Summary of HEALTHTRONICS, INC.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements

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

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

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

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

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

• the effects of competition and technological changes;

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

• general economic, market or business conditions.

General

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

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

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

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

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

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

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

We recognize urology revenue primarily from the following sources:

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

• Fees for managing the operation of our lithotripters and prostate treatment devices. Through our partnerships and otherwise directly by us, we provide services related to operating our lithotripters and prostate treatment equipment and receive a management fee for performing these services.

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

• Fees for maintenance services. We provide equipment maintenance services to our partnerships as well as outside parties. These services are billed either on a time and material basis or at a fixed contractual rate, payable monthly, quarterly, or annually. Revenues from these services are recorded when the related maintenance services are performed.

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

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

Recent Developments

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

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

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

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

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

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

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

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

Critical Accounting Policies and Estimates

Management has identified the following critical accounting policies and estimates:

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

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

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

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

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

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

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

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

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

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

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

Year ended December 31, 2007 compared to the year ended December 31, 2006

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

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

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

Income from discontinued operations in 2007 decreased $25,276,000 compared to . . .