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

                                   ----------
                                    FORM 10-Q

             [X] Quarterly Report Pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934
                For the quarterly period ended September 30, 1998

            [ ] Transition Report Pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934
                         For the transition period from
                                       to


                         Commission File Number: 0-22392
                                                                           
                                   ----------
                          PRIME MEDICAL SERVICES, INC. 
             (Exact name of registrant as specified in its charter)

          DELAWARE                                            74-2652727
 (State or other jurisdiction of                            (I.R.S. Employer
  incorporation or organization)                           Identification No.)

               1301 Capital of Texas Highway, Austin, Texas 78746
               (Address of principal executive offices) (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 the number of shares  outstanding of each of the issuer's  classes
of common equity, as of the latest practicable date.

                                                Number of Shares Outstanding at
      Title of Each Class                              October  31, 1998
      --------------------                           --------------------
   Common Stock, $.01 par value                           17,880,067


<PAGE>



                                                                               











                                     PART I


                              FINANCIAL INFORMATION















 
























                                       -2-
<PAGE>

                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (Unaudited)
($ in thousands, except per share data)
<TABLE>                                           
<S>                                               <C>           <C>             <C>            <C>                                
                                                        Three Months Ended         Nine Months Ended     
                                                           September  30,                    September  30,       
                                                           --------------                    --------------       
                                                    1998            1997         1998              1997 
                                                    ----            ----         ----              ---- 
Fee revenue:
     Lithotripsy:
          Fee revenues                            $23,053        $23,429        $62,598        $63,161
          Management fees                           1,444          1,702          3,797          4,847
          Equity income                               727            695          1,977          1,676
                                                      ---            ---          -----          -----
                                                   25,224         25,826         68,372         69,684

     Manufacturing                                  3,313            401          7,474            401
     Prostatherapy                                    344            --             651            --
     Cardiac and other                                 55            134            263            385
                                                   ------         ------         ------         ------
                                                   28,936         26,361         76,760         70,470
                                                   ------         ------         ------         ------
Costs and expenses:
     Cost of services and general
     and administrative expense
          Lithotripsy                               6,282          6,461         17,456         18,785
          Manufacturing                             2,993            345          6,150            345
          Prostatherapy                               259            --             528            --
          Cardiac and other                            49            196            197            358
          Corporate                                 1,328          1,375          3,979          4,213
          Nonrecurring restructuring/
             development costs                        --             --           1,617            --  
                                                   ------          -----         ------         ------                
                                                   10,911          8,377         29,927         23,701
 
     Depreciation and amortization                  2,567          2,464          7,740          7,282
                                                    -----          -----          -----          -----
                                                   13,478         10,841         37,667         30,983
                                                   ------         ------         ------         ------

Operating income                                   15,458         15,520         39,093         39,487

Other income (deductions):
     Interest and dividends                           564            212          1,150            507
     Interest expense                              (2,312)        (1,859)        (6,426)        (5,602)
     Financing costs                                  --             --          (4,982)          (360)
     Other, net                                      (147)           (82)           185             71
                                                     ----            ---            ---             --
                                                   (1,895)        (1,729)       (10,073)        (5,384)
                                                   ------         ------        -------         ------ 

Income before provision for income taxes
    and minority interest                          13,563         13,791         29,020         34,103

Minority interest in consolidated income            7,036          7,345         18,069         19,010

Provision for income taxes                          2,586          1,926          4,661          4,027
                                                    -----          -----          -----          -----

Net income                                        $ 3,941        $ 4,520        $ 6,290        $11,066
                                                  =======        =======        =======        =======

Basic earnings per share:
     Net income                                   $  0.21        $  0.23        $  0.33        $  0.57
                                                  =======        =======        =======        =======

     Weighted average shares outstanding           18,437         19,299         18,943         19,265
                                                   ======         ======         ======         ======

Diluted earnings per share:
     Net income                                   $  0.21        $  0.23        $  0.33        $  0.57
                                                  =======        =======        =======        =======

     Weighted average shares outstanding           18,561         19,483         19,084         19,458
                                                   ======         ======         ======         ======
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       -3-
<PAGE>

                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

($ in thousands)


                                                   September 30,   December 31,
                                                       1998           1997  
                                                       ----           ----  
                                                   (Unaudited)
ASSETS

Current assets:
     Cash                                              $ 32,563      $  23,770
     Accounts receivable, less allowance
       for doubtful accounts of $658 in
       1998 and $811 in 1997                             21,419         19,387
     Other receivables                                    2,295          1,103
     Deferred income taxes                                2,367          1,506
     Prepaid expenses and other current assets            2,798          1,776
                                                          -----          -----

          Total current assets                           61,442         47,542

Property and equipment:
     Equipment, furniture and fixtures                   34,079         32,673
     Real estate and leasehold improvements               1,991            531
                                                          -----            ---
                                                         36,070         33,204

Less accumulated depreciation and
     amortization                                      ( 17,026)       (13,497)
                                                       --------        ------- 

     Property and equipment, net                         19,044         19,707


Other investments                                        11,715         12,305
Goodwill, at cost, net of amortization                  140,778        143,823
Other noncurrent assets                                   1,462          1,517
                                                          -----          -----

                                                       $234,441       $224,894
                                                       ========       ========















 



          See accompanying notes to consolidated financial statements.


                                       -4-
<PAGE>




                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (continued)


($ in thousands)

 
                                                   September 30,   December 31,
                                                       1998           1997  
                                                       ----           ----  
LIABILITIES:                                        (Unaudited)

Current liabilities:
 
  Current portion of long-term debt                    $    924      $  11,138
  Accounts payable                                        9,877          5,386
  Accrued expenses                                        9,870         20,859
                                                          -----         ------

     Total current liabilities                           20,671         37,383

Long-term debt, net of current portion                  101,045         71,198
Deferred income taxes                                     4,953          4,877
                                                          -----          -----
     Total liabilities                                  126,669        113,458

Minority interest                                        21,148         19,372

STOCKHOLDERS' EQUITY:

Preferred stock, $.01 par value,
  1,000,000 shares authorized;
  none outstanding                                          --             --
Common stock, $.01 par value,
  40,000,000 shares authorized;
  19,322,267 issued in 1998 and
  19,306,267 issued in 1997                                 193            193
Capital in excess of par value                           84,225         84,050
Accumulated earnings                                     14,111          7,821
Treasury stock, at cost, 1,260,200 shares               (11,905)           -- 
                                                        -------         ------ 

     Total stockholders' equity                          86,624         92,064
                                                         ------         ------

                                                       $234,441       $224,894
                                                       ========       ========















          See accompanying notes to consolidated financial statements.

                                       -5-

<PAGE>




                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

($ in thousands)

                                                 Nine Months Ended September 30,
                                                       1998            1997  
                                                       ----            ----  

CASH FLOWS FROM OPERATING ACTIVITIES:
  Fee and other revenue collected                  $     72,755    $    67,273
  Cash paid to employees, suppliers
         of goods, and others                           (33,919)       (23,900)
  Interest received                                       1,150            502
  Interest paid                                          (7,001)        (5,666)
  Income taxes paid                                      (5,676)          (499)
                                                         ------         ------ 
         Net cash provided by
         operating activities                            27,309         37,710
                                                         ------         ------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of lithotripter operations                       --         (15,335)
  Purchase of equipment and
         leasehold improvements                          (3,643)        (1,667)
  Distributions from investments                          2,336          1,798
  Purchase of investments                                  (408)          (311)
  Other                                                     293           (192)
                                                         ------         ------
         Net cash (used in)
         investing activities                            (1,422)       (15,707)
                                                         ------         ------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Borrowings on notes payable                           100,025         50,959
  Payments on notes payable, exclusive of interest      (80,392)       (47,696)
  Distributions to minority interest                    (24,892)       (27,728)
  Purchase of treasury stock                            (11,905)           --
  Contributions by minority interest                        --             815
  Exercise of stock options                                  70            343
                                                        -------        -------
         Net cash (used in)
         financing activities                           (17,094)       (23,307)
                                                        -------        ------- 

NET INCREASE (DECREASE) IN CASH AND
         CASH EQUIVALENTS                                 8,793         (1,304)

Cash and cash equivalents, beginning of period          23,770         20,096
                                                         ------         ------

Cash and cash equivalents, end of period             $   32,563      $  18,792
                                                     ==========      =========











           See accompanying notes to consolidated financial statements

                                       -6-
<PAGE>




                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

($ in thousands)

 
                                                Nine Months Ended September 30,
                                                       1998             1997  
                                                       ----             ----  
Reconciliation of net income to
  cash provided by operating activities
    Net income                                     $    6,290      $    11,066

    Adjustments to reconcile net income
         to cash provided by
         operating activities:
            Minority interest in consolidated income   18,069           19,010
            Depreciation and amortization               7,740            7,282
            Provision (benefit) for 
               deferred income taxes                     (785)             882
            Provision for uncollectible accounts          --               362
            Equity in earnings of affiliates           (1,977)          (1,701)
            Other                                          20               66

            Changes in operating assets and
                  liabilities, net of effect of
                  purchase transactions:
                    Accounts receivable               ( 2,032)          (1,975)
                    Other receivables                  (1,192)             217
                    Other current assets               (1,022)            (320)
                    Accounts payable                    4,491             (691)
                    Accrued expenses                   (2,293)           3,512 
                                                       ------            ----- 
 
                    Total adjustments                  21,019           26,644
                                                       ------           ------

                  Net cash provided by
                    operating activities           $   27,309       $   37,710
                                                   ==========       ==========






















           See accompanying notes to consolidated financial statements

                                       -7-

<PAGE>



                          PRIME MEDICAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998
                                   (Unaudited)

1.       General:
--       -------
             

The accompanying  unaudited consolidated financial statements have been prepared
in conformity  with the accounting  principles  stated in the audited  financial
statements  for the year ended  December  31, 1997 and  reflect all  adjustments
which are, in the opinion of  management,  necessary for a fair statement of the
financial  position as of September 30, 1998 and the results of  operations  for
the periods  presented.  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 the Company's Annual
Report on Form  10-K/A  for the year  ended  December  31,  1997  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
of the Company.

2.       Financing Activities and Charge to Operations:
--       ----------------------------------------------

In March 1998, the Company completed an offering of an aggregate $100 million of
senior  subordinated  notes (the "Notes") due 2008. The issue price of the notes
was 99.50 with an 8.75% coupon.  Interest is payable semiannually on April 1 and
October 1, beginning  October 1, 1998. The financing costs  associated with this
offering  totaling  $4,418,000  were expensed on the  accompanying  consolidated
statements  of income.  A portion of the proceeds from the offering were used to
pay off the  Company's  $77  million of term  loans  under its  existing  credit
facility.

The Company  increased its senior  revolving  credit  facility by $50 million to
$100 million. The interest rate on draws on this facility is based on LIBOR plus
a margin ranging from 100 to 200 basis points. No amounts have been drawn on the
revolver.  Loan fees of $560,000  associated with the credit  facility  increase
were  expensed  in March 1998 on the  accompanying  consolidated  statements  of
income.

In March 1998, the Company  recorded a write off of  development  costs totaling
$1,617,000  due to  the  uncertainty  associated  with  the  proposed  Stark  II
regulations  issued in January  1998.  These  costs  include  development  costs
associated with partnerships and certification of its manufacturing entity.
 
3.       Earnings Per Share:
--       -------------------

SFAS No. 128 was adopted by the Company in 1997. The earnings per share data for
the nine months and quarter ended September 30, 1997 has been restated to comply
with SFAS No. 128.  Basic EPS is based on weighted  average  shares  outstanding
without any dilutive effects considered.  Diluted EPS reflects dilution from all
contingently  issuable shares,  including  options. A reconciliation of such EPS
data is as follows:















                                       -8-

<PAGE>



                          PRIME MEDICAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998
                                   (Unaudited)
                                   (continued)


Nine Months Ended September 30:
                                                    Basic           Diluted
                                                   earnings        earnings
                                                   per share       per share
                                                   ---------       ---------
                                                          (in thousands,
                                                      except per share data)
1998
----

Net income applicable to common stock              $   6,290       $   6,290
                                                   =========       =========

Average number of shares outstanding                  18,943          18,943
Average stock option shares                              --              141 
                                                   ---------       --------- 


  Shares for EPS  calculation                         18,943          19,084
                                                      ======          ======

Net income per share                               $    0.33       $    0.33
                                                   =========       =========

1997
----

Net income applicable to common stock              $ 11,066        $  11,066
                                                   ========        =========

Average number of shares outstanding                 19,265           19,265
Average stock option shares                             --               193
                                                   --------        ---------

  Shares for EPS calculation                         19,265           19,458
                                                   ========        =========

Net income per share                               $   0.57        $    0.57
                                                   ========        =========

Unexercised  stock options to purchase  1,397,000 shares of the Company's common
stock as of September 30, 1998 were not included in the  computation  of diluted
EPS because  the effect  would be  antidilutive.  Unexercised  stock  options to
purchase  736,500 shares of the Company's  common stock as of September 30, 1997
were not included in the  computation of diluted EPS because the effect would be
antidilutive.


                                       -9-
<PAGE>

                          PRIME MEDICAL SERVICES, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998
                                   (Unaudited)
(continued)

Quarter Ended September 30:
                                                    Basic           Diluted
                                                   earnings        earnings
                                                   per share       per share
                                                   ---------       ---------

                                                          (in thousands,
                                                       except per share data)
1998

Net income applicable to common stock              $   3,941       $   3,941
                                                   =========       =========



Average number of shares outstanding                  18,437          18,437
Average stock option shares                              --              124 
                                                   ---------       ---------

  Shares for EPS  calculation                         18,437          18,561
                                                   =========       =========   

Net income per share                               $    0.21       $    0.21
                                                   =========       =========

1997

Net income applicable to common stock              $   4,520       $   4,520
                                                   =========       =========

Average number of shares outstanding                  19,299          19,299
Average stock option shares                              --              184
                                                   ---------       ---------

  Shares for EPS calculation                          19,299          19,483
                                                   =========       =========
Net income per share                               $    0.23       $    0.23
                                                   =========       =========

Unexercised  stock options to purchase  1,386,000 shares of the Company's common
stock as of September 30, 1998 were not included in the  computation  of diluted
EPS because  the effect  would be  antidilutive.  Unexercised  stock  options to
purchase  705,500 shares of the Company's  common stock as of September 30, 1997
were not included in the  computation of diluted EPS because the effect would be
antidilutive.

4.       Condensed Financial Information Regarding Guarantor Subsidiaries:
--       -----------------------------------------------------------------

Condensed consolidating  financial information regarding the Company,  Guarantor
Subsidiaries  and  Non-guarantor  Subsidiaries  as of and for the periods  ended
September  30, 1998 and 1997 is presented  below for purposes of complying  with
the reporting  requirements of the Guarantor  Subsidiaries.  Separate  financial
statements and other disclosures  concerning each Guarantor  Subsidiary have not
been presented  because  management has determined that such  information is not
material to investors. The Guarantor Subsidiaries are wholly-owned  subsidiaries
of the Company who have fully and unconditionally guaranteed the Notes described
in Note 2 above.

                                      -10-
<PAGE>





                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                   (Unaudited)
                   Condensed Consolidating Statement of Income


                                           Nine Months Ended September 30, 1998 
                                           ------------------------------------ 


            ($ in thousands)
<TABLE>
<S>                                     <C>            <C>            <C>            <C>            <C> 

                                         Prime Medical  Guarantor     Non-Guarantor  Eliminating    Consolidated
                                         Services Inc. Subsidiaries   Subsidiaries     Entries         Total
                                         ------------- ------------   ------------     -------         -----



Fee revenue:
Lithotripsy:
     Fee revenues                       $      --      $   16,473     $   46,125     $     --       $   62,598
     Management fees                           --           2,139          1,658           --            3,797
     Equity income                          22,375         14,478            --         (34,876)         1,977
Manufacturing                                  --             --           7,474           --            7,474
Prostatherapy                                  --             --             651           --              651
Cardiac                                        --             263            --            --              263
                                        ----------     ----------     ----------     ----------     ----------   
                                            22,375         33,353         55,908        (34,876)        76,760
Costs and expenses:
Cost of services and general and
   administrative expenses:
     Lithotripsy                               --           2,604         14,852           --           17,456
     Manufacturing                             --             --           6,150           --            6,150
     Prostatherapy                             --             --             528           --              528
     Cardiac                                   --             197            --            --              197
     Corporate                                 149          3,830            --            --            3,979
     Nonrecurring restructuring /
        development costs                    1,617            --             --            --            1,617
                                        ----------     ----------     ----------     ----------     ----------
                                             1,766          6,631         21,530           --           29,927
Depreciation and amortization                    5          3,877          3,858           --            7,740
                                        ----------     ----------     ----------     ----------     ----------
Operating income                            20,604         22,845         30,520        (34,876)        39,093
                                        ----------     ----------     ----------     ----------     ----------
Other income (deductions):
Interest income                                507            359            284           --            1,150
Interest expense                            (6,259)            (5)          (162)          --           (6,426)
Financing costs                             (4,982)           --             --            --           (4,982)
Other, net                                    (135)           319              1           --              185
                                        ----------     ----------     ----------     ----------     ----------
  Total other income(deductions)           (10,869)           673            123           --          (10,073)

Income before provision for income
   taxes and minority interest               9,735         23,518         30,643        (34,876)        29,020
Minority interest in consolidated
   income                                      --             --             --          18,069         18,069
Provision for income taxes                   3,445          1,143             73           --            4,661
                                        ----------     ----------     ----------     ----------     ----------
          Net income                    $    6,290     $   22,375     $   30,570     $  (52,945)    $    6,290 
                                        ==========     ==========     ==========     ==========     ========== 
</TABLE>



                                      -11-
<PAGE>

                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                   (Unaudited)
                   Condensed Consolidating Statement of Income


                                         Nine Months Ended September 30, 1997
                                         ------------------------------------
($ in thousands)
<TABLE>
<S>                                     <C>            <C>            <C>            <C>            <C> 

                                        Prime Medical   Guarantor     Non-Guarantor  Eliminating    Consolidated
                                        Services Inc.  Subsidiaries   Subsidiaries     Entries          Total
                                        -------------- ------------   -------------  -----------    ------------


Fee Revenue:
Lithotripsy:
     Fee revenues                       $      --      $   15,329     $   47,832     $      --       $  63,161
     Management fees                           --           2,940          1,907            --           4,847
     Equity income                          20,017         12,952            --         (31,293)         1,676
Manufacturing                                  --             --             401            --             401
Cardiac and other                              --             385            --             --             385
                                        ----------     ----------     ----------     ----------     ----------
                                            20,017         31,606         50,140        (31,293)        70,470 
Cost and expenses:
Cost of services and general and
   administrative expenses
     Lithotripsy                               --           3,584         15,201            --          18,785
     Manufacturing                             --             --             345            --             345
     Cardiac and other                         --             358            --             --             358
     Corporate                                 525          3,688            --             --           4,213
                                        ----------     ----------     ----------     ----------     ----------
                                               525          7,630         15,546            --          23,701
                                        
Depreciation and amortization                    5          2,827          4,450            --           7,282
                                        ----------     ----------     ----------     ----------     ----------
Operating income                            19,487         21,149         30,144        (31,293)        39,487
                                        ----------     ----------     ----------     ----------     ----------
Other income (deductions):
Interest income                                --             217            290            --             507
Interest expense                            (5,370)           (44)          (188)           --          (5,602)
Financing costs                                --            (360)           --             --            (360)
Other, net                                     --             (34)           105            --              71
                                        ----------     ----------     ----------     ----------     ----------
Total other income (deductions)             (5,370)          (221)           207            --          (5,384)

Income before provision for income
   taxes and minority interest              14,117         20,928         30,351        (31,293)        34,103

Minority interest in consolidated income       --             --             --          19,010         19,010

Provision for income taxes                   3,051            911             65            --           4,027
                                        ----------     ----------     ----------     ----------     ----------
Net income                              $   11,066     $   20,017        $30,286     $  (50,303)    $   11,066
                                        ==========     ==========        =======     ==========     ==========

</TABLE>





                                      -12-
<PAGE>



                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                   (Unaudited)
                   Condensed Consolidating Statement of Income


                                          Three Months Ended September 30, 1998
                                          -------------------------------------


($ in thousands)
<TABLE>
<S>                                     <C>            <C>            <C>            <C>            <C> 

                                        Prime Medical   Guarantor     Non-Guarantor  Eliminating    Consolidated
                                        Services Inc.  Subsidiaries   Subsidiaries     Entries          Total
                                        -------------- ------------   -------------  -----------    ------------

Fee revenue:
Lithotripsy:
     Fee revenues                       $      --      $    5,866     $   17,187     $      --      $   23,053
     Management fees                           --             777            667            --           1,444
     Equity income                           8,312          5,506            --         (13,091)           727
Manufacturing                                  --             --           3,313            --           3,313
Prostatherapy                                  --             --             344            --             344
Cardiac                                        --              55            --             --              55
                                        ----------     ----------     ----------     ----------     ----------
                                             8,312         12,204         21,511        (13,091)        28,936
Costs and expenses:
Cost of services and general and
   administrative expenses:
     Lithotripsy                               --           1,136          5,146            --           6,282
     Manufacturing                             --             --           2,993            --           2,993
     Prostatherapy                             --             --             259            --             259
     Cardiac                                   --              49            --             --              49
     Corporate                                  74          1,254            --             --           1,328
                                         ----------     ----------     ----------     ----------     ----------
                                                74          2,439          8,398            --          10,911
Depreciation and amortization                    2          1,257          1,308            --           2,567
                                        ----------     ----------     ----------     ----------     ----------
Operating income                             8,236          8,508         11,805        (13,091)        15,458

Other income (deductions):
Interest income                                254            233             77            --             564
Interest expense                            (2,267)            (2)           (43)           --          (2,312)
Other, net                                    (138)            (9)           --             --            (147)
                                        ----------     ----------     ----------     ----------     ----------
   Total other income (deductions)          (2,151)           222             34            --          (1,895)

Income before provision for income
   taxes and minority interest               6,085          8,730         11,839        (13,091)        13,563
Minority interest in consolidated
   income                                      --             --             --           7,036          7,036
Provision for income taxes                   2,144            418             24            --           2,586
                                        ----------     ----------     ----------     ----------     ----------
          Net income                    $    3,941     $    8,312     $   11,815     $  (20,127)      $  3,941 
                                        ==========     ==========     ==========     ==========       ======== 


</TABLE>

                                      -13-
<PAGE>

                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                   (Unaudited)
                   Condensed Consolidating Statement of Income


                                       Three Months Ended September 30, 1997

($ in thousands)
<TABLE>
<S>                                     <C>            <C>            <C>            <C>            <C> 

                                        Prime Medical   Guarantor     Non-Guarantor  Eliminating    Consolidated
                                        Services Inc.  Subsidiaries   Subsidiaries     Entries          Total
                                        -------------- ------------   -------------  -----------    ------------
Fee Revenue:
Lithotripsy:
     Fee revenues                       $      --      $    5,912     $   17,517     $      --      $   23,429
     Management fees                           --           1,071            631            --           1,702
     Equity income                           7,983          5,138            --         (12,426)           695
                                             
Manufacturing                                  --             --             401            --             401
Cardiac                                        --             134            --             --             134
                                        ----------     ----------     ----------     ----------     ----------
                                             7,983         12,255         18,549        (12,426)        26,361
Cost and expenses:
Cost of services and general and
   administrative expenses
     Lithotripsy                               --           1,340          5,121            --           6,461
     Manufacturing                             --             --             345            --             345
     Cardiac                                   --             196            --             --             196
     Corporate                                  44          1,331            --             --           1,375
                                        ----------     ----------     ----------     ----------     ----------
                                                44          2,867          5,466            --           8,377

Depreciation and amortization                    1          1,089          1,374            --           2,464
                                        ----------     ----------     ----------     ----------     ----------
Operating income                             7,938          8,299         11,709        (12,426)        15,520
                                        ----------     ----------     ----------     ----------     ----------
Other income (deductions):
Interest income                                --              92            120            --             212
Interest expense                            (1,871)            62            (50)           --          (1,859)
Other, net                                     --            (117)            35            --             (82)
                                        ----------     ----------     ----------     ----------     ----------
Total other income (deductions)             (1,871)            37            105            --          (1,729)

Income before provision for income
   taxes and minority interest               6,067          8,336         11,814        (12,426)        13,791

Minority interest in consolidated income       --             --             --           7,345          7,345

Provision for income taxes                   1,547            353             26            --           1,926
                                        ----------     ----------     ----------     ----------     ----------
Net income                              $    4,520     $    7,983     $   11,788     $  (19,771)    $    4,520
                                        ==========     ==========     ==========     ==========     ==========

</TABLE>






                                      -14-
<PAGE>



                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
                                   (Unaudited)
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                      Condensed Consolidating Balance Sheet


($ in thousands)                                     September 30, 1998 
<TABLE>
<S>                                     <C>            <C>            <C>            <C>            <C> 

                                        Prime Medical   Guarantor     Non-Guarantor  Eliminating    Consolidated
                                        Services Inc.  Subsidiaries   Subsidiaries     Entries          Total
                                        -------------- ------------   -------------  -----------    ------------
ASSETS:

Current Assets:
Cash                                    $   17,101     $    7,477      $   7,985     $      --      $   32,563
Accounts receivable, net                       --           4,613         16,806            --          21,419
Other receivables                              --           2,295            --             --           2,295
Deferred income taxes                        1,640            727            --             --           2,367
Prepaid expenses and other current assets      --             882          1,916            --           2,798
                                        ----------     ----------     ----------     ----------     ----------
  Total current assets                      18,741         15,994         26,707            --          61,442

Property and equipment:
Equipment, furniture and fixtures              --           5,764         28,315            --          34,079
Real estate and leasehold improvements         --             491          1,500            --           1,991
                                        ----------     ----------     ----------     ----------     ----------                    
Less accumulated depreciation 
     and amortization                          --          (4,404)       (12,622)           --         (17,026)
                                        ----------     ----------     ----------     ----------     ---------- 
Property and equipment, net                    --           1,851         17,193            --          19,044
                                        ----------     ----------     ----------     ----------     ----------
Investment in subsidiaries and other
 investments                               173,882         26,103            --        (188,270)        11,715
Goodwill, at cost, net of amortization         --         140,778            --             --         140,778
Other noncurrent assets                        321            850            291            --           1,462
                                        ----------     ----------     ----------     ----------     ----------
    Total Assets                        $  192,944     $  185,576     $   44,191     $ (188,270)    $  234,441
                                        ==========     ==========     ==========     ==========     ==========


LIABILITIES:
Current Liabilities:
Current portion of long-term debt       $      --      $      --      $      924     $      --      $      924
Accounts payable                                14          4,492          5,371            --           9,877
Accrued expenses                             4,839          3,823          1,208            --           9,870
                                        ----------     ----------     ----------     ----------     ----------
  Total current liabilities                  4,853          8,315          7,503            --          20,671

Long-term debt, net of current portion     100,000            162            883            --         101,045
Deferred income taxes                        1,467          3,486            --             --           4,953
                                        ----------     ----------     ----------     ----------     ----------
  Total liabilities                        106,320         11,963          8,386            --         126,669

Minority interest                              --             --             --          21,148         21,148

STOCKHOLDERS' EQUITY:
Common stock                                   193            --             --             --             193
Capital in excess of par value              84,225            --             --             --          84,225
Retained earnings                           14,111            --             --             --          14,111
Treasury stock                             (11,905)           --             --             --         (11,905)
Subsidiary net equity                          --         173,613         35,805       (209,418)           --   
                                        ----------     ----------     ----------     ----------     ----------
  Total stockholders' equity                86,624        173,613         35,805       (209,418)        86,624
                                        ----------     ----------     ----------     ----------     ----------
    Total Liabilities and 
    stockholders' equity                $  192,944     $  185,576     $   44,191     $ (188,270)    $  234,441
                                        ==========     ==========     ==========     ==========     ==========

</TABLE>







                                      -15-
<PAGE>


                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                   (Unaudited)
                 Condensed Consolidating Statement of Cash Flows


                                         Nine Months Ended September 30, 1998 

($ in thousands)
<TABLE>
<S>                                     <C>            <C>            <C>            <C>            <C> 

                                        Prime Medical   Guarantor     Non-Guarantor  Eliminating    Consolidated
                                        Services Inc.  Subsidiaries   Subsidiaries     Entries          Total
                                        -------------- ------------   -------------  -----------    ------------
     Net cash (used) provided by                                                                 
        operating activities            $  (15,563)    $    8,667     $   34,205     $      --      $   27,309
                                        ----------     ----------     ----------     ----------     ----------                     
Cash flows from investing activities:
Purchases of equipment and leasehold                                                             
   improvements                                --            (670)        (2,973)           --          (3,643)
Distributions from subsidiaries             23,846         14,638            --         (38,484)           --
Investments                                   (408)         2,336            --             --           1,928
Other                                           43             97            153            --             293
                                        ----------     ----------     ----------     ----------     ----------
     Net cash provided (used) by
               investing activities         23,481         16,401         (2,820)       (38,484)        (1,422)
                                        ----------     ----------     ----------     ----------     ----------
Cash flows from financing activities:
Payments on notes payable, 
     exclusive of interest                 (79,000)            (5)        (1,387)           --         (80,392)
Borrowings on notes payable                100,000            --              25            --         100,025
Distribution to minority interest              --             --             --         (24,892)       (24,892)
Purchase of treasury stock                 (11,905)           --             --             --         (11,905)
Other                                           70            --             --             --              70
Distributions to equity owners                 --         (23,846)       (39,530)        63,376            --
                                        ----------     ----------     ----------     ----------     ----------
     Net cash provided (used) by
        financing activities                 9,165        (23,851)       (40,892)        38,484        (17,094)
                                        ----------     ----------     ----------     ----------     ----------
     Net increase (decrease) in cash and                                                         
        cash equivalents                    17,083          1,217         (9,507)           --           8,793
Cash and cash equivalents at beginning                                                           
   of period                                    18          6,260         17,492            --          23,770
                                        ----------     ----------     ----------     ----------     ----------
Cash and cash equivalents at end of
   period                               $   17,101     $    7,477     $    7,985     $      --      $   32,563
                                        ==========     ==========     ==========     ==========     ==========

</TABLE>






                                      -16-
<PAGE>




                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                   (Unaudited)
                 Condensed Consolidating Statement of Cash Flows


                                          Nine Months Ended September 30, 1997 

($ in thousands) 
<TABLE>
<S>                                     <C>            <C>            <C>            <C>            <C> 

                                        Prime Medical   Guarantor     Non-Guarantor  Eliminating    Consolidated
                                        Services Inc.  Subsidiaries   Subsidiaries     Entries          Total
                                        -------------- ------------   -------------  -----------    ------------


     Net cash (used) provided by                                                                 
        operating activities            $   (6,142)    $   10,250     $   33,602     $      --      $   37,710
                                        ----------     ----------     ----------     ----------     ----------
Cash flows from investing activities:
Purchase of lithotripter entities              --         (15,335)           --             --         (15,335)
Purchases of equipment and leasehold                                                             
   improvements                                --            (284)        (1,383)           --          (1,667)
Distribution from investment in                --           1,798            --             --           1,798
   partnerships
Investments in partnerships                    --            (311)           --             --            (311)
Distributions from subsidiaries              1,557         15,498            --         (17,055)           --
Other                                          --            (192)           --             --            (192)
                                        ----------     ----------     ----------     ----------     ----------
     Net cash used by investing
        activities                           1,557          1,174         (1,383)       (17,055)       (15,707)

Cash flows from financing activities:
Payments on notes payable, exclusive of    (45,750)          (607)        (1,339)           --         (47,696)
  interest
Borrowings on notes payable                 50,000            --             959            --          50,959
Distribution to minority interest              --             --             --         (27,728)       (27,728)
Exercise of stock option                       343            --             --             --             343
Contributions from minority interest           --             --             815            --             815
Distributions to equity owners                 --          (1,557)       (43,226)        44,783            --
                                        ----------     ----------     ----------     ----------     ----------
     Net cash provided (used) by
        financing activities                 4,593         (2,164)       (42,791)        17,055        (23,307)
                                        ----------     ----------     ----------     ----------     ----------
     Net increase (decrease) in cash                                                             
        and cash equivalents                     8          9,260        (10,572)           --          (1,304)

Cash and cash equivalents at beginning                                                      
   of period                                     2          2,598         17,496            --          20,096
                                        ----------     ----------     ----------     ----------     ----------
Cash and cash equivalents at end of                                                              
   period                               $       10    $    11,858        $ 6,924    $       --      $   18,792
                                        ==========    ===========        =======    ========        ==========

</TABLE>

                                         


                                      -17-
<PAGE>


                      Management's Discussion and Analysis
                           of Financial Condition and
                              Results of Operations


Results of Operations
---------------------

Revenues
--------

For  the  nine  months  ended  September  30,  1998,  total  revenues  increased
$6,290,000  (9%)  as  compared  to  the  same  period  in  1997.  Revenues  from
manufacturing increased $7,073,000 due to the acquisition of a 75% interest in a
manufacturing  entity in September 1997.  Revenues from lithotripter  operations
decreased by  $1,312,000  (2%)  primarily  due to a decline in  management  fees
earned for managing a fixed site in California which has experienced a reduction
in revenues, and a decline in the average reimbursement per procedure.  Revenues
from  cardiac  centers  decreased  $122,000  primarily  due to two sold  cardiac
centers.

For the  three  months  ended  September  30,  1998,  total  revenues  increased
$2,575,000  (10%)  as  compared  to the  same  period  in  1997.  Revenues  from
manufacturing increased $2,912,000 due to the acquisition of a 75% interest in a
manufacturing  entity in September 1997.  Revenues from lithotripter  operations
decreased by $602,000 (2%)  primarily  due to a decline in  management  fees and
average  reimbursement  per  procedure as stated  above.  Revenues  from cardiac
centers decreased $79,000 primarily due to two sold cardiac centers.

Expenses
--------

For the nine months  ended  September  30, 1998,  costs and expenses  (excluding
depreciation  and  amortization)  increased  from  34%  to 39%  of  revenues, or
$6,226,000  (26%) in  absolute  terms,  primarily  due to  certain  nonrecurring
restructuring/development  costs of $1,617,000 and the lower margins experienced
by  manufacturing  compared to  lithotripsy.  Cost of  services  and general and
administrative  expenses associated with manufacturing  increased $5,805,000 due
to  the  acquisition   discussed  above.   Cost  of  services   associated  with
lithotripter   operations  decreased  $1,329,000  (7%)  in  absolute  terms  and
decreased  from  27% to 26%  of  lithotripter  revenues  primarily  due to  cost
containment  measures enacted.  Cost of services associated with cardiac centers
decreased  $161,000 (45%) primarily due to two sold cardiac  centers.  Corporate
expenses  decreased  from  6% to 5% of  revenues  as the  Company  was  able  to
successfully grow without  proportionately  adding overhead.  Corporate expenses
decreased  $234,000  (6%)  primarily  due to  consolidation  of functions  and a
reduction  in the  amounts  due under  management  incentive  plans  tied to the
performance of the Company.

For the three months ended  September  30, 1998,  costs and expenses  (excluding
depreciation and amortization) increased from 32% to 38% of revenues,  primarily
due to the lower margins  experienced by manufacturing  compared to lithotripsy,
and increased $2,534,000 (30%) in absolute terms, compared to the same period in
1997. Cost of services and general and administrative  expenses  associated with
manufacturing  increased $2,648,000 due to the acquisition discussed above. Cost
of services associated with lithotripter  operations  decreased $179,000 (3%) in
absolute terms and were flat at 25% of lithotripter  revenues.  Cost of services
associated  with cardiac centers  decreased  $147,000 (75%) primarily due to two
sold cardiac centers.  Corporate expenses remained at 5% of revenues.  Corporate
expenses  decreased $47,000 (3%) primarily due to consolidation of functions and
a  reduction  in the amounts due under  management  incentive  plans tied to the
performance of the Company.



                                     -18-
<PAGE>

Other Income (Deductions)
-------------------------

For the nine  months  ended  September  30,  1998,  other  deductions  increased
$4,689,000 compared to the same period in 1997, primarily due to financing costs
totaling  $4,982,000  associated with the $100 million debt offering and the $50
million  increase in the senior  revolving  credit  facility.  Interest  expense
increased $824,000 (15%) due to the higher principal balances in 1998 related to
the $100 million debt offering, which was completed in March 1998. The increases
in expense  discussed  above were  partially  offset by a $643,000  increase  in
interest  income  resulting  from higher cash balances and other,  net increased
$114,000  primarily  due to a gain of $166,000 from the sale of 46,000 shares of
American Physicians Service Group, Inc. common stock.

For the three  months  ended  September  30, 1998,  other  deductions  increased
$166,000  compared to the same period in 1997,  primarily  due to an increase of
$453,000  in  interest  expense  due to the higher  principal  balances  in 1998
related to the $100 million debt  offering,  which closed in March 1998, and due
to the Company recognizing a loss related to a decline in the market value of an
investment  of  $137,000.  These  items were  offset by a $352,000  increase  in
interest income resulting from higher cash balances.

Minority Interest In Consolidated Income
----------------------------------------

Minority interest in consolidated income for the nine months ended September 30,
1998 decreased $941,000 compared to the same period in 1997,  primarily due to a
decline in fee revenue in certain of the partnerships. Earnings before interest,
taxes, depreciation and amortization (EBITDA) attributable to minority interests
was  $20,398,000  for the nine  months  ended  September  30,  1998  compared to
$21,098,000 for the same period in 1997. EBITDA is not intended to represent net
income or cash flows from  operating  activities  in accordance  with  generally
accepted  accounting  principles  and should not be  considered a measure of the
Company's profitability or liquidity.

Minority  interest in  consolidated  income for the three months ended September
30, 1998 decreased  $309,000 compared to the same period in 1997,  primarily due
to a decline in fee revenue in certain of the partnerships.  EBITDA attributable
to minority  interests was $7,852,000  for the three months ended  September 30,
1998 compared to $7,994,000 for the same period in 1997.  EBITDA is not intended
to represent  net income or cash flows from  operating  activities in accordance
with  generally  accepted  accounting  principles and should not be considered a
measure of the Company's profitability or liquidity.

Provision for income taxes
--------------------------

Income tax expense  for the nine  months  ended  September  30,  1998  increased
$634,000, despite the reduction in pretax earnings,  compared to the same period
in 1997 due primarily to the 1997 provision  including the effect of a reduction
in  the  Company's   valuation   allowance   related  to  net   operating   loss
carryforwards.

Income tax expense  for the three  months  ended  September  30, 1998  increased
$660,000 compared to the same period in 1997 due to the Company's Federal income
tax rate  increasing  to 35% in 1998,  as compared to 24% for the same period in
1997,  as the  Company  reduced  the  valuation  allowance  related  to its  net
operating loss carry forwards during 1997.




                                      -19-
<PAGE>

Liquidity and Capital Resources
-------------------------------

Cash was  $32,563,000  and  $23,770,000  at September  30, 1998 and December 31,
1997,  respectively.  Cash  provided by  operations  for the nine  months  ended
September 30, 1998 was  $27,309,000  compared to cash provided by operations for
the nine  months  ended  September  30, 1997 in the amount of  $37,710,000.  The
decline was primarily  attributable  to financing  costs and  development  costs
incurred  in the quarter  ended  March 31, 1998 and an increase in income  taxes
paid and interest paid.

Cash used in investing  activities for the nine months ended  September 30, 1998
was $1,422,000 compared to cash used in investing activities for the nine months
ended September 30, 1997 in the amount of $15,707,000. In 1997, the Company used
$15,335,000 to purchase (1) additional interests in 10 partnerships, (2) 100% of
the stock of a company  that  operates  two  lithotripsy  units and (3) a 38.25%
interest in a lithotripter operation that operates one lithotripter.

Cash used in financing  activities for the nine months ended  September 30, 1998
was  $17,094,000,  primarily  due to  distributions  to  minority  interests  of
$24,892,000  and  purchase  of  treasury  stock  of  $11,905,000  offset  by new
borrowings of $100,025,000  less payments on notes payable of $80,392,000.  Cash
used in financing  activities  for the nine months ended  September 30, 1997 was
$23,307,000, primarily due to distributions to minority interests of $27,728,000
offset by new  borrowings  of  $50,959,000  less  payments  on notes  payable of
$47,696,000.

In March 1998,  the  Company  completed  an  offering of $100  million of senior
subordinated notes due 2008 (the "Notes") to qualified  institutional  buyers. A
portion of the net proceeds from the offering of approximately  $96 million were
used to repay  all of the  outstanding  indebtedness  under the  Company's  bank
facility,  and the  remainder  will  be used  for  general  corporate  purposes,
including  acquisitions.  In  April  1998,  the  Company  increased  its  senior
revolving  credit  facility by $50 million to $100 million.  Advances  under the
revolver  will be  used  to fund  future  acquisitions  and to  finance  capital
expenditure  and working  capital needs of the Company.  As of October 31, 1998,
the Company had no outstanding  indebtedness  under its senior  revolving credit
facility.

In January 1998, the federal government published proposed regulations under the
"Stark  II"  provisions  of  the  Social   Security  Act  (the  "Proposed  Stark
Regulations").  The Company is currently evaluating its alternatives in light of
the Proposed Stark Regulations.  While the Proposed Stark Regulations may have a
material  adverse  effect on the  Company,  the Company  believes  the  changing
regulatory  environment  may benefit the  Company by  creating  new  lithotripsy
acquisition opportunities.  The Company is reevaluating its historical model for
providing  lithotripsy  and  thermotherapy  services  through  operations  which
include  physician-investors  and has  delayed  the  organization  of  physician
partnerships that were in various stages of development.

The  Company  intends  to  increase  the  number of its  lithotripsy  operations
primarily through acquisitions.  The Company believes that the fragmented nature
of the lithotripsy industry, combined with the operational challenges created by
increasing regulatory and business complexities, including Stark II, the Illegal
Remuneration   Statute  and  similar  state  laws,   will  provide   significant
lithotripsy acquisition opportunities.  Where appropriate, the Company will seek
to  increase  its  ownership  interest  in  current  lithotripsy  operations  by
purchasing  interests of urologists and other investors who desire to divest due
to concerns over regulatory  issues,  to realize a return on their investment or
to  retire.   The  Company  intends  to  fund  the  purchase  price  for  future
acquisitions  using borrowings  under its senior credit facility,  proceeds from
the  offering  of the  Notes and cash flow from  operations.  In  addition,  the
Company  may  use  shares  of  its  common  stock  in  such  acquisitions  where
appropriate.



                                      -20-
<PAGE>
Liquidity and Capital Resources (continued)
-------------------------------------------

In November  1998,  the Company  announced an $10 million  increase in its stock
repurchase  program from $15.0 million to $25.0  million of common  stock.  From
time to time, the Company may purchase  shares of its common stock where, in the
judgment of management, market valuations of its stock do not accurately reflect
the Company's past and projected  results of operations.  The Company intends to
fund any such purchases  using  available  cash,  cash flow from  operations and
borrowings under its senior credit facility. The Company has purchased 1,465,000
shares of stock for a total of $13,494,000 as of October 31, 1998.

The Company's ability to make scheduled  payments of principal of, or to pay the
interest on, or to  refinance,  its  indebtedness,  or to fund  planned  capital
expenditures will depend on its future performance,  which, to a certain extent,
is subject to general economic, financial, competitive,  legislative, regulatory
and other  factors that are beyond its control.  Based upon the current level of
operations and anticipated cost savings and revenue growth,  management believes
that cash flow from  operations  and available  cash,  together  with  available
borrowings  under its  senior  credit  facility,  will be  adequate  to meet the
Company's future  liquidity needs for at least the next several years.  However,
there can be no assurance that the Company's  business will generate  sufficient
cash flow  from  operations,  that  anticipated  revenue  growth  and  operating
improvements  will be realized or that future borrowings will be available under
the senior  credit  facility  in an amount  sufficient  to enable the Company to
service its indebtedness or to fund its other liquidity needs.

New Accounting Pronouncements
-----------------------------

In June 1997,  the FASB issued FASB No. 131,  Disclosures  about  Segments of an
Enterprise and Related  Information,  which the Company is required to adopt for
annual periods  beginning after December 15, 1997 and interim periods  beginning
in fiscal year 1999. SFAS No. 131 establishes  standards for the way that public
companies  report  information  about  operating  segments  in annual  financial
statements and requires that those companies report  information  about segments
in interim  financial  reports issued to  shareholders.  The Company has not yet
completed  its  analysis  of this  statement  and the  impact  on its  financial
statements.

In March 1998,  the  Accounting  Standards  Executive  Committee of the American
Institute of Certified Public  Accountants  issued Statement of Position ("SOP")
98-1,  Accounting for the Costs of Computer  Software  Developed or Obtained for
Internal Use, which the Company is required to adopt for fiscal years  beginning
after December 15, 1998. SOP 98-1 establishes  guidance on the capitalization or
expensing of the costs of computer  software  developed or obtained for internal
use. The Company does not expect this statement to have a material impact on its
financial statements.

In April 1998,  the  Accounting  Standards  Executive  Committee of the American
Institute  of Certified  Public  Accountants  issued SOP 98-5,  Reporting on the
Costs of Start-Up Activities,  which the Company is required to adopt for fiscal
years  beginning  after  December 15, 1998.  SOP 98-5 requires costs of start-up
activities and organization  costs to be expensed as incurred.  The Company does
not expect this statement to have a material impact on its financial statements.

Impact of Year 2000
-------------------

The "Year  2000 " issue  refers to the  phenomenon  whereby  computer  programs,
having been written using two digits  rather than four to define the  applicable
year, may  erroneously  recognize a date using "00" as the year 1900 rather than
the year  2000.  This  error  could  potentially  result in a system  failure or
miscalculations  causing  disruptions  of  operations,  including,  among  other
things,  a  temporary  inability  to process  transactions  or engage in similar
normal business activities.


The Company is currently  reviewing  what  effects,  if any, the Year 2000 issue
will have on the operations of its business.

                                      -21-
<PAGE>

Impact of Year 2000 (continued)       
-------------------------------       
Presently,  the Company's  internal  hardware systems include a PC Windows-based
network for its accounting and office software and a UNIX-based  network for its
operations  software.  The Company is in the process of determining  whether its
computer hardware is Year 2000 compliant. The Company's accounting software will
be updated in the fourth  quarter  of 1998 and the  upgrade  will  result in the
accounting software being Year 2000 compliant.  The Company has obtained written
notice that its operations  software is Year 2000 compliant.  This assessment is
anticipated to be completed by the end of the first quarter of 1999.

A review of the Company's  lithotripters  has determined that their operation is
not directly affected by the Year 2000 issue.

The Company  could be adversely  affected by third parties who are not Year 2000
compliant.  The Company is surveying its banking  relationships  to determine if
the banks are expected to have any negative  Year 2000 issues which could impact
the Company.  The Company  leases  office space from  various  landlords  and is
currently surveying whether there are any Year 2000 issues involving electrical,
gas and water  service,  elevators,  phone  systems  and  security  systems.  In
addition,  the Company's mobile  lithotripters rely on electricity and water, in
some  cases   provided  by  the  hospitals   and  surgery   centers  that  those
lithotripters service. The Company could be adversely affected by payment delays
caused by Year 2000 problems affecting  reimbursements for lithotripsy  services
from  Medicare,  Medicaid or Champus  programs or other third party payors.  The
Company  plans to survey its  hospital and surgery  center  clients to determine
whether any Year 2000  issues may arise from those  facilities  being  unable to
provide electricity and water for the Company's  lithotripters,  or from payment
delays from the  Government  programs or other third party  payors.  The Company
will survey its larger customers to determine if those parties will be Year 2000
compliant  in  relation to their  ability to process and pay bills for  services
rendered by the Company. The Company has surveyed its current payroll processing
and third party benefits providers,  who have stated that their systems are Year
2000 compliant. This assessment is anticipated to be completed by the end of the
first quarter of 1999.

The worst case scenario for the Company's operations would be if the Company was
unable  to [1]  obtain  electricity  for its  billing  and  collection  facility
resulting in  hampering  the  Company's  ability to schedule  patients,  process
invoices to its customers, and process collections on a timely basis, [2] obtain
electricity and water for its lithotripters, such that the units would be unable
to treat patients on the mobile lithotripter units and [3] receive payments from
customers  due to the  customers'  inability to process  billings or loss of the
Company's  data by the  customer.  The Company will examine  whether  installing
power  generators  for its billing and  collection  facilities and on its mobile
lithotripter units is justified in light of these possibilities. With respect to
those  customers that may lose data or have  difficulty  determining the amounts
due to the Company,  the Company plans to generate  paper copies of its billings
to have  available in the event a customer  cannot  determine the amount due the
Company.

The worst case scenario for the Company's  financial  activities would be if the
Company's bank depositories  were unable to process deposits and  disbursements.
This would adversely affect the Company's vendors and employees. In addition, if
the Company's  financial offices were unable to obtain electrical power,  delays
in closing its books and records and  preparing  financial  statements  would be
experienced,  possibly affecting its regulatory  reporting to the Securities and
Exchange Commission and the Internal Revenue Service.

To date, the Company has not experienced  significant  costs associated with the
Year 2000  issue and does not expect  significant  costs to be  incurred  due to
correcting the Year 2000 issue. The Company is reviewing its current billing and
collecting  software to  determine  if the Company  will replace it prior to the
Year 2000.  If the system is  replaced,  it is  considered  part of the  ongoing
operations of the Company and not related to the Year 2000 issue.

                                      -22-
<PAGE>

Forward-Looking Statements
--------------------------

All past and future written or oral  statements  made by the Company or its
officers,  directors,   shareholders,   agents,  representatives  or  employees,
including without limitation,  those statements contained in this Report on Form
10-Q, 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 the Company's
expectation,   hopes,   intentions   or   strategies   regarding   the   future.
Forward-looking  statements  may  appear in this  document  or other  documents,
reports,  press releases,  and written or oral presentations made by officers of
the Company to shareholders,  analysts,  news  organizations or others.  Readers
should  not  place   undue   reliance   on   forward-looking   statements.   All
forward-looking statements are based on information available to the Company and
the declarant at the time the forward-looking statement is made, and the Company
assumes no  obligation  to update any such forward-  looking  statements.  It is
important to note that the Company's actual results could differ materially from
those described in such forward-looking statements. In addition to any risks and
uncertainties  specifically  identified in connection with such  forward-looking
statements,  the reader should  consult the  Company's  reports on Form 10-K and
other filings under the Securities  Act of 1933 and the Securities  Exchange Act
of 1934, for factors that could cause actual results to differ  materially  from
those presented.

Forward-looking  statements  are  necessarily  based  on various assumptions and
estimates  and are  inherently  subject  to  various  risks  and  uncertainties,
including  risks and  uncertainties  relating to the possible  invalidity of the
underlying  assumptions  and estimates and possible  changes or  developments in
social, economic, business, industry, market, legal and regulatory circumstances
and  conditions  and  actions  taken or  omitted  to be taken by third  parties,
including   customers,   suppliers,   business   partners  and  competitors  and
legislative,   judicial  and  other  governmental   authorities  and  officials.
Assumptions  related to the foregoing  involve  judgments with respect to, among
other things, future economic, regulatory, competitive and market conditions and
future business  decisions,  all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company.  Any of such
assumptions  could be inaccurate and  therefore,  there can be no assurance that
any  forward-looking  statements  by the  Company  or its  officers,  directors,
shareholders,    agents,   representatives   or   employees,   including   those
forward-looking  statements  contained in this Report on Form 10-Q will prove to
be accurate.






                                      -23-
<PAGE>







 















                                     PART II


                                OTHER INFORMATION















 
















                                      -24-
<PAGE>



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

          None
 
Item 6.   Exhibits and Reports on Form 8-K.

(a)   Exhibits.
     10.1 Third Amended and Restated Loan Agreement for $100,000,000 Revolving 
          Credit Loan dated April 20, 1998
     12.   Computation of ratio of earnings to fixed charges
     27.   Financial Data Schedule

(b)  Current Reports on Form 8-K

          None









































                                      -25-
<PAGE>



                                   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.

                                                    PRIME MEDICAL SERVICES, INC.



Date: November 13, 1998                             By: /s/ Cheryl Williams    
                                                        -----------------------
                                                        Cheryl Williams
                                                        Chief Financial Officer




                                      -26-