_______________________________________________________

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 June 30, 2008
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities and 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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer   ¨              Accelerated Filer   x              Non-Accelerated Filer   ¨              Smaller reporting company   ¨ (Do not check if a smaller reporting company)  


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

YES       NO   X  


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
August 1, 2008
38,272,888







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 June 30,
Six Months Ended June 30,
2008
2007
2008
2007
Revenue:                    
     Urology Services     $ 37,865   $ 30,836   $ 67,415   $ 59,221  
     Medical Products       4,584     4,586     8,831     8,825  
     Other       131     141     288     268  
        Total revenue       42,580     35,563     76,534     68,314  
Cost of services and general and administrative expenses:    
     Urology Services       17,399     13,281     30,390     26,966  
     Medical Products       1,736     2,839     3,913     5,243  
     Selling, general & administrative       5,269     4,593     9,586     8,907  
     Depreciation and amortization       3,069     2,776     5,697     5,592  
        27,473     23,489     49,586     46,708  
Operating income       15,107     12,074     26,948     21,606  
 
Other income (expenses):    
     Interest and dividends       101     311     292     588  
     Interest expense       (246 )   (212 )   (409 )   (448 )
        (145 )   99     (117 )   140  
Income from continuing operations before provision    
     for income taxes and minority interest       14,962     12,173     26,831     21,746  
 
Minority interest in consolidated income       13,781     11,275     24,828     20,784  
Provision for income taxes       471     581     841     566  
Income from continuing operations       710     317     1,162     396  
 
Loss from discontinued operations, net of tax       --     (138 )   --     (247 )
Net income     $ 710   $ 179   $ 1,162   $ 149  
Basic earnings per share:    
     Income from continuing operations     $ 0.02   $ 0.01   $ 0.03   $ 0.01  
     Loss from discontinued operations       --     --     --     (0.01 )
        Net income     $ 0.02   $ 0.01   $ 0.03   $ --  
     Weighted average shares outstanding       37,059     35,425     36,242     35,416  
Diluted earnings per share:    
     Income from continuing operations     $ 0.02   $ 0.01   $ 0.03   $ 0.01  
     Loss from discontinued operations       --     --     --     (0.01 )
        Net income     $ 0.02   $ 0.01   $ 0.03   $ --  
     Weighted average shares outstanding       37,165     35,426     36,295     35,422  

See accompanying notes to condensed consolidated financial statements.


-3-


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

($ in thousands)

June 30,
2008
December 31,
2007
ASSETS            
 
Current assets:    
     Cash and cash equivalents     $ 18,207   $ 25,198  
     Accounts receivable, less allowance for doubtful    
         accounts of $2,537 in 2008 and $2,368 in 2007       24,021     21,889  
     Other receivables       1,117     2,703  
     Deferred income taxes       12,967     12,547  
     Prepaid expenses and other current assets       3,525     1,656  
     Inventory       8,880     10,221  
         Total current assets       68,717     74,214  
Property and equipment:    
     Equipment, furniture and fixtures       53,159     47,751  
     Building and leasehold improvements       5,769     12,437  
        58,928     60,188  
     Less accumulated depreciation and    
         amortization       (27,777 )   (27,169 )
         Property and equipment, net       31,151     33,019  
Other investments       1,799     1,353  
Goodwill, at cost       233,244     217,505  
Intangible assets       6,095     5,220  
Other noncurrent assets       4,357     4,745  
      $ 345,363   $ 336,056  


See accompanying notes to condensed consolidated financial statements.



-4-


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

($ in thousands, except share data)

June 30,
2008
December 31,
2007
LIABILITIES            
 
Current liabilities:    
     Current portion of long-term debt     $ 3,886   $ 4,332  
     Accounts payable       7,409     5,859  
     Accrued distributions to minority interests       95     226  
     Accrued expenses       6,389     7,275  
         Total current liabilities       17,779     17,692  
 
Long-term debt, net of current portion       3,206     4,194  
Other long term obligations       52     75  
Deferred income taxes       31,371     30,024  
         Total liabilities       52,408     51,985  
 
Minority interest       40,831     41,653  
 
STOCKHOLDERS' EQUITY    
 
Preferred stock, $.01 par value, 30,000,000 shares authorized: none outstanding    
Common stock, no par value, 70,000,000 authorized: 38,272,888 issued in 2008    
     and 38,194,495 outstanding in 2008; 35,610,236 issued in 2007 and    
     35,560,097 outstanding in 2007       210,696     202,049  
Accumulated earnings       42,003     40,841  
Treasury stock, at cost, 78,393 shares in 2008 and 50,139 shares in 2007       (575 )   (472 )
         Total stockholders' equity       252,124     242,418  
      $ 345,363   $ 336,056  


See accompanying notes to condensed consolidated financial statements.



-5-


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

Six Months Ended June 30,
($ in thousands)

2008
2007
CASH FLOWS FROM OPERATING ACTIVITIES:            
     Fee and other revenue collected     $ 79,750   $ 68,403  
     Cash paid to employees, suppliers of goods and others       (44,896 )   (40,768 )
     Interest received       292     588  
     Interest paid       (388 )   (438 )
     Taxes paid       (644 )   (573 )
     Discontinued operations       --     (114 )
         Net cash provided by operating activities       34,114     27,098  
CASH FLOWS FROM INVESTING ACTIVITIES:    
     Purchase of entities, net of cash acquired       (10,197 )   (7,004 )
     Purchases of equipment and leasehold improvements       (5,615 )   (3,466 )
     Proceeds from sales of assets       7,753     974  
     Other       (190 )   (18 )
     Discontinued operations       --     (39 )
         Net cash used in investing activities       (8,249 )   (9,553 )
CASH FLOWS FROM FINANCING ACTIVITIES:    
     Borrowings on notes payable       7,341     1,096  
     Payments on notes payable, exclusive of interest       (9,351 )   (2,670 )
     Distributions to minority interest       (30,132 )   (25,079 )
     Contributions by minority interest, net of buyouts       (611 )   (28 )
     Purchase of treasury stock       (103 )   --  
     Discontinued operations       --     (8 )
         Net cash used in financing activities       (32,856 )   (26,689 )
NET DECREASE IN CASH AND CASH EQUIVALENTS       (6,991 )   (9,144 )
 
Cash and cash equivalents, beginning of period, includes cash    
     from discontinued operations of $(198) for December 31, 2006       25,198     27,659  
Cash and cash equivalents, end of period, includes cash    
     from discontinued operations of $(349) for June 30, 2007     $ 18,207   $ 18,515  


See accompanying notes to condensed consolidated financial statements.




-6-


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

Six Months Ended June 30,
($ in thousands)

2008
2007
Reconciliation of net income to net cash provided by operating activities:            
     Net income     $ 1,162   $ 149  
     Adjustments to reconcile net income    
          to net cash provided by operating activities    
             Minority interest in consolidated income       24,828     20,784  
             Depreciation and amortization       5,697     5,592  
             Provision for uncollectible accounts       (54 )   254  
             Provision for deferred income taxes       422     3,233  
             Non-cash share based compensation       1,909     1,176  
             Other       (446 )   (32 )
     Discontinued Operations       --     286  
     Changes in operating assets and liabilities,    
          net of effect of purchase transactions    
             Accounts receivable       1,239     (729 )
             Other receivables       1,712     732  
             Other assets       (8 )   (450 )
             Accounts payable       (217 )   (439 )
             Accrued expenses       (2,130 )   (3,458 )
     Total adjustments       32,952     26,949  
Net cash provided by operating activities     $ 34,114   $ 27,098  


See accompanying notes to condensed consolidated financial statements.




-7-


HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(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 June 30, 2008 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, 2007 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 expense categories presented in 2007 to be consistent with the 2008 presentation. In 2007, we classified our operating expenses in the accompanying condensed consolidated statements of income by nature using the following categories: Salaries, wages and benefits; Other cost of services; General and administrative; Legal and professional; Manufacturing costs; Advertising; and Other. In 2008, in order to more closely match each class of revenue we have reclassified our operating expense categories by function as follows: Urology services, Medical products, and Sales, general & administrative. These reclassifications were between operating expense categories and did not change total operating expense in any period.

During the fourth quarter of 2006, we 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, 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.


2. Debt

Senior Credit Facility

Our senior credit facility is comprised of a five-year $60 million revolving line of credit and a $125 million senior secured term loan B due 2011. We entered into this senior credit facility in March 2005 and amended it in April 2008. The loan bears interest at a variable rate equal to LIBOR + 1.25 to 2.25% or prime + .25 to 1.25%. On July 31, 2006, we used a portion of the proceeds from the sale of our specialty vehicle manufacturing segment to repay the term loan B in full. As of June 30, 2008, there were no amounts drawn on the revolving line of credit. 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 June 30, 2008.




-8-


HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)


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

Other

As of June 30, 2008, we had notes payable totaling $7.1 million related to equipment purchased by our limited partnerships. These notes payable are paid down from the cash flows of the related partnerships. They generally bear interest at LIBOR or prime plus a certain premium and have various due dates over the next three years.


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, non-vested stock awards 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
Six Months Ended June 30, 2008            
 
Net income     $ 1,162   $ 1,162  
Weighted average shares outstanding       36,242     36,242  
Effect of dilutive securities       --     53  
Shares for EPS calculation       36,242     36,295  
Net income per share     $ 0.03   $ 0.03  
Six Months Ended June 30, 2007    
 
Net income     $ 149   $ 149  
Weighted average shares outstanding       35,416     35,416  
Effect of dilutive securities       --     6  
Shares for EPS calculation       35,416     35,422  
Net income per share     $ --   $ --  



-9-


HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)


($ in thousands, except per share data)

Basic earnings
per share
Diluted earnings
per share
Three Months Ended June 30, 2008            
 
Net income     $ 710   $ 710  
Weighted average shares outstanding       37,059     37,059  
Effect of dilutive securities       --     106  
Shares for EPS calculation       37,059     37,165  
Net income per share     $ 0.02   $ 0.02  
Three Months Ended June 30, 2007    
 
Net income     $ 179   $ 179  
Weighted average shares outstanding       35,425     35,425  
Effect of dilutive securities       --     1  
Shares for EPS calculation       35,425     35,426  
Net income per share     $ 0.01   $ 0.01  

We did not include in our computation of diluted EPS unexercised stock options and non-vested stock awards to purchase 3,090,000 and 3,881,000 shares of our common stock as of June 30, 2008 and 2007, respectively, because the effect would be antidilutive. In May 2008, our shareholders approved an amendment to our 2004 Equity Incentive Plan to increase by 2,850,000 shares the number of shares available for issuance thereunder from 2,950,000 to 5,800,000 shares.


4. Segment Reporting

We have two reportable segments: urology services and medical products. The urology services segment provides services related to the operation of the lithotripters, including scheduling, staffing, training, quality assurance, maintenance, regulatory compliance and contracting with payors, hospitals and surgery centers. Also in the urology segment, we provide treatments for benign and cancerous conditions of the prostate. In treating benign prostate disease, we deploy three technologies: (1) 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. 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. Our medical products segment sells and maintains lithotripters and their related consumables. We are also 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.




-10-


HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(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
Six Months Ended June 30, 2008            
 
Revenue from external customers     $ 67,415   $ 8,831  
Intersegment revenues       --     5,229  
Segment profit       5,469     1,876  
 
Six Months Ended June 30, 2007    
 
Revenue from external customers     $ 59,221   $ 8,825  
Intersegment revenues       --     4,801  
Segment profit       4,442     17  

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:


Six Months ended June 30,
($ in thousands)

2008
2007
Total segment profit     $ 7,345   $ 4,459  
Unallocated corporate revenues       288     268  
Unallocated corporate expenses:    
    General and administrative       (5,372 )   (3,701 )
    Net interest income (expense)       (32 )   302  
    Other, net       (226 )   (366 )
Total unallocated corporate expenses       (5,630 )   (3,765 )
Income before income taxes     $ 2,003   $ 962  


-11-


HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)


($ in thousands)

Urology Services
Medical Products
Three Months Ended June 30, 2008            
 
Revenue from external customers     $ 37,865   $ 4,584  
Intersegment revenues       --     2,785  
Segment profit       3,223     1,121  
 
Three Months Ended June 30, 2007    
 
Revenue from external customers     $ 30,836   $ 4,586  
Intersegment revenues       --     2,232  
Segment profit       2,772     (103 )

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 June 30,
($ in thousands)

2008
2007
Total segment profit     $ 4,344   $ 2,669  
Unallocated corporate revenues       131     141  
Unallocated corporate expenses:    
   General and administrative       (3,095 )   (1,884 )
   Net interest income (expense)       (82 )   150  
   Other, net       (117 )   (178 )
Total unallocated corporate expenses       (3,294 )   (1,912 )
Income before income taxes     $ 1,181   $ 898  

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 value 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
June 30, 2008
(Unaudited)


In the first quarter of 2008, we granted a total of 675,166 of non-vested shares under our 2004 Equity Incentive Plan. 80,000 shares vest 25% on each of the first four anniversaries of the grant date. 386,857 shares vest based on the achievement of the performance targets outlined below. 208,309 shares vest 25% on each of the first four anniversaries of the grant date; however, their vesting can be accelerated if the following performance targets are reached.


Percent of
Grant Vesting
Performance Target
(% increase over grant price)
    25% 15%
    25% 30%
    25% 45%
    25% 60%

On May 5, 2008, the first performance target was met and as a result 92,862 of the non-vested stock awards vested, which resulted in the recognition of approximately $307,000 in share based compensation cost.

As of June 30, 2008, unrecognized share-based compensation cost related to unvested stock options was approximately $2.2 million, which is expected to be recognized over a weighted average period of approximately 1.6 years. We also had $1.7 million of unrecognized compensation costs related to non-vested stock awards as of June 30, 2008, which is expected to be recognized over a weighted average period of approximately 1.6 years. We have included approximately $1.9 million and $0.8 million for share-based compensation cost in the accompanying condensed consolidated statements of income for the six months ended June 30, 2008 and 2007, respectively.

Share-based compensation expense recognized during the quarters ended June 30, 2008 and 2007 is related to awards granted prior to, but not yet fully vested as of, January 1, 2006 and awards granted subsequent to December 31, 2005. We have historically and continue to estimate the fair value of stock options using the Black-Scholes-Merton (“Black Scholes”) option-pricing model. For our non-vested stock awards, we relied upon a closed-form barrier option valuation model, which is a derivation of the Black Scholes model to determine the fair value of the awards and utilized a lattice model to analyze the appropriate service period.


6. Inventory

As of June 30, 2008 and December 31, 2007, inventory consisted of the following:


($ In thousands)

June 30,
2008
  December 31,
2007
 
Raw Materials     $ 6,089   $ 6,144  
Finished Goods       2,791     4,077  
      $ 8,880   $ 10,221  


-13-


HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)


7. Discontinued Operations

In November 2006, we announced our decision to discontinue our involvement in the clinical trials of the Ablatherm device (HIFU) manufactured by EDAP TMS S.A. (EDAP). This decision results in our forfeiting the exclusive rights in the United States, when and if a Pre-Market Approval is granted by the FDA and forfeiting our rights to earn additional warrants to acquire EDAP common stock. We have accordingly included our costs related to the clinical trials 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 2007, we entered into a purchase agreement to sell the RMPT business for $1.35 million. This sale closed on September 28, 2007. We classified this business as held for sale and included its results from operations in discontinued operations.

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


Condensed Consolidated Statements of Income
($ in thousands)

2007
    For the Six Months Ended June 30        
    Revenue    
         Rocky Mountain Prostate Thermotherapies     $ 2,237  
         HIFU       --  
    Cost of services    
         Rocky Mountain Prostate Thermotherapies       (2,440 )
         HIFU       (198 )
         Income tax benefit       154
    Discontinued operations, net of tax     $ (247 )

Condensed Consolidated Statements of Income
($ in thousands)

2007
    For the Three Months Ended June 30        
    Revenue    
         Rocky Mountain Prostate Thermotherapies     $ 1,099  
         HIFU       --  
    Cost of services    
         Rocky Mountain Prostate Thermotherapies       (1,274 )
         HIFU       (49 )
         Income tax benefit       86
    Discontinued operations, net of tax     $ (138 )


-14-


HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)


8. New Pronouncements

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

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

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

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




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HEALTHTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2008
(Unaudited)


9. Acquisitions

On April 17, 2008, we completed the acquisition of AMPI pursuant to the Stock Purchase Agreement dated March 18, 2008 between us, Litho Management, Inc., AMPI and the stockholders of AMPI. Founded in 2003, AMPI is a leading provider of urological cryosurgery services in the U.S. with operations in 46 states. We acquired the outstanding shares of capital stock of AMPI (other than shares already held by us) for 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 determined the value of our common stock by using an average closing price for the two trading days prior to and after the public announcement of the merger. Based upon our preliminary allocation of the purchase price, we recognized $12.8 million of goodwill related to this transaction, all of which is not tax deductible.

In 2008, we increased our ownership in two partnerships and purchased a small service company for an aggregate purchase price of approximately $3.7 million. We recorded approximately $2.9 million of goodwill related to these transactions, all of which is tax deductible.

Unaudited proforma combined income data for the periods ended June 30, 2008 and 2007 of the Company, assuming the acquisitions were effective January 1, of each year, is as follows:


Six Months Ended June 30,
($ in thousands, except per share data)

2008
2007
Total revenues     $ 83,876   $ 83,879  
Total expenses       (82,298 )   (82,458 )
Discontinued Operations       --     (247 )
  Net income     $ 1,578   $ 1,174  
  Diluted earnings per share     $ 0.04   $ 0.03  

10. Subsequent Events

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.




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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 medical devices, primarily to the urology marketplace. We have two reportable segments: urology services and medical products.

Urology Services . Our lithotripsy services are provided principally through limited partnerships or other entities that we manage, which use lithotripsy devices. In 2007, physicians who are affiliated with us used our lithotripters to perform approximately 48,000 procedures in the U.S. We do not render any medical services. Rather, the physicians do.




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


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, for each of the first six month periods of 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.

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. 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 managing the operation of 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 sell and maintain lithotripters and related spare parts and consumables. We are also 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.


  •

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 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 marketplace. Revenues from these services are recorded when the related laboratory procedures are performed.

Recent Developments

On April 17, 2008, we completed the acquisition of Advanced Medical Partners, Inc. (“AMPI”) pursuant to the Stock Purchase Agreement dated March 18, 2008 between us, Litho Management, Inc., AMPI and the stockholders of AMPI. We acquired the outstanding shares of capital stock of AMPI (other than shares already held by us) for a purchase price of approximately $6.9 million in cash and approximately 1.8 million shares of common stock, plus a two-year earn-out based on the future achievement of EBITDA.

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




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


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 intend to relocate our principal executive offices to the leased 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 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 2007 and 2006 goodwill impairments and the specific assumptions used in the income and market approaches in the 2007 and 2006 analyses, see footnote C to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007.




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


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 consolidated financial statements include our accounts, our wholly-owned subsidiaries, 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%. With respect to partnerships and LLCs where we exercise effective control but own less than 50%, we have reviewed each of the underlying governing agreements for such entities 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.

Six months ended June 30, 2008 compared to the six months ended June 30, 2007

Our total revenues for the six months ended June 30, 2008 increased $8,220,000 as compared to the same period in 2007. Revenues from our urology services segment increased $8,194,000 (14%) in the first half of 2008 as compared to the same period in 2007. Revenues from our lithotripsy business increased $2,257,000 for the first half of 2008 as compared to the same period in 2007, and revenues from our prostate business increased $5,937,000 in the first half of 2008 as compared to the same period in 2007. Revenues from our AMPI acquisition, which was effective April 1, 2008, were the primary driver in the increased prostate revenues. Revenues from AMPI entities totaled $6.4 million in first half of 2008. Revenues from our recent lithotripsy acquisitions accounted for our increased lithotripsy business as same stores revenues were comparable to 2007. Revenues for our medical products segment for the six month period ended June 30, 2008 were consistent with the same period in 2007. We sold 1 lithotripter and no tables in the first half of 2008. We sold 4 lithotripter and 28 tables during the same period in 2007. Revenues from our new laboratory which commenced operations in January 2006, totaled $2,360,000 and $1,493,000 for the six months ended June 30, 2008 and 2007, respectively.

Our costs of services and general and administrative expenses for the six months ended June 30, 2008 increased $2,878,000 (6%) compared to the same period in 2007. Our cost of services associated with our urology services operations increased $3,424,000 (13%) in the first half of 2008 as compared to the same period in 2007. The primary cause of this increase relates to cost of services at our new AMPI entities, whose costs totaled $4,156,000 in 2008, partially offset by an overall decrease in cost of services of $732,000 attributed to our organic urology business. This decrease in our organic business costs is primarily related to a 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 received at one of our partnerships related to damages suffered during hurricane Katrina. Our cost of services associated with our medical products operations for the first six months of 2008 decreased $1,330,000 (26%) compared to the same period in 2007. This decrease is due to lower cost of sales on fewer device sales in the period, partially offset by approximately $814,000 in increased expenses at our new lab which experienced significant growth year over year. 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 six months ended June 30, 2008 increased $679,000 compared to the same period in 2007. This increase primarily relates to compensation expenses related to restricted stock grants to employees which vested as performance goals were reached in the second quarter of 2008, partially offset by a gain of $415,000 realized in the sale of the building that houses our corporate headquarters.




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


In the first half of 2007, we had a loss from discontinued operations of $247,000 attributable to our RMPT and HIFU operations. Our RMPT business, was sold on September 28, 2007.

Depreciation and amortization expense increased $105,000 in the first half of 2008 as compared to the same period in 2007, primarily due to the addition of our new AMPI entities.

Minority interest in consolidated income for the six month period ended June 30, 2008 increased $4,044,000 compared to the same period in 2007, as a result of an increase in income at our existing urology partnerships and minority interest expense at our new AMPI entities.

Provision for income taxes in the first half of 2008 increased $275,000 compared to the same period in 2007 due to the increase in our taxable net income during the same periods, as well as an increase in the effective tax rate. For the next several years, we will only be an alternative minimum tax payer as we will utilize our existing net operating loss carryforwards to offset any current taxes payable.

Three months ended June 30, 2008 compared to the three months ended June 30, 2007

Our total revenues for the three months ended June 30, 2008 increased $7,017,000 as compared to the same period in 2007. Revenues from our urology services segment increased $7,029,000 (23%) in the second quarter of 2008 as compared to the same period in 2007. Revenues from our lithotripsy business increased $995,000 for the second quarter of 2008 as compared to the same period in 2007, and revenues from our prostate business increased $6,034,000 in the second quarter of 2008 as compared to the same period in 2007. Revenues from our AMPI acquisition, which was effective April 1, 2008, were the primary driver in the increased prostate revenues. Revenues from AMPI entities totaled $6.4 million in the second quarter of 2008. Revenues from our recent lithotripsy acquisitions accounted for our increased lithotripsy business as same stores revenues were comparable to 2007. Revenues for our medical products segment for the quarter ended June 30, 2008 were consistent with the same period in 2007. We sold 1 lithotripter and no tables during the second quarter of 2008. We sold 3 lithotripter and 4 tables during the same period in 2007. Revenues from our new laboratory which commenced operations in January 2006, totaled $1,134,000 and $877,000 for the quarters ended June 30, 2008 and 2007, respectively.




-22-


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 three months ended June 30, 2008 increased $3,984,000 (17%) compared to the same period in 2007. Our cost of services associated with our urology services operations increased $4,118,000 (31%) in the second quarter of 2008 as compared to the same period in 2007. The primary cause of this increase relates to cost of services related to our new AMPI entities, whose costs totaled $4,156,000 in the second quarter of 2008. Our cost of services associated with our medical products operations for the second three months of 2008 decreased $1,103,000 (39%) compared to the same period in 2007. The primary cause of this decrease is due to lower cost of sales on fewer device sales in the quarter, partially offset by approximately $345,000 in increased expenses at our new lab which experienced significant growth year over year. 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 as of June 30, 2008 increased $676,000 compared to the same period in 2007. This increase primarily relates to compensation expenses related to restricted stock grants to employees which vested as performance goals were reached in the second quarter of 2008 partially offset by a gain of $415,000 realized in the sale of the building that houses our corporate headquarters.

In the second quarter of 2007, we had a loss from discontinued operations of $138,000 attributable to our RMPT and HIFU operations. Our RMPT business, was sold on September 28, 2007.

Depreciation and amortization expense increased $293,000 in the first quarter of 2008 as compared to the same period in 2007, primarily due to the addition of our new AMPI entities.

Minority interest in consolidated income for the three month period ended June 30, 2008 increased $2,506,000 compared to the same period in 2007, as a result of an increase in income at our existing urology partnerships and minority interest expense at our new AMPI entities.

Provision for income taxes in the first quarter of 2008 decreased $110,000 compared to the same period in 2007 due to a decrease in our effective tax rate. For the next several years, we will only be an alternative minimum tax payer as we will utilize our existing net operating loss carryforwards to offset any current taxes payable.

Liquidity and Capital Resources

Cash Flows

Our cash and cash equivalents were $18,207,000 and $25,198,000 at June 30, 2008 and December 31, 2007, respectively. Our subsidiaries generally distribute all of their available cash quarterly, after establishing reserves for estimated capital expenditures and working capital. For the six months ended June 30, 2008 and 2007, our subsidiaries distributed cash of approximately $30,132,000 and $25,079,000, 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, before minority interest, was $34,114,000 for the six months ended June 30, 2008 and $27,098,000 for the six months ended June 30, 2007. For the six months ended June 30, 2008 compared to the same period in 2007, fee and other revenue collected increased by $11,347,000 due primarily to our increased revenues and a decrease in our overall accounts receivable balances. Cash paid to employees, suppliers of goods and others for the six months ended June 30, 2008 increased by $4,128,000 compared to the same period in 2007. This fluctuation is primarily attributable to expenses incurred at our new AMPI partnerships.

Cash used by our investing activities for the six months ended June 30, 2008, was $8,249,000. We utilized approximately $10 million in cash to acquire our interests in AMPI as well as increase other partnership interests in certain litho partnerships and we purchased equipment and leasehold improvements totaling $5,615,000 in 2008, $3,100,000 of which were for additional Revolix lasers. Cash used by our investing activities for the six months ended June 30, 2007, was $9,553,000. We utilized approximately $7,848,000 in cash to acquire our interests in the new Keystone partnership and purchased equipment and leasehold improvements totaling $3,466,000 in 2007.

Cash used in our financing activities for the six months ended June 30, 2008, was $32,856,000, primarily due to distributions to minority interests of $30,132,000 and payments on notes payable of $9,351,000 partially offset by borrowings on notes payable of $7,341,000. Cash used in our financing activities for the six months ended June 30, 2007, was $26,689,000, primarily due to distributions to minority interests of $25,079,000 and net payments on notes payable of $1,574,000.

Accounts receivable as of June 30, 2008 increased $2,132,000 from December 31, 2007. This increase relates primarily to our purchase of AMPI, whose accounts receivable at acquisition totaled $3,072,000.

Inventory as of June 30, 2008, totaled $10,391,000 and increased $170,000 from December 31, 2007.

Senior Credit Facility

Our senior credit facility is comprised of a five-year $60 million revolving line of credit and a $125 million senior secured term loan B due 2011. We entered into this senior credit facility in March 2005 and amended it in April 2008. The loan bears interest at a variable rate equal to LIBOR + 1.25 to 2.25% or prime + .25 to 1.25%. On July 31, 2006, we used a portion of the proceeds from the sale of our specialty vehicle manufacturing segment to repay the term loan B in full. On June 15, 2008, we borrowed $6 million under our revolving line of credit. This amount was repaid prior to June 30, 2008. As of June 30, 2008, there were no amounts drawn on the revolving line of credit. 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 June 30, 2008.




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


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

Other

Other long term debt . As of June 30, 2008, we had notes payable totaling $7.1 million related to equipment purchased by our limited partnerships. These notes payable are paid down from the cash flows of the related partnerships. They generally bear interest at LIBOR or prime plus a certain premium and have various due dates over the next three years.

Unrecognized Tax Benefits : As of June 30, 2008, we had $2.3 million of unrecognized tax benefits. This represents the tax benefits associated with various tax positions taken, or expected to be taken, on domestic and international tax returns that have not been recognized in our financial statements due to uncertainty regarding their resolution. The resolution or settlement of these tax positions with the taxing authorities is at various stages and therefore we are unable to make a reliable estimate of the eventual cash flows by period that will be required to settle these matters. In addition, certain of these matters may not require cash settlement due to the existence of credit and operating loss carryforwards as well as other offsets, including the indirect benefit from other taxing jurisdictions that may be available.

General

The following table presents our contractual obligations as of June 30, 2008 (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     $ 7,092   $ 3,886   $ 2,640   $ 183   $ 383  
Operating Leases (1)       10,927     2,052     4,072     2,801     2,002  
Non-compete contracts (2)       113     73     40     -     -  
Unrecognized tax benefit       2,294     -     -     -     2,294  
Total     $ 20,426   $ 6,011   $ 6,752   $ 2,984   $ 4,679  
 
  (1) Represents operating leases in the ordinary course of our business.
  (2) Represents an obligation of $33 due to an employee of Medstone, at a rate of $4 per month continuing until February 28, 2009, and an obligation of $80 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 June 30, 2008 are payable as follows:


  ($ in thousands)
  2008     $ 3,886  
  2009       1,927  
  2010       713  
  2011       155  
  2012       28  
  Thereafter       383  
  Total     $ 7,092  

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 or possible future share repurchases, 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 grow our urology services operations primarily through forming new operating subsidiaries in new markets as well as by mergers and acquisitions. We plan to grow our medical products segment by offering new equipment and services at our lab 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.

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 fuel costs and employee compensation and benefits.




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


Recently Issued Accounting Pronouncements

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

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

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

In September 2006, the FASB issued SFAS No. 157, “ Fair Value Measurements ” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In December 2007, the FASB released a proposed FASB Staff Position (FSP FAS 157-b–Effective Date of




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


FASB Statement No. 157) which, if adopted as proposed, would delay the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). In February 2008, the FASB issued FASB Staff Position FAS 157-2, “ Effective Date of FASB Statement No. 157 ” (the “FSP”). The FSP delayed, for one year, the effective date of FAS 157 for all nonfinancial assets and liabilities, except those that are recognized or disclosed in the financial statements on at least an annual basis. The implementation of SFAS No. 157 for financial assets and financial liabilities, effective January 1, 2008, did not have a material impact on our consolidated financial position and results of operations for the second quarter.




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Item 3 — Quantitative and Qualitative Disclosures
About Market Risk


Interest Rate Risk

As of June 30, 2008, we had long-term debt (including current portion) totaling $7,092,000, of which $5,051,000 had fixed rates of 5% to 9%, and $2,041,000 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 $2,041,000. We make monthly or quarterly payments of principal and interest on $848,000 of the floating rate debt. An increase in interest rates of 1% would result in a $20,000 annual increase in interest expense on this existing principal balance.




-29-


Item 4 – Controls and Procedures


As of June 30, 2008, 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 June 30, 2008, 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.




-30-







PART II

OTHER INFORMATION











-31-


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, 2007, 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 2. Unregistered Sales of Equity Securities and Use of Proceeds.

In June 2008, with respect to the vesting of restricted stock awards based on the achievement of performance criteria, three of our officers used some of the vested shares of the restricted stock awards (under the terms of the restricted stock awards) to pay their tax withholding obligations associated with such vesting. A total of 28,254 shares of our common stock were paid to us in respect of the tax withholding obligations. The terms of the restricted stock awards provide that the value of the restricted shares used to pay the tax withholding obligations will be based on the closing price per share of our common stock on the trading day immediately preceding the vesting date, as reported on the Nasdaq Global Select Market.


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

On May 8, 2008, we held an annual meeting of our shareholders to consider and vote on the election of our board of directors and a proposed amendment to our 2004 equity incentive plan. Management solicited proxies for this meeting.

1)    The following nine individuals were nominated to serve on our board of directors: R. Steven Hicks, Donny R. Jackson, Timothy J. Lindgren, Kevin A Richardson, II, Kenneth S. Shifrin, Perry M. Waughtal, Argil J. Wheelock, M.D., James S.B. Whittenburg and Mark G. Yudof.

All nominees were elected. The voting was as follows:


Nominee
Votes For
Votes Against
R. Steven Hicks       30,521,594     733,794  
Donny R. Jackson       30,471,139     784,249  
Timothy J. Lindgren       30,529,149     726,239  
Kevin A. Richardson, II       30,451,463     803,925  
Kenneth S. Shifrin       29,249,965     2,005,423  
Perry M. Waughtal       30,178,299     1,077,089  
Argil J. Wheelock, M.D.       30,451,913     803,475  
James S. B. Whittenburg       30,560,786     694,602  
Mark G. Yudof       30,528,797     726,621  

2)    We proposed to amend our 2004 Equity Incentive Plan to increase by 2,850,000 shares the number of shares available for issuance thereunder (from 2,950,000 to 5,800,000 shares). The “votes for” were 24,468,436, the “votes against” were 1,578,461, the “abstentions” were 13,054, and “broker non-votes” were 5,195,437.




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Item 6. Exhibits .

         10.1
                  
                  
                  
                  
         10.2
                  
                  
                  
         10.3
                  
                  
         10.4
                  
                  
                  
                  
         10.5
                  
                  
                  
         31.1*

         31.2*

         32.1*

         32.2* 		First Amendment to Credit Agreement, dated as of April 14, 2008, by and among HealthTronics, Inc., the lenders party thereto, JPMorgan Chase Bank, National Association, and the other parties thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 16, 2008).

Piggy-Back Registration Rights Agreement, dated as of April 17, 2008, by and among HealthTronics, Inc., Robert A. Yonke, Christopher J. Ringel and Kevin Bentley. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 22, 2008).

Third Amendment to the 2004 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 14, 2008).

Earnest Money Contract—Commercial Improved Property (Office Condominiums) dated as of April 1, 2008 (as amended on each of April 15, 2008 and May 12, 2008) by and between HealthTronics, Inc. and HPI Acquisition Company, LLC. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 20, 2008).

Lease Agreement dated May 19, 2008, by and between HealthTronics, Inc. and HEP-Davis Spring, L.P. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 20, 2008).

Certification of Chief Executive Officer

Certification of Chief Financial Officer

Certification of Chief Executive Officer

Certification of Chief Financial Officer

*    Filed herewith.




-33-


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: August 7, 2008



                                                     
                                                     
                                                      		HEALTHTRONICS, INC.







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









-34-


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