References in this report to “we,” “us,” “our,” and the “Company” mean Prime Medical Services, Inc. and (as the context may require) one or more of our subsidiaries.

We provide lithotripsy services in 26 states and design and manufacture trailers and coaches for transporting high technology medical devices and equipment designed for mobile command and control centers and the media and broadcast industry. During 2002, we completed our divestiture of our operations in the refractive vision correction or “RVC” industry. Thus, we currently have two reportable segments: lithotripsy and manufacturing. RVC operations are also reported to allow for meaningful prior year comparisons. See Note M to the consolidated financial statements for segment disclosures.

Lithotripsy is a non-invasive procedure for treating kidney stones, typically performed on an outpatient basis that eliminates the need for lengthy hospital stays and extensive recovery periods associated with surgery. Our services are provided principally through limited partnerships or other entities that we manage, which use lithotripsy devices. These partnerships were formed by us, and we have retained an equity interest ranging from approximately 17% to 100% while selling any remaining interests to physicians. We retain the sole general partnership interest in the partnerships and manage their daily operations. As of December 31, 2003, we had 62 lithotripters of which 58 are mobile and four are fixed sites. Our lithotripters performed approximately 28,100 procedures in the United States in 2003 serving approximately 372 hospitals and surgery centers in 26 states.

As the general partner of the limited partnerships, we provide 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. We also provide equipment maintenance services to the partnerships and supply them with various consumables. Urologists render medical care utilizing the lithotripters. We believe that we are one of the largest providers of lithotripsy services in the U.S. and that we have created the industry’s largest and most comprehensive lithotripsy database containing detailed treatment and outcomes data on over 150,000 procedures. We and our associated urologists utilize this database in seeking to provide the highest quality of lithotripsy services as efficiently as possible.

In February 2004, we acquired Medstone International, Inc. Medstone manufactures, sells, and maintains lithotripters and makes them available for use by health care providers under various fee-for-service arrangements in both fixed and mobile settings. Medstone and its subsidiaries also market fixed and mobile tables for urological treatments and imaging, patient handling tables for use by pain management clinics and other users, and x-ray generators for medical imaging. A pioneer in the manufacture of shockwave lithotripsy, Medstone’s lithotripter was the first FDA approved device to treat both kidney stones and gallstones. With more than 130 lithotripters in operation worldwide, and more than 324 urology and patient handling tables in use, the Medstone devices are well established in the urology office and hospital market. For the year ended December 31, 2003, Medstone had revenue of $21 million, comprised of $15 million in service revenue and $6 million in equipment sales.

We design, construct and engineer mobile trailers and coaches that transport high technology medical devices, equipment designed for mobile command and control centers, and equipment for broadcasting and communications applications. During 1997, we acquired a majority interest in AK Specialty Vehicles, which provides manufacturing services, installation, refurbishment and repair of trailers and coaches for mobile medical services providers, including non-lithotripsy medical services such as magnetic resonance imaging, cardiac catheterization labs, CT scanners, and postitron emission tomography. In May 2002, we acquired the remaining minority ownership interest in AK Specialty Vehicles which is now one of our wholly-owned subsidiaries.

In May 2001, we broadened our manufacturing platform by acquiring the assets of Calumet Coach Company, or Calumet. Since its founding more than 50 years ago, Calumet has produced thousands of special-purpose mobile units, earning a worldwide reputation for leadership in innovative design and quality manufacturing. Calumet’s customers include industry leaders such as GE Medical Systems, Philips, Siemens Medical Systems, Dornier Medical Systems, hundreds of hospital systems and healthcare providers, and numerous broadcast and production companies.

In May 2002, we acquired the assets and certain liabilities of Frontline Communications Corporation, or Frontline. Frontline is a leading manufacturer and integrator of custom vehicles exclusively for the broadcast and communications industry. This acquisition expanded our market share in the broadcast and communications industry.

In July 2002, we acquired Holland-based Smit Mobile Equipment Company, or Smit. Smit is a leading European manufacturer of mobile medical imaging vehicles. The Smit acquisition expanded our presence in the global marketplace as a manufacturer of specialty vehicles, strengthened our strategic position in the growing European market for high technology mobile medical imaging and broadcast and communication vehicles.

In January 2003, we acquired Aluminum Body Corporation, or ABC. The acquisition of ABC extends our position in the manufacture of command and control vehicles for the Homeland Security and military and government markets. Additionally, this acquisition provides us an important west coast hub for the service and sale of all of the products manufactured within our manufacturing group.

In February 2003, we acquired Winemiller Communications, or Winemiller. Winemiller provides turnkey remanufacturing and refurbishing of specialty vehicles utilized by the broadcast community and is a recognized leader in the application of microwave technology solutions.

Our manufacturing business is headquartered in Harvey, Illinois, with additional manufacturing operations in Calumet City, Illinois; Sanford, Florida; Clearwater, Florida; Riverside, California; Carlisle, Pennsylvania and Oud Bierjland, Holland. Additionally, we operate a service and sales facility in Camberley, England, and a sales office in Beijing, China.

RVC refers to the correction of common vision disorders such as myopia (nearsightedness), hyperopia (farsightedness) and astigmatism using specialized laser applications. During 1999 and 2000, we acquired eleven refractive centers, and affiliated with physicians specializing in refractive surgery.

In 2002, we completed the divesture of our RVC operations, thereby affording us the opportunity to focus our resources on opportunities in our manufacturing and lithotripsy businesses.

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

We currently maintain 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, we require medical professionals who utilize our 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 our liabilities, we 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 that might have a material adverse effect on our results of operations or financial condition.

We are directly, or indirectly through physicians and hospitals and other health care facilities, which we will refer to as Customers, subject to extensive regulation by both the federal government and the governments in states in which we conduct business, including:

Practices prohibited by these statutes include, but are not limited to, the payment, receipt, offer, or solicitation of money or other consideration in connection with the referral of patients for services covered by a federal or state health care program. We contract with physicians under a variety of financial arrangements, and physicians have ownership interests in some entities in which we also have an interest. If our operations are found to be in violation of any of the laws and regulations to which we or our Customers are subject, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines, exclusion from the Medicare, Medicaid, and other governmental healthcare programs, loss of licenses, and the curtailment of our operations. While we believe that we are in compliance with all applicable laws, we cannot assure that our activities will be found to be in compliance with these laws if scrutinized by regulatory authorities. Any penalties, damages, fines or curtailment of our operations, individually or in the aggregate, could adversely affect our ability to operate our business and our financial results. The risks of us being found in violation of these laws and regulations is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or in the courts, and their provisions are open to a variety of interpretations. Any action brought against us for violation of these laws or regulations, even if we were to successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.

We purchase our lithotripsy equipment and maintain that equipment with either internal personnel or pursuant to service contracts with the manufacturers or other service companies. For mobile lithotripsy, we either purchase or lease the tractor, usually for a term up to five years, and purchase the trailer or a self contained coach.

We are not dependent on one manufacturer of lithotripters and have no long term or multi-system purchase commitments for equipment in place.

As of February 18, 2004, we employed approximately 628 full-time employees and approximately 15 part-time employees.

The lithotripsy services market is highly fragmented and competitive. We compete with other private facilities and medical centers that offer lithotripsy services and with hospitals, clinics and individual medical practitioners that offer conventional and alternative medical treatment for kidney stones. We also compete with another public company, Healthtronics Surgical Services, Inc., which also manufactures and distributes lithotripsy equipment. Certain of our current and potential competitors have substantial financial resources and may compete with us for acquisitions and development of operations in markets we target. If the purchase price of lithotripters decreases, as a result of the development of less expensive lithotripsy equipment being developed or otherwise, competition could intensify. Increased competition could decrease our market share and prospects. Although most of our lithotripsy business is pursuant to lithotripsy service agreements, the duration of those agreements is limited to stated periods of time and most are either in their initial terms or have been renewed for a term of one to three years.

Our manufacturing segment competes with at least two privately held national companies in the mobile medical equipment market. We have at least five major competitors in the broadcast and satellite transmission industry. The primary competitive factors are price, quality, and product differences resulting from varying manufacturing techniques.

Our high levels of indebtedness may limit our financial and operating flexibility.

We continue to have high levels of debt and interest expense. Our long-term debt as of December 31, 2003 was approximately $111.7 million, not including the current portion of long-term debt of $3.3 million on that date. Our debt to equity ratio as of December 31, 2003 was approximately 1.08.

We have a revolving line of credit with a borrowing limit of $50.0 million, $3.0 million of which was drawn at December 31, 2003. In addition, we have outstanding $100.0 million of 8.75% senior subordinated notes due April 2008. The 8.75% notes are unsecured general obligations and are subordinated in right of payment to all of our existing and future senior indebtedness and are guaranteed by our subsidiaries on a full, unconditional, joint and several basis.

We have been assigned a B-1 senior implied rating and the 8.75% notes have been assigned a B-3 rating by Moody’s Investor Service Inc. We have also been assigned a BB- corporate credit rating by Standard and Poor’s Ratings Group. All of these ratings are below investment grade. As a result, at times we may have difficulty accessing capital markets or raising capital on favorable terms as we will incur higher borrowing costs than our competitors that have higher ratings. Therefore, our financial results may be negatively affected by our inability to raise capital or the cost of such capital as a result of our credit ratings.

We must comply with various covenants contained in our revolving credit facility, the indenture related to the 8.75% notes and any other future debt arrangements that, among other things, limit our ability to:

Our substantial debt could have important consequences to you. For example, it could:  

In addition, if we fail to comply with the terms of any of our debt, our lenders will have the right to accelerate the maturity of that debt and foreclose upon the collateral, if any, securing that debt. Realization of any of these factors could adversely affect our financial condition and results of operations.

If we are not able to establish or maintain relationships with physicians and hospitals, our ability to successfully commercialize our current or future service offerings will be materially harmed.

We are dependent on health care providers in two respects. First, if physicians and hospitals and other health care facilities, which we will refer to as Customers, determine that our services are not of sufficiently high quality or reliability, or if our Customers determine that our services are not cost effective, they will not utilize our services. In addition, any change in the rates of or conditions for reimbursement could substantially reduce (1) the number of procedures for which we or our Customers can obtain reimbursement or (2) the amounts reimbursed to us or our Customers for services provided by us. If third-party payors reduce the amount of their payments to Customers, our Customers may seek to reduce their payments to us or seek an alternate supplier of services. Because unfavorable reimbursement policies have constricted and may continue to constrict the profit margins of the hospitals and clinics we bill directly, we may need to lower our fees to retain existing customers and attract new ones. These reductions could have a significant adverse effect on our revenues and financial results by decreasing demand for services or creating downward pricing pressure. Second, physicians generally own equity interests in our partnerships. We provide a variety of services to the partnerships and in general manage their day-to-day affairs. Our operations could become disrupted, and financial results adversely affected, if these physician partners became dissatisfied with our services or if we became involved in disputes with our partners.

We are subject to extensive federal and state health care regulation.

We are subject to extensive regulation by both the federal government and the governments in states in which we conduct business. See “Government Regulation and Supervision” under this Part I for further discussion on these regulations.

Third party payors could refuse to reimburse health care providers for use of our current or future service offerings and products, which could make our revenues decline.

Third party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement of medical procedures and treatments. In addition, significant uncertainty exists as to the reimbursement status of newly approved health care products. Lithotripsy treatments are reimbursed under various federal and state programs, including Medicare and Medicaid, as well as under private health care programs, primarily at fixed rates. Governmental programs are subject to statutory and regulatory changes, administrative rulings, interpretations of policy and governmental funding restrictions, and private programs are subject to policy changes and commercial considerations, all of which may have the effect of decreasing program payments, increasing costs or requiring us to modify the way in which we operate our business. These changes could have a material adverse effect on us.

We face intense competition and rapid technological change that could result in products that are superior to the products we manufacture or superior to the products on which our current or proposed services are based.

Competition in our business segments is intense. We compete with national, regional and local providers of lithotripsy services and designers and manufacturers of trailers and coaches for transporting medical devices and mobile equipment designed for mobile command and control centers and equipment for the media and broadcast industry. This competition could lead to a decrease in our profitability. Moreover, if our customers determine that our competitors offer better quality products or services or are more cost effective, we could lose business to these competitors. The medical device and specialty vehicle industries are subject to rapid and significant technological change. Others may develop technologies or products that are more effective or less costly than our products or the products on which our services are based, which could render our products or services obsolete or noncompetitive. Our business is also impacted by competition between lithotripsy services, on the one hand, and surgical and other established methods for treating urological conditions, on the other hand.

We may be subject to costly and time-consuming product liability actions that would materially harm our business.

Our lithotripsy services and manufacturing business exposes us to potential product liability risks that are inherent in these industries. All medical procedures performed in connection with our business activities are performed by or under the supervision of physicians who are not our employees. We do not perform medical procedures. However, we may be held liable if patients undergoing lithotripsy treatments using our devices are injured. We may also face product liability claims as a result of our specialty vehicle manufacturing. We cannot ensure that we will be able to avoid product liability exposure. Product liability insurance is generally expensive, if available at all. We cannot ensure that our present insurance coverage is adequate or that we can obtain adequate insurance coverage at a reasonable cost in the future.

Our success will depend partly on our ability to operate without infringing on or utilizing the proprietary rights of others.

The medical device industry is characterized by a substantial amount of litigation over patent and other intellectual property rights. No one has claimed that any of our medical devices infringe on their intellectual property rights; however, it is possible that we may have unintentionally infringed on others’ patents or other intellectual property rights. Intellectual property litigation is costly. If we do not prevail in any litigation, in addition to any damages we might have to pay, we could be required to stop the infringing activity or obtain a license. Any required license may not be available to us on acceptable terms. If we fail to obtain a required license or are unable to design around a patent, we may be unable to sell some of our products, which would reduce our revenues and net income.

If we fail to attract and retain key personnel and principal members of our management staff, our business, financial condition and operating results could be materially harmed.

Our success depends greatly on our ability to attract and retain qualified management and technical personnel, as well as to retain the principal members of our existing management staff. The loss of services of any key personnel could adversely affect our current operations and our ability to implement our growth strategy. There is intense competition within our industry for qualified staff, and we cannot assure you that we will be able to attract and retain the necessary qualified staff to develop our business. If we fail to attract and retain key management staff, or if we lose any of our current management team, our business, financial condition and operating results could be materially harmed.

The market price of our common stock may experience substantial fluctuation for reasons over which we have little control.

Our stock price has a history of volatility. Fluctuations have occurred even in the absence of significant developments pertaining to our business. Stock prices and trading volume of companies in the health care and health services industry have fallen and risen dramatically in recent years. Both company-specific and industry-wide developments may cause this volatility. During 2003, our stock price ranged from $4.05 to $8.88. Factors that could impact the market price of our common stock include the following:

•  future announcements concerning us, our competition or the health care services market generally;

•  developments relating to our relationships with hospitals, other health care facilities, or physicians;

•  developments relating to our sources of supply;

•  claims made or litigation filed against us;

•  changes in, or new interpretations of, government regulations;

•  changes in operating results from quarter to quarter;

•  sales of stock by insiders;

•  news reports relating to trends in our markets;

•  acquisitions and financings in our industry; and

•  overall volatility of the stock market.

Furthermore, stock prices for many companies fluctuate widely for reasons that may be unrelated to their operating results. These fluctuations, coupled with changes in our results of operations and general economic, political and market conditions, may adversely affect the market price of our common stock.

Our acquisition strategy could fail or present unanticipated problems for our business in the future, which could adversely affect our ability to make acquisitions or realize anticipated benefits from those acquisitions.

We have followed an acquisition strategy since 1992 that has resulted in rapid growth in our business. This acquisition strategy may include acquiring healthcare services and specialty vehicle manufacturing businesses and is dependent on the continued availability of suitable acquisition candidates and our ability to finance and complete any particular acquisition successfully. Moreover, the Federal Trade Commission, or FTC, initiated an investigation in 1991 to determine whether the limited partnerships in which Lithotripters, Inc., now one of our wholly-owned subsidiaries, was the general partner posed an unreasonable threat to competition in the healthcare field. While the FTC closed its investigation and took no action, the FTC or another governmental authority charged with the enforcement of federal or state antitrust laws or a private litigant might, due to our size and market share, seek to (1) restrict our future growth by prohibiting or restricting the acquisition of additional lithotripsy operations or (2) require that we divest of certain of our lithotripsy operations. Furthermore, acquisitions involve a number of risks and challenges, including:

•  diversion of management's attention;

•  the need to integrate acquired operations;

•  potential loss of key employees of the acquired companies; and

•  an increase in our expenses and working capital requirements.

Any of these factors could adversely affect our ability to achieve anticipated levels of cash flows from our acquired businesses or realize other anticipated benefits from those acquisitions.

Our results of operations could be adversely affected as a result of goodwill impairments.  

Goodwill represents the excess of the purchase price paid for a company over the fair value of that company’s tangible and intangible net assets acquired. As of December 31, 2003, we had goodwill of $178 million. If we determine in the future that the fair value of any of our reporting segments does not exceed the carrying value of the related reporting segment, goodwill in that reporting segment will be deemed impaired. If impaired, the amount of goodwill will be reduced to the value determined by us to be the fair value of the reporting segment. The amount of the reduction will be deducted from earnings during the period in which the impairment occurs. An impairment will also reduce stockholders’ equity in the period incurred by the amount of the impairment.

Our manufacturing operations are partially dependent upon third-party suppliers, making us vulnerable to a supply shortage.

We obtain materials and manufactured components from third-party suppliers. Some of our suppliers are the sole source for a particular supply item. Any delay in our suppliers’ abilities to provide us with necessary material and components may affect our manufacturing capabilities or may require us to seek alternative supply sources. Delays in obtaining supplies may result from a number of factors affecting our suppliers, such as capacity constraints, labor disputes, the impaired financial condition of a particular supplier, suppliers’ allocations to other purchasers, weather emergencies or acts of war or terrorism. Any delay in receiving supplies could impair our ability to deliver products to our customers and, accordingly, could have a material adverse effect on our business, results of operations and financial condition.

We could be adversely affected by special risks and requirements related to our medical equipment manufacturing business.

As a result of our acquisition of Medstone and Medstone’s medical equipment manufacturing business, our consolidated operations have become subject to various special risks and requirements associated with being a medical equipment manufacturer, which could have adverse effects. These include the following:

As of February 26, 2004, our executive officers were as follows:

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

Mr. Shifrin has been our Chairman of the Board and a director since October 1989. In addition, Mr. Shifrin has served in various capacities with American Physicians Service Group, Inc., or APS, since February 1985, and is currently Chairman of the Board and Chief Executive Officer of APS. Since June 2003, Mr. Shifrin has also been a director of Financial Industries Corporation. Mr. Shifrin is a member of the World Presidents’ Organization.

Mr. Hummel has been our President and Chief Executive Officer since June 2000. From October 1999 until June 2000, Mr. Hummel was our Executive Vice President and Chief Operating Officer. Before joining us, Mr. Hummel was with Diagnostic Health Services, Inc. since 1984, most recently serving as their President and Chief Operating Officer from 1987 to 1999, Chief Executive Officer from January 1999 to October 1999 and as a member of its board of directors. Subsequent to Mr. Hummel’s departure, DHS filed for Chapter 11 bankruptcy reorganization in March 2000 and shortly thereafter re-emerged from bankruptcy in October 2000.

Mr. Barnidge has been our Chief Financial Officer, Senior Vice President and Secretary since December 2001. Mr. Barnidge was our Treasurer from August 2001 until December 2001. Before joining us, Mr. Barnidge, a CPA, was a partner in a public accounting and consulting firm from 1986 through July 2001. Mr. Barnidge is also a Certified Valuation Analyst and a Certified Fraud Examiner. He was formerly an Adjunct Professor in the University of Houston’s Graduate School of Business.

Ms. Lankford was named President of our Urology division in January 2003. Ms. Lankford joined us in January 2001 and was named Vice President in June 2002. From January 2000 to January 2001, she served as an Account Executive for Sonosite and, prior to that, she served as Senior Vice President — Operations for Diagnostic Health Services. Ms. Lankford has twenty years experience in healthcare services and medical device sales, including senior sales and operations roles in a public company setting.

Mr. Supple was named President of our Manufacturing division in July 2002. Mr. Supple joined us in November 2000 as a Vice President in our Manufacturing division. Prior to that, he served as President of Calumet Coach Company. Mr. Supple has twenty-five years experience with U.S. and European capital goods manufacturing concerns, including senior executive positions.

Mr. Rusk joined us in August 2000 as our Controller and was named Vice President in June 2002. Before joining us, Mr. Rusk, a CPA, was with KPMG LLP for approximately seventeen years, the last ten years as a senior audit manager.

We file annual, quarterly, and current reports, proxy statements, and other documents with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934 (the Exchange Act). You may read and copy any materials that we file with the SEC at the SEC’s public reference room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains a website that contains these SEC filings. You can obtain these filings at the SEC’s website at http://www.sec.gov.

We also make available free of charge on or through our website (http://www.primemedical.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

Our principal executive office is located in Austin, Texas in an office building owned by us. We purchased the building in November, 2001 from APS for approximately $6.0 million. This purchase allowed us to protect a significant investment in leasehold improvements, especially certain installed and fixed networking equipment related to our central business office, and to provide room for future growth. In 2003, we received positive cash flow of approximately $25,000 per month from owning and leasing the building. Before this purchase, we paid APS approximately $21,000 per month for approximately 11,600 square feet of office space, reception and telephone services, and other support services. Subsequent to this transaction, APS leased approximately 23,000 square feet of the building from us. This lease expires in September 2006.

For our manufacturing business, we own two buildings containing approximately 78,000 and 85,000 square feet of manufacturing and office space in Harvey and Calumet City, Illinois, respectively. Additionally, we lease approximately 35,000 square feet of manufacturing and office space in Sanford, Florida for approximately $16,000 a month, we lease approximately 64,000 square feet of manufacturing and office space in Clearwater, Florida for approximately $19,000 a month, we lease approximately 68,000 square feet of manufacturing and office space in Riverside, California for approximately $32,000 a month, we lease approximately 32,000 square feet of manufacturing and office space in Carlisle, Pennsylvania for approximately $8,000 a month and we lease approximately 98,000 square feet of manufacturing and office space in Oud Bierjland, Holland for approximately $54,000 a month.

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

On February 19, 2004, we held a special meeting of our stockholders to consider and vote on the two proposals we describe below. Management solicited proxies for this meeting.

1)     The proposal to approve the Medstone acquisition was approved. The “votes for” were 10,645,279, the “votes against” were 73,822 and the “votes withheld” were 12,763.

2)     The proposal to approve our 2003 stock option plan was approved. The “votes for” were 10,211,877, the “votes against” were 493,213 and the “votes withheld” were 26,774.

The following table sets forth the high and low closing prices per share for our common stock on the Nasdaq National Market for the years ended December 31, 2003 and 2002 (NASDAQ Symbol “PMSI”).

On February 18, 2004, we had 563 holders of record of our common stock.

We are not currently paying dividends on our common stock. We have the authority to declare and pay dividends on our common stock in our discretion, as long as we have funds legally available to do so and our credit facility and indenture related to our 8.75% notes permit the declaration and payment. Our credit facility and indenture restrict our ability to pay cash dividends. In addition, we intend to retain our earnings to finance the expansion of our business and for general corporate purposes. Therefore, we do not anticipate paying cash dividends on our common stock in the foreseeable future.

Our amended and restated 1993 stock option plan, which expired in October 2003, provided that the aggregate number of shares of our common stock that may be issued upon the exercise of all options under the plan shall not exceed 4,550,000. The plan, and all amendments thereto, had been approved by our shareholders. As of December 31, 2003, we had no equity compensation plans in effect. The following table sets forth certain information as of December 31, 2003 about our equity compensation plan:

On February 19, 2004, our stockholders approved our new 2003 stock option plan, which provides that the aggregate number of shares of our common stock that may be issued upon the exercise of all options under the plan shall not exceed 600,000.

The following tables set forth our summary consolidated historical financial information that has been derived from (a) our audited consolidated statements of income and cash flows for each of the years ended December 31, 2003, 2002, 2001, 2000 and 1999, (b) our audited consolidated balance sheets as of December 31, 2003, 2002, 2001, 2000 and 1999, and (c) our unaudited consolidated statements of income and cash flows for each of the three months ended December 31, 2003, September 30, 2003, June 30, 2003, and March 31, 2003. You should read this financial information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

Revenues

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

This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of Section 21E of the Exchange Act and the Private Securities Litigation Reform Act of 1995 about us that are subject to risks and uncertainties. All statements other than statements of historical fact included in this document are forward-looking statements. Although we believe that in making such statements our expectations are based on reasonable assumptions, such statements may be influenced by factors that could cause actual outcomes and results to be materially different from those projected.

Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “will”, “would”, “should”, “plans”, “likely”, “expects”, “anticipates”, “intends”, “believes”, “estimates”, “thinks”, “may”, and similar expressions, are forward-looking statements. The following important factors, in addition to those discussed under “Risk Factors,” could affect the future results of the health care industry in general, and us in particular, and could cause those results to differ materially from those expressed in such forward-looking statements.

We provide lithotripsy services and design and manufacture trailers and coaches that transport high technology medical devices and equipment for mobile command and control centers and the media and broadcast industry.

Lithotripsy Services. According to the American Foundation for Urologic Disease, nearly 10% of Americans are afflicted with kidney stones during their lifetime. Most kidney stones occur within the 40-60 year old age group. The two primary forms of treatment of kidney stones are lithotripsy and endoscopic extraction, a form of invasive surgery. Of the approximate 600,000 kidney stone cases each year, approximately 225,000 to 250,000 are treated with lithotripsy. Lithotripsy uses extracorporeal shock waves to break up kidney stones into small pieces, which can pass naturally through the body’s urinary tract. This procedure is a non-invasive procedure for treating kidney stones, typically performed on an outpatient basis that eliminates the need for lengthy hospital stays and extensive recovery periods associated with surgery.

Our services are provided principally through limited partnerships or other entities that we manage, which use lithotripsy devices. As of December 31, 2003, we owned 62 lithotripters, 58 of which are mobile and four of which are fixed site. In 2003, physicians who are affiliated with us used our lithotripters to perform approximately 28,100 procedures in the U.S. We do not render any medical services. Rather, the physicians do.

As the general partner of the limited partnerships, we also provide services relating to operating our lithotripters, including scheduling, staffing, training, quality assurance, maintenance, regulatory compliance, and contracting with payors, hospitals and surgery centers.

Although, for 2003 and 2002, manufacturing revenue was higher than lithotripsy revenue, the operating margins on lithotripsy revenue have been, historically, much higher than on manufacturing revenue. We recognize lithotripsy revenue primarily from the following sources:

Fees for lithotripsy services. A substantial majority of our lithotripsy revenue is derived from fees related to lithotripsy treatments performed using our lithotripters. We, through our partnerships or other entities, facilitate the use of our equipment and provide other support services in connection with these treatments at hospitals and other health care facilities. (For a further discussion on our partnerships, see “Lithotripsy” and “Government Regulation and Supervision” in Part I.) The professional fee payable to the physician performing the procedure is generally billed and collected by the physician.

Fees for operating our lithotripters. Through our partnerships and otherwise directly by us, we provide services related to operating our lithotripters and receive a management fee for performing these services. In addition, we provide equipment maintenance services to our partnerships and supply them with other consumables.

Manufacturing.     We design, construct and engineer mobile trailers, coaches, and special purpose mobile units that transport high technology medical devices such as magnetic resonance imaging, or MRI, cardiac catheterization labs, CT scanware, lithotripters and postitron emission tomography, or PET, and equipment designed for mobile command and control centers, and broadcasting and communications applications.

A significant portion of our revenue has been derived from our manufacturing operations. Manufacturing revenue is recognized at the time we fulfill the terms of the contract under which we have sold the equipment.

In February 2004, we acquired Medstone International, Inc. for approximately $18 million. Medstone manufactures, sells, and maintains lithotripters and makes them available for use by health care providers under various fee-for-service arrangements in both fixed and mobile settings. Medstone and its subsidiaries also market fixed and mobile tables for urological treatments and imaging, patient handling tables for use by pain management clinics and other users, and x-ray generators for medical imaging. A pioneer in the manufacture of shockwave lithotripsy, Medstone’s lithotripter was the first FDA approved device to treat both kidney stones and gallstones. With more than 130 lithotripters in operation worldwide, and more than 324 urology and patient handling tables in use, the Medstone devices are well established in the urology office and hospital market. For the year ended December 31, 2003, Medstone had revenue of $21 million, comprised of $15 million in service revenue and $6 million in equipment sales.

In July 2003, we entered into a letter agreement with each of two previous minority interest owners of one of our subsidiaries, AK Specialty Vehicles.  Under these two letter agreements, each minority interest owner is entitled to require that we repurchase up to approximately 365,000 shares (for a total of approximately 730,000 shares) of our common stock that we issued in connection with our repurchase of their interests in AK Specialty Vehicles.  Each such “put” right can only be exercised in three equal increments of approximately 121,360 shares in July 2003, June 2004 and June 2005 at per share purchase prices of $7.05, $7.12 and $7.19, respectively.  Both individuals exercised their right in July 2003 and, consequently, we purchased 242,716 shares under these letter agreements for approximately $1.7 million. We recorded $1.2 million as treasury stock based on the closing price of our stock on the date of repurchase and the remaining $498,000 was recorded as compensation expense. The remaining obligations under these agreements have been accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 150 and resulted in an estimated liability and related compensation expense of approximately $850,000.

In February 2003, we acquired Carlisle, Pennsylvania-based Winemiller Communications, Inc. for approximately $6.0 million. Winemiller provides turnkey remanufacturing and refurbishing of specialty vehicles utilized by the broadcast community.

In January 2003, we acquired Aluminum Body Corporation for approximately $8.6 million. ABC extends our position in the manufacture of command and control vehicles for the Homeland Security, military and government markets.

Impairments of goodwill and other intangible assets is both a critical accounting policy and estimate that requires judgment and is based on assumptions of future operations. We are required to test for impairments at least annually or if circumstances change that would reduce the fair value of a reporting unit below its carrying value. The fair value of each reporting unit is calculated using estimated discounted future cash flow projections. As of December 31, 2003, we had goodwill of $178 million. We recognized impairments of goodwill totaling $21.6 million in our refractive business segment in the fourth quarter of 2001 based on discounted future cash flows from this business compared to the carrying value of the related assets.

A second critical accounting policy and estimate which requires judgment of management is the estimated allowance for doubtful accounts and contractual adjustments. We have based our estimates on historical collection amounts, current contracts with payors, current changes of the facts and circumstances relating to these matters and certain negotiations with related payors.

A third critical accounting policy is consolidation of our investment in partnerships where we, as the general partner, exercise effective control, even though our ownership is less than 50%. We have reviewed each of the underlying agreements and determined we have effective control; however, if it was determined this control did not exist, these investments would be reflected on the equity method of accounting. Although this would change individual line items within our consolidated financial statements, it would have no effect on our net income and/or total stockholders’ equity.

Our total revenues decreased $9,543,000 (6%) as compared to the same period in 2002. Revenues from our lithotripter operations decreased by $9,885,000 (14%). Average revenue per procedure decreased 5% from prior year, but has remained consistent for all four quarters in 2003 and we believe it should continue at these levels in 2004. The actual number of procedures performed for the year ended December 31, 2003 decreased by 9% from 30,800 in 2002 to 28,100 in 2003. The most significant decreases totaling approximately $6.1 million in revenue related to lost contracts in Florida and Alabama. These lost contracts related primarily to the elimination of the Certificate for Need Law in Alabama where we had a significant competitive advantage prior to the change. Our manufacturing revenues increased by $10,202,000 (11%) primarily due to our acquisition of Frontline Communications during May 2002, Smit Mobile Equipment in July 2002, ABC in January 2003 and Winemiller in February 2003. The actual increase in revenues attributable to the acquisitions was $28.8 million, partially offset by an $18 million decrease in revenue in our mobile medical device business. Although we have maintained our dominant market share in this business, we have been negatively impacted by the slow down in demand for high end imaging devices. Our RVC revenues decreased $10,143,000 (100%) as we fully disposed of these operations in late 2002.

Our costs of services and general and administrative expenses (excluding depreciation and amortization) decreased from 77% to 73% of our revenues, primarily due to a $17.7 million impairment recorded in 2002 related primarily to our refractive operations as discussed below. Our cost of services associated with our lithotripsy operations decreased $1,490,000 (6%) in absolute terms but increased from 37% to 41% of our lithotripsy revenues due to a decrease in revenues noted above applied to a primarily fixed cost base. The actual decrease in costs of services relates primarily to reduced personnel costs from an actual reduction in headcount in direct service personnel. Our cost of services associated with our manufacturing operations increased $15,387,000 (21%) in absolute terms and increased from 84% to 90% of our manufacturing revenues due to increase sales and costs related to our acquisitions and a $1,348,000 charge related to stock buyback agreements discussed more fully in the “Recent Developments” section. The remaining decrease in margins is primarily attributable to a shift in product mix from the mobile device business to the broadcast and media industry products which have lower operating margins. Cost of services associated with our RVC operations decreased $8,862,000 (100%) as we fully disposed of these operations in late 2002. Our corporate expenses remained constant at (2%) of revenues, decreasing $108,000 (3%) in absolute terms, as we continue to grow without adding a disproportionately higher amount of corporate expenses.

Depreciation and amortization expense increased $392,000 for the year ended December 31, 2003 compared to the same period in 2002 due primarily to the acquisition of Winemiller and ABC during 2003.

In the third quarter of 2002, we recognized an impairment of approximately $17 million related to the disposal of our RVC operations. Additionally, we recognized an impairment related to certain lithotripsy assets located in south Florida due to a loss of the related revenue contracts.

Our other expenses decreased $978,000 from 2002 to 2003, primarily due to a $706,000 decrease in interest expense and $812,000 decrease in loan fees related to our senior credit facility partially offset by an increase of $616,000 in other, net due to a settlement of a lawsuit during 2002.

Minority interest in our consolidated income decreased $4,239,000 compared to the same period in 2002, as a result of a decrease in income from our lithotripsy segment.

Our income tax expense for 2003 increased $2,642,000 over 2002 due to an increase in taxable income partially offset by a decrease in our effective tax rate.

Our total revenues increased $15,068,000 (10%) as compared to the same period in 2001. Revenues from our lithotripter operations decreased by $10,586,000 (13%). Conversion of contracts from a retail style contract to a wholesale style contract, payor mix changes and renegotiation of contracts during the past year resulted in decreases in average revenue per procedure. The actual number of procedures performed increased in 2002 to 30,800 from 29,400. Our manufacturing revenues increased by $37,174,000 (72%) primarily due to our acquisition of Calumet in May 2001, Frontline in May 2002 and Smit in July 2002. Our RVC revenues decreased $12,189,000 (55%). We disposed of our refractive operations during 2002 as previously discussed.

Our costs of services and general and administrative expenses (excluding depreciation, amortization and impairment and other costs discussed below) increased from 58% to 66% of our revenues, primarily due to increases in our manufacturing operations, which have lower operating margins than our lithotripsy operations. These expenses increased $23,591,000 (26%) in absolute terms, compared to the same period in 2001. Our cost of services associated with our lithotripsy operations increased $125,000 (.5%) in absolute terms and increased from 32% to 37% of our lithotripsy revenues primarily due to the decrease in revenues noted above. Our cost of services associated with our manufacturing operations increased $30,211,000 (69%) in absolute terms and decreased from 85% to 84% of our manufacturing revenues as we were able to maintain our margins while acquiring two additional manufacturing companies during 2002. Cost of services associated with our RVC operations decreased $6,362,000 (42%) in absolute terms, and increased from 68% to 87% of our RVC revenues because we disposed of our RVC operations during 2002 as previously discussed. Our corporate expenses remained constant at 2% of revenues, decreasing $383,000 (10%) in absolute terms, as we continue to grow without adding a disproportionately higher amount of corporate expenses.

Depreciation and amortization expense decreased $7,564,000 for the year ended December 31, 2002 compared to the same period in 2001, primarily due to the adoption of SFAS No. 142 on January 1, 2002, which eliminated amortization expense related to goodwill and due to certain lithotripsy units becoming fully depreciated in the fourth quarter of 2001.

In the third quarter of 2002, we recognized an impairment of approximately $17 million related to the disposal of our RVC operations. Additionally, we recognized an impairment related to certain lithotripsy assets located in south Florida due to a loss of the related revenue contracts.

Our other expenses decreased $473,000 from 2001 to 2002, primarily due to a $1,286,000 decrease in interest expense related to our senior credit facility and partially offset by an increase of $906,000 in loan fees.

Minority interest in our consolidated income increased $2,580,000 primarily because minority interest in 2001 was significantly impacted by impairment and other costs, which occurred in 2001 and are discussed below.

Our income tax expense for 2002 increased $8,539,000 over 2001 primarily due to the increase in our pretax income from the 2001 nonrecurring items discussed below.

In the fourth quarter of 2001, we recognized an impairment and other costs totaling $44.6 million of which $8.2 million relates to minority interest leaving a net impact to us of $36.4 million, all but $2.5 million of which was non-cash. Of this amount, approximately $21.6 million was for our impairment of goodwill associated with acquisitions made in the RVC segment during 1999 and 2000, $4.4 million related to a loss on our sale of our Kansas City refractive center, $3.8 million related to us recognizing impairments of certain lithotripsy assets, $3.8 million related to an increase in reserves on lithotripsy receivables, net of the related minority interest portion of the increased reserves of $8.2 million, and $2.5 million for the severance of certain contractual obligations. We based our write down of goodwill in the RVC segment and our impairment of certain assets in the lithotripsy segment on the estimated fair value of the assets as compared to the related cost basis. We based our increase in reserves on certain lithotripsy receivables on negotiated settlements with hospitals and on additional information now available to us from a full year’s operations of our new receivables system, which was placed in service in late 2000.

Our cash and cash equivalents were $9,780,000 and $20,174,000 at December 31, 2003 and 2002, respectively. Our 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, 2003 and 2002, our subsidiaries distributed cash of approximately $21,618,000 and $25,063,000, respectively, to minority interest holders.

Cash provided by our operations, after minority interest, was $37,272,000 for the year ended December 31, 2003 and $48,131,000 for the year ended December 31, 2002. From 2002 to 2003, fee and other revenue collected decreased by $13,814,000 due primarily to the $9.5 million decrease in revenue previously discussed and an increase in accounts receivable for our manufacturing segment. Cash paid to employees, suppliers of goods and others increased by $2,461,000. These fluctuations are attributable to increased operations and inventories primarily in our manufacturing segment as well as the timing of accounts payable and accrued expense payments. A decrease in interest payments of $2,239,000 was due primarily to our interest rate swap agreements. Taxes refunded increased $3,713,000 from 2002 to 2003 due to RVC write-offs in 2002, which were carried back to prior taxable years.

Cash used by our investing activities for the year ended December 31, 2003, was $19,889,000 primarily due to $13,535,000 used in our acquisitions of ABC and Winemiller. We purchased equipment and leasehold improvements totaling $6,011,000. Cash used by our investing activities for the year ended December 31, 2002, was $20,607,000 primarily due to $17,354,000 used in our acquisition of Frontline, Smit and the remaining ownership interest in AK Specialty Vehicles. We purchased equipment and leasehold improvements totaling $6,116,000. We received $2,196,000 in distributions from investments.

Cash used in our financing activities for the year ended December 31, 2003, was $27,777,000, primarily due to distributions to minority interests of $21,618,000 and net payments on notes payable of $4,682,000 and purchases of treasury stock of $1,214,000. Cash used in our financing activities for the year ended December 31, 2002, was $23,853,000, primarily due to distributions to minority interests of $25,063,000 and net payments on notes payable of $1,822,000, partially offset by contributions of $1,495,000 received from holders of minority interests related to expanding existing partnerships and new partnership formations and $1,537,000 received from the exercise of stock options.

Our senior credit facility is a revolving line of credit, and it expires on July 25, 2005. The revolving line of credit has a borrowing limit of $50 million, $3 million of which was drawn at December 31, 2003 and $2 million as of February 18, 2004, respectively. Our senior credit facility contains covenants that, among other things, limit the payment of cash dividends on our common stock, limit repurchases of our common stock, restrict the amount of our consolidated debt, restrict our ability to make certain loans and investments, and provide that we must maintain certain financial ratios. We were not in compliance with one financial ratio at December 31, 2003. We received a waiver of this noncompliance from the lenders under our facility and, as a result, there was no material impact on us as a result of this noncompliance.

In addition, we have $100 million of unsecured senior subordinated notes. The notes bear interest at 8.75% and interest is payable semi-annually on April 1^st and October 1^st. Principal is due April 2008.

The indenture governing our 8.75% notes contains covenants that: (1) limit the incurrence of additional indebtedness; (2) limit certain investments; (3) limit restricted payments; (4) limit the disposition of assets; (5) limit the payment of dividends and other payment restrictions affecting subsidiaries; (6) limit transactions with affiliates; (7) limit the creation of liens; and (8) restrict mergers, consolidations and transfers of assets. In the event of a change of control under the indenture, we will be required to make an offer to repurchase the 8.75% notes at 101% of the principal amount thereof, plus accrued and unpaid interest to the date of the repurchase.

The 8.75% notes are unsecured general obligations and are subordinated in right of payment to all our existing and future senior indebtedness and are guaranteed by our subsidiaries on a full, unconditional, joint and several basis.

Interest Rate Swap. In August 2002, we entered into an interest rate swap which is designated as a fair value hedge pursuant to the provisions of FAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and FAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, An Amendment of FASB Statement No. 133. This swap was executed to convert $50 million of the 8.75% notes from a fixed to floating rate instrument. The floating rate is based on LIBOR plus 4.56%. In March 2003, we amended our interest rate swap agreement to add an additional $25 million with a floating rate based on LIBOR plus 5.11%. We terminated the swaps in May 2003. Approximately $1.2 million in proceeds from the swaps was capitalized and will be amortized as a reduction to future interest expense over the remaining life of the 8.75% notes. In August 2003, we entered into two new interest rate swaps for $25 million each which are designated as fair value hedges. The floating rates of the two interest rate swap agreements are based on LIBOR plus 4.72% and 4.97%, respectively. In January 2004, we terminated these swaps for approximately $150,000.

Other long term debt. At December 31, 2003, we had approximately $4 million of debt related to our building in Austin, Texas which bears interest at prime plus 1% and is due in monthly installments until November, 2006. We also had notes totaling $6.7 million related to equipment purchased by our limited partnerships. These notes are paid from the cash flows of the related partnerships. They bear interest at LIBOR or prime plus a certain premium and are due over the next three years.

Other long term obligations. At December 31, 2003, we had an obligation totaling $1,500,000 related to payments to the previous owner of ABC for $75,000 per quarter until March 31, 2008 as consideration for a noncompetition agreement and $850,000 related to the estimated fair values of puts as discussed more fully in the “Recent Developments” section.

Stock Repurchases. During 1998, we announced a stock repurchase program of up to $25.0 million of our common stock. In February 2000, we announced an increase in the authorized repurchase amount from $25.0 million to $35.0 million and in January 2001 we increased this amount to $45.0 million. We did not repurchase any of our common stock during 2003, 2002 or 2001. From time to time, we may purchase additional shares of our common stock where, in our judgment, market valuations of our stock do not accurately reflect our past and projected results of operations. We intend to fund any additional stock purchases using cash flows from operations and borrowings under our senior credit facility. Under our repurchase program, we had purchased 3,820,200 shares of our stock for a total cost of $32,524,000. These shares were retired in August 2002 and no additional shares have been purchased under the program.

In addition, the scheduled principal repayments for all long term debt as of December 31, 2003 are payable as follows:

Our primary sources of cash are cash flows from operations and borrowings under our senior credit facility. Our cash flows from operations and therefore our ability to make scheduled payments of principal, or to pay the interest on, or to refinance, our indebtedness, or to fund planned capital expenditures, will depend on our future performance, which is subject to general economic, financial competitive, legislative, regulatory and other factors discussed under “Risk Factors” under Part I. Likewise, our ability to borrow under our senior credit facility will depend on these factors, which will affect our ability to comply with the covenants in our facility and our ability to obtain waivers for, or otherwise address, any noncompliance with the terms of our facility with our lenders.

We intend to increase our lithotripsy operations primarily through forming new operating subsidiaries in new markets as well as by acquisitions. We seek opportunities to grow our manufacturing operations through acquisitions, expanding our product lines and by selling to a broader customer base. We intend to fund the purchase price for future acquisitions and developments using borrowings under our senior credit facility and cash flows from our operations. In addition, we may use shares of our common stock in such acquisitions where appropriate.

Based upon the current level of our operations and anticipated cost savings and revenue growth, we believe that cash flows from our operations and available cash, together with available borrowings under our senior credit facility, will be adequate to meet our future liquidity needs both for the short term and for at least the next several years. However, there can be no assurance that our business will generate sufficient cash flows from operations, that we will realize our anticipated revenue growth and operating improvements or that future borrowings will be available under our senior credit facility in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs.

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

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (Fin 46). This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and July 1, 2003 for variable interests in variable interest entities that existed at January 31, 2003 and remain in existence at July 1, 2003. In October 2003, the FASB delayed the implementation date for variable interests in variable interest entities that existed at January 31, 2003 and remain in existence at July 1, 2003 until fiscal years beginning after December 31, 2003. FIN 46 was subsequently revised and reissued in December 2003. The reissued guidance requires implementation by March 31, 2004. The application of this Interpretation is not expected to have a material effect on our consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. Statement No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of Statement No. 149 did not have an impact on our consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 requires certain financial instruments that have characteristics of both liabilities and equity to be classified as a liability on the balance sheet. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 will be effected by reporting the cumulative effect of a change in accounting principle for contracts created before the issuance date and still existing at the beginning of that interim period. The initial adoption of SFAS No. 150 did not have an impact on our consolidated financial statements; however, in July 2003, we entered into two separate letter agreements that will be accounted for under this statement, as discussed more fully under the “Recent Development” section.

As of December 31, 2003, we had long-term debt (including current portion) totaling $115,073,000, of which $100 million has a fixed rate of interest of 8.75%, $49,000 has fixed rates of 5% to 11%, $4,077,000 bears interest at a variable rate equal to a specified prime rate and $9,622,000 bears interest at a variable rate equal to LIBOR + 2 to 3.5%. The remaining $1,325,000 relates to interest rate swaps which are discussed below. We are exposed to some market risk due to the floating interest rate debt totaling $13,699,000. We make monthly or quarterly payments of principal and interest on $10,699,000 of the floating rate debt. An increase in interest rates of 1% would result in a $137,000 annual increase in interest expense on this existing principal balance.

Additionally, in August 2002, we entered into an interest rate swap, which is designated as a fair value hedge pursuant to the provisions of FAS No. 133 and FAS No. 138. This swap had the effect of converting $50 million of our 8.75% notes from a fixed to floating rate instrument with a rate of LIBOR plus 4.56%. In March 2003, we amended our interest rate swap agreement to add an additional $25 million with a floating rate based on LIBOR plus 5.11%. We terminated the swaps in May 2003. Approximately $1.2 million in proceeds from the swaps was capitalized and will be amortized as a reduction to future interest expense over the remaining life of the 8.75% notes. In August 2003, we entered into two new interest rate swaps for $25 million each which are designated as fair value hedges. The floating rates of the two interest rate swap agreements are based on LIBOR plus 4.72% and 4.97%, respectively. In January 2004, we terminated these swaps for approximately $150,000.

At December 31, 2003, under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), we evaluated the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of December 31, 2003, our disclosure controls and procedures were effective.

There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting.

The information required by this item will be contained in our definitive proxy statement to be filed in connection with our 2004 annual meeting of stockholders, except for the information regarding our executive officers, which is presented in Part I of this Form 10-K. The information required by this item contained in our definitive proxy statement is incorporated herein by reference.

The information required by this item will be contained in our definitive proxy statement to be filed in connection with our 2004 annual meeting of stockholders and is incorporated herein by reference.

The information required by this item will be contained in our definitive proxy statement to be filed in connection with our 2004 annual meeting of stockholders and is incorporated herein by reference.

The information required by this item will be contained in our definitive proxy statement to be filed in connection with our 2004 annual meeting of stockholders and is incorporated herein by reference.

The information required by this item will be contained in our definitive proxy statement to be filed in connection with our 2004 annual meeting of stockholders and is incorporated herein by reference.

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.

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.

APPENDIX A

INDEX

We have audited the consolidated financial statements of Prime Medical Services, Inc. and subsidiaries (“Company”) as listed in the accompanying index. In connection with our audits, we have also audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with 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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in notes B and C to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill and other intangibles.

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF INCOME

See accompanying notes to consolidated financial statements.

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

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

See accompanying notes to consolidated financial statements.

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF STOCKHOLDERS’ EQUITY
For the years ended December 31, 2003, 2002 and 2001

See accompanying notes to consolidated financial statements.

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

See accompanying notes to consolidated financial statements.

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