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, 1997

            [ ] 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, 1998: $228,150,000

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, 1998
          -------------------                            --------------
      Common Stock, $.01 par value                         19,314,267

                       DOCUMENTS INCORPORATED BY REFERENCE
         Selected portions of the Registrant's definitive proxy material for the
1998 annual meeting of shareholders  are incorporated by reference into Part III
of the Form 10-K.



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                          PRIME MEDICAL SERVICES, INC.

                           ANNUAL REPORT ON FORM 10-K

                      FOR THE YEAR ENDED DECEMBER 31, 1997


                                     PART I

ITEM 1.           BUSINESS.

         Prime Medical Services,  Inc., a Delaware  corporation  ("Prime" or the
"Company"),  is the  largest  provider  of  lithotripsy  services  in the United
States.  Lithotripsy  is a  non-invasive  procedure  for the treatment of kidney
stones, typically performed on an outpatient basis, that eliminates the need for
lengthy hospital stays and extensive  recovery periods  associated with surgery.
The  Company  has 61  lithotripters  of which 54 are  mobile and seven are fixed
site. The Company's  lithotripters  performed approximately 36,000 procedures in
the United States in 1997 through its network of approximately 450 hospitals and
surgery  centers in 34 states.  In addition,  the Company has over 270 contracts
with managed care organizations.

         Lithotripters  fragment  kidney stones by use of  extracorporeal  shock
wave lithotripsy.  The Company provides services related to the operation of the
lithotripters,  including  scheduling,  staffing,  training,  quality assurance,
maintenance,  regulatory  compliance and contracting with payors,  hospitals and
surgery  centers.  Medical  care is rendered  by the  urologists  utilizing  the
lithotripters. Management believes that the Company has collected the industry's
largest  and  most  comprehensive  lithotripsy  database,   containing  detailed
treatment and outcomes data on over 120,000 lithotripsy procedures.  The Company
and its  associated  urologists  utilize this database in seeking to provide the
highest quality of lithotripsy services as efficiently as possible.

         From 1992 through 1997, the Company completed 12 acquisitions involving
57 lithotripter  operations and internally developed four new operations.  Since
1992,  the Company  has  substantially  divested  its  original  non-lithotripsy
businesses.

Lithotripsy Industry Overview

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

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

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45 to 64 years of age.

Kidney Stone Treatment Methods

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

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

Extracorporeal Shock Wave Lithotripsy

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

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

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

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

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Other Lines of Business

     In September  1997, the Company,  through its acquisition of a 75% interest
in AK Associates,  L.L.C.  ("AK"),  began providing  manufacturing  services and
installation,  upgrade,  refurbishment and repair of major medical equipment for
mobile  medical  services  providers.  The  Company  paid $4.8  million for this
interest,  plus an earn-out of up to $1.1  million.  The  remaining 25% of AK is
owned  by  certain  members  of AK  management.  The  Company  did  not  receive
significant revenues from AK during 1997.

     In October 1997, the Company began providing thermotherapy services for the
treatment of benign  prostatic  hyperplasia  ("BPH").  BPH is the  non-cancerous
enlargement  of  the  prostate,   a  condition   common  in  men  over  age  60.
Thermotherapy uses microwaves to apply heat to the prostate, resulting in relief
of the  symptoms  of BPH without  damaging  surrounding  tissues.  Thermotherapy
relieves the symptoms of BPH without incurring the risks of complications  often
associated with surgery and more invasive  procedures.  The Company operates one
mobile  thermotherapy  device servicing hospitals and surgery centers in eastern
North  Carolina,  and has  been  granted  an  unrestricted  license  to  provide
thermotherapy  services with a second mobile system in southern California.  The
Company intends to evaluate the success of its thermotherapy  operations and may
expand such  operations in the future.  The Company did not receive  significant
revenues from this activity during 1997.

     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"). The Medical Providers have absolute
authority  over the medical  services  provided at the centers,  fees charged to
patients and the collection practices of the facility.  Prime Cardiac's fees are
generally  based  on  collected  revenues  of  the  centers.   The  Company  has
substantially  reduced its cardiac  rehabilitation  business over the last three
years,  which accounted for less than 1% of the Company's total revenues for the
year ended December 31, 1997.

Potential Liabilities-Insurance

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

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

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Government Regulation and Supervision

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

         In addition to the Illegal  Remuneration  Statute,  Section 1877 of the
Social  Security Act ("Stark II") imposes  certain  restrictions  upon referring
physicians  and  providers  of  certain  designated  health  services  under the
Medicare,  Medicaid and Champus  Programs  ("Government  Programs").  Subject to
certain exceptions, Stark II provides that if a physician (or a family member of
a physician) has a financial  relationship with an entity: (i) the physician may
not make a referral  to the  entity  for the  furnishing  of  designated  health
services reimbursable under the Government Programs; and (ii) the entity may not
bill Government Programs, any individual or any third-party payor for designated
health services furnished pursuant to a prohibited referral under the Government
Programs. The prohibitions of Stark II only apply to the treatment of Government
Program   patients,   and  have  no  application   to  services   performed  for
non-government  program patients.  Entities and physicians  committing an act in
violation of Stark II will be required to refund amounts  collected in violation
of the statute and also are subject to civil money  penalties and exclusion from
the  Government  Programs.  Urologists  are  investors in 43 of the Company's 61
lithotripsy operations,  and the two Company affiliates engaged in thermotherapy
services have  referring  physicians-  investors  (the Company  lithotripsy  and
thermotherapy  affiliates  with referring  physicians-investors  are referred to
herein as the "Company Physician Entities").

         Many key terms in Stark II are not  adequately  defined and the statute
is silent  regarding its application to vendors,  such as the Company  Physician
Entities,  contracting "under  arrangements" with hospitals for the provision of
outpatient  services.  Since the passage of Stark II, the  Company,  interpreted
Stark II  consistently  with the informal view of the General Counsel for Health
and

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Human  Services,  and concluded  that the statute did not apply to its method of
conducting  business.  Based upon a  reasonable  interpretation  of Stark II, by
referring  a patient to a hospital  furnishing  the  outpatient  lithotripsy  or
thermotherapy services "under arrangements" with the Company Physician Entities,
a physician  investor in a Company  Physician Entity is not making a referral to
an entity (the hospital) in which they have an ownership interest.

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

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

         In  addition,  upon  the  occurrence  of  changes  in the law  that may
adversely affect  operations,  the Company is required to purchase the interests
of  physician-investors  for certain of the Company  Physician  Entities.  These
mandatory purchase  obligations require the payment by the Company of a multiple
of earnings  similar to  multiples  used by the Company in pricing the  original
acquisition of such interests. To the extent the Company is required to purchase
such  interests,  such  purchases  might cause a default  under the terms of the
Company's  senior  credit  facility,  impair  the  Company's  relationship  with
urologists  and  otherwise  have a  material  adverse  impact  on  the  Company.
Regulatory  developments,  such as Stark II, might also dictate that the Company
purchase all the

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interests of its physician-investors, regardless of any contractual requirements
to do so,  or  substantially  alter its  business  and  operations  to remain in
compliance with applicable laws. Accordingly, there can be no assurance that the
Company will not be required to change its business  practices or its investment
relationships with urologists or that the Company will not experience a material
adverse  effect  as a  result  of any  challenge  made  by a  federal  or  state
regulatory   agency.   In   addition,   there   can   be   no   assurance   that
physician-investors who, voluntarily or otherwise,  divest of their interests in
Company  Physician  Entities will continue to refer patients at the same rate or
at all.

         Some states require  approval,  usually in the form of a certificate of
need  ("CON"),  prior to the  purchase of major  medical  equipment  exceeding a
predesignated  capital expenditure  threshold or for the commencement of certain
clinical health services.  Such approval is generally based upon the anticipated
utilization  of the  service  and the  projected  need  for the  service  in the
relevant geographical area of the state where the service is to be provided. CON
laws  differ in many  respects,  and not every  state's  CON law  applies to the
Company.  Most of the  Company's  operations  originated in states which did not
require a CON for  lithotripsy  services,  and the Company has obtained a CON in
states  where  one  is  required.  Some  states  also  require  registration  of
lithotripters  with the state agency  which  administers  its CON program.  Such
registration  is  not  subject  to  any  required  approval,  but  rather  is an
administrative  matter  imposed so that the state will be aware of all  existing
clinical health  services.  The Company  registers in those states which require
these filings.

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

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

         Except as  provided  herein,  the  Company  believes it complies in all
material  respects  with the  foregoing  laws  and  regulations,  and all  other
applicable  regulatory  requirements;  however,  these laws are complex and have
been broadly construed by courts and enforcement agencies. Thus, there can be no
assurance  that the Company will not be required to change its  practices or its
relationships  with  treating  physicians  who  are  investors  in  the  Company
Physician  Entities,  or that the Company will not experience  material  adverse
effects as a result of any investigations or enforcement actions by a federal or
state regulatory  agency.  Further,  the Company  acknowledges that the Proposed
Stark Regulations apply the physician  referral  prohibitions of Stark II to the
Company  Physician  Entities'  practice of contracting  under  arrangements with
hospitals for the treatment and billing of  Government  Program  patients.  As a
consequence,  the Company Physician  Entities will have to restructure or modify
their  business  practices  in order to  comply  with the  Stark II  statute  as
interpreted by the Proposed Stark Regulations.

         A number of proposals  for  healthcare  reform have been made in recent
years,  some of which have included  radical  changes in the healthcare  system.
Healthcare  reform  could  result  in  material  changes  in the  financing  and
regulation of the healthcare business, and the Company is unable to

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predict the effect of such  changes on its future  operations.  It is  uncertain
what legislation on healthcare reform, if any, will ultimately be implemented or
whether other changes in the  administration  or  interpretation of governmental
healthcare programs will occur. There can be no assurance that future healthcare
legislation  or  other  changes  in  the  administration  or  interpretation  of
governmental  healthcare programs will not have a material adverse effect on the
results of operations of the Company.

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  ranges  from  $600,000  to
$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, 1998, the Company employed  approximately 330 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. A decrease in the purchase price of lithotripters as a result of
the  development  of less  expensive  lithotripsy  equipment  could decrease the
Company's  competitive  advantage.  Most of the Company's  lithotripsy  services
agreements  have matured past their initial terms and are now in annual  renewal
terms  or  are  on a  month-to-month  basis.  Another  significant  provider  of
lithotripsy services is also a manufacturer of lithotripsy equipment,  which may
create different  incentives for such provider in pricing lithotripsy  services.
Moreover,  while the  Company  believes  that  lithotripsy  has  emerged  as the
superior  treatment  for  kidney  stone  disease,   the  Company  competes  with
alternative kidney stone disease treatments.

ITEM 2.           PROPERTIES.

         The Company's principal executive office is located in Austin, Texas in
an office building owned by American  Physicians  Services Group,  Inc. ("APS").
The Company  pays APS  approximately  $8,000 per month,  which  includes  rental
payment for  approximately  5,600  square feet of office  space,  reception  and
telephone services, and certain other services and facilities.  The office space
lease expires in December, 1998.

         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.


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         The Company leases  approximately  24,000 square feet of  manufacturing
and office space in Mokena,  Illinois  under a lease which expires in 2000.  The
current monthly lease amount is approximately $12,000.

ITEM 3.           LEGAL PROCEEDINGS.

         From time to time,  the Company  may be named as a party to  litigation
proceedings incidental to its business. The Company does not believe the outcome
of any such  litigation  is  likely  to have a  material  adverse  effect on its
business, financial condition or results of operations.

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

         NONE.


                                                      PART II

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

         The following  table sets forth the high and low closing prices for the
Company's  common  stock  in the  over-the-counter  market  as  reported  by the
National  Association of Securities Dealers,  Inc., Automated Quotations System,
for the years ended December 31, 1997 and 1996 (NASDAQ Symbol "PMSI").

         Year Ended December 31, 1997        High                      Low

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

         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

     On March 20, 1998, the Company had  approximately  800 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

                                        8

<PAGE>



relevant.

ITEM 6.  SELECTED FINANCIAL DATA.

($ in thousands, except per share data)
<TABLE>
<S>                                    <C>            <C>            <C>            <C>            <C>
                                                            Years Ended December 31,
                                         1997          1996            1995          1994          1993
                                         ----          ----            ----          ----          ----

Revenues:

  Lithotripsy                          $ 93,113       $ 71,602       $ 22,153       $ 14,843       $  7,309

  Other                                   2,866            802          1,042          9,925         13,259
                                       --------       --------       --------      ---------       --------

  Total                                $ 95,979       $ 72,404       $ 23,195       $ 24,768       $ 20,568
                                       ========       ========       ========       ========       ========

Income:

  Net income                           $ 14,856       $   8,961      $  7,204       $  4,504       $  2,539
                                       ========       =========      ========       ========       ========

Diluted earnings per share:
  Net income                             $ 0.76          $ 0.49        $ 0.48         $ 0.31         $ 0.21
                                         ======          ======        ======         ======         ======

Dividends per share                       None           None           None          None            None

Total assets                           $225,826       $202,534       $ 77,627       $ 53,861       $ 38,678
                                       ========       ========       ========       ========       ========

Long-term obligations                  $ 71,198       $ 70,910       $ 22,323       $ 12,734       $  2,675
                                       ========       ========       ========       ========       ========

</TABLE>

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

Forward Looking Statements

         The  statements  contained  in this  Report  on Form  10-K that are not
purely historical are  forward-looking  statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934,  including  statements  regarding  the  Company's  expectation,  hopes,
intentions or strategies  regarding the future.  Readers  should not place undue
reliance on forward-looking  statements. All forward-looking statements included
in this document are based on  information  available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-looking
statements.  It is important to note that the  Company's  actual  results  could
differ materially from those in such forward-looking  statements. In addition to
any risks and uncertainties specifically identified in the text surrounding such
forward- looking statements,  the reader should consult the Company's reports on
Form 10-Q and other filings under the  Securities Act of 1933 and the Securities
Exchange  Act of 1934,  for factors  that could cause  actual  results to differ
materially from those presented.

         The forward-looking statements included herein are necessarily based on
various  assumptions  and estimates and are inherently  subject to various risks
and  uncertainties,  including risks and uncertainties  relating to the possible
invalidity of the underlying  assumptions and estimates and possible  changes or
developments  in  social,  economic,   business,  industry,  market,  legal  and
regulatory circumstances and conditions and actions taken or omitted to be taken
by third parties,

                                        9

<PAGE>



including   customers,   suppliers,   business   partners  and  competitors  and
legislative,   judicial  and  other  governmental   authorities  and  officials.
Assumptions  related to the foregoing involve  judgements with respect to, among
other things,  future  economic,  competitive  and market  conditions and future
business  decisions,  all of  which  are  difficult  or  impossible  to  predict
accurately and many of which are beyond the control of the Company.  Any of such
assumptions  could be inaccurate and  therefore,  there can be no assurance that
the  forward-looking  statements  included  in this  Report on Form 10-K will be
prove to be accurate.

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

     For the year ended December 31, 1997, total revenues increased  $23,575,000
(33%)  as  compared  to the same  period  in 1996.  Revenues  from  lithotripter
operations increased by $21,511,000 primarily due to the acquisitions of (i) one
lithotripter  entity that owned or managed 31 lithotripters  throughout the U.S.
effective May 1996,  (ii)  additional  interests in 10  partnerships  in January
1997,  (iii) one company that owned two  lithotripters  effective  June 1997 and
(iv) a 38.25% interest in a lithotripter unit effective May 1997.  Revenues from
manufacturing  were  $2,358,000,  related  to the  acquisition  of  the  trailer
manufacturer  in September 1, 1997.  Revenues  from  cardiac  centers  decreased
$323,000 primarily due to the one sold cardiac center.

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

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

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

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

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

     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  acquisitions  of (i) an entity  that  owned or managed 31
lithotripters  effective  May 1, 1996 (ii) an entity that owned or managed eight
lithotripters  effective  October 1, 1995, and (iii) 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

                                       10

<PAGE>



$240,000 primarily due to four discontinued/sold cardiac centers.

     Costs and expenses (excluding depreciation and amortization) 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 deductions increased $8,251,000 primarily due to (i) 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
(ii) an increase in interest  expense of $4,746,000  due to $74.0 million in new
borrowings  in  1996  primarily  for the  acquisition  of  Lithotripters,  Inc.,
effective May 1, 1996.

     Minority interest in consolidated  income increased  $18,122,000  primarily
due to the other  ownership  interest  associated  with 21 partnerships in which
Lithotripters,  Inc.  holds a controlling  interest.  The Company  concluded the
acquisition of Lithotripters, Inc. effective May 1, 1996.

Liquidity and Capital Resources

     Cash was  $23,770,000 and $20,096,000 at December 31, 1997 and December 31,
1996,  respectively.  Cash provided by operations was  $51,693,000  for the year
ended  December 31, 1997 and  $41,602,000  for the year ended December 31, 1996.
The Company's  subsidiaries  generally  distribute  all of their  available cash
quarterly,  after establishing  reserves for estimated capital  expenditures and
working  capital.  For the years ended December 31, 1997 and 1996, the Company's
subsidiaries  distributed  cash of  approximately  $28,667,000 and  $13,440,000,
respectively, to minority interest holders.

     Cash used by investing  activities for the year ended December 31, 1997 was
$22,949,000  primarily  due to  $20,217,000  associated  with  acquisitions  and
$4,546,000 for the purchase of equipment and leasehold  improvements,  partially
offset by $1,690,000 in distributions  from investments.  Cash used by investing
activities for the year ended December 31, 1996 was $71,770,000 primarily due to
expenditures of $70,129,000  associated with acquisitions  including  $3,387,000
for  deferred  payments,  and  $2,526,000  for the  purchase  of  equipment  and
leasehold improvements. This was partially offset by $1,257,000 in distributions
from investments.

     Cash used in financing  activities for the year ended December 31, 1997 was
$25,070,000, primarily due to distributions to minority interests of $28,667,000
offset by net borrowings of $873,000,  and contributions  received from minority
interests of  $2,381,000.  Cash  provided by financing  activities  for the year
ended December 31, 1996 was $45,572,000,  which was primarily due to $58,649,000
in net borrowings under credit facilities,  partially offset by distributions to
minority interests of $13,440,000.

     The Company's existing credit facility is comprised of two term loans and a
revolving line of credit. The term loans bear interest at the rate of LIBOR plus
two percent to three percent,  payable monthly,  and require quarterly or annual
principal  payments.  At December 31, 1997,  approximately  $39 million was owed
under the term loan which matures in April 2001, and  approximately  $40 million
was owed under the term loan which matures in April 2003.  The revolving line of
credit  has a  borrowing  limit of $50.0  million  none of  which  was  drawn at
December 31, 1997.

     On March 27,  1998,  the Company  completed  an offering of $100 million of
senior  subordinated notes due 2008 (the  "Notes")  to  qualified  institutional
buyers. The net proceeds from the offering

                                       11

<PAGE>



of  approximately  $96  million  will  be  used to  repay  all  outstanding
indebtedness  under the Company's bank  facility,  with the remainder to be used
for general corporate purposes, including acquisitions.  In connection herewith,
the Company will take a charge to earnings of approximately $3.8 million for
debt issuance costs associated with the Notes.

     The  Company  is  currently  evaluating  its  alternatives  in light of the
Proposed Stark Regulations.  While the Company believes the changing  regulatory
environment  may benefit the Company by  creating  new  lithotripsy  acquisition
opportunities,  the Company is reevaluating  its historical  model for providing
lithotripsy  and  thermotherapy   services  through   operations  which  include
physician- investors and has delayed the organization of physician  partnerships
that were in various stages of development.

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

     The Company has announced a stock repurchase program of up to $15.0 million
of common stock.  From time to time, the Company may purchase  additional shares
of its common stock where, in the judgment of management,  market  valuations of
its stock do not accurately  reflect the Company's past and projected results of
operations. The Company intends to fund any such purchases using available cash,
cash flow from operations and borrowings under its senior credit facility.

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

Impact of Inflation

     The assets of the Company are not affected by inflation because the Company
is not required

                                       12

<PAGE>



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.

New Accounting Pronouncements

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

Year 2000 Compliance

     The Company is aware of the issues  associated with the programming code in
existing  computer systems as the year 2000 approaches.  The "year 2000 problem"
is pervasive and complex as virtually every computer  operation will be affected
in some way by the  rollover  of the two digit  year  value to 00.  The issue is
whether computer systems will properly recognize date sensitive information when
the  year  changes  to  2000.  Systems  that  do  not  properly  recognize  such
information could generate erroneous data or cause a system to fail. The Company
does not  anticipate  that it will incur  significant  operating  expenses or be
required to invest  heavily in  computer  systems  improvements  to be year 2000
compliant.  However,  significant  uncertainty  exists  concerning the potential
costs  and  effects  associated  with any year  2000  compliance.  Any year 2000
compliance  problem of either the Company or its vendors,  third party payors or
customers  could  have a  material  adverse  effect on the  Company's  business,
results of operations, financial condition and prospects.

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

         Not required for 1997.

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

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

         NONE.


                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The information  required by this item is contained in the definitive proxy
material of the Company to be filed in connection  with its 1998 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.




                                       13

<PAGE>



                  EXECUTIVE OFFICERS OF THE REGISTRANT.

     As of March 20, 1998, the executive officers of the Company are as follows:

     Name                   Age             Position

Kenneth S. Shifrin           48        Chairman of the Board

Joseph Jenkins, M.D., J.D.   50        President, Chief Executive Officer
                                          and Director

Michael Madler               39        Senior  Vice President - Operations

Dan Myers, M.D.              49        Senior Vice President - Development

Stan Johnson                 44        Vice President

Cheryl L. Williams           46        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  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.

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

     Mr.  Madler has been Sr. 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 of Operations.

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

                                       14

<PAGE>




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

ITEM 11.          EXECUTIVE COMPENSATION.

     The information  required by this item is contained in the definitive proxy
statement of the Company to be filed in connection  with its 1998 annual meeting
of shareholders, which information is incorporated herein by reference.

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

     The information  required by this item is contained in the definitive proxy
statement of the Company to be filed in connection  with its 1998 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 1998 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.

     NONE

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.


                                       15

<PAGE>



(c)  Exhibits. (1)

     3.1     Certificate of Incorporation of the Company. (2)

     3.2     Bylaws of the Company. (2)

     4.1     Specimen of Common Stock Certificate. (2)

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

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

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

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

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

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

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

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

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

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

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

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

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



                                       16

<PAGE>



     10.14  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.  (8)

     10.15  First Amendment to Loan Agreement dated August 17, 1995 between
            Prime Medical Services, Inc. and The First National Bank of Boston,
            as agent. (9)

     10.16  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. (11)

     10.17  Second Amended and Restated Loan Agreement between Prime Medical
            Services, Inc., The First National Bank of Boston, N.A. and
            NationsBank of Texas, N.A., as agent. (12)

     10.18  Revolving Credit Note, dated March 31, 1997 in the amount of
            $14,111,111.11 issued by the Company to NationsBank of Texas, N.A.
            as agent. (12)

     10.19  Revolving Credit Note, dated March 31, 1997 in the amount of
            $13,888,888.89 issued by the Company to The First National Bank of
            Boston as agent. (12)

     10.20  Revolving  Credit  Note,  dated March 31, 1997 in the amount of
            $8,333,333.33 issued by the Company to Bank One, Texas, N.A.
            as agent. (12)

     10.21  Revolving Credit Note, dated March 31, 1997 in the amount of
            $6,666,666.67 issued by the Company to Imperial Bank as agent. (12)

     10.22  Revolving Credit Note, dated March 31, 1997 in the amount of
            $7,000,000.00 issued by the Company to The Sumitomo Bank, Limited as
            agent. (12)

     10.23  Term Note A, dated March 31, 1997 in the amount of $12,500,000.00
            issued by the Company to NationsBank of Texas, N.A. as agent. (12)

     10.24  Term Note A,  dated  March 31,  1997 in the amount of $12,500,000.00
            issued  by the  Company  to The First National Bank of Boston as
            agent. (12)

     10.25  Term Note A, dated March 31, 1997 in the amount of $7,500,000.00
            issued by the Company to Bank One, Texas, N.A. as agent. (12)

     10.26  Term Note A, dated March 31, 1997 in the amount of $7,500,000.00
            issued by the Company to Imperial Bank as agent. (12)

                                       17

<PAGE>



     10.27   Term Note A, dated March 31, 1997 in the amount of $5,000,000.00
             issued by the Company to The Sumitomo Bank, Limited as agent. (12)

     10.28   Term Note B, dated March 31, 1997 in the amount of $10,000,000.00
             issued by the Company to NationsBank of Texas, N.A. as agent. (12)

     10.29   Term Note B, dated March 31, 1997 in the amount of $5,000,000.00
             issued by the Company to Crescent/MACH Partners, L.P. as agent.(12)

     10.30   Term Note B,  dated  March 31,  1997 in the amount of $5,000,000.00
             issued by the Company to Merrill Lynch Senior Floating Rate Fund,
             Inc. as agent. (12)

     10.31   Term Note B,  dated  March 31,  1997 in the amount of $5,000,000.00
             issued  by  the  Company  to  Pilgrim America Prime Rate Trust as
             agent. (12)

     10.32   Term Note B, dated March 31, 1997 in the amount of $5,000,000.00
             issued by the Company to ING Capital Senior Secured High Income
             Fund, L.P. as agent. (12)

     10.33   Term Note B, dated March 31, 1997 in the amount of $5,000,000.00
             issued by the Company to Van Kampen American Capital Prime Rate
             Income as agent. (12)

     10.34   Term Note B, dated March 31, 1997 in the amount of $5,000,000.00
             issued by the Company to Paribas Capital Funding LLC as agent. (12)

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

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

     10.37*  Employment Agreement dated October 27, 1995 between Prime Medical
             Services, Inc. and Stan D. Johnson. (9)

     10.38*  Employment Agreement dated May 1, 1996 between Prime Medical
             Services, Inc. and Joseph Jenkins, M.D., J.D. (11)

     10.39*  Employment Agreement dated April 1, 1997 between Prime Medical
             Services, Inc. and William Walsh. (12)

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


                                       18

<PAGE>



     10.41* Employment Agreement dated October 8, 1997 between Prime Medical
            Services, Inc. and Larry Sodomire. (12)

     10.42  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. (10)

     10.43  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. (10)

     10.44  Partnership Interest Purchase Agreement dated May 1, 1997 among
            Prime Lithotripter Operations,  Inc., Tenn-Ga Stone Group Two, L.P.,
            NGST, Inc. and all the shareholders of NGST, Inc. (12)

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

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

     10.47  Limited Partnership Agreement of Pacific Medical Limited
            Partnership. (12)

     10.48  Limited Partnership Agreement of California I Prostatherapy Limited
            Partnership. (12)

     10.49  Limited Partnership Agreement of Great Lakes Lithotripsy Limited
            Partnership. (12)

     10.50  Limited Partnership Agreement of Texas Lithotripsy Limited
            Partnership VI, L.P. (12)

     10.51  Limited Partnership Agreement of North Carolina Prostatherapy
            Limited Partnership I. (12)

     21.1   List of subsidiaries of the Company.  (12)

     23.1   Independent Auditors' Consent of KPMG Peat Marwick LLP.   (12)

     27     Financial Data Schedule (12)
 --------------

     *   Executive compensation plans and arrangements.



                                       19

<PAGE>



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

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

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

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

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

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

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

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

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

     (10) Filed as an Exhibit to the Current  Report on Form 8-K dated April 26,
1996 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, 1996.

     (12)         Filed herewith.

                                       20

<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 30, 1998

     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 30, 1998


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

Date:  March 30, 1998


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

Date:  March 30, 1998





                                       21

<PAGE>



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

Date:  March 30, 1998


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

Date:  March 30, 1998


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

Date:  March 30, 1998


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

Date:   March 30, 1998


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

Date:  March 30, 1998


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

Date:  March 30, 1998





                                       22

<PAGE>








                                   APPENDIX A

                                      INDEX
                                                                        Page


Independent Auditors' Report                                             A-2

Consolidated Financial Statements:
     Consolidated Statements of Income
          for the years ended December 31, 1997, 1996 and 1995.          A-3

     Consolidated Balance Sheets at December 31, 1997 and 1996.          A-4

     Consolidated Statements of Stockholders' Equity
          for the years ended December 31, 1997, 1996 and 1995.          A-6

     Consolidated Statements of Cash Flows
          for the years ended December 31, 1997, 1996 and 1995.          A-7

     Notes to Consolidated Financial Statements.                         A-11








                                       A-1

<PAGE>



                          Independent Auditors' Report




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

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

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  financial  position of Prime  Medical
Services,  Inc. and  subsidiaries at December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.


/s/ KPMG Peat Marwick, LLP
--------------------------
Austin, Texas
February 27, 1998, except Note N,
  to which the date is March 27, 1998










                                       A-2

<PAGE>



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

($ in thousands, except per share data)      Years Ended December 31,
                                         1997           1996            1995
                                         ----           ----            ----
Fee Revenue:
   Lithotripsy:
         Fee revenues                  $84,537         $65,138          $19,306
         Management fees                 6,237           4,698            1,617
         Equity income                   2,339           1,766            1,230
                                      --------       ---------       ----------
                                        93,113          71,602           22,153

   Manufacturing                         2,358              --               --
   Cardiac                                 479             802            1,042
   Other                                    29              --               --
                                      --------     -----------     ------------
         Total fee revenue              95,979          72,404           23,195
                                      --------     -----------     ------------

   Cost of services and general and
       administrative expenses
         Lithotripsy                    25,381          19,922            5,979
         Manufacturing                   1,743              --               --
         Cardiac                           310             632            1,505
         Other                             168              --               --
         Corporate                       5,683           4,245            2,573
                                      --------       ---------       ----------
                                        33,285          24,799           10,057

    Depreciation and amortization        9,911           8,422            3,195
                                      --------       ---------       ----------
         Total operating expenses       43,196          33,221           13,252
                                       -------       ---------        ---------

Operating income                        52,783          39,183            9,943

Other income (deductions):
     Interest and dividends                740             459              152
     Interest expense                   (7,477)         (5,977)         ( 1,231)
     Loan fees and stock offering costs   (360)         (3,535)             --
     Other, net                              6             370              647
                                    ----------     -----------      ------------

                                        (7,091)         (8,683)         (   432)
                                     ---------     -----------       -----------
Income before provision for income taxes
     and minority interest              45,692          30,500            9,511

Minority interest in
     consolidated income                25,041          19,543            1,421

Provision for income taxes               5,795           1,996              886
                                      --------      ----------       -----------

Net income                             $14,856       $   8,961        $   7,204
                                     =========       =========        ==========

Basic earnings per share:
     Net income                          $0.77           $0.51            $0.51
                                         =====           =====            =====

     Weighted average shares
          outstanding                   19,275          17,633           14,226
                                        ======          ======           ======

Diluted earnings per share:
     Net income                          $0.76           $0.49            $0.48
                                         =====           =====            =====

     Weighted average shares
          outstanding                   19,461          18,638           15,350
                                        ======          ======           ======

          See accompanying notes to consolidated financial statements.
                                       A-3

                                                            A-3

<PAGE>




                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


($ in thousands)


                                                         December 31,
                                                       1997              1996
                                                     --------          --------

ASSETS

Current assets:
     Cash                                            $ 23,770          $ 20,096
     Accounts receivable, less allowance
       for doubtful accounts of $811 in 1997
       and $335 in 1996                                19,387            16,346
     Other receivables                                  1,103             1,842
     Deferred income taxes                              1,506               948
     Prepaid expenses and other current assets          1,776               841
                                                    ---------        ----------

          Total current assets                         47,542            40,073
                                                     --------          --------

Property and equipment:
     Equipment, furniture and fixtures                 32,673            28,318
     Leasehold improvements                               531               113
                                                    ---------         ---------

                                                       33,204            28,431
Less accumulated depreciation and
     amortization                                     (13,497)           (8,089)
                                                     --------          --------

     Property and equipment, net                       19,707            20,342
                                                     --------           -------


Other investments                                      12,305             8,100
Goodwill, at cost, net of amortization                143,823           131,415
Other noncurrent assets                                 2,449             2,604
                                                    ---------         ---------

                                                     $225,826          $202,534
                                                     ========          ========







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



<PAGE>



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


($ in thousands)

                                                         December 31,
                                                      1997              1996
                                                  ----------        -----------
LIABILITIES:

Current Liabilities:

  Current portion of long-term debt                $  11,138          $ 10,522
  Accounts payable                                     5,386             4,451
  Accrued expenses                                    20,859            16,582
                                                   ----------         ---------

     Total current liabilities                        37,383            31,555

Long-term debt, net of current portion                71,198            70,910
Deferred income taxes                                  5,809             4,907
                                                  -----------        ----------

     Total liabilities                               114,390           107,372

Minority interest                                     19,372            18,735

STOCKHOLDERS' EQUITY:

Preferred stock, $.01 par value,
  1,000,000 shares authorized;
  none outstanding                                      --                 --
Common stock, $.01 par value,
  40,000,000 shares authorized;
  19,306,267 issued in 1997 and
  19,078,933 issued in 1996                              193               191
Capital in excess of par value                        84,050            83,271
Accumulated earnings (deficit)                         7,821           ( 7,035)
                                                  -----------        -----------

     Total stockholders' equity                       92,064            76,427
                                                   ----------        ----------

                                                   $ 225,826          $202,534
                                                   =========          ========












          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, 1997, 1996 and 1995

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

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

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

Balance, January 1, 1995        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
      including tax benefit of
      $130 on non-qualifying
      exercises                    477,666          5            488        --        --        --            --         493
  Debt converted to stock          921,415          9          5,241        --        --        --            --       5,250
  Exercise of warrants           1,343,825         13          4,040        --        --        --            --       4,053
  Retirement of treasury
      stock                  (      30,000)       --       (     101)       --    (30,000)      101           --         --
                             -------------- ----------     ----------  --------- ---------  -------- -------------  --------
Balance, December 31, 1996      19,078,933        191          83,271  (  7,035)      --        --            --      76,427

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

  Exercise of stock options
      including tax benefit of
      $438 on non-qualifying
      exercises                    227,334          2            779        --        --        --            --         781
                             -------------- ----------     ----------  --------- ---------  -------- ------------- ---------

Balance, December 31, 1997      19,306,267     $  193      $  84,050   $  7,821       --    $   --   $        --   $  92,064
                             ============== ==========     ==========  ========= =========  ======== ============= =========

</TABLE>

          See accompanying notes to consolidated financial statements.
                                       A-6



<PAGE>




                  PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S>                                                <C>               <C>            <C>

($ in thousands)
                                                      Years Ended December 31,
                                                     1997              1996           1995
                                                     ----              ----           ----

CASH FLOWS FROM OPERATING ACTIVITIES:
  Fee and other revenue collected                  $90,924           $ 72,452       $ 21,640
  Cash paid to employees, suppliers
      of goods and others                          (31,685)           (25,190)       ( 9,094)
  Interest received                                    739                459            157
  Interest paid                                    ( 7,521)           ( 5,104)       ( 1,275)
  Taxes paid                                       (   764)           ( 1,015)       (   530)
                                                   --------          ---------      ---------

      Net cash provided by operating activities     51,693             41,602         10,898
                                                   --------          ---------      ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of lithotripter entities                (20,217)           (66,742)       (15,033)
  Proceeds from sale of investment in American
                Physicians Service Group, Inc. stock   --                 --           2,753
  Purchases of equipment and leasehold
       improvements                                ( 4,546)           ( 2,526)      (    473)
  Deferred payments on lithotripter entities           --             ( 3,387)           --
  Proceeds from sales of equipment                      30                  6             21
  Investments                                        1,690              1,257            864
  Other                                                 94           (    378)      (      6)
                                                   --------          ---------      ---------

       Net cash used by investing activities       (22,949)           (71,770)      ( 11,874)
                                                   --------          ---------      ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Payments on notes payable & capital  leases,
       exclusive of interest                       (50,328)           (15,351)       ( 9,588)
  Borrowings on notes payable                       51,201             74,000         14,284
  Distributions to minority interest               (28,667)           (13,440)       ( 1,644)
  Contributions by minority interest                 2,381                --             --
  Exercise of stock options                            343                363             70
  Other                                                --                 --          (  366)
                                                   --------          ---------      ---------

      Net cash provided by (used in)
          financing activities                     (25,070)            45,572          2,756
                                                   --------          ---------      ---------

NET INCREASE IN CASH AND CASH
    EQUIVALENTS                                      3,674             15,404          1,780

Cash and cash equivalents, beginning of period      20,096              4,692          2,912
                                                   --------          ---------      ---------


Cash and cash equivalents, end of period           $23,770           $ 20,096       $  4,692
                                                   ========          =========      =========
</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>
<S>                                                <C>                <C>            <C>


                                                             Years Ended December 31,
                                                      1997              1996             1995
                                                      ----              ----             ----

Reconciliation of net income to net
 cash provided by operating activities
  Net income                                       $ 14,856           $ 8,961        $   7,204
  Adjustments to reconcile net
    income to cash provided by
    operating activities:
       Minority interest in consolidated income      25,041            19,543            1,421
       Depreciation and amortization                  9,911             8,422            3,195
       Provision for uncollectible accounts             427               319              771
       Equity in earnings of affiliates              (2,342)          ( 1,773)          (1,234)
       Gain on sale of investment in American
              Physicians Service Group, Inc. stock      --                 --            ( 559)
       Provision for deferred income taxes               68               974              193
       Writeoff of loan fees                            --                696              --
       Other                                          1,162                --             (226)
       Changes in operating  assets and  liabilities,
          net of effect of purchase transactions:
           Accounts receivable                       (3,156)            1,284           (  541)
           Other receivables                            754               472            2,197
           Other current assets                        (602)              529             (447)
           Accounts payable                             934               452           (1,224)
           Accrued expenses                           4,640             1,723              148
                                                   --------         ---------      -----------

        Total adjustments                            36,837            32,641            3,694
                                                   --------          --------       ----------

        Net cash provided by operating activities  $ 51,693          $ 41,602         $ 10,898
                                                   ========          ========         ========



</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>
<S>                                                <C>               <C>                  <C>

                                                              Years Ended December 31,
                                                       1997              1996             1995
                                                       ----              ----             ----

SUPPLEMENTAL INFORMATION OF
  NON-CASH INVESTING AND
  FINANCING ACTIVITIES:

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

           Current assets decreased by             $    9,532
           Noncurrent assets increased by               4,041
           Goodwill increased by                       15,836
           Current liabilities increased by             1,343
           Noncurrent liabilities increased            10,000
           Minority interest decreased by                 998

At December 31, 1997, the Company had accrued
distributions payable to minority interests.  The
effect of this transaction was as follows:

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

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

</TABLE>

          See accompanying notes to consolidated financial statements.
                                       A-9



<PAGE>



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

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

                                                             Years Ended December 31,
                                                      1997              1996          1995
                                                      ----              ----          ----

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

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
           Stockholders' equity                                                            7
</TABLE>

          See accompanying notes to consolidated financial statements.
                                      A-10


<PAGE>



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

A.       ORGANIZATION AND OPERATION OF THE COMPANY

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

B.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Consolidation

         The  consolidated  financial  statements  include  the  accounts of
         Prime,  its wholly-owned  subsidiaries,  entities more than 50% owned
         and  partnerships  where Prime  has  control,  even  though  its
         ownership  is less  than  50%.  Investments  in  entities  in which the
         Company's  investment is less than 50% ownership,  and the Company does
         not control,  are  accounted  for by the equity  method if ownership is
         between 20% - 50%, or by the cost method if ownership is less than 20%.
         Through  December  31,  1997,  the Company had  recognized  $466,000 in
         undistributed  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 control.  All  significant
         intercompany  accounts  and  transactions  have  been eliminated.

         Cash Equivalents

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

         Property and Equipment

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







                                      A-11

<PAGE>


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





B.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued


         Intangible Assets

         The Company  records as goodwill the excess of the purchase  price over
         the fair value of the net assets associated with acquired  businesses.
         Goodwill is amortized over a period not to exceed forty years using the
         straight-line basis.  Accumulated amortization at December 31, 1997 and
         1996 is $9,745,000 and $5,798,000,  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.

         Revenue Recognition

         Revenues generated from management services are recognized as they are
         earned.

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

         Revenues  for the  manufacture  of trailers  are  recognized  using the
         percentage of completion method.

         At December 31, 1997,  approximately 15% of accounts  receivable relate
         to units operating in Texas, 11% relate to units located in California,
         11% relate to  operations  located in North  Carolina  and 9% relate to
         units located in Louisiana.

         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%
         in 1995, reciprocal stockholdings were eliminated.


                                      A-12

<PAGE>


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





B.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

         Income Tax

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

         Long-Lived Assets

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

         Accounts Receivable

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

         Stock-Based Compensation

         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 J).






                                      A-13

<PAGE>


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





B.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

         Debt Issuance Costs

         The Company expenses debt issuance costs as incurred.

         Estimates Used to Prepare Financial Statements

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

         Reclassification

         Certain  reclassifications  have  been  made to  amounts  presented  in
         previous years to be consistent with the 1997 presentation.

         Earnings Per Share

         Statement of Financial  Accounting  Standards  No. 128,  "Earnings  per
         Share",   specifies  new   measurement,   presentation  and  disclosure
         requirements  for  earnings  per share and is  required  to be  applied
         retroactively  upon initial adoption.  The Company has adopted SFAS No.
         128 effective  with the release of December 31, 1997 earnings data, and
         accordingly,  has restated herein all previously  reported earnings per
         share data.  Basic earnings per share is based on the weighted  average
         shares  outstanding  without any dilutive effects  considered.  Diluted
         earnings per share  reflects  dilution from all  contingently  issuable
         shares,  including  options and convertible  debt. A reconciliation  of
         such earnings per share data is as follows:



                                      A-14

<PAGE>


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





B.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

     ($ in thousands, except per share data)

               1997
                                                        Per Share
                                      Income    Shares   Amounts
     Basic EPS
     Net Income.....................    $14,856   19,275 $   0.77
                                                         ========

     Effect of dilutive securities:
     Options      .                                  186
                                       --------      ---
     Diluted EPS....................    $14,856   19,461 $   0.76
                                        =======   ====== ========


               1996
                                                        Per Share
                                      Income    Shares   Amounts
     Basic EPS
     Net Income.....................    $ 8,961   17,633 $   0.51
                                                         ========

     Effect of dilutive securities:
     Warrants.......................                 400
     Convertible Debt...............        101      224
     Options      .                                  381
                                       --------      ---
     Diluted EPS....................     $9,062   18,638 $   0.49
                                         ======   ====== ========

               1995
                                                        Per Share
                                      Income    Shares   Amounts
     Basic EPS
     Net Income.....................    $ 7,204   14,226 $   0.51
                                                         ========

     Effect of dilutive securities:
     Warrants.......................                 402
     Convertible Debt...............         97      209
     Options      .                                  513
                                       --------      ---
     Diluted EPS....................     $7,301   15,350 $   0.48
                                         ======   ====== ========


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

                                      A-15

<PAGE>


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





C.   INVESTMENTS

        Tenn-Ga

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

        Southern California

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

        Texas, Ohio & Louisiana Partnerships

        In December  1994,  the Company  acquired  all of the common stock of
        three  corporations.  Each  corporation  is the  general  partner  and
        holds an approximate  20%  interest  in a limited  partnership  which
        operates  a mobile lithotripter. Texas ESWL/Laser Lithotripter, Ltd.
        operates a mobile lithotripter in Texas,  Oklahoma and  Arkansas.  Ohio
        Mobile  Lithotripter,  Ltd.  operates a mobile lithotripter in Ohio.
        Arklatx Mobile Lithotripter, L.P. operates a mobile lithotripter  in
        Louisiana.  This  investment is accounted for using the equity method.

        American Physicians Service Group, Inc.

        At December 31, 1997 and 1996, 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% of the outstanding  common stock of the Company at December 31, 1997
        and 1996.  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).  Two of the  Company's  eight
        board members are also on the board of APS.

        The Company  occupies  approximately  5,600  square feet of office space
        owned by APS. The Company also shares  certain  personnel  with APS. The
        monthly rent and personnel cost is approximately $8,000.

D.       ACQUISITIONS

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

                                      A-16

<PAGE>


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





D.       ACQUISITIONS, continued

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

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

         Unaudited proforma combined income data for the years ended December
         31,  1997  and  1996  of the  Company  and  the  acquisitions
         discussed  above assuming all were effective January 1, 1996 is as
         follows:
         ($ in thousands except per share data)
                                                1997           1996
                                             --------        -------

                  Total revenues             $100,228        $81,143
                  Total expenses               84,941         71,080
                                             --------       --------
                    Net income               $ 15,287        $10,063
                                             ========        =======

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

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

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

         Unaudited proforma combined income data for the years ended December
         31,  1996  and  1995  of the  Company  and  the  acquisitions
         discussed  immediately above assuming both were effective January 1,
         1995 is as follows:



                                      A-17

<PAGE>


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





         D.       ACQUISITIONS, continued

                  ($ in thousands except per share data)

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

                  Total revenues                  $92,499         $82,934
                  Total expenses                   82,684          74,409
                                                  -------         -------

                    Net income                    $ 9,815        $  8,525
                                                  =======        ========

                  Diluted earnings per share      $  0.51        $   0.50
                                                  =======        ========

         Effective October 1, 1995, the Company acquired 100% of the outstanding
         stock of Sun Medical  Technologies,  Inc.  ("Sun").  Sun operates eight
         lithotripters  serving  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 were convertible into 672,000 shares of the Company's common
         stock. 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  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 could be converted into 326,000
         shares of the Company's common stock. The noteholder elected to convert
         the outstanding balance of such note into the Company's stock in 1996.
         The acquisition was accounted for using the purchase method of
         accounting.




                                      A-18

<PAGE>


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





E.       FAIR VALUE OF FINANCIAL INSTRUMENTS

         Statement of Financial  Accounting Standards No. 107, Disclosures About
         Fair Value of Financial Instruments  (Statement 107), requires that the
         Company disclose estimated fair values for its financial instruments as
         of December 31, 1997 and 1996.  The carrying amounts and fair values of
         the Company's financial instruments are as follows:
<TABLE>
           <S>                                         <C>           <C>        <C>         <C>

                                                                   1997                    1996
                                                        ----------------------  -------------------------
                                                       Carrying       Fair      Carrying     Fair
           ($ in Thousands)                             Amount        Value      Amount      Value
                                                        ------        -----      ------      -----
              Financial assets:
           Cash                                         $23,770       $23,770   $20,096     $20,096
           Accounts receivable                           19,387        19,387    16,346      16,346
           Other receivables                              1,103         1,103     1,842       1,842
           Investment in American
               Physicians Service Group, Inc.               173           356       173         325

              Financial liabilities:
           Debt                                          82,336        82,336    81,432      81,432
           Accounts payable                               5,386         5,386     4,451       4,451
</TABLE>

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

           Cash

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

           Accounts Receivable and Other Receivables

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

           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.



                                      A-19

<PAGE>


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





E.         FAIR VALUE OF FINANCIAL INSTRUMENTS, continued

           Accounts Payable

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

           Limitations

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

F.       ACCRUED EXPENSES

         Accrued expenses consist of the following:

                                                  December 31,      December 31,
                                                     1997              1996
         ($ in Thousands)

         Legal fees                                 $ 634             $ 452
         Accrued group insurance costs                228               164
         Compensation and payroll
           related expense                          1,787             1,502
         Taxes, other than income taxes               439               334
         Accrued interest                             984             1,028
         Provision for closed centers                 159               163
         Income taxes payable                       4,229               761
         Dividends payable to minority interest     8,655            10,705
         Deferred payments for acquisitions         1,339               --
         Other                                      2,405             1,473
                                                  -------           -------
                                                  $20,859           $16,582
                                                  =======           =======


                                      A-20

<PAGE>


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





G.       INDEBTEDNESS

         Long-term debt, other than bank debt, are as follows:

         ($ in thousands)

         Interest                        December 31,
           Rates      Maturities       1997        1996
         --------     ----------     -------     ------

         None         2000 - 2006    $   161     $  241
         6%               --              --        984
         11.5%           1998              6         12
                                     -------    -------

                                         167      1,237
         Less current portion of
          long-term debt                   6      1,100
                                     -------     ------

                                     $   161     $  137
                                     =======     ======

       The non-interest bearing notes totaling $161,000 are unsecured. The 11.5%
       note is secured by computer equipment.

       Long-term bank notes payable are as follows:

       ($ in thousands)

       Interest                         December 31,
         Rates         Maturities      1997       1996
       --------        ----------    -------     ------

       60-day LIBOR
         plus 2 1/2%    1998-2003    $79,000     $76,750
       Prime            1998-2001      2,969       3,245
       Prime + 1%         1998           200         200
                                     -------     -------
                                      82,169      80,195
       Less current portion of
             long-term bank debt      11,132       9,422
                                     -------     -------
                                     $71,037     $70,773
                                     =======     =======

       During 1997,  the Company  increased  its bank  facility with Bank Boston
       from $90 million to $135 million. The facility consists of three separate
       loans:  (1) a $45 million term loan bearing an interest  rate of LIBOR +2
       to 3%, payable quarterly, with quarterly principal payments,  maturing in
       April 2001, (2) a $40 million term loan bearing an interest rate of LIBOR
       +2 to 3%, payable quarterly, with annual principal payments,  maturing in
       April  2003,  and (3) a $50 million  revolving  credit  facility  bearing
       interest of LIBOR +2 to 3%, maturing in April 2001. At December 31, 1997,
       the entire $50 million revolving credit facility was undrawn. At December
       31, 1997,


                                      A-21

<PAGE>


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





G.     INDEBTEDNESS, continued

     interest on the  Company's  bank  facility was 8.6%.  The bank  facility is
collateralized  by the  assets  of  the  Company,  including  the  stock  of its
subsidiaries. (See Note N)

       The stated  principal  repayments for all indebtedness as of December 31,
1997 are payable as follows:
                                                       ($ in thousands)
                           1998                              $11,138
                           1999                               13,134
                           2000                               13,706
                           2001                                7,426
                           2002                                  800
                           Thereafter                         36,132

H.       COSTS OF SERVICES AND GENERAL AND ADMINISTRATIVE EXPENSES

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

                                           Years Ended December 31,
                                             1997        1996      1995
                                          ----------  ---------  ---------

            ($ in thousands)

            Salaries, wages and benefits     $15,779   $11,953   $ 4,027
            Other costs of services            7,569     6,878     3,412
            General and administrative         3,595     1,941       718
            Legal and professional             2,064     1,315       659
            Manufacturing costs                1,394      --         --
            Other                              2,884     2,712     1,241
                                           ---------   -------   -------
                                             $33,285   $24,799   $10,057
                                           =========   =======   =======

I.       COMMITMENTS AND CONTINGENCIES

         At  December  31,  1997,   minimum  annual  rental   commitments  under
         non-cancelable  operating leases for equipment and office space,  which
         may contain renewal and escalation clauses through 2001, are:

                             ($ in thousands)

                    1998             $ 439
                    1999               365
                    2000               309
                    2001                 2


                                      A-22

<PAGE>


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





I.         COMMITMENTS AND CONTINGENCIES

           Rent  expense  for  equipment  and office  space for the years  ended
           December 31, 1997, 1996 and 1995 are $568,000, $360,000, and
           $239,000, respectively.

           The  Company  sponsors  a  partially,   self-insured   group  medical
           insurance  plan. The plan is designed to provide a specified level of
           coverage,  with stop-loss coverage provided by a commercial  insurer.
           The Company's maximum claim exposure is limited to $35,000 per person
           per policy year. At December 31, 1997,  the Company had 172 employees
           enrolled in the plan. The plan provides non-contributory coverage for
           employees and  contributory  coverage for  dependents.  The Company's
           contributions  totaled  $351,000  in  1997,  $224,000  in  1996,  and
           $150,000 in 1995.

J.         COMMON STOCK OPTIONS

           1993 Stock Option Plan:

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

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

           In June 1997,  the  Company  adopted an  amendment  to the 1993 Stock
           Option Plan that raised the number of shares to be issued by 500,000.

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






                                      A-23

<PAGE>


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





J.         COMMON STOCK OPTIONS, continued
<TABLE>
<S>                             <C>        <C>                <C>       <C>               <C>      <C>

                                           1997                        1996                        1995
                                ---------------------------   --------------------------  --------------------

                                Options    Weighted-Average   Options   Weighted-Average  Options  Weighted-Average
                                 (000)      Exercise Price     (000)     Exercise Price    (000)    Exercise Price
Outstanding - beginning
    of year                       1,228         $8.99             975        $1.31          1,055        $0.98
Granted                             428         11.94             730        13.87             55         5.58
Exercised                          (227)         1.51            (477)        0.52           (135)        0.52
Forfeited                           (35)        12.19             (--)         --             (--)         --
                                 ------                       -------

Outstanding-end of year           1,394        $11.04           1,228        $8.99            975        $1.31
                                 ======                       =======                     =======

Exercisable at end of year          466        $ 8.21             422        $2.03            816        $0.75

Weighted-average fair
     value of options granted
     during the year              $5.21         --              $6.13          --           $2.07         --

</TABLE>

           The following table summarizes the Company's  outstanding  options at
December 31, 1997:
<TABLE>
          <S>                         <C>        <C>              <C>           <C>            <C>
                                                    Outstanding options         Exercisable options
                                                 -------------------------      ----------------------
                                                   Average        Weighted                     Weighted
                                                  Remaining        Average                      Average
                                      Options    Contractual      Exercise      Options        Exercise
           Range of Exercise Prices   (000)         Life           Price         (000)          Price
           ------------------------   ------     -----------      ---------     -------        --------

           $  0.25 - $  4.12             223       2.0 years       $  1.39          195         $ 1.10
           $  4.13 - $  8.25              37       3.9 years       $  5.75           10         $ 5.99
           $  8.26 - $12.37              292       2.3 years       $ 10.55            5         $ 8.94
           $12.38 - $16.50               842       3.9 years       $ 14.04          256         $13.72
                                      ------                                    -------

           Total                       1,394                                        466
                                     =======                                    =======
</TABLE>

           Pro forma information  regarding net income and earnings per share is
           required by Statement 123, and has been  determined as if the Company
           had  accounted  for its employee  stock  options under the fair value
           method  of that  Statement.  The fair  value for  these  options  was
           estimated at the date of grant using a Black-  Scholes option pricing
           model with the following weighted-average assumptions for 1995, 1996,
           and 1997

                                      A-24

<PAGE>


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





J.         COMMON STOCK OPTIONS, continued

           respectively:  risk-free  interest  rates  of 5.7%,  6.2%  and  6.2%;
           dividend yields of 0%, 0% and 0%; volatility  factors of the expected
           market price of the Company's common stock of .38, .53 and .46; and a
           weighted-average expected life of the option of 4 years.

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

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

                                            1997           1996         1995
                                           -------       -------       ------

                  Pro forma net income     $12,448       $ 8,109       $7,197
                  Pro forma earnings
                    per share
                      Basic                  $0.65         $0.46        $0.51
                      Diluted                $0.64         $0.44        $0.47

          Statement 123 calls for a prospective application of compensation
          relating to the grant of stock options and, consequently pro-forma
          financial information may not be indicative of future amounts until
          the new rules are applied to all outstanding nonvested awards.

K.       OTHER INCOME (EXPENSE)

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

($ in thousands)
                                            Years Ended December 31,
                                      1997           1996         1995
Collections on amounts               -----          -----        -----
     previously written off          $ --           $ 192          --
Gain on sale of investment
     in American Physicians Service
     Group, Inc. Stock                 --              --          559
Equipment rental                       --              58          --
Other income                             6            120           88
                                     -----          -----        -----
Other, net                           $   6          $ 370        $ 647
                                     =====          =====        =====



                                      A-25

<PAGE>


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







L.       INCOME TAXES

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

         Income tax expense consists of the following:
         ($ in thousands)
                                                  Years ended December 31,
                                                 ----------------------------
                                                  1997        1996      1995
                                                 ------      ------    ------
               Federal
                  Current                        $4,369      $   97    $ 110
                  Deferred                           68         974      193
               State                              1,358         925      583
                                                 ------      ------    -----
                                                 $5,795      $1,996    $ 886
                                                 ======      ======    =====

          A reconciliation of expected income tax (computed by applying the
          United States statutory income tax rate of 35% for 1997 and 34% for
          1996 and 1995, to earnings before income taxes) to total income
          tax expense in the accompanying consolidated statements of income
          follows:
          ($ in thousands)                        Years ended December 31,
                                                 ------------------------
                                                  1997        1996      1995
                                                 ------      ------    ------
               Expected federal income tax       $7,228      $3,725    $2,751
               Change in beginning of year
                    valuation allowance          (2,399)     (3,093)   (2,091)
               State taxes                        1,358         925       583
               Other                             (  392)        439    (  357)
                                                 ------      ------    ------
                                                 $5,795      $1,996    $  886
                                                 ======      ======    ======

         The tax effects of temporary  differences that give rise to significant
         portions of the deferred tax assets and  deferred  tax  liabilities  at
         December 31, 1997 and 1996 are presented below.
         ($ in thousands)
                                                  1997             1996
                                                 -----           ------
         Deferred tax assets:
           Accounts receivable,
             principally due to allowance
             for doubtful accounts               $ 266           $  114
           AMT credit carryforwards                --               249
           Net operating loss carryforwards        --               944
           Investment tax credit carryforwards     --             1,200
           Accrued expenses deductible
             for tax purposes when paid          1,240              834
           Property and equipment,
             principally due to
             differences in depreciation           --               656
           Other                                   932              829
                                                 -----           ------
             Total gross deferred tax assets     2,438            4,826
             Less valuation allowance              --            (2,399)
                                                 -----           ------
             Net deferred tax assets             2,438            2,427
                                                 -----           ------
         Deferred tax liabilities:
           Property and equipment,
             principally due to
             differences in depreciation       (  583)              --
           Investments in affiliated
             entities, principally due to
             undistributed income              (2,807)           (2,860)
           Intangible assets, principally
             due to differences in
             amortization periods for tax
             purposes                          (2,419)           (1,872)
           IRS Section 481(A) adjustment
             for partnerships acquired         (  -- )           (  175)
                                              -------            ------


                                      A-26

<PAGE>


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





L.       INCOME TAXES, continued
                                                  1997          1996
           Total gross deferred tax             -------       -------
               liabilities                      ( 5,809)      ( 4,907)
                                                -------       -------
           Net deferred tax liability           ($3,371)      ($2,480)
                                                =======       =======

         The valuation allowance for deferred tax assets as of December 31, 1997
         was $-0-  representing  a  decrease  of  $2,399,000,  primarily  due to
         utilization  of  net  operating  loss   carryforwards.   The  valuation
         allowance for deferred tax assets as of January 1, 1996 was  $5,492,000
         with the  change in the total  valuation  allowance  for the year ended
         December 31, 1996 being a decrease of $3,093,000. The Company  believed
         that the valuation  allowance at December 31, 1996 was necessary due to
         uncertainties  regarding the Company's use of the net operating loss
         carryforwards and tax credit  carryforwards  which could have become
         limited in the event  that the Company experienced a greater than 50%
         stock ownership  change in a  three-year  period (as defined in the
         Internal Revenue Service regulations).

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

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

M.       RELATED PARTY TRANSACTIONS

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

N.       SUBSEQUENT EVENT

         On March 27, 1998, the Company completed an offering of $100 million of
         senior   subordinated  notes  due  2008  (the   "Notes")  to  qualified
         institutional   buyers.   The  net   proceeds   from  the  offering  of
         approximately  $96.0  million  will be used to  repay  all  outstanding
         indebtedness under the Company's bank facility, with the remainder  to
         be  used  for  general  corporate  purposes,   including acquisitions.
         In connection herewith, the Company will take a charge to earnings of
         approximately $3.8 million for debt issuance costs associated with the
         Notes.  (See Note B)

                                      A-27

<PAGE>