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


                                    FORM 10-K

              [X] Annual Report Pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934
                   For the fiscal year ended December 31, 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)

     Check whether the issuer (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
            ---   ---

     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 the Form 10-K or
any amendment to this Form 10-K. _____

     State the aggregate market value of the voting stock held by non-affiliates
computed by reference  to the price at which the stock was sold,  or the average
bid and asked prices of such stock,  as of a specified date within 60 days prior
to the date of filing.
             Aggregate Market Value at March 30, 1999: $130,334,000

     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                              March 30, 1999
        -------------------                              --------------
    Common Stock, $.01 par value                           17,234,267

                       DOCUMENTS INCORPORATED BY REFERENCE
     Selected  portions of the  Registrant's  definitive  proxy material for the
1999 annual meeting of shareholders  are incorporated by reference into Part III
of the Form 10-K.

                                        1
<PAGE>

                          PRIME MEDICAL SERVICES, INC.

                           ANNUAL REPORT ON FORM 10-K

                      FOR THE YEAR ENDED DECEMBER 31, 1998


                                     PART I

ITEM 1.           BUSINESS.
-------           ---------

     Prime  Medical  Services,  Inc.,  a Delaware  corporation  ("Prime"  or the
"Company"),  is the  largest  provider  of  lithotripsy  services  in the United
States.  Lithotripsy  is a  non-invasive  procedure  for the treatment of kidney
stones, typically performed on an outpatient basis, that eliminates the need for
lengthy hospital stays and extensive  recovery periods  associated with surgery.
The  Company  has 62  lithotripters  of which 55 are  mobile and seven are fixed
site. The Company's  lithotripters  performed approximately 37,000 procedures in
the United States in 1998 through a network of  approximately  450 hospitals and
surgery  centers in 34 states.  In addition,  the Company has over 270 contracts
with managed care organizations.

     Lithotripters  fragment kidney stones by use of  extracorporeal  shock wave
lithotripsy.  The Company  provides  services  related to the  operation  of the
lithotripters,  including  scheduling,  staffing,  training,  quality assurance,
maintenance,  regulatory  compliance and contracting with payors,  hospitals and
surgery  centers.  Medical  care is rendered  by the  urologists  utilizing  the
lithotripters. Management believes that the Company has collected the industry's
largest  and  most  comprehensive  lithotripsy  database,   containing  detailed
treatment and outcomes data on over 150,000 lithotripsy procedures.  The Company
and its  associated  urologists  utilize this database in seeking to provide the
highest quality of lithotripsy services as efficiently as possible.

     From 1992 through 1998, the Company completed 12 acquisitions  involving 57
lithotripter  operations and internally  developed  five new  operations.  Since
1992,  the Company  has  substantially  divested  its  original  non-lithotripsy
businesses.

     The  Company  has two  reportable  segments,  the  medical  segment,  which
includes  lithotripsy and  prostatherapy  services,  and cardiac  rehabilitation
services,  and manufacturing  segment. See Note O to the consolidated  financial
statements for segment disclosures.

Lithotripsy Industry Overview
-----------------------------

     Kidney  stones  develop from  crystals  made up primarily of calcium  which
separate from urine and build up on the inner surfaces of the kidney.  The exact
cause of kidney stone formation is unclear,  and there is no known  preventative
cure in the vast  majority of cases.  Approximately  25% of all kidney stones do
not pass  spontaneously  and therefore  require  medical or surgical  treatment.
Kidney stone treatments used by urologists  include  lithotripsy,  drug therapy,
endoscopic extraction or open surgery. While the nature and location of a kidney
stone impacts the choice of treatment,  the Company believes the majority of all
kidney stones that require treatment are treated with lithotripsy  because it is
non-invasive,  typically  requires no general  anesthesia,  and rarely  requires
hospital stays. After  fragmentation by lithotripsy,  the resulting kidney stone
fragments pass out of the body naturally. Recovery from the procedure is usually
a matter of hours.

     Kidney stone disease is most prevalent in the southern  United States.  Men
are afflicted  with kidney  stones more than twice as frequently as women,  with
the highest incidence occurring in men 45 to 64 years of age.


                                        1
<PAGE>

Kidney Stone Treatment Methods
------------------------------

     A number of kidney stone  treatments  are used by  urologists  ranging from
non-invasive  procedures,  such as drug  therapy  or  lithotripsy,  to  invasive
procedures, such as endoscopic extraction or open surgery. The type of treatment
a  urologist  chooses  depends  on a  number  of  factors,  such as the size and
chemical  make-up of the stone,  the stone's  location in the urinary system and
whether  the  stone is  contributing  to  other  urinary  complications  such as
blockage or infection.

     Certain  types of less common kidney stones may be dissolved by drugs which
allow normal passage from the urinary system. Stones located in certain areas of
the urinary tract may be extracted  endoscopically.  These  procedures  commonly
require  general or local  anesthesia  and can injure the involved  areas of the
urinary  tract.  Frequently,  kidney  stones  are  located  where  they  are not
accessible by an endoscopic procedure.  Prior to the development of lithotripsy,
stones  lodged in the upper  urinary tract were often treated by open surgery or
percutaneous stone removal,  both major operations requiring an incision to gain
access to the stone. After such procedures, the patient typically spends several
days in the hospital  followed by a convalescence  period of three to six weeks.
As the  technology  for treating  kidney stones has  improved,  there has been a
shift from more expensive and  complicated  invasive  procedures to safer,  more
cost efficient and less painful non- invasive procedures, such as lithotripsy.

Extracorporeal Shock Wave Lithotripsy 
------------------------------------- 

     General.  The lithotripter  has  dramatically  changed the course of kidney
stone disease treatment since lithotripsy is normally performed on an outpatient
basis, often without general anesthesia. Recovery times are generally only a few
hours,  and most patients can return to work the next day. There are three basic
types of lithotripsy treatment currently available:  electromagnetic,  spark-gap
and  piezoelectric.  A decision regarding which type is used in any instance may
depend on several factors, among which are the treating physician's preferences,
treatment times, stone location, and anesthesia considerations.  The Company has
41  electromagnetic  machines,  20  spark-gap  machines  and  one  piezoelectric
machine.

     Electromagnetic    Technology.    Most   new   lithotripters   utilize   an
electromagnetic  shock wave  component  that  eliminates the need for disposable
electrodes. The use of lithotripters employing electromagnetic technology allows
for more  precise  focusing  of shock wave  energy and more  predictable  energy
delivery than other  lithotripsy  technologies,  which  eliminates  the need for
anesthesia  in most  cases.  Utilization  of systems  employing  electromagnetic
technology  usually results in  fragmentation  of the kidney stone in between 60
and 90 minutes.

     Spark Gap Technology. With these lithotripsy systems, shock waves generated
by a disposable  high-voltage  spark  electrode  are focused on a kidney  stone.
Utilization  of  systems  employing  spark gap  technology  usually  results  in
fragmentation of the kidney stone in less than 60 minutes.  The use of spark-gap
technology  often  requires  the  administration  of  sedatives  or  intravenous
anesthesia care and in some cases requires general anesthesia.

     Piezoelectric  Technology.  Lithotripters applying piezoelectric technology
focus shock waves on the kidney stone using a linear array of ceramic  elements.
This  technology  has  not  been  widely  adopted,  and  there  are  only  a few
lithotripters utilizing piezoelectric technology operating in the United States.



                                        2
<PAGE>

Other Lines of Business:
-----------------------

Medical segment

     In October 1997, the Company began providing thermotherapy services for the
treatment of benign prostatic  hyperplasia  (''BPH'').  BPH is the non-cancerous
enlargement  of  the  prostate,   a  condition   common  in  men  over  age  60.
Thermotherapy uses microwaves to apply heat to the prostate, resulting in relief
of the  symptoms  of BPH without  damaging  surrounding  tissues.  Thermotherapy
relieves the symptoms of BPH without incurring the risks of complications  often
associated with surgery and more invasive  procedures.  The Company operates one
mobile  thermotherapy  device servicing hospitals and surgery centers in eastern
North Carolina,  and a second mobile system in southern California.  The Company
intends to evaluate the success of its  thermotherapy  operations and may expand
such  operations in the future.  The Company  received  approximately  1% of its
revenues from thermotherapy operations in 1998.

     Prime  Cardiac   Rehabilitation   Services,   Inc.  ("Prime  Cardiac"),   a
wholly-owned subsidiary of the Company, provides non-medical management services
for two cardiac rehabilitation centers,  pursuant to agreements with physicians,
clinics and hospitals ("Medical Providers"). The Medical Providers have absolute
authority  over the medical  services  provided at the centers,  fees charged to
patients and the collection practices of the facility.  Prime Cardiac's fees are
generally  based  on  collected  revenues  of  the  centers.   The  Company  has
substantially  reduced its cardiac  rehabilitation  business over the last three
years,  which accounted for less than 1% of the Company's total revenues for the
year ended December 31, 1998.

Manufacturing segment

In September  1997, the Company,  through its acquisition of a 75% interest
in AK Associates,  L.L.C.  ("AK"),  began providing  manufacturing  services and
installation,  upgrade,  refurbishment and repair of major medical equipment for
mobile  medical  services  providers.  The  Company  paid $4.8  million for this
interest, plus an earn-out of $1.1 million, which was paid in February 1999. The
remaining 25% of AK is owned by certain  members of AK  management.  The Company
received  approximately 11% of its revenues from the  manufacturing  segment in
1998.

Potential Liabilities-Insurance
-------------------------------

     All medical procedures  performed in connection with the Company's business
activities  are conducted  directly by, or under the  supervision of physicians,
who are not  employees  of the  Company.  The Company  does not provide  medical
services  to any  patients.  However,  patients  being  treated  at health  care
facilities at which the Company provides its non-medical services could suffer a
medical emergency  resulting in serious injury or death, which could subject the
Company to the risk of lawsuits seeking substantial damages.

     The  Company  currently   maintains  general  and  professional   liability
insurance with a total limit of $1,000,000 per loss event and $3,000,000  policy
aggregate  and an umbrella  excess limit of  $10,000,000,  with a deductible  of
$25,000 per occurrence.  In addition, the Company requires medical professionals
who utilize its services to maintain  professional  liability insurance.  All of
these insurance policies are subject to annual renewal by the insurer.  If these
policies  were to be canceled or not  renewed,  or failed to provide  sufficient
coverage  for  the  Company's  liabilities,  the  Company  might  be  forced  to
self-insure against the potential  liabilities referred to above. In that event,
a single  incident  might  result  in an award of  damages  which  might  have a
material adverse effect on the operations of the Company.




                                        3
<PAGE>

Government Regulation and Supervision 
------------------------------------- 

     The  Company  is  subject  to  extensive  regulation  by both  the  federal
government  and the  states in which the  Company  conducts  its  business.  The
Company is subject to Section  1128B of the Social  Security  Act (known as "the
Illegal  Remuneration  Statute"),  which imposes civil and criminal sanctions on
persons  who  solicit,  offer,  receive  or pay any  remuneration,  directly  or
indirectly,  for  referring,  or  arranging  for the  referral of, a patient for
treatment that is paid for in whole or in part by Medicare,  Medicaid or similar
government  programs.  The federal  government  has published  regulations  that
provide  exceptions  or a ''safe  harbor''  for certain  business  transactions.
Transactions  that are  structured  within  the safe  harbors  are deemed not to
violate the Illegal Remuneration  Statute.  Transactions that do not satisfy all
elements  of a relevant  safe  harbor do not  necessarily  violate  the  Illegal
Remuneration  Statute,  but may be subject to greater  scrutiny  by  enforcement
agencies.  The  arrangements  between the Company and the partnerships and other
entities in which it owns an  indirect  interest  and through  which the Company
provides most of its lithotripsy  services (and the  corresponding  arrangements
between such partnerships and other entities and the treating physicians who own
interests  therein  and  who  use  the  lithotripsy  facilities  owned  by  such
partnerships  and other  entities)  could  potentially  be questioned  under the
illegal remuneration prohibition and may not fall within the protection afforded
by these safe harbors. Many states also have laws similar to the Federal Illegal
Remuneration Statute.  While failure to fall within the safe harbors may subject
the Company to scrutiny  under the Illegal  Remuneration  Statute,  such failure
does  not   constitute  a  violation  of  the  Illegal   Remuneration   Statute.
Nevertheless,  these illegal  remuneration  laws,  as applied to activities  and
relationships  similar to those of the Company,  have been  subjected to limited
judicial  and  regulatory  interpretation,  and the Company has not  obtained or
applied  for any  opinion  of any  regulatory  or  judicial  authority  that its
business  operations  and  affiliations  are  in  compliance  with  these  laws.
Therefore,  no  assurances  can be given that the Company's  activities  will be
found to be in compliance with these laws if scrutinized by such authorities.

     In addition to the Illegal Remuneration Statute, Section 1877 of the Social
Security Act ("Stark II") imposes certain restrictions upon referring physicians
and providers of certain designated health services under the Medicare, Medicaid
and Champus Programs  ("Government  Programs").  Subject to certain  exceptions,
Stark II provides that if a physician (or a family member of a physician)  has a
financial relationship with an entity: (I) the physician may not make a referral
to the entity for the  furnishing of  designated  health  services  reimbursable
under the  Government  Programs;  and (ii) the  entity  may not bill  Government
Programs, any individual or any third-party payor for designated health services
furnished pursuant to a prohibited referral under the Government  Programs.  The
prohibitions  of Stark II only  apply to the  treatment  of  Government  Program
patients,  and have no  application  to services  performed  for  non-government
program  patients.  Entities and  physicians  committing  an act in violation of
Stark II will be  required  to refund  amounts  collected  in  violation  of the
statute and also are subject to civil money  penalties  and  exclusion  from the
Government  Programs.  Urologists  are  investors  in 44  of  the  Company's  62
lithotripsy operations,  and the two Company affiliates engaged in thermotherapy
services have  urologist-investors  (the Company  lithotripsy and  thermotherapy
affiliates  with  physician-investors  are  referred  to herein as the  "Company
Physician Entities").

     Many key terms in Stark II are not  adequately  defined  and the statute is
silent  regarding  its  application  to vendors,  such as the Company  Physician
Entities, contracting ''under arrangements'' with hospitals for the provision of
outpatient services.  Prior to the publication of the Proposed Stark Regulations
described below, the Company interpreted Stark II consistently with the informal
view of the General  Counsel for Health and Human  Services,  and concluded that
the statute  did not apply to its method of  conducting  business.  Based upon a
reasonable interpretation of Stark II, by referring

                                        4
<PAGE>

a patient to a hospital  furnishing the outpatient  lithotripsy or thermotherapy
services ''under arrangements'' with the Company Physician Entities, a physician
investor  in a Company  Physician  Entity is not making a referral  to an entity
(the hospital) in which they have an ownership interest.

     On January 9, 1998, the federal government  published proposed  regulations
under  Stark  II (the  "Proposed  Stark  Regulations").  By  clarifying  certain
ambiguities and defining certain statutory terms, the Proposed Stark Regulations
and accompanying  commentary apply the physician referral  prohibitions of Stark
II  to  the  Company  Physician   Entities'  practice  of  contracting   ''under
arrangements''  with  hospitals for treatment and billing of Government  Program
patients.  Only hospitals can bill the Government  Programs for  lithotripsy and
thermotherapy  services;  thus contracting under arrangements with hospitals was
the  way  the  Company  Physician  Entities  economically  participated  in  the
treatment of Government Program patients.  Absent a restructuring of traditional
operations,  to comply  with the  government's  interpretation  of Stark II, the
physician-  investors  will be  prohibited  from  referring  Government  Program
patients to the hospitals  contracting with the Company Physician Entities.  The
Company  cannot  predict when final Stark II  regulations  will be issued or the
substance  of the final  regulations,  but the  interpretive  provisions  of the
Proposed Stark  Regulations  may be viewed as the federal  government's  interim
enforcement   position  until  final   regulations  are  issued.   Restructuring
traditional  operations may reduce  Company  revenues and limit future growth by
(I) reducing or eliminating revenues attributable to the treatment of Government
Program patients by the Company Physician Entities,  (ii) reducing revenues from
the treatment of non-government  patients by Company  Physician  Entities due to
physician,  hospital and third-party  payor anxiety and concern created by Stark
II,  (iii)  requiring  the  Company  Physician  Entities  to  restructure  their
operations  to comply  with  Stark  II,  (iv)  restricting  the  acquisition  or
development of additional lithotripsy or thermotherapy operations that will both
treat Government  Program patients and have referring  physician-investors,  (v)
impairing  the  Company's   relationship  with  urologists  and  (vi)  otherwise
materially adversely impacting the Company.

     Many  states  currently  have  laws  similar  to Stark II that  restrict  a
physician with a financial  relationship with an entity from referring  patients
to that entity.  Often these laws contain statutory exceptions for circumstances
where the referring  physician,  or a member of his practice group, treats their
own patients.  States also commonly  require  physicians to disclose to patients
their financial  relationship with an entity. The Company believes that it is in
material   compliance   with  these  state  laws.   Nevertheless,   these  state
self-referral laws, as applied to activities and relationships  similar to those
of  the  Company,  have  been  subjected  to  limited  judicial  and  regulatory
interpretation,  and the Company has not  obtained or applied for any opinion of
any  regulatory  or  judicial   authority  that  its  business   operations  and
affiliations are in compliance with these laws. Therefore,  no assurances can be
given that the Company's activities will be found to be in compliance with these
laws if scrutinized by such authorities.

     In addition,  upon the  occurrence of changes in the law that may adversely
affect  operations,  the  Company is  required  to  purchase  the  interests  of
physician-investors  for  certain  of  the  Company  Physician  Entities.  These
mandatory purchase  obligations require the payment by the Company of a multiple
of earnings  similar to  multiples  used by the Company in pricing the  original
acquisition of such interests. To the extent the Company is required to purchase
such  interests,  such  purchases  might cause a default  under the terms of the
Company's  senior  credit  facility and senior  subordinated  notes,  impair the
Company's  relationship  with  urologists and otherwise have a material  adverse
impact on the  Company.  Regulatory  developments,  such as Stark II, might also
dictate that the Company purchase all the interests of its  physician-investors,
regardless of any contractual  requirements to do so, or substantially alter its
business  and  operations  to  remain  in  compliance  with   applicable   laws.
Accordingly,  there can be no assurance that the Company will not be required to
change its business

                                        5
<PAGE>

practices or its investment  relationships  with  urologists or that the Company
will not experience a material  adverse effect as a result of any challenge made
by a federal or state regulatory agency. In addition,  there can be no assurance
that  physician-investors  who,  voluntarily  or  otherwise,   divest  of  their
interests in Company  Physician  Entities will continue to refer patients at the
same rate or at all.
 
     Some states require approval,  usually in the form of a certificate of need
("CON"),  prior  to the  purchase  of  major  medical  equipment  exceeding  a
predesignated  capital expenditure  threshold or for the commencement of certain
clinical health services.  Such approval is generally based upon the anticipated
utilization  of the  service  and the  projected  need  for the  service  in the
relevant geographical area of the state where the service is to be provided. CON
laws  differ in many  respects,  and not every  state's  CON law  applies to the
Company.  Most of the  Company's  operations  originated in states which did not
require a CON for  lithotripsy  services,  and the Company has obtained a CON in
states  where  one  is  required.  Some  states  also  require  registration  of
lithotripters  with the state agency  which  administers  its CON program.  Such
registration  is  not  subject  to  any  required  approval,  but  rather  is an
administrative  matter  imposed so that the state will be aware of all  existing
clinical health  services.  The Company  registers in those states which require
these filings.

     All  states in which  the  Company  operates  require  registration  of the
fluoroscopic  x-ray tubes which are utilized to locate the kidney stones treated
with the Company's lithotripters.  The registration  requirements are imposed in
order to facilitate periodic inspection of the fluoroscopic tubes.

     Some  states  have  regulations  that  require  facilities  such as  mobile
lithotripters  to be licensed and to have  appropriate  emergency care resources
and qualified staff meeting the stated educational and experience criteria.  The
Company's lithotripsy equipment is subject to regulation by the U.S. Food & Drug
Administration,  and the motor  vehicles  utilized to  transport  the  Company's
mobile  lithotripsy  equipment  are  subject  to safety  regulation  by the U.S.
Department of  Transportation  and the states in which the Company  conducts its
mobile  lithotripsy  business.  The  Company  believes  that  it is in  material
compliance with these regulations.

     Except as provided herein, the Company believes it complies in all material
respects  with the  foregoing  laws and  regulations,  and all other  applicable
regulatory  requirements;  however, these laws are complex and have been broadly
construed by courts and enforcement  agencies.  Thus,  there can be no assurance
that  the  Company  will  not  be  required  to  change  its  practices  or  its
relationships  with  treating  physicians  who  are  investors  in  the  Company
Physician  Entities,  or that the Company will not experience  material  adverse
effects as a result of any investigations or enforcement actions by a federal or
state regulatory agency.

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



                                        6

Equipment
---------

     The  Company  purchases  its  lithotripter  equipment  and  maintenance  is
generally  provided pursuant to service contracts with the manufacturer or other
service  companies.  The cost of a new  lithotripter  ranges  from  $400,000  to
$1,000,000.  For mobile lithotripsy,  the Company either purchases or leases the
tractor,  usually for a term up to five years,  and  purchases  the trailer or a
self contained coach.

Employees
---------

     As of March 15, 1999,  the Company  employed  approximately  310  full-time
employees and approximately 38 part-time employees.

Competition
-----------

     The  market  to  provide  lithotripsy  services  is highly  fragmented  and
competitive.  The Company  competes  with other private  facilities  and medical
centers  that  offer  lithotripsy  services  and  with  hospitals,  clinics  and
individual medical  practitioners that offer conventional  medical treatment for
kidney stones.  Certain of the Company's current and potential  competitors have
substantially  greater financial resources than the Company and may compete with
the Company for  acquisitions  and development of operations in markets targeted
by the Company. A decrease in the purchase price of lithotripters as a result of
the  development  of less  expensive  lithotripsy  equipment  could decrease the
Company's  competitive  advantage.  Most of the Company's  lithotripsy  services
agreements  have matured past their initial terms and are now in annual  renewal
terms  or  are  on a  month-to-month  basis.  Another  significant  provider  of
lithotripsy services is also a manufacturer of lithotripsy equipment,  which may
create different  incentives for such provider in pricing lithotripsy  services.
Moreover,  while the  Company  believes  that  lithotripsy  has  emerged  as the
superior  treatment  for  kidney  stone  disease,   the  Company  competes  with
alternative kidney stone disease treatments.

ITEM 2.           PROPERTIES.
-------           -----------

     The Company's principal executive office is located in Austin,  Texas in an
office building owned by American  Physicians  Service Group, Inc. ("APS").  The
Company pays APS approximately  $8,000 per month,  which includes rental payment
for  approximately  5,600 square feet of office  space,  reception and telephone
services,  and certain  other  services and  facilities.  The office space lease
expires in December 1999.

     The Company  leases  approximately  11,000  square feet of office  space in
Fayetteville,  NC under two leases  expiring in 2001. The current  monthly lease
amount is approximately $10,000.

     The  Company's   manufacturing   subsidiary  owns  a  building   containing
approximately  78,000 square feet of  manufacturing  and office space in Harvey,
Illinois.




ITEM 3.           LEGAL PROCEEDINGS.
-------           ------------------

     From  time to time,  the  Company  may be  named  as a party to  litigation
proceedings incidental to its business. The Company does not believe the outcome
of any such litigation is likely to have

                                        7
<PAGE>

a material  adverse  effect on its business,  financial  condition or results of
operations.

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
-------           ----------------------------------------------------

     NONE.


                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCK HOLDER MATTERS.
------------------------------------------------------------------------------

     The  following  table  sets forth the high and low  closing  prices for the
Company's  common  stock  in the  over-the-counter  market  as  reported  by the
National  Association of Securities Dealers,  Inc., Automated Quotations System,
for the years ended December 31, 1998 and 1997 (NASDAQ Symbol "PMSI").

         Year Ended December 31, 1998               High              Low
         ----------------------------               ----              ---

                  First Quarter                    $13.38           $ 9.88
                  Second Quarter                    12.06             8.62
                  Third Quarter                      9.06             7.00
                  Fourth Quarter                     8.00             6.88

         Year Ended December 31, 1997               High              Low
         ----------------------------               ----              ---

                  First Quarter                    $12.38           $ 9.75
                  Second Quarter                    11.81             8.94
                  Third Quarter                     14.75            10.25
                  Fourth Quarter                    14.69            11.75


     On March 15, 1999, the Company had  approximately  700 holders of record of
its common stock.

     The Company has not declared any cash  dividends on its common stock during
the last two years and has no present  intention of declaring any cash dividends
in the  foreseeable  future.  In addition,  the Company is not  permitted by its
current  credit  facility and terms of senior  subordinated  notes to declare or
make any  payments  for  dividends.  It is the  present  policy  of the Board of
Directors to retain all earnings to provide funds for the growth of the Company.
The declaration and payment of dividends in the future will be determined by the
Board of  Directors  based upon the  Company's  earnings,  financial  condition,
capital  requirements,  loan  covenants  and such other  factors as the Board of
Directors may deem relevant.

                                        8

<PAGE>



ITEM 6.  SELECTED FINANCIAL DATA.

($ in thousands, except per share data)


<TABLE>
<S>                           <C>            <C>            <C>            <C>            <C> 

                                             Years Ended December 31,                                       
                              1998           1997           1996           1995           1994
                              ----           ----           ----           ----           ----
 
 
Revenues:

  Lithotripsy                 $ 92,053       $ 93,113       $ 71,602       $ 22,153       $ 14,843

  Other                         12,583          2,866            802          1,042          9,925
 
  Total                       $104,636       $ 95,979       $ 72,404       $ 23,195       $ 24,768
 
Income:

  Net income                  $  10,794      $ 14,856       $  8,961       $  7,204       $  4,504
 

Diluted earnings per share:
  Net income                     $ 0.57        $ 0.76         $ 0.49         $ 0.48         $ 0.31
 

Dividends per share               None          None           None           None            None
 

Total assets                  $241,119       $225,826       $202,534        $ 77,627       $ 53,861
 

Long-term obligations         $100,987       $ 71,198       $ 70,910        $ 22,323       $ 12,734
</TABLE>
 


                                        9
<PAGE>


Quarterly Data
($ in thousands, except share amounts)            
                               3/31       6/30       9/30       12/31
                               ----       ----       ----       -----

1998
Revenues                     $22,795      $25,029    $28,936    $27,876
Net income (loss)            ( 1,168)       3,517      3,941      4,505
Per share amounts (basic):
   Net income (loss)           (0.06)        0.18       0.21       0.25
   Weighted average shares
       outstanding            19,313       19,088     18,437     17,781
Per share amounts (diluted):
   Net income (loss)           (0.06)        0.18       0.21       0.25
   Weighted average shares
      outstanding             19,313       19,223     18,561     17,890

1997
Revenues                     $20,899      $23,220    $26,361    $25,509
Net income                     2,876        3,670      4,520      3,790
Per share amounts (basic):
   Net income                    .15          .19        .23        .20
   Weighted average shares
      outstanding             19,218       19,277     19,299     19,306
Per share amounts (diluted):
   Net income                    .15          .19        .23        .19
   Weighted average shares
      outstanding             19,395       19,435     19,483     19,496
 

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

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

     The  statements  contained  in this Report on Form 10-K 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   expectations,   hopes,
intentions or strategies  regarding the future.  Readers  should not place undue
reliance on forward-looking  statements. All forward-looking statements included
in this document are based on  information  available to the Company on the date
hereof, 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 in such forward-looking  statements. In addition to
any risks and uncertainties specifically identified in the text surrounding such
forward- looking statements,  the reader should consult the Company's reports on
Form 10-Q 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.

     The  forward-looking  statements  included herein 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 judgements with respect
to, among other things,  future economic,  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
the forward-looking statements included in this Report on Form 10-K

                                       10
<PAGE>

will prove to be accurate.

Year ended December 31, 1998 compared to the year ended December 31, 1997
-------------------------------------------------------------------------

     Total revenues increased  $8,657,000 (9%) as compared to the same period in
1997.  Revenues  from  lithotripter  operations  decreased  by  $1,060,000  (1%)
primarily due to a decline in average reimbursement per procedure. Manufacturing
revenue  increased by  $8,708,000  (369%) due to the fact that the 1998 revenues
were for the full year while 1997 revenues  were for four months of  operations.
The Company acquired the trailer  manufacturer in September 1997.  Prostatherapy
revenues  rose  $1,207,000  due to the fact that 1998 revenues were for the full
year for one entity and a partial year for another  entity,  while 1997 revenues
included one entity which began operations in the fourth quarter.  Revenues from
cardiac and other  decreased  $198,000  primarily due to four  discontinued/sold
cardiac centers.
 
     Costs and expenses (excluding depreciation and amortization) increased from
35% to 38% of  revenues  and  increased  $6,188,000  (19%)  in  absolute  terms,
compared  to  the  same  period  in  1997.  Cost  of  services  associated  with
lithotripter  operations  decreased  $2,707,000 (10%) in absolute terms and from
27%  to  25%  of  lithotripter  revenues.   Cost  of  services  associated  with
manufacturing  increased  $7,461,000  (428%),  due to full year of operations in
1998 while 1997 costs  represent  four  months of  operations.  Cost of services
associated  with  prostatherapy  increased  $803,000  due  to  a  full  year  of
operations for the first time in 1998. Cost of services  associated with cardiac
centers decreased $229,000 (48%) primarily due to four discontinued/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 $757,000 (13%) primarily due to a consolidation of corporate
functions.

     Other deductions  increased $4,635,000 primarily due to (i) the increase of
$4,618,000  for the  writeoff in fees paid to lenders to obtain  financing,  and
(ii) an  increase  in  interest  expense of  $992,000  due to an increase in new
borrowings in March 1998 related to the $100 million senior  subordinated  notes
offering.  The  increased  deductions  were offset  partially  by an increase in
interest income of $677,000.

     Minority interest in consolidated  income decreased  $251,000 primarily due
to  the  decline  in  revenue  discussed  above  in  certain  of  the  Company's
subsidiaries.  Earnings before interest, taxes,  depreciation,  and amortization
(EBITDA)  attributable to minority  interests was $28,077,000 for the year ended
December 31, 1998 compared to $28,591,000 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.

     Income  tax  expense  for  the  year  ended  December  31,  1998  increased
$1,582,000,  despite the 12% reduction in pretax earnings,  compared to the same
period in 1997 as the 1997  provision  included the effect of a reduction in the
Company's valuation allowance related to net operating loss carryforwards.

Year ended December 31, 1997 compared to the year ended December 31, 1996
-------------------------------------------------------------------------

     For the year ended December 31, 1997, total revenues increased  $23,575,000
(33%)  as  compared  to the same  period  in 1996.  Revenues  from  lithotripter
operations  increased by $21,511,000  (30%) primarily due to the acquisitions of
(I) one lithotripter  entity that owned or managed 31  lithotripters  throughout
the U.S. effective May 1996, (ii) additional interests in 10

                                       11
<PAGE>

partnerships  in January  1997,  (iii) one company that owned two  lithotripters
effective June 1997 and (iv) a 38.25% interest in a lithotripter  unit effective
May  1997.   Revenues  from  manufacturing  were  $2,358,000,   related  to  the
acquisition  of the trailer  manufacturer  on September 1, 1997.  Revenues  from
cardiac centers  decreased  $294,000 (37%) primarily due to the one sold cardiac
center.

     For the year  ended  December  31,  1997,  costs  and  expenses  (excluding
depreciation  and  amortization)  increased  from  34% to 35% of  revenues,  and
increased  $8,486,000  (34%) in absolute  terms,  compared to the same period in
1996.  Costs of  services  associated  with  lithotripter  operations  increased
$5,459,000 (27%) in absolute terms primarily due to the  acquisitions  discussed
above,  and decreased from 28% to 27% of  lithotripter  revenues.  Expenses from
manufacturing were $1,743,000.  Cost of services associated with cardiac centers
decreased  $322,000  (51%)  primarily  due to the  sale of one  cardiac  center.
Corporate expenses were 6% of revenues for both years as the Company was able to
successfully grow without  proportionately  adding overhead.  Corporate expenses
increased  $1,438,000 (34%) primarily due to the additional  corporate  expenses
associated with the acquisitions discussed above.

     For the year ended December 31, 1997, other deductions decreased $1,592,000
primarily due to $3,535,000 in debt issuance and canceled  stock  offering costs
in 1996, compared to only $360,000 which were recorded in 1997, partially offset
by an increase in  interest  expense of  $1,500,000  due to  borrowings  in 1997
related to the acquisitions discussed above.

     Minority interest in consolidated income increased $5,498,000 primarily due
to the limited partners'  ownership interest  associated with 21 partnerships in
which Lithotripters,  Inc. holds a controlling  interest.  The Company concluded
the Lithotripters, Inc. acquisition effective May 1, 1996.

     Provision  for income  taxes  increased  $3,799,000  due to the increase in
income before income taxes  partially  offset by the Company fully utilizing its
net  operating  loss and  other  carryforwards  in  1997,  which  resulted  in a
reduction in the beginning of year valuation allowance of $2,399,000.

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

     Cash was  $40,146,000  and  $23,770,000  at  December  31,  1998 and  1997,
respectively.  Cash provided by operations  was  $45,551,000  for the year ended
December 31, 1998 and  $51,693,000  for the year ended  December  31, 1997.  The
Company's   subsidiaries  generally  distribute  all  of  their  available  cash
quarterly,  after establishing  reserves for estimated capital  expenditures and
working  capital.  For the years ended December 31, 1998 and 1997, the Company's
subsidiaries  distributed  cash of  approximately  $25,799,000 and  $28,667,000,
respectively, to minority interest holders.

     Cash used by investing  activities for the year ended December 31, 1998 was
$2,142,000  primarily  due to  $5,213,000  for the  purchase  of  equipment  and
leasehold  improvements,  partially offset by $2,532,000 in  distributions  from
investments.  Cash used by investing  activities for the year ended December 31,
1997 was $22,949,000  primarily due to  expenditures  of $20,217,000  associated
with  acquisitions  and  $4,546,000  for the purchase of equipment and leasehold
improvements.  This was partially  offset by $1,690,000  in  distributions  from
investments.
 
     Cash used in financing  activities for the year ended December 31, 1998 was
$27,033,000,

                                       12
<PAGE>

primarily due to distributions to minority interests of $25,799,000, $16,439,000
of purchases of treasury stock and debt issuance costs of $4,417,000,  offset by
net borrowings of  $19,541,000.  Cash used in financing  activities for the year
ended   December  31,  1997  was   $25,070,000,   which  was  primarily  due  to
distributions to minority  interests of $28,667,000  offset by net borrowings of
$873,000 and contributions  received from holders of minority  interests related
to new partnership formations totaling $2,381,000.

     The Company's  existing credit facility is comprised of a revolving line of
credit. The revolving line of credit has a borrowing limit of $100 million, none
of which was drawn at December 31, 1998 and March 15, 1999.

     On March 27,  1998,  the Company  completed  an offering of $100 million of
senior  subordinated  notes due 2008 (the  "Notes") to  qualified  institutional
buyers. The net proceeds from the offering of approximately $96 million was used
to repay all outstanding  indebtedness  under the Company's bank facility,  with
the remainder to be used for general corporate purposes, including acquisitions.
In  connection  therewith,   the  Company  recorded  a  charge  to  earnings  of
approximately  $4.4 million for debt issuance costs  associated  with the Notes.
The Notes bear interest at 8.75% and interest is payable  semi-annually on April
1st and October 1st. Principal is due April 2008.

     The  Company  is  currently  evaluating  its  alternatives  in light of the
Proposed Stark Regulations.  While 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.

     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 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,  a desire  to  realize a return on their
investment or  retirement.  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.

     During  1998,  the Company  announced a stock  repurchase  program of up to
$25.0  million of common  stock.  From time to time,  the Company  may  purchase
additional  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 2,120,000 shares of stock for a total
of $18,605,000 as of March 30, 1999.


                                       13
<PAGE>

     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.


Impact of Inflation
-------------------

     The assets of the  Company  are not  significantly  affected  by  inflation
because the Company is not required to make large  investments  in fixed assets.
However,  the rate of inflation will affect  certain of the Company's  expenses,
such as employee compensation and benefits.



Year 2000 Compliance 
-------------------- 

     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  formed a Year 2000  Committee in mid 1998.  The  Committee was
charged with examining (1) internal hardware and software  systems;  (2) medical
equipment (3) physical facilities;

                                       14
<PAGE>

and (4) outside  suppliers,  as these items  relate to potential  problems  that
could be caused by the inability to process dates beyond December 31, 1999.

     The Committee  divided its task into four parts -  assessment,  remediation
planning,  implementation and testing and contingency  planning.  Assessment and
remediation  planning have been  substantially  completed for all four phases of
the project.  Implementation and testing and contingency  planning are discussed
below.

     Internal  hardware  and  software   systems:   The  Company  has  completed
substantially  all of the needed upgrades to its hardware and software  systems.
The  remaining  hardware and software  upgrades/replacements  are expected to be
complete by June 30, 1999.

     Medical Equipment:  A review of the Company's  lithotripters has determined
that their  operation  is not  affected  directly  by the Year 2000  issue.  The
Company is currently reviewing the miscellaneous  ancillary medical equipment to
determine compliance and expects to be completed by September 30, 1999.

     Physical facilities: The Committee has evaluated its non-computer equipment
and has determined that, except for its telephone  system,  there are no devices
whose failure would  materially  affect the ability to carry out the business of
the Company.  A compliant  telephone  system is expected to be installed by June
30, 1999. The outside  managers of the Company's  office buildings have reported
that all aspects of the  physical  facilities  -  elevators,  fire and  security
systems,  etc. are compliant.  Their further inquiry of those  supplying  public
utilities  have  produced  assurances  of  best  efforts  but  no  guarantee  of
performance.

     Outside  suppliers:  The Company is currently  inquiring about the state of
Year  2000  readiness  of those  outside  suppliers  who were  determined  to be
critical  to the  Company's  ability to carry out its  business.  This survey is
expected to be complete by June 30, 1999.

     Contingency planning:  The Company cannot be certain that it has identified
and will be successful in bringing into  compliance  all Year 2000 issues within
its control.  It can be even less certain of critical services being supplied by
third parties  beyond its control.  Upon  completion of the  implementation  and
testing phases of the plan, the Company will formalize plans for carrying on its
business in the event of unanticipated  Year 2000-related  failures.  Presently,
the Company  believes that the most reasonably  likely worst case scenario would
be a failure of relatively  short duration of basic third party services such as
the power grid.  With such a failure  the  Company's  planning  will be directed
toward a temporary suspension of operations followed by plans for resumption and
catch up operations.  Due to the magnitude of the uncertainties  related to Year
2000 issues, the Company is unable to fully assess the consequences of Year 2000
failures  and,  consequently,  there could be a material  adverse  effect on the
Company's results of operations, financial position and cash flows.

     To date, the Company has not experienced  significant costs associated with
the Year 2000  issue and does not expect  significant  costs to be  incurred  in
order to correct  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.

                                    15
<PAGE>

ITEM 7.A          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
--------          -----------------------------------------------------------

Interest Rate Risk:
     The  Company  has  long-term  debt  (including  current  portion)  totaling
$101,877,000,  of which $100  million  has a fixed rate of interest of 8.75% and
$162,000 does not bear any interest.  The remaining $1,715,000 bears interest at
the prime rate.  The Company is exposed to some market risk due to the  floating
interest rate on the $1,715,000. The Company makes monthly or quarterly payments
of principal  and  interest on the  $1,715,000.  A 1.50% rise in interest  rates
would result in a $26,000 annual  increase in interest  expense on this existing
principal balance.




ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------           --------------------------------------------

     The  information  required by this item is contained in Appendix A attached
hereto.

ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
-------           -------------------------------------------------
                  ACCOUNTING AND FINANCIAL DISCLOSURE.
                  ------------------------------------

     NONE.


                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
--------          ---------------------------------------------------

     The information  required by this item is contained in the definitive proxy
material of the Company to be filed in connection  with its 1999 annual  meeting
of shareholders,  except for the information regarding executive officers of the
Company which is provided below. The information required by this item contained
in such definitive proxy material is incorporated herein by reference.

                      EXECUTIVE OFFICERS OF THE REGISTRANT.

     As of March 15, 1999, the executive officers of the Company are as follows:

     Name                         Age              Position

Kenneth S. Shifrin                49          Chairman of the Board

Joseph Jenkins, M.D., J.D.        51          President, Chief Executive Officer
                                                   and Director

Stan Johnson                      45          Vice President

Cheryl L. Williams                47          Chief Financial Officer, Vice
                                              President-Finance, and  Secretary
                                       16
<PAGE>


     The   foregoing   does  not  include   positions   held  in  the  Company's
subsidiaries.  Officers  are  elected  for annual  periods.  There are no family
relationships  between any of the  executive  officers  and/or  directors of the
Company.

     Mr.  Shifrin  has been  Chairman of the Board and a director of the Company
since October 1989. In addition,  Mr.  Shifrin has served in various  capacities
with APS since February  1985, and is currently  Chairman of the Board and Chief
Executive  Officer  of APS.  Mr.  Shifrin  is a member of the Young  Presidents'
Organization.

     Dr. Jenkins has been President and Chief  Executive  Officer and a director
of the Company since April 1996.  From May 1990 until December 1991, Dr. Jenkins
was a Vice President of Lithotripters,  Inc. Since January 1992, Dr. Jenkins has
been President of Lithotripters, Inc. Dr. Jenkins is a board certified urologist
and is a founding  member,  a past  president  and  currently  a director of the
American Lithotripsy Society.

     Mr.  Johnson has been a Vice  President of the Company and President of Sun
Medical Technologies,  Inc. ("Sun"), a wholly-owned subsidiary of the Company,
since November 1995.  Mr.  Johnson was the Chief  Financial  Officer of Sun from
1990 to 1995.

     Ms. Williams has been Chief Financial Officer,  Vice  President-Finance and
Secretary of the Company  since  October 1989.  Ms.  Williams was  Controller of
Fairchild  Aircraft  Corporation  from August 1988 to October 1989. From 1985 to
1988, Ms. Williams served as the Chief Financial Officer of APS Systems, Inc., a
wholly-owned subsidiary of APS.



ITEM 11.        EXECUTIVE COMPENSATION.
--------        -----------------------

     The information  required by this item is contained in the definitive proxy
statement of the Company to be filed in connection  with its 1999 annual meeting
of shareholders, which information is incorporated herein by reference.

ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
--------        ---------------------------------------------------------------
                 

     The information  required by this item is contained in the definitive proxy
statement of the Company to be filed in connection  with its 1999 annual meeting
of shareholders, which information is incorporated herein by reference.

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
--------          -----------------------------------------------

     The information  required by this item is contained in the definitive proxy
statement of the Company to be filed in connection  with its 1999 annual meeting
of shareholders, which information is incorporated herein by reference.



                                       17
<PAGE>

                                     PART IV

ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
--------      -----------------------------------------------------------------

(a)  1.  Financial Statements.

     The  information  required by this item is contained in Appendix A attached
hereto.


     2.  Financial Statement Schedules.

         None.

     
(b)  Reports on Form 8-K.

         None.

(c)  Exhibits. (1)

     3.1              Certificate of Incorporation of the Company. (2)

     3.2              Bylaws of the Company. (2)

     4.1              Specimen of Common Stock Certificate. (2)

     10.1*            Prime Medical Services, Inc. 1993 Stock Option Plan. (3)

     10.2*            First Amendment to the Prime Medical Services, Inc. 
                      1993 Stock Option Plan. (12)

     10.3*            Second Amendment to the Prime Medical Services, Inc. 
                      1993 Stock Option Plan. (12)

     10.4*            Third Amendment to the Prime Medical Services, Inc. 
                      1993 Stock Option Plan. (13)

     10.5             Rights Agreement dated October 18, 1993 between the 
                      Company and American Stock Transfer and Trust Company. (3)

     10.6             Form of Indemnification Agreement dated October 11, 1993 
                      between the Company and certain of its officers and 
                      directors. (3)

     10.7             Partnership Agreement of Metro Atlanta Stonebusters, G.P.
                      (5)

     10.8             Management Agreement dated July 28, 1994 between the 
                      Alabama Renal Stone Institute, Inc. and Alabama Kidney 
                      Stone Foundation, Inc. (6)

                                       18
<PAGE>

     10.9             Asset Purchase Agreement, dated August 30, 1994, between 
                      Prime Lithotripter Operations, Inc. and Alabama 
                      Lithotripsy Joint Venture. (7)

     10.10            Asset Purchase Agreement, dated August 30, 1994, between 
                      Prime Lithotripter Operations, Inc. and Baptist Medical 
                      Center - Montclair. (7)

     10.11            Promissory Note, dated August 30, 1994, issued by Prime 
                      Lithotripter Operations, Inc. to Baptist Medical Center - 
                      Montclair.  (7)

     10.12            Management Agreement, dated August 30, 1994, between Prime
                      Lithotripter Operations, Inc. and Alabama Lithotripsy 
                      Associates, Inc.  (7)

     10.13            Security Agreement dated August 30, 1994, between Prime 
                      Lithotripter Operations, Inc. and Baptist Medical Center -
                      Montclair.  (7)

     10.14            Amended and Restated Joint Venture Agreement dated April
                      1989, betweenPrime Diagnostic Imaging Services, Inc. and 
                      The Shasta Diagnostic Imaging Medical Group. (4)

     10.15            Not used

     10.16            Not used

     10.17            Not used

     10.18            Not used

     10.19            Third Amended and Restated Loan Agreement dated April 20, 
                      1998 between Prime Medical Services, Inc., Bank Boston, 
                      N.A., NationsBank of Texas,N.A., and Nationsbanc 
                      Montgomery Securities LLC, as agent. (13)

     10.20            Revolving Credit Note, dated April 20, 1998 in the amount
                      of $20,000,000.00 issued by the Company to NationsBank of 
                      Texas, N.A., as agent. (13)

     10.21            Revolving Credit Note, dated April 20, 1998 in the amount 
                      of $20,000,000.00 issued by the Company to The First 
                      National Bank of Boston, as agent. (13)
 
     10.22            Revolving Credit Note, dated April 20, 1998 in the amount
                      of $10,000,000.00 issued by the Company to Bank One, 
                      Texas, N.A., as agent. (13)

     10.23            Revolving Credit Note, dated April 20, 1998 in the amount
                      of $10,000,000.00 issued by the Company to Imperial Bank, 
                      as agent. (13)

     10.24            Revolving Credit Note, dated April 20, 1998 in the amount
                      of $10,000,000.00 issued by the Company to Credit Lyonnais
                      New York Branch, as agent. (13)
                               
                                       19
<PAGE>
                           

     10.25            Revolving Credit Note, dated April 20, 1998 in the amount
                      of $10,000,000.00 issued by the Company to Fleet National 
                      Bank, as agent. (13)

     10.26            Revolving Credit Note, dated April 20, 1998 in the amount 
                      of $10,000,000.00 issued by the Company to LaSalle 
                      National Bank, as agent.(13)
 
     10.27            Revolving Credit Note, dated April 20, 1998 in the amount 
                      of $10,000,000.00 issued by the Company to Cooperatieve 
                      Centrale Raiffeisen - Boeren Leenbank B.A. "Rabobank 
                      Nederland", as agent. (13)

     10.28            Operating Agreement for Southern California Stone Center, 
                      L.L.C.  (9)

     10.29            Lease Agreement dated July 1, 1995 between Kidney Stone 
                      Center of South Florida, L.C. and Madorsky and Pinon 
                      Kidney Stone Center of South Florida, P.A. (9)

     10.30*           Employment Agreement dated October 8, 1997 between Prime 
                      Medical Services, Inc. and Robert Bachman. (12)

     10.31*           Employment Agreement dated October 8, 1997 between Prime 
                      Medical Services, Inc. and Larry Sodomire. (12)
 
     10.32            Partnership Interest Purchase Agreement dated May 1, 1997 
                      among Prime Lithotripter Operations,  Inc., Tenn-Ga Stone 
                      Group Two, L.P., NGST, Inc. and all the shareholders of 
                      NGST, Inc. (12)

     10.33            Stock Purchase Agreement dated June 1, 1997 between Sun 
                      Medical Technologies, Inc. and Executive Medical 
                      Enterprises, Inc. (12)

     10.34            Contribution Agreement dated October 8, 1997 between Prime
                      Medical Services, Inc. and AK Associates. (12)

     10.35            Confidential Assignment Summary for Pacific Medical 
                      Limited Partnership.(14)

     10.36            Limited Partnership Agreement for Texas Lithotripsy VII,
                      L.P. (14)

     10.37            Agreement and Plan of Merger of Texas Lithotripsy Limited 
                      Partnership II, L.P., Texas Lithotripsy Limited 
                      Partnership IV, L.P. and Texas ESWL/Laser Lithotripter, 
                      Ltd. (14)

     10.38            Limited Partnership Agreement for Big Sky Urological 
                      Limited Partnership.(14)

                                       20
<PAGE>

                           

     10.39            Operating Agreement for Kentucky I Lithotripsy, LLC. (14)

     10.40            Confidential Private Placement Memorandum for Tennessee 
                      Valley Lithotripter Limited Partnership. (14)

     10.41            Confidential Private Placement Memorandum for Fayetteville
                      Lithotripters Limited Partnership - Arkansas I. (14)

     10.42            Confidential Private Placement Memorandum for Texas 
                      Lithotripsy Limited Partnership I, L.P. (14)

     10.43            Operating Agreement for Washington Urological Services, 
                      LLC. (14)

     10.44*           Amended and Restated 1993 Stock Option Plan, as amended 
                      June 10, 1998. (10)

     10.45            Agreement of Limited Partnership of Wyoming Urological
                      Services, L.P. (14)

     10.46            Indenture Agreement dated March 27, 1998 between Prime
                      Medical Services, Inc. and State Street Bank and Trust
                      Company of Missouri, N.A. (8) 

     12               Computation of ratio of earnings to fixed charges (14)

     21.1             List of subsidiaries of the Company.  (14)

     23.1             Independent Auditors' Consent of KPMG LLP.   (14)

     27               Financial Data Schedule (14)
 ______________

     *   Executive compensation plans and arrangements.

     (1) The exhibits listed above will be furnished to any security holder upon
written request for such exhibit to Cheryl L. Williams,  Prime Medical Services,
Inc.,  1301 Capital of Texas  Highway,  Suite C-300,  Austin,  Texas 78746.  The
Securities and Exchange Commission (the "SEC") maintains a website that contains
reports,  proxy  and  information  statements  and other  information  regarding
registrants that file electronically with the SEC at "http://www.sec.gov".

     (2)  Filed  as an  Exhibit  to  the  Registration  Statement  on  Form  S-4
(Registration No. 33-56900) of the Company and incorporated herein by reference.

     (3) Filed as an Exhibit to the  Current  Report on  Form 8-K of the Company
dated October 18, 1993 and incorporated herein by reference.

     (4) Filed as an  Exhibit to the Annual  Report on  Form 10-K  of Old Prime,
Commission  File  Number  0-9963,  for the  year  ended  December 31,  1992  and
incorporated herein by reference.

     (5) Filed as an Exhibit to the Current Report on Form 8-K dated May 5, 1994
of the Company and incorporated herein by reference.

     (6) Filed as an  Exhibit to the  Current  Report on Form 8-K dated July 28,
1994 of the Company and incorporated herein by reference.

                                       21
<PAGE>



     (7) Filed as an Exhibit to the Current  Report on Form 8-K dated  September
13, 1994 of the Company and incorporated herein by reference.

     (8) Filed as an Exhibit to the Quarterly Report on Form 10Q for the period
ended June 30, 1998.

     (9) Filed as an Exhibit to the  Annual  Report on Form 10-K of the  Company
for the year ended December 31, 1995.

     (10)  Filed  as an  Exhibit  to the  Registration  Statement  on  Form  S-8
(Registration  No.  333-  62245)  of the  Company  and  incorporated  herein  by
reference.

     (11) Not used.

     (12) Filed as an Exhibit to the Annual  Report on Form 10-K of the  Company
for the year ended December 31, 1997.

     (13) Filed as an Exhibit to the Quarterly Report on Form 10Q for the period
ended September 30, 1998.

     (14) Filed herewith.





                                       22
<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) 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.



                                         By /s/ Joseph Jenkins, M.D., J.D.   
                                            ---------------------------------   
                                          Joseph Jenkins, M.D., J.D., President,
                                          Chief Executive Officer and Director

                                         Date:  March 31, 1999

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed by the following  persons on behalf of the registrant and
in the capacities and on the dates indicated.



By: /s/ Kenneth S. Shifrin             
    --------------------------             
    Kenneth S. Shifrin
    Chairman of the Board

Date:  March 31, 1999


By: /s/ Cheryl L. Williams             
    --------------------------             
    Cheryl L. Williams
    Vice President of Finance, Secretary
    and Chief Financial Officer (Principal
    Financial and Accounting Officer)

Date:  March 31, 1999


By: /s/ Joseph Jenkins                 
    ----------------------                 
    Joseph Jenkins, M.D., President,
    Chief Executive Officer and Director

Date:  March 31, 1999





                                       23
<PAGE>



By: /s/ Paul Butrus                       
-------------------                       
    Paul Butrus, Director

Date:  March 31, 1999


By: /s/ William E. Foree               
------------------------               
    William E. Foree, M.D., Director

Date:  March 31, 1999


By: /s/ John McEntire                  
---------------------                  
     John McEntire, Director

Date:   March 31, 1999


By: /s/ William A. Searles           
--------------------------           
    William A. Searles, Director

Date:  March 31, 1999


By: /s/ Michael Spalding              
------------------------              
    Michael Spalding, M.D., Director

Date:  March 31, 1999





                                       24
<PAGE>




                                   APPENDIX A

                                      INDEX

                                                                         Page


Independent Auditors' Report                                               A-2
Consolidated Financial Statements:
     Consolidated Statements of Income for the years                       
       ended December 31, 1998, 1997 and 1996.                             A-3
     Consolidated Balance Sheets at December 31, 1998 and 1997.            A-4
     Consolidated Statements of Stockholders' Equity                       
       for the years ended December 31, 1998, 1997 and 1996.               A-6
     Consolidated Statements of Cash Flows                                 
       for the years ended December 31, 1998, 1997 and 1996.               A-7
     Notes to Consolidated Financial Statements.                           A-11






                                                                           


                                       A-1
<PAGE>
                          Independent Auditors' Report




The Board of Directors and Shareholders
Prime Medical Services, Inc.:

     We have audited the accompanying consolidated financial statements of Prime
Medical   Services,   Inc.  and  subsidiaries   ("Company")  as  listed  in  the
accompanying   index.   These   consolidated   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. 

     We conducted  our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management, as well as evaluating the overall financial statement presentation. 
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all  material  respects,  the  financial  position of Prime
Medical  Services,  Inc. and subsidiaries at December 31, 1998 and 1997, and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.





Austin, Texas
March 1, 1999


                                       A-2
<PAGE>


                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME

($ in thousands, except per share data)
<TABLE>
<S>                                                                    <C>              <C>              <C>    

                                                                                 Years Ended December 31,           
                                                                            1998           1997            1996
                                                                        --------         -------          -------
Fee Revenue:                                                                                 
   Lithotripsy:
         Fee revenues                                                   $ 83,879         $84,537          $65,138
         Management fees                                                   5,284           6,237            4,698
         Equity income                                                     2,890           2,339            1,766
                                                                        --------         -------          -------
                                                                          92,053          93,113           71,602
 
   Manufacturing                                                          11,066           2,358               --
   Prostatherapy                                                           1,207              --               --
   Cardiac and other                                                         310             508              802
                                                                        --------         -------          -------
         Total fee revenue                                               104,636          95,979           72,404
                                                                        --------         -------          -------
 Cost of services and general and
       administrative expenses:
         Lithotripsy                                                      22,674          25,381           19,922
         Manufacturing                                                     9,204           1,743              --
         Prostatherapy                                                       803              --              --
         Cardiac and other                                                   249             478              632
         Corporate                                                         4,926           5,683            4,245
         Nonrecurring development and other costs                          1,617              --              --
                                                                        --------         -------          -------
                                                                          39,473          33,285           24,799
 
    Depreciation and amortization                                         10,476           9,911            8,422
                                                                        --------         -------          -------
         Total operating expenses                                         49,949          43,196           33,221
                                                                        --------         -------          -------
Operating income                                                          54,687          52,783           39,183
 
Other income (deductions):
     Interest and dividends                                               1,417              740              459
     Interest expense                                                    (8,469)          (7,477)          (5,977)
     Loan fees and stock offering costs                                  (4,978)            (360)          (3,535)
     Other, net                                                             304                6              370
                                                                        --------         -------          -------
                                                                        (11,726)          (7,091)          (8,683)
Income before provision for income taxes
     and minority interest                                                42,961          45,692           30,500
 
Minority interest in consolidated income                                  24,790          25,041           19,543
 
Provision for income taxes                                                 7,377           5,795            1,996
                                                                        --------         -------          ------- 
Net income                                                              $ 10,794         $14,856          $ 8,961
                                                                        ========         =======          =======

Basic earnings per share:
     Net income                                                            $0.58           $0.77            $0.51
                                                                           =====           =====            =====
 
     Weighted average shares outstanding                                  18,650          19,275           17,633
                                                                          ======          ======           ======
 
Diluted earnings per share:
     Net income                                                            $0.57           $0.76            $0.49
                                                                           =====           =====            =====
 
     Weighted average shares outstanding                                  18,783          19,461           18,638
                                                                          ======          ======           ======
</TABLE>


          See accompanying notes to consolidated financial statements.
                                       A-3

<PAGE>
                                                            

                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

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

                                                                                              December 31,        
                                                                                          1998              1997  
                                                                                       ---------         ---------
ASSETS

Current assets:
     Cash                                                                              $  40,146         $  23,770
     Accounts receivable, less allowance
       for doubtful accounts of $966 in 1998
       and $811 in 1997                                                                   22,321            19,387
     Other receivables                                                                     2,228             1,103
     Deferred income taxes                                                                 2,330             1,506
     Prepaid expenses and other current assets                                             2,774             1,776
                                                                                       ---------         ---------
          Total current assets                                                            69,799            47,542
                                                                                       ---------         ---------
Property and equipment:
     Equipment, furniture and fixtures                                                    34,485            32,673
     Building and leasehold improvements                                                   2,073               531
                                                                                       ---------         ---------
                                                                                          36,558            33,204
Less accumulated depreciation and
     amortization                                                                        (18,471)          (13,497)
                                                                                       ---------         ---------
     Property and equipment, net                                                          18,087            19,707
                                                                                       ---------         ---------

Other investments                                                                         11,491            12,305
Goodwill, at cost, net of amortization                                                   140,863           143,823
Other noncurrent assets                                                                      879             2,449
                                                                                       ---------         ---------
                                                                                        $241,119          $225,826
                                                                                        ========          ========

</TABLE>














                                                                     (continued)
          See accompanying notes to consolidated financial statements.
                                       A-4
<PAGE>

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


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

                                                                                                December 31,        
                                                                                          1998              1997  
                                                                                       ---------         ---------
LIABILITIES:

Current liabilities:
 
Current portion of long-term debt                                                     $      890          $ 11,138
Accounts payable                                                                           6,208             5,386
Accrued distributions to minority interests                                                8,951             8,655
Accrued expenses                                                                          12,051            12,204
                                                                                       ---------         ---------
     Total current liabilities                                                            28,100            37,383

Long-term debt, net of current portion                                                   100,987            71,198
Deferred income taxes                                                                      4,789             5,809
                                                                                       ---------         ---------
     Total liabilities                                                                   133,876           114,390

Minority interest                                                                         17,493            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;
  19,350,267 issued in 1998 and
  19,306,267 issued in 1997                                                                  194               193
Capital in excess of par value                                                            87,380            84,050
Accumulated earnings                                                                      18,615             7,821
Treasury stock, at cost, 1,845,200 shares                                                (16,439)               --
                                                                                       ---------         ---------
     Total stockholders' equity                                                           89,750            92,064
                                                                                       ---------         ---------
                                                                                       $ 241,119         $ 225,826
                                                                                       =========         =========

</TABLE>









          See accompanying notes to consolidated financial statements.
                                       A-5
<PAGE>

                          PRIME MEDICAL SERVICES, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              For the years ended December 31, 1998, 1997 and 1996
($ in thousands, except share data)
<TABLE>
<S>                                        <C>        <C>        <C>          <C>           <C>          <C>        <C>        

                                                Issued           Capital in   Accumulated
                                               Common Stock      Excess of     Earnings      Treasury Stock
                                             Shares    Amount    Par Value     (Deficit)       Shares     Amount      Total
                                           ----------  ------    -----------  ------------  ----------  ---------   ---------

Balance, January 1, 1996                   14,729,663     $147     $58,700     $(  15,996)      30,000   $(   101)    $42,750

  Net income for the year                       --         --          --           8,961          --         --        8,961
  Issuance of stock                         1,636,364       17      14,903           --            --         --       14,920
  Exercise of stock options                                                                                                        
      including tax benefit of
      $130 on non-qualifying
      exercises                               477,666        5         488           --            --         --          493
  Debt converted to stock                     921,415        9       5,241           --            --         --        5,250
  Exercise of warrants                      1,343,825       13       4,040           --            --         --        4,053
  Retirement of treasury
      stock                                   (30,000)     --         (101)          --        (30,000)       101         --
                                           ----------  -------  -----------  ------------  -----------  --------   ---------
Balance, December 31, 1996                 19,078,933      191      83,271         (7,035)         --         --       76,427

  Net income for the year                        --        --          --          14,856          --         --       14,856

  Exercise of stock options                                                                                                        
      including tax benefit of
      $438 on non-qualifying
      exercises                               227,334        2         779           --            --         --          781
                                           -----------  -------  -----------  ------------  -----------  --------   ---------
Balance, December 31, 1997                 19,306,267      193      84,050          7,821          --         --       92,064


  Net income for the year                         --       --         --           10,794          --         --       10,794
  Tax benefits on  exercised                      --       --        3,096           --            --         --        3,096
       warrants
  Exercise of stock options                                                                                                       
    including tax benefit of
    $140 on non-qualifying
    exercises                                  44,000        1         234           --            --         --          235
 Purchase of treasury stock                       --       --                               (1,845,200)   (16,439)    (16,439)
                                           -----------  -------  -----------  ------------  -----------  --------   ---------      

Balance, December 31, 1998                 19,350,267     $194     $87,380     $   18,615   (1,845,200)  $(16,439)  $  89,750
                                           ==========     ====     =======     ==========   ==========   ========   =========
</TABLE>


          See accompanying notes to consolidated financial statements.
                                       A-6
<PAGE>


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

($ in thousands)
                                              Years Ended December 31,         
                                           1998         1997          1996
                                           ----         ----          ----

CASH FLOWS FROM OPERATING ACTIVITIES:
  Fee and other revenue collected        $ 98,649      $90,924       $72,452
  Cash paid to employees, suppliers
      of goods and others                 (39,748)     (31,685)      (22,455)
  Interest received                         1,417          739           459
  Interest paid                           ( 7,261)     ( 7,521)      ( 5,104)
  Taxes paid                              ( 7,506)     (   764)      ( 1,015)
                                          -------      -------       ------- 

           Net cash provided by 
           operating activities            45,551       51,693        44,337
                                           ------       ------        ------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of lithotripter entities           --       (20,217)      (66,742)
  Purchases of equipment and leasehold
       improvements                       ( 5,213)     ( 4,546)      ( 2,526)
  Deferred payments on 
     lithotripter entities                    --           --        ( 3,387)
  Proceeds from sales of equipment            224           30             6
  Investments                               2,532        1,690         1,257
  Other                                       315           94       (   378)
                                              ---           --       ------- 

           Net cash used by 
           investing activities           ( 2,142)     (22,949)      (71,770)
                                          -------      -------       ------- 

CASH FLOWS FROM FINANCING ACTIVITIES:
  Payments on notes payable 
       exclusive of interest             ( 80,484)     (50,328)      (15,351)
  Borrowings on notes payable             100,025       51,201        74,000
  Distributions to minority interest     ( 25,799)     (28,667)      (13,440)
  Debt issuance costs                      (4,417)         --        ( 2,735)
  Contributions by minority interest           72        2,381           --
  Exercise of stock options                     9          343           363
  Purchase of treasury stock             ( 16,439)         --            --
                                          -------      -------       -------
           Net cash provided by 
          (used in) financing 
           activities                    ( 27,033)     (25,070)       42,837
                                         --------      -------        ------

NET INCREASE IN CASH AND CASH
    EQUIVALENTS                            16,376        3,674        15,404

Cash and cash equivalents, 
     beginning of period                   23,770       20,096         4,692
                                           ------       ------         -----


Cash and cash equivalents, 
     end of period                       $ 40,146      $23,770       $20,096
                                         ========      =======       =======






          See accompanying notes to consolidated financial statements.
                                       A-7


<PAGE>



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

($ in thousands)


                                                     Years Ended December 31,
                                                  1998         1997        1996
                                                  ----         ----        ----

Reconciliation of net income to net
 cash provided by operating activities
  Net income                                    $ 10,794     $14,856    $ 8,961
  Adjustments to reconcile net
    income to cash provided by
    operating activities:
       Minority interest in consolidated income   24,790      25,041     19,543
       Depreciation and amortization              10,476       9,911      8,422
       Provision for uncollectible accounts          252         427        319
       Equity in earnings of affiliates           (2,890)     (2,339)    (1,766)
       Debt issuance costs                         4,417         --       2,735 
       Provision for deferred income taxes          (442)         68        974
       Writeoff of loan fees                         --          --         696
       Other                                        (100)      1,159         (7)
       Changes in operating assets and liabilities,
         net of effect of purchase transactions:
           Accounts receivable                    (3,186)     (3,156)     1,284
           Other receivables                        (910)        754        472
           Other current assets                   (1,244)       (602)       529
           Accounts payable                          822         934        452
           Accrued expenses                        2,772       4,640      1,723
                                                   -----       -----      -----

        Total adjustments                         34,757      36,837     35,376
                                                  ------      ------     ------

        Net cash provided by 
        operating activities                     $45,551     $51,693    $44,337
                                                 =======     =======    =======














          See accompanying notes to consolidated financial statements.
                                       A-8
<PAGE>

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

($ in thousands)
<TABLE>
<CAPTION>
<S>                                                                                <C>              <C>               <C>     
                                                                                          Years Ended December 31,            
                                                                                    1998              1997             1996
                                                                                    ----              ----             ----

SUPPLEMENTAL INFORMATION OF
  NON-CASH INVESTING AND
  FINANCING ACTIVITIES:

At December 31, 1998, the Company had accrued
     distributions payable to minority interests.  The
     effect of this transaction was as follows:

           Current liabilities increased by                                         $8,951
           Minority interest decreased by                                            8,951

In 1998, the Company recognized tax benefits associated
     with warrants previously exercised.  The effect of this
     was as follows:
           Current liabilities decreased by                                          1,512
           Noncurrent liabilities decreased by                                       1,584
           Stockholders' equity increased by                                         3,096

In 1997, the Company acquired (1) additional
     ownership interests in 10 partnerships
     (2) a 38.25% general partnership interest in a
     lithotripter operation (3) 100% of the stock
     of a lithotripter operator and (4) 75% equity
     interest in a trailer manufacturer.  These
     transactions are discussed further in Notes C and D.
     The acquired assets and liabilities were as follows:

           Current assets decreased by                                                              $  9,532
           Noncurrent assets increased by                                                              4,041
           Goodwill increased by                                                                      15,836
           Current liabilities increased by                                                            1,343
           Noncurrent liabilities increased by                                                        10,000
           Minority interest decreased by                                                                998
 
  At December 31, 1997, the Company had accrued
     distributions payable to minority interests.  The
     effect of this transaction was as follows:

           Current liabilities increased by                                                            8,655
           Minority interest decreased by                                                              8,655

</TABLE>

          See accompanying notes to consolidated financial statements.
                                       A-9





<PAGE>

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

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

                                                                                         Years Ended December 31,           
                                                                                    1998              1997             1996
                                                                                    ----              ----             ----
  In 1996, the Company acquired (1) 100%
     of the outstanding stock of a corporation
     which operated 31 lithotripters and (2)
     increased ownership in two partnerships, in
     which the Company is the managing general
      partner.  These transactions are discussed
     further in Note D.  The acquired assets
     and liabilities were as follows:

           Current assets increased by                                                                                $19,032
           Noncurrent assets increased by                                                                              12,630
           Goodwill increased by                                                                                       82,297
           Current liabilities increased by                                                                            13,110
           Noncurrent liabilities increased by                                                                         69,712
           Minority interest increased by                                                                              16,218
           Stockholders' equity                                                                                        14,919

  In 1996, several holders of notes issued by the
     Company elected to convert the outstanding
     balances of the notes into 921,000 shares
     of the Company stock.  In addition, certain
     holders of warrants exercised their warrants and
     the Company issued 1,344,000 shares of the
     Company's stock to the warrant holders.  The
     effect of these transactions were as follows:

           Current assets increased by                                                                                  1,749
           Current liabilities decreased by                                                                             4,062
           Noncurrent liabilities decreased by                                                                          3,493
           Stockholders' equity increased by                                                                            9,304

  At December 31, 1996, the Company had accrued
     distributions payable to minority interests.  The
     effect of this transaction was as follows:

           Current liabilities increased by                                                                            10,705
           Minority interest decreased by                                                                              10,705





</TABLE>





          See accompanying notes to consolidated financial statements.
                                      A-10

<PAGE>


 



                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. ORGANIZATION AND OPERATION OF THE COMPANY

     Prime Medical  Services,  Inc.  ("Prime"),  through its direct and indirect
wholly-owned   subsidiaries,   provides   non-medical   management  services  to
lithotripsy,  prostatherapy,  and cardiac rehabilitation centers.  References to
the Company are to Prime and its controlled and affiliated entities. The Company
also manufactures trailers for major medical equipment  manufacturers and mobile
medical service providers. The Company operates lithotripters in 34 states.

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Consolidation

     The consolidated  financial  statements  include the accounts of Prime, its
wholly-owned  subsidiaries,  entities more than 50% owned and partnerships where
Prime has control,  even though its ownership is less than 50%.  Investments  in
entities in which the Company's  investment is less than 50% ownership,  and the
Company does not control, are accounted for by the equity method if ownership is
between 20% - 50%, or by the cost method if ownership is less than 20%.  Through
December 31, 1998, the Company had recognized $435,000 in undistributed earnings
using the equity  method.  This amount  represents  undistributed  earnings from
entities,  in which the Company owns 50% or less, and does not exhibit  control.
All significant intercompany accounts and transactions have been eliminated.

     Cash Equivalents

     The  Company  considers  as  cash  equivalents   demand  deposits  and  all
short-term investments with an original maturity of three months or less.

     Property and Equipment

     Property  and  equipment  are  stated  at  cost.   Major   betterments  are
capitalized  while  normal  maintenance  and repairs are charged to  operations.
Depreciation  is computed by the  straight-line  method using  estimated  useful
lives of five to ten years.  Leasehold improvements are generally amortized over
ten years or the term of the lease,  whichever is shorter.  When assets are sold
or retired, the corresponding cost and accumulated  depreciation or amortization
are  removed  from the  related  accounts  and any gain or loss is  credited  or
charged to operations.

     Intangible Assets

     The Company  records as goodwill the excess of the purchase  price over the
fair value of the net assets  associated with acquired  businesses.  Goodwill is
amortized over a period not to exceed forty years using the straight-line basis.
Accumulated  amortization  at  December  31,  1998 and 1997 is  $13,807,000  and
$9,745,000, respectively. Goodwill is reviewed for impairment whenever events or
changes  in  circumstances   indicate  that  the  carrying  amount  may  not  be
recoverable.  If the sum of the expected future  undiscounted cash flows is less
than  the  carrying  amount  of the  goodwill,  a loss  is  recognized  for  the
difference between the fair value and carrying value of the goodwill.



                                      A-11
<PAGE>

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


     Revenue Recognition

     Revenues generated from management services and the manufacture of trailers
are recognized as they are earned.

     The  Company's  lithotripsy  fee  revenues  are based upon fees charged for
services to hospitals,  commercial insurance carriers,  state and federal health
care agencies, and individuals, net of contractual fee reductions.

     At December 31, 1998,  approximately  17% of accounts  receivable relate to
units  operating in Texas,  11% relate to units  located in  Louisiana,  and 10%
relate to units located in California.

     Income Tax

     Deferred  tax  assets and  liabilities  are  recognized  for the future tax
consequences   attributable  to  differences  between  the  financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases and operating loss and tax credit  carryforwards.  Deferred tax assets and
liabilities  are measured  using enacted tax rates  expected to apply to taxable
income in the years in which  those  temporary  differences  are  expected to be
recovered  or settled.  The effect on deferred tax assets and  liabilities  of a
change in tax rates is  recognized  in income in the period  that  includes  the
enactment date.

     Long-Lived Assets

     Long-lived assets are reviewed for impairment whenever events or changes in
circumstances  indicate that the carrying amount may not be recoverable.  If the
sum of the  expected  future  undiscounted  cash flows is less than the carrying
amount of the asset, a loss is recognized,  for the difference  between the fair
value and carrying value of the asset.

     Accounts Receivable

     Accounts  receivable  are recorded  based on revenues,  less  allowance for
doubtful accounts and contractual adjustments.

     Stock-Based Compensation

     Upon  adoption of  Statement  of  Financial  Accounting  Standards  No.123,
Accounting for Stock-Based  Compensation ("Statement 123"), in 1996, the Company
continued  to  measure   compensation   expense  for  its  stock-based  employee
compensation  plans using the intrinsic  value method  prescribed by APB Opinion
No. 25, Accounting for Stock Issued to Employees.  The Company provides proforma
disclosures  of net income  and  earnings  per share as if the fair  value-based
method  prescribed by Statement  123 had been applied in measuring  compensation
expense. (See Note J).
     


                                      A-12

<PAGE>
                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



     Debt Issuance Costs

     The Company expenses debt issuance costs as incurred.

     Estimates Used to Prepare Financial Statements

     Management uses estimates and assumptions in preparing financial statements
in accordance with generally accepted accounting principles. Those estimates and
assumptions  affect  the  reported  amounts  of  assets  and  liabilities,   the
disclosure of contingent  assets and liabilities,  and the reported revenues and
expenses.  Actual  results  could vary from the  estimates  that were assumed in
preparing the financial statements.

     Reclassification

     Certain  reclassifications  have been made to amounts presented in previous
years to be consistent with the 1998 presentation.

     Earnings Per Share

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


(In thousands, except per share data)

                  1998


                                                              Per Share 
                                      Income      Shares        Amount 
                                      ------      ------        ------ 
     Basic EPS
     Net Income.....................   $ 10,794    18,650      $   0.58
                                                               ========
     Effect of dilutive securities:
     Options .  . ..................                  133
                                                      ---
     Diluted EPS....................   $ 10,794    18,783      $   0.57
                                       ========    ======      ========














                                      A-13
<PAGE>

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


                  Earnings Per Share continued

               1997
                                                                 Per Share 
                                        Income      Shares        Amounts
                                        ------      ------        -------
     Basic EPS
     Net Income.....................    $14,856     19,275        $   0.77
                                                                  ========
     Effect of dilutive securities:
     Options .  . ..................                   186
                                                       ---
     Diluted EPS....................    $14,856     19,461        $   0.76
                                        =======     ======        ========


               1996
                                                                Per Share
                                          Income   Shares         Amounts
                                          ------   ------         -------
     Basic EPS
     Net Income.....................     $ 8,961   17,633         $   0.51
                                                                  ========    
     Effect of dilutive securities:
     Warrants . ....................                  400
     Convertible Debt...............         101      224
     Options . . ...................                  381
                                                      ---
     Diluted EPS....................     $ 9,062   18,638         $   0.49
                                         =======   ======         ========


     Unexercised  employee  stock  options to  purchase  1,708,000,  841,000 and
706,000  shares of Prime common  stock as of December  31, 1998,  1997 and 1996,
respectively,  were not included in the  computations of diluted EPS because the
options  exercise  prices were greater than the average  market price of Prime's
common stock during the respective periods.

C. INVESTMENTS

     Tenn-Ga
 
     In May 1997, the Company  acquired a 38.25% general  partner  interest in a
partnership that provides mobile  lithotripsy  service in Tennessee and Georgia.
The purchase  price was cash of  $3,470,000.  This  investment  is accounted for
using the equity method.

     Southern California

     Effective June 1, 1995, the Company  acquired a 32.5% interest in a limited
liability  company  that  operates a fixed site  lithotripter  near Los Angeles,
California. This investment is accounted for using the equity method.

     Texas, Ohio & Louisiana Partnerships

     In December  1994,  the Company  acquired  all of the common stock of three
corporations.  Each  corporation is the general partner and holds an approximate
20%  interest in a limited  partnership  which  operates a mobile  lithotripter.
Texas ESWL/Laser  Lithotripter,  Ltd.  operates a mobile  lithotripter in Texas,
Oklahoma and


                                      A-14
<PAGE>

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


     Arkansas. Ohio Mobile Lithotripter,  Ltd. operates a mobile lithotripter in
Ohio.  Arklatx  Mobile  Lithotripter,  L.P.  operates a mobile  lithotripter  in
Louisiana. This investment is accounted for using the equity method.
 
     American Physicians Service Group, Inc.

     At December 31, 1998 and 1997, the Company owned 1,000 and 50,000 shares of
common  stock,  representing  less than 1%, of the  outstanding  common stock of
American  Physicians Service Group, Inc. (APS). APS owned  approximately 18% and
16% of the  outstanding  common  stock of the Company at  December  31, 1998 and
1997,  respectively.  Two of the  Company's  seven board members are also on the
board of APS.

     The Company occupies  approximately 5,600 square feet of office space owned
by APS. The Company also shares certain personnel with APS. The monthly rent and
personnel cost is approximately $8,000.
 
     The Company purchased treasury stock shares through APS Financial Services,
Inc. The Company paid commissions of $100,000 to acquire 1,845,000 shares.

D. ACQUISITIONS

     Effective  September 1, 1997, the Company acquired a 75% equity interest in
AK Associates, LLC ("AK"), which provides installation,  upgrade, manufacturing,
refurbishment and repair services for major medical equipment  manufacturers and
mobile medical service providers. The purchase price was $4,761,000 in cash with
contingent  consideration  up to another  $1,050,000  being  payable  based upon
certain  performance  criteria  being  met by AK  during  1998.  The  contingent
consideration  was accrued at December 31, 1998 and paid in the first quarter of
1999.  This   transaction  was  accounted  for  using  the  purchase  method  of
accounting.

     Effective June 1, 1997, the Company acquired 100% of the stock of Executive
Medical  Enterprises,  Inc.  ("EME"),  which  operated  three  lithotripters  in
California, Oregon and Washington. The purchase price was $1,339,000 in cash and
potential   contingent   consideration  based  upon  the  performance  of  these
operations during 1998, 1999 and 2000. $400,000 of the contingent  consideration
was paid in 1998 and  $843,000  was accrued at December 31, 1998 and paid in the
first  quarter of 1999.  The  transaction  was  accounted for using the purchase
method of accounting.

     In January 1997, the Company purchased additional ownership interests in 10
partnerships,  which the Company controls. The purchase price for the additional
ownership  interests was $10,510,000 in cash. These  transactions were accounted
for using the purchase method of accounting.

     Unaudited  proforma  combined  income data for the years ended December 31,
1997 and 1996 of the Company and the  acquisitions  discussed above assuming all
were effective January 1, 1996 is as follows:

($ in thousands, except per share data)          1997                1996   
                                                 ----                ----   

                  Total revenues               $100,228             $81,143
                  Total expenses                 84,941              71,080
                                                 ------              ------

                    Net income                $  15,287             $10,063
                                              =========             =======

                  Diluted earnings per share  $    0.79             $  0.54
                                              =========             =======

                                      A-15

<PAGE>
                 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 



     Effective  May 1, 1996,  the Company  acquired  100% of the common stock of
Lithotripters,   Inc.  ("Litho").   Litho  operated  31  lithotripters   serving
approximately  200 locations in 19 states.  The purchase  price was  $86,500,000
consisting  of  $71,600,000  cash and 1,636,000  shares of the Company's  common
stock  valued at  $14,900,000.  This  transaction  was  accounted  for using the
purchase method of accounting.

     Effective November 1, 1996, the Company increased its ownership interest in
two partnerships that operate lithotripters in Arkansas and South Carolina.  The
Company  acquired an additional  12.0%  interest in  Fayetteville  Lithotripters
Limited Partnership - Arkansas I and 2.7% interest in Fayetteville Lithotripters
Limited  Partnership - South  Carolina II, which the Company  manages as General
Partner.  The  purchase  price was  $1,291,000  in cash.  This  transaction  was
accounted for using the purchase method of accounting.

    
E. FAIR VALUE OF FINANCIAL INSTRUMENTS

     Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of  Financial  Instruments  (Statement  107),  requires  that the  Company
disclose estimated fair values for its financial  instruments as of December 31,
1998 and 1997. The carrying amounts and fair values of the Company's significant
financial instruments are as follows:
<TABLE>
          <S>                                        <C>                   <C>            <C>             <C>    

                                                                   1998                               1997                 
                                                                   ----                               ----                 
                                                     Carrying              Fair           Carrying         Fair
           ($ in Thousands)                           Amount               Value           Amount          Value
           ----------------                           ------               -----           ------          -----
               Financial assets:
           Cash                                      $40,146               $40,146        $23,770         $23,770
           Accounts receivable                        22,321                22,321         19,387          19,387
           Other receivables                           2,228                 2,228          1,103           1,103
             
 
               Financial liabilities:
           Debt                                      101,877                92,603          82,336          82,336
           Accounts payable                            6,208                 6,208           5,386           5,386
</TABLE>

                                      A-16
<PAGE>
                 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

     The  following  methods  and  assumptions  were  used  by  the  Company  in
estimating its fair value disclosures for financial instruments.

     Cash

     The carrying amounts for cash approximate fair value because they mature in
less than 90 days and do not present unanticipated credit concerns.

     Accounts Receivable and Other Receivables

     The carrying value of these receivables  approximates the fair value due to
their short-term nature and historical collectibility.

     Debt

     The  carrying  value of debt in 1997  approximates  fair  value  since  the
majority was  primarily  floating rate debt based on current  market rates.  The
fair  value at  December  31,  1998  for the  $100  million  fixed  rate  senior
subordinated  notes were  present  valued  using the  market  rate of 10.456% as
quoted by Bloomberg Financial  Services.  The carrying value of the debt bearing
interest at prime rate approximates fair value.

     Accounts Payable

     The  carrying  value of the  payables  approximates  fair  value due to the
short-term nature of the obligation.


     Limitations

     Fair  value  estimates  are made at a  specific  point  in  time,  based on
relevant market information and information about the financial instrument. Fair
value  estimates  are based on existing on balance sheet  financial  instruments
without  attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered  financial  instruments.
Other  significant  assets and  liabilities  that are not  considered  financial
assets or liabilities include the deferred tax assets and liabilities,  property
and equipment,  equity  investment in partnerships,  goodwill,  other noncurrent
assets and accrued expenses.  In addition,  the tax ramifications related to the
realization of the unrealized gains and losses can have a significant  effect on
fair  value  estimates  and  have  not  been  considered  in the  aforementioned
estimates.






                                      A-17
<PAGE>
                 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 


F.       ACCRUED EXPENSES

         Accrued expenses consist of the following:

                                            December 31,           December 31,
                                               1998                   1997   
                                               ----                   ----   
         ($ in Thousands)
 
         Legal fees                         $    1,280            $     634
         Accrued group insurance costs             206                  228
         Compensation and payroll 
          related expense                        2,958                1,787
         Taxes, other than income taxes          1,301                  439
         Accrued interest                        2,192                  984
         Income taxes payable                    1,229                4,229
         Deferred payments for acquisitions      1,950                1,339
         Other                                     935                2,564
                                                   ---                -----

                                               $12,051              $12,204
                                               =======              =======



    
       
 

                                      A-18
<PAGE>
                 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

G. INDEBTEDNESS

Long-term debt is as follows:
 
          ($ in thousands)
 


       Interest                                           December 31,         
         Rates                 Maturities          1998                1997   
         -----                 ----------          ----                ----   

       8.75%                     2008            $100,000            $    --
       60-day LIBOR
         plus 2 1/2%             1998                --               79,000
       Prime                   1999-2001            1,715              2,969
       Prime + 1%                1998                --                  200
       None                    2000-2006              162                161
       11.50%                    1998                --                    6
                                                  -------             ------
                                                  101,877             82,336
       Less current portion of
             long-term debt                           890             11,138
                                                      ---             ------
                                                 $100,987            $71,198
                                                 ========            =======


     In March 1998,  the Company  completed  an  offering of an  aggregate  $100
million of unsecured 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. (See Note P).

     The Notes  Indenture  restricts,  among  other  things,  the ability of the
Company and its Restricted  Subsidiaries to incur  additional  indebtedness  and
issue preferred stock, enter into sale and leaseback transactions,  incur liens,
pay dividends or make certain other restricted payments, apply net proceeds from
certain asset sales, enter into certain  transactions with affiliates,  merge or
consolidate  with any other  person,  sell  stock of  subsidiaries  and  assign,
transfer,  lease, convey or otherwise dispose of substantially all of the assets
of the Company.

     During 1998,  the Company  amended its bank  facility with Bank Boston from
$135 million to $100 million.  The facility consists of a $100 million revolving
credit facility  bearing  interest of LIBOR +1 to 2%, maturing in April 2003. At
December  31,  1998,  the entire $100  million  revolving  credit  facility  was
undrawn. At December 31, 1998, interest on the Company's bank facility was 8.6%.
The bank facility is collateralized by the assets of the Company,  including the
stock of its subsidiaries. 


     The stated  principal  repayments for all  indebtedness  as of December 31,
1998 are payable as follows:

                                               ($ in thousands)
                1999                             $    890
                2000                                  449
                2001                                  355
                2002                                   51
                2003                                    0
                Thereafter                        100,132


                                      A-19
<PAGE>

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

 


H. COSTS OF SERVICES AND GENERAL AND ADMINISTRATIVE EXPENSES

     Costs of services and general and  administrative  expenses  consist of the
following:

                                                Years  Ended December 31,
                                                -------------------------
                                             1998        1997            1996
                                             ----        ----            ----

            ($ in Thousands)
 
            Salaries, wages and benefits    $16,294      $15,779      $ 11,953
            Other costs of services           7,136        7,569         6,878
            General and administrative        3,225        3,595         1,941
            Legal and professional            2,551        2,064         1,315
            Manufacturing costs               8,294        1,394           --
            Other                             1,973        2,884         2,712
                                              -----        -----         -----
                                            $39,473      $33,285       $24,799
                                            =======      =======       =======


I. COMMITMENTS AND CONTINGENCIES

     At  December  31,   1998,   minimum   annual   rental   commitments   under
non-cancelable  operating  leases  for  equipment  and office  space are:

         ($ in thousands)

                    1999               $291
                    2000                260
                    2001                  2
                   
     Rent expense for  equipment  and office space for the years ended  December
31, 1998, 1997, and 1996 was $623,000, $568,000, and $360,000, respectively.

     The Company  sponsors a partially,  self-insured  group  medical  insurance
plan.  The plan is  designed  to provide a  specified  level of  coverage,  with
stop-loss coverage provided by a commercial insurer. The Company's maximum claim
exposure is limited to $35,000 per person per policy year. At December 31, 1998,
the  Company  had  244  employees  enrolled  in  the  plan.  The  plan  provides
non-contributory   coverage  for   employees  and   contributory   coverage  for
dependents.  The Company's  contributions totaled $623,000, in 1998, $351,000 in
1997, and $224,000 in 1996.







                                      A-20
<PAGE>
                 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

J. COMMON STOCK OPTIONS

     1993 Stock Option Plan

     The Company has elected to follow  Accounting  Principles Board Opinion No.
25,   "Accounting  for  Stock  Issued  to  Employees"  ("APB  25")  and  related
Interpretations  in  accounting  for its  employee  stock  options.  The Company
provides  proforma  disclosures  of net income and  earnings per share as if the
fair-value  based  method  prescribed  by  Statement  123 had  been  applied  in
measuring  compensation expense. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.

     On October 12, 1993,  the Company  adopted the 1993 Stock Option Plan which
authorizes  the  grant of up to  2,000,000  shares  to  certain  key  employees,
directors,  and consultants  and advisors to the Company.  Options granted under
the 1993 Stock Option Plan shall terminate no later than ten years from the date
the  option  is  granted,  unless  the  option  terminates  sooner  by reason of
termination of employment, disability or death.

     In June 1997,  the Company  adopted an  amendment  to the 1993 Stock Option
Plan that authorized an additional 500,000 shares.

     In June 1998,  the Company  adopted an  amendment  to the 1993 Stock Option
Plan that authorized an additional 750,000 shares.

     A summary of the Company's stock option activity,  and related  information
for the years ended December 31, follows:
<TABLE>
<S>                           <C>            <C>                 <C>            <C>                 <C>            <C>

                                     1998                                1997                                1996

                              Options        Weighted-Average     Options       Weighted-Average     Options       Weighted-Average
                               (000)          Exercise Price       (000)         Exercise Price       (000)        Exercise Price
                               -----          --------------       -----         --------------       -----        --------------
Outstanding - beginning
    of year                     1,394           $11.04              1,228          $ 8.99              975            $ 1.31
Granted                           825             8.63                428           11.94              730             13.87
Exercised                         (44)            3.73               (227)           1.51             (477)             0.52
Forfeited                        (283)           12.58                (35)          12.19              (--)              --
                                 ----                                 ---                             -----                    
                                                                
Outstanding-end of year         1,892           $10.10              1,394          $11.04            1,228           $ 8.99
                              =======                            ========                            =====

Exercisable at end of year        806           $10.74                466          $ 8.21              422            $2.03
                                  ===           ======                ===          ======              ===            =====

Weighted-average fair
     value of options granted
     during the year            $3.40             --                $5.21            --              $6.13             --
                                =====                               =====                            =====               
</TABLE>

                                      A-21
<PAGE>

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





     The  following  table  summarizes  the  Company's  outstanding  options  at
December 31, 1998:
<TABLE>
          <S>                                <C>                 <C>            <C>                 <C>            <C>    

                                                                   Outstanding Options                 Exercisable Options
                                                                  Average        Weighted                           Weighted
                                                                 Remaining       Average                            Average
                                              Options            Contractual     Exercise           Options         Exercise
           Range of Exercise Prices              (000)               Life         Price              (000)           Price   
           ------------------------              -----               ----         -----              -----           -----   

           $  0.25 - $ 4.12                      155                1.6 years   $  0.44               151          $  0.37
           $  4.13 - $ 8.25                      464                4.7 years   $  7.45                11          $  5.99
           $  8.26 - $12.37                      565                1.2 years   $ 10.05               114          $ 10.36
           $ 12.38 - $16.50                      708                2.9 years   $ 14.00               530          $ 13.87
                                               -----                                                  ---
           Total                               1,892                                                  806
                                               =====                                                  ===
</TABLE>


     Pro forma  information  regarding  net  income  and  earnings  per share is
required  by  Statement  123,  and has been  determined  as if the  Company  had
accounted  for its employee  stock  options  under the fair value method of that
Statement.  The fair value for these  options was estimated at the date of grant
using a Black- Scholes option pricing model with the following  weighted-average
assumptions for 1996, 1997 and 1998,  respectively:  risk-free interest rates of
6.2%, 6.2%, and 5.2%;  dividend yields of 0%, 0% and 0%;  volatility  factors of
the expected  market price of the  Company's  common stock of .53, .46, and .42;
and a weighted- average expected life of the option of 4 years.

     The  Black-Scholes   option  valuation  model  was  developed  for  use  in
estimating the fair value of traded  options which have no vesting  restrictions
and are fully  transferable.  In addition,  option  valuation models require the
input of highly  subjective  assumptions  including  the  expected  stock  price
volatility.  Because the Company's  employee stock options have  characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially  affect the fair value estimate,  in
management's  opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

     For  purposes of pro forma  disclosures,  the  estimated  fair value of the
options is amortized to expense over the options' vesting period.  The Company's
pro forma  information  follows  (in  thousands  except for  earnings  per share
information):

                                           1998              1997          1996
                                           ----              ----          ----

                  Pro forma net income   $7,817             $12,448       $8,109
                                         ======             =======       ======
                  Pro forma earnings
                    per share
                      Basic               $0.42               $0.65        $0.46
                                          =====               =====        =====
                      Diluted             $0.42               $0.64        $0.44
                                          =====               =====        =====

                                      A-22
<PAGE>
                 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                    
     Statement 123 calls for a prospective  application of compensation relating
to the grant of stock options and, consequently  pro-forma financial information
may not be indicative  of future  amounts until the new rules are applied to all
outstanding nonvested awards.

K. OTHER INCOME (EXPENSE)

     Included in other,  net in the  consolidated  statements  of income are the
following components:

                                                  Years Ended December 31,
($ in thousands)                         1998              1997             1996
----------------                         ----              ----             ----
Collections on amounts 
    previously written off            $    --            $   --            $ 192
Gain on sale of investment in stock       144                --               --
Equipment rental                           --                --               58
Other income                              160                 6              120
                                          ---             -----              ---
Other, net                               $304             $   6            $ 370
                                         ====             =====            =====


L. INCOME TAXES

     The  Company  files  a  consolidated  tax  return  with  its  wholly  owned
subsidiaries.  A substantial  portion of consolidated income is not taxed at the
corporate level as it represents income from partnerships. Accordingly, only the
portion  of  income  from  these  partnerships  attributable  to  the  Company's
ownership interests is included in taxable income in the consolidated tax return
and financial  statements.  The minority  interest portion of this income is the
responsibility of the individual partners.

     Income tax expense consists of the following:
     ($ in thousands)
                                           Years ended December 31,
                                       1998             1997             1996
                                       ----             ----             ----
           Federal
             Current                  $6,404          $ 4,369           $   97
             Deferred                   (442)              68              974
           State                       1,415            1,358              925
                                       -----            -----              ---
                                      $7,377           $5,795           $1,996
                                      ======           ======           ======
 
     A  reconciliation  of expected  income tax (computed by applying the United
States  statutory  income tax rate of 35% for 1998 and 1997 and 34% for 1996, to
earnings  before income  taxes) to total income tax expense in the  accompanying
consolidated statements of income follows:

                                      A-23
<PAGE>

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

 



         ($ in thousands)
                                           Years ended December 31,
                                         1998        1997       1996
                                         ----        ----       ----
          Expected federal income tax   $6,360      $7,228     $3,725
          Change in beginning of year
            valuation allowance           --        (2,399)    (3,093)
          State taxes                    1,415       1,358        925
          Other                           (398)    (   392)       439
                                          ----     -------        ---
                                        $7,377      $5,795     $1,996
                                        ======      ======     ======
 
     The tax  effects of  temporary  differences  that give rise to  significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997 are presented below:
         ($ in thousands)
                                                     1998                1997   
                                                     ----                ----   
 
         Deferred tax assets:
           Capitalized costs                         $2,381              $932
              Loan origination fees amortizable for
              tax purposes                            1,267               --
           Accounts receivable, principally due
              to allowance for doubtful accounts        248               266
            Accrued expenses deductible for tax
              purposes when paid                      2,082             1,240 
                                                      -----             ----- 
                  Total gross deferred tax assets     5,978             2,438
                  Less valuation allowance              --                --
                                                      -----             -----  
                  Net deferred tax assets             5,978             2,438
                                                      =====             =====
 
         Deferred tax liabilities:
            Property and equipment, principally due
              to differences in depreciation         $( 166)           $ (583)
            Investments in affiliated entities,
              principally due to undistributed income(2,703)           (2,807)
            Intangible assets, principally due to
              differences in amortization periods for
              tax purposes                           (5,568)           (2,419)
                                                     ------            ------ 
           Total gross deferred tax liability        (8,437)           (5,809)
                                                     ------            ------ 
            Net deferred tax liability               $2,459            $3,371
                                                     ======            ======
 
     There is no  valuation  allowance  for  deferred tax assets at December 31,
1998 and 1997. A decrease of $2,399,000 in 1997, primarily due to utilization of
net operating loss  carryforwards was recorded in 1997. The valuation  allowance
for deferred tax assets as of December  31, 1996 was $2,399,000. The valuation

                                      A-24
<PAGE>
                 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)



allowance  at December  31,  1996 was a result of  uncertainties  regarding  the
Company's  use  of  the  net  operating  loss   carryforwards   and  tax  credit
carryforwards  which  could have  become  limited in the event that the  Company
experienced a greater than 50% stock ownership change in a three-year period (as
defined in the Internal Revenue Service regulations).

     In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some  portion or all of the deferred tax
assets will not be realized.  The ultimate realization of deferred tax assets is
dependent  upon the  generation of future  taxable  income during the periods in
which those temporary  differences become deductible.  Management  considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment.

     Based  upon the level of  historical  taxable  income and  projections  for
future  taxable   income  over  the  periods  which  the  deductible   temporary
differences reverse,  management believes it is more likely than not the Company
will realize the benefits of these deductible differences at December 31, 1998.

                                            
M. RELATED PARTY TRANSACTIONS

     See Note C for additional related party transactions  involving investments
in affiliates.

O. SEGMENT REPORTING

     The  Company  has  two  reportable   segments:   Medical,   which  includes
lithotripsy,   prostatherapy  and  cardiac   rehabilitation  and  Manufacturing.
Lithotripsy and prostatherapy  provides services related to the operation of the
lithotripters and prostatherapy units, including scheduling, staffing, training,
quality  assurance,  maintenance,  regulatory  compliance and  contracting  with
payors,  hospitals  and surgery  centers;  and cardiac  rehabilitation  provides
non-medical  management  services  for several  cardiac  rehabilitation  centers
pursuant to agreements with physicians, clinics and hospitals. The manufacturing
segment provides manufacturing services and installation, upgrade, refurbishment
and repair of major medical equipment for mobile medical service providers.

     The accounting  policies of the segments are the same as those described in
Note B, the summary of significant  accounting  policies.  The Company  measures
performance  based on the  pretax  income or loss from its  operating  segments,
which do not include unallocated  corporate general and administrative  expenses
and corporate interest revenue and expense.

     The Company's  segments are divisions that offer  different  services,  and
require  different  technology  and  marketing  approaches.  The majority of the
lithotripsy segment is comprised of acquired entities,  as is  the manufacturing
segment. Prostatherapy and cardiac segments were developed internally.


                                      A-25
<PAGE>
                 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

 


     All  of  the  Company's  revenues  are  earned  in the  United  States  and
long-lived  assets are located in the United  States.  The Company does not have
any major customers who account for more than 10% of its revenues.

<TABLE>
<S>                 <C>                <C>                 <C>           <C>                   <C>            <C>

(Amounts in              1998              1998              1997              1997              1996             1996
thousands)
                       Medical         Manufacturing       Medical        Manufacturing        Medical        Manufacturing
                       -------         -------------       -------        -------------        -------        -------------
Revenue from                         
external
customers              $93,570              $11,066        $93,621               $2,358        $72,404                $-0-

Intersegment
revenues                     0                  255              0                  185              0                   0

Interest
revenue                    511                    0            560                    0            374                   0

Interest
expense                    235                   38            314                    0            539                   0

Depreciation
and
amortization             10,359                   72          9,868                   18          8,274                   0

Segment profit           33,189                1,753         31,666                  403         23,209                   0

Segment assets          235,248                4,892        219,166                1,152        196,731                   0

Investment in
equity method
investees                10,605                    0         11,453                    0          7,377                   0

Capital 
Expenditures              3,557                1,580          4,473                   23          2,507                   0
</TABLE>

     The following is a reconciliation of revenues per above to the consolidated
revenues per the consolidated statements of income:
 
 

(Amounts in thousands)                       1998         1997         1996
----------------------                       ----         ----         ----
Total revenues for reportable segments     $104,891      $96,164     $72,404
Elimination of intersegment revenues           (255)        (185)        --
                                           --------      -------     ------- 
Total consolidated revenues                $104,636      $95,979     $72,404 
                                           ========      =======     ======= 

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


(Amounts in thousands)                           1998          1997       1996
----------------------                           ----          ----       ----
Total segment profit for reportable segments   $34,942       $32,069    $23,209
Unallocated corporate expenses:                
  General and administrative                   ( 3,035)      ( 4,070)   ( 3,413)
  Net interest expense                         ( 7,292)      ( 6,983)   ( 5,354)
  Loan fees and stock offering costs           ( 4,978)      (   360)   ( 3,535)
  Nonrecurring development and other costs     ( 1,617)          --         --
  Other, net                                       151       (     5)        50
                                               --------      --------   --------
Unallocated corporate expenses total           (16,771)      (11,418)   (12,252)
                                               -------       -------    ------- 
Income before income taxes                     $18,171       $20,651    $10,957 
                                               =======       =======    ======= 

     The  following  is a  reconciliation  of  segment  assets  per above to the
consolidated assets per the consolidated balance sheets:


(Amounts in thousands)                          1998          1997        1996
----------------------                          ----          ----        ----
Total segment assets                          $240,140     $220,318    $196,731
Unallocated corporate assets                       979        5,508       5,803
                                              --------     --------    --------
Consolidated total                            $241,119     $225,826    $202,534
                                              ========     ========    ========

     The  reconciliation  of the other significant items to the amounts reported
on the consolidated financial statements is as follows:
 
<TABLE>
<S>                   <C>      <C>      <C>        <C>       <C>        <C>          <C>       <C>       <C>

(Amounts in           1998     1998     1998       1997      1997       1997         1996      1996      1996
                      ----     ----     ----       ----      ----       ----         ----      ----      ----
thousands)
                      Segment  Corp-    Consoli-   Segment   Corp-      Consoli-     Segment   Corp-     Consoli-
                       Totals  orate    dated      Totals    orate      dated        Totals    orate     dated
                                        Totals                          Totals                           Totals
                                        ------                          ------                           ------
  Interest revenue       $511     $906    $1,417      $560     $180         $740        $374      $85      $  459

  Interest expense        273    8,196     8,469       314    7,163        7,477         539    5,438       5,977

  Depreciation         
   and amortization    10,431       45    10,476     9,886       25        9,911       8,274      148       8,422

  
  Capital 
  Expenditures          5,137       76     5,213     4,496       50        4,546       2,507       19       2,526
    

</TABLE>

     The  adjustments in 1998,  1997 and 1996 for interest  revenue and expense,
depreciation  and  amortization  and  expenditures  for segment assets represent
amounts recorded by the operations of the Company's corporate  functions,  which
have not been allocated to the segments.

P. CONDENSED FINANCIAL INFORMATION REGARDING GUARANTOR SUBSIDIARIES

     Condensed   consolidating  financial  information  regarding  the  Company,
Guarantor  Subsidiaries and  non-guarantor  subsidiaries as of December 31, 1998
and 1997 and for each of the years in the  three-year  period ended December 31,
1998  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 G.




                                      A-26
<PAGE>
                 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                   Condensed Consolidating Statement of Income


                                                    Year Ended December 31, 1998
<TABLE>
<S>                                     <C>            <C>            <C>            <C>            <C>  
($ in thousands)
                                        Prime Medical   Guarantor     Non-Guarantor  Eliminating    Consolidated
                                        Services Inc.  Subsidiaries   Subsidiaries     Entries         Total 
                                        -------------  ------------   -------------   ---------       -------



Fee revenue:
  Lithotripsy:
     Fee revenues                         $      --      $22,487       $  61,392     $    --        $  83,879
     Management fees                             --        3,126           2,158          --            5,284
     Equity income                            30,952      20,077             --       (48,139)          2,890
  Manufacturing                                  --          --           11,066          --           11,066
  Prostatherapy                                  --          --            1,207          --            1,207
  Cardiac                                        --          310             --           --              310
                                          ----------     -------       ---------      -------       ---------   
                                              30,952      46,000          75,823      (48,139)        104,636
Costs and expenses:
Cost of services and general and
   administrative expenses:
     Lithotripsy                                 --        3,977          18,697          --           22,726
     Manufacturing                               --          --            9,204          --            9,204
     Prostatherapy                               --          --              803          --              803
     Cardiac                                     --          249            --            --              249
     Corporate                                   203       4,723            --            --            4,926
     Nonrecurring development 
          and other costs                      1,617         --             --            --            1,617
                                          ----------     -------       ---------      -------       ---------
                                               1,820       8,949          28,704          --           39,473
Depreciation and amortization                      7       5,221           5,248          --           10,476
                                          ----------     -------       ---------      -------       ---------
Operating income                              29,125      31,830          41,871      (48,139)         54,687
                                          ----------     -------       ---------      -------       ---------
Other income (deductions):
Interest income                                  735         305             377          --            1,417
Interest expense                              (8,234)        (44)           (191)         --           (8,469)
Financing costs                               (4,978)        --             --            --           (4,978)
Other, net                                       (39)        331              12          --              304
                                          ----------     -------       ---------      -------       ---------
          Total other income
             (deductions)                    (12,516)        592             198          --          (11,726)

Income before provision for income
   taxes and minority interest                16,609      32,422          42,069      (48,139)         42,961
Minority interest in consolidated
   income                                        --          --             --         24,790          24,790
Provision for income taxes                     5,815       1,470              92          --            7,377
                                          ----------     -------       ---------      -------       ---------
          Net income                      $   10,794     $30,952       $  41,977     $(72,929)      $  10,794 
                                          ==========     =======       =========     ========       ========= 

</TABLE>

                                      A-27
<PAGE>


                                                          

                 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                   Condensed Consolidating Statement of Income

                                                    Year Ended December 31, 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                       $    --        $   20,863       $63,674      $     --       $   84,537
     Management fees                         --             3,978         2,259            --            6,237
     Equity income                         27,386          18,587           --         (43,634)          2,339
                                           27,386          43,428        65,933        (43,634)         93,113

  Manufacturing                               --              --          2,358            --            2,358
  Cardiac                                     --              479           --             --              479
  Other                                       --               29           --             --               29
                                          ----------      -------       --------       -------       ---------
          Total fee revenue                27,386          43,936        68,291        (43,634)         95,979

Costs of services and general and
     administrative expenses
       Lithotripsy                            --            4,646        20,735            --           25,381
       Manufacturing                          --              --          1,743            --            1,743
       Cardiac                                --              310           --             --              310
       Other                                  --              168           --             --              168
       Corporate                              567           5,116           --             --            5,683
                                          ----------      -------       --------       -------       ---------
                                              567          10,240        22,478            --           33,285
   Depreciation and amortization                7           5,157         4,747            --            9,911
                                          ----------      -------       --------       -------       ---------
          Total operating expenses            574          15,397        27,225            --           43,196
                                          ----------      -------       --------       -------       ---------
Operating income                           26,812          28,539        41,066        (43,634)         52,783
                                          ----------      -------       --------       -------       ---------    
Other income (deductions):
    Interest and dividends                    --              309           431            --              740
    Interest expense                       (7,160)            (52)         (265)           --           (7,477)
    Loan fees and stock offering costs       (360)            --             --            --             (360)
    Other, net                                --             (128)          134            --                6
                                          ----------      -------       --------       -------       --------- 
                                           (7,520)            129           300            --           (7,091)
Income before provision for income
   taxes and minority interest             19,292          28,668        41,366        (43,634)         45,692
Minority interest in consolidated
   income                                     --              --            --          25,041          25,041
Provision for income taxes                  4,436           1,282            77            --            5,795
                                          -------         -------       --------       -------       ---------
          Net income                    $  14,856      $   27,386     $  41,289      $ (68,675)     $   14,856
                                        =========      ==========     =========      =========      ==========
</TABLE>


                                      A-28
<PAGE>
                 PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
                   Condensed Consolidating Statement of Income


                                                    Year Ended December 31, 1996

<TABLE>
<S>                                     <C>            <C>            <C>            <C>            <C>  
($ in thousands)
                                        Prime Medical   Guarantor     Non-Guarantor  Eliminating    Consolidated
                                        Services, Inc. Subsidiaries    Subsidiaries    Entries         Total
                                        -------------- -------------    ------------    -------         -----



Fee revenue:
  Lithotripsy:
     Fee revenues                       $     --       $   18,688     $  46,450      $      --      $   65,138
     Management fees                          --            3,180         1,518             --           4,698
     Equity income                         19,382          10,701           --          (28,317)         1,766
                                          -------         -------       --------       -------       ---------
                                           19,382          32,569        47,968         (28,317)        71,602
                                                                                                           
  Cardiac                                     --              802           --              --             802
                                          -------         -------       --------       -------       ---------
          Total fee revenue                19,382          33,371        47,968         (28,317)        72,404

Costs of services and general and
    administrative expenses
     Lithotripsy                              --            5,093        14,829             --          19,922
     Cardiac                                  --              632           --              --             632
     Corporate                                257           3,988           --              --           4,245
                                          -------         -------       --------       -------       ---------
                                              257           9,713        14,829             --          24,799

Depreciation and amortization                 127           3,537         4,758             --           8,422
                                          -------         -------       --------       -------       ---------
                 Total operating expenses     384          13,250        19,587             --          33,221
                                          -------         -------       --------       -------       ---------
Operating income                           18,998          20,121        28,381         (28,317)        39,183
                                          -------         -------       --------       -------       ---------
Other income (deductions):

   Interest and dividends                     --              202           257             --             459
   Interest expense                        (5,431)           (299)         (247)            --          (5,977)
   Loan fees and stock offering costs      (3,535)            --            --              --          (3,535)
   Other, net                                 --              207           163             --             370
                                          -------         -------       --------       -------       ---------
                                           (8,966)            110           173             --          (8,683)
 
Income before provision for income
   taxes and minority interest             10,032          20,231        28,554         (28,317)        30,500
Minority interest in consolidated
   income                                     --              --            --           19,543         19,543
Provision for income taxes                  1,071             849            76             --           1,996
                                          -------         -------       --------       -------       ---------
          Net income                    $   8,961      $   19,382     $  28,478      $  (47,860)    $    8,961
                                        =========      ==========     =========      ==========     ==========

</TABLE>


                                      A-29

<PAGE>





                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATING BALANCE SHEET



($ in thousands)                                               December 31, 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                                $   15,798     $   7,585      $  16,763      $     --       $   40,146
    Accounts receivable, net                   --          4,240         18,081            --           22,321
    Other receivables                          --          2,228            --             --            2,228
    Deferred income taxes                    1,603           727            --             --            2,330
    Prepaid expenses and 
       other current assets                    --            456          2,318            --            2,774
                                         ---------       -------       --------       --------       ---------
        Total current assets                17,401        15,236         37,162            --           69,799
                                         ---------       -------       --------       --------       ---------
Property and equipment:
    Equipment, furniture and fixtures          --          5,301         29,184            --           34,485
    Building and leasehold improvements        --            491          1,582            --            2,073
                                         ---------       -------       --------       --------       ---------
                                               --          5,792         30,766            --           36,558

Less accumulated depreciation 
  and amortization                             --         (4,485)       (13,986)           --          (18,471)
                                         ---------       -------       --------       --------       ---------
    Property and equipment, net                --          1,307         16,780            --           18,087
                                         ---------       -------       --------       --------       ---------
Investment in subsidiaries and other       178,611        24,003            --        (191,123)         11,491
investments
Goodwill, at cost, net of amortization         --        140,863            --             --          140,863
Other noncurrent assets                        105           488            286            --              879
                                         ---------       -------       --------       --------       ---------
    Total Assets                        $  196,117     $ 181,897      $  54,228      $(191,123)     $  241,119
                                        ==========     =========      =========      =========      ==========
                                         

LIABILITIES:

Current Liabilities:
    Current portion of long-term debt   $      --      $     --       $     890      $      --      $      890
    Accounts payable                         1,501         2,175          2,532             --           6,208
    Accrued expenses                         3,563         1,929         15,510             --          21,002
                                         ---------       -------       --------       --------       ---------
Total current liabilities                    5,064         4,104         18,932             --          28,100

Long-term debt, net of current portion     100,000           162            825             --         100,987
Deferred income taxes                        1,303         3,486            --              --           4,789
                                         ---------       -------       --------       --------       ---------
  Total liabilities                        106,367         7,752         19,757             --         133,876

Minority interest                              --            --             --           17,493         17,493

STOCKHOLDERS' EQUITY:

Common stock                                   194           --             --              --             194
Capital in excess of par value              87,380           --             --              --          87,380
Accumulated earnings                        18,615           --             --              --          18,615
Treasury stock                             (16,439)          --             --              --         (16,439)
Subsidiary net equity                          --        178,645         34,471        (213,116)           -- 
                                         ---------       -------       --------       --------       ---------
  Total stockholders' equity                89,750       178,645         34,471        (213,116)        89,750
                                         ---------       -------       --------       --------       ---------
  Total Liabilities and
     stockholders' equity               $  196,117     $ 186,397      $  54,228      $ (195,623)    $  241,119
                                        ==========     =========      =========      ==========     ==========

</TABLE>



                                                                A-31
<PAGE>


                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATING BALANCE SHEET

($ in thousands)                                               December 31, 1997
<TABLE>
<S>                                     <C>            <C>            <C>            <C>            <C>  

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





ASSETS:

Current Assets:
    Cash                                $       18     $     6,260    $  17,492      $     --       $   23,770
    Accounts receivable, net                   --            4,564       14,823            --           19,387
    Other receivables                          291             578          234            --            1,103
    Deferred income taxes                      779             727          --             --            1,506
    Prepaid expenses and 
      other current assets                      24           1,098          654            --            1,776
                                         ---------         -------      -------       --------       ---------
        Total current assets                 1,112          13,227       33,203            --           47,542
                                         ---------         -------      -------       --------       ---------
Property and equipment:
    Equipment, furniture and fixtures          --            5,970       26,703            --           32,673
    Leasehold improvements                     --              515           16            --              531
                                         ---------         -------      -------       --------       ---------
                                               --            6,485       26,719            --           33,204

Less accumulated depreciation 
     and amortization                          --           (4,646)      (8,851)           --          (13,497)
                                         ---------         -------      -------       --------       ---------
    Property and equipment, net                --            1,839       17,868            --           19,707
                                         ---------         -------      -------       --------       ---------
Investment in subsidiaries and other       175,082          24,376          --        (187,153)         12,305
investments
Goodwill, at cost, net of amortization         --          143,790           33            --          143,823
Other noncurrent assets                        344           1,721          384            --            2,449
                                         ---------         -------      -------       --------       ---------
    Total Assets                        $  176,538     $   184,953    $  51,488      $(187,153)     $  225,826
                                        ==========     ===========    =========      =========      ==========


LIABILITIES:

Current Liabilities:
    Current portion of long-term debt   $    9,800     $         6    $   1,332      $     --       $   11,138
    Accounts payable                           --            3,439        1,947            --            5,386
    Accrued expenses                         3,367           2,563       14,929            --           20,85
                                         ---------         -------      -------       --------       ---------
Total current liabilities                   13,167           6,008       18,208            --           37,383
                                         ---------         -------      -------       --------       ---------
Long-term debt, net of current portion      69,200             161        1,837            --           71,198
Deferred income taxes                        2,107           3,702           --            --            5,809
                                         ---------         -------      -------       --------       ---------
  Total liabilities                         84,474           9,871       20,045            --          114,390
                                         ---------         -------      -------       --------       ---------
Minority interest                              --              --           --          19,372          19,372


STOCKHOLDERS' EQUITY:

Common stock                                   193             --           --             --              193
Capital in excess of par value              84,050             --           --             --           84,050
Accumulated earnings                         7,821             --           --             --            7,821
Subsidiary net equity                          --          175,082       31,443       (206,525)            -- 
                                         ---------         -------      -------       --------       ---------
  Total stockholders' equity                92,064         175,082       31,443       (206,525)         92,064
                                         ---------         -------      -------       --------       ---------
  Total Liabilities and 
     stockholders' equity               $  176,538     $   184,953    $  51,488     $ (187,153)     $  225,826
                                        ==========     ===========    =========     ==========      ==========


</TABLE>



                                                                A-32
<PAGE>








                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS








($ in thousands)                                   Year Ended December 31, 1998
<TABLE>
<S>                                     <C>            <C>            <C>            <C>            <C>  
                                        Prime Medical   Guarantor     Non-Guarantor  Eliminating    Consolidated
                                        Services, Inc. Subsidiaries    Subsidiaries    Entries          Total
                                        -------------- ------------    ------------    -------          -----


          CASH FLOWS FROM OPERATING
                 ACTIVITIES:

     Net cash provided by (used in)
        operating activities            $ (10,215)     $   9,608      $  46,158      $      --      $   45,551
                                                          
CASH FLOWS FROM INVESTING
    ACTIVITIES:
Purchases of equipment and leasehold                                                             
   improvements                               --          (2,000)        (3,213)            --          (5,213)
Proceeds from sales of equipment              --             179             45             --             224
Distributions from subsidiaries            26,228         16,665            --          (42,893)           --
Investments                                   408          2,940            --              --           2,532
Other                                          22            166            127             --             315
                                         ---------       -------        -------        --------       ---------
     Net cash provided by (used in)
        investing activities               25,842         17,950         (3,041)        (42,893)        (2,142)
                                         ---------       -------        -------        --------       ---------
CASH FLOWS FROM FINANCING
   ACTIVITIES:
Payments on notes payable exclusive of                                                           
       interest                           (79,000)           (5)         (1,479)            --         (80,484)
Borrowings on notes payable               100,000           --               25             --         100,025
Distributions to minority interest            --            --              --          (25,799)       (25,799)
Debt issuance costs                        (4,417)          --              --              --          (4,417)
Contributions by minority interest            --            --               72             --              72
Exercise of stock options                       9           --              --              --               9
Distributions to equity owners                --        (26,228)        (42,464)         68,692            --
                                         ---------         -------      -------       --------       ---------
     Net cash provided by (used in)
        financing activities                  153       (26,233)        (43,846)         42,893        (27,033)
                                         ---------       -------        -------        --------       ---------
NET INCREASE (DECREASE) IN CASH                                                                  
   AND CASH EQUIVALENTS                    15,780         1,325            (729)            --          16,376

Cash and cash equivalents, beginning                                                             
   of period                                   18         6,260          17,492             --          23,770
                                         ---------       -------        -------        --------       ---------
Cash and cash equivalents, end of                                                                
   period                               $  15,798      $  7,585       $  16,763      $      --      $   40,146
                                        =========      ========       =========      ==========     ==========

</TABLE>


                                                                A-33
<PAGE>

                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS


($ in thousands)                                    Year Ended December 31, 1997
<TABLE>
<S>                                     <C>            <C>            <C>            <C>            <C>  
                                        Prime Medical   Guarantor     Non-Guarantor  Eliminating    Consolidated
                                        Services, Inc. Subsidiaries   Subsidiaries     Entries          Total
                                        ---------------------------   ------------     -------          -----


          CASH FLOWS FROM OPERATING
                 ACTIVITIES:

     Net cash provided by (used in)
        operating activities            $    (9,441)   $  14,879      $  46,255      $      --      $   51,693
                                                                      
CASH FLOWS FROM INVESTING
    ACTIVITIES:
Purchase of lithotripter entities               --       (20,217)           --              --         (20,217)
Purchases of equipment and leasehold                                                             
   improvements                                 --        (1,516)        (3,030)            --          (4,546)
Proceeds from sales of equipment                --            30            --              --              30
Distributions from subsidiaries               6,865       16,667            --          (23,532)           --
Investments                                     --         1,690            --              --           1,690
Other                                           --            94            --              --              94
     Net cash provided by (used in)
        investing activities                  6,885       (3,252)        (3,030)        (23,532)       (22,949)

CASH FLOWS FROM FINANCING
   ACTIVITIES:
Payments on notes payable exclusive of                                                           
       interest                             (47,750)      (1,100)        (1,478)            --         (50,328)
Borrowings on notes payable                  50,000          --           1,201             --          51,201
Distributions to minority interest              --           --             --          (28,667)       (28,667)
Contributions by minority interest              --           --           2,381             --           2,381
Exercise of stock options                       343          --              --             --             343
Distributions to equity owners                  --        (6,865)       (45,334)         52,199            --

     Net cash provided by (used in)
        financing activities                  2,593       (7,965)       (43,230)         23,532        (25,070)

NET INCREASE (DECREASE) IN CASH                                                                  
   AND CASH EQUIVALENTS                          17        3,662             (5)            --           3,674

Cash and cash equivalents, beginning                                                             
   of period                                      1        2,598         17,497             --          20,096

Cash and cash equivalents, end of                                                                
   period                               $        18    $   6,260      $  17,492      $      --      $   23,770
                                        ===========    =========      =========      ==========     ==========
</TABLE>


                                                                A-34
<PAGE>


                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS


 


($ in thousands)

                                                    Year Ended December 31, 1996
<TABLE>
<S>                                     <C>            <C>            <C>            <C>            <C>  
                                        Prime Medical   Guarantor     Non-Guarantor  Eliminating    Consolidated
                                        Services, Inc. Subsidiaries   Subsidiaries     Entries         Total
                                        -------------- ------------   ------------     -------         -----

CASH FLOWS FROM OPERATING
      ACTIVITIES:

     Net cash provided by (used in) 
       operating activities             $   (4,310)    $   7,912      $  40,735      $      --      $   44,337
                                                                   
 CASH FLOWS FROM INVESTING
      ACTIVITIES:
     Purchase of lithotripter entities         --        (66,742)           --              --         (66,742)
     Purchases of equipment and leasehold
      improvements                             --         (1,131)        (1,395)            --          (2,526)
     Deferred payments on lithotripter
       entities                                --         (3,387)           --              --          (3,387)
     Proceeds from sales of equipment          --            --               6             --               6
     Contributions to subsidiaries         (57,510)          --             --           57,510            --
     Distributions from subsidiaries           --          7,180            --           (7,180)           --
     Investments                               --          1,257            --              --           1,257
     Other                                     --           (378)           --              --            (378)
     Net cash provided by (used in)
       investing activities                (57,510)      (63,201)        (1,389)         50,330        (71,770)

CASH FLOWS FROM FINANCING
ACTIVITIES:
   Payments on notes payable exclusive
         of interest                       (12,300)       (1,515)        (1,536)            --         (15,351)
   Borrowings on notes payable              74,000           --             --              --          74,000
   Distributions to minority interest          --            --             --          (13,440)       (13,440)
   Contributions from parent                   --         57,510            --          (57,510)           --
   Debt issuance costs                      (2,735)          --             --              --          (2,735)
   Exercise of stock options                   363           --             --              --             363
   Distributions to equity owners              --            --         (20,620)         20,620            --
     Net cash provided by (used in)
       financing activities                 59,328        55,995        (22,156)        (50,330)        42,837

NET INCREASE (DECREASE) IN CASH                                                                  
 AND CASH EQUIVALENTS                       (2,492)          706         17,190             --          15,404
Cash and cash equivalents, beginning                                                             
   of period                                 2,493         1,892            307             --           4,692
Cash and cash equivalents, end of                                                                
   period                               $        1     $   2,598      $  17,497      $      --      $   20,096
                                        ==========     =========      =========      =========      ==========

</TABLE>

                                                                A-35
<PAGE>