_______________________________________________________________________________

                                  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, 1996

            [ ] 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 20, 1997: $216,678,000

     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 20, 1997 
     -------------------                                --------------
Common Stock,  $.01 par value                             19,260,267

                       DOCUMENTS INCORPORATED BY REFERENCE

     Selected  portions of the  Registrant's  definitive  proxy material for the
1997 annual meeting of shareholders  are incorporated by reference into Part III
of the Form 10-K.

                                        
<PAGE>



                          PRIME MEDICAL SERVICES, INC.

                           ANNUAL REPORT ON FORM 10-K

                      FOR THE YEAR ENDED DECEMBER 31, 1996


                                     PART I

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

     Prime  Medical  Services,  Inc.,  a Delaware  corporation  ("Prime"  or the
"Company"), through its direct and indirect wholly-owned subsidiaries,  provides
lithotripsy services to hospitals and provides  non-medical  management services
to cardiac rehabilitation centers.

     The Company's  predecessor  corporation  was  organized in April 1972.  The
Company  maintains  its  principal  executive  office at 1301  Capital  of Texas
Highway, Austin, Texas 78746, and its telephone number is (512) 328-2892.

     Unless the context indicates  otherwise,  "Prime" or the "Company" includes
Prime and all of the other  direct and  indirect  wholly-owned  subsidiaries  of
Prime on a consolidated basis.

Lithotripsy Operations
----------------------

     The  Company  provides  lithotripsy  services  through  seven  wholly-owned
subsidiaries:  Prime Lithotripsy  Services,  Inc. ("Prime  Lithotripsy"),  Prime
Lithotripter Operations, Inc. ("Prime Lithotripter"), Ohio Litho, Inc. ("Ohio"),
R. R. Litho,  Inc. ("R. R. Litho"),  Texas Litho,  Inc.  ("Texas"),  Sun Medical
Technologies, Inc. ("Sun") and Lithotripters, Inc. 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.  Lithotripsy is the only
approved   alternative  to  surgery  for  kidney  stones.   For  these  reasons,
lithotripsy is now the preferred treatment for kidney stones and is suitable for
the treatment of the overwhelming majority of the patients with kidney stones.

     As of March 15,  1997,  the Company  had an economic  interest in 49 mobile
lithotripters and 6 fixed site lithotripters,  all but two of which are operated
by the Company.  The  Company's  lithotripters  serve  hospitals and health care
facilities in 32 states.  The Company provides  non-medical  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,  while  medical  care is  rendered by
urologists utilizing the lithotripters.

     The Company  contracts  for its  lithotripsy  services  with  hospitals and
surgery  centers for utilization by urologists  practicing at these  facilities.
The  Company  markets  to  such  facilities  by  providing  well-maintained  and
conveniently  scheduled  equipment  for the use of the  facility's  doctors  and
patients and by providing a full range of  administrative  and support  services
that enable the facility to provide higher quality and more efficient care.

                                        1

<PAGE>



     The Company's service agreements, which generally have terms of one to five
years,  provide  for the three  basic  types of billing  arrangements  described
below.  In all instances,  urologists who perform  lithotripsy  procedures  bill
separately for their professional fees.

     Hospital Billing Contracts - Under a hospital billing contract, the Company
bills and collects from the hospital or surgery center for lithotripsy  services
provided by the Company to patients.  The rates charged under these arrangements
may vary depending upon the number of procedures  performed in a specific period
or category of  patient.  The  hospital  or surgery  center is  responsible  for
billing and collecting from the patient or third-party payor directly.

     True-up  Contracts  - Under a  true-up  contract,  the  Company  bills  and
collects a  negotiated  fee from the hospital or surgery  center,  which is then
retrospectively  reviewed  and adjusted  based on the  payments  received by the
hospital or surgery  center for the  corresponding  treatments.  The hospital or
surgery  center is responsible  for billing and  collecting  from the patient or
third-party payor directly, which forms the basis for any true-up.

     Direct  Billing  Contracts - Under a direct billing  contract,  the Company
bills the  patient or the  patient's  third-party  payor a combined  fee,  which
includes all aspects of the procedure,  excluding the treating  urologist's fee.
The  Company  then pays the  hospital  or  surgery  center a  percentage  of the
collected amount for its services.

Diagnostic Imaging Services
---------------------------

     As of December 31, 1994, the Company had terminated its  involvement in its
diagnostic operations.  Prior to that, Prime Diagnostic Services, Inc. and Prime
Diagnostic  Corp.  of Florida,  two  wholly-owned  subsidiaries  of the Company,
provided non-medical management services to diagnostic imaging centers.

Prime Cardiac Rehabilitation Services, Inc.
-------------------------------------------

     Prime  Cardiac   Rehabilitation   Services,   Inc.  ("Prime  Cardiac"),   a
wholly-owned subsidiary of the Company, provides non-medical management services
for six cardiac rehabilitation centers,  pursuant to agreements with physicians,
clinics and  hospitals  ("Medical  Providers")  for  initial  terms of up to ten
years. 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 2% of the
Company's total revenues for the year ended December 31, 1996.

Acquisitions/Divestitures
-------------------------

     Effective  May 1, 1996,  the Company  acquired  Lithotripters,  Inc.  which
operates  31  lithotripters  in 19 states  through a  network  of 21  affiliated
limited partnerships. Lithotripters, Inc. has an economic interest of 20% to 58%
in each of these  partnerships.  Due to the  significant  control  maintained by
Lithotripters,  Inc. as provided in the  partnership  agreements,  revenues  and
expenses  for  the  partnerships  are  consolidated  and  a  minority   interest
equivalent to the limited partners'  aggregate  ownership  interest is recorded.
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.

                                        2

<PAGE>





     Effective  October 1, 1995,  the Company  acquired  all of the  outstanding
stock of Sun  Medical  Technologies,  Inc.  which  operates 8  lithotripters  in
California,  Arizona,  Montana, New Mexico, Washington and Wyoming. The purchase
price of  $16,150,000  consisted  of cash paid at closing  equal to  $9,438,000,
seven notes  payable in three years with  original  principal  amounts  totaling
$4,025,000, and $2,687,000 cash paid in January, 1996. Additionally, the Company
issued warrants to purchase  200,000 shares of the Company's  common stock at an
exercise  price  of  $5.99.  The  notes  included  provisions  that  permit  the
noteholders to convert a portion or all of the unpaid principal balance into the
common  stock of the Company at $5.99 per share at each payment  date.  In 1996,
all of the warrants were exercised and the noteholders converted the outstanding
balances of their notes into the Company's stock.

     Effective July 1, 1995, the Company acquired a 70% interest in Kidney Stone
of South Florida,  L.L.C.  which operates a fixed site  lithotripter in the Fort
Lauderdale, Florida area. The purchase price for this interest was $3,885,000 in
cash and a promissory note with a principal amount of $1,665,000. The promissory
note  included a provision  that  permits the  noteholder  to convert all of the
unpaid  principal  balance  into common  stock of the  Company at the  quarterly
payment dates. The noteholder converted the outstanding balance of the note into
the Company's stock in 1996.

     Effective June 1, 1995,  the Company  acquired a 32.5% interest in Southern
California Stone Center, L.L.C., which operates a fixed-site  lithotripter and a
mobile  lithotripter  in the Los  Angeles,  California  area.  The Company  paid
$1,569,000 in cash for this interest.

     Effective  December 31, 1994,  the Company  sold  substantially  all of its
assets  located at an imaging  center in Rancho  Cucamonga,  California  for two
promissory notes with principal  amounts totaling  $1,155,000 and the assumption
of certain contractual obligations.

     Effective  December 30, 1994, the Company sold all of its assets located at
an imaging center in Hemet, California for $260,000 in cash.

     Effective  December 1, 1994, the Company  purchased all of the common stock
of Texas Litho,  Inc., Ohio Litho,  Inc. and R. R. Litho, Inc. from Maxum Health
Corp.  Texas  Litho,  Inc.  is the sole  managing  general  partner  and owns an
approximate 20% interest in Texas ESWL/Laser Lithotripter, Ltd. which operates a
mobile  lithotripter in Texas,  Arkansas and Oklahoma.  Ohio Litho,  Inc. is the
sole  managing  general  partner and owns an  approximate  21%  interest in Ohio
Mobile  Lithotripter,  Ltd. which operates a mobile  lithotripter in Ohio. R. R.
Litho,  Inc. is the sole managing general partner of and owns an approximate 20%
interest in Arklatx Mobile  Lithotripter  Limited  Partnership  which operates a
mobile  lithotripter in Louisiana.  The purchase price paid for the common stock
was $5,007,000 in cash.

     On August 31, 1994,  Shasta  Diagnostic  Center J.V.,  in which the Company
owned a 50% interest,  sold substantially all of the assets of Shasta Diagnostic
Center  located  in  Redding,  California.  The sales  price for the  assets was
$450,000 in cash, a promissory note in the principal amount of $450,000, and the
assumption of certain specified liabilities.



                                        3

<PAGE>

     Effective August 15, 1994, the Company sold substantially all of the assets
of Tower Diagnostic  Center located in Tampa,  Florida.  The sales price for the
assets was  $2,350,000  in cash, a promissory  note in the  principal  amount of
$500,000 and the assumption of certain specified liabilities.

     Effective  August 1, 1994, the Company  acquired  substantially  all of the
assets of Alabama Lithotripsy Joint Venture, an Alabama general partnership. The
partnership  operated  a mobile  lithotripter  in Alabama  which it leased  from
Baptist  Medical  Center-Montclair.   In  a  related  transaction,  the  Company
purchased the  lithotripter  for a promissory  note in the  principal  amount of
$316,000.  The purchase price for the assets of the joint venture was $2,863,000
in cash,  a  promissory  note in the  principal  amount of  $2,304,000,  a stock
purchase  warrant  covering  725,000  shares  of  common  stock  of the  Company
exercisable at $3.18 per share and the assumption of certain  liabilities of the
joint venture. In 1996, the warrants were exercised and the note was paid off.

     In July 1994, the Company  purchased all of the outstanding  capital stock
of Alabama Renal Stone Institute, Inc., an Alabama corporation, which operates a
fixed site lithotripter  located in Birmingham,  Alabama. The Company previously
operated  this  lithotripter  through a  license  agreement  which was  canceled
concurrent  with the  acquisition.  The purchase price for this  acquisition was
$3,000,000  cash paid in 1994,  along with an option  issued in 1992 for 210,000
shares of the Company's common stock,  and an additional  payment of $895,000 in
August, 1995.

     Effective  April 1, 1994,  the  Company  acquired a 60%  interest  in Metro
Atlanta Stonebusters, G.P., a Texas general partnership, which operates a mobile
lithotripter operating in the Atlanta, Georgia area. The purchase price for this
acquisition  was $2,040,000 in cash and a promissory  note issued by the Company
in an original principal amount of $3,700,000 bearing interest at 6% per year.

     In January 1994, the Company acquired all of the outstanding  capital stock
of Fazio Consulting, Inc. ("FCI"), a New Jersey corporation, which owns 2 mobile
lithotripters operating in Delaware, Illinois, Indiana, Maryland,  Pennsylvania,
West  Virginia,  and  Wisconsin.  The purchase  price for this  acquisition  was
$950,000 in cash, the repayment of two promissory  notes of FCI in the aggregate
amount of $1,100,000  and an earnout for the next five years based on 50% of the
annual  net  income of FCI.  In March,  1995,  the  Company  paid an  additional
$560,000 for the 1994 earnout.  In January,  1996,  the Company  terminated  the
earnout agreement for $500,000 in cash.

     The Company had a 1%  ownership  interest  in American  Physicians  Service
Group, Inc. ("APS") at December 31, 1995 and 1996 and a 22% interest at December
31, 1994. The Company intends to divest the remaining 1% ownership interest.

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

     All medical procedures  performed in connection with the Company's business
activities are conducted  directly by, or under the supervision of,  urologists,
cardiologists  and other 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.

                                        4

<PAGE>

     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.

Governmental Regulation and Associated Risks
--------------------------------------------

     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.

     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 and
Medicaid 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 Medicare and
Medicaid  programs,  and (ii) the entity may not bill  Medicare,  Medicaid,  any
individual or any third-party  payor for designated  health  services  furnished
pursuant to a prohibited referral.  Entities and physicians committing an act in
violation of Stark II are subject to civil money  penalties and  exclusion  from
the  Medicare  and  Medicaid  programs.  Although  lithotripsy  services are not
specifically  identified  as a  designated  health  service  in  Stark  II,  the
restrictions do apply to inpatient and outpatient hospital services. Lithotripsy
services provided by the Company to Medicare and Medicaid patients are billed by
the contracting hospital in its name and under its Medicare and Medicaid program
provider numbers. Therefore, while the lithotripsy services could be considered 

                                                         5

<PAGE>

inpatient/outpatient   hospital   services  subject  to  the  self-referral
restrictions  contained in Stark II, the Company  believes that the language and
legislative  history of Stark II indicate  that  Congress did not intend for the
restrictions  contained  therein  to  apply to  ownership  of  interests  in the
partnerships and other entities through which the Company's lithotripsy services
are provided.

     It is unclear  whether one of the  enumerated  exceptions to Stark II would
apply if  lithotripsy  services  are  considered  inpatient/outpatient  hospital
services  when billed by a hospital.  A complete  regulatory  interpretation  of
Stark  II will  only  be  available  upon  publication  of the  final  Stark  II
regulations.  Additionally,  it is unclear to what extent these  regulations may
address issues regarding the Company's  relationships with physician  investors.
Publication of these regulations could affect the Company's  relationships  with
physician investors and have a materially adverse effect upon the Company.

     In addition, many states have enacted similar legislation.

     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.


                                        6

<PAGE>



     While the Company  believes it complies in all material  respects  with the
foregoing   laws  and   regulations,   and  all  other   applicable   regulatory
requirements,  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 holding minority interests in partnerships and other entities through
which  the  Company  provides  most of its  lithotripsy  services),  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  health  care  reform  have been made in recent
years,  some of which have included  radical  changes in the health care system.
Health  care  reform  could  result in  material  changes in the  financing  and
regulation of the health care business, and the Company is unable to predict the
effect  of  such  changes  on  its  future  operations.  It  is  uncertain  what
legislation  on health care reform,  if any, will  ultimately be  implemented or
whether other changes in the  administration  or  interpretation of governmental
health care  programs will occur.  There can be no assurance  that future health
care legislation or other changes in the  administration  or  interpretation  of
governmental health care programs will not have a material adverse effect on the
results of operations of the Company.

Equipment
---------

     The  Company  purchases  its  lithotripter  equipment  and  maintenance  is
generally  provided pursuant to service contracts with the manufacturer or local
service companies.  The cost of a new lithotripter is approximately  $1,200,000.
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, 1997,  the Company  employed  approximately  250  full-time
employees and approximately 20 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.

     There are numerous  physicians,  hospitals,  clinics, and other groups that
own, operate and manage cardiac rehabilitation  centers. The primary competitive
factors in this  industry  are price,  professional  services  offered,  and the
equipment located at the facility.






                                        7

<PAGE>



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

     The Company's principal executive office is located in Austin,  Texas in an
office  building  owned by APS.  The Company pays APS  approximately  $4,000 per
month,  which  includes  rental payment for  approximately  2,800 square feet of
office space,  reception and telephone services,  and certain other services and
facilities. The office space lease expires in December, 1997.

     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  leases  approximately  5,700  square  feet of office  space in
Campbell,  California under a five year lease which expires in 1997. The current
monthly lease amount is approximately $10,000.



ITEM 3.           LEGAL PROCEEDINGS.
-------           ------------------
                  NONE.

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
-------           ----------------------------------------------------
                  NONE.

                                     PART II


ITEM 5.           MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER 
                  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, 1996 and 1995 (NASDAQ Symbol "PMSI").


              Year Ended December 31, 1996           High         Low
              ----------------------------           ----         ----
              First Quarter                    $    13.31   $     6.75
              Second Quarter                        20.38        13.06
              Third Quarter                         17.25        11.00
              Fourth Quarter                        13.75        10.00

              Year Ended December 31, 1995           High         Low
              ----------------------------           ----         ----
              First Quarter                    $     4.00   $     3.25
              Second Quarter                         4.94         3.38
              Third Quarter                          4.88         4.06
              Fourth Quarter                         9.13         4.63

                                        8

<PAGE>



     On March 20, 1997, the Company had  approximately  890 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 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.


                                        9

<PAGE>




ITEM 6.  SELECTED FINANCIAL DATA.
-------  ------------------------

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


                                                                Years Ended December 31,
                                          1996           1995           1994           1993           1992
                                       ----------     ----------     ----------     ----------     ----------
<S>                                    <C>            <C>            <C>            <C>            <C>

Revenues:

Lithotripsy                            $   71,602     $   22,153     $   14,843     $    7,309     $    4,291

Imaging and cardiac                           802          1,042          9,925         13,259         15,026
                                       ----------     ----------     ----------     ----------     ----------

Continuing operations                  $   72,404     $   23,195     $   24,768     $   20,568     $   19,317
                                       ==========     ==========     ==========     ==========     ==========


Income:

Net income                             $    8,961     $    7,204     $    4,504     $    2,539     $    1,592
                                       ==========     ==========     ==========     ==========     ==========


Fully diluted earnings per share:

Net income                             $     0.48     $     0.46     $     0.31     $     0.21     $     0.17
                                       ==========     ==========     ==========     ==========     ==========


Dividends per share                       None           None           None           None           None


Total assets                           $  197,753     $   77,627     $   53,861     $   38,678     $   22,349
                                       ==========     ==========     ==========     ==========     ==========

Long-term obligations                  $   70,910     $   22,323     $   12,734     $    2,675     $    3,921
                                       ==========     ==========     ==========     ==========     ==========
</TABLE>

                                                                 10

<PAGE>



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

Year ended December 31, 1996 compared to the year ended December 31, 1995
--------------------------------------------------------------------------

Revenues
---------

     Total revenues increased  $49,209,000 (212%) as compared to the same period
in  1995.  Revenues  from  lithotripter   operations  increased  by  $49,449,000
primarily  due to the  acquisition  of (1) an entity  that  owned or  managed 31
lithotripters  effective  May 1,  1996 (2) an  entity  that  owned or  managed 8
lithotripters  effective  October 1, 1995,  and (3) a 70%  interest in an entity
that operated one  lithotripter,  as of July 1, 1995.  In addition,  the Company
acquired a 32.5%  interest in an entity that operated one  lithotripter  in June
1995.  Revenues from cardiac centers  decreased  $240,000  primarily due to four
discontinued/sold cardiac centers.

Expenses
--------

     Costs and expenses  decreased  from 43% to 34% of revenues,  but  increased
$14,742,000 (147%) in absolute terms, compared to the same period in 1995. Costs
of services associated with lithotripter operations increased $13,943,000 (233%)
in absolute terms and from 27% to 28% of lithotripter  revenues primarily due to
the  acquisitions  discussed  above.  Cost of services  associated  with cardiac
centers decreased $873,000 (58%) primarily due to four discontinued/sold cardiac
centers.  Corporate expenses decreased from 11% to 6% of revenues as the Company
was able to successfully grow without proportionately adding overhead. Corporate
expenses  increased  $1,672,000 (65%) primarily due to the additional  corporate
expenses  associated  with the  acquisition  discussed  above and the management
incentive plans tied to the performance of the Company.

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

     Other deductions increased $8,251,000 primarily due to (1) the write-off of
$2,735,000  in fees paid to lenders to obtain  financing,  and  $800,000 in fees
associated with a proposed stock offering that was canceled in August, 1996, and
(2) interest expense  increased  $4,746,000 due to $74,000,000 in new borrowings
in 1996 primarily for the acquisition of  Lithotripters,  Inc.  effective May 1,
1996.


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

     Minority interest in consolidated  income increased  $19,089,000  primarily
due to the  minority  interest  associated  with  the 21  partnerships  in which
Lithotripters,  Inc. holds a controlling  interest.  The Company acquired all of
the stock of Lithotripters, Inc. effective May 1, 1996.



                                       11

<PAGE>


Year ended December 31, 1995 compared to the year ended December 31, 1994
--------------------------------------------------------------------------

Revenues
--------

     Total revenues decreased in 1995 by $1,573,000 (6%) compared to 1994, as an
increase in revenues  from  lithotripsy  operations  was more than offset by the
Company's exit from the diagnostic  imaging business.  Revenues from lithotripsy
operations  increased by $7,310,000 (49%) primarily due to the acquisition of 10
additional  lithotripter  operations in 1995 ($3,499,000) and the recognition of
revenues  for a full  year  of  operations  from  five  lithotripter  operations
acquired  during 1994  ($3,942,000).  Revenues from cardiac and imaging  centers
declined by $8,883,000  due primarily to the Company's  exit from the diagnostic
imaging business at the end of 1994.

Costs and Expenses
------------------

     Costs and expenses in 1995 declined by $5,220,000  (34%)  compared to 1994,
from 62% to 43% of  revenues.  Costs of  services  associated  with  lithotripsy
operations  decreased  from 29% to 27% of lithotripsy  revenues,  as the Company
recognized   operating   efficiencies   resulting  from  the   acquisition   and
consolidation of additional  lithotripsy  operations.  In absolute terms,  these
costs  increased by  $1,696,000  (40%)  primarily due to the  acquisition  of 10
additional lithotripter operations in 1995 ($1,271,000) and the full year effect
of the five lithotripsy  operations  acquired during 1994 ($542,000),  partially
offset by a decline in costs associated with lithotripsy  operations open during
both years  ($117,000).  Costs of services  from  cardiac  and  imaging  centers
decreased by  $7,075,000  (82%)  primarily  due to the  Company's  exit from the
diagnostic imaging business at the end of 1994.  Corporate expenses increased by
$159,000  (7%) from 10% to 11% of total  revenues  primarily  due to  management
incentive plans tied to the performance of the Company.

Other Income/Deductions
-----------------------

     Other  deductions  decreased  by $342,000.  Interest  and  dividend  income
decreased by $67,000 (31%)  primarily due to less cash  available for investment
due to cash being utilized to acquire lithotripsy  operations.  Interest expense
increased  by  $329,000   (36%)  as  a  result  of  increased  debt  related  to
acquisitions.  Other  income  increased  by $738,000  primarily  due to the gain
recognized on the sale in the open market of stock of APS ($559,000),  which was
being held for investment purposes.

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

     Minority interest in consolidated  income increased  $730,000 primarily due
the minority  interest in a fixed site  lithotripter  that  operated in the Fort
Lauderdale,  Florida area. The Company acquired a 70% interest in this operation
effective July 1, 1995.


                                       12

<PAGE>

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

     The Company's cash was  $20,096,000 and $4,692,000 at December 31, 1996 and
1995, respectively. Cash provided by operations for the years ended December 31,
1996  and 1995 was  $40,034,000  and  $10,898,000,  respectively.  Cash  used in
investing activities for the year ended December 31, 1996 was $70,202,000.  This
was primarily due to  expenditures of $68,561,000  associated with  acquisitions
and  $2,526,000 for the purchase of equipment and leasehold  improvements  to be
used in the Company's  operations  which  expenditures  were partially offset by
$1,257,000  in  distributions  from  investments.  Cash  provided  by  financing
activities  for the year  ended  December  31,  1996 was  $45,572,000  which was
primarily due to $74,000,000 of borrowings  under credit  facilities,  partially
offset by payments in the amount of $15,351,000 on notes payable and payments to
minority interests of $13,440,000.  The Company's line of credit has a borrowing
limit of $40,000,000. At December 31, 1996, $29,750,000 was drawn on the line of
credit.

     The Company  believes that its present cash  position,  together with funds
generated from operations,  will provide  sufficient  resources to meet its cash
requirements for current operations and repay existing debt. The Company intends
to  continue  its  growth  strategy  in the future  and  expects  to  facilitate
additional acquisitions through the issuance of common stock and debt financing.

     The Company  anticipates that capital  expenditures for new and replacement
equipment in 1997 will be approximately  $3,000,000,  the majority of which will
be financed through operating cash flow.

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

     The assets of the  Company  are not  significantly  affected  by  inflation
because, having no manufacturing operations, 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.


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.


                                       13

<PAGE>



                                    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 1997 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, 1997, the executive officers of the Company are as follows:

  Name                        Age         Position
  ----                        ---         --------
Kenneth S. Shifrin             47       Chairman of the Board

Joseph Jenkins, M.D., J.D.     49       President, Chief Executive Officer
and Director

Dan Myers, M.D.                42       Senior Vice President - Development

Michael Madler                 38       Senior Vice President of Operations

Stan Johnson                   43       Vice President

Cheryl L. Williams             45       Chief Financial Officer, 
                                        Vice President-Finance, and Secretary



     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
-----------

     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.


                                       14

<PAGE>



Dr. Jenkins
-----------

     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, the immediate  past-president and currently a director
of the American Lithotripsy Society.

Dr. Myers
---------

     Dr. Myers has been Senior Vice President - Development of the Company since
August 1996. Dr. Myers is a board  certified  urologist and was a Vice President
of Lithotripters, Inc. from January 1990 until it was acquired by the Company in
April 1996.

Mr.  Madler  
----------  

     Mr. Madler has been Senior Vice President - Operations of the Company since
August 1996.  From July 1993 to August  1996,  Mr.  Madler was Vice  President -
Operations  of  the  Company.  Previously  Mr.  Madler  was  Vice  President  of
Operations of American Health Services Corp., a diagnostic imaging company, from
July 1991 to June 1993.  He was employed by the Company from 1985 to 1991,  most
recently as its Vice President - Operations.

Mr. Johnson
-----------

     Mr.  Johnson has been a Vice President of the Company and President of Sun,
a subsidiary of the Company,  since  November  1995.  Mr.  Johnson was the Chief
Financial Officer of Sun from 1990 to 1995.

Mrs. Williams
-------------

     Mrs.  Williams  has  been  Chief  Financial  Officer,  Vice  President  and
Secretary of the Company  since October 1989.  Mrs.  Williams was  Controller of
Fairchild  Aircraft  Corporation  from August 1988 to October 1989. From 1985 to
1988, Mrs. 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 1997 annual meeting
of shareholders, which information is incorporated herein by reference.



                                       15

<PAGE>




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 1997 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 1997 annual meeting
of shareholders, which information is incorporated herein by reference.


                                     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.
                  ------------------------------

     II - Valuation and  Qualifying  Accounts as of December 31, 1996,  1995 and
1994.

     All other schedules are omitted as the required information is presented in
the Consolidated Financial Statements and related notes.

(b)      Reports on Form 8-K.
         -------------------- 

     None.

         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)


                                       16

<PAGE>



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

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

         10.4      Contribution Agreement among Metro Atlanta Stonebusters, 
                   Inc., Prime Lithotripsy Services, Inc. and Metro Atlanta 
                   Stonebusters, G.P. dated April 26, 1994. (6)

         10.5      Partnership Agreement of Metro Atlanta Stonebusters, G.P. (6)

         10.6      Promissory Note of Prime Lithotripsy Services, Inc. dated 
                   April 26, 1994. (6)

         10.7      Stock Purchase and Amendment Agreement dated July 28, 1994 
                   by and among A. Derrill Crowe, Paul R. Butrus, the Company, 
                   the Alabama Renal Stone Institute, Inc., Alabama Kidney 
                   Stone Foundation, Inc., American Physicians Service Group, 
                   Inc. and A. Derrill Crowe and Paul R. Butrus as Trustees of 
                   the A. Derrill Crowe Revocable Trust and the Paul R. Butrus 
                   Trust. (7)

         10.8      Management Agreement dated July 28, 1994 between the Alabama 
                   Renal Stone Institute, Inc. and Alabama Kidney Stone 
                   Foundation, Inc. (7)

         10.9      Asset Purchase Agreement, dated August 30, 1994, between     
                   Prime Lithotripter Operations, Inc. and Alabama Lithotripsy 
                   Joint Venture. (8)

         10.10     Asset Purchase Agreement, dated August 30, 1994, between 
                   Prime Lithotripter Operations, Inc. and Baptist Medical 
                   Center - Montclair. (8)

         10.11     Promissory Note, dated August 30, 1994, issued by Prime 
                   Lithotripter Operations, Inc. to Baptist Medical Center - 
                   Montclair.  (8)

         10.12     Management Agreement, dated August 30, 1994, between Prime
                   Lithotripter Operations, Inc. and Alabama Lithotripsy 
                   Associates, Inc.  (8)

         10.13     Security Agreement dated August 30, 1994, between Prime 
                   Lithotripter Operations, Inc. and Baptist Medical Center - 
                   Montclair.  (8)

         10.14     Asset Purchase Agreement dated August 15, 1994 between 
                   Radiology Associates of Tampa, P.A. and Prime Diagnostic 
                   Corp. of Florida.  (9)

         10.15     Stock Purchase Agreement dated December 19, 1994 between the
                   Company, Maxum Health Corp. And Maxum Health Services Corp.  
                   (10)

                                       17

<PAGE>



         10.16     Asset Purchase Agreement dated December 23, 1994 by and among
                   MedQuest Associates, Inc., Grove Diagnostic Imaging Center, 
                   Inc. and Prime Diagnostic Services, Inc.  (10)

         10.17     Amended and Restated Joint Venture Agreement dated April, 
                   1989, between Prime Diagnostic Imaging Services, Inc. and 
                   The Shasta Diagnostic Imaging Medical Group. (5)

         10.18     Contract of Sale of Business between Shasta Diagnostic 
                   Center, J.V., Shasta Diagnostic Imaging Services, Inc. and 
                   Michael G. Davis dated September 1, 1994.  (11)

         10.19     Promissory Note of Shasta Diagnostic Imaging Services, Inc. 
                   and Michael G. Davis dated September 1, 1994.  (11)

         10.20     Loan Agreement dated November 28, 1994 between Prime Medical
                   Services, Inc., The First National Bank of Boston, 
                   NationsBank of Texas, N.A. and The First National Bank of 
                   Boston, as agent.  (11)

         10.21     First Amendment to Loan Agreement dated August 17, 1995 
                   between Prime Medical Services, Inc. And The First National 
                   of Boston, as agent. (13)

         10.22     Amended and Restated Loan Agreement dated April 26, 1996 
                   between Prime Medical Services, Inc., The First National Bank
                   of Boston, NationsBank of Texas, N.A. and The First National 
                   Bank of Boston, as agent. (15)

         10.23     Promissory Note, dated April 26, 1996 issued by the Company 
                   to the First National Bank of Boston.  (15)

         10.24     Promissory Note, dated April 26, 1996 issued by the Company 
                   to NationsBank of Texas, N.A.  (15)

         10.25     Promissory Note, dated April 26, 1996 issued by the Company 
                   to the First National Bank of Boston.  (15)

         10.26     Promissory Note, dated April 26, 1996 issued by the Company 
                   to NationsBank of Texas, N.A.  (15)

         10.27     Contribution Agreement among Southern California Stone 
                   Center, A Medical Group, Prime Lithotripsy Services, Inc., 
                   and Southern California Stone Center, L.L.C. dated June 1, 
                   1995.  (13)
       
                                       18

<PAGE>

        
         10.28     Operating Agreement for Southern California Stone Center, 
                   L.L.C.  (13)

         10.29     Contribution Agreement among Kidney Stone Center of South 
                   Florida, Ltd., South Florida Lithotripters, Ltd., Prime 
                   Lithotripsy Services, Inc. and Kidney Stone Center of South 
                   Florida, L.C. dated August 24, 1995. (13)

         10.30     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.  (13)

         10.31     Stock Purchase Agreement with respect to all Outstanding 
                   Capital Stock of Sun Medical Technologies, Inc. dated 
                   November 10, 1995.  (12)

         10.32*    Employment Agreement dated October 27, 1995 between Prime 
                   Medical Services, Inc. And Stan D. Johnson.  (13)

         10.33*    Employment Agreement dated May 1, 1996 between Prime Medical
                   Services, Inc. and Joseph Jenkins, M.D., J.D. (15)

         10.34     Stock Purchase Agreement dated April 26, 1996 between Prime 
                   Medical Services, Inc.; Lithotripters, Inc.; William R. 
                   Jordan, M.D.; Franklin S. Clark, M.D.; Dan A. Myers, M.D.; 
                   Thomas B. Mobley, M.D.; Thomas R. Jordan; Anthony E. Rand; 
                   Estate of H. Edward Rietze, III; Phillip J. Gallina; Joseph 
                   Jenkins, M.D.; William B. Grine, M.D.; and W. Alan Terry. 
                   (14)

         10.35     Registration Rights Agreement dated April 26, 1996 between 
                   Prime Medical Services, Inc.; Lithotripters, Inc.; William R.
                   Jordan, M.D.; Franklin S. Clark, M.D.; Dan A. Myers, M.D.; 
                   Thomas B. Mobley, M.D.; Thomas R. Jordan; Anthony E. Rand; 
                   Estate of H. Edward Rietze, III; Phillip J. Gallina; Joseph 
                   Jenkins, M.D.; William B. Grine, M.D.; and W. Alan Terry. 
                   (14)

         10.36     Stock Purchase Agreement dated April 26, 1996 between Prime 
                   Medical Services, Inc. and FastStart, Inc.; Lithotripters, 
                   Inc.; William R. Jordan, M.D.; Franklin S. Clark, M.D.; Dan 
                   A. Myers, M.D.; Thomas B. Mobley, M.D.; Thomas R. Jordan; 
                   Anthony E. Rand; Estate of H. Edward Rietze, III; Phillip J. 
                   Gallina; Joseph Jenkins, M.D.; William B. Grine, M.D.; and 
                   W. Alan Terry. (14)


                                       19

<PAGE>

         11.1      Computation of per share earnings (included in Appendix A 
                   hereto).

         21.1      List of subsidiaries of the Company.  (15)


         23.1      Independent Auditors' Consent of KPMG Peat Marwick LLP. (15)
 --------------

         *        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, Austin, Texas 78746.

     (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,  1990 and
incorporated herein by reference.

     (5) 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.

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

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

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

     (9) Filed as an Exhibit to the Current  Report on Form 8-K dated August 26,
1994 of the Company and incorporated herein by reference.

     (10) Filed as an Exhibit to the Current  Report on Form 8-K dated  December
30, 1994 of the Company and incorporated herein by reference.

     (11) Filed as an Exhibit to the Annual  Report on Form 10-K of the  Company
for the year ended December 31, 1994.

     (12) Filed as an Exhibit to the Current  Report on Form 8-K dated  November
10, 1995 of the Company and incorporated herein by reference.

     

                                       20

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

     (14) Filed as an Exhibit to the Current  Report on Form 8-K dated April 26,
1996 of the Company and incorporated herein by reference.

     (15) Filed herewith.

                                       21

<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 27, 1997

     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 27, 1997


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

Date:  March 27, 1997


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

Date:  March 27, 1997






                                       22

<PAGE>




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

Date:  March 27, 1997



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

Date:  March 27, 1997


By: /s/ Irwin Katz
    --------------
    Irwin Katz, Director

Date:  March 27, 1997


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

Date:   March 27, 1997


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

Date:  March 27, 1997


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

Date:  March 27, 1997





                                       23


<PAGE>






                                   APPENDIX A

                                      INDEX
                                      -----
                                                                    Page
                                                                   ------

Independent Auditors' Report                                         A-2

Consolidated Financial Statements:

    Consolidated Statements of Income for the                        A-3
    years ended December 31, 1996, 1995 and 1994.           
         
    Consolidated Balance Sheets at December 31, 1996 and 1995.       A-4

    Consolidated Statements of Stockholders' Equity                  A-6
    for the years ended December 31, 1996, 1995 and 1994.              
         
    Consolidated Statements of Cash Flows for the years ended        A-7
    December 31, 1996, 1995 and 1994.
    
    Notes to Consolidated Financial Statements.                      A-12



Schedules:


   II - Valuation and Qualifying Accounts as of                      S-1
         December 31, 1996, 1995 and 1994.                                    
                  


                              --------------------



                                       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. In connection with our audits of the consolidated  financial
statements,  we also have audited the financial  statement schedule as listed in
the accompanying  index. These consolidated  financial  statements and financial
statement  schedule are the  responsibility  of the  Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements and financial statement schedule 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, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.  Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole,  presents  fairly,  in all material  respects,  the information set forth
therein.

/s/ KPMG Peat Marwick LLP
Austin, Texas
February 21, 1997











                                       A-2

<PAGE>



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

($ in thousands, except per share data)
<TABLE>
<CAPTION>
                                                                                    Years Ended December 31,
                                                                     --------------------------------------------            
                                                                          1996             1995              1994
                                                                          ----             ----              ----
<S>                                                                  <C>                <C>               <C>
Fee Revenue:
   Lithotripsy:
         Fee revenues                                                $   65,138         $ 19,306          $ 14,721
         Management fees                                                  4,698            1,617                31
         Equity income                                                    1,766            1,230                91
                                                                    -----------      -----------       -----------
                                                                         71,602           22,153            14,843
   Imaging and Cardiac                                                      802            1,042             9,925
                                                                   ------------      -----------        ----------
                                                                         72,404           23,195            24,768
                                                                    -----------       ----------         ---------
Costs and expenses:
   Cost of services and general and
       administrative expenses
         Lithotripsy                                                     19,922            5,979             4,283
         Imaging and Cardiac                                                632            1,505             8,580
            Corporate                                                     4,245            2,573             2,414
                                                                     ----------       ----------        ----------
                                                                         24,799           10,057            15,277

    Depreciation and amortization                                         7,455            3,195             2,975
                                                                     ----------       ----------        ----------
                                                                         32,254           13,252            18,252
                                                                      ---------        ---------         ---------

Operating income                                                         40,150            9,943             6,516

Other income (deductions):
     Interest and dividends                                                 459              152               219
     Interest expense                                                    (5,977)         ( 1,231)            ( 902)
     Loan fees and stock offering costs                                  (3,535)             --                --
     Other, net                                                             370              647             (  91)
                                                                    -----------     ------------        ----------

                                                                         (8,683)         (   432)            ( 774)
                                                                    -----------      -----------         ---------

Income before provision for income taxes
     and minority interest                                               31,467            9,511             5,742

Minority interest in consolidated income                                 20,510            1,421               691

Provision for income taxes                                                1,996              886               547
                                                                    -----------      -----------        ----------

Net income                                                          $     8,961       $    7,204         $   4,504
                                                                    ===========       ==========         =========

Primary earnings per share:
     Net income                                                     $      0.48      $      0.47        $     0.31
                                                                    ===========      ===========        ==========

     Weighted average shares outstanding                                 18,606           15,298            14,509
                                                                     ==========       ==========         =========

Fully diluted earnings per share:
     Net income                                                     $      0.48      $      0.46        $     0.31
                                                                    ===========      ===========        ==========

     Weighted average shares outstanding                                 18,898           16,010            14,650
                                                                     ==========       ==========         =========
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       A-3

                                                           

<PAGE>




                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


($ in thousands)



                                                    December 31,
                                           -----------------------      
                                              1996         1995
                                           ----------   ----------

ASSETS

Current assets:
  Cash                                     $   20,096   $    4,692
   Accounts receivable, less allowance
    for doubtful accounts of $335 in
    1996 and $232 in 1995                      16,346        4,109
   Other receivables                            1,842          364
   Deferred income taxes                          948          770
   Prepaid expenses and other 
    current assets                                841        1,003
                                           ----------   ----------

     Total current assets                      40,073       10,938
                                           ----------   ----------

Property and equipment:
   Equipment, furniture and fixtures           22,339        7,867
   Leasehold improvements                         113          113
                                           ----------   ----------

                                               22,452        7,980

Less accumulated depreciation and
   amortization                                (7,122)      (3,272)
                                           ----------   ----------

     Property and equipment, net               15,330        4,708
                                           ----------   ----------


Investment in American Physicians
  Service Group, Inc.                             173          173
Other investments                               7,927        7,623
Goodwill, at cost, net of amortization        132,302       52,679
Other noncurrent assets                         1,948        1,506
                                           ----------   ----------

                                           $  197,753   $   77,627
                                           ==========   ==========









          See accompanying notes to consolidated financial statements.
                                       A-4

                                                           

<PAGE>



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


($ in thousands)


                                                 December 31,
                                           -----------------------
                                              1996         1995
                                           ----------   ----------
LIABILITIES:

Current Liabilities:

   Current portion of long-term debt       $   10,522   $    3,043
   Accounts payable                             4,451        4,814
   Accrued expenses                            16,582        2,862
                                           ----------   ----------

     Total current liabilities                 31,555       10,719

Long-term debt, net of current portion         70,910       22,323
Deferred income taxes                           5,423        1,212
                                           ----------   ----------

     Total liabilities                        107,888       34,254

Minority interest                              13,438          623

STOCKHOLDERS' EQUITY:

Preferred stock, $.01 par value,
  1,000,000 shares authorized;
  none outstanding                              --           --
Common stock, $.01 par value,
  40,000,000 shares authorized;
  19,078,933 issued in 1996 and
  14,729,663 issued in 1995                       191          147
Capital in excess of par value                 83,271       58,700
Accumulated deficit                            (7,035)     (15,996)
Treasury stock, at cost, 30,000 shares           --           (101)
                                           ----------   ----------

     Total stockholders' equity                76,427       42,750
                                           ----------   ----------

                                           $  197,753   $   77,627
                                           ==========   ==========












          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, 1996, 1995 and 1994



($ in thousands, except share data)

<TABLE>
<CAPTION>

                                     Issued        Capital in   Accumulated
                                  Common Stock      Excess of    Earnings     Treasury Stock   Reciprocal
                                Shares    Amount    Par Value    (Deficit)   Shares    Amount  Stockholdings    Total
                             ---------- ----------  ----------  ----------- --------  -------- -------------  ---------
<S>                          <C>             <C>      <C>         <C>        <C>        <C>        <C>          <C>
Balance, January 1, 1994     14,458,663      $ 145    $ 58,590    ($27,704)     --        --        ($1,055)    $29,976

  Net income for the year          --          --          --        4,504      --        --             --       4,504
  Exercise of stock options     136,000          1          41         --       --        --             --          42
  Purchase of treasury stock       --          --          --          --    30,000     ( 101)           --        (101)
                             ----------  ---------  ----------  ---------- --------  --------- -------------  ----------
Balance, December 31, 1994   14,594,663        146      58,631     (23,200)  30,000     ( 101)     (  1,055)     34,421

  Net income for the year           --         --          --        7,204      --        --             --       7,204
  Exercise of stock options     135,000          1          69         --       --        --             --          70
  Reclassification of
    reciprocal stockholdings        --         --          --          --       --        --          1,055       1,055
                             ----------  ---------  ----------  ----------- -------  --------- -------------  ----------
Balance, December 31, 1995   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     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
                             ==========  =========  =========== =========== ========  ======== =============  =========
</TABLE>


          See accompanying notes to consolidated financial statements.
                                       A-6

                                                         

<PAGE>




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

($ in thousands)
<TABLE>
<CAPTION>
                                                                                          Years Ended December 31,
                                                                               -------------------------------------------- 
                                                                                    1996              1995             1994
                                                                                    ----              ----             ----
<S>                                                                            <C>                 <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Fee and other revenue collected                                              $   72,452          $ 21,640         $ 25,017
  Cash paid to employees, suppliers
      of goods and others                                                         (25,190)          ( 9,094)         (14,268)
  Interest received                                                                   459               157              216
  Interest paid                                                                   ( 5,104)          ( 1,275)         (   785)
  Taxes paid                                                                      ( 1,015)          (   530)         (   662)
                                                                               ----------      ------------       ----------

           Net cash provided by operating activities                               41,602            10,898            9,518
                                                                               ----------       -----------        ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of lithotripter entities                                               (66,742)          (15,033)         (14,837)
  Proceeds from sale of investment in American
                Physicians Service Group, Inc. stock                                  --              2,753              --
  Purchases of equipment and leasehold
       improvements                                                               ( 2,526)         (    473)        (    602)
  Deferred payments on lithotripter entities                                      ( 3,387)              --               --
  Sale of net assets of diagnostic centers                                            --                --             2,350
  Proceeds from sales of equipment                                                      6                21              120
  Investments                                                                       1,257               864              282
  Refund of deposit                                                                   --                --               176
  Other                                                                           (   378)         (      6)             153
                                                                                ---------        ----------       ----------

           Net cash (used by) investing activities                                (71,770)          (11,874)        ( 12,358)
                                                                                ---------        ----------       ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Payments on notes payable & capital  leases,
       exclusive of interest                                                     ( 15,351)          ( 9,588)         ( 8,780)
  Borrowings on notes payable                                                      74,000            14,284           11,525
  Distributions to minority interest                                             ( 13,440)          ( 1,644)        (    440)
  Line of credit fees                                                                 --               (367)        (    866)
  Other                                                                               363                71         (     59)
                                                                                ---------        ----------        ----------

           Net cash provided by financing activities                               45,572             2,756            1,380
                                                                                ----------       -----------       ----------

NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS                                                                    15,404             1,780          ( 1,460)

Cash and cash equivalents, beginning of period                                      4,692             2,912            4,372
                                                                                ---------        ----------        ---------


Cash and cash equivalents, end of period                                       $   20,096        $    4,692        $   2,912
                                                                               ==========        ==========        =========
</TABLE>

          See accompanying notes to consolidated financial statements.
                                       A-7




                                                                  

<PAGE>




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

($ in thousands)
<TABLE>
<CAPTION>


                                                                                            Years Ended December 31,
                                                                                -------------------------------------------     
                                                                                    1996              1995             1994
                                                                                    ----              ----             ----
<S>                                                                             <C>                 <C>            <C>
Reconciliation of net income to net
 cash provided by operating activities
  Net income                                                                    $   8,961           $ 7,204        $   4,504
  Adjustments to reconcile net
    income to cash provided by
    operating activities:
       Depreciation and amortization                                                7,455             3,195            2,975
       Provision for uncollectible accounts                                           319               771            2,078
       Minority interest in consolidated income                                    20,510             1,421              691
       Equity in earnings of affiliates                                            (1,773)          ( 1,234)         (    86)
       Gain on sale of investment in American
              Physicians Service Group, Inc. stock                                    --            (   559)             --
       Provision for deferred income taxes                                            974               --               --
       Writeoff of loan fees                                                          696               --               --
       Other                                                                          --           (     33)              80
       Changes in operating  assets and  liabilities,  net of effect of purchase
         transactions:
           Accounts receivable                                                      1,284           (   541)         ( 1,035)
           Notes receivable                                                           180             1,416         (    206)
           Other receivables                                                          292               781              294
           Other current assets                                                       529           (   447)              62
           Accounts payable                                                           452            (1,224)           ( 177)
           Accrued expenses                                                         1,723               148              338
                                                                                 --------         ---------      -----------

        Total adjustments                                                          32,641             3,694            5,014
                                                                                 --------          --------       ----------

        Net cash provided by operating activities                                $ 41,602           $10,898        $   9,518
                                                                                 ========           =======        =========

</TABLE>













          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>


                                                                                         Years Ended December 31,
                                                                                -------------------------------------------
                                                                                    1996              1995             1994
                                                                                    ----              ----             ----
<S>                                                                               <C>               <C>              <C>   
SUPPLEMENTAL INFORMATION OF
  NON-CASH INVESTING AND
  FINANCING ACTIVITIES:

     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-9

                                                                   

<PAGE>



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

($ in thousands)
<TABLE>
<CAPTION>

                                                                                            Years Ended December 31,
                                                                                --------------------------------------------
                                                                                    1996              1995             1994
                                                                                    ----              ----             ----

<S>                                                                               <C>              <C>                 <C>
     In  1995,  the  Company  acquired  (1) 100% of the  outstanding  stock of a
corporation  which owned or managed eight  lithotripter  operations  and (2) 70%
interest in a lithotripter  operation.  These transactions are discussed further
in Note D. The acquired assets and liabilities were as follows:

           Current assets decreased by                                                             $   9,905
           Noncurrent assets increased by                                                              2,491
           Goodwill increased by                                                                      19,553
           Current liabilities increased by                                                            7,249
           Noncurrent liabilities increased by                                                         4,890

     In 1995, the Company retired a note payable to American  Physicians Service
Group,  Inc. ("APS").  This note was retired by the Company  transferring to APS
shares of stock of APS that the Company owned. The effect of this transaction is
as follows:

           Current assets decreased by                                                                     3
           Investment in APS decreased by                                                                301
           Notes payable decreased by                                                                    297
           Loss                                                                                            7

     In 1994,  the Company  acquired (1) 100% of the  outstanding  stock of five
corporations, which own or manage lithotripter operations and (2) assets, net of
liabilities  assumed  of two  lithotripter  operations.  These  transaction  are
discussed in further detail in Note D. The acquired assets and liabilities  were
as follows:

           Current assets decreased by                                                                                 11,505
           Noncurrent assets increased by                                                                                 923
           Goodwill increased by                                                                                       20,257
           Current liabilities increased by                                                                             2,904
           Noncurrent liabilities increased by                                                                          6,771

</TABLE>

          See accompanying notes to consolidated financial statements.
                                      A-10

                                                               

<PAGE>



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

($ in thousands)
<TABLE>
<CAPTION>



                                                                                          Years Ended December 31,
                                                                                --------------------------------------------       
                                                                                    1996              1995             1994
                                                                                    ----              ----             ----

<S>                                                                               <C>              <C>                 <C>
     In 1994,  the Company sold its interests and  terminated  its management of
four imaging centers. These transactions are discussed in further detail in Note
E. The effect of these transactions is as follows:

           Current assets increased by                                                                                  3,302
           Noncurrent assets decreased by                                                                               3,368
           Goodwill decreased by                                                                                        2,193
           Current liabilities decreased by                                                                               851
           Noncurrent liabilities decreased by                                                                          1,408

</TABLE>






























          See accompanying notes to consolidated financial statements.

                                      A-11

<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   and  cardiac   rehabilitation   centers.   The  Company   operates
lithotripters  in 32 states.  In December  1994,  the Company sold its remaining
interest in the  diagnostic  imaging  centers that the Company owned or managed.
(See Note E).

B.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         ------------------------------------------
         Consolidation
         -------------

     The consolidated  financial statements include the accounts of the Company,
its  wholly-owned  subsidiaries,  entities more than 50% owned and  partnerships
where the  Company 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%. 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.

         Investments
         -----------

     Effective  January 1, 1996,  the  Company  acquired a 27%  general  partner
interest  in a  partnership  that  provides  lithotripsy  service in Ohio.  This
investment is accounted for using the equity method of accounting.






                                      A-12

<PAGE>


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


B.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
         -----------------------------------------------------
         Investments, continued
         ----------------------

     In November 1996, the Company acquired a 4% interest in a partnership that
operates  two  mobile  lithotripters  in  North  Carolina.  This  investment  is
accounted for using the cost method of accounting.

     Effective June 1, 1995, the Company  acquired a 32.5% interest in a limited
liability company that operates a lithotripter facility in California. (See Note
D). This investment is accounted for using the equity method of accounting.

     The Company has  approximately a 1% ownership  interest in the company that
is its largest stockholder. Two of the Company's eight board members are also on
the board of its largest stockholder.  (See Note C). The Company's investment is
accounted for using the cost method of accounting in 1995 and 1996. In 1994, the
Company  accounted for its investment using the equity method when the Company's
ownership exceeded 20%.

     In  December  1994,  the  Company  acquired  100%  of the  stock  of  three
corporations,  which are the managing  general partners and owned an approximate
20% interest in each of three  partnerships  (See Note C). These investments are
accounted for using the equity method of accounting.

     The Company also has an ownership  interest of 50% in a joint  venture that
had owned a diagnostic  imaging center,  which was sold in August 1994 (See Note
E). This investment is accounted for using the equity method of accounting.

     Through December 31, 1996, the Company had recognized  $190,000 in earnings
using the equity  method.  This amount  represents  undistributed  earnings from
entities,  in which the  Company  owns 50 percent or less,  and does not exhibit
substantial control.

         Intangible Assets
         -----------------

     The Company  records as goodwill the excess of the purchase  price over the
fair value of the net assets of acquired businesses.  Goodwill is amortized over
a period not to exceed forty years using the  straight-line  basis.  Accumulated
amortization  at  December  31,  1996 and  1995 is  $5,798,000  and  $2,873,000,
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-13

<PAGE>


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

B.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
         -----------------------------------------------------
         Revenue Recognition
         -------------------

     Revenues  generated  from  services are  recognized  as they are earned and
include,  under certain  contracts,  the reimbursement of contractually  defined
operating  expenses.  For the years ended December 31, 1996,  1995 and 1994, the
amounts included in revenues that were  reimbursement  of contractually  defined
operating expenses were $58,000, $82,000 and $3,483,000, respectively.

     The Company's  revenues are based upon  collectibility of fees for services
charged to hospitals, commercial insurance carriers and state and federal health
care agencies.

     At December 31, 1996,  approximately  17% of accounts  receivable relate to
units operating in Texas,  11% relate to units located in California,  9% relate
to units located in Florida and 9% relate to units located in South Carolina.

         Reciprocal Stockholdings
         ------------------------

     The Company had accounted for its  investment in its largest  shareholder's
common  stock on the  equity  basis  prior to 1995 (see Note C).  The  Company's
investment  was reduced for the  Company's pro rata interest in the common stock
of the Company  owned by such  shareholder.  This  reduction was reflected in an
offsetting  charge to reciprocal  stockholdings.  When the Company's  investment
dropped below 5%, reciprocal stockholdings were eliminated.

         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.







                                      A-14

<PAGE>


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

B.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
         ------------------------------------------------------
         Income Per Share
         ----------------

     Income  per  share is based on the  weighted  average  number  of shares of
common stock and common stock equivalent shares  outstanding during each period.
In 1995,  the Company  issued  convertible  debt,  in  conjunction  with certain
lithotripsy  acquisitions,  which  resulted in the  computation of fully diluted
earnings per share exceeding primary earnings per share by more than 3%.

         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,  if there is a difference between the
fair value and carrying value of the asset.

         Post Retirement/Post Employment Benefits
         ----------------------------------------

     The Company's  employee  benefits do not extend beyond an employee's active
employment.  Consequently,  no accrual  for future  benefits  as  prescribed  in
Statement  of  Financial  Accounting  Standards  No.  106 and No.  112 has  been
recorded.

         Derivative Financial Instruments
         --------------------------------

     The Company has not made use of derivative financial instruments as defined
in the Financial  Accounting  Standards Board Statement of Financial  Accounting
Standards No. 119,  Disclosure about Derivative  Financial  Instruments and Fair
Value of Financial Instruments.

         Notes Receivable
         ----------------

     Notes  receivable  are  recorded  at cost,  less  allowances  for  doubtful
accounts when deemed necessary.  The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan (Statement  114), in May 1993 and the related  Statement of
Financial Accounting Standards No. 118 Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosures,  in October 1994 for implementation
in fiscal years  beginning  after  December 15,  1994.  Management,  considering
current  information and events  regarding the borrowers  ability to repay their
obligations,  considers  a note to be  impaired  when it is  probable  that  the
Company will be unable to collect all amounts due  according to the  contractual
terms of the note  agreement.  When a loan is  considered  to be  impaired,  the
amount of the  impairment  is measured  based on the  present  value of expected
future cash flows discounted at the note's effective interest rate.

                                      A-15

<PAGE>


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


     B.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
          -----------------------------------------------------      
          Notes Receivable, continued  
          ---------------------------  

     Impairment  losses are  included in the  allowance  for  doubtful  accounts
through a charge to bad debt expense. Cash receipts on impaired notes receivable
are applied to reduce the principal amount of such notes until the principal has
been recovered and are recognized as interest income,  thereafter.  The adoption
of  Statements  114 and 118 by the  Company  on  January  1, 1995 did not have a
material affect on the financial statements.

         Stock-Based Compensation
         ------------------------

     The  Financial  Accounting  Standards  Board issued  Statement of Financial
Accounting   Standards  No.  123,   Accounting  for   Stock-Based   Compensation
("Statement  123"), in October 1995 for implementation in fiscal years beginning
after  December 15, 1995.  Statement  123 became  effective  beginning  with the
Company's  first quarter of fiscal year 1996 and did not have a material  effect
on the Company's  financial position or results of operations.  Upon adoption of
Statement  123, 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 K).

         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 1996 presentation.


                                      A-16

<PAGE>


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





C.       INVESTMENTS
         -----------
         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.  The purchase price was cash of  $1,569,000.  This  transaction  was
accounted for using the purchase method of accounting.

         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  Arkansas.  Ohio  Mobile  Lithotripter,  Ltd.  operates  a  mobile
lithotripter  in Ohio.  Arklatx  Mobile  Lithotripter,  L.P.  operates  a mobile
lithotripter in Louisiana.

     The  purchase  price paid by Prime for the common stock was  $5,007,000  in
cash. This transaction was accounted for using the purchase method of accounting
effective December 1, 1994.

     Condensed  unaudited  balance sheet for the three  partnerships at December
31:

                                              1996         1995
                                           ----------   ----------
Current assets                             $3,996,000   $4,327,000
Non-current assets                            451,000      729,000
                                           ----------   ----------

Total assets                               $4,447,000   $5,056,000
                                           ==========   ==========

Current liabilities                        $3,173,000   $3,770,000
Long-term liabilities                            --        311,000
Partners' capital                           1,274,000      975,000
                                           ----------   ----------

Total liabilities
and equity                                 $4,447,000   $5,056,000
                                           ==========   ==========






                                      A-17

<PAGE>


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





C.       INVESTMENTS, continued
         ----------------------
         Texas, Ohio & Louisiana Partnerships, continued
         -----------------------------------------------

     Condensed  unaudited  statement of earnings for the three  partnerships for
the year ended December 31:


                                              1996         1995
                                           ----------   ----------

Total revenues                             $9,985,000   $8,469,000
Total expenses                              2,926,000    3,519,000
                                           ----------   ----------

Net income                                 $7,059,000   $4,950,000
                                           ==========   ==========

     American Physicians Service Group, Inc.
     ---------------------------------------  

     At December 31, 1996 and 1995,  the Company  owned 50,000  shares of common
stock,  representing  approximately  1%,  of the  outstanding  common  stock  of
American  Physicians Service Group, Inc. (APS). APS owned  approximately 16% and
21%, respectively of the outstanding common stock of the Company at December 31,
1996 and 1995. The Company's pro rata interest in its own shares of common stock
had been included in stockholders'  equity as reciprocal  stockholdings prior to
1995. (See Note B).

     The Company occupies  approximately 2,800 square feet of office space owned
by APS. The Company also shares certain personnel with APS. The monthly rent and
personnel cost is approximately $4,000.

         Shasta Diagnostic Center Joint Venture
         --------------------------------------

     In 1989, the Company  acquired a 50% interest in Shasta  Diagnostic  Center
Joint Venture ("Shasta"),  a California general  partnership.  Shasta was formed
for the purpose of  operating  and  managing a  diagnostic  imaging  center.  In
September  1994,  the joint  venture sold the  operating  assets of the imaging
center.  The sales price was comprised of $450,000  cash, a promissory  note for
$450,000,  bearing interest at 8% and the assumption of approximately $2,145,000
in debt and lease obligations.

D.       ACQUISITIONS
         ------------

     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.

                                      A-18

<PAGE>


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


D.       ACQUISITIONS, continued
         -----------------------

     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.

     Also effective  November 1, 1996, the Company  acquired a 4% ownership in a
partnership  that operates two  lithotripters  in North  Carolina.  The purchase
price was $550,000 in cash.  This  acquisition  was accounted for using the cost
method of accounting.

     Unaudited  proforma  combined  statement  of  earnings  for the year  ended
December  31,  1996 of the  Company and the  acquisitions  discussed  previously
assuming all were effective January 1, 1995 is as follows:

                                              1996         1995
                                           -----------  -----------

Total revenues                             $92,499,000  $82,934,000
Total expenses                              82,355,000   74,409,000
                                           -----------  -----------

Net earnings                               $10,144,000  $ 8,525,000
                                           ===========  ===========
Earnings per share                         $      0.53  $      0.49
                                           ===========  ===========

     Effective  October 1, 1995,  the Company  acquired 100% of the  outstanding
stock  of  Sun  Medical   Technologies,   Inc.   ("Sun").   Sun  operates  eight
lithotripters  servicing clients in California,  Arizona,  Montana,  New Mexico,
Washington and Wyoming. The purchase price was $16,150,000 consisting of cash of
$9,438,000,  deferred  payments  payable in January,  1996 of $2,687,000,  notes
payable of $4,025,000,  and warrants to purchase 200,000 shares of the Company's
common stock. The exercise price of the warrants represented the market price of
the  Company's  common  stock at the date the warrants  were  issued.  The notes
payable of  $4,025,000  may be converted  into 672,000  shares of the  Company's
common stock.  Each noteholder may convert all or part of the  outstanding  note
balance on the quarterly  payment dates.  (Note:  These  noteholders  elected to
convert the  outstanding  balances of their  notes into the  Company's  stock in
1996.)  This  acquisition  was  accounted  for  using  the  purchase  method  of
accounting.

     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.  The purchase price was cash of  $1,569,000.  This  transaction  was
accounted for using the purchase method of accounting.



                                      A-19

<PAGE>


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


D.       ACQUISITIONS, continued
         -----------------------

     Effective July 1, 1995 the Company  acquired an undivided 70% interest in a
fixed site lithotripter located in Fort Lauderdale,  Florida. The purchase price
was $5,550,000 consisting of cash of $3,885,000 and notes payable of $1,665,000,
which can be converted  into 326,000 shares of the Company's  common stock.  The
noteholder  may  convert  all of the  balance  outstanding  on the  note  on the
quarterly  payment  dates.   (Note:  The  noteholder   elected  to  convert  the
outstanding  balance  of their  note  into the  Company's  stock in  1996.)  The
acquisition was accounted for using the purchase method of accounting.

     Unaudited  proforma  combined  statement  of  earnings  for the year  ended
December  31,  1995 of the  Company and the  acquisitions  discussed  previously
assuming all were effective January 1, 1994 is as follows:


                                              1995         1994
                                           -----------  -----------

Total revenues                             $31,771,000  $37,859,000
Total expenses                              23,851,000   31,665,000
                                           -----------  -----------

Net earnings                               $ 7,920,000  $ 6,194,000
                                           ===========  ===========
Earnings per share                         $      0.47  $      0.40
                                           ===========  ===========

     Effective  August 1,  1994,  the  Company  acquired  a mobile  lithotripter
operating in  Birmingham,  Alabama.  The purchase  price was cash of $2,863,000,
notes payable of  $2,620,000,  and a warrant to purchase  approximately  725,000
shares  of the  Company's  common  stock.  The  exercise  price  of the  warrant
represented  the  market  price of the  Company's  common  stock at the date the
warrant  was  issued.  (Note:  The  noteholder  exercised  its  warrants  and in
exchange,  considered the Company's $2,304,000 note paid in full, in 1996.) This
acquisition was accounted for using the purchase method of accounting.

     In July 1994, the Company acquired all of the outstanding stock of Alabama
Renal Stone  Institute,  Inc.  ("ARSI"),  which owns a  fixed-site  lithotripter
located  in  Birmingham,  Alabama  and had  previously  licensed  the use of the
lithotripter  to a  wholly-owned  subsidiary of the Company.  As a result,  ARSI
operates the lithotripter as a wholly-owned  subsidiary of the Company,  free of
certain  options that ARSI and its former  owners had to terminate  the license.
The purchase price was $3,895,000, and has been accounted for using the purchase
method of accounting.





                                      A-20

<PAGE>


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


D.       ACQUISITIONS, continued
         -----------------------

     In April  1994, the Company  acquired an undivided 60% interest in certain
assets,  subject to 60% of certain  liabilities  of Metro Atlanta  Stonebusters,
Inc.  ("MASI"),  which operated a mobile  lithotripter in the Atlanta,  GA area.
Prime paid to MASI $2,040,000 in cash and a promissory note issued in the amount
of $3,700,000, bearing interest at 6%. Prime contributed its interest in the net
assets acquired to Metro Atlanta Stonebusters, G.P. ("MASBGP") in exchange for a
60%  general  partnership  interest  in  MASBGP,  and MASI  contributed  its 40%
interest to MASBGP for a 40% interest in MASBGP.  This transaction was accounted
for using the purchase method of accounting.

     In January 1994, the Company acquired all of the outstanding capital stock
of Fazio Consulting,  Inc. ("FCI"),  which operated two mobile  lithotripters in
seven  states.  The purchase  price was cash of $950,000,  the  repayment of two
promissory notes of FCI in the aggregate amount of $1,100,000 and an earnout for
the next five years based on 50% of the net income of FCI. At December 31, 1994,
the Company  calculated the earnout for the first year to be $559,000,  and that
amount has been  recorded as goodwill and was  accounted  for using the purchase
method of accounting.  At December 31, 1995, the Company reached an agreement to
settle  the  remaining  four  years of the  earnout,  along with a buyout of the
remaining  term of two tractor  leases.  The Company has  recorded  the $700,000
settlement  as follows:  $685,000  recorded  to goodwill  and $15,000 to acquire
title to one tractor.

     Unaudited  proforma  combined  statement  of  earnings  for the year  ended
December  31,  1994 of the  Company and the  acquisitions  discussed  previously
assuming all were effective January 1, 1993 is as follows:

                                               1994         1993
                                           -----------  -----------

Total revenues                             $27,721,000  $27,904,000
Total expenses                              22,044,000   23,714,000
                                           -----------  -----------
Net earnings                               $ 5,677,000  $ 4,190,000
                                           ===========  ===========
Earnings per share                         $      0.39  $      0.34
                                           ===========  ===========

E.       DISPOSITIONS
         ------------

     In December  1994,  the Company sold its interest in the Grove  Diagnostic
Imaging Center.  The Company received two promissory  notes totaling  $1,155,000
and the buyer assumed approximately $1,200,000 in contractual obligations.

     In December  1994, the Company received $260,000 in cash for its equipment
and termination of its management contract, related to an imaging center managed
by the Company.


                                      A-21

<PAGE>


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


E.       DISPOSITIONS, continued
         -----------------------

     In August 1994, Shasta Diagnostic Center J.V., in which the Company owns a
50% interest,  sold the operating assets of Shasta Diagnostic  Imaging Center, a
multi-modality imaging center. The sales price was comprised of $450,000 cash, a
promissory  note for  $450,000,  bearing  interest at 8%, and the  assumption of
approximately $2,145,000 in debt and lease obligations.

     In  August  1994,  the  Company  sold the  operating  assets  of the Tower
Diagnostic  Center, a multi-modality  imaging center located in Tampa,  Florida.
The sales  price  was  comprised  of  $2,350,000  cash,  a  promissory  note for
$500,000,  bearing  interest  at  7.25%  and  the  assumption  of  approximately
$4,100,000 in capital and operating lease obligations.

     Summarized  results of operations for the centers  disposed of in 1994 were
as follows:

     Fee revenues                                $     8,292,000
     Cost of services and
       general and administrative expenses             6,705,000
     Depreciation and amortization                       941,000
                                                 ---------------
                                                         646,000
     Interest income                                      21,000
     Interest expense                                   (188,000)
     Other, net                                            3,000
                                                 ---------------
     Net income                                  $       482,000
                                                 ===============

F.       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,
1996 and 1995:
($ Amounts in Thousands)
<TABLE>
<CAPTION>

                                            1996                           1995
                                  -------------------------     -------------------------
                                   Carrying        Fair           Carrying       Fair
                                    Amount         Value          Amount         Value
                                  ----------     ----------     ----------     ----------
<S>                               <C>            <C>            <C>            <C>
Financial assets:
Cash                              $   20,096     $   20,096     $    4,692     $    4,692
Notes receivable                        --             --              203            200
Accounts receivable                   16,346         16,346          4,109          4,109
Other receivables                      1,842          1,842            183            183
Investment in American
Physicians Service Group, Inc.           173            325            173            481

</TABLE>

                                      A-22

<PAGE>


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

F.         FAIR VALUE OF FINANCIAL INSTRUMENTS, continued
           ----------------------------------------------
<TABLE>
<CAPTION>

($ Amounts in Thousands)                  1996                             1995
                                  -------------------------     -------------------------
                                   Carrying        Fair           Carrying       Fair
                                    Amount         Value          Amount         Value
                                  ----------     ----------     ----------     ----------
<S>                               <C>            <C>            <C>            <C>
Financial liabilities:
Debt                                  81,432         81,432         25,366         25,281
Accounts payable                       4,451          4,451          4,814          4,814
</TABLE>

     Fair value estimates,  methods, and assumptions are set forth below for the
Company's 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.

           Notes Receivable
           ----------------

     The fair value of notes has been  determined  using  discounted  cash flows
based on  management's  estimate of current  interest rates for notes of similar
credit quality.

           Accounts Receivable and Other Receivables
           -----------------------------------------

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

           Investment in American Physicians Service Group, Inc.
           -----------------------------------------------------

     The fair value of the stock is based on the last trade  value at the end of
the year.

           Debt
           ----

     The carrying  value of debt  approximates  fair value since the majority is
primarily floating rate debt based on current market rates.

           Accounts Payable
           ----------------

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





                                      A-23

<PAGE>


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

F.         FAIR VALUE OF FINANCIAL INSTRUMENTS, continued
           ----------------------------------------------
           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-and-off  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.

G.       ACCRUED EXPENSES
         ----------------

         Accrued expenses consist of the following:


                                          December 31,      December 31,
                                              1996              1995
                                          ------------      ------------
Legal fees                                $   452,000       $   228,000
Accrued group insurance costs                 164,000           114,000
Compensation and payroll
related expense                             1,502,000         1,114,000
Taxes, other than income taxes                334,000            92,000
Accrued interest                            1,028,000           155,000
Provision for closed centers                  163,000           221,000
Income taxes payable                          761,000           384,000
Dividends payable to minority interest     10,705,000           183,000
Other                                       1,473,000           371,000
                                           ----------        ----------

                                          $16,582,000       $ 2,862,000
                                          ===========       ===========

                                      A-24

<PAGE>


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

H.       INDEBTEDNESS
         ------------

     Outstanding  long-term  debts,  other  than  bank  debts,  are as  follows:

     Interest                                            December 31,
       Rates              Maturities                  1996           1995 
--------------------    ---------------          ------------   ------------

None                    1997 - 2006              $    241,000   $    320,000
6% Note                    1997                       984,000      1,967,000
10% Note                    --                           --        1,561,000
11.25% -11.6%           1997 - 1998                    12,000        190,000
60 Day Libor +
  2 1/2%                    --                           --        3,690,000
Prime                       --                           --        2,304,000
                                                 ------------   ------------
                                                    1,237,000     10,032,000
Less current portion of
long-term debt                                      1,100,000      2,759,000
                                                 ------------   ------------

                                                 $    137,000   $  7,273,000
                                                 ============   ============

     $171,000 of the  non-interest  bearing notes are unsecured.  A non-interest
bearing note in the amount of $70,000 is secured by a mobile  lithotripter.  The
6% note, in the principal amount of $984,000 and $1,967,000 at December 31, 1996
and 1995,  respectively,  is secured by a Security Agreement which conveys first
security  title to the  assets  the  lender  sold to the  Company as part of the
acquisition by the Company of 60% of certain  assets,  subject to 60% of certain
liabilities  of Metro Atlanta  Stonebusters,  Inc. The 11.25% to 11.6% notes are
secured by medical and computer equipment.

     Outstanding long-term notes payable - banks are as follows:

   Interest                                               December 31,
    Rates                 Maturities                 1996           1995
--------------------    ---------------          ------------   ------------

60-day LIBOR
  plus 2 1/2%             1997-2001              $ 76,750,000   $ 15,050,000
Prime                     1997-1998                 3,245,000           --
Prime + 1 1/2%              1997                      200,000        284,000
                                                 ------------   ------------
                                                   80,195,000     15,334,000
Less current portion of
long-term bank debt                                 9,422,000        284,000
                                                 ------------   ------------
                                                 $ 70,773,000   $ 15,050,000
                                                 ============   ============

                                      A-25

<PAGE>


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


H.     INDEBTEDNESS, continued
       -----------------------

     In  conjunction  with the  acquisition  discussion  in Note D, the  Company
increased  its bank  facility  with the Bank of Boston  from $25  million to $90
million.  The $50 million  term loan bears an interest  rate of LIBOR + 2 to 3%,
payable monthly and requires quarterly  principal payments beginning July, 1996,
with the final payment in April,  2001.  The $40 million line of credit bears an
interest rate of LIBOR + 2 to 3%,  payable  monthly and matures in April,  2001.
The 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,
1996 are payable as follows:

               1997                               $10,522,000
               1998                                10,134,000
               1999                                11,979,000
               2000                                12,696,000
               2001                                36,000,000
               Thereafter                             101,000


I.       COSTS OF SERVICES AND GENERAL AND ADMINISTRATIVE EXPENSES
         ---------------------------------------------------------

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


                                         Year Ended   Year Ended   Year Ended
                                           Dec. 31,    Dec. 31,     Dec. 31, 
                                             1996        1995         1994
                                         ----------   ----------   ----------

Salaries, wages and benefits             $11,953,000  $ 4,027,000  $ 5,460,000
Other costs of services                    6,878,000    3,412,000    6,014,000
Provision for bad debts                      150,000      573,000      805,000
General and administrative                 1,941,000      718,000    1,454,000
Legal and professional                     1,315,000      659,000      677,000
Other                                      2,562,000      668,000      867,000
                                         -----------  -----------  -----------
                                         $24,799,000  $10,057,000  $15,277,000
                                         ===========  ===========  ===========







                                      A-26

<PAGE>


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

J.       COMMITMENTS AND CONTINGENCIES
         -----------------------------

     At  December  31,   1996,   minimum   annual   rental   commitments   under
non-cancelable  operating  leases  for  equipment  and office  space,  which may
contain renewal and escalation clauses, are:

                    1997              $ 313,000
                    1998                191,000
                    1999                188,000
                    2000                157,000
                    2001                  2,000
                    Thereafter              --

     Rent expense for  equipment  and office space for the years ended  December
31, 1996 was $360,000,  December 31, 1995 was $239,000 and December 31, 1994 was
$544,000.

     The Company sponsors two partially,  self-insured  group medical  insurance
plans.  One 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, 1996,
the  Company  had  48  employees   enrolled  in  the  plan.  The  plan  provides
non-contributory   coverage  for   employees  and   contributory   coverage  for
dependents.  The  second  plan is  designed  to  provide  a  specified  level of
coverage,  with stop-loss coverage provided by a commercial insurer. At December
31, 1996, the Company had 150 employees  enrolled in the plan. The plan provides
non-contributory   coverage  for   employees  and   contributory   coverage  for
dependents.  The  Company's  maximum  claim  exposure  is limited to $20,000 per
person per policy year. The Company's  contributions  totaled  $224,000 in 1996,
$150,000 in 1995, and $431,000 in 1994.


K.         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  because,  as
discussed below,  the alternative fair value accounting  provided for under FASB
Statement No. 123,  "Accounting for Stock-Based  Compensation,"  requires use of
option  valuation  models that were not  developed  for use in valuing  employee
stock  options.  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.




                                      A-27

<PAGE>


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

K.         COMMON STOCK OPTIONS, continued
           --------------------------------
          
     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  after ten years from the date the
option is granted,  unless the option terminates sooner by reason of termination
of employment, disability or death.

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

                                            1996                             1995                             1994
                                ------------------------------   -------------------------------   -------------------------------
                                   Options   Weighted-Average       Options     Weighted-Average     Options      Weighted-Average
                                    (000)     Exercise Price         (000)       Exercise Price       (000)        Exercise Price
                                -----------  -----------------    -----------   ----------------   ------------   ----------------
<S>                             <C>          <C>                  <C>           <C>                <C>            <C> 
Outstanding - beginning of year        975   $           1.31         1,055     $           0.98       1,156      $           0.85
Granted                                730              13.87            55                 5.58          65                  3.05
Exercised                             (477)              0.52          (135)                0.52        (136)                 0.31
Forfeited                             ( --)                --          ( --)                  --        ( 30)                 3.46
                                -----------  -----------------    -----------   ----------------   ------------   ----------------
Outstanding-end of year               1,228   $          8.99           975     $           1.31       1,055      $           0.98
                                ===========   ================    ===========   ================   ============   ================

Exercisable at end of year              422   $          2.03           816     $           0.75         813      $           0.55

Weighted-average fair
  value of options granted
  during the year              $       6.13                --     $    2.07                   --         N/A                    --

</TABLE>









                                      A-28

<PAGE>


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

K.         COMMON STOCK OPTIONS, continued
           -------------------------------

     The  following  table  summarizes  the  Company's  outstanding  options  at
December 31, 1996:
<TABLE>
<CAPTION>

                                                                        Average        Weighted
                                                                       Remaining        Average
                                                                      Contractual      Exercise
           Range of Exercise Prices                      Shares           Life           Price
           ------------------------                    ---------      -----------      ---------
           <S>                                         <C>            <C>              <C>   
           $  0.25 - $  4.12                             447,000      2.2 years          $  1.39
           $  4.13 - $  8.25                              50,000      4.9 years          $  5.75
           $  8.26 - $12.37                               25,000      4.0 years          $  8.94
           $12.38 - $16.50                               706,000      4.7 years           $14.04
                                                       ---------

           Total                                       1,228,000
                                                       =========
</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  1995 and 1996 option  pricing  model with the  following
weighted-average assumptions for 1995 and 1996, respectively: risk-free interest
rates of 5.7% and 6.2%;  dividend yields of 0% and 0%; volatility factors of the
expected  market  price of the  Company's  common  stock  of .38 and .53;  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.








                                      A-29

<PAGE>


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


K.         COMMON STOCK OPTIONS, continued
           -------------------------------

     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):

                                                      1996           1995
                                                   ----------      ---------

      Pro forma net income                         $ 8,109         $ 7,197
      Pro forma earnings
       per share
         Primary                                     $0.44           $0.47
         Fully Diluted                               $0.43           $0.46


L.       OTHER INCOME (EXPENSE)
         ----------------------

     Included in other, net in the consolidated statements of operations are the
following components:
                                              Years Ended December 31,
                                            1996         1995         1994
                                         ----------   ----------   ----------
Collections on amounts 
     previously written off              $  192,000         --           --
Gain on sale of investment 
     in American Physicians
     Service Group, Inc. stock                 --        559,000         --
Equipment rental                             58,000         --           --
Equity in income of affiliates                 --           --          9,000
Loss on sale of
marketable securities                          --           --        (43,000)
Other income (expense)                      120,000       88,000      (57,000)
                                         ----------   ----------   ----------
Other, net                               $  370,000   $  647,000   $  (91,000)
                                         ==========   ==========   ==========

M.       INCOME TAXES
         ------------

     The Company  recognized  $97,000,  $110,000 and $114,000 in current Federal
income tax expense for 1996, 1995 and 1994 respectively,  consisting entirely of
alternative minimum tax.




                                      A-30

<PAGE>


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

M.       INCOME TAXES, continued
         -----------------------

     The tax  effects of  temporary  differences  that give rise to  significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are presented below.

                                                                              
                                                     1996            1995
                                                 -----------    ------------
         Deferred tax assets:
           Accounts receivable,
             principally due to allowance
             for doubtful accounts               $   114,000    $     79,000
           AMT credit carryforwards                  249,000         374,000
           Net operating loss carryforwards          944,000       4,088,000
           Investment tax credit carryforwards     1,200,000       1,200,000
           Accrued expenses deductible
             for tax purposes when paid              834,000         573,000
           Other                                     829,000         162,000
                                                 -----------    ------------
             Total gross deferred tax
              assets                               4,170,000       6,476,000
             Less valuation allowance             (2,399,000)     (5,492,000)
                                                 -----------    ------------
             Net deferred tax assets               1,771,000         984,000
                                                 -----------    ------------

         Deferred tax liabilities:
           Property and equipment,
             principally due to
             differences in depreciation           ( 516,000)       (334,000)
           Investments in affiliated
             entities, principally due to
             undistributed income                 (2,860,000)     (  430,000)
           Intangible assets, principally
             due to differences in
             amortization periods for tax
             purposes                             (1,872,000)     (  460,000)
           IRS Section 481(A) adjustment
             for partnerships acquired            (  175,000)            --
                                                 -----------      ----------
           Total gross deferred tax
               liabilities                        (5,423,000)     (1,224,000)
                                                 -----------      ----------
           Net deferred tax liability            ($3,652,000)     ($ 240,000)
                                                 ===========      ==========


                                      A-31

<PAGE>


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





M.       INCOME TAXES, continued
         -----------------------

     The valuation allowance for deferred tax assets as of December 31, 1996 was
$2,399,000  representing a decrease of $3,093,000,  primarily due to utilization
of net operating loss  carryforwards.  The valuation  allowance for deferred tax
assets  as of  January  1,  1995 was  $7,583,000  with the  change  in the total
valuation  allowance  for the year ended  December  31, 1995 being a decrease of
$2,091,000.  The Company  believes that the valuation  allowance at December 31,
1996 is necessary  due to  uncertainties  regarding the Company's use of the net
operating loss  carryforwards  and tax credit  carryforwards  which could become
limited  in the event  that the  Company  experiences  a greater  than 50% stock
ownership  change in a  three-year  period (as defined in the  Internal  Revenue
Service regulations).

     At December 31, 1996, net operating loss carryforwards  available to reduce
future taxable income  amounted to  approximately  $2,777,000 and expire through
2008. Investment tax credit  carryforwards,  which expire through 2000, amounted
to $1,200,000 at December 31, 1996.

     Based  upon the level of  historical  taxable  income and  projections  for
future  taxable  income  over the  periods  which the  deferred  tax  assets are
deductible,  management  believes it is more  likely  than not the Company  will
realize  the  benefits  of these  deductible  differences,  net of the  existing
valuation  allowances at December 31, 1996. The amount of the deferred tax asset
considered  realizable,  however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.

N.       RELATED PARTY TRANSACTIONS
         --------------------------

     See  Notes B and C for  additional  related  party  transactions  involving
investments in affiliates.

     O.  SUBSEQUENT EVENT  
         ---------------- 

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

                                      A-32

<PAGE>


                                                            SCHEDULE II
                                                            -----------

                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS

($ in thousands)
<TABLE>
<CAPTION>


                                                           Additions
                                                           ---------- 
                                                           Charged to                         Balance at
                                       Beginning of         Costs and                           End of
      Description                          Period            Accounts         Deductions        Period
      -----------                      ------------        ----------        -----------      ---------- 
<S>                                    <C>                 <C>               <C>              <C>
Year ended December 31, 1996:

  Accounts Receivable
    Allowance for doubtful
     accounts                          $        232        $      319        $      216 (A)   $     335
                                       =============       ===========       ===========      ==========

Year ended December 31, 1995:

  Accounts Receivable
    Allowance for doubtful
    accounts                           $        938        $      531        $   1,237 (A)    $     232
                                       =============       ===========       ==========       ==========


Year ended December 31, 1994:

  Accounts Receivable
    Allowance for doubtful
    accounts                           $     1,625         $   1,857         $   2,544 (A)    $     938
                                       ============        ==========        ==========       ==========


</TABLE>






-------------------------------


     (A)  Accounts  receivable  written off against the  allowance  for doubtful
accounts and other minor reclassifications.






                                       S-1


                                                                  
<PAGE>