Healthtronics (HTRN) 10-Q 2007 Q3 Quarterly report

_______________________________________________________

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

_____________________________

FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2007
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from
______ to ______


Commission File Number: 000-30406

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES   X  NO     

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. ..

Large Accelerated Filer  ¨                 Accelerated Filer  x                 Non-Accelerated Filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES      NO  X  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Title of Each Class
     Common Stock, no par value Number of Shares Outstanding at
November 1, 2007
35,425,097

PART I

FINANCIAL INFORMATION

Item 1 - Financial Statements

-2-

HEALTHTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

($ in thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Revenue:
Urology Services	$	31,625		$	31,108		$	90,846		$	92,975
Medical Products		4,176			4,640			13,002			16,050
Other		154			115			421			418
Total revenue		35,955			35,863			104,269			109,443
Cost of services and general and administrative expenses:
Salaries, wages and benefits		10,224			11,481			32,479			32,580
Other costs of services		4,700			4,793			14,249			13,282
General and administrative		1,863			2,250			5,663			6,439
Legal and professional		1,069			1,703			2,162			3,640
Manufacturing costs		1,750			1,980			5,598			8,424
Advertising		237			140			793			947
Other		203			39			218			259
Depreciation and amortization		2,747			2,888			8,339			8,332
		22,793			25,274			69,501			73,903
Operating income		13,162			10,589			34,768			35,540
Other income (expenses):
Interest and dividends		247			253			835			496
Interest expense		(196	)		(249	)		(644	)		(895	)
		51			4			191			(399	)
Income from continuing operations before provision
for income taxes and minority interest		13,213			10,593			34,959			35,141
Minority interest in consolidated income		12,214			11,381			32,998			33,030
Provision (benefit) for income taxes		389			(10	)		956			1,262
Income (loss) from continuing operations		610			(778	)		1,005			849
Income (loss) from discontinued operations, net of tax		135			31,955			(111	)		32,969
Net income	$	745		$	31,177		$	894		$	33,818
Basic earnings per share:
Income (loss) from continuing operations	$	0.02		$	(0.02	)	$	0.03		$	0.02
Income (loss) from discontinued operations	$	--		$	0.90		$	--		$	0.94
Net income	$	0.02		$	0.88		$	0.03		$	0.96
Weighted average shares outstanding		35,425			35,286			35,419			35,084
Diluted earnings per share:
Income (loss) from continuing operations	$	0.02		$	(0.02	)	$	0.03		$	0.02
Income (loss) from discontinued operations	$	--		$	0.90		$	--		$	0.94
Net income	$	0.02		$	0.88		$	0.03		$	0.96
Weighted average shares outstanding		35,425			35,370			35,423			35,329

See accompanying notes to condensed consolidated financial statements.

-3-

HEALTHTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

($ in thousands)	September 30, 2007			December 31, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	23,257		$	27,857
Accounts receivable, less allowance for doubtful
accounts of $2,315 in 2007 and $2,166 in 2006		20,873			22,752
Other receivables		2,092			1,201
Deferred income taxes		12,326			6,825
Prepaid expenses and other current assets		2,019			1,716
Inventory		10,359			11,474
Total current assets		70,926			71,825
Property and equipment:
Equipment, furniture and fixtures		46,868			46,155
Building and leasehold improvements		12,422			12,710
		59,290			58,865
Less accumulated depreciation and
amortization		(26,152	)		(24,595	)
Property and equipment, net		33,138			34,270
Assets held for sale		--			1,258
Other investments		1,385			1,348
Goodwill, at cost		234,648			229,261
Intangible assets		5,408			5,669
Other noncurrent assets		4,609			3,102
	$	350,114		$	346,733

See accompanying notes to condensed consolidated financial statements.

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HEALTHTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(Unaudited)

($ in thousands, except share data)	September 30, 2007			December 31, 2006
LIABILITIES
Current liabilities:
Current portion of long-term debt	$	4,844		$	5,664
Accounts payable		5,775			6,295
Accrued distributions to minority interests		126			7,687
Accrued expenses		7,213			10,477
Total current liabilities		17,958			30,123
Liabilities held for sale		--			258
Long-term debt, net of current portion		4,824			5,673
Other long term obligations		95			134
Deferred income taxes		33,627			24,924
Total liabilities		56,504			61,112
Minority interest		35,995			30,104
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 30,000,000 shares authorized: none outstanding		--			--
Common stock, no par value, 70,000,000 authorized: 35,475,236 issued
and 35,425,097 outstanding in 2007; 35,475,236 issued and 35,379,831
outstanding in 2006		201,719			200,941
Accumulated earnings		56,368			55,473
Treasury stock, at cost, 50,139 shares in 2007 and 95,405 shares in 2006		(472	)		(897	)
Total stockholders' equity		257,615			255,517
	$	350,114		$	346,733

See accompanying notes to condensed consolidated financial statements.

-5-

HEALTHTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Nine Months Ended September 30,
($ in thousands)	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Fee and other revenue collected	$	108,005		$	113,897
Cash paid to employees, suppliers of goods and others		(61,433	)		(63,317	)
Interest received		835			495
Interest paid		(642	)		(1,028	)
Taxes paid		(903	)		(440	)
Discontinued operations		(298	)		(12,761	)
Net cash provided by operating activities		45,564			36,846
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of entities, net of cash acquired		(7,976	)		--
Purchases of equipment and leasehold improvements		(6,838	)		(8,597	)
Proceeds from sales of assets		1,017			692
Distributions from investments		--			306
Other		(18	)		--
Discontinued operations		1,335			138,519
Net cash (used in) provided by investing activities		(12,480	)		130,920
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable		2,546			2,381
Payments on notes payable, exclusive of interest		(4,483	)		(132,152	)
Distributions to minority interest		(35,697	)		(40,764	)
Contributions by minority interest, net of buyouts		168			(570	)
Exercise of stock options		--			1,801
Purchase of treasury stock		--			(73	)
Discontinued operations		(20	)		(282	)
Net cash used in financing activities		(37,486	)		(169,659	)
NET DECREASE IN CASH AND CASH EQUIVALENTS		(4,402	)		(1,893	)
Cash and cash equivalents, beginning of period, includes cash
from discontinued operations of $(198) and $4,650
for December 31, 2006 and 2005, respectively		27,659			25,727
Cash and cash equivalents, end of period, includes cash
from discontinued operations of $156
for September 30, 2006	$	23,257		$	23,834

See accompanying notes to condensed consolidated financial statements.

-6-

HEALTHTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)

	Nine Months Ended September 30,
($ in thousands)	2007			2006
Reconciliation of net income to net cash provided by operating activities:
Net income	$	894		$	33,818
Adjustments to reconcile net income
to net cash provided by operating activities
Minority interest in consolidated income		32,998			33,030
Depreciation and amortization		8,339			8,332
Provision for uncollectible accounts		(8	)		119
Provision for deferred income taxes		3,200			463
Income on equity investments		--			(287	)
Non-cash share based compensation		1,204			1,414
Other		7			(356	)
Discontinued Operations		(117	)		(45,032	)
Changes in operating assets and liabilities,
net of effect of purchase transactions
Accounts receivable		1,764			2,559
Other receivables		(512	)		1,031
Other assets		1,656			481
Accounts payable		(639	)		1,154
Accrued expenses		(3,222	)		120
Total adjustments		44,670			3,028
Net cash provided by operating activities	$	45,564		$	36,846

See accompanying notes to condensed consolidated financial statements.

-7-

HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(Unaudited)

1.General

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with the accounting principles for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These condensed consolidated financial statements reflect all adjustments which are, in our opinion, necessary for a fair presentation of the statement of the financial position as of September 30, 2007 and the results of operations and cash flows for the periods presented. Such adjustments are of a normal recurring nature unless otherwise noted herein. The operating results for the interim periods are not necessarily indicative of results for the full fiscal year.

The notes to consolidated financial statements appearing in our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission should be read in conjunction with this Quarterly Report on Form 10-Q. There have been no significant changes in the information reported in those notes other than from normal business activities and as discussed herein. Certain reclassifications have been made to amounts presented in 2006 to be consistent with the 2007 presentation.

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

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

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

-8-

HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(Unaudited)

2.Debt

Our senior credit facility is comprised of a five-year $50 million revolver and a $125 million senior secured term loan B due 2011. We entered into this senior credit facility in March 2005. On July 31, 2006, we used a portion of the proceeds from the sale of our specialty vehicle manufacturing segment to repay the term loan B in full. At September 30, 2007, there were no amounts drawn on the revolver. The loan bears interest at a variable rate equal to LIBOR + 1.25 to 2.25% or prime + .25 to 1.25%. We were required to make quarterly principal payments in connection with the term loan B of $312,500 until February 2010, when quarterly payments would have increased to $29.7 million. Our senior credit facility contains covenants that, among other things, limit our ability to incur debt, create liens, make investments, sell assets, pay dividends, make capital expenditures, make restricted payments, enter into transactions with affiliates, and make acquisitions. In addition, our facility requires us to maintain certain financial ratios. Our assets and the stock of our subsidiaries collateralize the revolving credit facility. We were in compliance with the covenants under our senior credit facility as of September 30, 2007.

3.Earnings per share

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

($ in thousands, except per share data)	Basic earnings per share		Diluted earnings per share
Nine Months Ended September 30, 2007
Net income	$	894	$	894
Weighted average shares outstanding		35,419		35,419
Effect of dilutive securities		--		4
Shares for EPS calculation		35,419		35,423
Net income per share	$	0.03	$	0.03
Nine Months Ended September 30, 2006
Net income	$	33,818	$	33,818
Weighted average shares outstanding		35,084		35,084
Effect of dilutive securities		--		245
Shares for EPS calculation		35,084		35,329
Net income per share	$	0.96	$	0.96

-9-

HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(Unaudited)

($ in thousands, except per share data)	Basic earnings per share		Diluted earnings per share
Three Months Ended September 30, 2007
Net income	$	745	$	745
Weighted average shares outstanding		35,425		35,425
Effect of dilutive securities		--		--
Shares for EPS calculation		35,425		35,425
Net income per share	$	0.02	$	0.02
Three Months Ended September 30, 2006
Net income	$	31,177	$	31,177
Weighted average shares outstanding		35,286		35,286
Effect of dilutive securities		--		84
Shares for EPS calculation		35,286		35,370
Net income per share	$	0.88	$	0.88

We did not include in our computation of diluted EPS unexercised stock options to purchase 3,487,000 and 2,364,000 shares of our common stock as of September 30, 2007 and 2006, respectively, because the effect would be antidilutive. In May 2005, our shareholders approved an amendment to our 2004 Equity Incentive Plan to increase by 450,000 shares the number of shares available for issuance thereunder (from 500,000 to 950,000 shares). In June 2006, our shareholders approved an amendment to our 2004 Equity Incentive Plan to increase by 2 million shares the number of shares available for issuance thereunder (from 950,000 to 2,950,000 shares).

4.Segment Reporting

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

-10-

HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(Unaudited)

We measure performance based on the pretax income or loss from our operating segments, which does not include unallocated corporate general and administrative expenses or corporate interest income and expense.

($ in thousands)	Urology Services		Medical Products
Nine Months Ended September 30, 2007
Revenue from external customers	$	90,846	$	13,002
Intersegment revenues		--		6,895
Segment profit		7,210		64
Nine Months Ended September 30, 2006
Revenue from external customers	$	92,975	$	16,050
Intersegment revenues		--		7,116
Segment profit (loss)		11,428		(1,040	)

The following is a reconciliation of the measure of segment profit per above to consolidated income before provision for income taxes per the condensed consolidated statements of income:

	Nine Months ended September 30,
($ in thousands)	2007			2006
Total segment profit	$	7,274		$	10,388
Unallocated corporate revenues		421			418
Unallocated corporate expenses:
General and administrative		(5,599	)		(8,142	)
Net interest income (expense)		408			23
Other, net		(543	)		(576	)
Total unallocated corporate expenses		(5,734	)		(8,695	)
Income before income taxes	$	1,961		$	2,111

-11-

HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(Unaudited)

($ in thousands)	Urology Services		Medical Products
Three Months Ended September 30, 2007
Revenue from external customers	$	31,625	$	4,176
Intersegment revenues		--		2,093
Segment profit		2,768		47
Three Months Ended September 30, 2006
Revenue from external customers	$	31,108	$	4,640
Intersegment revenues		--		1,735
Segment profit (loss)		3,468		(277	)

The following is a reconciliation of the measure of segment profit per above to consolidated income before provision for income taxes per the condensed consolidated statements of income:

	Three Months ended September 30,
($ in thousands)	2007			2006
Total segment profit	$	2,815		$	3,191
Unallocated corporate revenues		154			115
Unallocated corporate expenses:
General and administrative		(1,898	)		(4,018	)
Net interest income (expense)		105			118
Other, net		(177	)		(194	)
Total unallocated corporate expenses		(1,970	)		(4,094	)
Income (loss) before income taxes	$	999		$	(788	)

5. Stock-Based Compensation

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

-12-

HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(Unaudited)

As of September 30, 2007, total unrecognized share-based compensation cost related to unvested stock options was approximately $3.1 million, which is expected to be recognized over a weighted average period of approximately 1.9 years. We have included approximately $780,000 and $683,000 for share-based compensation cost in the accompanying condensed consolidated statements of income for the nine months ended September 30, 2007 and 2006, respectively.

Share-based compensation expense recognized during the quarters ended September 30, 2007 and 2006 is related to awards granted prior to, but not yet fully vested as of, January 1, 2006 and awards granted subsequent to December 31, 2005. We have historically and continue to estimate the fair value of share-based awards using the Black-Scholes-Merton (“Black Scholes”) option-pricing model.

6. Inventory

As of September 30, 2007 and December 31, 2006, inventory consisted of the following:

($ in thousands)	September 30, 2007		December 31, 2006
Raw Materials	$	6,859	$	7,070
Finished Goods		3,500		4,404
	$	10,359	$	11,474

7. Discontinued Operations

In November, 2006, we announced our decision to discontinue our involvement in the clinical trials of the Ablatherm device manufactured by EDAP TMS S.A. (“EDAP”). As a result of this decision and a termination agreement we entered into with EDAP, we forfeited the exclusive rights to distribute such device in the United States, when and if a Pre-Market Approval of such device is granted by the FDA and forfeited our rights to vest in additional warrants to acquire EDAP common stock. We have accordingly included our costs related to the clinical trials of High Intensity Focused Ultrasound (“HIFU”) in discontinued operations in the accompanying condensed consolidated statements of income.

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

On November 30, 2006, we sold our cryosurgery operations to Advanced Medical Partners, Inc. (“AMPI”). We used the proceeds from the sale to acquire approximately 10% of the outstanding shares of AMPI. Due to the uncertainty of any future distributions, we have assigned no value to this investment in a closely held private company. We have included the operations of this business in discontinued operations in the accompanying condensed consolidated statements of income.

-13-

HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(Unaudited)

During the second quarter 2006, we committed to a plan to sell our specialty vehicle manufacturing segment. On June 22, 2006, we entered into an Interest and Stock Purchase Agreement pursuant to which Oshkosh agreed to acquire our specialty vehicle manufacturing segment for $140 million in cash. We completed this sale on July 31, 2006, and recognized a gain on the sale totaling $53.6 million. This gain utilized approximately $20.4 million of our deferred tax assets. We have included the operations of this business in discontinued operations in the accompanying condensed consolidated statements of income.

The following table details selected financial information included in income (loss) from discontinued operations in the condensed consolidated statements of income for the three and nine month periods ended September 30, 2007 and 2006.

Condensed Consolidated Statements of Income
($ in thousands)	2007			2006
For the Nine Months Ended September 30
Revenue
Specialty Vehicle Manufacturing	$	--		$	57,526
CryoSurgery		--			1,215
Rocky Mountain Prostate Thermotherapies		3,268			3,178
HIFU		--			--
Cost of services
Specialty Vehicle Manufacturing		--			(51,566	)
CryoSurgery		--			(1,164	)
Rocky Mountain Prostate Thermotherapies		(3,694	)		(3,327	)
HIFU		(209	)		(508	)
Depreciation and amortization
Specialty Vehicle Manufacturing		--			(542	)
CryoSurgery		--			(435	)
Rocky Mountain Prostate Thermotherapies		--			(150	)
HIFU		--			(12	)
Other
Specialty Vehicle Manufacturing		--			(72	)
Interest expense allocated to discontinued operations		--			(4,830	)
CryoSurgery		--			(3	)
Rocky Mountain Prostate Thermotherapies		--			--
HIFU		--			--
Income (loss) from discontinued operations	$	(635	)	$	(690	)
Gain on sale of Specialty Vehicle Manufacturing		--			53,551
Gain on sale of Rocky Mountain Prostate
Thermotherapies		454			--
Income tax benefit (expense)		70			(19,892	)
Discontinued operations, net of tax	$	(111	)	$	32,969

-14-

HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(Unaudited)

Condensed Consolidated Statements of Income
($ in thousands)	2007			2006
For the Three Months Ended September 30
Revenue
Specialty Vehicle Manufacturing	$	--		$	5,533
CryoSurgery		--			346
Rocky Mountain Prostate Thermotherapies		1,031			972
HIFU		--			--
Cost of services
Specialty Vehicle Manufacturing		--			(6,333	)
CryoSurgery		--			(271	)
Rocky Mountain Prostate Thermotherapies		(1,255	)		(1,053	)
HIFU		(10	)		(187	)
Depreciation and amortization
Specialty Vehicle Manufacturing		--			--
CryoSurgery		--			(150	)
Rocky Mountain Prostate Thermotherapies		--			(68	)
HIFU		--			(4	)
Other
Specialty Vehicle Manufacturing		--			(30	)
Interest expense allocated to discontinued operations		--			(780	)
CryoSurgery		--			--
Rocky Mountain Prostate Thermotherapies		--			--
HIFU		--			--
Income (loss) from discontinued operations	$	(234	)	$	(2,025	)
Gain on sale of Specialty Vehicle Manufacturing		--			53,551
Gain on sale of Rocky Mountain Prostate
Thermotherapies		454			--
Income tax benefit (expense)		(85	)		(19,571	)
Discontinued operations, net of tax	$	135		$	31,955

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

Pursuant to EITF 87-24 “Allocation of Interest to Discontinued Operations”, we have allocated certain interest and the related fees incurred to refinance our senior credit facility that was required to be repaid as a result of the disposal of our specialty vehicle manufacturing segment. Accordingly, we have included in discontinued operations interest expense totaling $780,000 and $4,830,000 for the three and nine months ended September 30, 2006.

8. Income Taxes

Effective January 1, 2007, we adopted Financial Accounting Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 specifies the way public companies are to account for uncertainties in income tax reporting, and prescribes a methodology for recognizing, reversing, and measuring the tax benefits of a tax position taken, or expected to be taken, in a tax return. Adoption of FIN 48 on January 1, 2007, did not result in a cumulative effect adjustment to our retained earnings. At January 1, 2007, our unrecognized tax benefits totaled $2.4 million and are included in deferred and other tax liabilities, none of which, if recognized in total, would impact the effective income tax rate. There have been no additions or subtractions to the total unrecognized tax benefits during the quarter ended September 30, 2007.

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HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(Unaudited)

Our continuing practice is to recognize interest and penalties related to income tax matters in interest expense. We had approximately $150,000 of accrued interest and no accrued interest penalties at December 31, 2006. The accrued interest is included as a component of the unrecognized tax benefit noted above.

We are currently under audit by the Internal Revenue Service for the 2000, 2001, 2002, 2003, and 2004 tax years. It is reasonable to expect that the examination phase of the audit for these years may conclude in the next 12 months, and that the related unrecognized tax benefits for the tax positions taken in previously filed tax returns may differ from recorded liabilities for uncertain tax positions in our financial statements at January 1, 2007. However, based on the status of the examination it is not possible to estimate the effect of any such change to previously recorded uncertain tax positions.

9. Aquisitions

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

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Item 2 — Management’s Discussion and Analysis of Financial Condition and
Results of Operations

Forward-Looking Statements

The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, hopes, intentions or strategies regarding the future. You should not place undue reliance on forward-looking statements. All forward-looking statements included in this report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results could differ materially from those in the forward-looking statements. In addition to any risks and uncertainties specifically identified below and in the text surrounding forward-looking statements in this report, you should review the risk factors described in our most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission, for factors that could cause our actual results to differ materially from those presented.

Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “will”, “would”, “should”, “plans”, “likely”, “expects”, “anticipates”, “intends”, “believes”, “estimates”, “thinks”, “may”, and similar expressions, are forward-looking statements. The following important factors, in addition to those referred to above, could affect the future results of the health care industry in general, and us in particular, and could cause those results to differ materially from those expressed in such forward-looking statements:

• uncertainties in our establishing or maintaining relationships with physicians and hospitals;

• the impact of current and future laws and governmental regulations;

• uncertainties inherent in third party payors’ attempts to limit health care coverages and levels of reimbursement;

• the effects of competition and technological changes;

• the availability (or lack thereof) of acquisition or combination opportunities; and

• general economic, market or business conditions.

General

We provide healthcare services and manufacture medical devices, primarily for the urology community. Prior to July 31, 2006, we also designed and manufactured trailers and coaches that transport high technology medical devices and equipment for mobile command and control centers and the media and broadcast industry. We now have two reportable segments: urology services and medical products. Our specialty vehicle manufacturing division, which was sold on July 31, 2006, was also considered a reportable segment prior to its sale.

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Item 2 — Management’s Discussion and Analysis of Financial Condition and
Results of Operations

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

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

Although the non-physician fee under both retail and wholesale contracts varies widely based on geographical markets and the identity of the third party payor, we estimate that nationally, on average, our share of the non-physician fee was roughly $2,100 for each of the first nine month periods of 2007 and 2006. At this time, we do not anticipate a material shift between our retail and wholesale arrangements.

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

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

We recognize urology revenue primarily from the following sources:

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

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Item 2 — Management’s Discussion and Analysis of Financial Condition and
Results of Operations

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

Medical Products. We manufacture, sell and maintain lithotripters and their related consumables. We also manufacture, sell and maintain intra-operative X-ray imaging systems and other mobile patient management tables, and are the exclusive U.S. distributor of the Revolix branded laser. The operations of our Claripath pathology laboratory are also included in our medical products segment at this time.

• Fees for maintenance services. We provide equipment maintenance services to our partnerships as well as outside parties. These services are billed either on a time and material basis or at a fixed monthly contractual rate.

• Fees for equipment sales, consumable sales and licensing applications. We manufacture, sell and maintain lithotripters and certain medical tables, we distribute the Revolix laser and we also manufacture and sell consumables related to the lithotripters. With respect to some lithotripter sales, in addition to the original sales price, we receive a licensing fee from the buyer of the lithotripter for each patient treated with such lithotripter. In exchange for this licensing fee, we provide the buyer of the lithotripter with certain consumables. All the sales for equipment and consumables are recognized when the related items are delivered. Revenues from licensing fees are recorded when the patient is treated. In some cases, we lease certain equipment to our partnerships as well as third parties. Revenues from these leases are recognized on a monthly basis or as procedures are performed.

• Fees for Claripath anatomical pathology services. We provide anatomical pathology services primarily to the urology market place. Revenues from these services are recorded when the related laboratory procedures are performed.

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

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

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Item 2 — Management’s Discussion and Analysis of Financial Condition and
Results of Operations

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

Recent Developments

Effective April 28, 2007, we acquired all of the outstanding capital stock of Keystone ABG, Inc., which owns a 21% general partner interest in Keystone Mobile Partners, L.P. (the “Partnership”), and an approximate 14% limited partner interest in the Partnership from the owners thereof, for an aggregate purchase price of $6.8 million, plus certain additional cash consideration to be paid depending on the number of limited partner units sold by us in a post-closing offering of such units, plus an earnout. In August 2007, we completed our post-closing offering of the limited partner units and paid an additional $934,000.

On August 7, 2007, Sam B. Humphries, our President and Chief Executive Officer, died as a result of complications from a May 21, 2007 cardiac event. Mr. Humphries had been on medical leave since May 21, 2007.

On August 13, 2007, our Board of Directors appointed James S. B. Whittenburg as our President and Chief Executive Officer and as a member of our Board of Directors. Mr. Whittenburg had been serving as acting President and Chief Executive Officer since late May, 2007. Prior to that appointment, Mr. Whittenburg served as President-Urology Services.

On July 9, 2007, Mr. Christopher B. Schneider resigned his position as President-Medical Products. Mr. Schneider will provide consulting services to us until December 31, 2007 and we will pay him approximately $22,600 per month through December 2007.

During the fourth quarter of 2006, we committed to a plan to sell our Rocky Mountain Prostate business. On September 28, 2007, we completed the sale of our Rocky Mountain Prostate business. As a result of this sale we received proceeds totaling $1.35 million in cash and recognized a gain of $450,000. Accordingly, all activities related to our Rocky Mountain Prostate business have been included in discontinued operations in the accompanying condensed consolidated financial statements.

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Item 2 — Management’s Discussion and Analysis of Financial Condition and
Results of Operations

Critical Accounting Policies and Estimates.

Management has identified the following critical accounting policies and estimates:

Impairments of goodwill and other intangible assets are both a critical accounting policy and estimate that requires judgment and is based on assumptions of future operations. We are required to test for impairments at least annually or if circumstances change that would reduce the fair value of a reporting unit below its carrying value. We test for impairment of goodwill during the fourth quarter. We now have two reporting units, urology services and medical products. The fair value of each reporting unit is calculated using estimated discounted future cash flow projections. In the fourth quarter of 2006, we recorded an impairment to our goodwill totaling $12.2 million related to our urology services segment and $8.4 million related to our medical products segment. The impairment to our urology services segment was due primarily to a decrease in the number of overall procedures during 2006, primarily across our western region partnerships, combined with the loss of certain partnerships and contracts late in 2006. The impairment in our medical products segment related primarily to our decision to reduce or exit certain product lines during the fourth quarter of 2006. As of September 30, 2007, we had goodwill of $235 million.

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

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

Nine months ended September 30, 2007 compared to the Nine months ended September 30, 2006

Our total revenues for the nine months ended September 30, 2007 decreased $5,174,000 (4.7%) as compared to the same period in 2006. Revenues from our urology services segment decreased $2,129,000 (2.3%) in the first nine months of 2007 as compared to the same period in 2006. Revenues from our lithotripsy business decreased $3,074,000 for the three quarters of 2007 as compared to the same period in 2006, while revenues from our prostate business increased $945,000 for the first nine months of 2007 as compared to the same period in 2006. The actual number of lithotripsy procedures performed in the first three quarters of 2007 decreased by 7% compared to the same period in 2006, primarily due to partnership and mobile route closures in late 2006 and continued weak performance across our western region partnerships in early 2007. The average rate per procedure increased by 3% in the first nine months of 2007 as compared to the same period in 2006. Revenues for our medical products segment decreased by $3,048,000 (19%) for the first nine months of 2007 compared to the same period in 2006. Medical products revenues before intersegment eliminations totaled $19,897,000 for the first three quarters of 2007 and $23,166,000 for the same period in 2006. We sold 7 devices and 28 tables in the nine months of 2007 compared to 17 devices and 68 tables during the same period in 2006. Revenues from our service operations and consumable sales decreased $1,965,000 in the first three quarters of 2007 as compared to the same period in 2006. This decrease relates primarily to lower electrode sales especially as related to our foreign operations which we closed in late 2006. Revenues from our new laboratory which commenced operations in January 2006, totaled $2,412,000 and $715,000 for the nine months ended September 30, 2007 and 2006, respectively.

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Item 2 — Management’s Discussion and Analysis of Financial Condition and
Results of Operations

Our costs of services and general and administrative expenses for the first nine months of 2007 decreased $4,402,000 compared to the same period in 2006. Our costs associated with salaries, wages and benefits decreased $101,000 in the first three quarters of 2007 as compared to the same period in 2006, primarily related to $1.3 million in severance costs paid to two executives in 2006, partially offset by performance merit increases, variable compensation accruals, and increased costs related to group medical claims. Our costs associated with other costs of services for the nine months ended September 30, 2007 increased $967,000 (7%) compared to the same period in 2006. This increase is primarily due to increased costs related to our significant increase in lab operations and several large gains on the sales of certain partnership interests in 2006, which were recorded against this expense category, partially offset by decreased costs for laser supplies which corresponds to the shift from the greenlight laser to the revolix laser. Our general and administrative costs for the first nine months of 2007 decreased $776,000 (12%) as compared to the first nine months of 2006, primarily due to decreased rent, insurance, recruiting, and other costs related to our restructuring efforts in late 2006. Costs associated with legal and professional fees decreased $1,478,000 (41%) in the first nine months of 2007 as compared to the same period 2006. This decrease is primarily due to fees from our strategic consultants incurred in 2006 which were not incurred in 2007. Manufacturing costs decreased $2,826,000 (34%) in the nine month period ended September 30, 2007 as compared to the same period in 2006. This decrease is due primarily to the decrease in the cost of sales to external customers. In the future, we expect margins in medical products to vary significantly from period to period based on the mix of intercompany and third-party sales. Advertising costs decreased $154,000 (16%) in the first nine months of 2007 as compared to the same period in 2006. This relates primarily to payments for product endorsement in 2006.

Income from discontinued operations for the nine months of 2007 decreased $33,080,000 compared to the same period in 2006. The income from discontinued operations in the first nine months of 2006 included $33,532,000 attributable to our specialty vehicle manufacturing segment and $563,000 in losses attributable to our HIFU, Cryosurgery, and Rocky Mountain Thermotherapy (“RMPT”) operations. We recognized a gain, net of tax, totaling $33.2 million in 2006 from the sale of our specialty vehicle manufacturing segment. In 2007, we had a loss from discontinued operations of $111,000 attributable to our Rocky Mountain Thermotherapy and HIFU operations. This loss included a gain of $450,000 from the sale of our Rocky Mountain Prostate business, which closed on September 28, 2007.

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Item 2 — Management’s Discussion and Analysis of Financial Condition and
Results of Operations

Depreciation and amortization expense increased $7,000 in 2007 as compared to the same period in 2006.

Minority interest in consolidated income for the nine month period ended September 30, 2007 decreased $32,000 compared to the same period in 2006, as a result of a decrease in income from our urology services segment offset by increases in minority interest percentages at certain partnerships.

Provision for income taxes in 2007 decreased $306,000 compared to 2006 due to the decrease in our taxable net income during the same periods.

Three months ended September 30, 2007 compared to the three months ended September 30, 2006

Our total revenues for the three months ended September 30, 2007 increased $92,000 as compared the same period in 2006. Revenues from our urology services segment increased $517,000 (2%) in the third quarter of 2007 as compared to the same period in 2006. Revenues from our lithotripsy business increased $332,000 for the third quarter of 2007 as compared to the same period in 2006, and revenues from our prostate business increased $185,000 in the third quarter of 2007 as compared to the same period in 2006. The actual number of lithotripsy procedures performed in the third quarter of 2007 decreased by 3% compared to 2006, primarily due to partnership and mobile route closures in late 2006. The average rate per procedure increased by 3% in the third quarter of 2007 as compared to the same period in 2006. Revenues for our medical products segment decreased by $464,000 (10%) for the quarter ended September 30, 2007 compared to the same period in 2006. Medical products revenues before intersegment eliminations totaled $6,269,000 for the third quarter of 2007 and $6,375,000 for the same period in 2006. We sold 3 devices and no tables in the third quarter of 2007 compared to 3 devices and 23 tables during the same period in 2006. Revenues from our service operations and consumable sales decreased $378,000 in the third quarter of 2007 as compared to 2006. This decrease relates primarily to lower electrode sales especially as related to our foreign operations, which we closed in late 2006. Revenues from our new laboratory which commenced operations in January 2006, totaled $919,000 and $187,000 for the quarters ended September 30, 2007 and 2006, respectively.

Our costs of services and general and administrative expenses for the third quarter of 2007 decreased $2,481,000 (10%) compared to the same period in 2006. Our costs associated with salaries, wages and benefits decreased $1,257,000 (11%) in the third quarter of 2007 as compared to the same period in 2006, primarily related to approximately $900,000 of severance cost in 2006 as well as decreases in the variable incentive compensation accrual in the third quarter of 2007 and lower share-based compensation costs due to forfeitures in the quarter, partially offset by an increase in group medical costs resulting from higher medical claims in 2007. Our costs associated with other costs of services for the quarter ended September 30, 2007 decreased $93,000 (2%) compared to the same period in 2006. This decrease is primarily related to decreased expenses for laser supplies related to our shift from the greenlight laser to the revolix laser, and collections on accounts previously deemed uncollectible, partially offset by increased repairs and maintenance costs. Our general and administrative costs for the third quarter of 2007 decreased $387,000 (17%) as compared to the third quarter of 2006, primarily due to decreased recruiting costs and certain other insurance costs. Costs associated with legal and professional fees decreased $634,000 (37%) in the third quarter of 2007 as compared to the same period 2006. This decrease is primarily due to fees from our strategic consultants incurred in 2006. Manufacturing costs decreased $230,000 (12%) in the three month period ended September 30, 2007 as compared to the same period in 2006. This increase is due primarily to the decrease in the cost of sales to external customers. In the future, we expect margins in medical products to vary significantly from period to period based on the mix of intercompany and third-party sales. Advertising costs increased $97,000 (69%) in the third quarter of 2007 as compared with the same period in 2006. This relates primarily to expenses related to trade shows and other marketing efforts in the third quarter of 2007.

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Item 2 — Management’s Discussion and Analysis of Financial Condition and
Results of Operations

Income from discontinued operations in the third quarter of 2007 decreased $31,820,000 compared to the third quarter of 2006. The income from discontinued operations in the third quarter of 2006 included $32,213,000 attributable to our specialty vehicle manufacturing segment partially offset by $258,000 in losses attributable to our HIFU, Cryosurgery, and Rocky Mountain Thermotherapy operations. We recognized a gain, net of tax, totaling $33.2 million in 2006 from the sale of our specialty vehicle manufacturing segment. In the third quarter of 2007, we had income from discontinued operations of $135,000 attributable to our Rocky Mountain Thermotherapy and HIFU operations. This income included a gain of $450,000 from the sale of our Rocky Mountain Prostate business, which closed on September 28, 2007.

Depreciation and amortization expense decreased $141,000 in the third quarter of 2007 as compared to the same period in 2006.

Minority interest in consolidated income for the three month period ended September 30, 2007 increased $833,000 compared to the same period in 2006, as a result of an increase in income at our urology partnerships, as well as increases in minority interest percentages at certain partnerships compared to the same period in 2006.

Provision for income taxes in the third quarter of 2007 increased $399,000 compared to 2006 due to the increase in our taxable net income during the same periods, as well as an increase in the effective tax rate in 2007.

Liquidity and Capital Resources

Cash Flows

Our cash and cash equivalents were $23,257,000 and $27,857,000 at September 30, 2007 and December 31, 2006, respectively. Our subsidiaries generally distribute all of their available cash quarterly, after establishing reserves for estimated capital expenditures and working capital. For the nine months ended September 30, 2007 and 2006, our subsidiaries distributed cash of approximately $35,697,000 and $40,764,000, respectively, to minority interest holders.

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Item 2 — Management’s Discussion and Analysis of Financial Condition and
Results of Operations

Cash provided by our operations, after minority interest, was $45,564,000 for the nine months ended September 30, 2007 and $36,846,000 for the nine months ended September 30, 2006. For the nine months ended September 30, 2007 compared to the same period in 2006, fee and other revenue collected decreased by $5,892,000 due primarily to our decreased revenues. Cash paid to employees, suppliers of goods and others for the nine months ended September 30, 2007 decreased by $1,884,000 compared to the same period in 2006. This fluctuation is attributable to a significant payoff of accrued expenses partially offset by a decrease in our overall expenses.

Cash used by our investing activities for the nine months ended September 30, 2007, was $12,480,000. We utilized approximately $8 million in cash to acquire our interests in the new Keystone partnership and purchased equipment and leasehold improvements totaling $6,838,000 in 2007. Cash provided by our investing activities for the nine months ended September 30, 2006, was $130,920,000 primarily due to $138,519,000 received from the sale of our Specialty Vehicle segment partially offset by $8,597,000 in equipment and leasehold improvements purchases.

Cash used in our financing activities for the nine months ended September 30, 2007, was $37,486,000, primarily due to distributions to minority interests of $35,697,000 and payments on notes payable of $4,483,000 partially offset by borrowings on notes payable of $2,546,000. Cash used in our financing activities for the nine months ended September 30, 2006, was $169,659,000, primarily due to distributions to minority interests of $40,764,000 and net payments on notes payable of $129,771,000, which included the repayment in full of our term loan B.

Accounts receivable as of September 30, 2007 decreased $1,879,000 from December 31, 2006. This decrease relates primarily to lower revenues as well as to the timing of collections.

Inventory as of September 30, 2007, totaled $10,359,000 and decreased $1,115,000 from December 31, 2006.

Senior Credit Facility

Our senior credit facility is comprised of a five-year $50 million revolver and a $125 million senior secured term loan B due 2011. We entered into this senior credit facility in March 2005. On July 31, 2006, we used a portion of the proceeds from the sale of our specialty vehicle manufacturing segment to repay the term loan B in full. As of September 30, 2007, there were no amounts drawn on the revolver. The loan bears interest at a variable rate equal to LIBOR + 1.25 to 2.25% or prime + .25 to 1.25%. Our senior credit facility contains covenants that, among other things, limit our ability to incur debt, create liens, make investments, sell assets, pay dividends, make capital expenditures, make restricted payments, enter into transactions with affiliates, and make acquisitions. In addition, our facility requires us to maintain certain financial ratios. We were in compliance with the covenants under our senior credit facility as of September 30, 2007.

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Item 2 — Management’s Discussion and Analysis of Financial Condition and
Results of Operations

Other

Other long term debt. On July 31, 2006, we used a portion of the proceeds from the sale of our specialty vehicle manufacturing segment to repay approximately $3.5 million of mortgage debt related to our building in Austin, Texas. As of September 30, 2007, we had notes totaling $9.7 million related to equipment purchased by our limited partnerships. These notes are paid from the cash flows of the related partnerships. The notes bear interest at LIBOR or prime plus a certain premium and are due over the next three years.

Other long term obligations. At September 30, 2007, we had an obligation totaling $150,000 related to payments to the previous owner of Aluminum Body Corporation, a wholly owned subsidiary of ours that we sold as part of the sale of our specialty vehicles manufacturing segment (“ABC”), for $75,000 per quarter until March 31, 2008 as consideration for a noncompetition agreement. Also at September 30, 2007, as part of our acquisition of Medstone International Inc. in February 2004, we had an obligation totaling $70,840 related to payments to an employee for $20,833 a month until February 28, 2007 and $4,167 a month beginning March 1, 2007 and continuing until February 28, 2009 as consideration for a noncompetition agreement. We also had as part of the Prime-HSS merger, two obligations totaling $12,500 related to payments to two previous employees of HSS. One obligation is for $8,333 a month until October 31, 2007 as consideration for a noncompetition agreement. The other obligation is for $4,167 a month until October 31, 2007 as consideration for a noncompetition agreement. We have an obligation totaling $110,000 related to payments of $3,333 a month until June 15, 2010 as consideration for a noncompetition agreement with a previous employee of our Medical Products division.

General

The following table presents our contractual obligations as of September 30, 2007 (in thousands):

	Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Long Term Debt (1)	$	9,668	$	4,844	$	4,113	$	680	$	31
Operating Leases (2)		6,329		1,619		2,599		1,485		626
Non-compete contracts (3)		343		252		91		--		--
Total	$	16,340	$	6,715	$	6,803	$	2,165	$	657

(1)	Represents long term debt as discussed above.
(2)	Represents operating leases in the ordinary course of our business.
(3)	Represents an obligation of $150 due to the previous owner of ABC, at a rate of $75 per quarter, an obligation of $71 due to a previous employee of Medstone, at a rate of $21 per month until February 28, 2007 and $4 beginning March 1, 2007 and continuing until February 28, 2009, an obligation of $13 due to previous employees of HSS, at a rate of $13 per month until October 31, 2007, and an obligation of $110 due to a previous employee of ours, at a rate of $3 per month until June 15, 2010.

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Item 2 — Management’s Discussion and Analysis of Financial Condition and
Results of Operations

In addition, the scheduled principal repayments for all long term debt as of September 30, 2007 are payable as follows:

($ in thousands)
2007	$	4,844
2008		2,553
2009		1,560
2010		554
2011		126
Thereafter		31
Total	$	9,668

On January 1, 2007, we adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”) as described in Note 8 to the condensed consolidated financial statements. As of January 1, 2007 and September 30, 2007, our total liabilities for unrecognized tax benefits amounted to $2.4 million. We do not believe that our adoption of FIN 48 has a material effect on the schedule of cash contractual obligations included in our most recent Annual Report on Form 10-K because we cannot make a reasonably reliable estimate of the amount and period of related future payment of our FIN 48 liabilities.

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

We intend to increase our urology services operations primarily through forming new operating subsidiaries in new markets as well as by acquisitions. We plan to increase our medical products segment by offering new equipment and expanding our customer base. We intend to fund the purchase price for future acquisitions and developments using borrowings under our senior credit facility and cash flows from our operations. In addition, we may use shares of our common stock in such acquisitions where appropriate.

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

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Item 2 — Management’s Discussion and Analysis of Financial Condition and
Results of Operations

Inflation

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

Recently Issued Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. SFAS No. 157 is effective January 1, 2008. We are currently evaluating the effect, if any, of this statement on our financial condition and results of operation.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” ("SFAS No. 159"). SFAS No. 159 expands the use of fair value accounting to many financial instruments and certain other items. The fair value option is irrevocable and generally made on an instrument-by-instrument basis, even if a company has similar instruments that it elects not to measure based on fair value. SFAS 159 is effective for fiscal years beginning after November15, 2007. We are currently evaluating the effect that the adoption of SFAS 159 will have on our financial position and results of operations.

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Item 3 — Quantitative and Qualitative Disclosures
About Market Risk

Interest Rate Risk

As of September 30, 2007, we had long-term debt (including current portion) totaling $9,668,000, of which $6,867,000 had fixed rates of 1% to 11%, and $2,801,000 incurred interest at a variable rate equal to a specified prime rate. We are exposed to some market risk due to the remaining floating interest rate debt totaling $2,801,000. We make monthly or quarterly payments of principal and interest on $1,402,000 of the floating rate debt. An increase in interest rates of 1% would result in a $28,000 annual increase in interest expense on this existing principal balance.

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Item 4 – Controls and Procedures

As of September 30, 2007, under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), we evaluated the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of September 30, 2007, our disclosure controls and procedures were effective.

There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting.

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PART II

OTHER INFORMATION

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Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Risk Factors” in Part I, Item 1 in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 6. Exhibits.

         10.1
                  
                  
                  
         10.2
                  
                  
                  
                  
         10.3
                  
                  
                  
         31.1*

         31.2*

         32.1*

         32.2* First Amendment to Executive Employment Agreement, dated as of August 10, 2007, by and between HealthTronics, Inc. and James S. B. Whittenburg (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 15, 2007).

Letter agreement, dated as of July 9, 2007, by and among HealthTronics, Inc., HT Prostate Therapy Management Company, LLC, EDAP TMS S. A., EDAP S. A. and Technomed Medical Systems S. A. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 12, 2007).

Termination and Consulting Agreement, dated July 9, 2007, by and between HealthTronics, Inc. and Christopher B. Schneider. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 12, 2007).

Certification of Chief Executive Officer

Certification of Chief Financial Officer

Certification of Chief Executive Officer

Certification of Chief Financial Officer

*    Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

                                                     



Date: November 2, 2007



                                                     
                                                     
                                                      HEALTHTRONICS, INC.







By:/s/ Ross A. Goolsby                                
     Ross A. Goolsby
     Chief Financial Officer

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