PRIME MEDICAL SERVICES INC /TX/ - 10-K Annual Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

[X] Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2000

[ ] 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

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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 15, 2001: $101,157,771

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 15, 2001
------------------- --------------
Common Stock, $.01 par value 15,562,734

DOCUMENTS INCORPORATED BY REFERENCE

Selected portions of the Registrant's definitive proxy material for the
2001 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 FISCAL YEAR ENDED DECEMBER 31, 2000

PART I

ITEM 1. BUSINESS
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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 67 lithotripters of which 60 are mobile and seven are fixed site.
The Company's lithotripters performed approximately 36,000 procedures in the
United States in 2000 through a network of approximately 450 hospitals and
surgery centers in 34 states.

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 160,000 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 2000, the Company completed 13 acquisitions involving 58
lithotripters. Since 1992, the Company has divested its original non-lithotripsy
businesses.

During 1997 the Company acquired a 75% interest in a manufacturing company which
provides manufacturing services, and installation, refurbishment and repair of
major medical equipment for mobile medical services providers. The primary
intention of this acquisition was to provide vertical integration with the
lithotripsy business. However, the non-lithotripsy business of the manufacturing
segment has continued to increase. In addition to manufacturing services for
lithotripsy trailers, the manufacturing segment also provides manufacturing
services for magnetic resonance imaging ("MRI") trailers, cardiac
catheterization lab trailers and postitron emission tomography ("PET") trailers.

During 1999 and 2000, the Company completed six acquisitions totaling eleven
refractive centers in the rapidly growing field of refractive vision correction
(RVC). These six acquisitions now operate fifteen laser vision correction
facilities, which performed approximately 33,000 procedures on an annualized
basis during 2000. These facilities provide laser vision correction of common

refractive vision disorders such as myopia (nearsightedness), hyperopia
(farsightedness) and astigmatism. The Company also opened its first internally
developed center in 2000.

There are currently two procedures that use the excimer laser ("laser") to
correct vision disorders: Laser in-situ Keratomileusis ("LASIK") and
Photorefractive Keratectomy ("PRK"). LASIK is an outpatient procedure that
accounts for nearly 90% of laser procedures done today. In LASIK, an ophthalmic
surgeon uses a special knife called a microkeratome to peal back the top layers
of the cornea and ablates the underlying corneal tissue with the laser before
replacing the corneal layer. LASIK has three key advantages over PRK where the
laser is used without creating the corneal flap: less pain, shorter recovery
time, and fewer visual side effects.

The Company has three reportable segments: lithotripsy, manufacturing and RVC.
Other operating segments, which do not meet the qualitative thresholds for
reportable segments, include prostatherapy services. See Note N to the
consolidated financial statements for segment disclosures.

Lithotripsy Segment Overview
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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 preventive cure in the
vast majority of cases. Approximately 25% of all kidney stones do not pass
spontaneously and therefore require medical or surgical treatment. Kidney stone
treatments used by urologists include lithotripsy, drug therapy, endoscopic
extraction or open surgery. While the nature and location of a kidney stone
impacts the choice of treatment, the Company believes the majority of all kidney
stones that require treatment are treated with lithotripsy because it is
non-invasive, typically requires no general anesthesia, and rarely requires
hospital stays. After fragmentation by lithotripsy, the resulting kidney stone
fragments pass out of the body naturally. Recovery from the procedure is usually
a matter of hours.

Kidney stone disease is most prevalent in the southern United States. Men are
afflicted with kidney stones more than twice as frequently as women, with the
highest incidence occurring in men 45 to 64 years of age. During 2000 the
Company received approximately 64% of its revenues from the lithotripsy segment.

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
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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 two basic
types of lithotripsy treatment currently available: electromagnetic and
spark-gap. 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 55
electromagnetic machines and 12 spark-gap machines.

Electromagnetic Technology. These 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.

Manufacturing Segment Overview
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In September 1997, the Company, through its acquisition of a 75% interest in AK
Associates, L.L.C. ("AK"), began providing manufacturing services and
installation, upgrade, refurbishment and repair of major medical equipment for
mobile medical services providers. The Company paid $4.8 million for this
interest, plus an earn-out of $1.1 million, which was paid in February 1999.
Certain members of AK management own the remaining 25% of AK. During 1998 AK
became certified by General Electric Company ("GE") to provide trailers for MRI
equipment, and during 1999 AK became certified by two additional companies to
provide trailers for their equipment. These certifications have resulted in
increased revenues in the manufacturing segment. Currently, AK manufactures MRI,
cardiac catheterization lab and PET trailers. The sales prices for these
trailers range from $270,000 to $360,000. AK either has a sales contract prior
to beginning the manufacturing process or enters into a sales contract prior to
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completion of the trailer. AK is certified to manufacture trailers for GE,
Siemens, Philips and Marconi. In addition, AK repairs, refurbishes and upgrades
existing trailers. Although repair and upgrade work was less than 5% of total
sales in 2000, this opportunity will continue to grow as more and more units are
placed into service. The Company received approximately 17 % of its revenues
from the manufacturing segment in 2000.

RVC Segment Overview
- --------------------

During 1999, the Company entered into the RVC field through two acquisitions.
Effective September 1, 1999, the Company acquired a 60% interest in three
refractive surgery centers, owned and operated by Barnet Dulaney Eye Center in
Phoenix and Tucson, Arizona for approximately $8.8 million in cash, a warrant to
purchase 29,000 shares of the Company's common stock and a contingent earn-out
obligation totaling $1 million which was paid in 2000. Also effective September
1, 1999, the Company acquired, through a majority owned subsidiary, 60% of the
outstanding stock of Horizon Vision Centers, Inc. ("Horizon") for approximately
$10.9 million in cash, which operated four refractive surgery centers in the San
Francisco and Oakland bay area. During 2000, Horizon opened three additional
refractive centers.

Effective March 1, 2000, the Company purchased a 60% interest in a refractive
surgery center owned and operated by the Mann Berkeley Caplan Laser Center of
Austin, Texas. The Company paid approximately $3.8 million in cash and issued
warrants to purchase 27,000 shares of the Company's common stock. Additionally
in conjunction with this transaction, the Company issued warrants to purchase
28,000 shares of common stock to a third party.

Also effective March 1, 2000, the Company purchased a 60% interest in a
refractive surgery center in Los Angeles owned and operated by the Caster Eye
Center. The Company paid approximately $5.8 million in cash. Additionally in
conjunction with this transaction, the Company issued warrants to purchase
44,000 shares of the Company's common stock to a third party.

Effective April 1, 2000, the Company purchased a 65% interest in a refractive
surgery center in New York City owned and operated by New York Eye Specialists.
The Company paid approximately $8.9 million in cash. Additionally in conjunction
with this transaction, the Company issued warrants to purchase 67,000 shares of
the Company's common stock to a third party. During 2000, this Company
subsidiary opened a new center in Connecticut.

Effective September 1, 2000, the Company purchased a 65% interest in a Kansas
City refractive surgery center owned and operated by Vision Correction Centers
of Kansas City. The Company paid approximately $4.5 million in cash for the
center in October 2000. Additionally in conjunction with this transaction, the
Company issued warrants to purchase 33,750 shares of the Company's common stock
to a third party.

In 2000, the Company also opened its first internally developed refractive
vision correction center in St. Louis. This center was developed in conjunction
with certain principals in Barnet Dulaney Eye Center and two local doctors.
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The Company received approximately 18% of its revenue from the RVC segment in
2000.

Refractive Disorders

The primary function of the human eye is to focus light. The eye works much like
a camera; light rays enter the eye through the cornea, which provides most of
the focusing power. Light then travels through the lens where it is fine-tuned
to focus properly on the retina. The retina, located at the back of the eye,
acts like the film in the camera, changing light into electric impulses that are
carried by the optic nerve to the brain. To see clearly, light must be focused
precisely on the retina. The amount of refraction required to properly focus
images depends on the curvature of the cornea and the size of the eye. If the
curvature is not correct, the cornea cannot properly focus the light passing
through it onto the retina, and the viewer will see a blurred image. Refractive
disorders, such as myopia, hyperopia and astigmatism, result from an inability
of the cornea and the lens to focus images on the retina properly.

Laser Vision Correction Procedures

In both PRK and LASIK the physician assesses the corneal correction required and
programs the laser. The laser's software calculates the optimal number of pulses
needed to achieve the corneal correction. Both PRK and LASIK are performed on an
outpatient basis without general anesthesia, using only topical anesthetic eye
drops. The eye drops eliminate the reflex to blink, while an eyelid holder is
inserted to prevent blinking. The patient reclines in a chair, with his or her
eye focused on a target, and the surgeon positions the patient's cornea for the
procedure. The surgeon uses a foot pedal to apply the laser beam, which emits a
rapid succession of laser pulses. The actual laser treatment takes 15 to 90
seconds to perform and the entire procedure, from set-up to completion, takes 10
to 15 minutes.

Prostatherapy Segment Overview
- ------------------------------

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 operated three
mobile thermotherapy devices servicing hospitals and surgery centers in eastern
North Carolina, Texas, and southern California. The Company received
approximately 1% of its revenues from the prostatherapy segment in 2000. In
January 2001, the Company sold its prostatherapy segment in exchange for a three
year unsecured non-recourse note receivable for $950,000. The Company also
entered into a mutual covenant not to compete with the buyer in exchange for an
unsecured non-recourse note receivable for $150,000.

Potential Liabilities-Insurance
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All medical procedures performed in connection with the Company's business
activities are conducted directly by, or under the supervision of, physicians
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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 $5,000,000, with a deductible of $50,000 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.

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 for
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 all of its prostatherapy services (and the
corresponding arrangements between such partnerships and other entities and the
treating physicians who own interests therein and who use the lithotripsy and
prostatherapy facilities owned by such partnerships and other entities) could
potentially be questioned under the illegal remuneration prohibition and
generally do 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 in and
of itself 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.
6

In addition to the Illegal Remuneration Statute, Section 1877 of the Social
Security Act ("Stark II") imposes certain restrictions upon referring
physicians and providers of certain designated health services under the
Medicare and Medicaid Programs ("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. 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. Physicians are investors in 51 of the Company's 65
lithotripsy operations, all of the three Company affiliates engaged in
thermotherapy services and each of the Company's refractive vision correction
facilities. The Company lithotripsy and thermotherapy affiliates with
physician-investors are referred to herein as the "Company Physician Entities".

Many key terms in Stark II are not defined and the statute is silent regarding
its application to vendors, such as the Company Physician Entities, contracting
"under arrangements" with hospitals for the provision of outpatient services.
Prior to the publication of the Proposed Stark Regulations described below, the
Company interpreted Stark II consistently with the informal view of the General
Counsel for Health and Human Services, and concluded that the statute did not
apply to its method of conducting business. Based upon a reasonable
interpretation of Stark II, by referring 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 Health Care Financing Administration ("HCFA") published
proposed regulations designed to interpret and clarify the application of Stark
II. As these regulations were simply proposed and subject to future modification
or repeal, the Company awaited the issuance of final Stark II regulations. On
January 4, 2001 HCFA issued the first of two rules intended to implement the
final Stark II regulations (the "Final Regulations"). The first rule ("Phase I")
implements the Final Regulations pertaining to (i) Stark II's general
prohibition against physician self-referrals to entities in which they have a
financial relationship, (ii) the general exceptions applicable to both the
ownership and compensation arrangement prohibitions, (iii) certain new
regulatory exceptions, and (iv) the definitions that are used throughout Stark
II. HCFA intends to publish a second final rule ("Phase II") shortly which will
address the remainder of the Stark II statute and its application to the
Medicaid program, as well as certain proposals for new exceptions not included
in the proposed Stark II regulations, but suggested in the public comments
thereto. Phase I will become effective on January 4, 2002. HCFA has delayed the
effective date of Phase I to allow individuals and entities engaged in business
arrangements impacted by Phase I time to restructure those arrangements to
comply with the provisions in Phase I.
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Currently, Medicare and Medicaid only reimburse for lithotripsy if the service
is provided through a hospital. The lithotripsy services to be provided by the
Company Physician Entities pursuant to the hospital service contracts to
Medicare/Medicaid hospital outpatients will be provided "under arrangements"
with hospitals, with the treatment being billed under the hospital's provider
billing number. HCFA acknowledged in its commentary to the proposed Stark II
regulations that physician overutilization of lithotripsy is unlikely and
solicited comments on whether there should be a regulatory exception to Stark II
specifically for lithotripsy services. Upon consideration of numerous public
comments received on the proposed regulations and upon review of the Stark II
legislative history, HCFA concluded in its commentary to the Final Regulations
that it does not have the authority to exclude lithotripsy from the inpatient
and outpatient hospital services covered by Stark II. Consequently, the Company
Physician Entities practice of providing lithotripsy services "under
arrangements" to hospitals for treatment of Medicare and Medicaid patients must
comply with the provisions of the Final Regulations.

Although the Final Regulations do not provide a specific Stark II exception for
lithotripsy services, the regulations do provide needed clarity and certain
opportunities for the Partnership to operate in compliance with Stark II. In the
Commentary to the Final Regulations, HCFA notes its desire to permit
physician-owned lithotripsy ventures to continue if such ventures are structured
such that no direct or indirect compensation arrangement is created, or the
arrangement fits within a compensation arrangement exception to Stark II. The
Final Regulations accomplish HCFA's desire in part by: (i) clarifying that
physician-owned lithotripsy vendors providing services "under arrangements" with
hospitals can comply with Stark II by either being structured such that they are
not compensation arrangements, as defined in the Final Regulations, or
qualifying under a compensation exception (but not an ownership interest
exception as well); (ii) broadening certain existing Stark II statutory
exceptions by redefining certain standards to allow "per-use" lithotripsy
payments, as long as such payments are at fair market value; and (iii) adding
two new Stark II regulatory exceptions that are potentially available for
Company Physician Entity operations.

In order for the Company Physician Entities to comply with Stark II as modified
by the Final Regulations, the entities financial relationships with hospitals
must either fall outside the definition of a compensation arrangement, or comply
with a Stark II compensation arrangement exception. The Company has worked to
establish a compliance program that is in the process of implementation. As
noted above, due to the Final Regulations delayed effective date, the Company
has until January 4, 2002 to take reasonable steps to review the Company
Physician Entities operations under the Final Regulations. Specifically, the
Company Physician Entities intend to work with hospitals to review and modify,
if necessary, the service contracts so that they satisfy the standards set forth
in the new Final Regulations. To the extent financial arrangements with the
contract hospitals meet the definition of "indirect compensation arrangements"
under the Final Regulations, then the Company Physician Entities intend to see
that such agreements fit within the new indirect compensation arrangement
exception. Indirect compensation arrangements have several important elements,
including the presence of an intervening entity, that directly links referring
physician owners with the entity providing the designated health service (e.g.,
the contract hospital). In order to comply with the indirect compensation
exception, the Company Physician Entities hospital contracts must meet each of
the following standards:
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o The compensation received directly by the Company Physician
Entities from the hospitals must be fair market value for the
items or services provided under the arrangement and must not take
into account the value or volume of referrals or other business
generated by the referring physician for the contract hospital;

o The compensation arrangement between the Company Physician
Entities and the hospitals must be set out in writing, signed by
the parties, and specify the services covered by the arrangement;
and

o The compensation arrangement must not violate the Anti-Kickback
Statute or any laws or regulations governing billing or claims
submission.

In regard to the Company Physician Entities proposed operations, the indirect
compensation arrangement exception may be used with respect to any or all
payments made by the hospitals to the entities, including payments for the use
of the lithotripters, as well as the personal services of a technician and/or
nurse. It is important to note that the Final Regulations allow fair market
value per-use payments for lithotripsy services. The Company believes that its
current financial relationships with hospitals are compliant or can be modified
to the extent necessary to satisfy the requirements of the indirect compensation
arrangement exception, and that accordingly, the Company Physician Entities will
be able to operate in compliance with Stark II. To succeed with its compliance
plan, the Company Physician Entities must obtain the hospitals' cooperation in
making any necessary revisions to their service contracts consistent with the
indirect compensation arrangement exception. Whereas the Company believes that
the service contracts which create financial relationships with the hospitals
have always met the fair market value standard, the Final Regulations place the
burden on the contracting parties that rely on the indirect compensation
exception to prove the standard is met. The Company intends to engage a
valuation expert or pursue other commercially reasonable methodologies to assist
it in meeting that burden of proof.

The Company believes it will successfully implement the above described
compliance plan, however, there can be no assurance that such will be the case.
The hospitals may not cooperate with the Company Physician Entities. If
hospitals chose not to continue a financial relationship with the Company
Physician Entities, this could have a material adverse effect on the entities.
Should that occur, then the Company intends to explore and implement any other
available options that would allow the Company Physician Entities to comply with
Stark II, as well as all other material health care statutes and regulations.
Such alternative options may include contracting with ambulatory surgery centers
("ASCs") rather than hospitals, since lithotripsy services at ASCs are not
covered by Stark II. The Medicare and Medicaid programs, however, do not
reimburse for lithotripsy services at ASCs at this time. It is anticipated that
ASCs will receive reimbursement for treatment of Medicare and Medicaid patients
in the near future, but there can be no assurance that such will be the case. It
should be noted that there can be no assurance that compliance action taken by
the Company under any potential alternative, or contract decisions by hospitals,
will occur in a manner that does not have a material adverse effect on the
Company Physician Entities.
9

Stark II compliance efforts 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 purchase
prices calculated using various formulas ranging from capital account value to a
multiple of earnings similar to multiples used by the Company in pricing the
original acquisition of such interests. To the extent the Company is required to
purchase such interests, such purchases might cause a default under the terms of
the Company's senior credit facility and senior subordinated notes, impair the
Company's relationship with physicians and otherwise have a material adverse
impact on the Company. Regulatory developments might also dictate that the
Company purchase all the interests of its physician-investors, regardless of any
contractual requirements to do so, or substantially alter its business and
operations to remain in compliance with applicable laws. Accordingly, there can
be no assurance that the Company will not be required to change its business
practices or its investment relationships with physicians 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
10

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 the Company's 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 and thermotherapy facilities 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 and
thermotherapy equipment are subject to safety regulation by the U.S. Department
of Transportation and the states in which the Company conducts its mobile
lithotripsy and thermotherapy business. The Company believes that it is in
material compliance with these regulations.

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

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

Equipment
- ---------

The Company purchases its equipment, and maintenance is generally provided
pursuant to service contracts with the manufacturer or other service companies.
The cost of a new lithotripter ranges from $400,000 to $600,000. For mobile
lithotripsy and thermotherapy, the Company either purchases or leases the
11

tractor, usually for a term up to five years, and purchases the trailer or a
self contained coach. The cost of the laser equipment utilized in RVC ranges
from $300,000 to $500,000.

Employees
- ---------

As of March 15, 2001, the Company employed approximately 350 full-time employees
and approximately 50 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. The Company also competes with three public
companies, all of which are also manufacturers of lithotripsy equipment, which
may create different incentives for such providers 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.

The Company's manufacturing segment competes with at least three privately held,
national companies. The primary competitive factors are price and quality,
including product manufacturing differences. Additionally, two of the three
largest competitors are certified to provide GE trailers. The Company believes
it manufactures a high quality product at a competitive price.

The RVC market is fragmented and competitive. The Company competes with several
national, public companies as well as individual ophthalmologists, hospitals and
smaller service companies. The principal methods for competition are pricing and
quality issues. The larger competitors are primarily focused on pricing, while
the smaller competitors compete using both pricing and quality issues. While
there are lower cost competitors in the geographic areas where the Company
currently has operations, the Company believes it provides a higher quality
service for a competitive price.

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

The Company's principal executive office is located in Austin, Texas in an
office building owned by American Physicians Service Group, Inc. ("APS"). The
Company pays APS approximately $18,000 per month, which includes rental payment
for approximately 11,600 square feet of office space, reception and telephone
services, and certain other services and facilities. The office space lease
expires in December 2002.
12

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

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

The Company is involved in various claims and legal actions that have arisen in
the ordinary course of business. Management believes that any liabilities
arising from these actions will not have a material adverse effect on the
financial condition, results of operations or cash flows of the Company.

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

On June 14, 2000, an annual meeting of the shareholders of the Company was held
to consider and vote on the proposal described below. Proxies for this meeting
were solicited pursuant to Regulation 14 under the Act.

1) Election of seven directors to the board of directors;

The nominees for director were:

David Dulaney, M.D., Joseph Jenkins, M.D., J.D., J.A. McEntire IV,
William A. Searles, Kenneth S. Shifrin, Michael J.Spalding, M.D. and
James M. Usdan.

All nominees were elected. The voting was as follows:

Nominee Votes For Votes Against Votes Withheld

David Dulaney, M.D. 15,195,059 1,010,579 --
Joseph Jenkins, M.D., J.D. 15,195,059 1,010,579 --
J.A. McEntire IV 15,195,059 1,010,579 --
William A. Searles 15,195,059 1,010,579 --
Kenneth S. Shifrin 15,195,059 1,010,579 --
Michael J. Spalding, M.D. 15,195,059 1,010,579 --
James M. Usdan 15,195,059 1,010,579 --

13

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
- ------- -------------------------------------------------
STOCKHOLDER MATTERS
-------------------

The following table sets forth the high and low closing prices for the Company's
common stock in the over-the-counter market as reported by the National
Association of Securities Dealers, Inc., Automated Quotations System, for the
years ended December 31, 2000 and 1999 (NASDAQ Symbol "PMSI").

2000 1999
---------------- ----------------
High Low High Low
---- --- ---- ---

First Quarter $ 9.06 $ 7.13 $ 8.44 $ 7.13
Second Quarter $ 9.06 $ 6.81 $ 7.56 $ 6.75
Third Quarter $ 9.50 $ 7.50 $ 9.75 $ 7.44
Fourth Quarter $ 8.25 $ 4.91 $ 10.63 $ 8.13

On March 15, 2001, the Company had approximately 594 holders of record of its
common stock.

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

14

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

(In thousands, except per share data) Years Ended December 31,
------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Revenues:
Lithotripsy $83,335 $89,180 $92,053 $93,113 $71,602
Manufacturing 22,157 17,527 11,066 2,358 --
RVC 23,501 3,414 -- -- --
Other 1,702 2,053 1,517 508 802
-------- ------- ------- ------- -------
Total $130,695 $112,174 $104,636 $95,979 $72,404
======== ======== ======== ======= =======
Income:
Net income $10,657 $15,039 $10,794 $14,856 $8,961
======= ======= ======= ======= ======
Diluted earnings per share $0.66 $0.88 $0.57 $0.76 $0.49
===== ===== ===== ===== =====
Dividends per share None None None None None
Total assets $276,218 $246,972 $240,198 $224,905 $201,175
======== ======== ======== ======== ========
Long-term obligations $123,172 $103,797 $100,987 $71,198 $70,910
======== ======== ======== ======= =======

Quarterly Data March 31 June 30 Sept. 30 Dec. 31
- -------------- -------- ------- --------- --------

2000
- ----

Revenues $29,443 $32,966 $35,445 $32,841
Net income $3,297 $3,102 $3,168 $1,090
Per share amounts (basic):
Net income $0.20 $0.19 $0.20 $0.07
Weighted average shares outstanding 16,435 16,218 15,943 15,749
Per share amounts (diluted):

Net income $0.20 $0.19 $0.20 $0.07
Weighted average shares outstanding 16,607 16,303 16,025 15,750

1999
- ----

Revenues $25,382 $28,608 $30,632 $27,552
Net income $3,162 $4,302 $4,339 $3,236
Per share amounts (basic):
Net income $0.18 $0.25 $0.26 $.20
Weighted average shares outstanding 17,387 17,098 16,818 16,553
Per share amounts (diluted)

Net income $0.18 $0.25 $0.26 $0.19
Weighted average shares outstanding 17,495 17,196 17,000 16,788

15

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

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

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

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

Year ended December 31, 2000 compared to the year ended December 31, 1999
- -------------------------------------------------------------------------

Total revenues increased $18,521,000 (17%) as compared to the same period in
1999. Revenues from lithotripter operations decreased by $5,845,000 (7%)
primarily due to renegotiation of contracts which resulted in a larger number of
contracts providing for per diem pricing, and slightly lower procedure volumes
related to contracts lost due to non-renewal and competition. Manufacturing
revenue increased by $4,630,000 (26%) due to increased sales of MRI and cardiac
catheterization lab trailers as well as the Company's expansion into the sales
of PET trailers. RVC revenues increased $20,087,000 (588%) as 2000 revenues
included a full year of operations for five centers and partial year of
operations for eleven new centers, while 1999 revenues included partial year of
operations for two entities. Prostatherapy revenues decreased $256,000 (14%).

16

Costs of services and general and administrative expenses (excluding
depreciation and amortization) increased from 40% to 47% of revenues and
increased $16,955,000 (38%) in absolute terms, compared to the same period in
1999. Cost of services associated with lithotripter operations decreased
$585,000 (3%) in absolute terms and increased from 26% to 27% of lithotripter
revenues. Cost of services associated with manufacturing increased $4,269,000
(33%) in absolute terms and from 73% to 77% of manufacturing revenues due to
expansion into new product lines. Cost of services associated with RVC
operations increased $11,902,000 (609%) in absolute terms, and from 57% to 59%
of RVC revenues due to full year of operation for five centers in 2000 and
partial year of operations for the additional eleven centers. Cost of services
associated with prostatherapy increased $39,000 and the Company recognized an
impairment on its prostatherapy segment of $1,230,000 in 2000 in connection with
approving the disposal of this segment in a transaction which closed in January
2001. Corporate expenses decreased from 4% to 3% of revenues, as the Company was
able to successfully grow without proportionately adding overhead. Corporate
expenses decreased $541,000 (11%) primarily due to a consolidation of corporate
functions.

Other deductions increased $2,069,000 from 1999 to 2000. This increase is
partially attributable to an increase in interest expense of $1,155,000 during
2000. Also contributing to the increase in other deductions was income
recognition in 1999 of $1,140,000 due to the release of a contractual obligation
related to a management incentive compensation program accrued at December 31,
1998.

Minority interest in consolidated income increased $3,246,000 primarily due to
the decline in lithotripsy revenue discussed above. Earnings before interest,
taxes, depreciation, and amortization (EBITDA) attributable to minority
interests was $32,328,000 for the year ended December 31, 2000 compared to
$28,554,000 for the same period in 1999. EBITDA is not intended to represent net
income or cash flows from operating activities in accordance with generally
accepted accounting principles and should not be considered a measure of the
Company's profitability or liquidity.

Income tax expense for 2000 decreased $2,706,000 over 1999 primarily due to the
decrease in pretax income.

Year ended December 31, 1999 compared to the year ended December 31, 1998
- -------------------------------------------------------------------------

Total revenues increased $7,538,000 (7%) as compared to the same period in 1998.
Revenues from lithotripter operations decreased by $2,873,000 (3%) primarily due
to renegotiation of contracts which resulted in a larger number of contracts
providing for per diem pricing, and contracts lost due to non-renewal and
competition. Despite the lithotripsy revenue declines, lithotripsy procedure
volume was constant from 1998 to 1999, which the Company believes is indicative
of its market share preservation. Manufacturing revenue increased by $6,461,000
(58%) due to increased sales of MRI trailers as well as the Company's expansion
into manufacturing and sales of cardiac catheterization lab trailers. RVC
revenues were $3,414,000 in 1999 and included fee revenue of $3,004,000 and
equity income of $410,000. The RVC operations were acquired during the third
quarter of 1999. Prostatherapy revenues increased $627,000 (52%) as1999 revenues
included a full year of operations for three entities, while 1998 revenues
included a full year of operations for one entity and a partial year of
operations for two entities.

17

Costs of services and general and administrative expenses (excluding
depreciation and amortization) increased from 38% to 40% of revenues and
increased $5,466,000 (14%) in absolute terms, compared to the same period in
1998. Cost of services associated with lithotripter operations increased
$327,000 (1%) in absolute terms and from 25% to 26% of lithotripter revenues.
Cost of services associated with manufacturing increased $3,676,000 (40%) due to
the increase in sales. Cost of services associated with RVC was $1,954,000,
which represents approximately 4 months of operations. Cost of services
associated with prostatherapy increased $482,000 due to increased operations.
Corporate expenses decreased from 5% to 4% of revenues and increased $101,000
(2%) in absolute terms, as the Company was able to successfully grow without
proportionately adding overhead.

Other deductions decreased $4,318,000 from 1998 to 1999. This decrease is
attributable to a decrease in loan fees and stock offering costs of $4,412,000
due to costs recognized in 1998 of $4,978,000 associated with the $100 million
senior subordinated notes offering and the $50 million increase in the senior
revolving credit facility, partially offset by 1999 expenses of $566,000 related
to a restructuring of the Company's $100 million senior revolving credit
facility. Also contributing to the decrease in other deductions was income
recognition in 1999 of $1,140,000 due to the release of a contractual obligation
related to a management incentive compensation program accrued at December 31,
1998. These decreases were partially offset by an increase in interest expense
of $939,000, primarily due to the $100 million debt offering which closed in
March 1998.

Minority interest in consolidated income decreased $282,000 in 1999 as compared
to 1998 primarily due to the decline in lithotripsy revenue discussed above.
EBITDA attributable to minority interests was $28,554,000 for the year ended
December 31, 1999 compared to $28,077,000 for the same period in 1998.

Income tax expense for 1999 increased $2,055,000 over 1998 primarily due to the
increase in pretax income.

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

Cash and cash equivalents were $15,530,000 and $20,064,000 at December 31, 2000
and 1999, respectively. 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, 2000
and 1999, the Company's subsidiaries distributed cash of approximately
$27,092,000 and $27,180,000, respectively, to minority interest holders.

Cash provided by operations was $45,180,000 for the year ended December 31, 2000
and $35,744,000 for the year ended December 31, 1999. From 1999 to 2000 fee and
other revenue collected increased by $12,256,000 and was offset by the increase
in cash paid to employees, suppliers of goods and others of $11,092,000. These
fluctuations are attributable to increased operations as well as the timing of
accounts receivable collections and accounts payable and accrued expense
payments. An increase in interest payments of $1,052,000 was due to the Company
drawing on its line of credit during 2000 related to the refractive acquisitions

18

made during 2000. Taxes paid decreased $2,555,000 from 1999 to 2000.
Additionally, the Company purchased investments of $3,714,000 during 2000,
offset by proceeds from sales and maturities of $6,615,000.

Cash used by investing activities for the year ended December 31, 2000, was
$33,802,000 primarily due to $23,784,000 used in four refractive acquisitions
and as well as payments of earnouts related to a prior year acquisition. The
Company purchased equipment and leasehold improvements totaling $12,975,000. The
Company received $2,680,000 in distributions from investments. Cash used by
investing activities for the year ended December 31, 1999, was $26,241,000
primarily due to $23,580,000 used in two refractive acquisitions and as well as
payments totaling $5,790,000 for the purchase of equipment and leasehold
improvements. The Company received $2,352,000 in distributions from investments.

Cash used in financing activities for the year ended December 31, 2000, was
$15,912,000, which was primarily due to distributions to minority interests of
$27,092,000 and purchases of treasury stock of $7,703,000 partially offset by
net borrowings of $18,517,000 and contributions of $202,000 received from
holders of minority interests related to expansion of existing partnerships and
new partnership formations. Cash used in financing activities for the year ended
December 31, 1999, was $29,585,000, primarily due to distributions to minority
interests of $27,180,000, purchases of treasury stock of $8,382,000, partially
offset by net borrowings of $3,181,000 and contributions of $2,636,000 received
from holders of minority interests related to expansion of existing partnerships
and new partnership formations.

The Company's credit facility as of December 31, 2000 is comprised of a
revolving line of credit. The revolving line of credit has a borrowing limit of
$100 million, $18 million and $12 million of which was drawn at December 31,
2000 and March 15, 2001, respectively. During 2000, the Company completed a
restructuring of its revolving line of credit to enable the Company to borrow
for RVC acquisitions. The restructuring split the credit facility into two
facilities: one for $14,000,000 for refractive acquisitions by certain
subsidiaries, another for the remaining $86,000,000 for lithotripsy,
manufacturing, refractive and prostatherapy acquisitions, stock repurchases and
working capital. On March 27, 1998, the Company completed an offering of $100
million of senior subordinated notes due 2008 (the "Notes") to qualified
institutional buyers. The net proceeds from the offering of approximately $96
million was used to repay all outstanding indebtedness under the Company's bank
facility, with the remainder used for general corporate purposes, including
acquisitions. In connection therewith, the Company recorded a charge to earnings
in 1998 of approximately $4.4 million for debt issuance costs associated with
the Notes. The Notes bear interest at 8.75% and interest is payable
semi-annually on April 1st and October 1st. Principal is due April 2008.

The Company intends to increase the number of its lithotripsy operations
primarily through acquisitions, the number of its RVC operations through both
acquisitions and development, and its manufacturing operations through
acquisitions and by increasing its product lines through additional
certifications. The Company intends to fund the purchase price for future
acquisitions and developments using borrowings under its senior credit facility
and cash flow from operations. In addition, the Company may use shares of its
common stock in such acquisitions where appropriate.

19

During 1998, the Company announced a stock repurchase program of up to $25.0
million of common stock. In February 2000, the Company announced an increase in
the authorized repurchase amount from $25.0 million to $35.0 million and in
January 2001 this amount was increased to $45.0 million. From time to time, the
Company may purchase additional shares of its common stock where, in the
judgment of management, market valuations of its stock do not accurately reflect
the Company's past and projected results of operations. The Company intends to
fund any such purchases using available cash, cash flow from operations and
borrowings under its senior credit facility. The Company has purchased 3,820,200
shares of stock for a total of $32,524,000 as of March 15, 2001.

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.

Inflation
- ---------

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

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

As of December 31, 2000, the Company had long-term debt (including current
portion) totaling $125,709,000, of which $100 million has a fixed rate of
interest of 8.75%, $1,517,000 has fixed rates of 6% to 9%, $6,030,000 bears
interest at a variable rate equal to a specified prime rate, $18 million bears
interest at a variable rate equal to LIBOR + 1 to 2% and $162,000 does not bear
any interest. The Company is exposed to some market risk due to the floating
interest rate debt totaling $24,030,000. The Company makes monthly or quarterly
payments of principal and interest on $6,030,000 of the floating rate debt. An
increase in interest rates of 1.5% would result in a $360,000 annual increase in
interest expense on this existing principal balance.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------ -------------------------------------------
The information required by this item is contained in Appendix A attached
hereto.

20

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 2001 annual meeting
of shareholders, except for the information regarding executive officers of the
Company, which is presented below. The information required by this item
contained in such definitive proxy material is incorporated herein by reference.

As of March 15, 2001, the executive officers of the Company are as follows:

Name Age Position

Kenneth S. Shifrin 51 Chairman of the Board
Brad A. Hummel 44 Chief Executive Officer and President
Cheryl L. Williams 49 Chief Financial Officer, Senior Vice
President-Finance and Secretary
Stan Johnson 47 Vice President
David Vela, M. D. 53 Vice President

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

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

Mr. Hummel has been President and Chief Executive Officer since June 2000.
From October 1999 until June 2000, Mr. Hummel was Executive Vice President and
Chief Operating Officer of the Company. Prior to joining the Company, Mr. Hummel
was with Diagnostic Health Services, Inc. ("DHS") since 1984, most recently
serving as the President and Chief Executive Officer, and as a member of the
Board of Directors. DHS filed for Chapter 11 bankruptcy reorganization in March
2000 and re-emerged from bankruptcy in October 2000. From 1981 to 1984, Mr.
Hummel was an associate with Covert, Crispin and Murray, a Washington, D.C. and
London-based management consulting firm. Mr. Hummel also serves as a member of
APS's Board of Directors.

21

Ms. Williams has been Chief Financial Officer, Senior 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.

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. In March 2000, Mr. Johnson was named a Group Vice President of
the Company. Mr. Johnson was the Chief Financial Officer of Sun from 1990 to
1995.

Dr. Vela has been a Group Vice President of the Company since March 2000. Dr.
Vela received his medical degree in 1984. Dr. Vela developed and operated
various outpatient centers throughout the United States from 1986 to 1995.
From February 1997 to March 2000, Dr. Vela served as Regional Vice President of
the Company for the Central Region.

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 2001 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 2001 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 2001 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.

22

2. Financial Statement Schedules.
-----------------------------

None.

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

None.

(c) Exhibits. (1)
--------

3.1 Certificate of Incorporation of the Company. (2)

3.2 Bylaws of the Company. (2)

4.1 Specimen of Common Stock Certificate. (2)

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

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

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

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

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

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

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

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

10.9 Asset Purchase Agreement dated July 21, 1999 among Prime
Lithotripsy Services, Inc., Reston Hospital Lithotripter
Joint Venture, Reston Lithotripsy Associates, Inc., Columbia
Arlington Healthcare System, L.L.C. and Robert Ball,M.D. (15)

10.10 Not used

10.11 Not used

10.12 Not used

23

10.13 Not used

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

10.15 Agreement of Limited Partnership of Mobile Kidney
Stone Centers of California III, L.P. (15)

10.16 Amendments to First Amended and Restated Agreement of Limited
Partnership of Ohio Mobile Lithotripter, Ltd. (15)

10.17 Second Amendment to Agreement of Limited Partnership of
Pacific Medical Limited Partnership (15)

10.18 Amendments to Agreement of Limited Partnership of Texas
Lithotripsy Limited Partnership VII, L.P. (15)

10.19 Fourth Amendment to Agreement of Limited Partnership of
San Diego Lithotripters Limited Partnership (15)

10.20 Amendment to Agreement of Limited Partnership of Fayetteville
Lithotripters Limited Partnership - Virginia I (15)

10.21 Amendments to Agreement of Limited Partnership of Fayetteville
Lithotripters Limited Partnership - South Carolina I (15)

10.22 Amendment to Agreement of Limited Partnership of Fayetteville
Lithotripters Limited Partnership - Utah I (15)

10.23 Third Amendment to Agreement of Limited Partnership of Florida
Lithotripters Limited Partnership I (15)

10.24 Fourth Amendment to Agreement of Limited Partnership of
Indiana Lithotripters Limited Partnership I (15)

10.25 Sixth Amendment to Agreement of Limited Partnership of Texas
Lithotripsy Limited Partnership III, L.P. (15)

10.26 Agreement of Limited Partnership of Mobile Kidney Stone
Centers of California II, L.P. (15)

10.27 Fourth Amendment to Agreement of Limited Partnership of
Louisiana Lithotripsy Investment Limited Partnership (15)

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

24

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

10.30 Not used

10.31 Not used

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

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

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

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

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

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

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

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

10.40 Not used

10.41 Not used

10.42 Not used

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

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

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

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

10.47 Loan Agreement dated January 31, 2000 for $14,000,000
Advancing Term Loan between Prime Refractive Management,
L.L.C., Bank of America, N.A. as Administrative Agent,
Bank Boston, N.A. as Documentation Agent and the Lenders
Named Therein (15)

25

10.48 Fourth Amended and Restated Loan Agreement dated January 31,
2000 for $86,000,000 Revolving Credit Loan between
Prime Medical Services Inc., Bank of America, N.A. as
Administrative Agent, BankBoston, N.A. as Documentation Agent
and the Lenders Named Therein (15)

10.49 Pledge and Security Agreements dated January 31, 2000 relating
to $14,000,000 Advancing Term Loan and $86,000,000
Revolving Credit Loan (15)

10.50 Borrower Security Agreements dated January 31, 2000 relating
to $14,000,000 Advancing Term Loan and $86,000,000
Revolving Credit Loan (15)

10.51 Guarantor Security Agreements dated January 31, 2000 relating
to $14,000,000 Advancing Term Loan and $86,000,000
Revolving Credit Loan (15)

10.52 Guarantor Copyright Security Agreements dated January 31,
2000 relating to $14,000,000 Advancing Term Loan and
$86,000,000 Revolving Credit Loan (15)

10.53 Guaranty Agreements dated January 31, 2000 relating to
$14,000,000 Advancing Term Loan and $86,000,000 Revolving
Credit Loan (15)

10.54 Note dated January 31, 2000 in the amount of $1,050,000
between Prime Refractive Management and Guaranty Federal
Bank, F.S.B. (15)

10.55 Note dated January 31, 2000 in the amount of $1,575,000
between Prime Refractive Management and Fleet National Bank
(15)

10.56 Note dated January 31, 2000 in the amount of $3,150,000
between Prime Refractive Management and BankBoston, N.A. (15)

10.57 Note dated January 31, 2000 in the amount of $4,725,000
between Prime Refractive Management and Bank of America,
N.A. (15)

10.58 Note dated January 31, 2000 in the amount of $2,100,000
between Prime Refractive Management and Bank One, Texas,
N.A. (15)

10.59 Note dated January 31, 2000 in the amount of $12,900,000
between Prime Medical Services, Inc. and Bank One, Texas,
N.A. (15)

10.60 Note dated January 31, 2000 in the amount of $8,600,000
between Prime Medical Services, Inc. and LaSalle Bank,
National Association (15)

26

10.61 Note dated January 31, 2000 in the amount of $8,600,000
between Prime Medical Services, Inc. and Cooperative
Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland",
New York Branch (15)

10.62 Note dated January 31, 2000 in the amount of $8,600,000
between Prime Medical Services, Inc. and Credit Lyonnais New
York Branch (15)

10.63 Note dated January 31, 2000 in the amount of $5,375,000
between Prime Medical Services, Inc. and Fleet National Bank
(15)

10.64 Note dated January 31, 2000 in the amount of $8,600,000
between Prime Medical Services, Inc. and Imperial Bank(15)

10.65 Note dated January 31, 2000 in the amount of $6,450,000
between Prime Medical Services, Inc. and Guaranty Federal
Bank, F.S.B. (15)

10.66 Note dated January 31, 2000 in the amount of $16,125,000
between Prime Medical Services, Inc. and Bank of America,
N.A. (15)

10.67 Note dated January 31, 2000 in the amount of $10,750,000
between Prime Medical Services, Inc. and BankBoston, N.A.
(15)

10.68 Note dated January 31, 2000 in the amount of $1,400,000
between Prime Refractive Management and LaSalle Bank,
National Association (15)

10.69 Not used

10.70 Contribution Agreement dated September 1, 1999 and First
Amendment dated January 31, 2000 among Barnet Dulaney Eye
Center,P.L.L.C., David Dulaney, M.D., Ronald W. Barnet, M.D.,
Mark Rosenberg, Prime Medical Services Inc., Prime
Medical Operating Inc., LASIK Investors, L.L.C., Prime/BDR
Acquisition, L.L.C. and Prime/BDEC Acquisition, L.L.C (15)

10.71 Loan Agreement dated September 1, 1999 between Prime Medical
Operating, Inc. and Prime/BDR Acquisition, L.L.C. (15)

10.72 Limited Liability Company Agreement of Prime/BDR Acquisition,
L.L.C. (15)

10.73 Limited Liability Company Agreement of Prime/BDEC Acquisition,
L.L.C. (15)

10.74 Non-Competition Agreements dated September 1, 1999 between
Robert B. Pinkert, O.D. and Scott A. Perkins, M.D. for
the benefit of Prime Medical Services Inc., Prime Medical
Operating, Inc., Prime/BDR Acquisition, L.L.C., Prime/BDEC
Acquisition, L.L.C., Barnet Dulaney Eye Center, P.L.L.C.,
LASIK Investors, L.L.C., Ronald W. Barnet, M.D., David D.
Dulaney, M.D., and Mark Rosenberg (15)

27

10.75 Promissory Note dated September 1, 1999 from Prime/BDR
Acquisition, L.L.C., to Prime Medical Operating, Inc. (15)

10.76 Collocation Agreement dated September 1, 1999 by and
between Barnet Dulaney Eye Center, P.L.L.C. and Prime/BDR
Acquisition, L.L.C. (15)

10.77 Membership Interest Transfer Restriction Agreement dated
September 1, 1999 (15)

10.78 Assignment and Security Agreement dated September 1, 1999
between Prime Medical Operating, Inc. and LASIK Investors,
L.L.C.(15)

10.79 Promissory Note dated September 1, 1999 from Prime/BDR
Acquisition, L.L.C., to Prime Medical Operating, Inc. (15)

10.80 Loan Agreement dated January 31, 2000 between Prime
Refractive, L.L.C. and Prime Refractive Management, L.L.C.(15)

10.81 Promissory Note dated January 31, 2000 between Prime
Refractive, L.L.C. and Prime Refractive Management, L.L.C.(15)

10.82 Assignment and Security Agreement dated January 31, 2000
between Prime Refractive Management, L.L.C. and LASIK
Investors, L.L.C. (15)

10.83 Limited Liability Company Agreement dated September 1, 1999
of Prime Refractive, L.L.C. (15)

10.84 Stock Purchase Agreements dated September 1, 1999 relating to
the acquisition of Horizon Vision Center, Inc. (15)

10.85 Assignment and Security Agreements relating to the acquisition
of Horizon Vision Center, Inc. (15)

10.86 Exclusive Use Agreements relating to the acquisition of
Horizon Vision Center, Inc. (15)

10.87 Amended and Restated Bylaws for the regulation of Horizon
Vision Center, Inc. (15)

10.88 Assignment and Security Agreement by and between Prime Medical
Operating, Inc. and Prime/BDR Acquisition, L.L.C. (15)

10.89 Limited Liability Company Agreement of Caster One, L.L.C. (16)

10.90 Contribution Agreement dated March 1, 2000 among Prime
Medical Services, Inc., Prime Refractive, L.L.C.,
Andrew Caster, M.D., and Caster Eye Center Medical Group (16)

28

10.91 Facility Use Agreement dated March 1, 2000 by and among
Caster One,L.L.C., Andrew Caster, M.D., and Caster Eye Center
Medical Group (16)

10.92 First Amendment and Restated Limited Liability Company
Agreement dated March 1, 2000 of Caster One, L.L.C. (16)

10.93 First Amendment to Facility Use Agreement dated July 2000 by
and among Caster One, L.L.C., Andrew Caster, M.D., and Caster
Eye Center Medical Group (16)

10.94 Contribution Agreement dated September 1, 2000 among Prime
Medical Services, Inc., Prime RVC, Inc., Prime Refractive -
Kansas City, L.L.C., Vision Correction Centers of Kansas
City, P.C., Kansas City Laser Vision Correction Centers,
L.L.C., and Jeffrey Couch, M.D. (16)

10.95 Limited Liability Company Agreement dated September 1, 2000 of
Prime Refractive - Kansas City, L.L.C. (16)

10.96 Facility Use Agreement dated September 2000 by and among
Vision Correction Centers of Kansas City, P.C., Kansas City
Laser Vision Correction Centers, L.L.C., Jeffrey Couch, M.D.
and Prime Refractive - Kansas City (16)

10.97 Limited Liability Company Agreement of Horizon Vision
Centers, L.L.C. (16)

10.98 Non-Competition Agreement dated April 1, 2000 by Horizon
Vision Centers, L.L.C., for the benefit of Prime RVC and
each of Prime RVC's affiliates (16)

10.99 Specimen of First Amendment to Assignment and Security
Agreement dated April 1, 2000 relating to Horizon Vision
Centers, Inc. (16)

10.100 Specimen of Consent and Agreement dated April 1, 2000 of
Horizon Vision Centers, Inc., for the benefit of the
Existing Center, Horizon Vision Centers, L.L.C., Prime
RVC, Inc., and the parent companies and affiliates of each
of the Existing Center, the New Center and Prime RVC (16)

10.101 Contribution Agreement dated March 1, 2000 among Prime MBC,
L.L.C., MBC Holding Company, L.L.C., Mann Berkeley Eye Center,
P.A., Paul Michael Mann, M.D., Ralph G. Berkeley, M.D.,
Michael B. Caplan, M.D., Mark F. Micheletti and Prime RVC,
Inc. (16)

10.102 Membership Interest - Transfer Restriction Agreement dated
March 1, 2000 by and among MBC Holding Company, L.L.C., Prime
RVC, Inc., Paul Michael Mann, M.D., Ralph G. Berkeley, M.D.
Michael B. Caplan, M.D., and Mark Micheletti (16)

10.103 Limited Liability Company Agreement of Prime MBC, L.L.C. (16)

29

10.104 Refractive Laser Center Management Agreement dated March 1,
2000 by and between Prime MBC, L.L.C. and Mann Berkeley Eye
Center, P.A. (16)

10.105 Incidental Registration Rights Agreement dated March 1,
2000 by and among Prime Medical Services, Inc. and MBC Holding
Company, L.L.C. (16)

10.106 Contribution Agreement dated April 1, 2000 among Prime Medical
Services, Inc., Prime RVC, Inc., New York Laser Management,
L.L.C., Ken Moadel, M.D., and Ken Moadel, M.D., P.C. (16)

10.107 Limited Liability Company Agreement of New York Laser
Management, L.L.C. (16)

10.108 Office and Equipment Use Agreement dated April 1, 2000 by and
among New York Laser Management, L.L.C., Ken Moadel, M.D. and
Ken Moadel, M.D., P.C. (16)

10.109 Loan Agreement dated April 1, 2000 by and between Prime
Medical Services, Inc. and New York Laser Management,L.L.C(16)

10.110 Assignment and Security Agreement dated April 1, 2000 by and
between Prime Medical Services, Inc. and Ken Moadel, M.D. (16)

10.111 Limited Liability Company Agreement of Prime Refractive
Management, L.L.C. (16)

10.112 Delaware Certificate of Incorporation Prime RVC, Inc. (16)

10.113 Bylaws as of January 31, 2000 of Prime RVC, Inc. (16)

10.114 Intercompany Agreement dated April 1, 2000 by and between
Prime Medical Operating,Inc., Prime RVC, Inc.,Prime Refractive
Management, L.L.C. and Prime/BDR Acquisition, L.L.C. (16)

10.115 First Amended and Restated Limited Liability Company Agreement
dated September 1, 1999 of Prime/BDEC Acquisition, L.L.C. (16)

10.116 Consent and Liability Waiver dated March 31, 2000 by David D.
Dulaney, M.D., Ronald W. Barnet, M.D., Mark Rosenberg, Barnet
Dulaney Eye Center, P.L.L.C., LASIK Investors, L.L.C., Prime
Refractive, L.L.C., Prime/BDR Acquisition, L.L.C. for
the benefit of Prime Medical Services, Inc. (16)

10.117 Assignment Agreement and Second Amendment to Contribution
Agreement dated April 1, 2000 by and between Prime Medical
Services, Inc., Prime Medical Operating, Inc., Prime RVC,Inc.,
Prime Refractive Management,L.L.C., Barnet Dulaney Eye Center,
P.L.L.C., LASIK Investors, L.L.C., Prime/BDR Acquisition,
L.L.C., Prime/BDEC Acquisition, L.L.C., Prime Refractive,
L.L.C., David D. Dulaney, M.D., Ronald W. Barnet, M.D. and
Mark Rosenberg (16)

30

10.118 Stock Purchase Agreement dated December 31, 2000 by and
between Prime Medical Services, Inc. and Innovative Medical
Technologies, Inc. (16)

10.119 Mutual Non-Competition Agreement dated December 31, 2000
between Prime Medical Services, Inc., Prostatherapies, Inc.,
Innovative Medical Technologies, Inc. and Ronald Sorensen,
M.D. (16)

10.120 Assignment and Security Agreement dated December 31, 2000 by
and between Prime Medical Services, Inc. and Innovative
Medical Technologies, Inc. (16)

10.121 Promissory Note dated December 31, 2000 by Innovative Medical
Technologies, Inc. to Prime Medical Services Inc. (16)

10.122 Promissory Note dated December 31, 2000 by Innovative Medical
Technologies, Inc. to Prime Medical Services Inc. (16)

10.123 Executive Employment Agreement dated November 1, 2000 by and
between Prime Medical Services,Inc. and Kenneth S, Shifrin(16)

10.124 Executive Employment Agreement dated November 1, 2000 by and
between Prime Medical Services, Inc. and Brad A. Hummel (16)

10.125 Executive Employment Agreement dated September 1, 2000 by and
between Prime Medical Services, Inc. and Cheryl Williams (16)

10.126 Non-Competition Release and Severance Agreement dated
December 29, 2000 by and between Prime Medical Services, Inc.
and Joseph Jenkins, M.D. (16)

10.127 Confidential Private Placement Memorandum for Fayetteville
Lithotripters Limited Partnership - Arizona I (16)

10.128 First Amendment to the Confidential Private Placement
Memorandum dated August 14,2000 for Fayetteville Lithotripters
Limited Partnership - Arizona I (16)

10.129 Second Amendment to the Confidential Private Placement
Memorandum dated February 6, 2001 for Fayetteville
Lithotripters Limited Partnership - Arizona I (16)

10.130 Confidential Private Placement Memorandum for Florida
Lithotripters Limited Partnership I (16)

10.131 First Amendment to the Confidential Private Placement
Memorandum dated March 31, 2000 for Florida Lithotripters
Limited Partnership I (16)

10.132 Second Amendment to the Confidential Private Placement
Memorandum dated April 14, 2000 for Florida Lithotripters
Limited Partnership I (16)

31

10.133 Third Amendment to the Confidential Private Placement
Memorandum dated April 19, 2000 for Florida Lithotripters
Limited Partnership I (16)

10.134 Fourth Amendment to the Confidential Private Placement
Memorandum dated May 2, 2000 for Florida Lithotripters
Limited Partnership I (16)

10.135 Confidential Private Placement Memorandum for Indiana
Lithotripters Limited Partnership I (16)

10.136 First Amendment to the Confidential Private Placement
Memorandum dated August 9, 2000 for Indiana Lithotripters
Limited Partnership I (16)

10.137 Second Amendment to the Confidential Private Placement
Memorandum dated September 12, 2000 for Indiana Lithotripters
Limited Partnership I (16)

10.138 Third Amendment to the Confidential Private Placement
Memorandum dated September 26, 2000 for Indiana Lithotripters
Limited Partnership I (16)

10.139 Confidential Private Placement Memorandum for Mobile Kidney
Stone Centers of California III, L.P. (16)

10.140 First Amendment to the Confidential Private Placement
Memorandum dated June 28, 2000 for Mobile Kidney Stone
Centers of California III, L.P. (16)

10.141 Confidential Private Placement Memorandum for Mobile Kidney
Stone Centers of California II, L.P. (16)

10.142 First Amendment to the Confidential Private Placement
Memorandum dated June 1, 2000 for Mobile Kidney Stone
Centers of California II, L.P. (16)

10.143 Second Amendment to the Confidential Private Placement
Memorandum dated September 28, 2000 for Mobile Kidney Stone
Centers of California II, L.P. (16)

10.144 Confidential Private Placement Memorandum for Fayetteville
Lithotripters Limited Partnership - South Carolina II (16)

10.145 Amendment to the Confidential Private Placement Memorandum
and Consent dated February 18, 2000 for Fayetteville
Lithotripters Limited Partnership - South Carolina II (16)

10.146 First Amendment to the Confidential Private Placement
Memorandum dated December 22, 1999 for Fayetteville
Lithotripters Limited Partnership - South Carolina II (16)

32

10.147 Second Amendment to the Confidential Private Placement
Memorandum dated January 14, 2000 for Fayetteville
Lithotripters Limited Partnership - South Carolina II (16)

10.148 Confidential Private Placement Memorandum for Tennessee
Lithotripters Limited Partnership I (16)

10.149 First Amendment to the Confidential Private Placement
Memorandum dated January 14, 2000 for Tennessee Lithotripters
Limited Partnership I Assignment Offering (16)

10.150 Second Amendment to the Confidential Private Placement
Memorandum dated February 29, 2000 for Tennessee Lithotripters
Limited Partnership I Assignment Offering (16)

10.151 Confidential Private Placement Memorandum for Fayetteville
Lithotripters Limited Partnership - Utah I (16)

10.152 First Amendment to the Confidential Private Placement
Memorandum dated October 17, 2000 for Fayetteville
Lithotripters Limited Partnership - Utah I (16)

10.153 Confidential Private Placement Memorandum for Washington
Urological Services, LLC (16)

10.154 First Amendment to the Confidential Private Placement
Memorandum dated June 6, 2000 for Washington Urological
Services, L.L.C. (16)

10.155 Second Amendment to the Confidential Private Placement
Memorandum dated September 28, 2000 for Washington
Urological Services, LLC (16)

10.156 Confidential Private Placement Memorandum for Western Kentucky
Lithotripters Limited Partnership(16)

10.157 Agreement of Limited Partnership for Western Kentucky
Lithotripters Limited Partnership (16)

10.158 First Amendment to the Confidential Private Placement
Memorandum dated January 31, 2000 for Western Kentucky
Lithotripters Limited Partnership (16)

10.159 Second Amendment to the Confidential Private Placement
Memorandum dated February 24, 2000 for Western Kentucky
Lithotripters Limited Partnership (16)

10.160 Third Amendment to the Confidential Private Placement
Memorandum dated March 29, 2000 for Western Kentucky
Lithotripters Limited Partnership (16)

10.161 Limited Liability Company Agreement of Connecticut Laser
Management, L.L.C. (16)

33

10.162 Limited Liability Company Agreement of Prime Refractive -
St. Louis, L.L.C. (16)

10.163 Amended and Restated Agreement of Limited Partnership of Texas
Lithotripsy Limited Partnership VIII (16)

10.164 Management Agreement dated October 13, 2000 by and between
Texas Lithotripsy Limited Partnership VIII and Lithotripers,
Inc. (16)

10.165 Acquisition of 100% of the Issued and Outstanding Capital
Stock of the Windsor Group, Inc. (16)

10.166 Confidential Private Placement Memorandum for Texas
Lithotripsy Limited Partnership VII, L.P.(16)

10.167 First Amendment to Confidential Private Placement Memorandum
for Texas Lithotripsy Limited Partnership VII, L.P.(16)

10.168 Second Amendment to Confidential Private Placement Memorandum
for Texas Lithotripsy Limited Partnership VII, L.P.(16)

10.169 Third Amendment to Confidential Private Placement Memorandum
for Texas Lithotripsy Limited Partnership VII, L.P.(16)

12 Computation of ratio of earnings to fixed charges. (16)

21.1 List of subsidiaries of the Company. (16)

23.1 Independent Auditors' Consent of KPMG LLP. (16)

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

* Executive compensation plans and arrangements.

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

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

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

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

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

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

(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.

34

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

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

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

(11) Not used.

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

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

(14) Filed as an Exhibit to the Annual Report on Form 10-K of the
Company for the year ended December 31, 1998.

(15) Filed as an Exhibit to the Annual Report on Form 10-K of the
Company for the year ended December 31, 1999.

(16) Filed herewith.

35

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/ Brad A. Hummel
----------------------
Brad A. Hummel, President
and Chief Executive Officer

Date: March 30, 2001

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, 2001

By: /s/ Cheryl L. Williams
- --------------------------
Cheryl L. Williams

Senior Vice President of Finance, Secretary
and Chief Financial Officer (Principal
Financial and Accounting Officer)

Date: March 30, 2001

36

By: /s/ Joseph Jenkins
- ----------------------
Joseph Jenkins, M.D., Director

Date: March 30, 2001

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

Date: March 30, 2001

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

Date: March 30, 2001

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

Date: March 30, 2001

By: /s/ James M. Usdan
- ----------------------
James M. Usdan, Director

Date: March 30, 2001

By: /s/ David Dulaney, M. D.
- ----------------------------
David Dulaney, M. D., Director

Date: March 30, 2001

37

APPENDIX A

INDEX

Page

Independent Auditors' Report A-2

Consolidated Financial Statements:

Consolidated Statements of Income for the years
ended December 31, 2000, 1999 and 1998. A-3

Consolidated Balance Sheets at December 31, 2000
and 1999. A-4

Consolidated Statements of Stockholders' Equity for
the years ended December 31, 2000, 1999 and 1998. A-6

Consolidated Statements of Cash Flows for the
years ended December 31, 2000, 1999 and 1998. A-7

Notes to Consolidated Financial Statements. A-10

Independent Auditors' Report

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

We have audited the 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 auditing standards generally accepted
in the United States of America. 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, 2000 and 1999, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.

/s/:KPMG LLP

Austin, Texas
March 6, 2001

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

($ in thousands, except per share data)

Years Ended December 31,
2000 1999 1998
Revenue:
Lithotripsy:
Fee revenues $ 77,143 $ 80,880 $ 83,879
Management fees 3,684 5,719 5,284
Equity income 2,508 2,581 2,890
------ ------ ------
83,335 89,180 92,053
Manufacturing 22,157 17,527 11,066
Refractive 23,501 3,414 -
Prostatherapy 1,578 1,834 1,207
Other 124 219 310
------- ------- -------
Total revenue 130,695 112,174 104,636
------- ------- --------

Cost of services and general and administrative expenses:
Lithotripsy 22,416 23,001 22,674
Manufacturing 17,149 12,880 9,204
Refractive 13,856 1,954 -
Prostatherapy 1,324 1,285 803
Other 135 165 249
Corporate 4,486 5,027 4,926
Relocation of central billing office 698 - -
Nonrecurring development, impairment
and other costs, net 1,830 627 1,617
------ ------ ------
61,894 44,939 39,473
Depreciation and amortization 14,187 10,848 10,476
------ ------ ------
Total operating expenses 76,081 55,787 49,949
------ ------ ------
Operating income 54,614 56,387 54,687

Other income (deductions):
Interest and dividends 1,176 1,505 1,417
Interest expense (10,563) (9,408) (8,469)
Loan fees (173) (566) (4,978)
Release of contractual obligation - 1,140 -
Other, net 83 (79) 304
------ ------ -------
(9,477) (7,408) (11,726)
------ ------ -------
Income before provision for income taxes
and minority interest 45,137 48,979 42,961

Minority interest in consolidated income 27,754 24,508 24,790

Provision for income taxes 6,726 9,432 7,377
------ ------ ------
Net income $ 10,657 $ 15,039 $ 10,794
====== ====== ======
Basic earnings per share:
Net income $ 0.66 $ 0.89 $ 0.58
====== ====== ======
Weighted average shares outstanding 16,085 16,958 18,650
====== ====== ======
Diluted earnings per share:
Net income $ 0.66 $ 0.88 $ 0.57
====== ====== ======
Weighted average shares outstanding 16,170 17,114 18,783
====== ====== ======

See accompanying notes to consolidated financial statements.

A-3

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)

December 31,
2000 1999
ASSETS ---- ----

Current assets:
Cash and cash equivalents $15,530 $20,064
Investments 1,241 4,120
Accounts receivable, less allowance for doubtful
accounts of $212 in 2000 and $224 in 1999 30,152 23,273
Other receivables 6,619 3,637
Deferred income taxes 1,032 1,066
Prepaid expenses and other current assets 1,629 2,322
Inventory 5,068 3,676
------ ------
Total current assets 61,271 58,158
------ ------
Property and equipment:
Equipment, furniture and fixtures 53,553 42,128
Building and leasehold improvements 3,574 2,092
------ ------
57,127 44,220
Less accumulated depreciation and
amortization (30,873) (25,567)
------ ------
Property and equipment, net 26,254 18,653
------ ------
Other investments 10,229 18,963
Goodwill, at cost, net of amortization 172,824 149,088
Other noncurrent assets 5,640 2,110
-------- --------
$276,218 $246,972
======== ========

See accompanying notes to consolidated financial statements.
A-4

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

($ in thousands, except share data)

December 31,
2000 1999
---- ----
LIABILITIES

Current liabilities:
Current portion of long-term debt $ 3,705 $ 1,763
Accounts payable 4,611 3,290
Accrued distributions to minority interests 7,930 8,332
Accrued expenses 6,908 7,254
------ ------
Total current liabilities 23,154 20,639

Long-term debt, net of current portion 122,004 103,797
Deferred compensation liability 1,168 -
Deferred income taxes 9,502 6,400
------- -------
Total liabilities 155,828 130,836

Minority interest 20,599 19,454

STOCKHOLDERS' EQUITY

Preferred stock, $.01 par value, 1,000,000 shares
authorized; none outstanding - -
Common stock, $0.01 par value, 40,000,000 shares
authorized; 19,524,533 issued in 2000 and
19,367,267 isssued in 1999 195 194
Capital in excess of par value 88,978 87,655
Accumulated earnings 44,311 33,654
Treasury stock, at cost, 3,961,799 shares in 2000
and 2,875,300 shares in 1999 (33,693) (24,821)
------ ------
Total stockholders' equity 99,791 96,682
-------- --------
$276,218 $246,972
======== ========

See accompanying notes to consolidated financial statements.

A-5

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 2000, 1999 and 1998

($ in thousands, except share data)

Capital in
Issued Common Stock Excess of Accumulated Treasury Stock
Shares Amount Par Value Earnings Shares Amount Total
------ ------ --------- -------- ------ ------ -----
Balance, January 1, 1998 19,306,267 $ 193 $ 84,050 $ 7,821 - $ - $ 92,064

Net income for the year - - - 10,794 - - 10,794

Tax benefits on exercised warrants - - 3,096 - - - 3,096

Exercise of stock options including tax
benefit of $140 on non-qualifying exercises 44,000 1 234 - - - 235

Purchase of treasury stock - - - - (1,845,200) (16,439) (16,439)
---------- ---- ------ ------ ----------- -------- ------
Balance, December 31, 1998 19,350,267 194 87,380 18,615 (1,845,200) (16,439) 89,750

Net income for the year - - - 15,039 - - 15,039

Issuance of warrants - - 170 - - - 170

Exercise of stock options including tax
benefit of $18 on non-qualifying exercises 17,000 - 105 - - - 105

Purchase of treasury stock - - - - (1,030,100) (8,382) (8,382)
---------- ---- ------ ------ ----------- -------- ------
Balance, December 31, 1999 19,367,267 194 87,655 33,654 (2,875,300) (24,821) 96,682

Net income of the year - - - 10,657 - - 10,657

Issuance of warrants - - 1,211 - - - 1,211

Stock options exercised under
a deferred compension plan 141,599 1 - - (141,599) (1,169) (1,168)

Exercise of stock options including tax
benefit of $18 on non-qualifying exercises 15,667 - 112 - - - 112

Purchase of treasury stock - - - - (944,900) (7,703) (7,703)
---------- ---- ------ ------ ----------- -------- ------
Balance, December 31, 2000 19,524,533 $ 195 $ 88,978 $ 44,311 $ (3,961,799) $ (33,693)$ 99,791
========== ==== ====== ====== =========== ======== ======

See accompanying notes to consolidated financial statements.

A-6

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

($ in thousands)

Years Ended December 31,
2000 1999 1998
------------ ----------- ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Fee and other revenue collected $ 120,507 $ 108,251 $ 98,649
Cash paid to employees, suppliers
of goods and others (63,236) (52,144) (39,748)
Purchases of investments (3,714) (9,222) -
Proceeds from sales and maturities of investments 6,615 5,003 -
Interest received 1,154 1,505 1,417
Interest paid (10,405) (9,353) (7,261)
Taxes paid (5,741) (8,296) (7,506)
------------ ----------- ------------

Net cash provided by operating activities 45,180 35,744 45,551
------------ ----------- ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equity investments and entities (23,784) (23,580) -
Purchases of equipment and leasehold
improvements (12,975) (5,790) (5,213)
Proceeds from sales of equipment 277 207 224
Distributions from investments 2,680 2,352 2,532
Other - 570 315
------------ ----------- ------------

Net cash used in investing activities (33,802) (26,241) (2,142)
------------ ----------- ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable, exclusive of interest (3,075) (1,403) (80,484)
Borrowings on notes payable 21,592 4,584 100,025
Distributions to minority interest (27,092) (27,180) (25,799)
Debt issuance costs - - (4,417)
Contributions by minority interest 202 2,636 72
Exercise of stock options 164 160 9
Purchase of treasury stock (7,703) (8,382) (16,439)
------------ ----------- ------------

Net cash used in financing activities (15,912) (29,585) (27,033)
------------ ----------- ------------

NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (4,534) (20,082) 16,376

Cash and cash equivalents, beginning of period 20,064 40,146 23,770
------------ ----------- ------------

Cash and cash equivalents, end of period $ 15,530 $ 20,064 $ 40,146
============ =========== ============

See accompanying notes to consolidated financial statements.

A-7

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

($ in thousands)

Years Ended December 31,
2000 1999 1998
------------ ------------ ------------

Reconciliation of net income to net cash
provided by operating activities:
Net income $ 10,657 $ 15,039 $ 10,794
Adjustments to reconcile net income to cash provided
by operating activities:
Minority interest in consolidated income 27,754 24,508 24,790
Depreciation and amortization 14,187 10,848 10,476
Provision for uncollectible accounts 110 702 252
Equity in earnings of affiliates (2,342) (2,802) (2,890)
Debt issuance costs - - 4,417
Provision for deferred income taxes 1,298 2,875 (442)
Write down of equipment 1,230 1,149 -
Settlement of contingent liability - (500) -
Release of contractual liability - (1,140) -
Other (161) (66) (100)
Changes in operating assets and liabilities,
net of effect of purchase transactions:
Investments 2,879 (4,120) -
Accounts receivable (7,729) (1,851) (3,186)
Other receivables (3,400) (1,570) (910)
Other assets (839) (2,585) (1,244)
Accounts payable 556 (2,665) 822
Accrued expenses 980 (2,078) 2,772
------------ ------------ ------------

Total adjustments 34,523 20,705 34,757
------------ ------------ ------------

Net cash provided by operating activities $ 45,180 $ 35,744 $ 45,551
============ ============ ============

See accompanying notes to consolidated financial statements.

A-8

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

($ in thousands)

Years Ended December 31,
2000 1999 1998
---------- ------------ ------------
SUPPEMENTAL INFORMATION OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:

At December 31, the Company had accrued distributions payable
to minority interests. The effect of this transaction was as follows:
Current liabilities increased by $ 7,930 $ 8,332 $ 8,951
Minority interest decreased by 7,930 8,332 8,951

In 2000, the Company acquired four refractive centers.
These transactions are discussed further in Note D. The acquired
assets and liabilities were as follows:
Current assets increased by 594 - -
Noncurrent assets increased by 7,221 - -
Goodwill increased by 20,899 - -
Current liabilities increased by 701 - -
Noncurrent liabilities increased by 2,082 - -
Minority interest increased by 1,005 - -
Capital in excess of par value increased by 1,142 - -

In 2000, 147,000 options were exercised into a deferred
compensation plan.
Noncurrent liabilities increased by 1,168 - -
Stockholder's equity decreased by 1,168 - -

In 1999, the Company acquired, through a majority owned subsidiary
60% of the outstanding stock of Horizon Vision Centers. This
transaction is discussed further in Note D. The acquired assets
and liabilities were as follows:
Current assets increased by - 710 -
Noncurrent assets increased by - 3,057 -
Goodwill increased by - 9,174 -
Current liabilities increased by - 1,489 -
Noncurrent liabilities increased by - 413 -
Minority interest increased by - 910 -

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

See accompanying notes to consolidated financial statements.

A-9

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 for
lithotripsy, refractive and prostatherapy operations. The Company provides its
services in 34 states. The Company also manufactures trailers for major medical
equipment manufacturers and mobile medical service providers. References to the
Company are to Prime and its controlled and affiliated entities.

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 have significant influence, 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, 2000, the Company had recognized
approximately $274,000 in undistributed earnings using the equity method. This
amount represents undistributed earnings from entities, in which the Company
owns 50% or less, and does not have significant influence. 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.

Investments

The Company classifies its investments in debt securities as trading securities
in accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities. Trading
securities are reported at fair value, with unrealized gains and losses included
in earnings. The change in net unrealized holding gain or loss on trading
securities was not material for the years ended December 31, 2000 and 1999.

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 three 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-10

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 using the straight-line basis over a period not to exceed twenty five
years for the refractive segment and forty years for the lithotripsy segment.
Accumulated amortization at December 31, 2000 and 1999 is $23,950,000 and
$18,155,000, 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 discounted cash flows and carrying value of the goodwill.

Revenue Recognition

Revenues generated from management services and the manufacture of trailers are
recognized as they are earned. The Company's lithotripsy fee revenues are based
upon fees charged for services to hospitals, commercial insurance carriers,
state and federal health care agencies, and individuals, net of contractual fee
reductions. The Company's refractive revenues are based on fees charged for
services to individuals or commercial insurance carriers, net of contractual fee
reductions.

Major Customers and Credit Concentrations

A significant portion of the Company's manufacturing revenues are from four
customers. For the years ended December 31, 2000 and 1999, sales to these four
customers accounted for 80% and 71% of each year's manufacturing revenues,
respectively.

Concentrations of credit risk with respect to receivables are limited due to the
wide variety of customers, as well as their dispersion across many geographic
areas. Other than as disclosed below, the Company does not consider itself to
have any significant concentrations of credit risk. At December 31, 2000,
approximately 15% of accounts receivable relate to units operating in Texas, 8%
relate to units located in Louisiana, 8% relate to units operating in Virginia,
and 9% relate to units located in California. At December 31, 1999,
approximately 14% of accounts receivable relate to units operating in Texas, 8%
relate to units located in Louisiana, 7% relate to units located in Virginia,
and 12% relate to units located in California.

Income Tax

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

A-11

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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.

Inventory

Inventory is stated at the lower of cost or market. Cost is determined using the
average cost method. Certain components that meet the Company's manufacturing
requirements are only available from a limited number of suppliers. The
inability to obtain components as required or to develop alternative sources, if
and as required in the future, could result in delays or reduction in product
shipments, which in turn could have a material adverse effect on the Company's
manufacturing business, financial condition and results of operations.

Stock-Based Compensation

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

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

A-12

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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 1999 presentation.

Earnings Per Share

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

(In thousands, except per share data)

Net Per Share
For the year ended December 31, 2000 Income Shares Amounts
- ------------------------------------ ------ ------ -------

Basic $10,657 16,085 $0.66
=====
Effect of dilutive securities:
Options - 85
------- ------ -----
Diluted $10,657 16,170 $0.66
======= ====== =====
For the year ended December 31, 1999
- ------------------------------------
Basic $15,039 16,958 $0.89
=====
Effect of dilutive securities:
Options - 156
------- ------ -----
Diluted $15,039 17,114 $0.88
======= ====== =====
For the year ended December 31, 1998
- ------------------------------------
Basic $10,794 18,650 $0.58
=====
Effect of dilutive securities:
Options - 133
------- ------ -----
Diluted $10,794 18,783 $0.57
======= ====== =====

Unexercised employee stock options and warrants to purchase 1,638,000,
1,247,000 and 1,708,000 shares of Prime common stock as of December 31,
2000, 1999 and 1998, respectively, were not included in the
computations of diluted EPS because the exercise prices were greater
than the average market price of Prime's common stock during the
respective periods.

A-13

C. INVESTMENTS

Barnet Dulaney Eye Center

Effective September 1, 1999 the Company purchased a 60% interest in two laser
(refractive) surgery centers operated by Barnet Dulaney Eye Center for
approximately $8,807,000 in cash and a warrant to purchase 29,000 shares of
Company common stock, plus a contingent earn-out obligation totaling $1 million
which was paid in 2000 at the end of the first year of post- acquisition
operations. The contingent earn-out obligation was based on the operating
performance of one of the two surgery centers for one year. This investment was
accounted for using the equity method until June 30, 2000. Effective July 1,
2000, the Company amended certain agreements related to its 60% interest in
Barnet Dulaney Eye Center. As a result of these amendments, the Company's
investment in the Barnet Dulaney Eye Center has been consolidated in the
accompanying financial statements as of July 1, 2000.

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.

Ohio and Louisiana Partnerships

In December 1994, the Company acquired all of the common stock of two
corporations. Each corporation is the general partner and holds an approximate
20% interest in a limited partnership which operates a mobile lithotripter.
Ohio Mobile Lithotripter, Ltd. operates a mobile lithotripter in Ohio. Arklatx
Mobile Lithotripter, L.P. operates a mobile lithotripter in Louisiana. These
investments are accounted for using the equity method.

American Physicians Service Group, Inc.

At December 31, 2000 and 1999, the Company owned 111,000 and 1,000 shares of
common stock, respectively, representing less than 1%, of the outstanding common
stock of American Physicians Service Group, Inc. (APS). APS owned approximately
15% and 14% of the outstanding common stock of the Company at December 31, 2000
and 1999, respectively. Two of the Company's six board members are also on the
board of APS.

The Company occupies approximately 11,600 square feet of office space owned by
APS. The Company also shares certain personnel with APS. The monthly rent and
personnel cost is approximately $18,000. The Company purchased treasury stock
shares through APS Financial

A-14

C. INVESTMENTS (continued)

Services, Inc. (a wholly owned subsidiary of APS). For the years ended December
31, 2000 and 1999, the Company paid commissions of approximately $8,000 and
$25,000, respectively, to acquire 136,200 and 420,100 shares, respectively,
which management believes was competitive with commissions charged by other
firms offering such services.

D. ACQUISITIONS

Effective March 1, 2000, the Company purchased a 60% interest in the Mann
Berkeley Caplan Laser Center of Austin, Texas, a refractive vision correction
center. The Company paid approximately $3.8 million in cash and issued warrants
to purchase 27,000 shares of common stock, and has accounted for this
transaction using the purchase method of accounting. Additionally in conjunction
with this transaction, the Company issued warrants to purchase 28,000 shares of
common stock to a third party.

Effective March 1, 2000, the Company purchased a 60% interest in the Caster Eye
Center, a refractive vision correction center. The Company paid approximately
$5.8 million in cash, and has accounted for this transaction using the purchase
method of accounting. Additionally in conjunction with this transaction, the
Company issued warrants to purchase 44,000 shares of common stock to a third
party.

Effective April 1, 2000, the Company purchased a 65% interest in New York Eye
Specialists, a refractive vision correction center. The Company paid
approximately $8.9 million in cash, and has accounted for this transaction using
the purchase method of accounting. Additionally in conjunction with this
transaction, the Company issued warrants to purchase 67,000 shares of common
stock to a third party.

Effective September 1, 2000, the Company purchased a 65% interest in Vision
Correction Centers of Kansas City, a refractive vision correction center. The
Company paid approximately $4.5 million in cash for the center in October 2000,
and has accounted for this transaction using the purchase method of accounting.
Additionally in conjunction with this transaction, the Company issued warrants
to purchase 34,000 shares of common stock to a third party.

Effective September 1, 1999, the Company acquired 60% of the outstanding stock
of Horizon Vision Centers, Inc. (Horizon). Horizon operates seven laser
(refractive) surgery centers in California. The Company paid approximately $10.9
million in cash for this acquisition and has accounted for the transaction using
the purchase method of accounting. Additionally in conjunction with a
modification to the purchase agreement in 2000, the Company issued warrants to
purchase 81,000 shares of common stock to a third party.

Certain of the acquisitions discussed above have contingent earn-out clauses
based on the future operations of the related centers exceeding certain
performance measurements. The Company does not believe any future payments would
be significant.

A-15

D. ACQUISITIONS (continued)

Unaudited proforma combined income data for the years ended December 31, 2000
and 1999 of the Company, the acquisitions discussed above and the acquisition of
Barnet Dulaney Eye Center's refractive surgery centers discussed in Note C
assuming they were effective January 1, 1999 is as follows:

($ in thousands, except per share data) 2000 1999
---- ----

Total revenues $140,865 $139,919
Total expenses $128,485 $122,516
-------- --------

Net income $ 12,380 $17,403
======== =======

Diluted earnings per share $0.77 $1.02
======== ========

E. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of the Company's significant
financial instruments as of December 31, 2000 and 1999 are as follows:

2000 1999
---- ----
Carrying Fair Carrying Fair
($in thousands) Amount Value Amount Value
------ ----- ------ -----
Financial assets:
Cash $15,530 $15,530 $20,064 $20,064
Investments 1,241 1,241 4,120 4,120
Accounts receivable 30,152 30,152 23,273 23,273
Other receivables 6,619 6,619 3,637 3,637

Financial liabilities:
Debt 125,709 111,709 105,560 97,560
Accounts payable 4,611 4,611 3,290 3,290

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.

Investments

The carrying value of investments approximates fair value as they are reported
based on quoted market rates.

A-16

E. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

Accounts Receivable and Other Receivables

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

Debt

The fair value at December 31, 2000 and 1999 for the $100 million fixed rate
senior subordinated notes was valued using the market rate of 11.66% and 10.2%,
respectively. The carrying value of the debt bearing interest at prime rate
approximates fair value.

Accounts Payable

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

Limitations

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

A-17

F. ACCRUED EXPENSES

Accrued expenses consist of the following:

December 31,
($ in thousands) 2000 1999
---- ----
Legal fees $ 146 $291
Accrued group insurance costs 60 193
Compensation and payroll related expense 1,472 1,393
Taxes, other than income taxes (benefit) (26) 343
Accrued interest 2,404 2,247
Deferred payments for acquisitions -- 54
Other 2,852 2,733
----- -----

$ 6,908 $ 7,254
===== =====

G. INDEBTEDNESS

Long-term debt is as follows:

($ in thousands) December 31,
2000 1999
---- ----
Interest Rates Maturities

8.75% 2000-2008 $100,000 $100,808
Floating 2000-2003 24,030 4,464
None 2000-2006 162 162
6%-9% 2000-2004 1,517 126
----------- ------------
$125,709 $105,560

Less current portion of long-term debt 3,705 1,763
----------- -----------
$122,004 $103,797
======== ========

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

The Note Indenture restricts, among other things, the ability of the Company and
its Restricted Subsidiaries to incur additional indebtedness and issue preferred
stock, enter into sale and leaseback transactions, incur liens, pay dividends or
make certain other restricted payments,

A-18

G. INDEBTEDNESS (continued)

apply net proceeds from certain asset sales, enter into certain transactions
with affiliates, merge or consolidate with any other person, sell stock of
subsidiaries and assign, transfer, lease, convey or otherwise dispose of
substantially all of the assets of the Company.

During 1998, the Company amended its syndicated bank facility from $135 million
to $100 million. The facility consists of a $100 million revolving credit
facility bearing interest of LIBOR + 1 to 2%, maturing in April 2003. At
December 31, 2000, the Company had drawn $18 million on the revolving credit
facility. At December 31, 2000, interest on the Company's bank facility was
8.59%. The assets of the Company and the stock of its subsidiaries collateralize
the bank facility.

The stated principal repayments for all indebtedness as of December 31, 2000 are
payable as follows:

($ in thousands)
2001 $ 3,705
2002 2,292
2003 19,165
2004 217
2005 261
Thereafter 100,069

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,
2000 1999 1998
---- ---- ----
($ in thousands)

Salaries, wages and benefits $19,767 $16,230 $16,294
Other costs of services 11,121 7,789 7,136
General and administrative 6,844 5,770 3,225
Legal and professional 2,516 2,167 2,551
Manufacturing costs 15,851 11,902 8,294
Advertising 3,143 255 157
Other 2,652 826 1,816
------- ------- -------
$61,894 $44,939 $39,473
======= ======= =======

A-19

I. COMMITMENTS AND CONTINGENCIES

The Company is involved in various claims and legal actions that have arisen in
the ordinary course of business. Management believes that any liabilities
arising from these actions will not have a material adverse effect on the
financial condition, results of operations or cash flows of the Company.

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, 2000, the
Company had 256 employees enrolled in the plan. The plan provides
non-contributory coverage for employees and contributory coverage for
dependents. The Company's contributions totaled $1,025,000, $966,000 and
$623,000, in 2000, 1999 and 1998 respectively.

In 2000, 147,000 options were exercised with exercise prices of $.25 and $.56 in
conjunction with the establishment of a deferred compensation plan. The related
common stock is held in the deferred compensation plan.The Company has a related
deferred compensation liability of $1,168,000 recorded on the accompanying
balance sheet.

J. COMMON STOCK OPTIONS AND WARRANTS

1993 Stock Option Plan

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

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

In June 1997, the Company adopted an amendment to the 1993 Stock Option Plan
that authorized an additional 500,000 shares. In June 1998, the Company adopted
an amendment to the 1993 Stock Option Plan that authorized an additional 750,000
shares. In June 1999 the Company adopted an amendment to the 1993 Stock Option
Plan that authorized an additional 400,000 shares.

A-20

J. COMMON STOCK OPTION AND WARRANTS (continued)

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

2000 1999 1998

Options Weighted-Average Options Weighted-Average Options Weighted-Average
(000) Exercise Price (000) Exercise Price (000) Exercise Price
--------------------------------- -------------------------------- ------------------------

Outstanding-beginning

of year 2,294 $9.10 1,892 $10.10 1,394 $11.04

Granted 441 7.21 695 7.56 825 8.63

Exercised (163) .89 (17) 5.10 (44) 3.73

Forfeited (168) 12.49 (276) 12.20 (283) 12.58
------ ----- ----- ------- ------- -------

Outstanding-end of year 2,404 $9.09 2,294 $9.10 1,892 $10.10
====== ===== =====

Exercisable at end of year 1,563 $9.82 1,137 $9.89 806 $10.74

Weighted-average fair
value of options

granted during the year $2.71 -- $2.96 -- $3.40 --

The following table summarizes the Company's outstanding options at December 31,
2000:

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

$0.25 - $4.91 130 4.1 years $4.91 -- $ --
$4.92 - $8.50 1,198 3.4 years 7.53 626 7.38
$8.51 - $12.25 621 3.1 years 9.78 517 9.92
$12.26 - $15.32 455 1.3 years 13.43 420 13.35
--- ---

Total 2,404 1,563
===== =====

Proforma 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 2000,
1999 and 1998, respectively: risk-free interest rates of 6.6%, 6.5% and

A-21

J. COMMON STOCK OPTION AND WARRANTS (continued)

5.2%; dividend yields of 0%, 0% and 0%; volatility factors of the expected
market price of the Company's common stock of .42, .44 and .42; and a
weighted-average expected life of the option of 4 years.

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

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

2000 1999 1998

Pro forma net income $8,512 $11,960 $7,817
Pro forma earning per share:
Basic $0.53 $0.71 $0.42
Diluted $0.53 $0.70 $0.42

As of December 31, 2000, the Company had issued warrants to purchase
approximately 310,000 shares of common stock to third parties. The exercise
prices of the warrants range from $7.73 to $10.38 per share. These warrants were
issued in conjunction with the refractive acquisitions discussed in Note D.

K. LONG-LIVED ASSETS TO BE DISPOSED OF

In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, equipment which management has both the ability and intent to
remove from service is reported in the financial statements at the lower of
carrying amount or fair value less costs to sell. In December 2000, the Company
committed to dispose of its prostatherapy segment and entered into an agreement
to dispose of this segment in January 2001. In exchange for 100% of its interest
in its prostatherapy segment, the Company received an unsecured non-recourse
note receivable. An estimated impairment of $1,230,000 was recognized to adjust
the segment net assets to fair value less the estimated costs to sell in the
caption "nonrecurring development, impairment and other costs, net" in the
accompanying statement of income.

A-22

K. LONG-LIVED ASSETS TO BE DISPOSED OF (continued)

During 1999, the Company approved the removal from service of five lithotripter
units. Three of these units were removed from service by the end of 1999 and the
remaining two were removed from service in the first quarter of 2000. These
assets were held by the lithotripsy segment. The customers of these units are
now serviced by other equipment. A loss of approximately $1.1 million was
recognized on the write-down to fair value less costs to sell in the caption
"nonrecurring development, impairment and other costs, net" of the accompanying
statement of income. The minority interest portion of this loss was
approximately $600,000.

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:

Years Ended December 31,
($ in thousands) 2000 1999 1998
---- ---- ----
Federal:
Current $4,494 $5,490 $6,404
Deferred 1,298 2,875 (442)
State 934 1,067 1,415
------ ------ ------
$6,726 $9,432 $7,377
====== ====== ======

A reconciliation of expected income tax (computed by applying the United States
statutory income tax rate of 35% to earnings before income taxes) to total
income tax expense in the accompanying consolidated statements of income
follows:

Years Ended December 31,
($ in thousands) 2000 1999 1998
---- ---- ----

Expected federal income tax $6,084 $8,565 $6,360
State taxes 607 694 920
Other 35 173 97
------ ------ ------
$6,726 $9,432 $7,377
====== ====== ======

A-23

L. INCOME TAXES (continued)

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2000 and
1999 are presented below:

($ in thousands)
2000 1999
---- ----
Deferred tax assets:
Capitalized costs $1,079 $1,948
Loan origination fees amortizable for
tax purposes 644 949
Accounts receivable, principally due to
allowance for doubtful accounts - 73
Accrued expenses deductible for tax
purposes when paid 1,032 994
----- -----
Total gross deferred tax assets 2,755 3,964
Less valuation allowance -- --
----- -----
Net deferred tax assets $2,755 $3,964
----- -----

($ in thousands)
2000 1999
---- ----
Deferred tax liabilities:
Property and equipment, principally due
to differences in depreciation $ (245) $ (99)
Investments in affiliated entities,
principally due to undistributed income (1,820) (2,329)
Intangible assets, principally due to
differences in amortization periods
for tax purposes (9,160) (6,870)
------ ------
Total gross deferred tax liability (11,225) (9,298)
------- ------
Net deferred tax liability $ (8,470) $ (5,334)
======= ======

There is no valuation allowance for deferred tax assets at December 31, 2000 and
1999.

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

Based upon the level of historical taxable income and projections for future
taxable income over the periods which the deductible temporary differences
reverse, management believes it is more likely than not the Company will realize
the benefits of these deductible differences at December 31, 2000.

A-24

M. SEGMENT REPORTING

The Company has three reportable segments: lithotripsy, manufacturing and
refractive. The lithotripsy segment 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. The manufacturing segment provides manufacturing
services and installation, upgrade, refurbishment and repair of major medical
equipment for mobile medical service providers. The refractive segment, which
was added in 1999, provides services related to the operations of refractive
vision correction centers. Other operating segments which do not meet the
quantitative thresholds for reportable segments include prostatherapy services,
which was disposed in January 2000.

The accounting policies of the segments are the same as those described in Note
B, the summary of significant accounting policies. The Company measures
performance based on the pretax income or loss after consideration of minority
interests from its operating segments, which do not include unallocated
corporate general and administrative expenses and corporate interest income and
expense. Additionally, certain consolidated entities that are reported as
"corporate" own and operate lithotripsy equipment. The revenue and depreciation
expense related to this equipment is included in the lithotripsy segment.
However, the equipment is included in corporate assets.

The Company's segments are divisions that offer different services, and require
different technology and marketing approaches. The majority of the lithotripsy
segment is comprised of acquired entities, as are the manufacturing and
refractive segments. The prostatherapy segment was developed internally. The
presentation of segments for 1998, which included two segments for medical and
manufacturing, have been recast to conform to the Company's operating segments
for 2000 and 1999.

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

A-25

M. SEGMENT REPORTING (continued)

($ in thousands)
Lithotripsy Manufacturing Refractive Other
----------- ------------- ---------- -----
2000
- ----
Revenue from
external customers $83,335 $22,157 $23,501 $1,702

Intersegment revenues -- 298 -- --

Interest income 408 12 5 14

Interest expense 499 125 1,003 --

Depreciation and
amortization 9,798 165 3,688 394

Segment profit 26,916 3,541 2,418 82

Segment assets 193,683 13,489 57,403 4

Investment in
equity method
investees 9,696 -- -- --

Capital expenditures 4,961 172 6,283 500

1999
- ----
Revenue from
external customers $89,180 $17,527 $3,414 $2,053

Intersegment revenues -- 243 -- --

Interest income 341 -- -- 4

Interest expense 269 98 457 --

Depreciation and
amortization 9,754 264 363 336

Segment profit 32,115 3,430 450 337

Segment assets 195,012 13,122 23,254 3,021

Investment in
equity method
investees 8,814 - 9,375 --

Capital expenditures 4,367 161 548 298

A-26

M. SEGMENT REPORTING (continued)

($ in thousands)
Lithotripsy Manufacturing Refractive Other
----------- ------------- ---------- -----
1998
----
Revenue from
external customers $92,053 $11,066 -- $1,517

Intersegment revenues -- 255 -- --

Interest income 444 -- -- 3

Interest expense 235 38 -- --

Depreciation and
amortization 9,899 223 -- 252

Segment profit 35,484 1,142 -- 209

Segment assets 203,653 9,916 -- 2,628

Investment in
equity method
investees 10,696 -- -- --

Capital expenditures 2,770 1,580 -- 787

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

($ in thousands) 2000 1999 1998
---- ---- ----

Total revenues for reportable segments $129,291 $110,364 $103,374

Other segment 1,702 2,053 1,517

Elimination of intersegment revenues (298) (243) (255)
-------- ------- --------

Total consolidated revenues $130,695 $112,174 $104,636
======== ======== ========

A-27

M. SEGMENT REPORTING (continued)

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

($ in thousands) 2000 1999 1998
---- ---- ----

Total profit for reportable segments $32,875 $35,995 $36,626

Other segment 82 337 209

Unallocated corporate expenses:

General and administrative (4,486) (5,027) (4,926)

Net interest expense (8,199) (7,424) (7,226)

Loan fees and stock offering costs (173) (566) (4,978)

Relocation of central billing office (698) -- --

Nonrecurring development and other costs (1,830) 475 (1,617)

Release of contractual obligation -- 1,140 --

Other, net (188) (459) 83
-------- -------- --------

Unallocated corporate expenses total (15,574) (11,861) (18,664)
-------- ------- -------

Income before income taxes $17,383 $24,471 $18,171
======= ======= =======

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

($ in thousands) 2000 1999 1998
---- ---- ----

Total assets for reportable segments $264,575 $231,388 $213,569

Other segment 4 3,021 2,628

Unallocated corporate assets 11,639 12,563 24,001
-------- -------- --------

Consolidated total $276,218 $246,972 $240,198
======== ======== ========

A-28

M. SEGMENT REPORTING (continued)

The reconciliation of the other significant items to the amounts reported in the
consolidated financial statements is as follows:

Eliminating
($ in thousands) Segments Corporate Entries Consolidated
-------- --------- ------- ------------
2000

Interest income $439 $1,992 $(1,255) $1,176
Interest expense 1,627 10,191 (1,255) 10,563
Depreciation and
amortization 14,045 142 -- 14,187
Capital expenditures 11,916 1,059 -- 12,975

1999

Interest income $345 $1,250 $(90) $1,505
Interest expense 824 8,674 (90) 9,408
Depreciation and
amortization 10,717 131 -- 10,848
Capital expenditures 5,374 416 -- 5,790

1998

Interest income $447 $1,007 $(37) $1,417
Interest expense 273 8,233 (37) 8,469
Depreciation and
amortization 10,374 102 -- 10,476
Capital expenditures 5,137 76 -- 5,213

The amounts in 2000, 1999 and 1998 for interest income and expense, depreciation
and amortization and capital expenditures represent amounts recorded by the
operations of the Company's corporate functions, which have not been allocated
to the segments.

N. CONDENSED FINANCIAL INFORMATION REGARDING GUARANTOR SUBSIDIARIES

Condensed consolidating financial information regarding the Company, Guarantor
Subsidiaries and non-guarantor subsidiaries as of December 31, 2000 and 1999 and
for each of the years in the three-year period ended December 31, 2000 is
presented below for purposes of complying with the reporting requirements of the
Guarantor Subsidiaries. Separate financial statements and other disclosures
concerning each Guarantor Subsidiary have not been presented because management
has determined that such information is not material to investors. The Guarantor
Subsidiaries are wholly-owned subsidiaries of the Company who have fully and
unconditionally guaranteed the Notes described in Note G.

A-29

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Income
Year Ended December 31, 2000

Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total
------------------------------ -------------- -------------- --------------

Revenue:
Lithotripsy:
Fee revenues $ - $ 15,490 $ 61,653 $ - $ 77,143
Management fees - 2,131 1,553 - 3,684
Equity income 24,615 18,666 530 (41,303) 2,508
-------------- -------------- -------------- -------------- --------------
24,615 36,287 63,736 (41,303) 83,335
Manufacturing - - 22,157 - 22,157
Refractive 2,211 5,025 22,577 (6,312) 23,501
Prostatherapy - - 1,578 - 1,578
Other - 124 - - 124
-------------- -------------- -------------- -------------- --------------
Total revenue 26,826 41,436 110,048 (47,615) 130,695
-------------- -------------- -------------- -------------- --------------

Cost of services and general and
administrative expenses:
Lithotripsy - 792 21,624 - 22,416
Manufacturing - - 17,149 - 17,149
Refractive - 164 13,692 - 13,856
Prostatherapy - (288) 1,612 - 1,324
Other - 135 - - 135
Corporate 54 4,432 - - 4,486
Relocation of central billing office - 698 - - 698
Nonrecurring development, impairment - - -
and other costs 1,230 600 - - 1,830
-------------- -------------- -------------- -------------- --------------
1,284 6,533 54,077 - 61,894
Depreciation and amortization - 7,266 6,921 - 14,187
-------------- -------------- -------------- -------------- --------------
Total operating expenses 1,284 13,799 60,998 - 76,081
-------------- -------------- -------------- -------------- --------------

Operating income 25,542 27,637 49,050 (47,615) 54,614
-------------- -------------- -------------- -------------- --------------

Other income (deductions):
Interest income 197 542 437 - 1,176
Interest expense (9,741) (28) (794) - (10,563)
Loan fees and stock offering costs (173) - - - (173)
Other, net 49 (51) 85 - 83
-------------- -------------- -------------- -------------- --------------
Total other income (deductions) (9,668) 463 (272) - (9,477)
-------------- -------------- -------------- -------------- --------------

Income before provision for income
taxes and minority interest 15,874 28,100 48,778 (47,615) 45,137

Minority interest in consolidated income - - - 27,754 27,754

Provision for income taxes 5,217 1,274 235 - 6,726
-------------- -------------- -------------- -------------- --------------

Net income $ 10,657 $ 26,826 $ 48,543 $ (75,369) $ 10,657
============== ============== ============== ============== ==============

A-30

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Income
Year Ended December 31, 1999

Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total
------------------------------ -------------- -------------- --------------

Revenue:
Lithotripsy:
Fee revenues $ - $ 20,303 $ 60,577 $ - $ 80,880
Management fees - 3,304 2,415 - 5,719
Equity income 32,763 18,799 - (48,981) 2,581
-------------- -------------- -------------- -------------- --------------
32,763 42,406 62,992 (48,981) 89,180
Manufacturing - - 17,527 - 17,527
Refractive 346 410 3,004 (346) 3,414
Prostatherapy - - 1,834 - 1,834
Other - 219 - - 219
-------------- -------------- -------------- -------------- --------------
Total revenue 33,109 43,035 85,357 (49,327) 112,174
-------------- -------------- -------------- -------------- --------------

Cost of services and general and
administrative expenses:
Lithotripsy - 1,995 21,006 - 23,001
Manufacturing - - 12,880 - 12,880
Refractive - - 1,954 - 1,954
Prostatherapy - (198) 1,483 - 1,285
Other - 165 - - 165
Corporate 248 4,779 - - 5,027
Nonrecurring development,
impairment and other costs, net (570) 173 1,024 - 627
-------------- -------------- -------------- -------------- --------------
(322) 6,914 38,347 - 44,939
Depreciation and amortization 5 5,216 5,627 - 10,848
-------------- -------------- -------------- -------------- --------------
Total operating expenses (317) 12,130 43,974 - 55,787
-------------- -------------- -------------- -------------- --------------

Operating income 33,426 30,905 41,383 (49,327) 56,387
-------------- -------------- -------------- -------------- --------------

Other income (deductions):
Interest income 749 510 246 - 1,505
Interest expense (9,111) 438 (735) - (9,408)
Loan fees and stock offering costs (492) (74) - - (566)
Release of contractual obligation - 1,140 - - 1,140
Other, net (662) 522 61 - (79)
-------------- -------------- -------------- -------------- --------------
Total other income (deductions) (9,516) 2,536 (428) - (7,408)
-------------- -------------- -------------- -------------- --------------

Income before provision for income
taxes and minority interest 23,910 33,441 40,955 (49,327) 48,979

Minority interest in consolidated income - - - 24,508 24,508

Provision for income taxes 8,871 332 229 - 9,432
-------------- -------------- -------------- -------------- --------------

Net income $ 15,039 $ 33,109 $ 40,726 $ (73,835) $ 15,039
============== ============== ============== ============== ==============

A-31

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Income
Year Ended December 31, 1998

Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total
------------------------------ -------------- -------------- --------------

Revenue:
Lithotripsy:
Fee revenues $ - $ 22,487 $ 61,392 $ - $ 83,879
Management fees - 3,126 2,158 - 5,284
Equity income 30,952 20,077 - (48,139) 2,890
-------------- -------------- -------------- -------------- --------------
30,952 45,690 63,550 (48,139) 92,053
Manufacturing - - 11,066 - 11,066
Prostatherapy - - 1,207 - 1,207
Other - 310 - - 310
-------------- -------------- -------------- -------------- --------------
Total revenue 30,952 46,000 75,823 (48,139) 104,636
-------------- -------------- -------------- -------------- --------------

Cost of services and general and
administrative expenses:
Lithotripsy - 3,977 18,697 - 22,674
Manufacturing - - 9,204 - 9,204
Prostatherapy - - 803 - 803
Other - 249 - - 249
Corporate 203 4,723 - - 4,926
Nonrecurring development,
impairment and other costs, net 1,617 - - - 1,617
-------------- -------------- -------------- -------------- --------------
1,820 8,949 28,704 - 39,473
Depreciation and amortization 7 5,221 5,248 - 10,476
-------------- -------------- -------------- -------------- --------------
Total operating expenses 1,827 14,170 33,952 - 49,949
-------------- -------------- -------------- -------------- --------------

Operating income 29,125 31,830 41,871 (48,139) 54,687
-------------- -------------- -------------- -------------- --------------

Other income (deductions):
Interest income 735 305 377 - 1,417
Interest expense (8,234) (44) (191) - (8,469)
Loan fees and stock offering costs (4,978) - - - (4,978)
Other, net (39) 331 12 - 304
-------------- -------------- -------------- -------------- --------------
Total other income (deductions) (12,516) 592 198 - (11,726)
-------------- -------------- -------------- -------------- --------------

Income before provision for income
taxes and minority interest 16,609 32,422 42,069 (48,139) 42,961

Minority interest in consolidated income - - - 24,790 24,790

Provision for income taxes 5,815 1,470 92 - 7,377
-------------- -------------- -------------- -------------- --------------

Net income $ 10,794 $ 30,952 $ 41,977 $ (72,929) $ 10,794
============== ============== ============== ============== ==============

A-32

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheet
December 31, 2000

Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total
------------------------------ -------------- -------------- -------------

ASSETS

Current assets:
Cash $ 427 $ 7,393 $ 7,710 $ - $ 15,530
Investments 1,241 - - - 1,241
Accounts receivable, net - 3,453 26,699 - 30,152
Other receivables 2,137 2,720 1,762 - 6,619
Deferred income taxes 305 727 - - 1,032
Prepaid expenses and other current assets 40 312 1,277 - 1,629
Inventory - - 5,068 5,068
-------------- -------------- -------------- -------------- -------------
Total current assets 4,150 14,605 42,516 - 61,271
-------------- -------------- -------------- -------------- -------------
Property and equipment:
Equipment, furniture and fixtures - 6,301 47,252 - 53,553
Building and leasehold improvements - 535 3,039 - 3,574
-------------- -------------- -------------- -------------- -------------
- 6,836 50,291 - 57,127
Less accumulated depreciation
and amortization - (4,109) (26,764) - (30,873)
-------------- -------------- -------------- -------------- -------------
Property and equipment, net - 2,727 23,527 - 26,254

Investment in subsidiaries
and other investments 226,154 35,342 - (251,267) 10,229
Goodwill, at cost, net of amortization - 172,824 - - 172,824
Other noncurrent assets 770 4,154 716 - 5,640
-------------- -------------- -------------- -------------- -------------
$ 231,074 $ 229,652 $ 66,759 $ (251,267) $ 276,218
============== ============== ============== ============== =============

LIABILITIES

Current liabilities:
Current portion of long-term debt $ - $ - $ 3,705 $ - $ 3,705
Accounts payable 73 555 3,983 - 4,611
Accrued expenses 4,613 751 9,474 - 14,838
-------------- -------------- -------------- -------------- -------------
Total current liabilities 4,686 1,306 17,162 - 23,154
Long-term debt, net of current portion 118,000 119 3,885 - 122,004
Deferred compensation liability 1,168 - - - 1,168
Deferred income taxes 7,429 2,073 - - 9,502
-------------- -------------- -------------- -------------- -------------
Total liabilities 131,283 3,498 21,047 - 155,828

Minority interest - - - 20,599 20,599

STOCKHOLDERS' EQUITY

Common stock 195 - - - 195
Capital in excess of par value 88,978 - - - 88,978
Accumulated earnings 44,311 - - - 44,311
Treasury stock (33,693) - - - (33,693)
Subsidiary net equity - 226,154 45,712 (271,866) -
-------------- -------------- -------------- -------------- -------------
Total stockholders' equity 99,791 226,154 45,712 (271,866) 99,791
-------------- -------------- -------------- -------------- -------------
$ 231,074 $ 229,652 $ 66,759 $ (251,267) $ 276,218
============== ============== ============== ============== =============

A-33

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Balance Sheet
December 31, 1999

Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total
------------------------------ -------------- -------------- -------------

ASSETS

Current assets:
Cash $ 2,043 $ 2,682 $ 15,339 $ - $ 20,064
Investments 4,120 - - - 4,120
Accounts receivable, net - 3,069 20,204 - 23,273
Other receivables 437 1,689 1,511 - 3,637
Deferred income taxes 94 972 - - 1,066
Prepaid expenses and other current assets 14 1,195 1,113 - 2,322
Inventory - - 3,676 3,676
-------------- -------------- -------------- -------------- -------------
Total current assets 6,708 9,607 41,843 - 58,158
-------------- -------------- -------------- -------------- -------------
Property and equipment:
Equipment, furniture and fixtures - 5,549 36,579 - 42,128
Building and leasehold improvements - 498 1,594 - 2,092
-------------- -------------- -------------- -------------- -------------
- 6,047 38,173 - 44,220
Less accumulated depreciation
and amortization - (4,514) (21,053) - (25,567)
-------------- -------------- -------------- -------------- -------------
Property and equipment, net - 1,533 17,120 - 18,653

Investment in subsidiaries
and other investments 196,347 50,721 - (228,105) 18,963
Goodwill, at cost, net of amortization - 139,989 9,099 - 149,088
Other noncurrent assets 281 643 1,186 - 2,110
-------------- -------------- -------------- -------------- -------------
$ 203,336 $ 202,493 $ 69,248 $ (228,105) $ 246,972
============== ============== ============== ============== =============

LIABILITIES

Current liabilities:
Current portion of long-term debt $ - $ - $ 1,763 $ - $ 1,763
Accounts payable 70 1,256 1,964 - 3,290
Accrued expenses 3,670 1,242 10,674 - 15,586
-------------- -------------- -------------- -------------- -------------
Total current liabilities 3,740 2,498 14,401 - 20,639
Long-term debt, net of current portion 100,000 162 3,635 - 103,797
Deferred income taxes 2,914 3,486 - - 6,400
-------------- -------------- -------------- -------------- -------------
Total liabilities 106,654 6,146 18,036 - 130,836

Minority interest - - - 19,454 19,454

STOCKHOLDERS' EQUITY

Common stock 194 - - - 194
Capital in excess of par value 87,655 - - - 87,655
Accumulated earnings 33,654 - - - 33,654
Treasury stock (24,821) - - - (24,821)
Subsidiary net equity - 196,347 51,212 (247,559) -
-------------- -------------- -------------- -------------- -------------
Total stockholders' equity 96,682 196,347 51,212 (247,559) 96,682
-------------- -------------- -------------- -------------- -------------
$ 203,336 $ 202,493 $ 69,248 $ (228,105) $ 246,972
============== ============== ============== ============== =============

A-34

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 2000

Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total
------------------------------ -------------- -------------- --------------

CASH FLOWS FROM OPERATING
ACTIVITIES:
Net cash provided by (used in)
operating activities $ (13,222) $ 17,034 $ 41,368 $ - $ 45,180
-------------- -------------- -------------- -------------- --------------

CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of investments and entities - (23,784) - - (23,784)
Purchases of equipment and leasehold
improvements - (2,032) (10,943) - (12,975)
Proceeds from sales of equipment - - 277 - 277
Distributions from subsidiaries 19,145 11,958 - (31,103) -
Investments (18,000) - - 18,000 -
Distributions from investments - 2,680 - - 2,680
Other - - - - -
-------------- -------------- -------------- -------------- --------------
Net cash provided by (used in)
investing activities 1,145 (11,178) (10,666) (13,103) (33,802)
-------------- -------------- -------------- -------------- --------------

CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on notes payable exclusive of
interest - - (3,075) - (3,075)
Borrowings on notes payable 18,000 - 3,592 - 21,592
Distributions to minority interest - - - (27,092) (27,092)
Contributions by minority interest - - 202 - 202
Exercise and issuance of stock options 164 - - - 164
Purchase of treasury stock (7,703) - - - (7,703)
Contributions from parent - 18,000 - (18,000) -
Distributions to equity owners - (19,145) (39,050) 58,195 -
-------------- -------------- -------------- -------------- --------------

Net cash provided by (used in)
financing activities 10,461 (1,145) (38,331) 13,103 (15,912)
-------------- -------------- -------------- -------------- --------------

NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,616) 4,711 (7,629) - (4,534)

Cash and cash equivalents, beginning of period 2,043 2,682 15,339 - 20,064
-------------- -------------- -------------- -------------- --------------

Cash and cash equivalents, end of period $ 427 $ 7,393 $ 7,710 $ - $ 15,530
============== ============== ============== ============== ==============

A-35

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 1999

Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total
------------------------------ ------------- -------------- --------------

CASH FLOWS FROM OPERATING
ACTIVITIES:
Net cash provided by (used in)
operating activities $ (20,940) $ 5,205 $ 51,479 $ - $ 35,744
-------------- -------------- ------------- -------------- --------------

CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of investments and entities - (13,451) (10,129) - (23,580)
Purchases of equipment and leasehold
improvements - (1,193) (4,597) - (5,790)
Proceeds from sales of equipment - 167 40 - 207
Distributions from subsidiaries 15,407 17,424 - (32,831) -
Investments - 2,352 - - 2,352
Other - - 570 - 570
-------------- -------------- ------------- -------------- --------------

Net cash provided by (used in)
investing activities 15,407 5,299 (14,116) (32,831) (26,241)
-------------- -------------- ------------- -------------- --------------

CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on notes payable exclusive of
interest - - (1,403) - (1,403)
Borrowings on notes payable - - 4,584 - 4,584
Distributions to minority interest - - - (27,180) (27,180)
Contributions by minority interest - - 2,636 - 2,636
Exercise and issuance of stock options 160 - - - 160
Purchase of treasury stock (8,382) - - - (8,382)
Distributions to equity owners - (15,407) (44,604) 60,011 -
-------------- -------------- ------------- -------------- --------------

Net cash provided by (used in)
financing activities (8,222) (15,407) (38,787) 32,831 (29,585)
-------------- -------------- ------------- -------------- --------------

NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (13,755) (4,903) (1,424) - (20,082)

Cash and cash equivalents, beginning of period 15,798 7,585 16,763 - 40,146
-------------- -------------- ------------- -------------- --------------

Cash and cash equivalents, end of period $ 2,043 $ 2,682 $ 15,339 $ - $ 20,064
============== ============== ============= ============== ==============

A-36

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidating Statement of Cash Flows
Year Ended December 31, 1998

Prime Medical Guarantor Non-Guarantor Eliminating Consolidated
($ in thousands) Services, Inc. Subsidiaries Subsidiaries Entries Total
------------------------------ ------------- -------------- --------------

CASH FLOWS FROM OPERATING
ACTIVITIES:
Net cash provided by (used in)
operating activities $ (10,215) $ 9,608 $ 46,158 $ - $ 45,551
-------------- -------------- ------------- -------------- --------------

CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of equipment and leasehold
improvements - (2,000) (3,213) - (5,213)
Proceeds from sales of equipment - 179 45 - 224
Distributions from subsidiaries 26,228 16,665 - (42,893) -
Investments (408) 2,940 - - 2,532
Other 22 166 127 - 315
-------------- -------------- ------------- -------------- --------------

Net cash provided by (used in)
investing activities 25,842 17,950 (3,041) (42,893) (2,142)
-------------- -------------- ------------- -------------- --------------

CASH FLOWS FROM FINANCING
ACTIVITIES:
Payments on notes payable exclusive of
interest (79,000) (5) (1,479) - (80,484)
Borrowings on notes payable 100,000 - 25 - 100,025
Distributions to minority interest - - - (25,799) (25,799)
Debt issuance costs (4,417) - - - (4,417)
Contributions by minority interest - - 72 - 72
Exercise and issuance of stock options 9 - - - 9
Purchase of treasury stock (16,439) - - - (16,439)
Distributions to equity owners - (26,228) (42,464) 68,692 -
-------------- -------------- ------------- -------------- --------------

Net cash provided by (used in)
financing activities 153 (26,233) (43,846) 42,893 (27,033)
-------------- -------------- ------------- -------------- --------------

NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 15,780 1,325 (729) - 16,376

Cash and cash equivalents, beginning of period 18 6,260 17,492 - 23,770
-------------- -------------- ------------- -------------- --------------

Cash and cash equivalents, end of period $ 15,798 $ 7,585 $ 16,763 $ - $ 40,146
============== ============== ============= ============== ==============

A-37