HEALTHTRONICS SURGICAL SERVICES INC - 10-K Annual Report

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

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

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

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

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

Check whether the issuer is an accelerated filer (as defined in Rule 12b-2 of the Act).

As of March 20, 2003 the aggregate market value of the voting and non-voting common equity held by non-affiliates was $109,507,577.

The Registrant has 11,418,934 Shares of No Par Value Common Stock as of March 20, 2003.

Portions of the issuer's Proxy Statement for the Annual Meeting of Shareholders to be held May 16, 2003 are incorporated by reference in Part III.

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

HealthTronics Surgical Services, Inc. (may be referred to as, "HealthTronics", the "Company", "we", "us" or "our") is a leading provider of non-invasive surgical treatments for the urology and orthopaedic markets. Our urology business is two-fold. The major component is lithotripsy, a process in which a device called a lithotripter transmits high energy shock waves through the body to a kidney stone. These shock waves cause the stone to break into small pieces which can then be passed from the body through the normal flow of urine. Also in the urology sector, we provide treatments for benign and cancerous conditions of the prostate. In treating benign prostate disease, we use a technology called trans-urethral microwave therapy and other technologies and, on the cancer side, we use a procedure called cryosurgery of the prostate.

In orthopaedics, we provide non-invasive surgical solutions for a wide variety of chronic orthopaedic conditions such as heel pain and tennis elbow. We provide these services with our device called the OssaTron®, which is an adaptation of the lithotripsy technology. The OssaTron is approved by the FDA for these two indications and has been demonstrated to be effective through several clinical studies.

Much of our business is done through partnerships with urologists, orthopaedic surgeons and podiatrists. Underlying our technology is an extensive network of clinical technicians who assist doctors with the treatment and electronic technicians who maintain the medical devices in good working order.

We were formed in December 1995 and began offering lithotripsy services in late 1996. In October 2000, we received FDA approval to market the OssaTron orthopaedic extracorporeal shock wave device for the treatment of chronic plantar fasciitis, a sometimes debilitating condition characterized by chronic heel pain. On March 14, 2003, we also received FDA approval for the treatment of lateral epicondylitis, or tennis elbow, with the OssaTron extracorporeal shock wave device. Other possible applications are under review.

Our services are provided principally through limited partnerships or other entities that we manage. Many of these partnerships were formed by us, and we maintain an equity interest ranging from 12.5% to 100% of the partnership while selling any remaining interests to physicians. We generally retain the sole general partnership interest in the partnerships and manage their daily operations. We also provide equipment maintenance services to the partnerships and supply them with various consumables used in lithotripsy and Orthotripsy® extracorporeal shock wave surgery procedures. To date we have expanded our operations by forming partnerships in new geographic markets and acquiring interests in partnerships from unaffiliated parties, and we expect to continue to do so in the future.

In recent years our lithotripsy business has grown significantly. As of December 31, 2002, we had approximately 80 lithotripsy devices operating in North America. In orthopaedics, as of December 31, 2002, we had approximately 58 OssaTron® brand extracorporeal shock wave devices operating in North America.

In December 2001, we acquired Litho Group, Inc., the second largest provider of lithotripsy services in the U.S., for a total purchase price of $46.8 million including acquisition costs. Litho Group, Inc. was a non-debtor subsidiary of Integrated Health Services, Inc. which had filed for bankruptcy.

In July, 2002, Litho Management, Inc., a wholly owned subsidiary of the Company, sold its general and limited partnership interests in U.S. Lithotripsy, L.P., a consolidated entity, to U.S. Medical Development, Inc. for $6.8 million, resulting in a gain of approximately $3.7 million. U.S. Lithotripsy, L.P. provided us with approximately $5.6 million in net revenues in 2002 through the sale date.

In August, 2002, and November, 2002, the Company purchased a collective 61% interest in a Colorado limited liability company that provides benign prostate therapy in nine western states for a total of $2.8 million in cash and the Company's stock. The Company has consolidated the financial statements of this new subsidiary since the date of purchase.

Health care related expenditures constitute a large and growing segment of the U.S. economy. In 2000, total health care expenditures in the United States were estimated at $1.3 trillion, representing approximately 13% of the U.S. gross domestic product, according to the Centers for Medicare & Medicaid Services. Over the next decade, an aging U.S. population and advances in medical technology are expected to drive increases in hospital patient populations and the consumption of health care services. As a result, total health care expenditures are projected to increase to approximately $2.8 trillion in 2011, representing a compounded annual growth rate of approximately 7%.

Government programs, private insurance companies, managed care organizations and self-insured employees have sought to limit the growth of health care expenditures. At the same time, technological advances in areas such as endoscopy, interventional radiology and extracorporeal shock wave treatment have provided minimally invasive alternatives to open surgery for many conditions. These alternatives are less costly to perform than open surgery, typically involve fewer complications and, as a result, have a better safety profile and are more convenient for the patient because they can often be performed on an outpatient basis.

Lithotripsy and orthopaedic shock wave devices use extracorporeal shock waves for the non-invasive surgical treatment of certain medical conditions. Extracorporeal shock wave surgery treats medical conditions by focusing shock waves on a point in the human body to break up tissue. An electrode or other energy source generates a spark to initiate the shock wave. The shock wave reflects off an elliptical surface to focus the energy to the point of treatment. These non-invasive surgical, medical treatments are more effective, and often safer and less costly, than traditional treatment alternatives that may be non-surgical and conservative or invasive in nature. Lithotripsy has been commonly performed in the U.S. for over a decade. While orthopaedic extracorporeal shock wave surgery is relatively new in the U.S., it has been performed in Europe for over five years.

According to the American Foundation for Urologic Disease, nearly 10% of Americans are afflicted with kidney stones during their lifetime. Most kidney stones occur within the 40-60 year old age group. According to the U.S. Census Bureau, this age segment should increase by 6.7 million people by the year 2010.

The two primary forms of treatment of kidney stones are lithotripsy and endoscopic extraction, a form of invasive surgery. Of the approximate 600,000 kidney stone cases each year, 250,000 are treated with lithotripsy. Lithotripsy uses extracorporeal shock waves to break up kidney stones into small pieces, which can pass naturally through the body's urinary tract. This procedure is non-invasive and typically requires only local anesthesia. Alternative treatments include drug therapy and open surgery.

Based on numerous discussions with health care professionals and other evidence, we believe that 6.5-7.0 million cases of plantar fasciitis, a sometimes debilitating condition characterized by chronic heel pain, are diagnosed annually in the U.S. Of these cases, we estimate that approximately 10% of patients choose to have invasive surgery performed.

The potential market for orthopaedic extracorporeal shock wave surgery includes all patients who have open invasive surgery to treat plantar fasciitis, tennis elbow, Achilles tendonitis, patellar (knee) tendonitis and shoulder tendonitis. The potential market for orthopaedic extracorporeal shock wave surgery may include patients who are treated for other soft tissue conditions, as well.

Orthopaedic extracorporeal shock wave surgery uses shock waves to treat plantar fasciitis and tennis elbow. Orthotripsy extracorporeal shock wave surgery stimulates new blood vessel formation around the injury to allow tissue-healing cells to repair the condition. Alternative treatments include inactivity, massage, stretching, anti-inflammatory medication, orthotics, physical therapy and invasive surgery.

Extracorporeal shock wave surgery offers the following advantages over current alternative treatments:

Hospitals and other providers typically choose not to buy extracorporeal shock wave devices, because of capital budget constraints and space allocation concerns, given that a device may not be needed in one location on a continuous basis. A single mobile device can serve numerous hospitals and other facilities across a large geographic area.

We believe that we are one of the leaders in providing lithotripsy services in the United States. We intend to leverage this established leadership position in lithotripsy to expand our position in orthopaedic extracorporeal shock wave surgery. The key components of our strategy are to:

We are one of the nation's leading providers of equipment and technical and administrative services to physicians, hospitals and surgery centers performing lithotripsy and orthopaedic extracorporeal shock wave surgery. We provide our customers with a "turnkey" solution, including trained technicians, state-of-the-art equipment and all ancillary services and supplies necessary to perform these treatments. We provide our services at pre-scheduled times to meet the health care facility's needs. By utilizing our services on a procedure-by-procedure basis, physicians and health care facilities can provide their patients with high quality clinical treatments while minimizing their investment in technology, human resources and other systems. Additionally, the ongoing need for purchasing and maintenance of equipment as well as the hiring and training of skilled technicians and other personnel is also reduced.

We use state-of-the-art medical devices, which include lithotripsy and other extracorporeal shock wave devices, as well as x-ray equipment. As of December 31, 2002, we had 80 lithotripsy devices and 58 orthopaedic extracorporeal shock wave surgery devices in operation in approximately 40 states. Our devices have been designed to be mobile, and many of them serve multiple health care facilities. We have contributed several innovations to engineering and transporting devices to maximize convenience and ease of use.

We source our lithotripsy machines, orthopaedic extracorporeal shock wave surgery devices and x-ray equipment from third-party manufacturers. We currently source the LithoTron® kidney lithotripter and the OssaTron® brand orthopaedic extracorporeal shock wave surgery system from HMT High Medical Technologies, AG ("HMT"), a privately owned company in Switzerland, pursuant to an agreement that grants us exclusive distribution, marketing and selling rights for these products in North America. We source our x-ray systems from Philips, a leading provider of high quality x-ray and other imaging systems. We source substantially all of our electrodes and other consumables from HMT.

We provide our lithotripsy and orthopaedic extracorporeal shock wave surgery services through our partnership subsidiaries, which generally are owned in part by physician investors. Generally, we act as the general partner and manager of the partnerships. Pursuant to contracts with these partnerships or pursuant to partnership agreements, we manage their daily operations and also provide them with equipment, maintenance and consumables. Our physician partners acquire their partnership interests for a cash payment.

Generally when a procedure is scheduled, we transport the device to the health care facility by specially designed vans or trucks accompanied by a trained technician and necessary consumables. At the health care facility the device is typically transported to and installed in a designated suite. The physician can then perform the procedure, assisted by our technician. Once the procedure has been completed, the device is transported back to the van and then on to the next facility. One device may service numerous health care facilities.

Although we provide the devices and technicians to assist the physician, the physician is solely responsible for administering the treatment and separately bills the appropriate payor for the applicable professional fee. The health care facility is responsible for providing space for the physician to perform the procedure and maintaining all patient files and records.

We contract with health care facilities to provide our services either on a "retail" or "wholesale" basis. Under a retail billing arrangement, the contract with the facility allows us access to the premises for providing our services, and we pay the facility a flat fee per procedure. Substantially all of our Orthotripsy extracorporeal shock wave contracts, and a minority of our lithotripsy contracts, provide for retail billing. Under a wholesale billing arrangement, the facility pays us a fee for providing our services. The facility then bills the third party payor or other responsible party. Our fee might be a set fee per procedure, a set fee per month based on a specified number of days of service at the facility per month, or a percentage of revenue collected by the facility from payors in respect of procedures performed using our services.

Lithotripsy and orthopaedic extracorporeal shock wave surgery devices must be serviced regularly, and we provide this equipment maintenance to our partnerships on a periodic and "on-call" basis. We also procure and provide the electrodes and other consumables that are necessary to operate these devices. We provide these services to third party lithotripsy service companies on a fee basis as well as to our subsidiary partnerships.

We perform billing and collection services for most of our partnerships. When billing under the retail billing model, we work with physicians and patients to obtain pre-approval of procedures by their insurance companies. We also negotiate with insurance companies and other third party payors for regional or national reimbursement contracts for our Orthotripsy extracorporeal shock wave surgery procedures.

We have recently completed the FDA Post Approval clinical study of the HealthTronics OssaTron brand orthopaedic extracorporeal shock wave device for the treatment of chronic proximal plantar fasciitis. Post approval studies are routinely required by the FDA. This study consisted of 300 open-label treatments for this condition, obtaining occurrence of complications related to the treatment. The results of this study were filed with the FDA on February 6, 2003 and are consistent with the results of our initial pre-market approval study.

We also recently received FDA approval for the OssaTron brand orthopaedic extracorporeal shock wave device for the treatment of chronic lateral epicondylitis or "tennis elbow". The Final Report which includes long term follow-up of 225 treated subjects for this multi-site, double blind, randomized, placebo controlled study will be filed with the FDA no later than March 28, 2003.

The HealthTronics OssaTron brand orthopaedic extracorporeal shock wave device is also currently being studied for the treatment of nonunion or delayed healing of fractures in metatarsals. There has been a small subset of subjects treated under an FDA approved clinical study for the treatment of chronic Achilles tendonitis and chronic Supraspinatus tendonitis. These subjects will continue to be followed to a year post treatment or as outlined in the study protocols.

Our results of operations have been and can be expected to be subject to quarterly fluctuations. Historically, our lithotripsy business has generated higher treatment volume in the second and third quarters because there tends to be a higher incidence of kidney stone patients in the warmer weather. Our quarterly results can also fluctuate as a result of a number of other factors including the timing and transition of new acquisitions of, or sales of interests in, partnerships or joint ventures and completion or commencement of significant contracts.

While patients occasionally pay for lithotripsy procedures, most patients depend upon third party payors, including Medicare, Medicaid, TriCare, and other federal health care programs, as well as private insurers, to pay for their procedures. Some patients also pay directly for Orthotripsy extracorporeal shock wave surgery procedures, but most patients depend upon private insurers to pay for their procedures (most federal health care programs do not yet reimburse for this new procedure). Accordingly, a significant portion of our revenue depends on third party reimbursement.

Reimbursement for lithotripsy services is well established. Reimbursement for Medicare beneficiaries is in accordance with the Hospital Outpatient Prospective Payment System (HOPPS). Under HOPPS, reimbursement is made on a per procedure basis. The physician is paid a professional fee and the hospital, surgery center or partnership, depending on the facility contract, is paid a technical fee. The technical fee paid to the hospital, surgery center or partnership includes the per procedure share of the cost for any depreciable equipment and the provision of disposable devices, such as the NewTrodes®.

The reimbursement for Orthotripsy extracorporeal shock wave services has not yet been established. Establishment of permanent codes for Orthotripsy extracorporeal shock wave surgery could facilitate reimbursement because the American Medical Association's issuance of permanent CPT Codes substantiates widespread usage and acceptance of the procedure by the medical community. We have dedicated several employees to monitoring and directing reimbursement strategy for our subsidiary partnerships.

Future devices and technology that we develop would have to go through a similar process with government and private insurers as with our current technology post-FDA approval. The Medicare approval process is lengthy and there is no assurance that Medicare approval would be granted. Each insurer makes its own determination whether to cover a device or procedure and sets its own reimbursement rate.

To date, we have worked with physicians and private insurers to gain local, individual payor approval in the United States and have obtained favorable reimbursement decisions from a number of these insurers for Orthotripsy extracorporeal shock wave services. At December 31, 2002 we had secured favorable reimbursement contracts with private insurers covering approximately 36 million lives. We have also entered into several network contracts with private insurance companies and other insurance carriers for established reimbursement rates for Orthotripsy extracorporeal shock wave services. We work with physicians, practice groups, surgery centers and hospitals to do the following with respect to efforts to receive reimbursement for Orthotripsy extracorporeal shock wave services:

In obtaining reimbursement for Orthotripsy extracorporeal shock wave services, we have an added challenge in that almost all of our facility contracts with hospitals and surgery centers are currently "retail" or provide that the partnership pays a set fee to the hospital or surgery center per procedure and then the partnership seeks reimbursement from the patient or third party payor. The added challenge to obtaining reimbursement for a new procedure is establishing each individual partnership as a provider recognized by the third party payors.

To obtain favorable reimbursement decisions in the future, we will need to overcome a number of challenges. One such challenge is that managed care providers are attempting to control the cost of health care by authorizing fewer elective surgical procedures. Another challenge is the damage caused by competing firms conducting orthopaedic shock wave services with inferior devices and billing unreasonably high or low fees to patients and third party payors.

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

The orthopaedic extracorporeal shock wave surgery services market is in its infancy, with the first device, the OssaTron, being approved in October, 2000. Two other orthopaedic extracorporeal shock wave devices have recently been approved. On January 15, 2002, Dornier Medical Systems received FDA approval for an orthopaedic shock wave device for the treatment of plantar fasciitis. On July 19, 2002, Siemens Medical Solutions USA, Inc. received FDA approval for an orthopedic shock wave device for the treatment of lateral epicondylitis (tennis elbow). We do not know what either Dornier's or Siemens' strategy is for marketing their devices, however we anticipate that these products will compete against our Orthotripsy extracorporeal shock wave surgery device for the treatment of heel pain and tennis elbow. We also expect to face competition from hospitals, clinics and individual medical practitioners offering surgical and other established treatments for orthopaedic conditions.

We compete in the lithotripsy market on the basis of what we believe to be superior products and exceptional clinical and technical support. We compete in the orthopaedic extracorporeal shock wave surgery market on the basis of our first to market position, our superior device, training, and our quality service.

We are subject to regulation by both the federal government and the states in which we conduct our business. The following is a listing of some, but not all, of these regulations: Social Security Act's Section 1128B, or the Illegal Remuneration Statute, the Federal Self-Referral Law and the Social Security Act's Section 1877, or Stark II.

The Illegal Remuneration Statute prohibits the referring or arranging for the referral of a patient that is paid for in whole or in part by Medicare, Medicaid or similar government programs. The federal government provides exceptions or "safe harbors" for certain business transactions. Transactions that are structured within the safe harbors are deemed not to violate the Illegal Remuneration Statute. We contract with hospitals and other health care facilities under a variety of financial arrangements, and physicians have ownership interests in some entities in which we have an interest. If we were found to have failed to comply with any of these laws, we could suffer criminal and civil penalties and/or exclusion from

participating in Medicare, Medicaid or other governmental health care programs and possible license revocation. We believe that we fully comply with these regulations. However, we can give no assurances that our activities will be found to comply with these laws if scrutinized by authorities.

The Federal Self-Referral Law prohibits a physician from referring a patient to an entity with which the physician (or a family member) has a financial relationship if the referral involves a "designated health service" reimbursable under the Medicare or Medicaid programs. Certain transactions involving lithotripsy or orthopaedic extracorporeal shock wave surgery could create a financial relationship between physicians and hospitals.

Although the Stark II final regulations do not provide a specific exception for lithotripsy services, the regulations do provide needed clarity and certain opportunities for our lithotripsy subsidiaries to operate in compliance with Stark II. In the commentary to the final regulations, the Health Care Financing Administration ("HCFA", the predecessor to The Centers for Medicine & Medicaid Services or CMS) notes its desire to permit physician-owned lithotripsy ventures to continue if the ventures are structured such that no direct or indirect compensation arrangement is created, or the arrangement fits within a compensation arrangement exception to Stark II. The final regulations accomplish HCFA's desire in part by: (i) clarifying that physician-owned lithotripsy vendors providing services under arrangements with hospitals can comply with Stark II by either structuring the arrangements so that they are not compensation arrangements, as defined in the final regulations, or they qualify under a compensation exception (but not an ownership interest exception as well); (ii) broadening certain existing Stark II statutory exceptions by redefining standards to allow per-use lithotripsy payments, as long as such payments are at fair market value; and (iii) adding two new Stark II regulatory exceptions that are potentially available for our lithotripsy subsidiaries' operations.

Currently, orthopaedic extracorporeal shock wave surgery generally is not covered by Medicare or Medicaid. We do not know whether it will be covered in the future.

Some states have regulations that require facilities or devices such as mobile lithotripters or orthopaedic shock wave devices to be licensed and to have appropriate emergency care resources and qualified staff meeting specified educational and experience criteria. The motor vehicles we use to transport our mobile equipment are subject to safety regulation by the U.S. Department of Transportation and the states in which we conduct our business.

We believe we comply in all material respects with the foregoing laws and regulations, and all other applicable regulatory requirements; however, these laws are complex and courts and enforcement agencies have broadly construed them. Thus, there can be no assurance that we will not be required to change our practices or relationships with treating physicians who are investors in our subsidiaries, or that we will not experience material adverse effects as a result of any investigations or enforcement actions by a federal or state regulatory agency.

Title II, subtitle F, sections 261-264 of the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), Public Law 104-191, titled "Administrative Simplification" was enacted to improve the efficiency and effectiveness of the health care system through the establishment of standards and requirements for the electronic transmission of certain health information. To achieve that end, Congress required the Secretary of the United States Department of Health and Human Services ("DHHS") to promulgate a set of interlocking regulations establishing standards and protections for health information systems, including standards for the following:

Final rules setting forth standards for electronic transactions and code sets were published on August 17, 2000 and for the privacy of individually identifiable health information on December 28, 2000, both of which apply to health plans, health care clearinghouses and health care providers who transmit any health information in electronic form in connection with certain administrative and financial health care transactions, including claims, enrollment, eligibility, payment and coordination of benefits. Final rules for the security standards were published on February 20, 2003. Compliance with the privacy regulations and with the electronic transactions and code sets regulations is required by April 14, 2003 and by October 16, 2003, respectively. Compliance with the rules for security standards is required by April 21, 2005.

We are currently evaluating the effect of the final rules published to date and have developed a task force to address the standards set forth in these rules and their effect on our business. Given the complexity of these regulations, we cannot estimate at this time the cost of compliance.

HIPAA also has implemented the most sweeping amendments to the federal health care fraud laws to date. Specifically, HIPAA also has created five new health care related crimes and has granted authority to the Secretary of the DHHS to impose certain civil and criminal penalties. HIPAA encourages the reporting of health care fraud by allowing reporting individuals to share in any recovery made by the government. HIPAA also requires new programs, investigations, audits, and inspections to control fraud and abuse.

These provisions of HIPAA criminalize situations that previously were handled exclusively civilly through repayments of overpayments, offsets and fines. We believe that our business arrangements and practices comply with HIPAA. However, a violation could subject us to penalties, fines and/or possible exclusion from Medicare or Medicaid. Such sanctions could reduce our revenue or profits.

A number of proposals for health care reform have been made in recent years, some of which have included radical changes in the health care system. Health care reform could result in material changes in the financing and regulation of the health care business, and we are unable to predict the effect of such changes on our future operations. It is uncertain what legislation on health care reform, if any, will ultimately be implemented or whether other changes in the administration of or interpretation of existing legislation regarding governmental health care programs will occur. There can be no assurance that future health care legislation or other changes in the administration or interpretation of governmental health care programs will not have a material adverse effect on the results of our operations.

Our lithotripsy, orthopaedic and other urologic equipment is subject to regulation by the FDA. The current and future preclinical and clinical testing, manufacturing, labeling, distribution and promotion of our medical devices are subject to extensive and rigorous government regulation by the FDA in the United States and by comparable regulatory bodies in other countries. Noncompliance with applicable regulatory requirements can lead to enforcement action by the FDA or comparable foreign regulatory bodies that may result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal by the government to grant pre-market clearance or pre-market approval for devices, withdrawal of marketing approvals and criminal prosecution.

Our medical devices, the LithoTron and the OssaTron, were required to obtain pre-market approval by the FDA to ensure their safety and effectiveness.

Even after regulatory clearance or approval to market a device is obtained from the FDA, the Company may be required to make further filings with the FDA under certain circumstances. FDA regulations require agency approval for certain changes to a marketed device.

Any products manufactured or distributed by us are subject to pervasive and continuing regulation by the FDA and certain state agencies. We are subject to routine inspections by the FDA and state agencies and must comply with the host of regulatory requirements that usually apply to medical devices in the United States, including labeling regulations, elaborate testing, control, documentation, and other quality assurance procedures, reporting to the FDA certain adverse events involving devices, and prohibitions against promoting products for unapproved or "off-label" uses.

Several of our products under development will require clinical trials to determine their safety and efficacy in humans for various conditions.

We had 312 employees, including those employed by our consolidated subsidiaries, as of December 31, 2002. We believe that relations with the employees are good.

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

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

We are dependent on health care providers in two respects. First, if physicians and hospitals and other health care facilities determine that our services are not of sufficiently high quality or reliability, or if facilities determine that our services are not cost effective, they will not utilize our services. Second, physicians generally own equity interests, and in some cases majority interests, in our partnerships. We provide a variety of services to the partnerships and in general manage their day-to-day affairs. Our operations could become disrupted, and financial results adversely affected, if these physician partners became dissatisfied with our services or if we became involved in disputes with our partners.

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

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

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

we could suffer criminal and civil penalties and/or exclusion from participating in Medicare, Medicaid or other governmental health care programs and possible license revocation.

The Federal Self-Referral Law prohibits a physician from referring a patient to an entity with which he or she (or a family member) has a financial relationship if the referral involves a "designated health service" reimbursable under the Medicare or Medicaid programs. Our partnerships and their contracts may create a financial relationship between physicians and hospitals. Regulations under the Federal Self-Referral Law do provide that a rental arrangement that otherwise satisfies a lease exception may provide for payment on a per-treatment or usage basis, even if physicians own the equipment and refer their patients for treatments using the equipment.

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

Although we typically consult with local counsel before entering a market, it is possible that based on developments or differing interpretations of state law, regulatory officials could take exception to our "retail" model facility contracts.

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

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

Orthopaedic extracorporeal shock wave surgery is a relatively new procedure in the U.S., and reimbursement policies are still evolving. Medicare does not currently reimburse for this procedure, and there is no current procedural terminology, or CPT, code designated for the procedure by the American Medical Association. Reimbursement by private third party payors has been made on a case-by-case basis. We cannot assure you that third party payors will establish and maintain price levels sufficient for us to realize an appropriate return on our investment. Furthermore, physicians, hospitals and other health care providers may be reluctant to perform these procedures, and therefore may not utilize our services, if they do not receive sufficient reimbursement for the cost of the procedures. Competing orthopaedic shock wave devices that use low energy protocols and are marketed to physicians for use in office settings, or treatment use by technicians or physical therapists may also cause a material decrease in reimbursement by third party payors as a result of confusion in the market regarding high energy and low energy devices or protocols.

New federal and state legislation and regulatory initiatives relating to patient privacy could require us to expend substantial sums acquiring and implementing new information systems, which could negatively impact our financial results.

There is recent legislation and several regulatory initiatives at the state and federal levels addressing patient privacy concerns. New federal legislation will extensively regulate the use and disclosure of individually identifiable health-related information and the security and standardization of electronically maintained or transmitted health-related information. We do not yet know the total financial or other

impact of these regulations on our business. Compliance with these regulations could require us to spend substantial sums, including but not limited to purchasing new computer systems, which could negatively impact our financial results. Additionally, if we fail to comply with these privacy regulations, we could suffer civil penalties up to $25,000 per calendar year per standard (with well over fifty standards with which to comply) and criminal penalties with fines of up to $250,000 for willful and knowing violations. In addition, our facilities will continue to remain subject to any state laws that are more restrictive than the federal privacy regulations. These laws vary by state and could impose additional penalties.

We face intense competition and rapid technological change that could result in products that are superior to the products on which our current or proposed services are based.

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

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

Our business exposes us to potential product liability risks that are inherent in the medical device industry, including those which may arise from misuse or malfunction of, or design flaws in, the extracorporeal shock wave treatment devices we use. We may be held liable if patients undergoing lithotripsy, orthopaedic extracorporeal shock wave or prostate surgery using our devices are injured. Treatment with the extracorporeal shock wave device may result in a variety of complications, in particular, post-treatment pain and neurological symptoms. We cannot ensure that we will be able to avoid product liability exposure. Product liability insurance is generally expensive, if available at all. We cannot ensure that our present insurance coverage is adequate or that we can obtain adequate insurance coverage at a reasonable cost in the future.

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

We acquired Litho Group, Inc. ("LGI") in December 2001. LGI had revenues in 2001 prior to its acquisition by us of approximately $50.4 million, compared to our 2001 revenues of $43.9 million and our 2002 revenues of $87.2 million. In integrating LGI, we face challenges in consolidating functions, integrating its organizations, procedures and operations in a timely and efficient manner and retaining key personnel. These challenges will result principally because LGI:

As a result, the integration will be complex and will require additional attention from members of management. The diversion of management attention and any difficulties encountered in the transition and integration process could have a material adverse effect on our revenues, level of expenses and operating results. A commitment was also made to sell, and we are currently selling, additional interests in each LGI partnership to physicians, thereby diluting our ownership interest in each partnership. This ownership dilution may decrease earnings from each partnership. The term on some partnerships' purchase in the LGI transaction will also expire in the next 4 to 10 years. There is no guarantee that the physician partners will renew the partnership to include the Company as a partner or general/managing partner. Such exclusion would have a material adverse impact on continuing revenue and earnings.

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

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

If we fail to attract and retain key personnel and principal members of our management staff, our business, financial condition and operating results could be materially harmed.

Our success depends greatly on our ability to attract and retain qualified management and technical personnel, as well as to retain the principal members of our existing management staff. Our Chairman, Dr. Argil Wheelock, is a urologist whose management ability and relationships with our physician partners are extremely important to us. The loss of services of any key personnel could adversely affect our current operations and our ability to implement our growth strategy. There is intense competition within our industry for qualified staff, and we cannot assure you that we will be able to attract and retain the necessary qualified staff to develop our business. If we fail to attract and retain key management staff, or if we lose any of our current management team, our business, financial condition and operating results could be materially harmed.

We incurred debt to finance the acquisition of Litho Group, Inc. To comply with the debt covenants, we must use a significant portion of our operating cash flows to meet scheduled payment terms. At December 31, 2002, we had debt outstanding of approximately $38.0 million and shareholders' equity of $33.0 million. We may continue to borrow funds to finance acquisitions as well as for other purposes.

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

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

We currently source our lithotripsy and orthopaedic extracorporeal shock wave devices from HMT, a privately held company that is not required to publish any financial information. If HMT experiences financial, manufacturing or development difficulties or if there are adverse developments in our relationship with HMT, we may be required to find an alternative manufacturer or to manufacture our products on our own. There are currently only two other manufacturers of FDA-approved orthopaedic extracorporeal shock wave surgery devices, and if we cannot purchase devices from these companies, we would need to obtain, either alone or with a third-party manufacturer, FDA approval before marketing and using another orthopaedic extracorporeal shock wave surgery device. We may not be able to find an alternative source to develop or manufacture our products on a timely basis or on terms acceptable to us; however, we believe we could find suitable alternatives. We do not own or operate any manufacturing facilities.

We may not be able to achieve market acceptance of extracorporeal shock wave surgery for orthopaedic indications.

We anticipate that most of our near-term growth will come from our orthopaedic operations. However, orthopaedic extracorporeal shock wave surgery is a new medical procedure in the U.S. with no established market. There are established alternatives to treating the indications for which we intend to promote orthopaedic extracorporeal shock wave surgery. Moreover, physicians may not utilize the OssaTron device until they receive long-term clinical evidence to convince them to alter their existing treatment methods. Physicians may also resist using the OssaTron device until we have demonstrated that third party payors will reimburse them for procedures using it.

We cannot commercialize the use of the OssaTron for any additional orthopaedic indications until we have obtained regulatory approval for any such indication.

Medical devices like the OssaTron device must be approved by the U.S. Food and Drug Administration ("FDA") prior to their marketing for commercial use. The FDA often grants approval only for a particular indication or disease, and in these cases, the device may not be marketed for use in treating other conditions unless the FDA grants additional approvals. The process of attempting to obtain regulatory approvals is unpredictable, often lengthy and requires the expenditure of substantial resources. The FDA can delay, limit or deny approval for several reasons, including:

The FDA has granted approval for marketing the OssaTron device to treat plantar fasciitis. On March 14, 2003, the FDA granted us approval to market the OssaTron device for treatment of lateral epicondylitis or tennis elbow. Our orthopaedic business may not be successful and our long-term growth prospects may not be realized without FDA approval for the use of the OssaTron device in indications other than plantar fasciitis and lateral epicondylitis. Furthermore, any delay in receiving approval, failure to receive approval or failure to comply with existing or future regulatory requirements would harm our ability to conduct our business.

The market price of our common stock may experience substantial fluctuation for reasons over which we have little control.

Our stock price has a history of volatility. Fluctuations have occurred even in the absence of significant developments pertaining to our business. Stock prices and trading volume of companies in the

health care and health services industry have fallen and risen dramatically in recent years. Both company-specific and industry-wide developments may cause this volatility. During 2002, our stock price ranged from $6.04 to $17.75. Factors that could impact the market price of our common stock include the following:

Furthermore, stock prices for many companies fluctuate widely for reasons that may be unrelated to their operating results. These fluctuations, coupled with changes in our results of operations and general economic, political and market conditions, may adversely affect the market price of our common stock.

As a public company, we regularly file reports and proxy statements with the Securities and Exchange Commission. These reports are required by the Securities Exchange Act of 1934 and include:

Anyone may read and copy any of the materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, Washington, DC, 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also visit the internet site maintained by the SEC that contains our reports, proxy and information statements, and our other SEC filings. The address of that site is http://www.sec.gov.

Also, we make certain of our SEC filings available on our own internet site as reasonably practicable after we have filed with the SEC. Our internet address is http://www.healthtronics.com.

In January 2000, we negotiated a seven-year lease on a 28,000 square foot facility in Marietta, Georgia. We took occupancy of the new facility in April 2000. In February 2003, we negotiated an amendment to our seven-year lease to include an additional 15,000 square feet adjacent to our current facility. The adjusted monthly rental is calculated on a graduating scale beginning at $26,800 per month for the first year and ending with $29,400 per month for the last year. The new straight-line expense is $28,000 per month for the life of the lease. The property is in good condition and is sufficient to meet our current operating needs.

The Company's consolidated subsidiaries generally lease office or clinical space around the United States. Lease terms are typically for five to ten years. The Company believes that its current facilities are suitable and adequate to support the current level of its present operations.

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

No matters were submitted to a vote of shareholders of the Company during the fourth quarter of the Company's fiscal year ended December 31, 2002.

Item 5: Market for Registrant's Common Equity and Related Stockholder Matters.

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

Fiscal Year ended December 31, 2001	High		Low
First Quarter	$	13.75	$	6.19
Second Quarter	$	11.35	$	6.63
Third Quarter	$	10.25	$	4.45
Fourth Quarter	$	9.55	$	5.30

Fiscal Year ended December 31, 2002	High		Low
First Quarter	$	12.30	$	7.60
Second Quarter	$	17.50	$	9.25
Third Quarter	$	17.75	$	7.41
Fourth Quarter	$	9.94	$	6.04

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

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

The following table sets forth selected consolidated financial data which have been derived from our consolidated financial statements for the five years ended December 31, 2002, 2001, 2000, 1999 and 1998. All the information set forth below should be read in conjunction with "Management's Discussion and

Analysis of Financial Condition and Results of Operations," and the consolidated financial statements and related notes included elsewhere herein. See "Index to Financial Statements."

Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations.

This prospectus contains certain forward-looking statements (all statements other than with respect to historical fact) within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. See "Forward-looking information". We undertake no obligation to publicly release any revisions to any forward-looking statement in this discussion to reflect events and circumstances occurring after the date of this prospectus or to reflect unanticipated events.

We provide equipment as well as technical and administrative services to physicians, hospitals, and surgery centers performing lithotripsy and Orthotripsy extracorporeal shock wave surgery. We were formed in December 1995 and began offering lithotripsy services in 1996. In October 2000, we received FDA approval to market an orthopaedic extracorporeal shock wave surgery device, the OssaTron, and since then we have invested significant resources in developing our orthopaedic services network while expanding our lithotripsy operations.

Our services are provided principally through limited partnerships or other entities that we manage which use lithotripsy devices or the OssaTron orthopaedic shock wave device. Many of these partnerships were formed by us, and we have retained an equity interest ranging from 12.5% to 100% while selling any remaining interests to physicians. We generally retain the sole general partnership interest in the partnerships and manage their daily operations. We also provide equipment maintenance services to the partnerships and supply them with various consumables used in lithotripsy and Orthotripsy extracorporeal shock wave surgery procedures. To date we have expanded our operations by forming partnerships in new geographic markets and acquiring interests in partnerships from third parties, and we expect to continue to do so in the future.

As a result of the control we exert over the partnerships by virtue of our sole general partnership interest, management contract and otherwise, for financial reporting purposes we consolidate the results of operations of the partnerships with our own even though we own less than all (and in many cases less than 50%) of their outstanding equity interests. We reflect the equity of third-party partners in the partnerships' results of operations in our consolidated statements of income and on our consolidated balance sheet as minority interest.

In certain instances, we do not control partnerships or other entities in which we have ownership interests. We account for our interests in these entities either on the equity or cost basis, depending on the degree of influence we exert over the entity.

We recognize revenue in our consolidated statements of income from the following three principal sources:

Historically, our revenue was derived primarily from service fees and the sale of lithotripsy devices and related consumables. We have implemented a strategy of structuring our operations to focus on revenues from treatment fees, which generate significantly greater operating margins.

As the percentage of our revenue attributable to treatment fees has increased, we have become more dependent, both directly in the case of "retail" billing and indirectly in the case of "wholesale" billing, on the reimbursement policies of governmental and private third party payors. While the reimbursement status of lithotripsy is well established, orthopaedic extracorporeal shock wave surgery is a relatively new procedure in the U.S., and the reimbursement policies of third party payors for this treatment are still developing. Our results of operations could be significantly affected by changes in reimbursement policies regarding lithotripsy or by decisions made regarding the reimbursement status of Orthotripsy extracorporeal shock wave surgery.

We completed several acquisitions in 2001 that significantly expanded our operations. In May 2001 we acquired Heritage Medical Services of Texas, Inc. and HSC of Gulf Coast, Inc. for $565,000 in cash. These entities provided lithotripsy operations similar to our own and recorded net revenues in 2000 of $4.1 million. In December 2001 we acquired Litho Group, Inc. for $42.5 million in cash. We financed this purchase with borrowings under a credit facility established at the time of the acquisition. Litho Group, Inc., which also provided lithotripsy services similar to our own, had net revenues in 2000 of $57.6 million and net revenues in 2001 (through the date of acquisition) of $50.4 million. Each of these acquisitions was

accounted for as a purchase, and consequently the results of operations of the acquired companies are included in our own since the date of their respective acquisitions. See Note 4 of the Notes to Consolidated Financial Statements.

Historically our business has consisted primarily of lithotripsy equipment sales and, more recently, patient treatments. In October 2000 we received FDA approval to market our Orthotripsy extracorporeal shock wave device for the treatment of plantar fasciitis. Since then we have been engaged in an active program of forming orthopaedic services partnerships, selling interests in these partnerships to physicians and other activities designed to promote this new orthopaedic treatment modality. On March 14, 2003, we received FDA approval to market our orthopaedic shock wave device for the treatment of lateral epicondylitis or tennis elbow.

Net Revenue: Net revenue increased from $43,882,106 for the year ended December 31, 2001 to $87,192,411 for the year ended December 31, 2002, an increase of 99%. This increase is primarily attributable to the increase in clinical treatment revenues generated as a result of the acquisition of Heritage Medical Services of Texas, Inc., HSC of Gulf Coast, Inc., and Litho Group, Inc. and, to a lesser extent, to the increase in clinical treatment revenues generated by orthopaedic and urology partnerships over 2001.

Cost of Devices, Service Parts and Consumables: Cost of devices, service parts and consumables increased from $8,685,833 for the year ended December 31, 2001 to $16,875,224 for the year ended December 31, 2002, an increase of 94%. This increase is mainly attributable to the acquisition of Heritage Medical Services of Texas, Inc., HSC of Gulf Coast, Inc. and Litho Group, Inc.

Salaries, General and Administrative Expenses: Salaries, general and administrative expenses increased from $19,094,994 for the year ended December 31, 2001 to $37,541,687 for the year ended December 31, 2002, an increase of 97%. This increase is primarily attributable to the lithotripsy partnership acquisitions completed in the latter part of 2001 as well as the addition of (1) personnel for corporate administration, reimbursement administration and Orthotripsy partnership operations and (2) marketing and general expenses for the expansion of reimbursement and corporate administrative functions related to the Orthotripsy business.

Depreciation and Amortization: Depreciation and amortization increased from $4,395,956 for the year ended December 31, 2001 to $5,687,131 for the year ended December 31, 2002, an increase of 29%. This increase is primarily attributable to the 2001 acquisition of Heritage Medical Services of Texas, Inc., HSC of Gulf Coast, Inc. and Litho Group, Inc. offset by the sale of U.S. Lithotripsy, L.P.

Equity in Earnings of Unconsolidated Partnerships: Equity in earnings of unconsolidated partnerships increased from $194,141 for the year ended December 31, 2001 to $608,190 for the year ended December 31, 2002, an increase of 213%. This increase is attributable to the growth of the equity-based partnerships.

Gain on Sale of Subsidiary and Investment Interest: Gain on sale of subsidiary and investment interest increased from $3,396,860 for the year ended December 31, 2001 to $4,362,592 for the year ended December 31, 2002, an increase of 28%. The gain on sale of subsidiary and investment interests in 2001 resulted from the sale of partnership interest in newly formed Orthotripsy extracorporeal shock wave surgery partnerships. In 2002, the gain primarily consists of a gain of $3,654,371 on the July 2002 sale of the remaining interest in U.S. Lithotripsy, L.P.

Interest Expense: Interest expense increased from $509,052 for the year ended December 31, 2001 to $2,963,387 for the year ended December 31, 2002, an increase of 482%. This increase is primarily attributable to the addition of debt to finance the acquisition of Litho Group, Inc.

Minority Interest in Consolidated Subsidiaries: Minority interest in consolidated subsidiaries increased from $10,230,481 for the year ended December 31, 2001 to $16,575,323 for the year ended December 31, 2002, an increase of 62%. This increase is attributable to the increase in the number of minority investors in the Company's consolidated subsidiaries primarily as a result of the acquisition of Litho Group, Inc. as well as income growth of new and existing subsidiaries.

Provision for Income Taxes: Provision for income taxes increased from $2,086,791 for the year ended December 31, 2001 to $5,491,044 for the year ended December 31, 2002, an increase of 163%. The increase is attributable to the increase in taxable income over the prior year.

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

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

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

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

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

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

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

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

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

The following table shows certain statement of operations items expressed as a percentage of revenues for the years ended December 31, 2000, 2001 and 2002:

				Year ended December 31,
				2002		2001

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

	Years ended December 31,
Consolidated statement of operations data:	Years ended December 31,
Consolidated statement of operations data:	2002			2001			2000			1999			1998
	(in thousands, except per share amounts)
Net Revenue	$	87,192		$	43,882		$	33,846		$	24,414		$	14,682
Operating income		27,088			11,705			10,370			7,707			3,786
Minority interest		(16,575	)		(10,230	)		(7,039	)		(5,076	)		(2,292	)
Interest expense, net		(2,767	)		(335	)		(143	)		(261	)		(145	)
Net income	$	8,543		$	3,133		$	2,621		$	1,597		$	1,205

Net income per common share—diluted	$	0.73		$	0.28		$	0.24		$	0.16		$	0.13

Weighted average number of shares outstanding—diluted		11,739			11,123			11,098			10,238			9,446

	As of December 31,
Consolidated balance sheet data:	As of December 31,
Consolidated balance sheet data:	2002		2001		2000		1999		1998
Cash and cash equivalents	$	16,808	$	9,905	$	5,823	$	5,025	$	802
Working capital		3,345		9,287		10,452		6,870		2,624
Total assets		105,631		101,569		30,433		23,535		14,115
Long-term debt and other long-term obligations		30,436		44,302		3,641		3,046		3,441
Minority interest		12,133		14,770		3,945		2,224		1,470
Shareholders' equity		32,831		21,876		18,184		14,128		7,625