                                                                                                                                                                                                      
|10.12    |  | Credit Agreement between HealthTronics Surgical Services, Inc. and Bank of America, N.A.                                                                                                                                                                                                                                                   
|21.1     |  | Subsidiaries                                                                                                                                                                                                                                                                                                                               
|23.1     |  | Consent of Independent Auditors                                                                                                                                                                                                                                                                                                            
|         |  |                                                                                                                                                                                                                                                                                                                                            

16

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|99.1 |  | Letter from FDA dated 7/21/97 approving the PMA for the LithoTron(R) Lithotripsy System, subject to certain conditions, incorporated by reference to Exhibit 99.1 of Form SB-2 (Reg. No. 333-66977)
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|99.2 |  | Letter from FDA dated 10/12/00 approving the PMA for the OssaTron(R) Orthopaedic Extracorporeal Shock Wave System, subject to certain conditions                                                   

Two
reports on Form 8-K were filed by the Company with the SEC during the quarter ended December 31, 2001: (1) on October 17, 2001, the Company
reported its schedule for the third quarter earnings release and reported an acquisition in negotiations and (2) on December 26, 2001, the Company reported its acquisition of Litho
Group, Inc.

17

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Signatures

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

| |  | HEALTHTRONICS SURGICAL SERVICES, INC.
| |  | -------------------------------------
| |  | By:                                  

Dated: April 1, 2002

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities
indicated on April 1, 2002.

|Signature                             |  | Title                                                                                    
|------------------------------------- |  | -----------------------------------------------------------------------------------------
|                                      |  |                                                                                          
|/s/ARGIL J. WHEELOCKArgil J. Wheelock |  | Chairman of the Board, Chief Executive Officer and Director
(Principal Executive Officer)
|/s/ROY S. BROWNRoy S. Brown           |  | President, Chief Operating Officer and Director                                          
|/s/MARTIN J. MCGAHANMartin J. McGahan |  | Chief Financial Officer
(Principal Financial Officer)                                    
|/s/VICTORIA W. BECKVictoria W. Beck   |  | Chief Accounting Officer
(Principal Accounting Officer)                                  
|/s/JAMES R. ANDREWSJames R. Andrews   |  | Director                                                                                 
|/s/JON BURKEJon Burke                 |  | Director                                                                                 
|/s/SCOTT COCHRANScott Cochran         |  | Director                                                                                 
|Russ Maddox                           |  | Director                                                                                 
|/s/MICHAEL D. MARTINMichael D. Martin |  | Director                                                                                 

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