PRIME MEDICAL SERVICES INC /TX/, S-3/A, 1996-06-11

PRIME MEDICAL SERVICES INC /TX/
S-3/A, 1996-06-11
MISC HEALTH & ALLIED SERVICES, NEC

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1996.

REGISTRATION NO. 333-05189
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

----------------
PRIME MEDICAL SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 74-2652727
(I.R.S. EMPLOYER
(STATE OR OTHER JURISDICTION OF IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

1301 CAPITAL OF TEXAS HIGHWAY, SUITE C-300
AUSTIN, TEXAS 78746-6550
(512) 328-2892
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

----------------
KENNETH S. SHIFRIN
PRIME MEDICAL SERVICES, INC.
1301 CAPITAL OF TEXAS HIGHWAY, SUITE C-300
AUSTIN, TEXAS 78746-6550
(512) 328-2892
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S AGENT FOR SERVICE)

----------------
COPIES TO:
TIMOTHY L. LAFREY JEFFREY A. CHAPMAN
SMALL, CRAIG & WERKENTHIN, P.C. VINSON & ELKINS L.L.P.
100 CONGRESS AVENUE 3700 TRAMMEL CROW CENTER
SUITE 1100 2001 ROSS AVENUE
AUSTIN, TEXAS 78701 DALLAS, TEXAS 75201-2975
(512) 472-8355 (214) 220-7700
FAX: (512) 320-9734 FAX: (214) 220-7716

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
possible after this Registration Statement becomes effective.

----------------
If any of the securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]

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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value(3)....................... 11,393,326 $17.625 $200,807,370.75 $69,243.92
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</TABLE>

(1) Includes 1,486,086 shares subject to an over-allotment option granted by
the Registrant to the Underwriters. See "Underwriting."
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c), using the average of the high and low sales
prices reported on The Nasdaq National Market for the Registrant's Common
Stock on May 28, 1996.
(3) This Registration Statement also pertains to rights to purchase shares of
Common Stock of the Registrant. One right is attached to and trades with
each share of Common Stock of the Registrant. Until the occurrence of
certain events, the rights are not exercisable and will not be evidenced
or transferred apart from the Common Stock.

----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES
AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

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<PAGE>

EXPLANATORY NOTE

This Registration Statement covers the registration of 9,411,878 shares of
Common Stock to be offered in a public offering in the United States and
Canada (the "U.S. Offering") and 1,981,448 shares of Common Stock to be
offered in a concurrent public offering outside of the United States and
Canada (the "International Offering"). The complete form of prospectus
relating to the U.S. Offering (the "U.S. Prospectus") follows immediately
after this explanatory note. The form of prospectus relating to the
International Offering (the "International Prospectus") will be identical in
all respects to the U.S. Prospectus, except that the International Prospectus
contains different front and back cover pages. The form of the U.S. Prospectus
included herein is followed by those pages to be used in the International
Prospectus which differ from those in the U.S. Prospectus.
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED JUNE 7, 1996

PROSPECTUS
, 1996
LOGO
[LOGO OF PRIME
MEDICAL SERVICES,
9,907,240 SHARES INC. APPEARS HERE]
PRIME MEDICAL SERVICES, INC.
COMMON STOCK

Of the 9,907,240 shares of Common Stock being offered hereby, 7,925,792
shares are being offered initially in the United States and Canada by the U.S.
Underwriters (the "U.S. Offering") and 1,981,448 shares are being offered
initially outside of the United States and Canada by the International Managers
(the "International Offering"). See "Underwriting." Of the 9,907,240 shares of
Common Stock being offered, 5,000,000 shares are being sold by the Company and
4,907,240 shares are being sold by the Selling Stockholders. See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from
the sale of shares by the Selling Stockholders. On June 7, 1996, the last sale
price of the Common Stock as reported on The Nasdaq National Market was $17 5/8
per share.

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
Total(3).......................... $ $ $ $
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</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses estimated at $750,000, which will be paid by the
Company.

(3) The Company has granted the U.S. Underwriters an option, exercisable within
30 days of the date hereof, to purchase up to 1,486,086 additional shares
of Common Stock at the Price to the Public less Underwriting Discounts and
Commissions, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to the Public, Underwriting Discounts
and Commissions and Proceeds to the Company will be $ , $ and $ ,
respectively. See "Underwriting."

The shares are being offered by the several Underwriters when, as and if
delivered to and accepted by the Underwriters and subject to various prior
conditions, including their right to reject orders in whole or in part. It is
expected that delivery of share certificates will be made in New York, New York
on or about , 1996.

DONALDSON, LUFKIN & JENRETTE PRUDENTIAL SECURITIES INCORPORATED
SECURITIES CORPORATION
<PAGE>

PRIME MEDICAL SERVICES, INC.
LITHOTRIPSY SERVICE AREA

[MAP OF U.S.]

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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A
UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."

2
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless the context otherwise requires, the
"Company" refers to Prime Medical Services, Inc. and its consolidated
subsidiaries and affiliated partnerships and limited liability companies.
Unless otherwise indicated, all information in this Prospectus assumes no
exercise of the Underwriters' option to purchase up to 1,486,086 additional
shares from the Company solely to cover over-allotments, if any.

THE COMPANY

The Company is the largest and fastest growing 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 an economic interest in 48 mobile and
six fixed site lithotripters, all but two of which are operated by the Company.
The Company's lithotripters performed approximately 31,000, or approximately
17%, of the estimated 180,000 lithotripsy procedures performed in the United
States in 1995. Approximately 1,850 urologists utilized the Company's
lithotripters in 1995, representing approximately 25% of the estimated 7,300
active urologists in the United States. Of these physicians, approximately 900
(12% of the U.S. total) also own minority interests in certain lithotripters of
the Company. In addition, management believes that the Company has collected
the United States' largest lithotripsy treatment database, containing detailed
treatment and outcomes data on over 100,000 lithotripsy procedures, which the
Company and its associated urologists utilize in seeking to provide the highest
quality of lithotripsy services as efficiently as possible.

The Company began providing lithotripsy services with an acquisition in 1992
and has grown rapidly since that time through a total of ten acquisitions with
interests in 54 lithotripters. Forty-six of the Company's 54 lithotripsy
operations were formed by the Company's current directors and managers prior to
the Company's acquisition of such operations. Since 1992, the Company has
substantially divested its non-lithotripsy businesses. Lithotripsy revenues
have grown from no revenues in 1991 to $22.2 million in 1995. Total revenues
and income before extraordinary items (including the divested businesses) grew
over the same period from $12.7 million to $23.2 million and from $200,000 to
$7.2 million, respectively. Revenues and net income for the year ended December
31, 1995, pro forma for the Recent Acquisitions (as defined) and this offering,
were $90.1 million and $19.4 million, respectively. Pro forma revenues and net
income for the three months ended March 31, 1996, were $21.5 million and $4.6
million, respectively.

The Company provides lithotripsy services at approximately 380 hospitals and
surgery centers in 31 states. The Company provides non-medical services related
to the operation of the lithotripters, including scheduling, staffing,
training, quality assurance, maintenance, regulatory compliance and contracting
with payors, hospitals and surgery centers, while medical care is rendered by
urologists utilizing the lithotripters. On a pro forma basis for 1995, the
Company was paid directly by hospitals or surgery centers for slightly more
than one-half of the lithotripsy procedures performed by its lithotripters. In
the remaining procedures, the Company was paid directly by the patient or the
patient's third-party payor, with government payors (Medicare, Medicaid and
Champus) accounting for approximately 20% of the pro forma 1995 revenues
derived from such direct-pay procedures. In addition, the Company has over 200
contracts with managed care organizations.

3
<PAGE>

Moreover, management believes that demographics favor growth in lithotripsy
services, with the highest incidence of kidney stones occurring in men 45 to 64
years of age. This is the fastest growing segment of the U.S. population and is
primarily covered by private payor plans rather than government payors.

The Company's strategy to continue its growth is as follows:

. Continue to grow through acquisitions.

. Form operations to serve new markets and expand operations in existing
markets.

. Employ its proprietary outcomes database to optimize quality and
efficiency.

. Develop strategic alliances with vertically integrated networks of
providers.

. Develop new business opportunities in partnership with urologists.

The Company is a Delaware corporation. Its principal executive offices are
located at 1301 Capital of Texas Highway, Austin, Texas 78746, and its
telephone number is (512) 328-2892.

RECENT EVENTS

In April 1996, the Company acquired Lithotripters, Inc. (the "Litho
Acquisition") for $86.0 million, consisting of $70.0 million in cash and 1.6
million shares of restricted Common Stock. Lithotripters, Inc. operates 31
lithotripters serving approximately 200 locations in 19 states. The Litho
Acquisition provided the Company with complementary geographic coverage as well
as additional expertise in forming and managing lithotripsy operations. Senior
management of Lithotripters, Inc., most of whom have remained associated with
the Company, formed all of Lithotripters, Inc.'s operations. The President of
Lithotripters, Inc. at the time of the acquisition, Dr. Joseph Jenkins, is now
President and Chief Executive Officer of the Company.

In October 1995, the Company acquired Sun Medical Technologies, Inc. ("Sun")
for an aggregate purchase price of approximately $16.2 million. Sun operates
eight lithotripters serving approximately 70 locations in six states. This
acquisition also extended the Company's service area and provided the Company
with experienced managers.

The acquisition of Sun, together with two small acquisitions of one
lithotripter each in early 1995, are collectively referred to herein as the
"1995 Acquisitions" and, together with the Litho Acquisition, are referred to
as the "Recent Acquisitions."

4
<PAGE>

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered:
By the Company......................... 5,000,000 shares
By the Selling Stockholders(1)......... 4,907,240 shares
----------
Total(1)............................. 9,907,240 shares
==========
Common Stock outstanding after the
offering(1)(2).......................... 24,028,600 shares
==========
Use of proceeds by the Company........... To repay indebtedness, to pursue the
Company's acquisition and growth
strategy and for general corporate
purposes. See "Use of Proceeds."
Nasdaq symbol............................ PMSI
</TABLE>
- --------------------

(1) Includes 1,244,597 net shares of Common Stock reserved for issuance upon
exercise of certain warrants issued by the Company to the Selling
Stockholders. These warrants will be exercised (the "Warrant Exercise")
prior to, and such shares will be sold in, this offering. The Company
expects to receive approximately $4.1 million in net proceeds from the
Warrant Exercise.
(2) Based on the number of shares outstanding as of May 31, 1996. Excludes
options outstanding on May 31, 1996, to purchase up to 928,167 shares of
Common Stock at a weighted average exercise price of $7.32 per share. Also
excludes 373,500 shares of Common Stock available for issuance under the
Prime Medical Services, Inc. 1993 Stock Option Plan (the "Option Plan").
See "Management--Option Plan."

RISK FACTORS

Prospective investors should carefully consider the factors discussed in
detail elsewhere in this Prospectus under the caption "Risk Factors."

Certain statements contained herein are not based on historical facts, but
are forward-looking statements that are based upon numerous assumptions about
future conditions that could prove not to be accurate. Actual events,
transactions and results may materially differ from the anticipated events,
transactions or results described in such statements. The Company's ability to
consummate such transactions and achieve such events or results is subject to
certain risks and uncertainties. Such risks and uncertainties include, but are
not limited to, the existence of demand for and acceptance of the Company's
services, the availability of appropriate candidates for acquisition by the
Company, regulatory approvals, economic conditions, the impact of competition
and pricing, results of financing efforts and other factors affecting the
Company's business that are beyond the Company's control, including but not
limited to the matters described in "Risk Factors." See "Risk Factors."

5
<PAGE>

SUMMARY SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- -----------------------
PRO PRO
FORMA FORMA
1991 1992 1993 1994 1995 1995(1) 1995 1996 1996(2)
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATING
DATA:
Lithotripsy revenues... $ -- $ 4,291 $ 7,309 $14,843 $22,153 $89,085 $ 4,196 $ 7,002 $21,310
Total revenues......... 12,747 19,317 20,568 24,768 23,195 90,127 4,506 7,224 21,532
Operating income
(loss)................ (419) 1,670 2,884 6,516 9,943 51,872 1,872 3,054 11,980
Income before income
taxes, minority
interest and
extraordinary item.... 346 1,717 2,749 5,742 9,511 51,334 1,647 2,647 12,068
Income before income
taxes and
extraordinary item.... 346 1,717 2,749 5,051 8,090 21,307 1,433 2,170 5,148
Income before
extraordinary
item(3)............... 200 1,008 2,539 4,504 7,204 19,364 1,281 1,906 4,645
Net income(3).......... 303 1,592 2,539 4,504 7,204 19,364 1,281 1,906 4,645
Pro forma net in-
come(4)............... 12,784 3,089
Fully diluted earnings
per share(3).......... $0.03 $0.17 $0.21 $0.31 $0.46 $0.82 $0.09 $0.12 $0.19
Pro forma fully diluted
earnings per
share(4).............. $0.55 $0.13
Weighted average shares
outstanding........... 8,300 9,411 12,371 14,650 16,010 24,120 14,841 17,368 24,520
OTHER DATA:
Number of lithotripters
at end of period...... 0 1 5 13 23 54 13 23 54
Number of lithotripsy
procedures............ 0 986 2,348 6,057 11,308 31,053 2,091 3,672 7,350
Approximate number of
locations served...... 0 1 26 90 160 380 90 160 380
</TABLE>

<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA(5) AS ADJUSTED(6)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ 3,841 $ 9,681 $ 14,681
Total assets............ 74,567 193,720 193,720
Long-term debt, net of
current maturities..... 17,467 87,599 8,120
Minority interest....... 730 14,523 14,523
Stockholders' equity.... 50,036 62,926 147,405
</TABLE>
- --------------------

(1) Gives effect to the following pro forma adjustments as if they had occurred
on January 1, 1995: (a) the Recent Acquisitions; and (b) the sale of five
million shares of Common Stock offered hereby by the Company at an assumed
public offering price of $17.00 per share, the Warrant Exercise and in both
cases the application of the net proceeds therefrom. See "Use of Proceeds,"
"Pro Forma Consolidated Financial Statements" and the Company's
Consolidated Financial Statements included elsewhere herein.

(2) Gives effect to the following pro forma adjustments as if they had occurred
on January 1, 1995: (a) the Litho Acquisition; and (b) the sale of five
million shares of Common Stock offered hereby by the Company at an assumed
public offering price of $17.00 per share, the Warrant Exercise and in both
cases the application of the net proceeds therefrom. See "Use of Proceeds,"
"Pro Forma Consolidated Financial Statements" and the Company's
Consolidated Financial Statements included elsewhere herein.
(3) The Company had approximately $9.5 million of net operating loss
carryforwards (the "NOL") as of March 31, 1996. The Company expects the NOL
will be fully utilized in early 1997. As a result of the utilization of the
NOL, the Company's effective federal income tax rate for both the year
ended December 31, 1995 and for the three months ended March 31, 1996 was
2%.
(4) Reflects pro forma net income and fully diluted earnings per share using an
assumed combined state and federal income tax rate of 40%.
(5) Gives effect to the Litho Acquisition as if it had occurred on March 31,
1996.

(6) Gives effect to the following pro forma adjustments as if they had occurred
on March 31, 1996: (a) the Litho Acquisition; and (b) the sale of five
million shares of Common Stock offered hereby by the Company at an assumed
public offering price of $17.00 per share, the Warrant Exercise and in both
cases the application of the net proceeds therefrom. See "Use of Proceeds,"
"Pro Forma Consolidated Financial Statements" and the Company's
Consolidated Financial Statements included elsewhere herein.

6
<PAGE>

RISK FACTORS

Prospective investors should carefully consider the following factors,
together with the other information set forth in this Prospectus, in
evaluating an investment in shares of Common Stock of the Company.

ACQUISITION GROWTH STRATEGY

The Company has followed an aggressive acquisition strategy since 1992 that
has resulted in rapid growth in its business. This acquisition strategy is
dependent on the continued availability of suitable acquisition candidates and
subjects the Company to the risks inherent in assessing acquisition candidates
and integrating and managing the operations of acquired companies. The
Company's growth is also expected to place significant demands on the
Company's financial and management resources. Moreover, the Federal Trade
Commission ("FTC") initiated an investigation in 1991 to determine whether the
limited partnerships in which Lithotripters, Inc. is the general partner posed
an unreasonable threat to competition in the healthcare field. While the FTC
has notified the Company that the investigation has been closed, and no action
was taken, the FTC or another governmental authority charged with the
enforcement of federal or state antitrust laws or a private litigant might,
due to the Company's size and market share, seek to (i) restrict the Company's
future growth by prohibiting or restricting the acquisition of additional
lithotripsy facilities or (ii) require that the Company divest of certain of
its lithotripsy operations. Consequently, there can be no assurance that the
Company will be able to continue to grow or that its growth strategy will
prove successful. Moreover, in view of the Company's significant recent
growth, the Company's historical financial performance may not be indicative
of its future performance. The Company's failure to implement its growth
strategy successfully could adversely affect the Company. See "Business--
Strategy."

OPERATIONS SUBJECT TO GOVERNMENT REGULATION

The Company is subject to extensive regulation by both the federal and state
governments. The Company has agreed to purchase the partnership interests of
certain affiliated physician-investors in the event of changes in the law that
prohibit, or the occurrence of enforcement actions that challenge, the
ownership by physician-investors of an interest in a lithotripsy treatment
facility. These mandatory purchase obligations generally require the payment
by the Company of a multiple of earnings similar to multiples used by the
Company in pricing the original acquisition of such interests. To the extent
the Company is required to purchase such interests, such purchases might cause
a default under the terms of the Company's Senior Credit Facility (the "Senior
Credit Facility"), impair the Company's relationship with urologists and
otherwise have a material adverse impact on the Company. While the Company
believes that it is in compliance in all material respects with all applicable
laws that govern the Company's business and operations, these laws are complex
and have been broadly construed by courts and enforcement agencies.
Accordingly, there can be no assurance that the Company will not be required
to change its business practices or its investment relationships with
urologists or that the Company will not experience a material adverse effect
as a result of any challenge made by a federal or state regulatory agency in
connection with its investigation of such practices or relationships. See
"Business--Strategy" and "--Lithotripsy Operations."

UNCERTAINTIES RELATED TO CHANGING HEALTHCARE ENVIRONMENT

The healthcare industry has experienced substantial changes in recent years.
Although managed care has yet to become a major factor in the delivery of
lithotripsy services, the Company anticipates that managed care programs,
including capitation plans, may play an increasing role in the delivery of
lithotripsy services and that competition in the lithotripsy services industry
may shift from individual practitioners to health maintenance organizations
("HMOs") and other significant providers of managed care. No assurance can be
given that the Company will prosper in the changing healthcare environment.
See "Business--Strategy."

In addition, the hospitals and surgery centers to which the Company provides
services are reimbursed for lithotripsy services under various federal and
state programs, including Medicare, Medicaid and Champus, primarily at fixed
rates. These programs are subject to statutory and regulatory changes,
administrative rulings,

7
<PAGE>

interpretations of policy and governmental funding restrictions, all of which
may have the effect of decreasing program payments, increasing costs or
requiring the Company to modify the way in which it operates its business. The
Company is not able to predict whether changes will be made in the rates
prescribed by these governmental programs. Such changes could have a material
adverse effect on the Company. Furthermore, increases in operating costs that
are subject to inflation, such as labor and supply costs, without a
compensating increase in prescribed rates may adversely affect the Company.

There have been numerous initiatives at the federal and state levels for
comprehensive reforms affecting the payment for and availability of healthcare
services, including services provided by the Company. The Company believes
that such initiatives may continue in the future. Aspects of certain of these
reforms as proposed in the past could, if adopted, adversely affect the
Company.

RISKS INHERENT IN THE PROVISION OF MEDICAL SERVICES

The urologists who use the Company's lithotripters are involved in the
delivery of healthcare services to the public and, therefore, are exposed to
the risk of liability claims. Since the Company typically operates the
lithotripters used by the urologists and provides lithotripsy nurses and
radiology technicians to assist the urologists in the use of lithotripters,
the Company may also be named in a claim against a urologist in connection
with performing a lithotripsy procedure at the Company's facilities. Claims of
this nature, if successful, could result in substantial damage awards to the
claimants which may exceed the limits of any applicable insurance coverage. To
date, there have been no material medical professional claims made against the
Company. While the Company maintains professional liability insurance, there
can be no assurance that any such claims against the Company will not exceed
the amount of insurance maintained. Successful malpractice claims asserted
against the Company, to the extent not covered by the Company's liability
insurance, could adversely affect the Company. See "Business--Lithotripsy
Operations."

COMPETITION

The lithotripsy services industry is fragmented and highly competitive in
many respects. Moreover, 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. The Company has experienced
competition in the acquisition of existing lithotripsy facilities and the
development of relationships with treating physicians. The Company has also
experienced competition from hospitals or treating physicians who have opened
their own lithotripsy facilities. Such competition could intensify in the
event of a decrease in the purchase price of lithotripters or if the supply of
new or used lithotripters increases over time. Another significant provider of
lithotripsy services is also a manufacturer of lithotripsy equipment, which
may create different incentives for such provider in pricing lithotripsy
services. Moreover, while the Company believes that lithotripsy has emerged as
the superior treatment for kidney stone disease, the Company competes with
alternative kidney stone disease treatments. See "Business--Industry Overview"
and "--Competition."

TECHNOLOGICAL CHANGES

The equipment and software utilized by the Company in the provision of its
lithotripsy services have been characterized by technological changes.
Although the Company believes that its equipment and software can generally be
upgraded as necessary to remain technologically current, the development of
new technologies or refinements of existing ones might render the Company's
existing equipment and software technologically or economically obsolete.
Although the Company is not aware of any pending technological developments
that would be likely to materially and adversely affect its business, there
can be no assurance that such developments will not occur. There is also a
risk that the particular manufacturers of the Company's equipment may
discontinue the manufacture of such equipment or may not offer equipment and
software upgrades necessary to keep such equipment technologically current.
Even if such upgrades are available, there can be no assurance that the
Company will have the financial resources to acquire them. See "Business--
Industry Overview" and "--Lithotripsy Operations."

8
<PAGE>

DEPENDENCE ON KEY PERSONNEL

The Company is dependent upon the services and management experience of the
Company's executive officers, including Kenneth S. Shifrin, Chairman of the
Board, and Joseph Jenkins, M.D., President and Chief Executive Officer of the
Company. The Company does not carry key-man life insurance in material amounts
on any of its officers. The loss of, or the failure to attract, qualified
employees could adversely affect the Company. In addition, the Company's
continued growth depends upon its ability to attract and retain skilled
employees, particularly highly skilled lithotripsy nurses and radiology
technicians. See "Management."

DEPENDENCE ON PHYSICIANS

The Company depends upon the treatment of patients by urologists practicing
in the communities served by the Company's lithotripters. In some cases, the
Company's affiliated physician-investors have entered into noncompetition
agreements with the Company under which they have agreed to refrain from
owning interests in competing facilities for various periods. While the
Company has generally experienced compliance with the terms of these
noncompetition agreements, such enforceability is generally a matter of state
law, varies from state-to-state and is evolving over time. Additionally, in
some cases the Company may be forced to purchase the minority ownership
interests of one or more affiliated urologist-investors under mandatory
repurchase arrangements existing between the Company and such urologist-
investors. The loss of relationships with key treating urologists at a
particular facility, whether due to retirement, relocation, dissatisfaction
with the Company's services, regulatory referral prohibitions or other
factors, could adversely affect the Company. See "--Operations Subject to
Government Regulation."

ANTITAKEOVER PROVISIONS

The Company's Rights Agreement (which entitles the Company's stockholders,
other than certain acquiring persons, under the circumstances described
therein, to purchase Common Stock or the common stock of certain acquiring
persons at prices equal to one-half of the fair market value thereof), the
Company's Certificate of Incorporation and certain provisions of the Delaware
General Corporation Law include several provisions that may have the effect of
deterring hostile takeovers, delaying or preventing changes in control or
changes in management of the Company, or limiting the ability of stockholders
to approve transactions that they may deem to be in their best interests.

SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS

Sales of substantial amounts of Common Stock in the public market or the
perception that such sales might occur could adversely affect the prevailing
market price for the Common Stock and the ability of the Company to raise
equity capital. The Company cannot predict the effect, if any, that sales of
shares of its Common Stock, or the availability of shares for future sale,
will have on the market price of the Common Stock prevailing from time to
time. Such sales may also make it more difficult for the Company to sell
equity securities or equity-related securities at a time and price that it
deems appropriate. Certain stockholders of the Company, including the
recipients of Common Stock in the Litho Acquisition, are also entitled to
registration rights. See "Summary--Recent Events."

DIVIDEND POLICY AND RESTRICTIONS

The Company does not intend to pay cash dividends on the Common Stock in the
foreseeable future and anticipates that future earnings will be retained to
finance future operations and expansion. The Senior Credit Facility also
prohibits the Company from paying dividends and making other distributions on
its Common Stock. See "Price Range of Common Stock," "Dividend Policy" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

9
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 5,000,000 shares of
Common Stock offered by the Company hereby, after deducting underwriters'
discounts and commissions and estimated expenses of the offering and assuming
a public offering price of $17.00, will be approximately $80.4 million ($104.6
million in the event the underwriters' over-allotment option is exercised).
The Company will also receive approximately $4.1 million upon the Warrant
Exercise, resulting in total net proceeds to the Company of approximately
$84.5 million ($108.6 million in the event the underwriters' over-allotment
option is exercised). The Company intends to use such net proceeds (i) to
repay the full amount outstanding under the $40.0 million revolving credit
loan included in the Senior Credit Facility (approximately $34.6 million),
(ii) to repay $47.7 million of the term loan included in the Senior Credit
Facility (or $50.0 million, the full amount outstanding, in the event the
underwriters' over-allotment option is exercised), (iii) to extinguish
approximately $2.3 million of notes payable, and (iv) to the extent there are
proceeds remaining, for general corporate purposes. Following the offering,
the entire $40.0 million will be available under the Company's revolving
credit loan to finance the Company's acquisition and growth strategy. The
Company will not receive any proceeds from the sale of Common Stock by the
Selling Stockholders.

The Senior Credit Facility was established for the purpose of financing
acquisitions and for other general corporate purposes. The Senior Credit
Facility, consisting of a term loan of $50.0 million and a revolving credit
facility of $40.0 million, matures on April 30, 2001. The term loan amortizes
over the five years of its term with quarterly principal payments aggregating
$7.0 million in year one, $8.0 million in year two, $10.0 million in year
three, and $12.5 million in each of the remaining two years. Interest accrues
on amounts outstanding under the Senior Credit Facility at variable rates
determined in accordance with formulas set forth in related agreements.
Currently, interest is accruing on the Senior Credit Facility at the rate of
8.1875% per annum. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

10
<PAGE>

PRICE RANGE OF COMMON STOCK

The Company's Common Stock is quoted on The Nasdaq National Market under the
symbol "PMSI." The following table sets forth, for the periods indicated, the
high and low sale prices per share for the Common Stock as reported on The
Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
1994
First Quarter.................................................. $ 3.00 $ 2.50
Second Quarter................................................. 3.00 2.38
Third Quarter.................................................. 3.38 2.38
Fourth Quarter................................................. 3.63 3.00
1995
First Quarter.................................................. 4.00 3.25
Second Quarter................................................. 4.94 3.38
Third Quarter.................................................. 4.88 4.06
Fourth Quarter................................................. 9.13 4.63
1996
First Quarter.................................................. 13.50 6.50
Second Quarter (to June 7, 1996)............................... 21.00 12.50
</TABLE>

The last reported sale price of the Common Stock as reported on the Nasdaq
National Market on June 7, 1996 was $17 5/8. At June 7, 1996 there were
approximately 925 holders of record of the Common Stock.

DIVIDEND POLICY

The Company currently anticipates that all earnings will be retained for the
development and expansion of its business and therefore does not anticipate
paying dividends on its Common Stock in the foreseeable future. In addition,
the Company's Senior Credit Facility contains provisions that prohibit the
Company from paying dividends on its Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."

11
<PAGE>

CAPITALIZATION

The following table sets forth, as of March 31, 1996, (i) the actual
capitalization of the Company and (ii) the capitalization of the Company (a)
pro forma to reflect consummation of the Litho Acquisition and (b) as further
adjusted to reflect the sale of 5,000,000 shares of Common Stock offered
hereby by the Company at a public offering price of $17.00 per share, the
Warrant Exercise and in both cases the application of the net proceeds
therefrom, all as if they occurred on March 31, 1996. See "Use of Proceeds"
and "Pro Forma Consolidated Financial Statements."

<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
-------------------------------
(IN THOUSANDS)
PRO FORMA
PRO AS
ACTUAL FORMA(1) ADJUSTED(2)
<S> <C> <C> <C>
Short-term debt and current maturities of long-
term debt..................................... $ 1,511 $ 6,974 $ 1,974
======== ======== ========
Long-term debt, net of current maturities...... $ 17,467 $ 87,599 $ 8,120
Minority interest.............................. 730 14,523 14,523
Stockholders' equity:
40,000,000 shares authorized; 15,807,269
shares issued and outstanding; 17,443,633
shares issued and outstanding, pro forma(1);
23,733,600 shares issued and outstanding pro
forma as adjusted(2)........................ 158 174 237
Additional paid-in capital..................... 63,968 79,842 164,258
Accumulated deficit............................ (14,090) (17,090) (17,090)
-------- -------- --------
Total stockholders' equity................. 50,036 62,926 147,405
-------- -------- --------
Total capitalization........................... $ 68,233 $165,048 $170,048
======== ======== ========
</TABLE>
- ---------------------
(1) Includes the issuance of 1,636,364 shares of Common Stock in the Litho
Acquisition.
(2) Includes 5,000,000 shares of Common Stock offered hereby, 1,244,597
shares to be issued as a result of the Warrant Exercise, and 45,370
shares issued after March 31, 1996 but prior to the date of this
Prospectus.

12
<PAGE>

PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited Pro Forma Consolidated Statement of Operations
for the year ended December 31, 1995 is based on the historical consolidated
financial statements of the Company adjusted as if the following events
occurred on January 1, 1995: (a) the Recent Acquisitions; and (b) the sale of
five million shares of Common Stock offered hereby by the Company at an
assumed public offering price of $17.00 per share, the Warrant Exercise and in
both cases the application of the net proceeds therefrom. The accompanying
unaudited Pro Forma Consolidated Statement of Operations for the three months
ended March 31, 1996 is based on the historical consolidated financial
statements of the Company adjusted as if the following events occurred on
January 1, 1995: (a) the Litho Acquisition; and (b) the sale of five million
shares of Common Stock offered hereby by the Company at an assumed public
offering price of $17.00 per share, the Warrant Exercise and in both cases the
application of the net proceeds therefrom. The unaudited Pro Forma
Consolidated Balance Sheet as of March 31, 1996, is based on the historical
consolidated financial statements of the Company adjusted as if the following
events occurred on March 31, 1996: (a) the Litho Acquisition; and (b) the sale
of five million shares of Common Stock offered hereby by the Company at an
assumed public offering price of $17.00 per share, the Warrant Exercise and in
both cases the application of the net proceeds therefrom.

The unaudited Pro Forma Consolidated Statements of Operations combine the
historical results of the Company with the historical results of the Recent
Acquisitions or the Litho Acquisition, as the case may be, prior to the dates
the Company made such acquisitions, using the purchase method of accounting.
These Pro Forma Consolidated Financial Statements are not necessarily
indicative of the operating results that would have been achieved had such
transactions occurred at the beginning of each period presented. These
statements are based on the assumptions set forth in the notes to such
statements and should be read in conjunction with the related financial
statements and notes thereto of the Company and Lithotripters, Inc. included
elsewhere in this Prospectus.

13
<PAGE>

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)

<TABLE>
<CAPTION>
1995
ACQUISITIONS HISTORICAL LITHO
HISTORICAL AND LITHOTRIPTERS, ACQUISITION OFFERING PRO FORMA
COMPANY ADJUSTMENTS(A) INC. ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Fee revenue............. $23,195 $ 7,717 $59,215 $90,127
Costs and expenses:
Cost of services and
general and
administrative
expenses.............. 10,057 3,552 15,545 29,154
Depreciation and
amortization.......... 3,195 1,515 5,031 (640)(B) 9,101
------- ------- ------- ------- ------ -------
13,252 5,067 20,576 (640)(C) 38,255
------- ------- ------- ------- ------ -------
Operating income....... 9,943 2,650 38,639 640 51,872
Other income
(deductions):
Interest and
dividends............. 152 152
Interest expense....... (1,231) (1,626) (250) (5,950)(D) 7,181(H) (1,876)
Other, net............. 647 60 479 1,186
------- ------- ------- ------- ------ -------
(432) (1,566) 229 (5,950) 7,181 (538)
Income before provision
for income taxes and
minority interest..... 9,511 1,084 38,868 (5,310) 7,181 51,334
Minority interest in
consolidated income.... 1,421 633 26,210 1,763 (E) 30,027
Provision for income
taxes.................. 886 483 (F) 574(F) 1,943
------- ------- ------- ------- ------ -------
Net income............. $ 7,204 $ 451 $12,658 $(7,556) $6,607 $19,364
======= ======= ======= ======= ====== =======
Primary earnings per
share:
Net income............. $ 0.47 $ 0.84
Weighted average shares
outstanding........... 15,298 62 1,702 (G) 5,926(I) 22,988
Fully diluted earnings
per share:
Net income............. $ 0.46 $ 0.82 (F)
Weighted average shares
outstanding........... 16,010 991 1,702 (G) 5,417(I) 24,120
</TABLE>

The accompanying notes are an integral part of the Pro Forma Consolidated
Financial Statements.

14
<PAGE>

PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
HISTORICAL LITHO
HISTORICAL LITHOTRIPTERS, ACQUISITION OFFERING PRO FORMA
COMPANY INC. ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Fee revenue............. $ 7,224 $14,308 $21,532
Costs and expenses:
Cost of services and
general and
administrative
expenses.............. 3,021 4,284 7,305
Depreciation and
amortization.......... 1,149 1,129 (31)(B) 2,247
------- ------- ------- ------ -------
4,170 5,413 (31)(C) 9,552
------- ------- ------- ------ -------
Operating income....... 3,054 8,895 31 11,980
Other income
(deductions):
Interest and
dividends............. 22 0 22
Interest expense....... (509) (53) (1,488)(D) 1,795 (H) (255)
Other, net............. 80 241 321
------- ------- ------- ------ -------
(407) 188 (1,488) 1,795 88
Income before provision
for income taxes and
minority interest..... 2,647 9,083 (1,457) 1,795 12,068
Minority interest in
consolidated income.... 477 6,089 354 (E) 6,920
Provision for income
taxes.................. 264 95 (F) 144 (F) 503
------- ------- ------- ------ -------
Net income............. $ 1,906 $ 2,994 $(1,906) $1,651 $ 4,645
======= ======= ======= ====== =======
Primary earnings per
share:
Net income............. $ 0.12 $ 0.20
Weighted average shares
outstanding........... 16,360 1,702 (G) 5,451 (I) 23,513
Fully diluted earnings
per share:
Net income............. $ 0.12 $ 0.19 (F)
Weighted average shares
outstanding........... 17,368 1,702 (G) 5,450 (I) 24,520
</TABLE>

The accompanying notes are an integral part of the Pro Forma Consolidated
Financial Statements.

15
<PAGE>

PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
HISTORICAL LITHO
HISTORICAL LITHOTRIPTERS, ACQUISITION OFFERING PRO FORMA
COMPANY INC. ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash
equivalents........... $ 3,316 $14,639 $ 17,955
Accounts receivable,
trade, net............ 3,574 12,547 16,121
Other current assets... 2,073 992 3,065
------- ------- ------- ------- --------
Total current assets.. 8,963 28,178 37,141
Property and equipment,
net.................... 4,309 21,770 (9,770)(J) 16,309
Intangible assets, net.. 52,300 86,437 (K) 131,914
(6,823)(L)
Equity investments...... 7,323 7,323
Other assets............ 1,672 61 (700)(M) 1,033
------- ------- ------- ------- --------
Total assets.......... $74,567 $50,009 $69,144 $193,720
======= ======= ======= ======= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of
long-term debt........ $ 1,511 $ 463 $ 5,000 (K) $(5,000)(N) $ 1,974
Accounts payable....... 1,127 2,513 547 (K) 4,187
Accrued expenses and
other current
liabilities........... 2,484 11,515 2,300 (M) 16,299
------- ------- ------- ------- --------
Total current
liabilities.......... 5,122 14,491 7,847 (5,000) 22,460
Long-term debt, net of
current portion........ 17,467 5,132 65,000 (K) (79,479)(N) 8,120
Other liabilities....... 1,212 1,212
Minority interest....... 730 20,339 (6,546)(J) 14,523
Stockholders' equity:
Common stock........... 158 39 16 (K) 63 (N) 237
(39)(L)
Capital in excess of
par value............. 63,968 4 15,874 (K) 84,416 (N) 164,258
(4)(L)
Accumulated earnings
(deficit)............. (14,090) 10,004 (3,224)(J) (17,090)
(6,780)(L)
(3,000)(M)
------- ------- ------- ------- --------
Total stockholders'
equity............... 50,036 10,047 2,843 84,479 147,405
------- ------- ------- ------- --------
Total liabilities and
stockholders'
equity............... $74,567 $50,009 $69,144 -- $193,720
======= ======= ======= ======= ========
</TABLE>

The accompanying notes are an integral part of the Pro Forma Consolidated
Financial Statements.

16
<PAGE>

NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

(A) Includes historical results of the 1995 Acquisitions prior to the
acquisition dates and related adjustments. Such adjustments consist of
provisions for goodwill amortization and interest expense on debt
incurred in connection with the acquisitions prior to the acquisition
dates. In addition, the Company's primary and fully diluted shares are
adjusted to reflect the effect of options, warrants and convertible debt
issued in connection with the acquisitions.
(B) Reflects the reduction in depreciation expense due to the purchase price
accounting adjustment to reduce book value of equipment to fair value,
offset by an increase in amortization due to goodwill associated with the
Litho Acquisition, as shown below:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DEC. 31, 1995 ENDED MARCH 31, 1996
------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
Reduction in depreciation expense......... $(2,631) $(529)
Goodwill amortization..................... 1,991 498
------- -----
Total adjustment........................ $ (640) $ (31)
======= =====
</TABLE>
(C) Does not include charges associated with the write-off of bank financing
fees as described in (M), below.
(D) Reflects additional interest expense attributable to the $70.0 million of
bank debt incurred in conjunction with the Litho Acquisition at an assumed
interest rate of 8.5%.
(E) Reflects an increase in minority interest resulting from the decrease in
depreciation expense due to the adjustment to reduce book value of
equipment to fair value in connection with the Litho Acquisition.

(F) Represents an adjustment to reflect income tax expense at an assumed
effective state tax rate of 6% and an effective federal tax rate of 2% as
a result of utilization of the NOL. Without the benefit of the NOL, and
at an assumed combined state and federal income tax rate of 40%, the
Company's pro forma income tax expense would have been $8,523,000, net
income would have been $12,784,000 and fully diluted earnings per share
would have been $0.55 for the year ended December 31, 1995, and the
Company's pro forma income tax expense would have been $2,059,000, net
income would have been $3,089,000 and fully diluted earnings per share
would have been $0.13 for the three months ended March 31, 1996.

(G) To record (i) the issuance of 1,636,364 shares of Common Stock used for
the stock component of the Litho Acquisition and (ii) stock options
issued to key employees of Lithotripters, Inc. concurrently with such
acquisition.
(H) To record the reduction in interest expense resulting from the repayment
of debt under the Company's Senior Credit Facility with the proceeds from
the 5,000,000 shares of Common Stock offered hereby and the Warrant
Exercise.

(I) To reflect (i) the 5,000,000 shares of Common Stock offered hereby and
(ii) the 1,244,597 shares issued as a result of the Warrant Exercise,
offset by the portion of such shares previously included in the Company's
historical weighted average shares outstanding.

(J) Reflects adjustment to fair value for equipment acquired in conjunction
with the Litho Acquisition and the corresponding reductions to minority
interest and stockholders' equity.

(K) To record the purchase of the net assets of Lithotripters, Inc. for $70.0
million (bank debt) plus the issuance of 1,636,364 shares of Common
Stock.

(L) To record the elimination of Lithotripters, Inc.'s Common Stock, capital
in excess of par value and accumulated earnings.

(M) Reflects a non-recurring write-off of approximately $3.0 million,
including (i) a write-off of $700,000 in deferred costs from the Company's
previous bank facility, and (ii) non-recurring costs of $2.3 million not
previously recorded related to the Company's new Senior Credit Facility.

(N) To record the proposed offering of 5,000,000 shares of Common Stock and
the Warrant Exercise, with the net proceeds used to reduce the principal
balance outstanding on the Senior Credit Facility.

17
<PAGE>

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The selected data presented below for, and as of the end of, each of the
years in the five-year period ended December 31, 1995, are derived from the
consolidated financial statements of the Company, which financial statements
have been audited by KPMG Peat Marwick LLP, independent certified public
accountants. The consolidated financial statements as of December 31, 1995 and
1994, and for each of the years in the three-year period ended December 31,
1995, are included elsewhere in this Prospectus. The selected data presented
below for the three-month periods ended March 31, 1996 and 1995 and as of
March 31, 1996 and 1995 are derived from the unaudited consolidated financial
statements of the Company included elsewhere in this Prospectus. The results
of operations for the three months ended March 31, 1996 are not necessarily
indicative of the results for the 1996 fiscal year. This information is
qualified by reference to, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements included
elsewhere herein.

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATING
DATA:
Revenues:
Lithotripsy............ -- $ 4,291 $ 7,309 $14,843 $22,153 $ 4,196 $ 7,002
Imaging and cardiac.... $12,747 15,026 13,259 9,925 1,042 310 222
------- ------- ------- ------- ------- ------- -------
Total revenues........ 12,747 19,317 20,568 24,768 23,195 4,506 7,224
Costs and expenses:
Lithotripsy............ -- 1,844 2,672 4,283 5,979 1,135 2,263
Imaging and cardiac.... 11,035 13,349 11,996 8,580 1,505 292 159
Corporate expenses..... 1,161 1,516 1,198 2,414 2,573 536 599
------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............. 12,196 16,709 15,866 15,277 10,057 1,963 3,021
Depreciation and
amortization.......... 970 938 1,818 2,975 3,195 671 1,149
------- ------- ------- ------- ------- ------- -------
Operating income
(loss)............... (419) 1,670 2,884 6,516 9,943 1,872 3,054
Other income
(deductions).......... 765 47 (135) (774) (432) (225) (407)
------- ------- ------- ------- ------- ------- -------
Income before income
taxes, minority
interest, and
extraordinary items.. 346 1,717 2,749 5,742 9,511 1,647 2,647
Provision for income
taxes................. 146 709 210 547 886 152 264
Minority interest in
consolidated income... -- -- -- 691 1,421 214 477
Extraordinary gain..... 103 584 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income............ $ 303 $ 1,592 $ 2,539 $ 4,504 $ 7,204 $ 1,281 $ 1,906
======= ======= ======= ======= ======= ======= =======
Fully diluted earnings
per share............. $ 0.03 $ 0.17 $ 0.21 $ 0.31 $ 0.46 $ 0.09 $ 0.12
Weighted average shares
outstanding........... 8,300 9,411 12,371 14,650 16,010 14,841 17,368
BALANCE SHEET DATA:
Working capital........ $ 5,793 $ (13) $ 1,135 $ 2,225 $ 219 $ 1,995 $ 3,841
Total assets........... 15,178 22,349 38,768 53,861 77,627 51,283 74,567
Long-term debt, net of
current maturities.... 900 1,475 371 12,734 22,323 10,625 17,467
Total stockholders'
equity................ 9,847 12,993 29,976 34,421 42,750 35,733 50,036
</TABLE>

18
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company has an interest in 54 lithotripters, including 23 as of March
31, 1996 and 31 acquired since that time in the Litho Acquisition. Of the 23
lithotripters on March 31, 1996, 19 were wholly or majority owned by the
Company and therefore fully consolidated in the Company's results of
operations with provisions for minority interests where appropriate. Revenues
from these 19 operations consist of fees charged to hospitals, patients and
third-party payors for lithotripsy services. The remaining four lithotripters,
in which the Company owns a minority interest, are accounted for using the
equity method. Revenues in these cases include management fees paid to the
Company and equity income from the Company's ownership interests. The results
from the Litho Acquisition are being fully consolidated as described below.
For the year ended December 31, 1995, 87% of the Company's lithotripsy
revenues were generated from fees charged for lithotripsy services, 7% were
derived from management fees, and 6% were derived from equity income. See
"Summary--Recent Developments."

The Company's rapid growth has resulted primarily from acquisitions of or
investments in businesses engaged in providing lithotripsy services. During
the period from April 1, 1992 to March 31, 1996, the Company completed nine
acquisitions involving 22 lithotripter operations and developed one operation.
As of March 31, 1996, the Company had an economic interest in 23 lithotripter
operations located in 22 states.

The following table provides certain information concerning the Company's
acquisitions during the periods indicated:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------ 5 MOS. ENDED
1992 1993 1994 1995 MAY 31, 1996
<S> <C> <C> <C> <C> <C>
Lithotripters acquired during the
period.......................... 1 4 7 10 31
Lithotripters developed during
the period...................... -- -- 1 -- --
Number of lithotripters at end of
period.......................... 1 5 13 23 54
</TABLE>

The Company's acquisitions have been funded by cash, debt, convertible notes
and shares of Common Stock. Cash utilized for the acquisitions has been
generated from operations, the divestiture of the Company's diagnostic imaging
and cardiac rehabilitation businesses and the Senior Credit Facility.

The Company had approximately $9.5 million of NOL as of March 31, 1996,
which the Company expects to fully utilize in early 1997. As a result of the
utilization of the NOL, the Company's effective federal tax rate in 1995 and
for the three months ended March 31, 1996 was 2%.

The Company completed its exit from the diagnostic imaging business in 1994
and has also substantially reduced its cardiac rehabilitation business, which
accounted for approximately 1% of the Company's total pro forma revenues in
1995.

RECENT DEVELOPMENTS

In April 1996, the Company acquired Lithotripters, Inc., which operates 31
lithotripters in 19 states through a network of 22 affiliated limited
partnerships. Lithotripters, Inc. has an economic interest of 20% to 58% in
each of these partnerships. The Litho Acquisition became effective May 1, 1996
and was accounted for as a purchase. Due to the significant control maintained
by Lithotripters, Inc. as provided in the partnership agreements, revenues and
expenses for the partnerships are consolidated and a minority interest
equivalent to the limited partners' aggregate ownership interest is recorded.
The partnerships' revenues are derived solely from fees charged to hospitals,
patients and third-party payors for lithotripsy services. As a result of the
significant size of the Litho Acquisition, the Company's future financial
results will not be comparable to its historical results. See "Pro Forma
Consolidated Financial Statements."

19
<PAGE>

RESULTS OF OPERATIONS

The following table sets forth certain consolidated financial data as a
percentage of total net revenues (unless otherwise noted) for each of the
three years ended December 31, 1995 and for the three months ended March 31,
1995 and March 31, 1996.

<TABLE>
<CAPTION>
PERCENTAGE OF REVENUES
----------------------------------------------
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- ----------------
1993 1994 1995 1995 1996
<S> <C> <C> <C> <C> <C>
Revenues:
Lithotripsy................. 35.5% 60.0% 95.5% 93.1% 96.9%
Imaging and cardiac......... 64.5 40.0 4.5 6.9 3.1
-------- -------- -------- ------- -------
Net revenues................ 100.0 100.0 100.0 100.0 100.0
-------- -------- -------- ------- -------
Costs and expenses:
Lithotripsy as a % of li-
thotripsy revenues......... 36.6 28.9 27.0 27.0 32.3
Imaging and cardiac as a %
of imaging and cardiac
revenues................... 90.5 86.4 144.4 94.2 71.6
Corporate expenses.......... 5.8 9.7 11.1 11.9 8.3
Total costs and expenses.. 77.1 61.7 43.4 43.6 41.8
Depreciation and amortiza-
tion....................... 8.8 12.0 13.8 14.9 15.9
Operating income............ 14.0 26.3 42.9 41.5 42.3
Other Income (deductions):
Interest and dividends...... 1.0 0.9 0.6 1.0 0.3
Interest expense............ (2.6) (3.6) (5.3) (6.2) (7.0)
Other, net.................. 0.9 (0.4) 2.8 0.2 1.1
-------- -------- -------- ------- -------
Total deductions.......... (0.7) (3.1) (1.9) (5.0) (5.6)
-------- -------- -------- ------- -------
Income before provision for
income taxes and minority
interest..................... 13.3 23.2 41.0 36.5 36.7
Minority interest in
consolidated income.......... 0.0 2.8 6.1 4.7 6.6
Provision for income taxes.... 1.0 2.2 3.8 3.4 3.7
-------- -------- -------- ------- -------
Net income.................... 12.3 18.2 31.1 28.4 26.4
======== ======== ======== ======= =======
</TABLE>

THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995

Revenues. Total revenues increased by $2,718,000 (60%) for the three months
ended March 31, 1996 compared to the same period in 1995. Revenues from
lithotripter operations increased by $2,806,000 (67%) primarily due to
revenues from the acquisition of ten lithotripter operations after March 31,
1995. Revenues from cardiac rehabilitation centers decreased by $88,000 (28%)
due to discontinued and sold cardiac rehabilitation centers.

Costs and Expenses. Costs and expenses decreased from 44% to 42% of revenues
for the three months ended March 31, 1996, compared to the same period in
1995, but increased $1,058,000 (54%) in absolute terms. Costs of services
associated with lithotripsy operations increased from 27% to 32% of
lithotripsy revenues, $1,128,000 (99%) in absolute terms, primarily due to the
acquisitions described above, which had lower operating margins than the
Company's existing business. Costs of services from cardiac rehabilitation
centers decreased by $133,000 (46%) due to discontinued and sold cardiac
rehabilitation centers. Corporate expense decreased from 12% to 8% of revenues
as the Company was able to successfully grow without proportionately adding
additional overhead. Corporate expenses increased in absolute terms by $63,000
(12%).

Other Income/Deductions. Other deductions increased by $182,000 (81%) for
the three month period ended March 31, 1996, compared to the same period in
1995, primarily due to a $230,000 (83%) increase in interest expense related
to increased borrowings associated with the acquisition of lithotripter
operations.

20
<PAGE>

YEARS ENDED DECEMBER 31, 1995 AND 1994

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

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

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

YEARS ENDED DECEMBER 31, 1994 AND 1993

Revenues. Total revenues increased by $4,200,000 (20%) in 1994 compared to
1993. Revenues from lithotripsy operations increased by $7,534,000 (103%) due
to the acquisition of seven additional lithotripter operations and the
internal development of one lithotripter during 1994. Revenues from cardiac
and imaging centers declined by $3,334,000 (25%) primarily due to the
divestiture of diagnostic imaging centers and discontinued cardiac
rehabilitation centers.

Costs and Expenses. Costs and expenses in 1994 declined by $589,000 (4%)
compared to 1993, from 77% to 62% of revenues. Costs of services associated
with lithotripsy operations decreased from 37% to 29% of lithotripsy revenues
as the Company recognized operating efficiencies resulting from the
acquisition and consolidation of additional lithotripsy operations. In
absolute terms these costs increased by $1,611,000 (60%) primarily due to the
acquisition of seven additional lithotripter operations and the internal
development of one lithotripter operation during 1994. Costs of services from
cardiac and diagnostic imaging centers declined by $3,416,000 (28%) primarily
due to the divestiture or discontinuation of imaging centers and cardiac
rehabilitation centers. Corporate expenses increased by $1,216,000 (102%) from
6% to 10% of total revenues as certain expenses previously charged to cardiac
and imaging were reallocated to corporate.

Other Income/Deductions. Other deductions increased by $639,000. Interest
and dividend income increased by $23,000 (12%) primarily due to interest
earned on promissory notes related to the sales of the diagnostic imaging
centers. Interest expense increased by $358,000 (66%) as a result of the
increased debt related to the acquisition of the lithotripter operations.
Other income decreased by $304,000 primarily due to results of investments and
fixed asset sales.

21
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Cash was $3,316,000 and $4,692,000 at March 31, 1996 and December 31, 1995,
respectively. Cash provided by operations was $3,072,000 for the quarter ended
March 31, 1996 and $10,898,00 for the year ended December 31, 1995. Cash used
in investing activities was $3,071,000 for the quarter ended March 31, 1996.
Cash used in investing activities for the year ended December 31, 1995 was
$12,241,000 primarily due to expenditures of $15,033,000 associated with
acquisitions, $367,000 for the fees associated with the Senior Credit Facility
and $473,000 for the purchase of equipment and leasehold improvements, which
expenditures were partially offset by $2,753,000 in proceeds from the sale of
common stock of APS. Cash used in financing activities for the quarter ended
March 31, 1996 was $1,377,000, which included $1,138,000 for payments on notes
payable and distributions to minority interests totaling $369,000. Cash
provided by financing activities for the year ended December 31, 1995 was
$3,123,000 which was primarily due to $14,284,000 of borrowings under the
Senior Credit Facility partially offset by payments in the amount of
$9,588,000 on notes payable.

The Company anticipates aggregate capital requirements for purchases of
equipment and leasehold improvements for facilities, excluding acquisitions of
new lithotripter operations, in the year ended December 31, 1996 will be
approximately $2.0 million as compared to $473,000 in the year ended December
31, 1995.

On April 25, 1996, the Company amended its Senior Credit Facility to consist
of a $50.0 million term loan maturing in five years and a revolving credit
loan of $40.0 million also maturing in five years. The Company currently has
fully utilized the term loan of $50.0 million and currently has loans
outstanding under the revolving line of credit totaling $34,550,000. The
Company plans to utilize all of the net proceeds of this offering to repay
indebtedness incurred under the Senior Credit Facility. Approximately
$34,550,000 of such proceeds will be used to pay the full amount outstanding
under the revolving credit loan in its entirety, thereby allowing the Company
to reborrow up to $40.0 million to finance future acquisitions. See "Use of
Proceeds."

The loans included in the Senior Credit Facility are secured by
substantially all of the assets of the Company including the capital stock and
other ownership interests in the Company's subsidiaries. The term loan
requires quarterly payments of principal which vary during the term of the
loan and monthly payments of interest. The revolving line of credit requires
monthly payments of interest and a balloon payment of outstanding principal at
maturity. Loans under the loan agreements are denominated at the Company's
option as either LIBOR tranches or Alternate Base Rate tranches, each of which
bears interest at the applicable rate plus a margin which varies depending
upon certain financial ratios. The Senior Credit Facility contains various
customary positive and negative covenants, including a requirement for lender
approval for certain acquisitions. Upon the conclusion of this offering, the
Company intends to renegotiate the Senior Credit Facility to obtain more
favorable terms.

The Company believes that its present cash position, together with funds
generated from operations and from available lines of credit, will provide
sufficient resources to meet the Company's cash requirements for existing
operations in the foreseeable future.

SEASONALITY

Due to the effect of climate and physical activity on the incidence of
kidney stones, the Company's business is seasonal in nature. The Company's
first and fourth quarters generally reflect lower net revenues on a same
facility basis when compared to the Company's second and third quarters.

FORWARD LOOKING STATEMENTS

22
<PAGE>

BUSINESS

GENERAL

The Company is the largest and fastest growing 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 an economic interest in 48 mobile and
six fixed site lithotripters, all but two of which are operated by the
Company. The Company's lithotripters performed approximately 31,000, or
approximately 17%, of the estimated 180,000 lithotripsy procedures performed
in the United States in 1995. Approximately 1,850 urologists utilized the
Company's lithotripters in 1995, representing approximately 25% of the
estimated 7,300 active urologists in the United States. Of these physicians,
approximately 900 (12% of the U.S. total) also own minority interests in
certain lithotripters of the Company. In addition, management believes that
the Company has collected the United States' largest lithotripsy treatment
database, containing detailed treatment and outcomes data on over 100,000
lithotripsy procedures, which the Company and its associated urologists
utilize in seeking to provide the highest quality of lithotripsy services as
efficiently as possible.

The Company began providing lithotripsy services with an acquisition in 1992
and has grown rapidly since that time through a total of ten acquisitions with
interests in 54 lithotripters. Forty-six of the Company's 54 lithotripsy
operations were formed by the Company's current directors and managers prior
to the Company's acquisition of such operations. Since 1992, the Company has
substantially divested its non-lithotripsy businesses. Lithotripsy revenues
have grown from no revenues in 1991 to $22.2 million in 1995. Total revenues
and income before extraordinary items (including the divested businesses) grew
over the same period from $12.7 million to $23.2 million and from $200,000 to
$7.2 million, respectively. Revenues and net income for the year ended
December 31, 1995, pro forma for the Recent Acquisitions and this offering,
were $90.1 million and $19.4 million, respectively. Pro forma revenues and net
income for the three months ended March 31, 1996, were $21.5 million and $4.6
million, respectively.

The Company provides lithotripsy services at approximately 380 hospitals and
surgery centers in 31 states. The Company provides non-medical services
related to the operation of the lithotripters, including scheduling, staffing,
training, quality assurance, maintenance, regulatory compliance and
contracting with payors, hospitals and surgery centers, while medical care is
rendered by urologists utilizing the lithotripters. On a pro forma basis for
1995, the Company was paid directly by hospitals or surgery centers for
slightly more than one-half of the lithotripsy procedures performed by its
lithotripters. In the remaining procedures, the Company was paid directly by
the patient or the patient's third-party payor, with government payors
(Medicare, Medicaid and Champus) accounting for approximately 20% of the pro
forma 1995 revenues derived from such direct-pay procedures. In addition, the
Company has over 200 contracts with managed care organizations.

The market for lithotripsy services remains highly fragmented. While the
Company operates approximately 15% of the estimated 350 lithotripters
currently operated in the United States, the Company believes that the next
five largest lithotripsy service companies collectively account for less than
20% of the country's lithotripters, and that no other lithotripsy service
company operates more than 2%. In addition, the Company does not currently
serve 52 of the 100 largest MSAs in the United States. Moreover, management
believes that demographics favor growth in lithotripsy services, with the
highest incidence of kidney stones occurring in men 45 to 64 years of age.
This is the fastest growing segment of the U.S. population and is primarily
covered by private payor plans rather than government payors.

INDUSTRY OVERVIEW

KIDNEY STONE DISEASE

The exact cause of kidney stone formation is unclear, although it has been
attributed to genetics, diet, climate, metabolism and certain medications.
While certain life-style and diet modifications may decrease the

23
<PAGE>

incidence of kidney stones, there is no known preventative cure in the vast
majority of cases. Approximately 25% of all kidney stones do not pass
spontaneously and therefore require medical or surgical treatment. These
patients suffer from extreme pain and, without treatment, may develop serious
adverse health consequences that, in extreme cases, may lead to renal failure,
loss of a kidney or even death. However, through the use of pain medication
and other techniques, treatment can be postponed in nearly all cases for
several weeks without adverse consequences.

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.

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, its 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 appropriate
drugs to allow normal passage from the urinary system. Stones located in
certain areas of the urinary tract may be extracted endoscopically. These
procedures commonly require general or local anesthesia and can injure the
involved areas of the urinary tract. Frequently, kidney stones are located
where they are not accessible by an endoscopic procedure. Prior to the
development of lithotripsy, stones lodged in the upper urinary tract were
often treated by open surgery or percutaneous stone removal, both major
operations requiring an incision to gain access to the stone. After such
procedures, the patient typically spends several days in the hospital followed
by a convalescence period of three to six weeks. As the technology for
treating kidney stones has improved, there has been a shift from more
expensive and complicated invasive procedures to safer, more cost efficient
and less painful non-invasive procedures, such as extracorporeal shock wave
lithotripsy ("ESL"). The overwhelming majority of all kidney stones that
require treatment are treated with ESL, eliminating the need for invasive
surgical procedures and associated lengthy hospital stays and recovery
periods.

EXTRACORPOREAL SHOCK WAVE LITHOTRIPSY

General. ESL involves equipment (a lithotripter) that uses shock waves to
disintegrate kidney stones non-invasively. Stone fragments are then passed
with the urine. The ESL lithotripter has dramatically changed the course of
kidney stone disease treatment. ESL is normally performed on an outpatient
basis, often without general anesthesia. Recovery times are generally only a
few hours, and most patients can return to work the next day.

There are three types of ESL technology: electromagnetic, spark-gap and
piezoelectric. The Company has 36 electromagnetic machines, 17 spark-gap
machines and only one piezoelectric machine.

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

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

Piezoelectric Technology. Lithotripters applying piezoelectric technology
use a linear array of ceramic elements, all focused at one point. There are
only a few lithotripters utilizing piezoelectric technology operating in the
United States.

24
<PAGE>

STRATEGY

The Company's objective is to continue to grow and strengthen its position
as the leading provider of lithotripsy services in the United States. The
Company has consistently pursued an aggressive growth policy since it entered
the lithotripsy business in 1992 and believes its acquisition experience and
ability to leverage off of its existing infrastructure will allow it to
continue to recognize and take advantage of future acquisition opportunities.
Furthermore, management believes that the Company's reputation and strong
relationships with physicians, equipment manufacturers, managed care
organizations, hospital groups and integrated provider networks have
strategically positioned it to grow through the introduction of new services
and the entry into new markets.

The Company's strategy to accomplish its growth objective is as follows:

CONTINUE TO GROW THROUGH ACQUISITIONS

The Company intends to continue to aggressively pursue acquisitions of both
large and small lithotripsy service providers. Since October 1995 the Company
has acquired two of the three other top lithotripsy service companies in the
United States, and since 1992 the Company has made ten acquisitions
representing a total of 53 lithotripters. These acquisitions ranged in size
from one to 31 lithotripters each. The Company believes that the fragmented
nature of the lithotripsy industry, combined with operational challenges
created by increasing regulatory and business complexities, will provide
significant opportunities to acquire additional service providers at
attractive prices. Where appropriate, the Company will seek to increase its
ownership interest in current lithotripsy operations by purchasing interests
of urologists and other investors who desire to divest due to retirement,
concerns over regulatory issues or a desire to realize a return on their
investment.

FORM OPERATIONS TO SERVE NEW MARKETS AND EXPAND OPERATIONS IN EXISTING
MARKETS

The Company intends to leverage its management and other resources by
forming additional partnerships or subsidiaries to serve new markets. Forty-
six of the Company's 54 lithotripsy operations were formed by current
directors and managers of the Company prior to the acquisition of such
operations by the Company. Future expansion opportunities exist as 52 of the
largest 100 MSAs in the United States are not currently served by the Company.
The Company believes that it can attract urologist-investors by appealing to
an increasing number of physicians who seek to align themselves with larger,
professionally managed organizations with favorable, established reputations
in the industry. The Company also believes that it can increase the number of
procedures performed per location by increasing its marketing efforts directed
towards urologists and by upgrading existing equipment. For example, the
Company recently modified five of its older spark-gap lithotripters to improve
their imaging systems and to allow for the treatment of distal ureteral
stones. These improvements, which cost approximately $70,000 per lithotripter,
are expected to improve efficiency and to increase patient volumes by 5% to
15% for such lithotripters. The Company plans to make these same improvements
on five of the remaining spark-gap lithotripters, and to continue to explore
other ways to upgrade and modify equipment to improve efficiency and increase
patient volumes. The Company will also evaluate opportunities to add
lithotripters to its existing operations to serve more locations.

EMPLOY ITS PROPRIETARY OUTCOMES DATABASE TO OPTIMIZE QUALITY AND EFFICIENCY

The Company intends to utilize its proprietary outcomes database and
information system to enhance its ability to furnish the highest quality of
lithotripsy service on an efficient basis. In addition, the Company furnishes
its database information to urologists utilizing the Company's facilities to
assist them in improving the quality and efficiency of patient care. This
information also enables the Company to negotiate more effectively with
hospitals and third-party payors. Moreover, the Company is able to provide
clinical and regulatory information that helps establish strong relationships
with referring physicians, hospitals and surgery centers.

DEVELOP STRATEGIC ALLIANCES WITH VERTICALLY INTEGRATED NETWORKS OF PROVIDERS

The Company is positioning its operations to compete successfully within
emerging models of healthcare payment and delivery systems by actively
developing alliances with vertically integrated networks of hospitals

25
<PAGE>

and other healthcare providers and third-party payors, including managed care
organizations. By combining these alliances with the Company's extensive
management experience, relationships with urologists and proprietary database,
the Company believes that it can cost-effectively develop risk-sharing
programs covering the full range of costs associated with lithotripsy
treatment.

DEVELOP NEW BUSINESS OPPORTUNITIES IN PARTNERSHIP WITH UROLOGISTS

The Company currently provides services to approximately 25% of the
estimated 7,300 active urologists in the United States and seeks to maintain
close relationships with the medical community through its network of local
physician advisory boards. The Company believes that it can utilize these
relationships and its management expertise to develop new opportunities
resulting from technological and other advances in affiliated urology
businesses, including new therapeutic services relating to prostate disease
and other urological disorders. The Company also is evaluating business
opportunities involving physician practice management services. Management
believes that the skills and expertise required to manage its lithotripsy
business are very similar to those required for the management of physician
practices.

LITHOTRIPSY OPERATIONS

The Company manages the operation of 52 of its 54 lithotripters. All of its
lithotripters are operated in connection with hospitals or surgery centers.
The Company operates its lithotripters as the general partner of a limited
partnership or through a subsidiary. The Company provides a full range of
management and other non-medical support services to the lithotripsy
operations, while medical care is provided by urologists utilizing the
facilities and certain medical support services are provided by the hospital
or surgery center. Urologists are investors in 43 of the 54 operations.

MANAGEMENT SERVICES

In general, the Company provides turn-key management services to its
lithotripsy operations. Key services performed include the following:

. routing and scheduling of mobile lithotripters;
. centralized patient scheduling;
. pre-procedure insurance verification and post procedure billing and
collection;

. arranging for the hiring, training and continuing education of
lithotripsy nurses and radiology technicians;
. negotiating contracts with hospitals, surgery centers and all types of
payors;
. monitoring regulatory, legal and legislative issues affecting operations
and arranging Certificate of Need preparation, testimony and support;
. performing satisfaction surveys with hospitals, physicians and patients;
. providing patient education materials;
. arranging for consultation services from leading lithotripsy experts to
treating physicians via a toll free telephone number;
. as necessary, providing for the training and certification of urologists
in the use of lithotripters;
. maintaining the Company's proprietary outcomes database and information
system; and
. providing quality assurance, utilization review and continuing medical
education for hospitals and physicians.

The breadth of these services varies throughout the Company's operations.
The Company continues to evaluate opportunities to expand the provision of
such services throughout its system.

LITHOTRIPSY FACILITIES

There are three types of ESL technology: electromagnetic, spark-gap and
piezoelectric. The Company has 36 electromagnetic machines, 17 spark-gap
machines and only one piezoelectric machine. The Company's

26
<PAGE>

lithotripters range in age from one to 11 years. With its continued ongoing
maintenance program, all parts on the machines can be repaired or replaced as
needed and are readily available. In addition, the Company continues to
upgrade its lithotripters with technological advances as appropriate. As a
result, the Company does not anticipate that any of its existing machines will
need to be replaced or will become obsolete in the foreseeable future.

Mobile Lithotripsy. Of the Company's 54 lithotripters, 48 are mobile units
mounted in tractor-trailers or self-contained coaches serving locations in 31
states. The typical cost of a mobile lithotripter (including the coach) can
range from $400,000 (used) to $1,800,000 (new). Mobile lithotripsy services
are widely accepted and are utilized by most physicians, hospitals and
patients. The increased convenience of bringing the mobile unit to the
physician and patient has greatly enhanced the use of lithotripsy over
alternative invasive treatment methods. In addition, few hospitals in the
United States have the patient volume to justify the purchase and operation of
an in-house system. Typically, a mobile unit will have a scheduled route of
stops, visiting each hospital or surgery center from one to eight times per
month. Most lithotripsy patients can delay the need for immediate treatment
through the use of pain medication and can be scheduled to have their
procedure in a timely manner without risk. In some locations, the Company has
developed a flexible schedule that allows units to move between locations more
than once per day, providing for greater flexibility to accommodate both
physicians and patients.

Fixed Site Lithotripsy. The Company also operates six fixed site
lithotripters in five states. All of the Company's fixed lithotripsy units are
located and operated in conjunction with a hospital or surgery center. Most of
these locations are in major metropolitan markets where the population can
support such an operation. Fixed site lithotripters generally cannot be
economically justified in other locations.

Integration of Acquisitions. The Company's growth strategy has focused on
the acquisition of profitable and well managed lithotripsy operations. Because
its operations are spread over 31 states and given the importance of
maintaining positive relationships with local urologists and hospitals, the
Company generally retains local management and related functions where no
clear economies of scale exist. However, certain functions, such as managed
care contracting, vendor relations, maintenance and supply contracting, and
accounting, have been centralized because obvious benefits have been
identified.

PROPRIETARY OUTCOMES DATABASE

The Company believes that it maintains the most comprehensive quality
outcomes database and information system in the lithotripsy services industry.
The Company has detailed information on over 100,000 procedures covering
patient demographic information and medical condition prior to treatment, the
clinical and technical parameters of the procedure and resulting outcomes.
Information is collected before, during and up to three months after the
procedure through internal data collection by doctors, nurses and technicians
and through patient questionnaires.

This information also enables the Company to negotiate more effectively with
hospitals and third-party payors. In addition, the Company is able to provide
clinical and regulatory information that strengthens relationships with
referring physicians, hospitals and surgery centers.

Because consistency is a key factor in organizing and evaluating this data,
it is collected at a centralized location which disperses results to
management and affiliated urologists on a regular basis. Currently, the
Company has procedures in place to collect all such data on a consistent basis
for 31 of its lithotripters and plans to expand such data collection to
additional lithotripters.

PHYSICIAN RELATIONS AND MARKETING

Approximately 900 physicians have invested in 43 of the Company's 54
lithotripsy operations. In addition, approximately 950 other urologists
utilized the Company's lithotripters in 1995. The Company markets

27
<PAGE>

its services to urologists by providing (i) top quality, well-maintained
facilities and equipment, (ii) well-trained lithotripsy nurses and radiology
technicians, (iii) professional management and a full range of support
services, and (iv) convenient scheduling, all of which enable the urologist to
focus on the practice of medicine. The Company believes that its reputation
and management experience, as well as "word-of-mouth" marketing from
urologists currently utilizing its facilities, also play a significant role in
attracting urologists.

In all of its operations, the Company seeks to maintain strong relationships
with its referring physicians. In most locations, the Company has established
local physician advisory boards that meet periodically to discuss the
provision and quality of services, financial performance and other factors
with management that may impact operations. The Company has also established a
National Advisory Board comprised of leading urologists to assist in
establishing quality factors relating to services, to evaluate new
technological advances and to assist the Company in evaluating other potential
opportunities that would complement its lithotripsy operations. Members of the
National Advisory Board are geographically diverse, which assists the Company
in keeping up to date with regional or local trends in the healthcare market.

CONTRACTS FOR LITHOTRIPSY SERVICES

The Company contracts for its lithotripsy services with hospitals and
surgery centers for utilization by urologists practicing at these facilities.
The Company markets to such facilities by providing well-maintained and
conveniently scheduled equipment for the use of the facility's doctors and
patients and by providing a full range of administrative and support services
that enable the facility to provide higher quality and more efficient care.
The Company believes that its reputation and management experience, together
with input from urologists who wish to utilize the Company's facilities, also
provide significant incentives for hospitals and surgery centers to contract
with the Company.

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

HOSPITAL BILLING CONTRACTS

Under a hospital billing contract, the Company bills and collects from the
hospital or surgery center for lithotripsy services provided by the Company to
patients. The rates charged under these arrangements vary and may be based on
the number of procedures performed in a specific period or may be based on
different rates depending on whether the patient is covered by private
insurance or government payment plans or is a private pay patient. The
hospital or surgery center is responsible for billing and collecting from the
patient or third-party payor directly.

TRUE-UP CONTRACT

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

DIRECT BILLING CONTRACTS

Under a direct billing contract, the Company bills the patient or the
patient's third-party payor a combined fee, which includes all aspects of the
procedure, excluding the treating urologist's fee. The Company then pays the
hospital or surgery center a percentage of the collected amount for its
services. Contracts of this type are advantageous to the Company because they
provide it with considerable market feedback concerning reimbursement rates,
which the Company utilizes when negotiating with hospitals, surgery centers
and managed care organizations.

28
<PAGE>

PRICING AND REIMBURSEMENT

The prices the Company charges for lithotripsy services are generally
accepted by third-party payors as being usual, customary and reasonable. On a
pro forma basis for 1995, the Company was paid directly by hospitals or
surgery centers for slightly more than one-half of the lithotripsy procedures
performed by its lithotripters. In the remaining procedures, the Company was
paid directly by the patient or the patient's third-party payor, with
government payors (Medicare, Medicaid and Champus) accounting for
approximately 20% of the pro forma 1995 revenues derived from such direct-pay
procedures.

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.

In addition, the second largest lithotripsy service company in the United
States, which operates approximately 30 lithotripters, has announced that it
is evaluating strategic alternatives, including the possible sale of its
lithotripsy operations. Another significant provider of lithotripsy services
is also a manufacturer of lithotripsy equipment, which may create different
incentives for such provider in pricing lithotripsy services.

OTHER LINES OF BUSINESS

Prior to entering the lithotripsy business, the Company's primary business
activities involved the ownership and management of diagnostic imaging centers
and the provision of non-medical management services to cardiac rehabilitation
centers. In 1994, the Company completed its exit from the diagnostic imaging
business. The Company has also substantially reduced its cardiac
rehabilitation business, which accounted for approximately 1% of the Company's
total pro forma revenues in 1995.

PROPERTIES

The Company leases approximately 2,800 square feet of office space for its
executive offices in Austin, Texas, under a lease expiring in 1997. The
Company also leases approximately 5,700 square feet of office space in
Campbell, California, under a lease expiring in 1997 and approximately 11,000
square feet of office space in Fayetteville, North Carolina, under two leases
expiring in 2001. The Company believes its facilities are adequate for its
reasonably foreseeable needs.

EMPLOYEES

The Company has approximately 260 employees. None of these employees are
subject to a collective bargaining agreement and the Company has experienced
no work stoppages. The Company believes that its employee relations are good.

29
<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information regarding the Company's
directors and executive officers, including their respective ages, as of May
31, 1996.

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
<S> <C> <C>
Kenneth S. Shifrin...... 47 Chairman of the Board
Joseph Jenkins, M.D., 48 President, Chief Executive Officer and Director
J.D....................
Michael Madler.......... 37 Vice President--Operations
Cheryl Williams......... 44 Chief Financial Officer, Vice President--Finance and Secretary
Stan D. Johnson......... 42 Vice President
Paul R. Butrus.......... 55 Director
Jack R. Chandler, 71 Director
M.D. ..................
William E. Foree, 64 Director
M.D. ..................
Irwin Katz.............. 76 Director
William A. Searles...... 53 Director
Michael J. Spalding, 55 Director
M.D....................
</TABLE>

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 American Physicians Service Group, Inc. ("APS") since February 1985, and
is currently Chairman of the Board and Chief Executive Officer of APS.

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

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

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

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

Mr. Butrus has been a director of the Company since September 1992. Mr.
Butrus is also an Executive Vice President and a director of MAIC Holdings,
Inc. ("MAIC") and its wholly-owned subsidiary, Mutual Assurance, Inc. ("Mutual
Assurance"), and has served in such positions since 1991. Mutual Assurance is
a property and casualty insurance company.

30
<PAGE>

Dr. Chandler has been a director of the Company since October 1989. Dr.
Chandler is a founder of APS, has been a director of APS since July 1983 and
has served as Vice Chairman of the Board of APS since February 1985. Dr.
Chandler was a physician in private practice in San Antonio, Texas from 1956
until 1985.

Dr. Foree has been a director of the Company since October 1993. Dr. Foree
is a board certified urologist and has been practicing medicine since 1965.

Mr. Katz has been a director of the Company since 1986. From 1952 until his
retirement in January 1987, Mr. Katz was a partner with Katz, Sapper & Miller,
Certified Public Accountants. Mr. Katz is currently a director of M-wave,
Inc., a manufacturer of Teflon-based microwave circuitry.

Mr. Searles has been a director of the Company since October 1989. He is an
independent business consultant and from 1981 to 1989 was associated with
Bear, Stearns & Co., Inc., an investment banking firm, most recently as an
Associate Director/Limited Partner. He currently serves as a director of APS.

Dr. Spalding has been a director of the Company since October 1993. Dr.
Spalding is a board certified urologist and has been practicing medicine since
1973. Dr. Spalding was the Chairman of Tennessee Valley Lithotripters, which
was acquired by the Company in 1993.

COMPENSATION TO DIRECTORS

The Company pays Dr. Chandler, Dr. Foree, Mr. Katz, Mr. Searles and Dr.
Spalding a monthly fee of $1,250 for serving as directors. The Company's
directors are also eligible to receive stock options under the Company's
Option Plan. The Company's directors receive reimbursement of all ordinary and
necessary expenses incurred in attending any meeting of the Board of Directors
or any committee of the Board of Directors.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors of the Company has established an Audit Committee, a
Compensation Committee, a Stock Option Committee and a Nominating Committee.
The Audit Committee's functions include recommending to the Board of Directors
the engagement of the Company's independent public accountants, reviewing with
such accountants the plans for and the results and scope of their auditing
engagement and certain other matters relating to their services to the
Company, including matters relating to the independence of such accountants.
The Compensation Committee makes recommendations to the Board of Directors
with respect to the compensation of executive officers. The Stock Option
Committee administers and authorizes the issuance of options under the Option
Plan. The Nominating Committee has primary responsibility for nominating
persons for election to the Board of Directors. Mr. Katz and Mr. Searles serve
on the Audit Committee, Dr. Chandler and Mr. Searles serve on the Compensation
Committee, Dr. Chandler and Dr. Foree serve on the Stock Option Committee, and
Mr. Katz, Mr. Butrus and Mr. Searles serve on the Nominating Committee.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

Set forth below is information concerning aggregate compensation paid during
each of the Company's last three fiscal years to the Company's Chief Executive
Officer and each of the Company's other most highly compensated executive
officers who received in excess of $100,000 in salary and bonuses during any
of the last three fiscal years (collectively, the "Named Executives").

31
<PAGE>

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------- -------------
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS ($)(1) OPTIONS(#)(2) ($)(3)
<S> <C> <C> <C> <C> <C>
Kenneth S. Shifrin...... 1995 112,500 68,425 -- 696
Chairman of the Board 1994 112,500 28,350 -- 696
1993 112,500 65,000 -- 408
Jackie C. Majors(4)..... 1995 150,000 68,425 -- 2,808
President and Chief 1994 150,000 47,250 -- 2,808
Executive Officer 1993 150,000 100,000 -- 1,800
Michael Madler.......... 1995 150,000 68,425 -- 37,081
Vice President-- 1994 150,000 20,200 -- 132
Operations
1993 71,539 -- 100,000 44
Cheryl Williams......... 1995 80,736 68,425 -- 228
Chief Financial Officer 1994 75,385 20,200 -- 206
and Vice President-- 1993 70,000 40,000 -- 184
Finance
</TABLE>
- ---------------------
(1) Reflects bonuses paid during the year.
(2) Options to acquire Common Stock.

(3) Consists of life insurance premiums paid during the fiscal year. Also
reflects moving expenses reimbursed to Mr. Madler in the amount of
$36,905.

(4) Mr. Majors, who had served as President and Chief Executive Officer of
the Company since 1989, retired in January 1996. Dr. Joseph Jenkins was
elected to the Board of Directors and appointed President and Chief
Executive Officer of the Company in April 1996. Under his employment
agreement with the Company, Dr. Jenkins will receive an annual salary of
not less than $325,000 and will also be entitled to receive a performance
bonus and stock options at the discretion of the Company's Board of
Directors.

OPTIONS GRANTED DURING LAST FISCAL YEAR

During 1995, the Company did not grant any options to any of the Named
Executives.

32
<PAGE>

OPTION EXERCISES DURING 1995 AND OPTION VALUES AT DECEMBER 31, 1995

The following table provides information related to options exercised by the
Named Executives during 1995 and the number and value of options held at
December 31, 1995. The Company does not have any outstanding stock appreciation
rights.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING
UNEXERCISED OPTIONS/SARS VALUE OF UNEXERCISED IN-THE-MONEY
SHARES AT FISCAL YEAR-END OPTIONS/SARS AT FISCAL YEAR-END($)
ACQUIRED ON VALUE ----------------------------------- ----------------------------------
NAME EXERCISE(#) REALIZED ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE($) UNEXERCISABLE($)(2)
<S> <C> <C> <C> <C> <C> <C>
Kenneth S. Shifrin...... 50,000 256,250 200,000 -- 1,750,000(2) --
Jackie C. Majors(3)..... -- -- 150,000 -- 1,312,500(2) --
Michael Madler.......... -- -- 40,000 60,000 215,000(2) 322,500
Cheryl Williams......... 25,000 96,875 42,000 5,000 361,250(2) 42,188
</TABLE>
- ---------------------
(1) Calculated by subtracting the per share exercise price of the option from
the closing price for the Company's Common Stock on the date of exercise
and multiplying the difference by the number of shares of Common Stock
purchased upon the exercise of the option.
(2) Calculated by subtracting the per share exercise price of the option from
the closing price for the Company's Common Stock on December 31, 1995
($9.00) and multiplying the difference by the number of shares of Common
Stock underlying the option.
(3) Mr. Majors, who had served as President and Chief Executive Officer of the
Company since 1989, retired in January 1996. Dr. Joseph Jenkins was
elected to the Board of Directors and appointed President and Chief
Executive Officer of the Company in April 1996.

OTHER COMPENSATION AND RELATED ARRANGEMENTS

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with Joseph Jenkins, M.D.,
President and Chief Executive Officer of the Company, and Stan D. Johnson, a
Vice President of the Company. Dr. Jenkins is currently paid $325,000 per year
and Mr. Johnson is currently paid $165,000 per year under such agreements. Each
of these agreements provides for the payment of basic salary amounts,
performance bonuses and other customary benefits. Dr. Jenkins' employment
agreement provides for his employment until April 30, 1998, and Mr. Johnson's
employment agreement provides for his employment through September 30, 1998.
Each of the agreements entitles such individual to receive severance payments
if the Company terminates such individual's employment without cause. In any
such event, Dr. Jenkins would be entitled to receive compensation for the
remainder of the term of his employment agreement at the highest annual rate of
cash salary that he received from the Company prior to such termination, and
Mr. Johnson would be entitled to receive an amount equal to the lesser of
$165,000 or the amount of salary otherwise payable to Mr. Johnson through
September 30, 1998. Both agreements provide that the executive may terminate
his employment agreement with the Company with or without cause by providing
sixty days prior written notice to the Board of Directors.

NONCOMPETITION AGREEMENTS

The Company has entered into noncompetition agreements with Dr. Jenkins, Mr.
Johnson, Dr. Foree, Dr. Spalding and Mr. Butrus. While the terms of such
agreements vary, they generally provide that each such person, during the
period specified in his agreement, will not own, manage or control any business
that competes with the Company and will not advise a customer or supplier of
the Company to cancel or curtail its dealings with, or influence any employee
of the Company to terminate his or her employment with, the Company.

33
<PAGE>

INDEMNITY AGREEMENTS

The Company has entered into indemnity agreements with a number of persons
who either are or have been officers, directors or key employees of the
Company, including Mr. Shifrin, who is Chairman of the Board and a director of
the Company; Mr. Butrus, Dr. Chandler, Mr. Katz and Mr. Searles, who are
directors of the Company; and Ms. Williams and Mr. Madler, who are officers of
the Company. The agreements generally provide that, to the extent permitted by
law, the Company must indemnify each such person for judgments, expenses,
fines, penalties and amounts paid in settlement of claims that result from the
fact that such person was an officer, director or employee of the Company. In
addition, the Company's and certain of its subsidiaries' certificates of
incorporation provides for certain limitations on director liability. See
"Description of Capital Stock--Indemnification and Limitations on Directors'
Liability."

OPTION PLAN

The Company's Option Plan provides for the issuance of incentive and non-
qualified stock options to purchase up to 2,000,000 shares of Common Stock.
Non-qualified stock options may be granted to employees (including officers
and directors) of the Company or its affiliates or to persons performing
services for the Company or its affiliates. Incentive stock options may only
be granted to employees of the Company. The Company has granted options to
purchase 1,626,500 shares of Common Stock under the Option Plan, of which
options covering 698,333 shares of Common Stock have been exercised, and
options covering 395,000 shares of Common Stock were vested (but had not been
exercised) as of May 31, 1996.

34
<PAGE>

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of May 31, 1996, and as adjusted to reflect
the sale of the Common Stock offered hereby, by (i) each person known by the
Company to own beneficially more than 5% of the Company's Common Stock, (ii)
each of the Company's directors, (iii) each current director and executive
officer of the Company, (iv) all current directors and executive officers of
the Company as a group and (v) the Selling Stockholders. Unless otherwise
indicated, the Company believes that each person or entity named below has
sole voting and investment power with respect to all shares shown as
beneficially owned by such person or entity, subject to community property
laws where applicable and the information set forth in the footnotes to the
table below.

<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING AFTER THE OFFERING
----------------------- -----------------------
NUMBER OF
NUMBER SHARES BEING NUMBER
NAME OF SHARES PERCENT OFFERED OF SHARES PERCENT
<S> <C> <C> <C> <C> <C>
American Physicians 3,064,503 17.2 2,500,000 564,503 2.3
Service Group, Inc.....
1301 Capital of Texas
Highway
Austin, Texas 78746
A. Derrill Crowe, 897,164 5.0 -- 897,164 3.7
M.D.(1)................
100 Brookwood Place
Birmingham, Alabama
35209
Alabama Lithotripsy 724,597 3.9 724,597 -- --
Joint Venture..........
FSC Corporation......... 352,000 1.9 352,000 -- --
Atlantic Equity 168,000 0.9 168,000 -- --
Corporation............
Kidney Stone Center of 305,467 1.7 305,467 -- --
South Florida, Ltd.....
Sutter Health/California 226,771 1.3 226,771 -- --
Healthcare System......
Health Advantage 303,021 1.7 303,021 -- --
Ventures...............
Robert L. Dale, M.D..... 33,437 0.2 33,437 -- --
Robert L. Dale, M.D., 28,824 0.2 28,824 -- --
Inc. ..................
J. Kersten Kraft, M.D... 30,264 0.2 30,264 -- --
J. Kersten Kraft, M.D., 27,806 0.2 27,806 -- --
Inc....................
Mobile Kidney Stone 65,053 0.4 65,053 -- --
Center, Inc. ..........
Paul R. Butrus(2)....... 248,500 1.4 142,000 106,500 0.4
Jack R. Chandler, 25,100 0.1 -- 25,100 0.1
M.D.(2)(3).............
William E. Foree, M.D... 215,385 1.2 -- 215,385 0.9
Joseph Jenkins, M.D..... 57,273 0.3 -- 57,273 0.2
Irwin Katz.............. 5,100 -- -- 5,100 --
Michael Madler(2)....... 28,500 0.2 -- 28,500 0.1
William A. Searles(3)... 800 -- -- 800 --
Kenneth S. 209,900 1.2 -- 209,900 0.9
Shifrin(2)(3)..........
Michael J. Spalding, 71,165 0.4 -- 71,165 0.3
M.D....................
Cheryl Williams(2)...... 59,569 0.3 -- 59,569 0.2
All directors and
executive officers as a
group (11 persons)..... 921,292 5.1 142,000 779,292 3.2
</TABLE>
- ---------------------
(1) Includes 168,000 shares of Common Stock subject to issuance under certain
options issued to Dr. Crowe with an exercise price of $1.25 per share.
(2) Includes the following number of shares subject to options that are
presently exercisable or exercisable within 60 days after May 31, 1996:
Mr. Butrus, 42,000; Dr. Chandler, 25,000; Mr. Madler, 20,000; Mr.
Shifrin, 100,000; and Ms. Williams, 42,000.
(3) Dr. Chandler, Mr. Searles and Mr. Shifrin are each directors of APS and,
together with the other officers and directors of APS, may share in the
voting and investment power with respect to the shares of Common Stock of
the Company owned by APS. Each of such persons disclaims the beneficial
ownership of any such shares.

35
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The following summary is a description of certain provisions of the
Company's Certificate of Incorporation, as amended (the "Certificate of
Incorporation"). Such summary does not purport to be complete and is subject
to, and is qualified in its entirety by, all of the provisions of the
Certificate of Incorporation.

The Company's authorized capital stock consists of 40,000,000 shares of
Common Stock, $0.01 par value per share, and 1,000,000 shares of Preferred
Stock, $0.01 par value per share ("Preferred Stock").

COMMON STOCK

As of May 31, 1996, there were 17,784,003 shares of Common Stock issued and
outstanding. Holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders. There are
no cumulative voting rights applicable to the Common Stock. Subject to the
preferences applicable to shares of Preferred Stock outstanding at any time,
holders of shares of Common Stock are entitled to dividends if, when and as
declared by the Board of Directors from funds legally available therefor and
are entitled, in the event of liquidation, to share ratably in all assets
remaining after payment of liabilities and Preferred Stock preferences, if
any. The authorized but unissued shares of Common Stock are available for
issuance without further action by the Company's stockholders, unless such
action is required by applicable law or the rules of any stock exchange or
trading system on which the Common Stock may be listed or quoted. Shares of
Common Stock are not redeemable and there are no sinking fund provisions.

PREFERRED STOCK

The Board of Directors is authorized, without further action by the
Company's stockholders, to issue Preferred Stock from time to time in one or
more classes or series and to fix, as to any such class or series, the voting
rights, if any, applicable to such series and such other designations,
preferences and special rights as the Board of Directors may determine,
including dividend, conversion, redemption and liquidation rights and
preferences. There are no shares of Preferred Stock outstanding. The issuance
of shares of Preferred Stock under certain circumstances could have the effect
of delaying or preventing a change in control of the Company or other
corporate actions.

INDEMNIFICATION AND LIMITATIONS ON DIRECTORS' LIABILITY

The Certificate of Incorporation provides that the Company shall indemnify
any person who was or is a party or is threatened to be made a party to a
proceeding by reason of the fact that he or she is or was a director or
officer of the Company or, while a director or officer of the Company, is or
was serving at the request of the Company in some capacity with another
business enterprise, to the fullest extent permitted by law.

The Certificate of Incorporation also provides that no director of the
Company shall be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) in respect
of certain unlawful dividend payments or stock redemptions or repurchases or
(iv) for any transaction from which the director derived an improper personal
benefit. The effect of these provisions is to eliminate the rights of the
Company and its stockholders (through stockholders' derivative suits brought
on behalf of the Company) to recover monetary damages against a director for
breach of fiduciary duty as a director (including breaches resulting from
grossly negligent behavior), except in the situations described above. See
"Management--Other Compensation and Related Arrangements."

TRANSFER AGENT

The Company's registrar and transfer agent for the Common Stock is American
Stock Transfer & Trust Company.

36
<PAGE>

UNDERWRITING

Subject to the terms and conditions contained in the Underwriting Agreement
(the "Underwriting Agreement"), the United States underwriters named below
(the "U.S. Underwriters"), for whom Donaldson, Lufkin & Jenrette Securities
Corporation and Prudential Securities Incorporated are acting as
representatives (the "U.S. Representatives"), and the international managers
named below (the "International Managers" and, together with the U.S.
Underwriters, the "Underwriters"), for whom Donaldson, Lufkin & Jenrette
Securities Corporation and Prudential-Bache Securities (U.K.) Inc. are acting
as representatives (the "International Representatives" and, together with the
U.S. Representatives, the "Representatives"), have severally agreed to
purchase from the Company and the Selling Stockholders an aggregate of
9,907,240 shares of Common Stock. The number of shares of Common Stock that
each Underwriter has agreed to purchase is set forth opposite its name below:

<TABLE>
<CAPTION>
U. S. UNDERWRITERS NUMBER OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Prudential Securities Incorporated..........................
---------
U.S. Offering Subtotal.................................. 7,925,792
<CAPTION>
INTERNATIONAL MANAGERS NUMBER OF SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Prudential-Bache Securities (U.K.) Inc. ....................
---------
International Offering Subtotal......................... 1,981,448
---------
Total............................................... 9,907,240
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to accept delivery of the shares of Common Stock offered hereby
are subject to approval of certain legal matters by counsel and to certain
other conditions. If any shares of Common Stock are purchased by the
Underwriters pursuant to the Underwriting Agreement, all such shares (other
than shares covered by the over-allotment options described below) must be
purchased. The offering price and underwriting discounts and commissions per
share for the U.S. Offering and the International Offering will be identical.

37
<PAGE>

The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer the shares of Common Stock in part
directly to the public initially at the Price to the Public set forth on the
cover page of this Prospectus and in part to certain dealers at such price
less a concession not in excess of $ per share. The Underwriters may allow,
and such dealers may re-allow, a concession not in excess of $ per share on
sales to other dealers.

The Company has granted to the U.S. Underwriters an option, exercisable for
30 days from the date of this Prospectus, to purchase up to an additional
1,486,086 shares of Common Stock at the initial Price to the Public less
underwriting discounts and commissions. The U.S. Underwriters may exercise
such option only for the purpose of covering over-allotments, if any, incurred
in connection with the sale of shares of Common Stock offered hereby. To the
extent that the U.S. Underwriters exercise such option, each U.S. Underwriter
will become obligated, subject to certain conditions, to purchase the same
proportion of such additional shares as the number of other shares to be
purchased by that U.S. Underwriter bears to the total number of shares set
forth on the cover page of this Prospectus.

The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933 ("Securities Act"), or to contribute to payments that
the Underwriters may be required to make in respect thereof.

In connection with this offering, certain Underwriters (and selling group
members) may engage in passive market making transactions in the Common Stock
on The Nasdaq National Market in accordance with Rule 10b-6A under the
Securities Exchange Act of 1934 (the "Exchange Act"). Rule 10b-6A permits,
upon the satisfaction of certain conditions, underwriters and selling group
members participating in a distribution that are also Nasdaq market makers in
the security being distributed to engage in limited market making transactions
during the period when Rule 10b-6 under the Exchange Act would otherwise
prohibit such activity. Rule 10b-6A generally prohibits underwriters and
selling group members engaged in passive market making from entering a bid or
effecting a purchase at a price that exceeds the highest bid for those
securities displayed on Nasdaq by a market marker that is not participating in
the distribution. Under Rule 10b-6A, each underwriter or selling group member
engaged in passive market making is subject to a daily net purchase limitation
equal to 30% of such entity's average daily trading volume during the two full
consecutive calendar months immediately preceding the date of the filing of
the registration statement under the Securities Act pertaining to the security
to be distributed.

The Company's officers and directors and APS have agreed that they will not,
with certain limited exceptions, directly or indirectly offer to sell, sell or
otherwise dispose of any shares of Common Stock of the Company owned by them
without the prior written consent of the Representatives, for a period of 90
days after the date of this Prospectus. In addition, the Company has agreed
that for a period of 90 days after the date of this Prospectus it will not,
without the prior written consent of the Representatives, directly or
indirectly offer to sell, issue, distribute or otherwise dispose of any equity
securities or any options, rights or warrants with respect to any equity
securities, except for (i) shares of Common Stock issued pursuant to the
exercise of outstanding options and warrants disclosed in this Prospectus,
(ii) options granted after the date of this Prospectus under the Company's
Option Plan, and (iii) shares of Common Stock issued in connection with
acquisitions of the assets or securities of other businesses.

Pursuant to an Agreement Between U.S. Underwriters and International
Managers, each U.S. Underwriter has represented and agreed that, with respect
to the shares included in the U.S. Offering and with certain exceptions, (i)
it is not purchasing any Common Stock for the account of anyone other than a
United States or Canadian Person (as defined below) and (ii) it has not
offered or sold, and will not offer or sell, directly or indirectly, any
Common Stock or distribute this Prospectus outside of the United States or
Canada or to anyone other than a United States or Canadian Person. Pursuant to
the Agreement Between U.S. Underwriters and

38
<PAGE>

International Managers, each International Manager has represented and agreed
that, with respect to the shares included in the International Offering and
with certain exceptions, (i) it is not purchasing any Common Stock for the
account of any United States or Canadian Person and (ii) it has not offered or
sold, and will not offer or sell, directly or indirectly, any Common Stock or
distribute this Prospectus within the United States or Canada or to any United
States or Canadian Person. The foregoing limitations do not apply to
stabilization transactions and to certain other transactions among the
International Managers and the U.S. Underwriters. As used herein, "United
States or Canadian Person" means any individual who is a resident in the
United States or Canada or any corporation, pension, profit-sharing or other
trust or other entity organized under or governed by the laws of the United
States or Canada or of any political subdivision thereof (other than a branch
located outside the United States or Canada of any United States or Canadian
Person) and includes any United States or Canadian branch of a person other
than a United States or Canadian Person, and "United States" means the United
States of America, its territories, its possessions and all areas subject to
its jurisdiction.

Pursuant to the Agreement Between U.S. Underwriters and International
Managers, sales may be made between the U.S. Underwriters and the
International Managers of any number of shares of Common Stock to be purchased
pursuant to the Underwriting Agreement as may be mutually agreed. The per
share price and currency of settlement of any shares so sold shall be the
public offering price set forth on the cover page of this Prospectus, in
United States dollars, less an amount not greater than the per share amount of
the concession to dealers set forth above.

Pursuant to the Agreement Between U.S. Underwriters and International
Managers, each U.S. Underwriter has represented that it has not offered or
sold, and has agreed not to offer or sell, any Common Stock, directly or
indirectly, in Canada in contravention of the securities laws of Canada or any
province or territory thereof and has represented that any offer of Common
Stock in Canada will be made only pursuant to an exemption from the
requirement to file a prospectus in the province or territory of Canada in
which such offer is made. Each U.S. Underwriter has further agreed to send to
any dealer who purchases from it any Common Stock a notice stating in
substance that, by purchasing such Common Stock, such dealer represents and
agrees that it has not offered or sold, and will not offer or sell, directly
or indirectly, any of such Common Stock in Canada or to or for the benefit of
any resident of Canada in contravention of the securities laws of Canada or
any province or territory thereof and that any offer of Common Stock in Canada
will be made only pursuant to an exemption from the requirement to file a
prospectus in the province or territory of Canada in which such offer is made,
and that such dealer will deliver to any other dealer to whom it sells any of
such Common Stock a notice to the foregoing effect.

Pursuant to the Agreement Between U.S. Underwriters and International
Managers, each International Manager has represented that (i) it has not
offered or sold and during the period of six months from the date of this
Prospectus will not offer or sell any shares of Common Stock to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances
which do not constitute an offer to the public in the United Kingdom within
the meaning of the Public Offers of Securities Regulations 1995 (the
"Regulations"); (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 of the United Kingdom and the
Regulations with respect to anything done by it in relation to the Common
Stock in, from or otherwise involving the United Kingdom; and (iii) it has
only issued or passed on and will only issue or pass on in the United Kingdom
any document received by it in connection with the issue of the Common Stock
to any person who is of a kind described in Article 11(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995 of the
United Kingdom or is a person to whom such document may otherwise lawfully be
issued or passed on.

Donaldson, Lufkin & Jenrette Securities Corporation advised Lithotripters,
Inc. in connection with the Litho Acquisition, for which it received a
customary fee.

39
<PAGE>

CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS

The following is a general discussion of certain United States federal tax
consequences of the ownership and disposition of Common Stock by a holder
that, for United States federal income tax purposes, is not a "United States
person" (a "Non-United States Holder"). For purposes of this discussion, a
"United States person" means a citizen or resident alien individual of the
United States, a corporation, partnership or other entity created or organized
in the United States or under the laws of the United States or of any state,
or an estate or trust the income of which may be included in gross income for
United States federal income tax purposes regardless of its source. Resident
alien individuals will be subject to United States federal income tax with
respect to the Common Stock as if they were United States citizens.

The Company has not obtained an opinion of counsel with respect to the tax
consequences discussed below, and nothing contained herein should be construed
as constituting such an opinion. Moreover, this discussion does not consider
specific facts or circumstances that may apply to a particular Non-United
States Holder. Accordingly, prospective investors are urged to consult their
own tax advisors regarding the United States federal tax consequences of
owning and disposing of Common Stock (including such an investor's status as a
United States person or Non-United States Holder), as well as any tax
consequences that may arise under the laws of any state, municipality or other
taxing jurisdiction, including any foreign tax jurisdiction.

DIVIDENDS

Dividends paid by the Company to a Non-United States Holder will generally
be subject to withholding of United States federal income tax at the rate of
30% unless the dividend is effectively connected with the conduct of a trade
or business within the United States by the Non-United States Holder, in which
case the dividend will be subject to the same United States federal income tax
on net income that applies to United States persons (and, with respect to
corporate holders and under certain circumstances, the branch profits tax).
Non-United States Holders should consult any applicable United States income
tax treaties, which may provide for reduced withholding or other rules
different from those described above. A Non-United States Holder may be
required to satisfy certain certification requirements in order to claim
treaty benefits or to otherwise claim a reduction of or exemption from
withholding under the foregoing rules, including in the case of dividends
effectively connected with a U.S. trade or business conducted by a Non-United
States Holder.

GAIN ON DISPOSITION

Except under special rules for individuals described below, a Non-United
States Holder generally will not be subject to United States federal income
tax on gain resulting from a sale or other disposition of Common Stock unless
the gain is (i) effectively connected with the conduct of a United States
trade or business by the Non-United States Holder or (ii) treated as
effectively connected with such a trade or business because the Company is or
has been a "United States real property holding corporation" and certain other
conditions are satisfied as discussed below. Any gain from disposition of
Common Stock that is (or is treated as) effectively connected with a United
States trade or business will be subject to the same United States federal
income tax that applies to United States persons (and, in the case of
corporate Non-United States Holders, may be subject to the branch profits
tax), except as otherwise provided by an applicable United States income tax
treaty.

A corporation is generally a "United States real property holding
corporation" for United States federal income tax purposes if the fair market
value of its United States real property interests equals or exceeds 50% of
the sum of the fair market value of its worldwide real property interests plus
its other assets used or held for use in a trade or business both within and
outside of the United States. The Company does not believe that it is a United
States real property holding corporation; however, there can be no assurance
that the Company will not become, or be determined to be, such a corporation.
Even if the Company becomes a United States real property holding corporation,
such status will not cause gain from the disposition of Common Stock to be
treated as effectively connected with a United States trade or business so
long as (i) the Common Stock is regularly traded

40
<PAGE>

on an established securities market (as defined in Treasury Regulations) and
(ii) the Non-United States Holder has not held, directly or indirectly, more
than 5% of the Common Stock at any time during the five-year period ending on
the date of disposition.

Special rules apply to individual Non-United States Holders. An individual
Non-United States Holder who recognizes gain from the disposition of Common
Stock held as a capital asset and is present in the United States for a period
or periods aggregating 183 days or more during the taxable year of disposition
generally will be taxed at a rate of 30% on any such gain (less certain
capital losses, if any, from United States sources), if the Non-United States
Holder either (i) has a "tax home" in the United States (as defined in
Treasury Regulations) or (ii) maintains an office or other fixed place of
business in the United States to which such gain is attributable. In addition,
certain individual Non-United States Holders who once were United States
citizens may be subject to special rules applicable to United States
expatriates.

In 1990, 1992 and 1995, legislation was introduced that, if enacted, would
under certain circumstances have imposed federal income tax on gain realized
from dispositions of Common Stock by certain Non-United States Holders who
owned, at or prior to, the time of disposition 10% or more of the Common
Stock. There can be no assurance that similar legislation will not be proposed
and, if proposed, enacted in the future.

FEDERAL ESTATE TAXES

Common Stock owned or treated as owned by an individual who is not a citizen
or resident (as specially defined for United States federal estate tax
purposes) of the United States at the date of death will be included in such
individual's estate for United States federal estate tax purposes and thus
will be subject to United States federal estate tax, unless an applicable
estate tax treaty provides otherwise.

INFORMATION REPORTING AND BACKUP WITHHOLDING

The Company must report annually to the Internal Revenue Service (the "IRS")
and to each Non-United States Holder the amount of dividends paid to, and the
tax withheld with respect to, such holder, regardless of whether any tax was
actually withheld because, for example, the withholding requirement was
eliminated under an applicable United States income tax treaty. That
information may also be made available to the tax authorities of the country
in which the Non-United States Holder resides.

United States federal withholding (which generally is withholding imposed at
the rate of 31% on certain payments to persons not otherwise exempt who fail
to furnish certain identifying information to the IRS) will generally not
apply to dividends paid to a Non-United States Holder that are subject to
withholding at the 30% rate (or would be so subject but for a reduced rate
under an applicable income tax treaty). In addition, the payor of dividends
may rely on the payee's foreign address in determining that the payee is
exempt from backup withholding, unless the payor has knowledge that the payee
is in fact a United States person.

These backup withholding and information reporting requirements also apply
to the gross proceeds paid to a Non-United States Holder upon the disposition
of Common Stock by or through a United States office of a United States or
foreign broker, unless the holder certifies to the broker under penalties of
perjury as to its name and address and the holder either is a Non-United
States Holder or otherwise establishes an exemption from the requirements.
Information reporting requirements (but not backup withholding) will apply to
a payment of the proceeds of a disposition of Common Stock by or through a
foreign office of (i) a United States broker, (ii) a foreign broker 50% or
more of whose gross income for certain periods is effectively connected with
the conduct of a trade or business in the United States, or (iii) a foreign
broker that is a "controlled foreign corporation" for United States federal
income tax purposes, unless the broker has documentary evidence in its records
that the holder is a Non-United States Holder and certain other conditions are
met, or the holder otherwise establishes an exemption from the requirements.
Neither backup holding nor information reporting will generally apply to a
payment of the proceeds of a disposition of Common Stock by or through a
foreign office of a foreign broker not described in the preceding sentence.

41
<PAGE>

Any amounts withheld under the backup withholding rules will be refunded or
credited against the Non-United States Holder's United States federal income
tax liability, provided that required information is furnished to the IRS.

The backup withholding and information reporting rules are currently under
review by the Treasury Department, and their application to the Common Stock
is subject to change.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Small, Craig & Werkenthin, a Professional Corporation, Austin,
Texas, and for the Underwriters by Vinson & Elkins L.L.P., Dallas, Texas.

EXPERTS

The consolidated financial statements of Prime Medical Services, Inc. and
its subsidiaries as of December 31, 1995 and 1994, and for each of the years
in the three-year period ended December 31, 1995, have been included herein in
reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein upon the authority of said firm
as experts in accounting and auditing.

The consolidated financial statements of Lithotripters, Inc. and its
subsidiaries as of December 31, 1994 and 1995 and for each of the years in the
three-year period ended December 31, 1995, have been included herein in
reliance upon the report of Arthur Andersen LLP, independent certified public
accountants, appearing elsewhere herein upon the authority of said firm as
experts in accounting and auditing.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices at Seven
World Trade Center, 13th Floor, New York, New York 10048 and CitiCorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such material can be obtained by mail from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Such reports, proxy statements and other information concerning the
Company are also available for inspection at the offices of The Nasdaq
National Market, Reports Section, 1735 K Street, N.W., Washington, D.C. 20006.

The Company has filed with the Commission a Registration Statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which were omitted
in accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement. Any
statements contained herein concerning the provisions of any document filed as
an exhibit to the Registration Statement or otherwise filed with the
Commission are not necessarily complete, and in each instance reference is
made to the copy of such document so filed. Each such statement is qualified
in its entirety by such reference.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents filed by the Company with the Commission are
incorporated herein by reference:

(l) The Company's Annual Report on Form 10-K for its fiscal year ended
December 31, 1995;

42
<PAGE>

(2) The Company's Annual Report on Form 10-K/A, dated June 4, 1996;

(3) The Company's Quarterly Report on Form 10-Q for the three month
period ended March 31, 1996;

(4) The Company's Current Report on Form 8-K, dated May 2, 1996;

(5) The Company's Current Report of Form 8-K/A, dated June 4, 1996;

(6) The description of the Common Stock contained in the Company's Form
8-A, dated September 14, 1993; and

(7) The description of the rights issued to stockholders of the Company
contained in the Company's Form 8-A, dated March 10, 1994.

All documents filed by the Company pursuant to Sections 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date of this Prospectus and prior to the
termination of this offering shall be deemed to be incorporated by reference
into this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.

The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person,
a copy of any or all of the documents which are incorporated by reference
herein, other than exhibits to such documents (unless such exhibits are
specifically incorporated by reference into such documents).

43
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
PRIME MEDICAL SERVICES, INC.
Independent Auditors' Report............................................ F- 2
Consolidated Balance Sheets............................................. F- 3
Consolidated Statements of Operations................................... F- 4
Consolidated Statements of Stockholders' Equity......................... F- 5
Consolidated Statements of Cash Flows................................... F- 6
Notes to Consolidated Financial Statements.............................. F- 9
Consolidated Balance Sheets as of December 31, 1995 and March 31, 1996
(Unaudited)............................................................ F-24
Consolidated Statements of Operations for the Three Months Ended March
31, 1995 and 1996 (Unaudited).......................................... F-25
Consolidated Statements of Cash Flows for the Three Months Ended March
31, 1995 and 1996 (Unaudited).......................................... F-26
Notes to Unaudited Consolidated Financial Statements.................... F-27
LITHOTRIPTERS, INC.
Report of Independent Public Accountants................................ F-28
Consolidated Balance Sheets............................................. F-29
Consolidated Statements of Income....................................... F-30
Consolidated Statements of Changes in Shareholders' Equity.............. F-31
Consolidated Statements of Cash Flows................................... F-32
Notes to Consolidated Financial Statements.............................. F-33
Unaudited Consolidated Balance Sheets as of December 31, 1995 and March
31, 1996............................................................... F-38
Unaudited Consolidated Statements of Income for the Three Months Ended
March 31, 1995
and 1996............................................................... F-39
Unaudited Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1995
and 1996............................................................... F-40
Notes to Unaudited Consolidated Financial Statements.................... F-41
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

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

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

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Prime
Medical Services, Inc. and subsidiaries at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.

As discussed in notes B and M to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1993 to adopt the
provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."

KPMG Peat Marwick LLP

Austin, Texas
March 4, 1996

F-2
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1995
($ IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 2,912 $ 4,692
Notes receivable......................................... 1,795 181
Accounts receivable, less allowance for doubtful accounts
of $232 in 1995 and $938 in 1994........................ 2,980 4,109
Other receivables........................................ 572 183
Deferred income taxes.................................... -- 770
Prepaid expenses and other current assets................ 494 1,003
-------- --------
Total current assets................................... 8,753 10,938
Property and equipment:
Equipment, furniture and fixtures........................ 5,299 7,867
Leasehold improvements................................... 139 113
-------- --------
5,438 7,980
Less accumulated depreciation and amortization........... (2,211) (3,272)
-------- --------
Property and equipment, net.............................. 3,227 4,708
Investment in American Physicians Service Group, Inc. ..... 1,612 173
Equity investments......................................... 5,387 7,623
Goodwill, at cost, net of amortization..................... 33,639 52,679
Other noncurrent assets.................................... 1,243 1,506
-------- --------
$ 53,861 $ 77,627
======== ========
LIABILITIES
Current Liabilities:
Current portion of long-term debt........................ $ 2,494 $ 3,043
Accounts payable......................................... 2,453 4,814
Accrued expenses......................................... 1,581 2,862
-------- --------
Total current liabilities.............................. 6,528 10,719
Long-term debt, net of current portion..................... 12,734 22,323
Deferred income taxes...................................... -- 1,212
-------- --------
Total liabilities...................................... 19,262 34,254
Minority interest.......................................... 178 623
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none outstanding.............................. -- --
Common stock, $.01 par value, 40,000,000 shares authorized;
14,729,663 issued in 1995 and 14,594,663 issued in 1994... 146 147
Capital in excess of par value............................. 58,631 58,700
Accumulated deficit........................................ (23,200) (15,996)
Reciprocal stockholdings................................... (1,055) --
Treasury stock, at cost, 30,000 shares..................... (101) (101)
-------- --------
Total stockholders' equity............................. 34,421 42,750
-------- --------
$ 53,861 $ 77,627
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1993 1994 1995
($ IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Fee Revenue:
Lithotripsy:
Fee revenues.................................. $ 7,309 $ 14,721 $ 19,306
Management fees............................... -- 31 1,617
Equity income................................. -- 91 1,230
------- -------- --------
7,309 14,843 22,153
Imaging and Cardiac............................. 13,259 9,925 1,042
------- -------- --------
20,568 24,768 23,195
------- -------- --------
Costs and expenses:
Cost of services and general and administrative
expenses
Lithotripsy................................... 2,672 4,283 5,979
Imaging and Cardiac........................... 11,996 8,580 1,505
Corporate..................................... 1,198 2,414 2,573
------- -------- --------
15,866 15,277 10,057
Depreciation and amortization................... 1,818 2,975 3,195
------- -------- --------
17,684 18,252 13,252
------- -------- --------
Operating income................................. 2,884 6,516 9,943
Other income (deductions):
Interest and dividends......................... 196 219 152
Interest expense............................... (544) (902) (1,231)
Other, net..................................... 213 (91) 647
------- -------- --------
(135) (774) (432)
------- -------- --------
Income before provision for income taxes and
minority interest............................... 2,749 5,742 9,511
Minority interest in consolidated income......... -- 691 1,421
Provision for income taxes....................... 210 547 886
------- -------- --------
Net income....................................... $ 2,539 $ 4,504 $ 7,204
======= ======== ========
Primary earnings per share:
Net income..................................... $ 0.21 $ 0.31 $ 0.47
======= ======== ========
Weighted average shares outstanding............ 12,371 14,509 15,298
======= ======== ========
Fully diluted earnings per share:
Net income..................................... $ 0.21 $ 0.31 $ 0.46
======= ======== ========
Weighted average shares outstanding............ 12,371 14,650 16,010
======= ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

PRIME MEDICAL SERVICES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
ISSUED
COMMON STOCK CAPITAL IN ACCUMULATED TREASURY STOCK
----------------- EXCESS OF EARNINGS --------------- RECIPROCAL
SHARES AMOUNT PAR VALUE (DEFICIT) SHARES AMOUNT STOCKHOLDINGS TOTAL
---------- ------ ---------- ----------- ------- ------- ------------- -------
($ IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1993................... 9,922,458 $ 99 $43,779 $(30,243) -- $ -- $ (642) $12,993
Net income for the
year.................. -- -- -- 2,539 -- -- -- 2,539
Exercise of stock
options............... 136,000 2 4 -- -- -- -- 6
Issuance of common
stock................. 4,400,205 44 14,807 -- -- -- -- 14,851
Acquisition of
reciprocal
stockholdings......... -- -- -- -- -- -- (413) (413)
---------- ---- ------- -------- ------- ------ ------ -------
Balance, December 31,
1993................... 14,458,663 145 58,590 27,704 -- -- (1,055) 29,976
Net income for the
year.................. -- -- -- 4,504 -- -- -- 4,504
Exercise of stock
options............... 136,000 1 41 -- -- -- -- 42
Purchase of treasury
stock................. -- -- -- -- 30,000 (101) -- (101)
---------- ---- ------- -------- ------- ------ ------ -------
Balance, December 31,
1994................... 14,594,663 146 58,631 (23,200) 30,000 (101) (1,055) 34,421
Net income for the
year.................. -- -- -- 7,204 -- -- -- 7,204
Exercise of stock
options............... 135,000 1 69 -- -- -- -- 70
Reclassification of
reciprocal
stockholdings......... -- -- -- -- -- -- 1,055 1,055
---------- ---- ------- -------- ------- ------ ------ -------
Balance, December 31,
1995................... 14,729,663 $147 $58,700 $(15,996) 30,000 $ (101) $ -- $42,750
========== ==== ======= ======== ======= ====== ====== =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1993 1994 1995
($ IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Fee and other revenue collected................ $ 20,416 $ 25,017 $ 21,640
Cash paid to employees, suppliers of goods and
others........................................ (17,187) (14,268) (9,094)
Interest received.............................. 193 216 157
Interest paid.................................. (550) (785) (1,275)
Taxes paid..................................... (220) (662) (530)
-------- -------- --------
Net cash provided by operating
activities.............................. 2,652 9,518 10,898
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of lithotripter entities.............. -- (14,837) (15,033)
Proceeds from sale of investment in American
Physicians Service Group, Inc. stock.......... -- -- 2,753
Purchases of equipment and leasehold
improvements.................................. (406) (602) (473)
Purchases of marketable securities............. 59 -- --
Sale of net assets of diagnostic centers....... -- 2,350 --
Line of credit fees............................ -- (866) (367)
Proceeds from sales of equipment............... 278 120 21
Investments.................................... 85 282 864
Refund of deposit.............................. -- 176 --
Buyout of lease................................ (325) -- --
Preacquisition costs........................... (427) -- --
Other.......................................... (154) 153 (6)
-------- -------- --------
Net cash (used by) investing activities.. (890) (13,224) (12,241)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable & capital leases,
exclusive of interest......................... (1,530) (8,780) (9,588)
Borrowings on notes payable.................... 1,175 11,525 14,284
Cash acquired from purchased entity............ 1,402 -- --
Distribution to minority interest.............. -- (440) (1,644)
Other.......................................... 6 (59) 71
-------- -------- --------
Net cash provided by financing
activities.............................. 1,053 2,246 3,123
-------- -------- --------
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS
AND CASH, PLEDGED............................... 2,815 (1,460) 1,780
Cash, cash equivalents and cash, pledged,
beginning of period............................. 1,557 4,372 2,912
-------- -------- --------
Cash, cash equivalents and cash, pledged, end of
period.......................................... $ 4,372 $ 2,912 $ 4,692
======== ======== ========
Reconciliation of net income to net cash provided
by operating activities
Net income..................................... $ 2,539 $ 4,504 $ 7,204
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization................ 1,818 2,975 3,195
Provision for uncollectible accounts......... 970 2,078 771
Minority interest in consolidated income..... -- 691 1,421
Equity in earnings of affiliates............. (134) (86) (1,234)
Gain on sale of investment in American
Physicians Service Group, Inc. stock........ -- -- (559)
Other........................................ (97) 80 (33)
Changes in operating assets and liabilities,
net of effect of purchase transactions:
Accounts receivable........................ (819) (1,035) (541)
Notes receivable........................... -- (206) 1,416
Other receivables.......................... 30 294 781
Other current assets....................... 54 62 (447)
Accounts payable........................... (1,534) (177) (1,224)
Accrued expenses........................... (175) 338 148
-------- -------- --------
Total adjustments........................ 113 5,014 3,694
-------- -------- --------
Net cash provided by operating
activities.............................. $ 2,652 $ 9,518 $ 10,898
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-6
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
($ IN THOUSANDS)
<S> <C> <C> <C>
SUPPLEMENTAL INFORMATION OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
In 1995, the Company acquired (1) 100% of the
outstanding stock of a corporation which owns or
manages eight lithotripter operations and (2) 70%
interest in a lithotripter operation. These
transactions are discussed further in Note D. The
acquired assets and liabilities were as follows:
Current assets decreased by........................ $ 9,905
Noncurrent assets increased by..................... 2,491
Goodwill increased by.............................. 19,553
Current liabilities increased by................... 7,249
Noncurrent liabilities increased by................ 4,890
In 1995, the Company retired a note payable to
American Physicians Service Group, Inc. ("APS"). This
note was retired by the Company transferring to APS
shares of stock of APS that the Company owned. The
effect of this transaction was as follows:
Current assets decreased by........................ 3
Investment in APS decreased by..................... 301
Notes payable decreased by......................... 297
Loss............................................... 7
Decrease investment in American Physicians Service
Group, Inc. and Equity for reciprocal stockholding... $ 413
In 1994, the Company acquired (1) 100% of the
outstanding stock of five corporations, which own or
manage lithotripter operations and (2) assets, net of
liabilities assumed of two lithotripter operations.
These transaction are discussed in further detail in
Note D. The acquired assets and liabilities were as
follows:
Current assets decreased by........................ $11,505
Noncurrent assets increased by..................... 923
Goodwill increased by.............................. 20,257
Current liabilities increased by................... 2,904
Noncurrent liabilities increased by................ 6,771
In 1994, the Company sold its interests and terminated
its management of four imaging centers. These
transactions are discussed in further detail in Note
E. The effect of these transactions was as follows:
Current assets increased by........................ 3,302
Noncurrent assets decreased by..................... 3,368
Goodwill decreased by.............................. 2,193
Current liabilities decreased by................... 851
Noncurrent liabilities decreased by................ 1,408
</TABLE>

F-7
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONCLUDED)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
($ IN THOUSANDS)
<S> <C> <C> <C>
SUPPLEMENTAL INFORMATION OF NON-CASH INVESTING AND
FINANCING ACTIVITIES--(Continued)
In October 1993, the Company completed the acquisition
of substantially all of the assets of the three
Tennessee partnerships, which operate three mobile
lithotripters and one fixed site lithotripter. The
transaction was effective July 1, 1993. The effect of
the acquisition has been included in the accompanying
financial statements. The purchase price was
4,400,205 shares of common stock, totalling $14,851.
The acquired assets and liabilities were as follows:
Current assets increased by........................ $ 1,916
Noncurrent assets increased by..................... 1,162
Goodwill increased by.............................. 13,800
Current liabilities increased by................... 1,887
Noncurrent liabilities increased by................ 140
Related to the acquisition of the Tennessee
partnerships, preacquisition costs of $506 which had
been capitalized were reclassed from other noncurrent
assets to goodwill.
In June 1993, the Company retired a note payable to
American Physicians Service Group, Inc. (APS). This
note was retired by the Company transferring to APS
shares of stock of APS that the Company owned. The
effect of this transaction was as follows:
Current assets increased by........................ 7
Investment in APS decreased by..................... 304
Notes payable decreased by......................... 297
The Company sold certain assets and transferred
certain liabilities of a diagnostic imaging center
effective March 31, 1993, for $375 which will be paid
in installments in the future. The assets sold and
liabilities transferred to the purchaser were as
follows:
Current assets increased by........................ 265
Fixed assets decreased by.......................... 155
Goodwill decreased by.............................. 156
Other noncurrent assets increased by............... 150
Noncurrent liabilities increased by................ 105
</TABLE>

See accompanying notes to consolidated financial statements.

F-8
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A. ORGANIZATION AND OPERATION OF THE COMPANY

Prime Medical Services, Inc. ("Prime"), through its direct and indirect
wholly-owned subsidiaries, provides non-medical management services to
lithotripsy and cardiac rehabilitation centers. The Company operates
lithotripters in the following 22 states: Alabama, Arizona, Arkansas,
California, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana,
Maryland, Montana, New Mexico, Ohio, Oklahoma, Pennsylvania, Tennessee, Texas,
Washington, Wisconsin, West Virginia and Wyoming. In December, 1994, the
Company sold its remaining interest in the diagnostic imaging centers that the
Company owned or managed. (See Note E).

B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CONSOLIDATION

The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and entities more than 50% owned. Investments in
entities in which the Company's investment is less than 50% ownership are
accounted for by the equity method if significant influence is not present and
ownership is between 20%-50%, or by the cost method if ownership is less than
20%. All significant intercompany accounts and transactions have been
eliminated.

CASH EQUIVALENTS

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

PROPERTY AND EQUIPMENT

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

INVESTMENTS

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

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

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

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

Through December 31, 1995, the Company had recognized $519,000 in earnings
using the equity method. This amount represents undistributed earnings from
entities, in which the Company owns 50 percent or less.

F-9
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

INTANGIBLE ASSETS

The Company records as goodwill the excess of the purchase price over the
fair value of the net assets of acquired businesses. Goodwill is amortized
over a period not to exceed forty years using the straight-line basis.
Accumulated amortization at December 31, 1995 and 1994 is $2,873,000 and
$993,000, respectively.

REVENUE RECOGNITION

Revenues generated from services are recognized as they are earned and
include, under certain contracts, the reimbursement of contractually defined
operating expenses.

For the years ended December 31, 1995, 1994 and 1993, the amounts included
in revenues that were reimbursement of contractually defined operating
expenses were $82,000, $3,483,000 and $6,313,000, respectively.

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

At December 31, 1995, approximately 22% of accounts receivable relate to
centers located in Alabama, 18% relate to centers located in California, 16%
relate to centers located in Florida and 11% relate to centers located in
Georgia.

RECIPROCAL STOCKHOLDINGS

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

INCOME TAX

Prior to 1993, the Company accounted for income taxes using the provisions
of Accounting Principles Board Opinion No. 11, "Accounting for Income Taxes."
The Company provided for deferred income taxes for transactions that are
recorded in one period for financial statements purposes and in another period
for income tax purposes.

In February 1992, the Financial Accounting Standards Board issued Statement
No. 109, Accounting for Income Taxes. The Company adopted the new method of
accounting for income taxes as of January 1, 1993. Statement 109 requires a
change from the deferred method of accounting for income taxes to the asset
and liability method of accounting. Under the asset and liability method of
Statement 109, deferred tax assets and liabilities are recognized for the
future tax consequences attributed to differences between the carrying amounts
of existing assets and liabilities and their tax bases and operating loss
carryforwards.

INCOME PER SHARE

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

F-10
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

LONG-LIVED ASSETS

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of ("Statement 121") in March
1995 for implementation in fiscal years beginning after December 15, 1995. The
statement addresses the impact on an enterprise's financial statements when
circumstances indicate the carrying amount of an asset may not be recoverable.
The Company does not expect Statement 121 to have a material affect on the
financial statements at adoption.

POST RETIREMENT/POST EMPLOYMENT BENEFITS

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

DERIVATIVE FINANCIAL INSTRUMENTS

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

NOTES RECEIVABLE

Notes receivable are recorded at cost, less allowances for doubtful accounts
when deemed necessary. The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 114, Accounting by Creditors
for Impairment of a Loan ("Statement 114"), in May 1993 and the related
Statement of Financial Accounting Standards No. 118, Accounting by Creditors
for Impairment of a Loan--Income Recognition and Disclosures, in October 1994
for implementation in fiscal years beginning after December 15, 1994.
Management, considering current information and events regarding the borrowers
ability to repay their obligations, considers a note to be impaired when it is
probable that the Company will be unable to collect all amounts due according
to the contractual terms of the note agreement. When a loan is considered to
be impaired, the amount of the impairment is measured based on the present
value of expected future cash flows discounted at the note's effective
interest rate. Impairment losses are included in the allowance for doubtful
accounts through a charge to bad debt expense. Cash receipts on impaired notes
receivable are applied to reduce the principal amount of such notes until the
principal has been recovered and are recognized as interest income,
thereafter. The adoption of Statements 114 and 118 by the Company on January
1, 1995 did not have a material affect on the financial statements.

STOCK-BASED COMPENSATION

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
("Statement 123"), in October 1995 for implementation in fiscal years
beginning after December 15, 1995. The Company has not elected early adoption
of Statement 123. Statement 123 becomes effective beginning in 1996 and will
not have a material effect on the Company's financial position or results of
operations. Upon adoption of Statement 123, the Company will continue 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, and will provide 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.

F-11
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

ESTIMATES USED TO PREPARE FINANCIAL STATEMENTS

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

RECLASSIFICATION

Certain reclassifications have been made to amounts presented in previous
years to be consistent with the 1995 presentation.

C. INVESTMENTS

SOUTHERN CALIFORNIA

Effective June 1, 1995, the Company acquired a 32.5% interest in a limited
liability company that operates a fixed site lithotripter near Los Angeles,
California. The purchase price was cash of $1,569,000. This transaction was
accounted for using the purchase method of accounting.

TEXAS, OHIO & LOUISIANA PARTNERSHIPS

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

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

The following is a condensed unaudited balance sheet for the three
partnerships at December 31:

<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Current assets...................................... $3,412,000 $4,327,000
Non-current assets.................................. 1,461,000 729,000
---------- ----------
Total assets...................................... $4,873,000 $5,056,000
========== ==========
Current liabilities................................. $1,327,000 $3,770,000
Long-term liabilities............................... 874,000 311,000
Partners' capital................................... 2,672,000 975,000
---------- ----------
Total liabilities and equity...................... $4,873,000 $5,056,000
========== ==========
</TABLE>

The following is a condensed unaudited statement of earnings for the three
partnerships for the year ended December 31:

<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Total revenues....................................... $8,283,000 $8,469,000
Total expenses....................................... 4,405,000 3,519,000
---------- ----------
Net income......................................... $3,878,000 $4,950,000
========== ==========
</TABLE>

F-12
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMERICAN PHYSICIANS SERVICE GROUP, INC.

At December 31, 1995 and 1994, the Company owned 50,000 and 772,000 shares
respectively, of common stock representing approximately 1% and 22%, of the
outstanding common stock of American Physicians Service Group, Inc. (APS). APS
owned approximately 21% and 23%, respectively, of the outstanding common stock
of the Company at December 31, 1995 and 1994. The Company's pro rata interest
in its own shares of common stock has been included in stockholders' equity as
reciprocal stockholdings prior to 1995. (See Note B).

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

Condensed financial information for APS is as follows:

CONDENSED BALANCE SHEET AT DECEMBER 31:

<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Current assets................................. $10,135,000 $13,038,000
Non-current assets............................. 9,783,000 10,702,000
----------- -----------
Total assets................................. $19,918,000 $23,740,000
=========== ===========
Current liabilities............................ $ 4,049,000 $ 5,572,000
Long-term liabilities.......................... 878,000 574,000
Shareholders' equity........................... 14,991,000 17,594,000
----------- -----------
Total liabilities and equity................. $19,918,000 $23,740,000
=========== ===========

CONDENSED STATEMENT OF EARNINGS FOR THE YEARS ENDED DECEMBER 31:

<CAPTION>
1994 1995
<S> <C> <C>
Total revenues................................. $17,737,000 $20,490,000
Total expenses................................. 16,454,000 18,515,000
----------- -----------
Operating income............................... 1,283,000 1,975,000
Equity in income of unconsolidated affiliate
(Prime)....................................... 950,000 1,508,000
Minority interest in consolidated earnings..... 15,000 --
Income tax expense............................. 798,000 1,108,000
Loss from discontinued operations.............. (166,000) (351,000)
----------- -----------
Net earnings................................. $ 1,254,000 $ 2,024,000
=========== ===========
</TABLE>

SHASTA DIAGNOSTIC CENTER JOINT VENTURE

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

F-13
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Condensed balance sheet at December 31:

<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Current assets........................................ $ 394,000 $241,000
Non-current assets.................................... 276,000 123,000
---------- --------
Total assets........................................ $ 670,000 $364,000
========== ========
Current liabilities................................... $ 17,000 $ 18,000
Venturers' capital.................................... 653,000 346,000
---------- --------
Total liabilities and equity........................ $ 670,000 $364,000
========== ========

Condensed statement of earnings for the years ended December 31:

<CAPTION>
1994 1995
<S> <C> <C>
Total revenues........................................ $2,246,000 $ 28,000
Gain on sale of center................................ 658,000 --
Total expenses........................................ 2,275,000 21,000
---------- --------
Net income.......................................... $ 629,000 $ 7,000
========== ========
</TABLE>

D. ACQUISITIONS

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

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

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

<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Total revenues..................................... $37,859,000 $31,771,000
Total expenses..................................... 31,665,000 23,851,000
----------- -----------
Net earnings..................................... $ 6,194,000 $ 7,920,000
=========== ===========
</TABLE>

F-14
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Effective August 1, 1994, the Company acquired a mobile lithotripter
operating in Birmingham, Alabama. The purchase price was cash of $2,863,000,
notes payable of $2,620,000, and a warrant to purchase approximately 725,000
shares of the Company's common stock. The exercise price of the warrant
represented the market price of the Company's common stock at the date the
warrant was issued. This transaction was accounted for using the purchase
method of accounting.

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

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

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

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

<TABLE>
<CAPTION>
1993 1994
<S> <C> <C>
Total revenues..................................... $27,904,000 $27,721,000
Total expenses..................................... 23,714,000 22,044,000
----------- -----------
Net earnings..................................... $ 4,190,000 $ 5,677,000
=========== ===========
</TABLE>

Effective July 1, 1993, the Company acquired substantially all of the assets
of each of Tennessee Institute for Stone Disease, Tennessee Valley
Lithotripter and Lithotripter Associates (collectively referred to as the
"Tennessee Partnerships"). In exchange for those assets, the Company issued
4,400,205 shares of common stock valued at $14,851,000 and assumed certain
specified liabilities of the Tennessee Partnerships. The acquisition has been
accounted for as a purchase. The total acquisition cost exceeded the fair
value of the net assets acquired by approximately $14,307,000 and this amount
is being amortized over a forty-year period on a straight-line basis.

F-15
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Unaudited proforma combined statement of earnings for the year ended
December 31, 1993 of the Company and the Tennessee Partnerships assuming the
acquisition of the Tennessee Partnerships was effective January 1, 1993 is as
follows:

<TABLE>
<S> <C>
Total revenues................................................. $23,278,000
Total expenses................................................. 19,690,000
-----------
Net earnings................................................. $ 3,588,000
===========
</TABLE>

E. DISPOSITIONS

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

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

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

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

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

F-16
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

F. FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments ("Statement 107"), requires that the Company
disclose estimated fair values for its financial instruments as of December
31, 1994 and 1995:

<TABLE>
<CAPTION>
1994 1995
---------------- ----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Financial assets:
Cash....................................... $ 2,912 $ 2,912 $ 4,692 $ 4,692
Notes receivable........................... 1,989 1,961 203 200
Accounts receivable........................ 2,980 2,980 4,109 4,109
Other receivables.......................... 572 572 183 183
Investment in American Physicians Service
Group, Inc................................ 1,612 1,834 173 481
Financial liabilities:
Debt....................................... 15,228 15,003 25,366 25,281
Accounts payable........................... 2,453 2,453 4,814 4,814
</TABLE>

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

CASH

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

NOTES RECEIVABLE

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

ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES

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

INVESTMENT IN AMERICAN PHYSICIANS SERVICE GROUP, INC.

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

DEBT

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

ACCOUNTS PAYABLE

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

F-17
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

LIMITATIONS

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

G. ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
<S> <C> <C>
Legal fees......................................... $ 294,000 $ 228,000
Accrued group insurance costs...................... 124,000 114,000
Compensation and payroll related expense........... 465,000 1,114,000
Taxes, other than income taxes..................... 162,000 92,000
Accrued interest................................... 199,000 155,000
Provision for closed centers....................... 75,000 221,000
Income taxes payable............................... 91,000 384,000
Dividends payable.................................. -- 183,000
Other.............................................. 171,000 371,000
---------- ----------
$1,581,000 $2,862,000
========== ==========
</TABLE>

H. INDEBTEDNESS

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

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
INTEREST RATES MATURITIES 1994 1995
<S> <C> <C> <C>
None..................................... 1996-2006 $ 733,000 $ 320,000
6% Note.................................. 1996-1997 3,700,000 1,967,000
10% Note................................. 1996-1999 -- 1,561,000
11.25% -11.6%............................ 1996-1998 491,000 190,000
60 Day Libor +2 1/2%..................... 1996-1998 -- 3,690,000
Prime.................................... 1997 2,304,000 2,304,000
---------- -----------
7,228,000 10,032,000
Less current portion of long-term
debt.................................. 2,494,000 2,759,000
---------- -----------
$4,734,000 $ 7,273,000
========== ===========
</TABLE>

$145,000 of the non-interest bearing notes are unsecured. A non-interest
bearing note in the amount of $175,000 is secured by a mobile lithotripter.
The 6% note, in the principal amount of $1,967,000 at December 31, 1995 and
$3,700,000 at December 31, 1994, is secured by a Security Agreement which
conveys first security

F-18
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
title to the assets the lender sold to the Company as part of the acquisition
by the Company of 60% of certain assets, subject to 60% of certain liabilities
of Metro Atlanta Stonebusters, Inc. The 10% note is secured by a Security
Agreement which grants a security interest in the Company's 70% undivided
interest in the fixed site lithotripter in Florida. The note may be converted
into the Company's common stock. (See Note D). The 11.25% to 11.6% notes are
secured by medical and computer equipment. The 60-Day libor plus 2 1/2% notes
are secured by certain security instruments which grant a security interest in
the assets of Sun. The notes may be converted into the Company's common stock.
(See Note D). The note bearing interest at prime is secured by a mobile
lithotripter.

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

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
INTEREST RATES MATURITIES 1994 1995
<S> <C> <C> <C>
60-day LIBOR plus 2 1/2%................. 1996-1998 $8,000,000 $15,050,000
Prime + 1 1/2%........................... 1996 -- 284,000
---------- -----------
8,000,000 15,334,000
Less current portion of long-term bank
debt.................................. -- 284,000
---------- -----------
$8,000,000 $15,050,000
========== ===========
</TABLE>

In November, 1994, the Company established a $15,000,000 line of credit. In
August, 1995, the Company's line of credit was amended, which raised the
maximum amount from $15 million to $25 million. The outstanding balance up to
$15,000,000 bears interest at the 60-Day LIBOR rate plus 2 1/2% in effect at
the time of draws on the line of credit. The outstanding balance between
$15,000,000 and $25,000,000 bears interest at the 60-day LIBOR rate plus 3%.
The weighted average rate at December 31, 1995 was 8.5%. The line of credit is
secured by accounts receivable, equipment and the 50,000 shares of APS stock
owned by the Company. The line of credit matures in January, 1999. In
conjunction with the amendment of the line of credit, the Company granted the
lenders warrants that permit the lenders to purchase 170,000 shares of the
Company's common stock beginning September 1, 1995 for $4.34 per share, which
represented the market value at the time of the loan commitment. The warrants
expire on the later of a) August 17, 1999, b) the date when the line of credit
ceases following repayment of principal and interest, or c) 5 business days
after the Company provides notice of the cessation of the credit arrangements
under the line of credit. In conjunction with the origination of the line of
credit, the Company granted the lenders warrants that permit the lenders to
purchase 350,000 shares of the Company's common stock beginning September 1,
1995 for $2.89 per share, which represents the market value of the stock at
the time of the loan commitment. The warrants expire on the later of a)
October 31, 1998, b) the date when the line of credit ceases following
repayment of principal and interest, or c) 5 business days after the Company
provides notice of the cessation of the credit arrangements under the line of
credit.

The stated principal repayments for all indebtedness as of December 31, 1995
are payable as follows:

<TABLE>
<S> <C>
1996.......................... $3,043,000
1997.......................... 8,937,000
1998.......................... 7,864,000
1999.......................... 5,487,000
2000.......................... --
Thereafter.................... 35,000
</TABLE>

F-19
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

I. COSTS OF SERVICES AND GENERAL AND ADMINISTRATIVE EXPENSES

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

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DEC. 31, 1993 DEC. 31, 1994 DEC. 31, 1995
<S> <C> <C> <C>
Salaries, wages and benefits..... $ 5,316,000 $ 5,460,000 $ 4,027,000
Other costs of services.......... 7,357,000 6,014,000 3,412,000
Provision for bad debts.......... 244,000 805,000 573,000
General and administrative....... 1,666,000 1,454,000 718,000
Legal and professional........... 879,000 677,000 659,000
Other............................ 404,000 867,000 668,000
----------- ----------- -----------
$15,866,000 $15,277,000 $10,057,000
=========== =========== ===========
</TABLE>

J. COMMITMENTS AND CONTINGENCIES

At December 31, 1995, minimum annual rental commitments under non-cancelable
operating leases for equipment and office space, which may contain renewal and
escalation clauses, are:

<TABLE>
<S> <C>
1996............................ $230,000
1997............................ 157,000
1998............................ 27,000
1999............................ 28,000
2000............................ 14,000
Thereafter...................... --
</TABLE>

Rent expense for equipment and office space for the years ended December 31,
1995 was $239,000, December 31, 1994 was $544,000 and December 31, 1993 was
$681,000.

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,
1995, the Company had 48 employees enrolled in the plan. The plan provides
non-contributory coverage for employees and contributory coverage for
dependents. The Company's contributions totaled $150,000 in 1995, $431,000 in
1994 and $394,000 in 1993.

K. COMMON STOCK OPTIONS

1993 STOCK OPTION PLAN:

On October 12, 1993, the Company adopted the 1993 Stock Option Plan which
authorizes the grant of up to 2,000,000 shares to certain key employees,
directors, and consultants and advisors to the Company. Options granted under
the 1993 Stock Option Plan shall terminate after ten years from the date the
option is granted, unless the option terminates sooner by reason of
termination of employment, disability or death.

F-20
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Information as to options outstanding is as follows:

<TABLE>
<CAPTION>
NUMBER OF
SHARES EXERCISE PRICE EXERCISABLE
<S> <C> <C> <C>
Outstanding, January 1, 1994............... 1,156,000 $ .25-$3.875 843,000
Granted.................................. 65,000 $ 3.00-$3.125
Exercised................................ 136,000 $ .25-$.5625
Canceled................................. 30,000 $ 3.375-$3.875
---------
Outstanding, December 31, 1994............. 1,055,000 $ .25-$3.625 813,000
=========
Granted.................................. 55,000 $3.875--$5.75
Exercised................................ 135,000 $ .25--$3.875
Canceled................................. -- --
---------
Outstanding, December 31, 1995............. 975,000 $ .25--$5.75 816,000
=========
</TABLE>

L. OTHER INCOME (EXPENSE)

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1993 1994 1995
<S> <C> <C> <C>
Gain on sale of investment in American
Physicians Service Group, Inc. stock......... -- -- $559,000
Equity in income of affiliates................ 112,000 9,000 --
Loss on sale of marketable securities......... -- (43,000) --
Other income (expense)........................ 101,000 (57,000) 88,000
-------- -------- --------
Other, net.................................. $213,000 $(91,000) $647,000
======== ======== ========
</TABLE>

M. INCOME TAXES

As discussed in Note B, the Company adopted Statement 109 as of January 1,
1993. There was no cumulative effect of change in accounting for income taxes
since the valuation allowance at the date of implementation was equal to the
net deferred tax asset. As a result of the Company being in a net loss
carryforward position, no Federal income tax expense or benefit was recorded
by the Company in 1993. The Company recognized $110,000 and $114,000 in
Federal income tax expense for 1995 and 1994 respectively, consisting entirely
of alternative minimum tax.

F-21
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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, 1995 and 1994 are presented below.

<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts............... $ 317,000 $ 79,000
AMT credit carryforwards....................... 114,000 374,000
Net operating loss carryforwards............... 5,752,000 4,088,000
Investment tax credit carryforwards............ 1,200,000 1,200,000
Accrued expenses deductible for tax purposes
when paid..................................... 396,000 573,000
Other.......................................... 106,000 162,000
----------- -----------
Total gross deferred tax assets................ 7,885,000 6,476,000
Less valuation allowance....................... (7,583,000) (5,492,000)
----------- -----------
Net deferred tax assets........................ 302,000 984,000
----------- -----------
Deferred tax liabilities:
Property and equipment, principally due to
differences in depreciation................... (183,000) (334,000)
Investments in affiliated company, principally
due to undistributed income................... (93,000) (430,000)
Intangible assets, principally due to
differences in amortization periods for tax
purposes...................................... (26,000) (460,000)
----------- -----------
Total gross deferred tax liabilities........... (302,000) 1,224,000
----------- -----------
Net deferred tax liability..................... -- $ 240,000
=========== ===========
</TABLE>

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

At December 31, 1995, net operating loss carryforwards available to reduce
future taxable income amounted to approximately $12,000,000 and expire through
2008. Investment tax credit carryforwards, which expire through 2000, amounted
to $1,200,000 at December 31, 1995.

Based upon the level of historical taxable income and projections for future
taxable income over the periods which the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences, net of the existing valuation
allowances at December 31, 1995. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.

N. RELATED PARTY TRANSACTIONS

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

F-22
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
O. SUBSEQUENT EVENTS

In March, 1996, the Company was informed by the holder of five notes, whose
balances total $3,239,000 at December 31, 1995, that the noteholders were
electing to convert some or all of the outstanding balances of their notes
into 585,000 shares of the Company's common stock on March 31, 1996. (See
Notes D and H).

F-23
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------ ---------
1995 1996
($ IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................. $ 4,692 $ 3,316
Notes receivable..................................... 181 114
Accounts receivable, less allowance for doubtful
accounts of $214 in 1996
and $232 in 1995.................................... 4,109 3,574
Other receivables.................................... 183 391
Deferred income taxes................................ 770 770
Prepaid expenses and other current assets............ 1,003 798
-------- --------
Total current assets............................... 10,938 8,963
Property and equipment:
Equipment, furniture and fixtures.................... 7,867 8,064
Leasehold improvements............................... 113 113
-------- --------
7,980 8,177
Less accumulated depreciation and amortization....... (3,272) ( 3,868)
-------- --------
Property and equipment, net........................ 4,708 4,309
Investment in American Physicians Service Group, Inc... 173 173
Equity investments..................................... 7,623 7,323
Goodwill, at cost, net of amortization................. 52,679 52,300
Other noncurrent assets................................ 1,506 1,499
-------- --------
$ 77,627 $ 74,567
======== ========
LIABILITIES
Current Liabilities:
Current portion of long-term debt.................... $ 3,043 $ 1,511
Accounts payable..................................... 4,814 1,127
Accrued expenses..................................... 2,862 2,484
-------- --------
Total current liabilities.......................... 10,719 5,122
Long-term debt, net of current portion................. 22,323 17,467
Deferred income taxes.................................. 1,212 1,212
-------- --------
Total liabilities.................................. 34,254 23,801
Minority interest...................................... 623 730
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000 shares au-
thorized; none outstanding............................ -- --
Common stock, $.01 par value, 40,000,000 shares
authorized; 14,729,663 issued
in 1995 and 15,807,269 issued in 1996................. 147 158
Capital in excess of par value......................... 58,700 63,968
Accumulated deficit.................................... (15,996) (14,090)
Treasury stock at cost, 30,000 shares at December 31,
1995.................................................. (101) --
-------- --------
Total stockholders' equity......................... 42,750 50,036
-------- --------
$ 77,627 $ 74,567
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-24
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
($ IN THOUSANDS,
EXCEPT
PER SHARE DATA)
<S> <C> <C>
Fee revenue:
Lithotripsy:
Fee revenues........................................ $ 3,928 $ 6,069
Management fees..................................... 98 554
Equity income....................................... 170 379
--------- ---------
4,196 7,002
Cardiac............................................... 310 222
--------- ---------
4,506 7,224
--------- ---------
Costs and expenses:
Cost of services and general and administrative ex-
pense................................................
Lithotripsy......................................... 1,135 2,263
Cardiac............................................. 292 159
Corporate........................................... 536 599
--------- ---------
1,963 3,021
Depreciation and amortization......................... 671 1,149
--------- ---------
2,634 4,170
--------- ---------
Operating income........................................ 1,872 3,054
Other income (deductions):
Interest and dividends................................ 43 22
Interest expense...................................... (279) (509)
Other, net............................................ 11 80
--------- ---------
(225) (407)
--------- ---------
Income before provision for income taxes and minority
interest............................................... 1,647 2,647
Minority interest in consolidated income................ 214 477
Provision for income taxes.............................. 152 264
--------- ---------
Net income.............................................. $ 1,281 $ 1,906
========= =========
Primary earnings per share:
Net income............................................ $ 0.09 $ 0.12
========= =========
Weighted average shares outstanding................... 14,841 16,360
========= =========
Fully diluted earnings per share:
Net income............................................ $ 0.09 $ 0.12
========= =========
Weighted average shares outstanding................... 14,841 17,368
========= =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-25
<PAGE>

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
($ IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Fee and other revenue collected........................ $ 4,412 $ 7,457
Cash paid to employees, suppliers of goods and others.. (1,272) (3,676)
Interest received...................................... 43 22
Interest paid.......................................... (383) (505)
Income taxes paid...................................... (124) (226)
--------- ---------
Net cash provided by operating activities............ 2,676 3,072
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deferred payments on lithotripter entities acquired.... -- (3,387)
Purchase of equipment and leasehold improvements....... ( 10) (229)
Proceeds from sales of equipment....................... 11 --
Distributions from investments......................... 77 646
Purchase of investments................................ (46) --
Other.................................................. (15) (101)
--------- ---------
Net cash provided by (used in) investing activities.. 17 (3,071)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable, exclusive of interest....... (2,852) (1,138)
Distributions to minority interest..................... (262) (369)
Exercise of stock options.............................. 31 130
--------- ---------
Net cash (used in) financing activities.............. (3,083) (1,377)
--------- ---------
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND
CASH PLEDGED............................................ (390) (1,376)
Cash, cash equivalent and cash pledged, beginning of
period................................................ 2,912 4,692
--------- ---------
Cash, cash equivalents and cash pledged, end of peri-
od.................................................... $ 2,522 $ 3,316
========= =========
Reconciliation of net income to cash provided by operat-
ing activities..........................................
Net income............................................. $ 1,281 $ 1,906
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization........................ 671 1,150
Provision for uncollectible accounts................. 59 35
Disposal of equipment................................ 20 --
Equity in earnings of affiliates..................... (168) (382)
Minority interest in consolidated income............. 214 477
Write down of fixed assets........................... 14 --
Changes in operating assets and liabilities, net of
effect of purchase transactions:
Notes receivable................................... 1,059 69
Accounts receivable................................ 35 499
Other receivables.................................. 352 (208)
Other current assets............................... 129 206
Accounts payable................................... (871) (301)
Accrued expenses................................... ( 119) (379)
--------- ---------
Total adjustments.................................. 1,395 1,166
--------- ---------
Net cash provided by operating activities.......... $ 2,676 $ 3,072
========= =========
</TABLE>

See accompanying notes to consolidated financial statements

F-26
<PAGE>

PRIME MEDICAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 1996
(UNAUDITED)

1. GENERAL

The accompanying unaudited consolidated financial statements have been
prepared in conformity with the accounting principles stated in the audited
financial statements for the year ended December 31, 1995 and reflect all
adjustments which are, in the opinion of management, necessary for a fair
statement of the financial position as of March 31, 1996 and the results of
operations for the periods presented. These statements have not been audited
or reviewed by the Company's independent certified public accountants. The
operating results for the interim periods are not necessarily indicative of
results for the full fiscal year.

The notes to consolidated financial statements appearing in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995 filed with the
Securities Exchange Commission should be read in conjunction with this
Quarterly Report on Form 10-Q. There have been no significant changes in the
information reported in those notes other than from normal business activities
of the Company.

2. NONCASH INVESTING AND FINANCING ACTIVITIES:

In March 1996, the Company was informed by the holder of seven notes, whose
balances totaled $5,250,000 prior to conversion, that the noteholders elected
to convert all of the outstanding balances of their notes into 921,000 shares
of the Company's common stock.

Also in March 1996, the Company was informed by the holders of certain
warrants issued in conjunction with the Sun Medical acquisition in 1995, that
the warrant holders would exercise their warrants. A provision in the warrant
agreement permitted the warrant holder to exercise the warrant without any
cash disbursement by the warrant holder. The number of shares issued to the
warrant holder was reduced by an amount computed based on the number of
warrants times the market price at the time of exercise. The Company issued
53,858 shares of the Company's common stock to the warrant holders.

3. SUBSEQUENT EVENTS:

In April 1996, the Company acquired 100% of the stock of Lithotripters, Inc.
for $88 million, which consisted of $70 million in cash and 1,636,364 shares
of the Company's common stock.

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

F-27
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of Lithotripters, Inc.:

We have audited the accompanying consolidated balance sheets of
Lithotripters, Inc. (a North Carolina corporation) as of December 31, 1993,
1994 and 1995, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years then ended.
These financial statements are the responsibility of Lithotripters'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit 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
Lithotripters, Inc. as of December 31, 1993, 1994 and 1995, and the results of
their operations and their cash flows for each of the three years then ended,
in conformity with generally accepted accounting principles.

Charlotte, North Carolina,
March 1, 1996.

F-28
<PAGE>

LITHOTRIPTERS, INC.

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 1993, 1994 AND 1995

<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............ $ 15,626,188 $ 15,928,728 $ 17,521,037
Accounts receivable, net............. 13,843,253 13,793,827 13,609,930
Prepaid expenses..................... 730,036 691,622 775,090
------------ ------------ ------------
Total current assets............. 30,199,477 30,414,177 31,906,057
Property and equipment, net.......... 26,692,004 23,798,256 21,848,863
Other assets......................... 438,042 280,774 129,624
------------ ------------ ------------
$ 57,329,523 $ 54,493,207 $ 53,884,544
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable................... $ 1,900,038 $ 1,865,185 $ 2,371,939
Accrued expenses................... 454,218 452,290 520,569
Accrued distribution............... 13,663,944 14,557,517 14,661,070
Notes payable, current portion..... 3,949,468 1,775,954 1,851,766
------------ ------------ ------------
Total current liabilities........ 19,967,668 18,650,946 19,405,344
Notes payable........................ 2,854,374 1,366,718 2,359,574
------------ ------------ ------------
Total liabilities................ 22,822,042 20,017,664 21,764,918
Commitments and contingencies (Note
5)
Minority interests................... 24,065,639 22,963,915 21,552,837
------------ ------------ ------------
Shareholders equity:
Common stock par value, 100,000
shares authorized,
40,000 shares issued and
outstanding....................... 39,250 39,250 39,250
Other capital contributions........ 3,727 3,727 3,727
Accumulated earnings............... 46,955,373 60,292,058 72,949,215
Cumulative distributions........... (36,556,508) (48,823,407) (62,425,403)
------------ ------------ ------------
Total shareholders' equity....... 10,441,842 11,511,628 10,566,789
------------ ------------ ------------
$ 57,329,523 $ 54,493,207 $ 53,884,544
============ ============ ============
</TABLE>

The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.

F-29
<PAGE>

LITHOTRIPTERS, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Operating revenue...................... $59,997,288 $61,202,943 $59,214,624
Operating expenses:
Salaries and benefits................ 7,996,280 8,201,083 8,737,366
Mobile unit expense.................. 4,326,181 4,732,301 4,421,877
Legal and professional fees.......... 1,404,028 1,262,864 1,557,680
Travel and entertainment............. 1,295,823 1,431,229 1,487,432
Depreciation and amortization........ 4,263,104 4,374,219 5,030,766
Charges to affiliates................ (2,263,594) (2,478,440) (2,521,468)
Other................................ 1,824,528 2,328,729 1,862,368
----------- ----------- -----------
Total operating expenses........... 18,846,350 19,851,985 20,576,021
----------- ----------- -----------
Income from operations............. 41,150,938 41,350,958 38,638,603
----------- ----------- -----------
Interest expense....................... (754,474) (335,556) (250,010)
Other income........................... 306,303 386,455 478,988
----------- ----------- -----------
Income before minority interest in
consolidated income................... 40,702,767 41,401,857 38,867,581
Minority interest in consolidated
income................................ 27,635,913 28,065,172 26,210,424
----------- ----------- -----------
Net income......................... $13,066,854 $13,336,685 $12,657,157
=========== =========== ===========
</TABLE>

The accompanying notes to consolidated financial statements are an integral
part of these statements.

F-30
<PAGE>

LITHOTRIPTERS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

<TABLE>
<CAPTION>
OTHER TOTAL
COMMON CAPITAL ACCUMULATED CUMULATIVE SHAREHOLDERS'
STOCK CONTRIBUTIONS EARNINGS DISTRIBUTIONS EQUITY
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1992................... $39,250 $3,727 $33,888,519 $(25,190,331) $ 8,741,165
Net income............ 0 0 13,066,854 0 13,066,854
Distributions to
shareholders......... 0 0 0 (11,366,177) (11,366,177)
------- ------ ----------- ------------ ------------
Balance, December 31,
1993................... 39,250 3,727 46,955,373 (36,556,508) 10,441,842
Net income............ 0 0 13,336,685 0 13,336,685
Distributions to
shareholders......... 0 0 0 (12,266,899) (12,266,899)
------- ------ ----------- ------------ ------------
Balances, December 31,
1994................... 39,250 3,727 60,292,058 (48,823,407) 11,511,628
Net income............ 0 0 12,657,157 0 12,657,157
Distributions to
shareholders......... 0 0 0 (13,601,996) (13,601,996)
------- ------ ----------- ------------ ------------
Balance, December 31,
1995................... $39,250 $3,727 $72,949,215 $(62,425,403) $ 10,566,789
======= ====== =========== ============ ============
</TABLE>

The accompanying notes to consolidated financial statements are an integral
part of these statements.

F-31
<PAGE>

LITHOTRIPTERS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995

<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................... $ 13,066,854 $ 13,336,685 $ 12,657,157
Adjustments to reconcile net income
to net cash provided by operating
activities--
Depreciation and amortization..... 4,263,104 4,374,219 5,030,766
Minority interest in consolidated
income........................... 27,635,913 28,065,172 26,210,424
Decrease (increase) in accounts
receivable....................... (620,043) 49,426 183,897
Decrease (increase) in prepaid
expenses......................... (188,470) 38,414 (83,468)
Decrease (increase) in other
assets........................... (54,999) 0 1,446
Increase (decrease) in accounts
payable.......................... (122,961) (34,853) 506,754
Increase (decrease) in accrued
expenses......................... (181,770) (1,928) 68,279
------------ ------------ ------------
Net cash provided by operating
activities...................... 43,797,628 45,827,135 44,575,255
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment,
net............................... (720,536) (1,323,203) (2,931,669)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable........ 5,019,811 1,453,150 3,355,000
Payments on notes payable.......... (5,293,744) (5,114,320) (2,286,332)
Payments on capital leases......... (6,761,990) 0 0
Distributions to shareholders...... (9,110,328) (11,373,326) (13,498,443)
Distributions to minority
interests, net of contributions... (25,939,268) (29,166,896) (27,621,502)
------------ ------------ ------------
Net cash used in financing
activities...................... (42,085,519) (44,201,392) (40,051,277)
------------ ------------ ------------
Net increase in cash and cash
equivalents......................... 991,573 302,540 1,592,309
Cash and cash equivalents, beginning
of year............................. 14,634,615 15,626,188 15,928,728
------------ ------------ ------------
Cash and cash equivalents, end of
year................................ $ 15,626,188 $ 15,928,728 $ 17,521,037
============ ============ ============
Supplemental disclosure of cash flow
information--cash paid during the
year for interest................... $ 754,000 $ 336,000 $ 250,000
============ ============ ============
</TABLE>

The accompanying notes to consolidated financial statements are an integral
part of these statements.

F-32
<PAGE>

LITHOTRIPTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1993, 1994 AND 1995

1. ORGANIZATION AND OPERATIONS:

Lithotripters, Inc. (Lithotripters) is a North Carolina corporation formed
in 1987 for the purpose of sponsoring and managing medical service limited
partnerships. Lithotripters serves as the general partner for each partnership
with primarily local physicians (primarily urologists) holding the limited
partnership units.

Lithotripters, located in Fayetteville, North Carolina, is a provider of
renal lithotripsy services. Lithotripsy involves the use of extracorporeal
shock waves to pulverize kidney and ureteral stones. Lithotripters provides
lithotripsy services primarily through a network of affiliated partnerships
(the Partnerships) to hospitals located primarily in the Southern and Western
sections of the United States. The Partnerships operate 23 self-contained
mobile lithotripsy systems and two fixed-base systems, all of which feature
the Siemens Medical Systems, Inc. Lithostar(TM) machine (the Lithostar).
Lithotripters also directly owns and operates three mobile Lithostar units.

Lithotripters is the managing general partner in each partnership and has an
economic interest in each which varies from 20% to 58%. Lithotripters provides
a wide array of other services to both the physician partners and the
nonaffiliated physician users. As of December 31, 1995, Lithotripters had an
ownership interest in the Partnerships as follows:

<TABLE>
<CAPTION>
YEAR
OWNERSHIP OPERATIONS
PERCENTAGE COMMENCED
<S> <C> <C>
California Lithotripters Limited Partnership II......... 20.0% 1991
Fayetteville Lithotripters Limited Partnership--Arizona
I...................................................... 37.0 1989
Fayetteville Lithotripters Limited Partnership--Arkansas
I...................................................... 20.0 1990
Fayetteville Lithotripters Limited Partners--Louisiana
I...................................................... 22.0 1990
Fayetteville Lithotripters Limited Partnership--South
Carolina I............................................. 39.0 1989
Fayetteville Lithotripters Limited Partnership--South
Carolina II............................................ 20.0 1989
Fayetteville Lithotripters Limited Partnership--Utah I.. 24.0 1989
Fayetteville Lithotripters Limited Partnership--Virginia
I...................................................... 20.0 1990
Florida Lithotripters Partnership I..................... 20.0 1991
Indiana Lithotripters Limited Partnership............... 22.6 1991
San Diego Lithotripters Limited Partnership............. 20.0 1991
Tennessee Lithotripters Limited Partnership............. 33.0 1991
Texas Lithotripsy Limited Partnership I................. 45.5 1991
Texas Lithotripsy Limited Partnership II................ 21.5 1991
California Lithotripters Limited Partnership III, L.P... 20.0 1991
Las Vegas Lithotripters Limited Partnership............. 27.0 1991
Montana Lithotripters Limited Partnership I............. 53.0 1992
Texas Lithotripsy Limited Partnership III............... 32.5 1991
Texas Lithotripsy Limited Partnership IV, L.P........... 50.0 1992
Texas Lithotripsy Limited Partnership V, L.P............ 58.0 1993
Mountain Lithotripsy Limited Partnership................ 44.0 1995
</TABLE>

Certain of the Partnerships have formed two additional joint venture
partnerships to own and operate an additional Lithostar machine. The
operations of these two joint ventures are included in the respective
Partnerships' accounts.

The income, losses and cash distributions of the Partnerships are allocated
based on the respective ownership interests of the partners.

F-33
<PAGE>

LITHOTRIPTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

The consolidated financial statements have been prepared on the accrual
basis of accounting and include the accounts of Lithotripters and the
Partnerships (collectively, the Company). The consolidated financial
statements also include FastStart, Inc., an entity under common control by the
shareholders of Lithrotripters which provides certain training services on
behalf of the Company. The accounts of FastStart, Inc. are immaterial to these
consolidated financial statements.

Under the terms of the respective partnership agreements, Lithotripters, as
the managing general partner, has the authority to make major financial
decisions regarding the assets of the Partnerships without the approval of the
limited partners. Due to the significant control exhibited by Lithotripters,
the Partnerships have been consolidated in the accompanying financial
statements. All significant intercompany accounts and transactions have been
eliminated in consolidation with the pro rata share of profit and losses and
partners' capital of the Partnerships not owned by Lithotripters allocated to
minority interest.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with an original
maturity of less than 90 days to be cash equivalents.

REVENUE RECOGNITION

Operating revenue is reported at the estimated realizable amounts from
patients, hospitals and insurance providers including a significant amount of
revenue funded by Medicare for services rendered. Billings in excess of the
estimated realizable amounts generally represent amounts due from patients in
excess of amounts paid by the patient's insurance provider or Medicare.
Amounts that are considered highly uncollectible are recognized as revenue
upon collection. The Company has negotiated agreements with some hospitals to
provide lithotripsy services based on fee schedules. Certain agreements with
hospitals provide for fees to be paid to the hospital based on varying
percentages of revenues collected in connection with services rendered at that
hospital. Revenue is recorded net of fees due hospitals. These agreements with
the hospitals are generally renewed annually. No individual hospital is
material to the consolidated financial statements. Revenue under certain
agreements is subject to audit and retroactive adjustments. Provisions for
estimated settlements and adjustments are estimated in the period the related
services are rendered and adjusted in the period the final settlement is
determined.

ACCOUNTS RECEIVABLE

The Company records accounts receivable at the estimated realizable amounts
which include contractual adjustments for amounts to be paid by the patient
insurance providers, Medicare, hospitals and estimated uncollectible amounts.
Accordingly, no reserve for doubtful accounts is necessary.

PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost. Major betterments to equipment
are capitalized while normal maintenance and repairs are charged to
operations. Depreciation on construction in progress commences upon being
placed in service.

F-34
<PAGE>

LITHOTRIPTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Building................................ $ 145,007 $ 145,007 $ 145,336
Lithostar machines...................... 30,928,994 32,398,994 32,826,578
Mobile units............................ 7,497,733 7,644,501 7,829,643
Other equipment......................... 438,500 475,396 507,755
Other vehicles.......................... 68,842 104,561 131,824
Leasehold improvements.................. 631,045 665,686 665,686
Construction in process................. 380,000 22,500 168,655
----------- ----------- -----------
Total................................. 40,090,121 41,456,645 42,275,477
Accumulated depreciation................ 13,398,117 17,658,389 20,426,614
----------- ----------- -----------
Net total............................. $26,692,004 $23,798,256 $21,848,863
=========== =========== ===========
</TABLE>
Depreciation is provided over the estimated useful lives as follows:

<TABLE>
<CAPTION>
METHOD USEFUL LIVES
<S> <C> <C>
Buildings......................................... Straight-line 20 years
Lithostar machines................................ Straight-line 10 years
Mobile units...................................... Straight-line 10 years
Other equipment and vehicles...................... Accelerated 5 to 7 years
Leasehold improvements............................ Accelerated 5 to 7 years
</TABLE>

INCOME TAXES

Lithotripters and FastStart, Inc. have elected to be treated as an S
Corporation for federal and state income tax purposes. Under current tax law,
the income or loss of the Partnerships is included in the income tax return of
the partners. As such, income or loss of the Company, including its pro rata
share of partnership income, is included in the income tax returns of the
shareholders. Accordingly, no provision for income taxes has been recorded in
the accompanying consolidated financial statements. However, certain states in
which the Company or the Partnerships operate do impose certain franchise and
income taxes. Included in other operating expenses are franchise and income
tax expenses of approximately $138,000 for 1993, $242,000 for 1994 and
$193,000 for 1995.

MANAGEMENT ESTIMATES AND RISK OF OPERATIONS

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In
addition, the Company's revenues are derived primarily from the use of the
Lithostar machines. As such, the future operations would be significantly
impacted by the development of a new technology or an alternative procedure.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Cash, accounts receivable, accounts payable and accrued liabilities are
reflected in the financial statements at fair value because of the short-term
maturity of those instruments. The carrying amount of notes payable
approximates fair value at December 31, 1995.

F-35
<PAGE>

LITHOTRIPTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. TRANSACTIONS WITH AFFILIATES:

Lithotripters provides managerial, operational and other support services to
the Partnerships after formation. As the managing general partner,
Lithotripters receives a management fee for supervising the Partnerships'
operations and business affairs. Generally, under the terms of the individual
partnership agreements, such management fees equate to the greater of $8,000
or 7.5% of individual partnership cash flow (as defined) per month. Such
management fees amounted to approximately $3,129,000 for 1993, $3,347,000 for
1994 and $3,390,000 for 1995. Such amounts have been eliminated in
consolidation.

In addition, Lithotripters is reimbursed by the Partnerships for certain
administrative expenses incurred on behalf of the Partnerships, such as direct
administrative salaries and benefits, rent and office supplies. Such
reimbursement, which is based on the number of patients served by each
partnership divided by the total number of patients served by all
partnerships, amounted to approximately $2,436,062 for 1993, $2,715,370 for
1994 and $2,729,531 for 1995. Such amounts have been eliminated in
consolidation.

Lithotripters provides similar services and certain equipment to two
affiliated entities and charged $2,263,594 for 1993, $2,478,440 for 1994 and
$2,521,468 for 1995. These charges are recorded as charges to affiliates on
the accompanying consolidated statements of income.

In 1993, the Company purchased $335,000 of equipment from an affiliated
entity.

Lithotripters' corporate offices are owned by certain shareholders of
Lithotripters and are leased to Lithotripters. The rent expense was
approximately $108,000 for 1995, $111,000 for 1994 and $108,000 for 1993.

4. NOTES PAYABLE:

Notes payable are as follows:

<TABLE>
<CAPTION>
1993 1994 1995
<S> <C> <C> <C>
Equipment loans bearing interest at
prime plus .25%, secured by certain
equipment............................ $ 5,522,628 $ 3,142,672 $ 4,211,340
Notes payable bearing interest at
prime plus .25%, secured by accounts
receivable........................... 1,199,300 0 0
Other................................. 81,914 0 0
----------- ----------- -----------
$ 6,803,842 $ 3,142,672 $ 4,211,340
=========== =========== ===========
</TABLE>

Future principal payments on notes payable are as follows:

F-36
<PAGE>

LITHOTRIPTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

5. COMMITMENTS AND CONTINGENCIES:

The Company carries malpractice insurance coverage with Healthcare Insurance
Services, Inc. which is a secondary form of insurance which covers medical
professionals once their primary insurance has been
exhausted. There are no significant malpractice claims which have been
asserted against the Company. Incidents occurring through December 31, 1995,
may result in the assertion of claims arising from services provided to
patients in the past. Management believes that future claims, if asserted,
would be settled within the limits of its insurance coverages.

The Federal Trade Commission (FTC) has investigated two of the Partnerships
to determine whether they pose an unreasonable threat to competition. The
Company's counsel has recently been advised by the director of the Bureau of
Competition that the FTC staff has recommended that these investigations be
closed. Based upon the Company's counsel's experience with the FTC, the
Company expects the investigation to be formally closed.

The Company has entered into an agreement with an investment advisor whereby
the advisor would be entitled to a fee in the event Lithotripters and/or
certain affiliates are sold to a third party.

The Company has a facility lease with certain shareholders expiring in
December 2000. The Company will have annual minimum operating lease payments
of approximately $120,000 in 1996 through 2000.

The Company has entered into an agreement to purchase equipment in 1996 for
one of the partnerships for approximately $1,000,000.

6. PENSION PLAN:

The Company makes contributions to a defined contribution pension plan for
qualified employees of the Company included in these consolidated financial
statements, as defined in the plan agreement. Contributions are based on
employee's compensation during the plan year. The Company contributed
approximately $422,000, $498,000 and $557,000 during 1993, 1994 and 1995,
respectively.

F-37
<PAGE>

LITHOTRIPTERS, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1995 AND MARCH 31, 1996

<TABLE>
<CAPTION>
DECEMBER 31, 1995 MARCH 31, 1996
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents..................... $ 17,521 $ 14,639
Accounts receivable, net...................... 13,610 12,547
Prepaid expenses.............................. 775 992
-------- --------
Total current assets...................... 31,906 28,178
Property and equipment, net................... 21,849 21,770
Other assets.................................. 130 61
-------- --------
$ 53,885 $ 50,009
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable............................ $ 2,372 $ 2,513
Accrued expenses............................ 520 697
Accrued distribution........................ 14,661 10,818
Notes payable, current portion.............. 1,852 463
-------- --------
Total current liabilities................. 19,405 14,491
Notes payable................................. 2,360 5,132
-------- --------
Total liabilities......................... 21,765 19,623
Minority interests............................ 21,553 20,339
Shareholders' equity:
Common stock, no par value, 100,000 shares
authorized, 40,000 shares issued and
outstanding................................ 39 39
Other capital contributions................. 4 4
Accumulated earnings........................ 72,949 75,943
Cumulative distributions.................... (62,425) (65,939)
-------- --------
Total shareholders' equity................ 10,567 10,047
-------- --------
$ 53,885 $ 50,009
======== ========
</TABLE>

The accompanying notes to consolidated financial statements are an integral
part of these balance sheets

F-38
<PAGE>

LITHOTRIPTERS, INC.

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1995 MARCH 31, 1996
(IN THOUSANDS)
<S> <C> <C>
Operating revenue....................... $13,654 $14,308
Operating expenses:
Salaries and benefits................. 2,106 2,359
Mobile unit expense................... 1,134 956
Legal and professional fees........... 244 487
Travel and entertainment.............. 441 424
Depreciation and amortization......... 1,036 1,129
Charges to affiliates................. (584) (655)
Other................................. 623 713
------- -------
Total operating expenses............ 5,000 5,413
------- -------
Income from operations.............. 8,654 8,895
Interest expense........................ (63) (53)
Other income............................ 65 241
------- -------
Income before minority interest in
consolidated income.................... 8,656 9,083
Minority interest in consolidated
income................................. 5,953 6,089
------- -------
Net income.......................... $ 2,703 $ 2,994
======= =======
</TABLE>

The accompanying notes to consolidated financial statements are an integral
part of these statements

F-39
<PAGE>

LITHOTRIPTERS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1995 MARCH 31, 1996
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income..................................... $ 2,703 $ 2,994
Adjustments to reconcile net income to net cash
provided by operating activities--............
Depreciation and amortization................. 1,036 1,129
Minority interest in consolidated income...... 5,953 6,089
Decrease in accounts receivable, net.......... 645 1,063
Increase in prepaid expenses.................. (280) (217)
Decrease (increase) in other assets........... (30) 49
Increase in accounts payable.................. 529 141
Increase in accrued expenses.................. 121 177
-------- --------
Net cash provided by operating activities.... 10,677 11,425
-------- --------
Cash flows from investing activities:
Purchase of property and equipment............. (189) (1,029)
-------- --------
Cash flows from financing activities:
Proceeds from notes payable.................... 165 1,900
Payments on notes payable...................... (716) (517)
Distributions to shareholders.................. (4,500) (4,900)
Distributions to minority interests, net of
contributions................................. (10,003) (9,761)
-------- --------
Net cash used in financing activities........ (15,054) (13,278)
-------- --------
Net decrease in cash and cash equivalents........ (4,566) (2,882)
Cash and cash equivalents, beginning of period... 15,929 17,521
-------- --------
Cash and cash equivalents, end of period......... $ 11,363 $ 14,639
======== ========
</TABLE>

The accompanying notes to consolidated financial statements are an integral
part of these statements

F-40
<PAGE>

LITHOTRIPTERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 1996
(UNAUDITED)

1. BASIS OF PRESENTATION:

The unaudited consolidated financial statements have been prepared on the
accrual basis of accounting and include the accounts of Lithotripters, Inc.
(Lithotripters) and certain limited partnerships of which Lithotripters is the
general partner (collectively, the Company).

The accompanying unaudited consolidated financial statements have been
prepared in conformity with the accounting principles stated in the audited
financial statements for the year ended December 31, 1995, and reflect all
adjustments (which consist of normal recurring adjustments), in the opinion of
management, necessary to present fairly the financial position as of March 31,
1996, and the results of operations and cash flows for the periods presented.
These statements have not been audited by the Company's independent public
accountants. The operating results for the interim periods are not necessarily
indicative of results for the full year.

Certain information and footnote disclosures required for complete financial
statements have been condensed or omitted. The notes to consolidated financial
statements appearing in the Company's audited financial statements for the
year ended December 31, 1995, should be read in conjunction with these interim
financial statements. There have been no significant changes in the
information reported in those notes other than from normal business activities
of the Company and the matter discussed in Note 2 below.

2. SUBSEQUENT EVENT:

In April 1996, 100% of the common stock of Lithotripters was acquired by
Prime Medical Services, Inc. for $88 million, which consisted of $70 million
in cash and 1,636,364 shares of Prime's common stock.

F-41
<PAGE>

[ART WORK]
<PAGE>

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE SELLING
STOCKHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO,
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CRE-
ATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.

-----------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 10
Price Range of Common Stock.............................................. 11
Dividend Policy.......................................................... 11
Capitalization........................................................... 12
Pro Forma Consolidated Financial Statements.............................. 13
Selected Consolidated Financial and
Operating Data.......................................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 23
Management............................................................... 30
Principal and Selling Stockholders....................................... 35
Description of Capital Stock............................................. 36
Underwriting............................................................. 37
Certain United States Federal Tax Consequences to Non-United States
Holders................................................................. 40
Legal Matters............................................................ 42
Experts.................................................................. 42
Available Information.................................................... 42
Documents Incorporated by Reference...................................... 42
Index to Financial Statements............................................ F-1
</TABLE>

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

9,907,240 SHARES

LOGO
[LOGO OF PRIME MEDICAL SERVICES, INC. APPEARS HERE]

PRIME MEDICAL SERVICES, INC.

COMMON STOCK

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

PROSPECTUS

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

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

PRUDENTIAL SECURITIES INCORPORATED

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

SUBJECT TO COMPLETION, DATED JUNE 7, 1996

PROSPECTUS
, 1996

LOGO
[LOGO OF PRIME
MEDICAL SERVICES,
9,907,240 SHARES INC. APPEARS HERE]
PRIME MEDICAL SERVICES, INC.
COMMON STOCK

Of the 9,907,240 shares of Common Stock being offered hereby, 1,981,448
shares are being offered initially outside the United States and Canada by the
International Managers (the "International Offering") and 7,925,792 shares are
being offered initially in the United States and Canada by the U.S.
Underwriters (the "U.S. Offering"). See "Underwriting." Of the 9,907,240 shares
of Common Stock being offered, 5,000,000 shares are being sold by the Company
and 4,907,240 shares are being sold by the Selling Stockholders. See "Principal
and Selling Stockholders." The Company will not receive any of the proceeds
from the sale of shares by the Selling Stockholders. On June 7, 1996, the last
sale price of the Common Stock as reported on The Nasdaq National Market was
$17 5/8 per share.

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.

(3) The Company has granted the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to 1,486,086 additional
shares of Common Stock at the Price to the Public less Underwriting
Discounts and Commissions, solely to cover over-allotments, if any. If such
option is exercised in full, the total Price to the Public, Underwriting
Discounts and Commissions and Proceeds to the Company will be $ , $
and $ , respectively. See "Underwriting."

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION PRUDENTIAL-BACHE SECURITIES
<PAGE>

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE SELLING STOCK-
HOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OF-
FER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.

THERE ARE RESTRICTIONS ON THE OFFER AND SALE OF COMMON STOCK OFFERED HEREBY
IN THE UNITED KINGDOM. ALL APPLICABLE PROVISIONS OF THE PUBLIC OFFERS OF SECU-
RITIES REGULATIONS 1995, THE FINANCIAL SERVICES ACT 1986 AND THE COMPANIES ACT
1985 WITH RESPECT TO ANYTHING DONE BY ANY PERSON IN RELATION TO THE COMMON
STOCK IN, FROM OR OTHERWISE INVOLVING THE UNITED KINGDOM MUST BE COMPLIED WITH.
SEE "UNDERWRITING."

-----------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 10
Price Range of Common Stock.............................................. 11
Dividend Policy.......................................................... 11
Capitalization........................................................... 12
Pro Forma Consolidated Financial Statements.............................. 13
Selected Consolidated Financial
and Operating Data...................................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 23
Management............................................................... 30
Principal and Selling Stockholders....................................... 35
Description of Capital Stock............................................. 36
Underwriting............................................................. 37
Certain United States Federal Tax Consequences to Non-United States
Holders................................................................. 40
Legal Matters............................................................ 42
Experts.................................................................. 42
Available Information.................................................... 42
Documents Incorporated by Reference...................................... 42
Index to Financial Statements............................................ F-1
</TABLE>

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

9,907,240 SHARES

LOGO
[LOGO OF PRIME MEDICAL SERVICES, INC. APPEARS HERE]

PRIME MEDICAL SERVICES, INC.

COMMON STOCK

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

PROSPECTUS

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

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

PRUDENTIAL-BACHE SECURITIES

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The Registrant estimates that expenses payable by it in connection with the
offering described in this Registration Statement (other than underwriting
fees and commissions) will be as follows:

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $ 69,250
NASD filing fee.................................................... 20,600
Nasdaq Listing Application......................................... 17,500
Printing and mailing expenses...................................... 150,000
Accounting fees and expenses....................................... 200,000
Legal fees and expenses............................................ 264,000
Blue sky fees and expenses......................................... 10,000
Transfer Agent fees and expenses................................... 3,500
Miscellaneous...................................................... 15,150
--------
Total............................................................ $750,000
========
</TABLE>

The Selling Stockholders will pay no expenses related to the offering except
underwriting discounts, commissions, transfer taxes and their attorney's fees,
if any.

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Article Ten of the Certificate of Incorporation of the Registrant provides
that the Registrant shall indemnify any person who was or is a party or is
threatened to be made a party to a proceeding by reason of the fact that he or
she (i) is or was a director or officer of the Registrant or (ii) while a
director or officer of the Registrant, is or was serving at the request of the
Registrant as a director, officer, partner, venturer, proprietor, trustee,
employee, agent, or similar functionary of another foreign or domestic
corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan, or other enterprise, to the fullest extent permitted under the
Delaware General Corporation Law, as the same exists or may hereafter be
amended.

Pursuant to Section 145 of the Delaware General Corporation Law, the
Registrant generally has the power to indemnify its present and former
directors and officers against expenses and liabilities incurred by them in
connection with any suit to which they are, or are threatened to be made, a
party by reason of their serving in those positions so long as they acted in
good faith and in a manner they reasonably believed to be in, or not opposed
to, the best interests of the Registrant, and with respect to any criminal
action, so long as they had no reasonable cause to believe their conduct was
unlawful. With respect to suits by or in the right of the Registrant, however,
indemnification is generally limited to attorneys' fees and other expenses and
is not available if the person is adjudged to be liable to the Registrant,
unless the court determines that indemnification is appropriate. The statute
expressly provides that the power to indemnify authorized thereby is not
exclusive of any rights granted under any bylaws, agreement, vote of
stockholders or disinterested directors, or otherwise. The Registrant also has
the power to purchase and maintain insurance for its directors and officers
and has obtained such insurance.

The preceding discussion of the Registrant's Certificate of Incorporation
and Section 145 of the Delaware General Corporation Law is not intended to be
exhaustive and is qualified in its entirety by the Certificate of
Incorporation and Section 145 of the Delaware General Corporation Law.

II-1
<PAGE>

The Registrant has entered into indemnity agreements with certain of its
directors and officers. Pursuant to these agreements, the Registrant will, to
the extent permitted under applicable law, indemnify these persons against all
judgments, expenses, fines and penalties incurred in connection with the
defense or the settlement of any actions brought against them by reason of the
fact that they are or were directors or officers of the Registrant or that
they assumed certain responsibilities at the direction of the Registrant.

ITEM 16. EXHIBITS.

(1) Form of Underwriting Agreement

(5) Opinion of Small, Craig & Werkenthin, P.C.*

(23) (a) Consent of Small, Craig & Werkenthin, P.C. (included in
Exhibit 5)*

(b) Consent of KPMG Peat Marwick LLP

(24) Powers of Attorney*
- ---------------------

* Previously filed.

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes:

(1)(i) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:

(ii) To include any prospectus required in Section 10(a) (3) of the
Securities Act of 1933;

(iii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; and

(iv) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.

(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.

(4) That, for purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to section
13(a) or section 15(d) of the Exchange Act that is incorporated by
reference in the Registration Statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

(5) That for purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of the Registration Statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.

(6) That for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-2
<PAGE>

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

II-3
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Austin, State of Texas on June 11, 1996.

Prime Medical Services, Inc.

/s/ Cheryl Williams
By __________________________________

Cheryl Williams, Vice President-
Finance

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

SIGNATURE TITLE DATE
<S> <C> <C>

* Chairman of the June 11, 1996
- ------------------------------------- Board and Director
KENNETH S. SHIFRIN

* President, Chief June 11, 1996
- ------------------------------------- Executive Officer
JOSEPH JENKINS, M.D. and Director

/s/ Cheryl Williams Chief Financial June 11, 1996
- ------------------------------------- Officer, Vice
CHERYL WILLIAMS President--Finance
and Secretary
(Chief Accounting
Officer)

* Director June 11, 1996
- -------------------------------------
PAUL R. BUTRUS

* Director June 11, 1996
- -------------------------------------
JACK R. CHANDLER, M.D.

* Director June 11, 1996
- -------------------------------------
WILLIAM E. FOREE, M.D.

</TABLE>

II-4

<PAGE>

SIGNATURE TITLE DATE

<S> <C> <C>
Director
* June 11, 1996
- -------------------------------------
IRWIN KATZ

Director
* June 11, 1996
- -------------------------------------
WILLIAM A. SEARLES

Director
* June 11, 1996
- -------------------------------------
MICHAEL J. SPALDING, M.D.

* /s/ Cheryl Williams June 11, 1996
- -------------------------------------

CHERYL WILLIAMS, ATTORNEY-IN-FACT

</TABLE>
II-5
<PAGE>

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBITS PAGE NUMBER
-------- -----------
<C> <S> <C>
(1) Form of Underwriting Agreement.
(5) Opinion of Small, Craig & Werkenthin, P.C.*
(23) (a) Consent of Small, Craig & Werkenthin, P.C. (included in
Exhibit 5).*
(b) Consent of KPMG Peat Marwick LLP.
(c) Consent of Arthur Andersen LLP.
(24) Powers of Attorney*
</TABLE>
- ---------------------

* Previously filed.

II-6

<PAGE>

EXHIBIT 1

PRIME MEDICAL SERVICES, INC.

Common Stock

UNDERWRITING AGREEMENT
----------------------

June ___, 1996

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PRUDENTIAL SECURITIES INCORPORATED
As representatives of the
several U.S. underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PRUDENTIAL SECURITIES INCORPORATED
As representatives of the
several international
managers named in Schedule
II hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
Jupiter House
Trinton Court
14 Finsbury Square
London EC2A 1BR, England

Dear Sirs:

Prime Medical Services, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell to the several Underwriters (as defined below) an
aggregate of 5,000,000 shares of its common stock, par value $.01 per share
("Common Stock"), and certain stockholders of the Company named in Schedule III
hereto (the "Selling Stockholders") severally propose to sell to the
several Underwriters, an aggregate of shares of Common Stock of the
Company. The shares
<PAGE>

of Common Stock to be issued and sold by the Company are hereinafter called the
"Company Shares." The shares of Common Stock to be sold by the Selling
Stockholders are hereinafter called the "Stockholder Shares." The Company Shares
and the Stockholder Shares are hereinafter called the "Firm Shares."

It is understood that, subject to the conditions hereinafter stated, the
Stockholder Shares and ______________ Company Shares (the "U.S. Company Shares"
and together with the Stockholder Shares, the "U.S. Firm Shares") will be sold
to the several U.S. Underwriters named in Schedule I hereto (the "U.S.
Underwriters") in connection with the offering and sale of such U.S. Firm Shares
in the United States and Canada to United States and Canadian Persons (as such
terms are defined in the Agreement Between U.S. Underwriters and International
Managers of even date herewith), and _______________ Company Shares (the
"International Firm Shares") will be sold to the several International Managers
named in Schedule II hereto (the "International Managers") in connection with
the offering and sale of such International Firm Shares outside the United
States and Canada to persons other than United States and Canadian Persons.
Donaldson, Lufkin & Jenrette Securities Corporation and Prudential Securities
Incorporated shall act as representatives (the "U.S. Representatives") of the
several U.S. Underwriters, and Donaldson Lufkin & Jenrette Securities
Corporation and Prudential Securities Incorporated shall act as representatives
(the "International Representatives") of the several International Managers.
The U.S. Underwriters and the International Managers are hereinafter
collectively referred to as the "Underwriters."

The Company also proposes to issue and sell to the several U.S.
Underwriters not more than an additional _________ shares of its Common Stock
(the "U.S. Additional Shares"), if requested by the U.S. Underwriters as
provided in Section 2 hereof. The Company also proposes to issue and sell to
the several International Managers not more than an additional _______ shares of
its Common Stock (the "International Additional Shares"). The U.S. Additional
Shares and the International Additional Shares are herein collectively called
the "Additional Shares." The Firm Shares and the Additional Shares are herein
collectively called the "Shares." The Company and the Selling Stockholders are
hereinafter collectively referred to as the "Sellers."

1. Registration Statement and Prospectus. The Company has prepared and
-------------------------------------
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively called the
"Act"), a registration statement on Form S-3 (File No. 333-_______) including a
prospectus relating to the Shares, which may be amended. The registration
statement contains two prospectuses to be used in connection with the offering
and sale of the Shares: the U.S. prospectus, to be used in connection with the
offering and sale of Shares in the United States and Canada to United States and
Canadian Persons, and the international prospectus, to be used in connection
with the offering and sale of Shares outside the United States and Canada to
persons other than United States and Canadian Persons. The international
prospectus is identical to the U.S. prospectus except for the outside front and
back cover pages. The registration statement as amended at the time when it
becomes effective, including a registration statement (if any) filed pursuant to
Rule 462(b) under the Act increasing the size of the offering registered under
the Act and information (if any) deemed to be part of the registration statement
at the time of effectiveness pursuant to Rule 430A under the Act, is hereinafter
referred to as the "Registration Statement;" and the U.S. prospectus and the

-2-
<PAGE>

international prospectus in the respective forms first used to confirm sales of
Shares are hereinafter referred to as the "Prospectus."

2. Agreements to Sell and Purchase. The Company hereby agrees to issue
-------------------------------
and sell the U.S. Company Shares to the several U.S. Underwriters, and each
Selling Stockholder, severally and not jointly, hereby agrees to sell to the
several U.S. Underwriters the number of Stockholder Shares set forth opposite
such Selling Stockholder's name in Schedule III hereto, and each of the U.S.
Underwriters, upon the basis of the representations and warranties contained in
this Agreement, and subject to its terms and conditions, agrees, severally and
not jointly, to purchase from the Company and such Selling Stockholder at a
price per share of $ _____ (the "Purchase Price"), the respective number of
U.S. Company Shares and Stockholder Shares (subject to such adjustments to
eliminate fractional shares as the U.S. Representatives may determine) that
bears the same proportion to the number of U.S. Company Shares and Stockholder
Shares to be sold by the Company or by such Selling Stockholder, as the case may
be, as the number of Firm Shares set forth in Schedule I hereto opposite the
name of such U.S. Underwriter bears to the total number of Firm Shares set forth
opposite the names of all U.S. Underwriters in Schedule I hereto.

The Company hereby agrees to issue and sell the International Shares to the
International Managers named in Schedule II hereto, and each of the
International Managers, upon the basis of the representations and warranties
contained in this Agreement, and subject to its terms and conditions, agrees,
severally and not jointly, to purchase from the Company at the Purchase Price
the respective number of Firm Shares set forth opposite the name of such
International Manager in Schedule II hereto.

On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell to the U.S. Underwriters the U.S. Additional Shares and the U.S.
Underwriters shall have the right to purchase, severally and not jointly, up to
_____ U.S. Additional Shares from the Company at the Purchase Price. U.S.
Additional Shares may be purchased solely for the purpose of covering over-
allotments made in connection with the offering of the U.S. Firm Shares. The
U.S. Underwriters may exercise their right to purchase U.S. Additional Shares in
whole or in part from time to time by giving written notice thereof to the
Company within 30 days after the date of this Agreement. The U.S.
Representatives shall give any such notice on behalf of the U.S. Underwriters
and such notice shall specify the aggregate number of U.S. Additional Shares to
be purchased pursuant to such exercise and the date for payment and delivery
thereof. The date specified in any such notice shall be a business day (i) no
earlier than the Closing Date (as hereinafter defined), (ii) no later than ten
business days after such notice has been given and (iii) no earlier than two
business days after such notice has been given. If any U.S. Additional Shares
are to be purchased, each U.S. Underwriter, severally and not jointly, agrees to
purchase from the Company the number of U.S. Additional Shares (subject to such
adjustments to eliminate fractional shares as the U.S. Representatives may
determine) which bears the same proportion to the total number of U.S.
Additional Shares to be purchased from the Company as the number of U.S. Firm
Shares set forth opposite the name of such Underwriter in Schedule I bears to
the total number of U.S. Firm Shares.

-3-
<PAGE>

On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell to the International Managers the International Additional Shares and
the International Managers shall have the right to purchase, severally and not
jointly, up to _____ International Additional Shares from the Company at the
Purchase Price. International Additional Shares may be purchased solely for the
purpose of covering over-allotments made in connection with the offering of the
International Firm Shares. The International Managers may exercise their right
to purchase International Additional Shares in whole or in part from time to
time by giving written notice thereof to the Company within 30 days after the
date of this Agreement. The International Representatives shall give any such
notice on behalf of the International Managers and such notice shall specify the
aggregate number of International Additional Shares to be purchased pursuant to
such exercise and the date for payment and delivery thereof. The date specified
in any such notice shall be a business day (i) no earlier than the Closing Date
(as hereinafter defined), (ii) no later than ten business days after such notice
has been given and (iii) no earlier than two business days after such notice has
been given. If any International Additional Shares are to be purchased, each
International Manager, severally and not jointly, agrees to purchase from the
Company the number of International Additional Shares (subject to such
adjustments to eliminate fractional shares as the International Representatives
may determine) which bears the same proportion to the total number of
International Additional Shares to be purchased from the Company as the number
of International Firm Shares set forth opposite the name of such Underwriter in
Schedule II bears to the total number of International Firm Shares.

The Company shall, concurrently with the execution of this Agreement,
deliver an agreement executed by (i) each of the directors and officers of the
Company who is not a Selling Stockholder and (ii) American Physician Services,
Inc., a Delaware corporation, pursuant to which each such person and entity
agrees not to offer, sell, contract to sell, grant any option to purchase, or
otherwise dispose of any common stock of the Company or any securities
convertible into or exercisable or exchangeable for such common stock or in any
other manner transfer all or a portion of the economic consequences associated
with the ownership of any such common stock, except to the Underwriters pursuant
to this Agreement, for a period of 90 days after the date of the Prospectus
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. Notwithstanding the foregoing, during such period (i) the Company
may grant stock options pursuant to the Company's existing stock option plan and
(ii) the Company may issue shares of its common stock upon the exercise of an
option or warrant or the conversion of a security outstanding on the date
hereof.

3. Terms of Public Offering. The Sellers are advised by you that the
------------------------
Underwriters propose (i) to make a public offering of their respective portions
of the Shares as soon after the effective date of the Registration Statement as
in your judgment is advisable and (ii) initially to offer the Shares upon the
terms set forth in the Prospectus.

Each U.S. Underwriter hereby makes to and with the Company the
representations and agreements of such U.S. Underwriter contained in the fifth
paragraph of Section 3 of the Agreement Between U.S. Underwriters and
International Managers of even date herewith. Each International Manager hereby
makes to and with the Company the representations and agreements of such
International Manager contained in the seventh, eighth, ninth and tenth
paragraphs of Section 3 of such Agreement.

-4-
<PAGE>

4. Delivery and Payment. Delivery to the Underwriters of and payment for
--------------------
the Firm Shares shall be made at 10:00 A.M., New York City time, on the third or
fourth business day unless otherwise permitted by the Commission pursuant to
Rule 15c6-1 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") (the "Closing Date") following the date of the initial public offering, at
the offices of Vinson & Elkins L.L.P., One American Center, 600 Congress Avenue,
Austin, Texas 78701-3200. The Closing Date and the location of delivery of and
the form of payment for the Firm Shares may be varied by agreement between you
and the Sellers.

Delivery to the Underwriters of and payment for any Additional Shares to be
purchased by the Underwriters shall be made at the offices of Vinson & Elkins
L.L.P., One American Center, 600 Congress Avenue, Austin, Texas 78701-3200 at
10:00 A.M., New York City time, on the date specified in the applicable exercise
notice given by you pursuant to Section 2 (an "Option Closing Date"). Any such
Option Closing Date and the location of delivery of and the form of payment for
such Additional Shares may be varied by agreement between the U.S.
Representatives and/or the International Managers, as the case may be, and the
Company.

Certificates for the Shares shall be registered in such names and issued in
such denominations as you shall request in writing not later than two full
business days prior to the Closing Date or an Option Closing Date, as the case
may be. Such certificates shall be made available to you for inspection not
later than 9:30 A.M., New York City time, on the business day next preceding the
Closing Date or an Option Closing Date, as the case may be. Certificates in
definitive form evidencing the Shares shall be delivered to you on the Closing
Date or an Option Closing Date, as the case may be, with any transfer taxes
thereon duly paid by the respective Sellers, for the respective accounts of the
several Underwriters, against payment of the Purchase Price therefor by wire or
certified or official bank checks payable in Federal funds to the order of the
applicable Sellers. [DTC Close?].

5. Agreements of the Company. The Company agrees with you:
-------------------------

(a) To use its best efforts to cause the Registration Statement to
become effective at the earliest possible time.

(b) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) when the Registration Statement has become effective
and when any post-effective amendment to it becomes effective, (ii) of any
request by the Commission for amendments to the Registration Statement or
amendments or supplements to the Prospectus or for additional information,
(iii) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the suspension of
qualification of the Shares for offering or sale in any jurisdiction, or
the initiation of any proceeding for such purposes, and (iv) of the
happening of any event during the period referred to in paragraph (e) below
which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires the making of any
additions to or changes in the Registration Statement or the Prospectus in
order to make the statements therein not misleading. If at any time the
Commission shall issue any stop order

-5-
<PAGE>

suspending the effectiveness of the Registration Statement, the Company
will make every reasonable effort to obtain the withdrawal or lifting of
such order at the earliest possible time.

(c) To furnish to you, without charge, three signed copies of the
Registration Statement as first filed with the Commission and of each
amendment to it, including all exhibits, and to furnish to you and each
Underwriter designated by you such number of conformed copies of the
Registration Statement as so filed and of each amendment to it, without
exhibits, as you may reasonably request.

(d) Not to file any amendment or supplement to the Registration
Statement, whether before or after the time when it becomes effective, or
to make any amendment or supplement to the Prospectus of which you shall
not previously have been advised or to which you shall reasonably object;
and to prepare and file with the Commission, promptly upon your reasonable
request, any amendment to the Registration Statement or supplement to the
Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause the
same to become promptly effective.

(e) Promptly after the Registration Statement becomes effective, and
from time to time thereafter for such period as in the opinion of counsel
for the Underwriters a prospectus is required by law to be delivered in
connection with sales by an Underwriter or a dealer, to furnish to each
Underwriter and dealer as many copies of the Prospectus (and of any
amendment or supplement to the Prospectus) as such Underwriter or dealer
may reasonably request.

(f) If during the period specified in paragraph (e) any event shall
occur as a result of which, in the opinion of counsel for the Underwriters
it becomes necessary to amend or supplement the Prospectus in order to make
the statements therein, in the light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, or if it is
necessary to amend or supplement the Prospectus to comply with any law,
forthwith to prepare and file with the Commission an appropriate amendment
or supplement to the Prospectus so that the statements in the Prospectus,
as so amended or supplemented, will not in the light of the circumstances
when it is so delivered, be misleading, or so that the Prospectus will
comply with law, and to furnish to each Underwriter and to such dealers as
you shall specify, such number of copies thereof as such Underwriter or
dealers may reasonably request.

(g) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters
and by dealers under the state securities or Blue Sky laws of such
jurisdictions as you may request, to continue such qualification in effect
so long as required for distribution of the Shares and to file such
consents to service of process or other documents as may be necessary in
order to effect such registration or qualification.

-6-
<PAGE>

(h) To mail and make generally available to its stockholders as soon
as reasonably practicable an earnings statement covering a period of at
least twelve months after the effective date of the Registration Statement
(but in no event commencing later than 90 days after such date) which shall
satisfy the provisions of Section 11(a) of the Act, and to advise you in
writing when such statement has been so made available.

(i) During the period of five years after the date of this Agreement,
(i) to mail as soon as reasonably practicable after the end of each fiscal
year to the record holders of its Common Stock a financial report of the
Company and its subsidiaries on a consolidated basis (and a similar
financial report of all unconsolidated subsidiaries, if any), all such
financial reports to include a consolidated balance sheet, a consolidated
statement of operations, a consolidated statement of cash flows and a
consolidated statement of shareholders' equity as of the end of and for
such fiscal year, together with comparable information as of the end of and
for the preceding year, certified by independent certified public
accountants, and (ii) to mail and make generally available as soon as
practicable after the end of each quarterly period (except for the last
quarterly period of each fiscal year) to such holders, a consolidated
balance sheet, a consolidated statement of operations and a consolidated
statement of cash flows (and similar financial reports of all
unconsolidated subsidiaries, if any) as of the end of and for such period,
and for the period from the beginning of such year to the close of such
quarterly period, together with comparable information for the
corresponding periods of the preceding year.

(j) During the period referred to in paragraph (i), to furnish to you
as soon as available a copy of each report or other publicly available
information of the Company mailed to the holders of Common Stock or filed
with the Commission and such other publicly available information
concerning the Company and its subsidiaries as you may reasonably request.

(k) To pay all costs, expenses, fees and taxes incident to (i) the
preparation, printing, filing and distribution under the Act of the
Registration Statement (including financial statements and exhibits), each
preliminary prospectus and all amendments and supplements to any of them
prior to or during the period specified in paragraph (e), (ii) the printing
and delivery of the Prospectus and all amendments or supplements to it
during the period specified in paragraph (e), (iii) the printing and
delivery of this Agreement, the Preliminary and Supplemental Blue Sky
Memoranda and all other agreements, memoranda, correspondence and other
documents printed and delivered in connection with the offering of the
Shares (including in each case any disbursements of counsel for the
Underwriters relating to such printing and delivery), (iv) the registration
or qualification of the Shares for offer and sale under the securities or
Blue Sky laws of the several states (including in each case the fees and
disbursements of counsel for the Underwriters relating to such registration
or qualification and memoranda relating thereto), (v) filings and clearance
with the National Association of Securities Dealers, Inc. in connection
with the offering, (vi) the listing of the Shares on The Nasdaq Stock
Market National Market System, (vii) furnishing such copies of the
Registration Statement, the Prospectus and all amendments and supplements
thereto as may be requested for use in connection with the offering or sale
of the Shares by the
-7-
<PAGE>

Underwriters or by dealers to whom Shares may be sold and (viii) the
performance by the Sellers of their other obligations under this Agreement.

(1) To use its best efforts to maintain the inclusion of the Common
Stock in the Nasdaq Stock Market National Market System (or on a national
securities exchange) for a period of five years after the effective date of
the Registration Statement.

(m) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company
prior to the Closing Date or any Option Closing Date, as the case may be,
and to satisfy all conditions precedent to the delivery of the Shares.

6. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to each Underwriter that:

(a) The Registration Statement has become effective, no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or threatened by the
Commission.

(b) (i) Each part of the Registration Statement, when such part became
effective, did not contain and each such part, as amended or supplemented,
if applicable, will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, (ii) the Registration Statement
and the Prospectus comply and, as amended or supplemented, if applicable,
will comply in all material respects with the Act and (iii) the Prospectus
does not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph (b) do not apply
to statements or omissions in the Registration Statement or the Prospectus
based upon information relating to any Underwriter furnished to the Company
in writing by such Underwriter through you expressly for use therein.

(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, and each Registration Statement filed
pursuant to Rule 462 (b) under the Act, if any, complied when so filed in
all material respects with the Act, and did not contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.

(d) The Company and each of its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation and has the corporate power
and authority to carry on its business as it is currently being conducted
and to own, lease and operate its properties, and each is duly

-8-
<PAGE>

qualified and is in good standing as a foreign corporation authorized to do
business in each jurisdiction in which the nature of its business or its
ownership or leasing of property requires such qualification, except where
the failure to be so qualified would not have a material adverse effect on
the Company and its subsidiaries, taken as a whole. [add similar psp.
representation and language throughout].

(e) All of the outstanding shares of capital stock of, or other
ownership interests in, each of the Company's subsidiaries have been duly
authorized and validly issued and are fully paid and non-assessable and are
owned by the Company, free and clear of any security interest, claim, lien,
encumbrance or adverse interest of any nature except as disclosed in the
Prospectus.

(f) All the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholders) have been
duly authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights; and the Shares to be
issued and sold by the Company hereunder have been duly authorized and,
when issued and delivered to the Underwriters against payment therefor as
provided by this Agreement, will be validly issued, fully paid and non-
assessable, and the issuance of such Shares will not be subject to any
preemptive or similar rights.

(g) The authorized capital stock of the Company, including the Common
Stock, conforms as to legal matters to the description thereof contained in
the Prospectus.

(h) Neither the Company nor any of its subsidiaries is in violation of
its respective charter or by-laws or in default in the performance of any
obligation, agreement or condition contained in any bond, debenture, note
or any other evidence of indebtedness or in any other agreement, indenture
or instrument material to the conduct of the business of the Company and
its subsidiaries, taken as a whole, to which the Company or any of its
subsidiaries is a party or by which it or any of its subsidiaries or their
respective property is bound.

(i) The execution, delivery and performance of this Agreement,
compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not require any
consent, approval, authorization or other order of any court, regulatory
body, administrative agency or other governmental body (except as such may
be required under the securities or Blue Sky laws of the various states)
and will not conflict with or constitute a breach of any of the terms or
provisions of, or a default under, the charter or by-laws of the Company or
any of its subsidiaries or any agreement, indenture or other instrument to
which it or any of its subsidiaries is a party or by which it or any of its
subsidiaries or their respective property is bound, or violate or conflict
with any laws, administrative regulations or rulings or court decrees
applicable to the Company, any of its subsidiaries or their respective
property.

(j) Except as otherwise set forth in the Prospectus, there are no
material legal or governmental proceedings pending to which the Company or
any of its subsidiaries is a party or of which any of their respective
property is the subject, and, to the best of the Company's

-9-
<PAGE>

knowledge, no such proceedings are threatened or contemplated. No contract
or document of a character required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement is not so described or filed as required.

(k) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the
protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants ("Environmental
Laws"), nor any federal or state law relating to unfair business practices
or antitrust matters ("Antitrust Laws"), nor any federal or state law
relating to the regulation of health care service providers ("Health Care
Laws"), nor any federal or state law relating to discrimination in the
hiring, promotion or pay of employees nor any applicable federal or state
wages and hours laws, nor any provisions of the Employee Retirement Income
Security Act of 1974, as amended, or the rules and regulations promulgated
thereunder, which in each case might result in any material adverse change
in the business, prospects, financial condition or results of operation of
the Company and its subsidiaries, taken as a whole.

(l) The Company and each of its subsidiaries has such certificates,
permits, licenses, franchises and authorizations of governmental or
regulatory authorities ("permits"), including, without limitation, under
any applicable Health Care Laws, Antitrust Laws and Environmental Laws, as
are necessary to conduct its business or own, lease and operate its
respective properties; the Company and each of its subsidiaries has
fulfilled and performed all of its material obligations with respect to
such permits and no event has occurred which allows, or after notice or
lapse of time would allow, revocation or termination thereof or results in
any other material impairment of the rights of the holder of any such
permit; and, except as described in the Prospectus, such permits contain no
restrictions that are materially burdensome to the Company or any of its
subsidiaries.

(m) In the ordinary course of its business, the Company conducts a
periodic review of the effect of Health Care Laws, Antitrust Laws and
Environmental Laws on the business, operations and properties of the
Company and its subsidiaries, in the course of which it identifies and
evaluates associated costs and liabilities (including, without limitation,
any divestiture or reorganization of the Company or any Company-controlled
entity pursuant to Health Care Laws or Antitrust Laws or capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval, any
related constraints on operating activities and any potential liabilities
to third-parties). On the basis of such review, the Company has reasonably
concluded that such associated costs and liabilities would not, singly or
in the aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.

(n) Except as otherwise set forth in the Prospectus or such as are not
material to the business, prospects, financial condition or results of
operation of the Company and its subsidiaries, taken as a whole, the
Company and each of its subsidiaries has good and marketable title, free
and clear of all liens, claims, encumbrances and restrictions except liens
for taxes not yet due and payable, to all property and assets described in
the Registration Statement as being owned by it. All leases to which the
Company or any of its subsidiaries

-10-
<PAGE>

is a party are valid and binding and no default has occurred or is
continuing thereunder, which might result in any material adverse change in
the business, prospects, financial condition or results of operation of the
Company and its subsidiaries taken as a whole, and the Company and its
subsidiaries enjoy peaceful and undisturbed possession under all such
leases to which any of them is a party as lessee with such exceptions as do
not materially interfere with the use made by the Company or such
subsidiary.

(o) The Company and each of its subsidiaries maintains reasonably
adequate insurance.

(p) KPMG Peat Marwick LLP and Arthur Anderson LLP are independent
public accountants with respect to the Company as required by the Act.

(q) The financial statements, together with related schedules and
notes forming part of the Registration Statement and the Prospectus (and
any amendment or supplement thereto), present fairly the consolidated
financial position, results of operations and changes in financial position
of the Company and its subsidiaries on the basis stated in the Registration
Statement at the respective dates or for the respective periods to which
they apply; such statements and related schedules and notes have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; and the other financial and statistical information and data set
forth in the Registration Statement and the Prospectus (and any amendment
or supplement thereto) is, in all material respects, accurately presented
and prepared on a basis consistent with such financial statements and the
books and records of the Company.

(r) The Company is not an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.

(s) No holder of any security of the Company has any right to require
registration of shares of Common Stock or any other security of the
Company, except as otherwise disclosed in the Registration Statement.

(t) The Company has complied with all provisions of Section 517.075,
Florida Statutes (Chapter 92-198, Laws of Florida).

(u) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens related to or
entitling any person to purchase or otherwise to acquire any shares of the
capital stock of, or other ownership interest in, the Company or any
subsidiary thereof except as otherwise disclosed in the Registration
Statement.

(v) Except as disclosed in the Prospectus, there are no business
relationships or related party transactions required to be disclosed
therein by Item 404 of Regulation S-K of the Commission.

-11-
<PAGE>

(w) There is (i) no significant unfair labor practice complaint
pending against the Company or any of its subsidiaries or, to the best
knowledge of the Company, threatened against any of them, before the
National Labor Relations Board or any state or local labor relations board,
and no significant grievance or arbitration proceeding arising out of or
under any collective bargaining agreement is so pending against the Company
or any of its subsidiaries or, to the best knowledge of the Company,
threatened against any of them, and (ii) no significant strike, labor
dispute, slowdown or stoppage pending against the Company or any of its
subsidiaries or, to the best knowledge of the Company, threatened against
it or any of its subsidiaries except for such actions specified in clause
(i) or (ii) above, which, singly or in the aggregate could not reasonably
be expected to have a material adverse effect on the Company and its
subsidiaries, taken as a whole.

(x) All material tax returns required to be filed by the Company and
each of its subsidiaries in any jurisdiction have been filed, other than
those filings being contested in good faith, and all material taxes,
including withholding taxes, penalties and interest, assessments, fees and
other charges due pursuant to such returns or pursuant to any assessment
received by the Company or any of its subsidiaries have been paid, other
than those being contested in good faith and for which adequate reserves
have been provided.

(y) Except as disclosed in the Prospectus, each of the Company and its
subsidiaries owns or possesses the patents, patent licenses, trademarks,
trade names, service marks, service names, copyrights and other
intellectual property rights ("Intellectual Property") necessary to carry
on its business as presently conducted and neither the Company nor any of
its subsidiaries have received any notice of infringement or conflict with
asserted rights of others with respect to the Intellectual Property which,
singly or in the aggregate, if the subject of any unfavorable decision,
ruling or finding, would have a material adverse effect on the current or
future consolidated financial position, stockholders' equity or results of
operations of the Company and its subsidiaries.

7. Representations and Warranties of the Selling Stockholders. Each
----------------------------------------------------------
Selling Stockholder severally represents and warrants to each Underwriter that:

(a) Such Selling Stockholder is the lawful owner of the Shares to be
sold by such Selling Stockholder pursuant to this Agreement and has, and on
the Closing Date will have, good and clear title to such Shares, free of
all restrictions on transfer, liens, encumbrances, security interests and
claims whatsoever.

(b) Upon delivery of and payment for such Shares pursuant to this
Agreement, good and clear title to such Shares will pass to the
Underwriters, free of all restrictions on transfer, liens, encumbrances,
security interests and claims whatsoever.

(c) Such Selling Stockholder has, and on the Closing Date will have,
full legal right, power and authority to enter into this Agreement and the
Custody Agreement between the Selling Stockholders and [Kenneth S.
Shifrin], as Custodian (the "Custody Agreement"), and to sell, assign,
transfer and deliver such Shares in the manner provided herein and

-12-
<PAGE>

therein, and this Agreement and the Custody Agreement have been duly
authorized, executed and delivered by such Selling Stockholder and each of
this Agreement and the Custody Agreement is a valid and binding agreement
of such Selling Stockholder enforceable in accordance with its terms,
except as rights to indemnity and contribution hereunder may be limited by
applicable law.

(d) The power of attorney signed by such Selling Stockholder
appointing Kenneth S. Shifrin and Cheryl Williams, or either one of them,
as his attorney-in-fact to the extent set forth therein with regard to the
transactions contemplated hereby and by the Registration Statement and the
Custody Agreement has been duly authorized, executed and delivered by or on
behalf of such Selling Stockholder and is a valid and binding instrument of
such Selling Stockholder enforceable in accordance with its terms, and,
pursuant to such power of attorney, such Selling Stockholder has authorized
[Kenneth S. Shifrin] and [Cheryl Williams], or either one of them, to
execute and deliver on his behalf this Agreement and any other document
necessary or desirable in connection with transactions contemplated hereby
and to deliver the Shares to be sold by such Selling Stockholder pursuant
to this Agreement.

(e) Such Selling Stockholder has not taken, and will not take,
directly or indirectly, any action designed to, or which might reasonably
be expected to, cause or result in stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of
the Shares pursuant to the distribution contemplated by this Agreement, and
other than as permitted by the Act, the Selling Stockholder has not
distributed and will not distribute any prospectus or other offering
material in connection with the offering and sale of the Shares.

(f) The execution, delivery and performance of this Agreement by such
Selling Stockholder, compliance by such Selling Stockholder with all the
provisions hereof and the consummation of the transactions contemplated
hereby will not require any consent, approval, authorization or other order
of any court, regulatory body, administrative agency or other governmental
body (except as such may be required under the Act, state securities laws
or Blue Sky laws) and will not conflict with or constitute a breach of any
of the terms or provisions of, or a default under, the organizational
documents of such Selling Stockholder, if not an individual, or any
agreement, indenture or other instrument to which such Selling Stockholder
is a party or by which such Selling Stockholder or property of such Selling
Stockholder is bound, or violate or conflict with any laws, administrative
regulation or ruling or court decree applicable to such Selling Stockholder
or property of such Selling Stockholder.

(g) Such parts of the Registration Statement under the caption
"Principal and Selling Stockholders" which specifically relate to such
Selling Stockholder do not, and will not on the Closing Date, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of circumstances under which they were made, not misleading.

-13-
<PAGE>

(h) At any time during the period described in paragraph 5(e) hereof,
if there is any change in the information referred to in paragraph 7(g)
above, the Selling Stockholders will immediately notify you of such change.

8. Indemnification. (a) The Sellers, jointly and severally, agree to
---------------
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from
and against any and all losses, claims, damages, liabilities and judgments
caused by any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) or any preliminary prospectus, or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages, liabilities or judgments are caused by any such untrue
statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriters furnished in writing to the Company by
or on behalf of any Underwriter through you expressly for use therein; provided
--------
however. that the foregoing indemnity agreement with respect to any preliminary
- --------
prospectus shall not inure to the benefit of any Underwriter from whom the
person asserting any such losses, claims, damages and liabilities and judgments
purchased Shares, or any person controlling such Underwriter, if a copy of the
Prospectus (as then amended or supplemented if the Company shall have furnished
any amendments or supplements thereto) was not sent or given by or on behalf of
such Underwriter to such person, if required by law so to have been delivered,
at or prior to the written confirmation of the sale of the Shares to such
person, and if the Prospectus (as so amended and supplemented) would have cured
the defect giving rise to such loss, claim, damage, liability or judgment.
Notwithstanding the foregoing, the aggregate liability of any Selling
Stockholder pursuant to the provisions of this paragraph shall be limited to an
amount equal to the aggregate purchase price received by such Selling
Stockholder from the sale of such Selling Stockholder's Shares hereunder.

(b) In case any action shall be brought against any Underwriter or any
person controlling such Underwriter, based upon any preliminary prospectus,
the Registration Statement or the Prospectus or any amendment or supplement
thereto and with respect to which indemnity may be sought against the
Company and the Selling Stockholders, such Underwriter shall promptly
notify the Company and the Selling Stockholders in writing and the Company
and the Selling Stockholders shall assume the defense thereof, including
the employment of counsel reasonably satisfactory to such indemnified party
and payment of all fees and expenses. Any Underwriter or any such
controlling person shall have the right to employ separate counsel in any
such action and participate in the defense thereof, but the fees and
expenses of such counsel shall be at the expense of such Underwriter or
such controlling person unless (i) the employment of such counsel shall
have been specifically authorized in writing by the Company, (ii) the
Company and the Selling Stockholders shall have failed to assume the
defense and employ counsel reasonably satisfactory to such Underwriter or
controlling person or (iii) the named parties to any such action (including
any impleaded parties) include both such Underwriter or such controlling
person and the Company or any

-14-
<PAGE>

Selling Stockholder, as the case may be, and such Underwriter or such
controlling person shall have been advised by such counsel that there may
be one or more legal defenses available to it which are different from or
additional to those available to the Company or the Selling Stockholders,
as the case may be (in which case the Company and the Selling Stockholders
shall not have the right to assume the defense of such action on behalf of
such Underwriter or such controlling person, it being understood, however,
that the Company and the Selling Stockholders shall not, in connection with
any one such action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the fees and expenses of more
than one separate firm of attorneys (in addition to any local counsel) for
all such Underwriters and controlling persons, which firm shall be
designated in writing by Donaldson, Lufkin & Jenrette Securities
Corporation, and that all such fees and expenses shall be reimbursed
promptly as they are incurred). A Seller shall not be liable for any
settlement of any such action effected without the written consent of such
Seller but if settled with the written consent of such Seller, such Seller
agrees to indemnify and hold harmless any Underwriter and any such
controlling person from and against any loss or liability by reason of such
settlement. Notwithstanding the immediately preceding sentence, if in any
case where the fees and expenses of counsel are at the expense of the
indemnifying party and an indemnified party shall have requested the
indemnifying party to reimburse the indemnified party for such fees and
expenses of counsel as incurred, such indemnifying party agrees that it
shall be liable for any settlement of any action effected without its
written consent if (i) such settlement is entered into more than ten
business days after the receipt by such indemnifying party of the aforesaid
request and (ii) such indemnifying party shall have failed to reimburse the
indemnified party in accordance with such request for reimbursement prior
to the date of such settlement. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of
any pending or threatened proceeding in respect of which any indemnified
party is or could have been a party and indemnity could have been sought
hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on
claims that are the subject matter of such proceeding.

(c) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, any person controlling the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, each
Selling Stockholder and each person, if any, controlling such Selling
Stockholder within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act to the same extent as the foregoing indemnity from the
Sellers to each Underwriter but only with reference to information relating
to such Underwriter furnished in writing by or on behalf of such
Underwriter through you expressly for use in the Registration Statement,
the Prospectus or any preliminary prospectus. In case any action shall be
brought against the Company, any of its directors, any such officer or any
person controlling the Company or any Selling Stockholder or any person
controlling such Selling Stockholder based on the Registration Statement,
the Prospectus or any preliminary prospectus and in respect of which
indemnity may be sought against any Underwriter, the Underwriter shall have
the rights and duties given to the Sellers (except that if any Seller

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<PAGE>

shall have assumed the defense thereof, such Underwriter shall not be
required to do so, but may employ separate counsel therein and participate
in the defense thereof but the fees and expenses of such counsel shall be
at the expense of such Underwriter), and the Company, its directors, any
such officers and any person controlling the Company and the Selling
Stockholders and any person controlling such Selling Stockholders shall
have the rights and duties given to the Underwriter, by Section 8(b)
hereof.

(d) If the indemnification provided for in this Section 8 is
unavailable to an indemnified party in respect of any losses, claims,
damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, liabilities and judgments (i) in
such proportion as is appropriate to reflect the relative benefits received
by the Sellers on the one hand and the Underwriters on the other hand from
the offering of the Shares or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause
(i) above but also the relative fault of the Sellers and the Underwriters
in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other
relevant equitable considerations. The relative benefits received by the
Sellers and the Underwriters shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses)
received by the Sellers, and the total underwriting discounts and
commissions received by the Underwriters, bear to the total price to the
public of the Shares, in each case as set forth in the table on the cover
page of the Prospectus. The relative fault of the Sellers and the
Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
Company, the Selling Stockholders or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.

The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account the
equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant

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<PAGE>

to this Section 8(d) are several in proportion to the respective number of
Shares purchased by each of the Underwriters hereunder and not joint.

(e) Each Seller hereby designates the Company as its authorized agent,
upon which process may be served in any action, suit or proceeding which
may be instituted in any state or federal court in the State of New York by
any Underwriter or person controlling any Underwriter asserting a claim for
indemnification or contribution under or pursuant to this Section 8, and
each Seller will accept the jurisdiction of such court in such action, and
waives, to the fullest extent permitted by applicable law, any defense
based upon lack of personal jurisdiction or venue. A copy of any such
process shall be sent or given to such Seller, at the address for notices
specified in Section 12 hereof.

9. Conditions of Underwriters' Obligations. The several obligations of
---------------------------------------
the Underwriters to purchase the Firm Shares under this Agreement are subject to
the satisfaction of each of the following conditions:

(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same
force and effect as if made on and as of the Closing Date.

(b) The Registration Statement shall have become effective not later
than 5:00 P.M. (and in the case of a Registration Statement filed under
Rule 462(b) of the Act, not later than 10:00 p.m.), New York City time, on
the date of this Agreement or at such later date and time as you may
approve in writing, and on the Closing Date no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.

(c) (i) Since the date of the latest balance sheet included in the
Registration Statement and the Prospectus, there shall not have been any
material adverse change, or any development involving a prospective
material adverse change, in the condition, financial or otherwise, or in
the earnings, affairs or business prospects, whether or not arising in the
ordinary course of business, of the Company, (ii) since the date of the
latest balance sheet included in the Registration Statement and the
Prospectus there shall not have been any change, or any development
involving a prospective material adverse change, in the capital stock or in
the long-term debt of the Company from that set forth in the Registration
Statement and Prospectus, (iii) the Company and its subsidiaries shall have
no liability or obligation, direct or contingent, which is material to the
Company and its subsidiaries, taken as a whole, other than those reflected
in the Registration Statement and the Prospectus and (iv) on the Closing
Date you shall have received a certificate dated the Closing Date, signed
by Kenneth S. Shifrin and Joe Jenkins, M.D., in their capacities as the
Chairman of the Board and President of the Company, confirming the matters
set forth in paragraphs (a), (b), and (c) of this Section 9.

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<PAGE>

(d) All the representations and warranties of the Selling Stockholders
contained in this Agreement shall be true and correct on the Closing Date
with the same force and effect as if made on and as of the Closing Date and
you shall have received a certificate to such effect, dated the Closing
Date, from each Selling Stockholder or from such Selling Stockholders'
attorney-in-fact as described in Section 7(d) hereof.

(e) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing
Date, of Small, Craig & Werkenthin, a Professional Corporation, counsel for
the Company and the Selling Stockholders, to the effect that:

(i) the Company and each of its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation and has the
corporate power and authority required to carry on its business as it
is currently being conducted and to own, lease and operate its
properties;

(ii) the Company and each of its subsidiaries is duly qualified
and is in good standing as a foreign corporation authorized to do
business in each jurisdiction in which the nature of its business or
its ownership or leasing of property requires such qualification,
except where the failure to be so qualified would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole;

(iii) all of the outstanding shares of capital stock of, or other
ownership interests in, each of the Company's subsidiaries have been
duly and validly authorized and issued and are fully paid and non-
assessable, and are owned by the Company, free and clear of any
security interest, claim, lien, encumbrance or adverse interest of any
nature except as set forth in the Prospectus;

(iv) all the outstanding shares of Common Stock (including the
Shares to be sold by the Selling Stockholders) have been duly
authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights;

(v) the Shares to be issued and sold by the Company hereunder have
been duly authorized, and when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement,
will have been validly issued and will be fully paid and non-
assessable, and the issuance of such Shares is not subject to any
preemptive or similar rights;

(vi) this Agreement has been duly authorized, executed and
delivered by the Company and each of the Selling Stockholders and is a
valid and binding agreement of the Company and each Selling
Stockholder enforceable in accordance with its terms (except as rights
to indemnity and contribution hereunder may be limited by applicable
law);

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<PAGE>

(vii) the authorized capital stock of the Company, including the
Common Stock, conforms as to legal matters to the description thereof
contained in the Prospectus;

(viii) the Registration Statement has become effective under the
Act, no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are, to the knowledge of such counsel,
pending before or contemplated by the Commission;

(ix) the statements under the captions "Description of Capital
Stock" and "Underwriting" in the Prospectus and Item 15 of Part II of
the Registration Statement insofar as such statements constitute a
summary of legal matters, documents or proceedings referred to
therein, fairly present the information called for with respect to
such legal matters, documents and proceedings;

(x) neither the Company nor any of its subsidiaries is in
violation of its respective charter or by-laws and, to the best of
such counsel's knowledge after due inquiry, neither the Company nor
any of its subsidiaries is in default in the performance of any
obligation, agreement or condition contained in any bond, debenture,
note or any other evidence of indebtedness or in any other agreement,
indenture or instrument material to the conduct of the business of the
Company and its subsidiaries, taken as a whole, to which the Company
or any of its subsidiaries is a party or by which it or any of its
subsidiaries or their respective property is bound;

(xi) the execution, delivery and performance of this Agreement by
the Company and each Selling Stockholder, compliance by the Company
and each Selling Stockholder with all the provisions hereof and the
consummation of the transactions contemplated hereby will not require
any consent, approval, authorization or other order of any court,
regulatory body, administrative agency or other governmental body
(except as such may be required under the Act or other securities or
Blue Sky laws) and will not conflict with or constitute a breach of
any of the terms or provisions of, or a default under, the charter or
by-laws of the Company or any of its subsidiaries, the organizational
documents of any Selling Stockholder that is not an individual or any
agreement, indenture or other instrument to which the Company or any
of its subsidiaries or any Selling Stockholder is a party or by which
the Company or any of its subsidiaries or any Selling Stockholder or
their respective properties are bound, or violate or conflict with any
laws, administrative regulations or rulings or court decrees
applicable to the Company or any of its subsidiaries or any Selling
Stockholder or their respective properties;

(xii) after due inquiry, such counsel does not know of any legal
or governmental proceeding pending or threatened to which the Company
or any of its subsidiaries is a party or to which any of their
respective property is subject which is required to be described

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<PAGE>

in the Registration Statement or the Prospectus and is not so
described, or of any contract or other document which is required to
be described in the Registration Statement or the Prospectus or is
required to be filed as an exhibit to the Registration Statement which
is not described or filed as required;

(xiii) to the best of such counsel's knowledge, after due inquiry,
neither the Company nor any of its subsidiaries has violated any
Antitrust Laws, Health Laws or Environmental Laws, nor any federal or
state law relating to discrimination in the hiring, promotion or pay
of employees nor any applicable federal or state wages and hours laws,
nor any provisions of ERISA or the rules and regulations promulgated
thereunder, which in each case might result in any material adverse
change in the business, prospects, financial condition or results of
operation of the Company and its subsidiaries, taken as a whole;

(xiv) the Company and each of its subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits"), including, without limitation, under any
Antitrust Laws, Health Laws or Environmental Laws, as are necessary to
conduct their businesses in the manner described in the Prospectus and
own, lease and operate their respective properties; to the best of
such counsel's knowledge, after due inquiry, the Company and each of
its subsidiaries has fulfilled and performed all of their material
obligations with respect to such permits and no event has occurred
which allows, or after notice or lapse of time would allow, revocation
or termination thereof or results in any other material impairment of
the rights of the holder of any such permit, subject in each case to
such qualifications as may be set forth in the Prospectus; and, except
as described in the Prospectus, such permits contain no restrictions
that are materially burdensome to the Company or any of its
subsidiaries;

(xv) the Company is not an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended;

(xvi) no holder of any security of the Company has any right to
require registration of shares of Common Stock or any other security
of the Company except as described in the Registration Statement and
the sale of the Shares does not violate the terms of any such
agreement described in the Registration Statement;

(xvii) (1) the Registration Statement (including any Registration
Statement filed under 462(b) of the Act, if any) and the Prospectus
and any supplement or amendment thereto (except for financial
statements as to which no opinion need be expressed) comply as to form
in all material respects with the Act, and (2) such counsel believes
that (except for financial statements, as aforesaid) the Registration
Statement and the prospectus included therein at the time the
Registration Statement became effective did not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and that the Prospectus, as amended or supplemented, if
applicable (except for financial statements, as aforesaid) does not
contain any untrue

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<PAGE>

statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;

(xviii) to the best of such counsel's knowledge, after due
inquiry, all leases to which the Company or any of its subsidiaries is
a party are valid and binding and no default has occurred or is
continuing thereunder, which might result in any material adverse
change in the business, prospects, financial condition or results of
operation of the Company and its subsidiaries, taken as a whole, and
the Company and its subsidiaries enjoy peaceful and undisturbed
possession under all such leases to which any of them is a party as
lessee with such exceptions as do not materially interfere with the
use made by the Company or such subsidiary;

(xix) the Custody Agreement has been duly authorized, executed and
delivered by each Selling Stockholder and is a valid and binding
agreement of such Selling Stockholder enforceable in accordance with
its terms;

(xx) each Selling Stockholder has full legal right, power and
authority, and any approval required by law (other than any approval
imposed by the applicable state securities and Blue Sky laws) to sell,
assign, transfer and deliver the Shares to be sold by him in the
manner provided in this Agreement and the Custody Agreement;

(xxi) each Selling Stockholder has good and clear title to the
certificates for the Shares to be sold by him and upon delivery
thereof, pursuant hereto and payment therefor, good and clear title
will pass to the Underwriters, severally, free of all restrictions on
transfer, liens, encumbrances, security interests and claims
whatsoever; and

(xxii) the power of attorney signed by each Selling Stockholder
appointing Kenneth S. Shifrin and Cheryl Williams, or either of them,
as his attorney-in-fact to the extent set forth therein with regard to
the transactions contemplated hereby and by the Registration Statement
has been duly authorized, executed and delivered by or on behalf of
each Selling Stockholder and is a valid and binding instrument of such
Selling Stockholder enforceable in accordance with its terms, and
pursuant to such power of attorney, each of the Selling Stockholders
has authorized Kenneth S. Shifrin and Cheryl Williams, or either of
them, to execute and deliver on their behalf this Agreement and any
other document necessary or desirable in connection with the
transactions contemplated hereby and to deliver the Shares to be sold
by him or it pursuant to this Agreement.

In giving such opinion with respect to the matters covered by clause (xvii)
such counsel may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and Prospectus
and any amendments or supplements thereto and review and

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<PAGE>

discussion of the contents thereof, but are without independent check or
verification except as specified.

The opinion of Small, Craig & Werkenthin, a Professional Corporation,
described in paragraph (e) above shall be rendered to you at the request of the
Company or one or more of the Selling Stockholders, as the case may be, and
shall so state therein.

(f) You shall have received on the Closing Date an opinion (reasonably
satisfactory to you and counsel for the Underwriters), dated the Closing
Date, of ________ to the effect that:

(i) each of the Company and its subsidiaries has such permits,
licenses, franchises, consents, approvals, orders, certificates and
authorizations of governmental or regulatory authorities ("permits")
as are necessary to own, lease and operate its respective properties
and to conduct its business in the manner described in the Prospectus
except where the failure to have a permit would not, individually or
in the aggregate, have a material adverse effect on the Company and
its subsidiaries, taken as a whole;

(ii) to the best of such counsel's knowledge, each of the Company
and its subsidiaries has fulfilled and performed all of its material
obligations with respect to such permits and no event has occurred
which allows, or after notice or lapse of time would allow, revocation
or termination thereof or results in any other material impairment of
the rights of the holder of any such permit, subject in each case to
such qualification as may be set forth in the Prospectus, except where
the failure to perform or fulfill such material obligations or the
occurrence of any such event would not, individually or in the
aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole; and

(iii) to the best of such counsel's knowledge, each permit is in
full force and effect, each of the Company and its subsidiaries is
operating in compliance with its permits, and there are no proceedings
pending or threatened against the Company or any of its subsidiaries
that seek to cause any permit material to the conduct or prospects of
the business of the Company and its subsidiaries to be revoked,
withdrawn, cancelled, suspended or not renewed, except where the
failure of a permit to be in full force or effect or noncompliance
with a permit would not, individually or in the aggregate, have a
material adverse effect on the Company and its subsidiaries, taken as
a whole.

(g) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Vinson & Elkins L.L.P., counsel for the Underwriters, as
to the matters referred to in clauses (v), (vi) (but only with respect to
the Company), (viii), (ix) (but only with respect to the statements under
the captions "Description of Capital Stock" and "Underwriting") and (xvii)
of the foregoing paragraph (e). In giving such opinion with respect to the
matters covered by clause (xvii) such counsel may state that their opinion
and belief are based upon

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<PAGE>

their participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto and review and
discussion of the contents thereof, but are without independent check or
verification except as specified.

(h) You shall have received a letter on and as of the Closing Date, in
form and substance satisfactory to you, from each of KPMG Peat Marwick
L.L.P. and Arthur Andersen L.L.P., with respect to the financial statements
and certain financial information contained in the Registration Statement
and the Prospectus and substantially in the form and substance of the
letter delivered to you by each of KPMG Peat Marwick L.L.P. and Arthur
Andersen L.L.P. on the date of this Agreement.

(i) The Company shall have delivered to you the agreements specified
in Section 2 hereof.

(j) The Company and the Selling Stockholders shall not have failed at
or prior to the Closing Date to perform or comply with any of the
agreements herein contained and required to be performed or complied with
by the Company and the Selling Stockholders at or prior to the Closing
Date.

(k) You shall have received on the Closing Date, a certificate of each
Selling Stockholder who is not a U.S. Person to the effect that such
Selling Stockholder is not a U.S. Person (as defined under applicable U.S.
federal tax legislation), which certificate may be in the form of a
properly completed and executed United States Treasury Department Form W-8
(or other applicable form or statement specified by Treasury Department
regulations in lieu thereof).

The several obligations of the Underwriters to purchase any Additional Shares
hereunder are subject to the same conditions as set forth in this Section 9
relating to the Firm Shares and the delivery to the U.S. Representatives on the
applicable Option Closing Date of such other documents as you may reasonably
request with respect to the good standing of the Company, the due authorization
and issuance of such Additional Shares and other matters related to the issuance
of such Additional Shares.

10. Effective Date of Agreement and Termination. This Agreement shall
-------------------------------------------
become effective upon the later of (i) execution of this Agreement and (ii) when
notification of the effectiveness of the Registration Statement has been
released by the Commission.

This Agreement may be terminated at any time prior to the Closing Date by you by
written notice to the Company if any of the following has occurred: (i) since
the respective dates as of which information is given in the Registration
Statement and the Prospectus, any material adverse change or development
involving a prospective material adverse change in the condition, financial or
otherwise, of the Company and its subsidiaries, taken as a whole, or the
earnings, affairs, or business prospects of the Company and its subsidiaries,
taken as a whole, whether or not arising in the ordinary course of business,
which would, in your judgment, make it impracticable to market the Shares on the
terms and in the manner contemplated in the Prospectus; (ii) any outbreak or
escalation

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<PAGE>

of hostilities or other national or international calamity or crisis or change
in economic conditions or in the financial markets of the United States or
elsewhere that, in your judgment, is material and adverse and would, in your
judgment, make it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus; (iii) the suspension or material
limitation of trading in securities on the New York Stock Exchange, the American
Stock Exchange or The Nasdaq Stock Market or limitation on prices for securities
on any such exchange or trading systems; (iv) the enactment, publication, decree
or other promulgation of any federal or state statute, regulation, rule or order
of any court or other governmental authority which in your opinion materially
and adversely affects, or will materially and adversely affect, the business or
operations of the Company or any Subsidiary; (v) the declaration of a banking
moratorium by either federal or New York State authorities; or (vi) the taking
of any action by any federal, state or local government or agency in respect of
its monetary or fiscal affairs which in your opinion has a material adverse
effect on the financial markets in the United States.

If on the Closing Date or on an Option Closing Date, as the case may be,
any one or more of the U.S. Underwriters shall fail or refuse to purchase the
U.S. Firm Shares or U.S. Additional Shares, as the case may be, which it or they
have agreed to purchase hereunder on such date and the aggregate number of U.S.
Firm Shares or U.S. Additional Shares, as the case may be, which such defaulting
U.S. Underwriter or U.S. Underwriters, as the case may be, agreed but failed or
refused to purchase is not more than one-tenth of the total number of U.S. Firm
Shares or U.S. Additional Shares, as the case may be, to be purchased on such
date by all U.S. Underwriters, each non-defaulting U.S. Underwriter shall be
obligated severally, in the proportion which the number of U.S. Firm Shares set
forth opposite its name in Schedule I bears to the total number of U.S. Firm
Shares which all the non-defaulting US. Underwriters, as the case may be, have
agreed to purchase, or in such other proportion as you may specify, to purchase
the U.S. Firm Shares or U.S. Additional Shares, as the case may be, which such
defaulting U.S. Underwriter or U.S. Underwriters, as the case may be, agreed but
failed or refused to purchase on such date; provided that in no event shall the
--------
number of U.S. Firm Shares or U.S. Additional Shares, as the case may be, which
any U.S. Underwriter has agreed to purchase pursuant to Section 2 hereof be
increased pursuant to this Section 10 by an amount in excess of one-ninth of
such number of U.S. Firm Shares or U.S. Additional Shares, as the case may be,
without the written consent of such U.S. Underwriter. If on the Closing Date or
on an Option Closing Date, as the case may be, any U.S. Underwriter or U.S.
Underwriters shall fail or refuse to purchase U.S. Firm Shares, or U.S.
Additional Shares, as the case may be, and the aggregate number of U.S. Firm
Shares or U.S. Additional Shares, as the case may be, with respect to which such
default occurs is more than one-tenth of the aggregate number of U.S. Firm
Shares or U.S. Additional Shares, as the case may be, to be purchased on such
date by all U.S. Underwriters and arrangements satisfactory to you and the
applicable Sellers for purchase of such Shares are not made within 48 hours
after such default, this Agreement will terminate without liability on the part
of any non-defaulting U.S. Underwriter and the applicable Sellers. In any such
case which does not result in termination of this Agreement, either you or the
Sellers shall have the right to postpone the Closing Date or the applicable
Option Closing Date, as the case may be, but in no event for longer than seven
days, in order that the required changes, if any, in the Registration Statement
and the Prospectus or any other documents or arrangements may be effected. Any
action taken under this paragraph shall not relieve any defaulting U.S.
Underwriter from liability in respect of any default of any such U.S.
Underwriter under this Agreement.

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<PAGE>

If on the Closing Date or on an Option Closing Date, as the case may be,
any one or more of the International Managers shall fail or refuse to purchase
the International Firm Shares or International Additional Shares, as the case
may be, which it or they have agreed to purchase hereunder on such date and the
aggregate number of International Firm Shares or International Additional
Shares, as the case may be, which such defaulting International Managers, as the
case may be, agreed but failed or refused to purchase is not more than one-tenth
of the total number of International Firm Shares or International Additional
Shares, as the case may be, to be purchased on such date by all International
Managers, each non-defaulting International Manager shall be obligated
severally, in the proportion which the number of International Firm Shares set
forth opposite its name in Schedule II bears to the total number of
International Firm Shares which all the non-defaulting International Managers,
as the case may be, have agreed to purchase, or in such other proportion as you
may specify, to purchase the International Firm Shares or International
Additional Shares, as the case may be, which such defaulting International
Manager or International Managers, as the case may be, agreed but failed or
refused to purchase on such date; provided that in no event shall the number of
--------
International Firm Shares or International Additional Shares, as the case may
be, which any International Manager has agreed to purchase pursuant to Section 2
hereof be increased pursuant to this Section 10 by an amount in excess of one-
ninth of such number of International Firm Shares or International Additional
Shares, as the case may be, without the written consent of such International
Manager. If on the Closing Date or on an Option Closing Date, as the case may
be, any International Manager or International Managers shall fail or refuse to
purchase International Firm Shares, or International Additional Shares, as the
case may be, and the aggregate number of International Firm Shares or
International Additional Shares, as the case may be, with respect to which such
default occurs is more than one-tenth of the aggregate number of International
Firm Shares or International Additional Shares, as the case may be, to be
purchased on such date by all International Managers and arrangements
satisfactory to you and the Company for purchase of such Shares are not made
within 48 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting International Manager and the
Company. In any such case which does not result in termination of this
Agreement, either you or the Company shall have the right to postpone the
Closing Date or the applicable Option Closing Date, as the case may be, but in
no event for longer than seven days, in order that the required changes, if any,
in the Registration Statement and the Prospectus or any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve any defaulting International Manager from liability in respect of any
default of any such International Manager under this Agreement.

11. Agreements of the Selling Stockholders. Each Selling Stockholder
--------------------------------------
severally agrees with you and the Company:

(a) To pay or to cause to be paid all transfer taxes with respect to
the Shares to be sold by such Selling Stockholder; and

(b) To take all reasonable actions in cooperation with the Company and
the Underwriters to cause the Registration Statement to become effective at
the earliest possible time, to do and perform all things to be done and
performed under this Agreement prior to the Closing Date and to satisfy all
conditions precedent to the delivery of the Shares pursuant to this
Agreement.

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<PAGE>

12. Miscellaneous. Notices given pursuant to any provision of this
-------------
Agreement shall be addressed as follows: (a) if to the Company, to Cheryl
Williams, Chief Financial Officer, Prime Medical Services, Inc., 1301 Capital of
Texas Hwy., Suite C-300, Austin, Texas 78746-6550 (b) if to the Selling
Stockholders, to Kenneth S. Shifrin c/o Prime Medical Services, Inc. and (c) if
to any Underwriter or to you, to you c/o Donaldson, Lufkin & Jenrette Securities
Corporation, 140 Broadway, New York, New York 10005, Attention: Syndicate
Department, or in any case to such other address as the person to be notified
may have requested in writing.

The respective indemnities, contribution agreements, representations,
warranties and other statements of the Selling Stockholders, the Company, its
officers and directors and of the several Underwriters set forth in or made
pursuant to this Agreement shall remain operative and in full force and effect,
and will survive delivery of and payment for the Shares, regardless of (i) any
investigation, or statement as to the results thereof, made by or on behalf of
any Underwriter or by or on behalf of the Sellers, the officers or directors of
the Company or any controlling person of the Sellers, (ii) acceptance of the
Shares and payment for them hereunder and (iii) termination of this Agreement.

If this Agreement shall be terminated by the Underwriters because of any
failure or refusal on the part of the Sellers to comply with the terms or to
fulfill any of the conditions of this Agreement, the Sellers agree to reimburse
the several Underwriters for all out-of-pocket expenses (including the fees and
disbursements of counsel) reasonably incurred by them.

Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Sellers, the Underwriters, any
controlling persons referred to herein and their respective successors and
assigns, all as and to the extent provided in this Agreement, and no other
person shall acquire or have any right under or by virtue of this Agreement.
The term "successors and assigns" shall not include a purchaser of any of the
Shares from any of the several Underwriters merely because of such purchase.

This Agreement shall be governed and construed in accordance with the laws
of the State of New York.

This Agreement may be signed in various counterparts which together shall
constitute one and the same instrument.

-26
<PAGE>

Please confirm that the foregoing correctly sets forth the agreement
between the Company, the Selling Stockholders and the several Underwriters.

Very truly yours,

PRIME MEDICAL SERVICES, INC.

By: ______________________________
Title:

THE SELLING STOCKHOLDERS NAMED
IN SCHEDULE III HERETO

By: _______________________________
Attorney-in-fact

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PRUDENTIAL SECURITIES INCORPORATED

Acting severally on behalf of themselves and
the several U.S. Underwriters named in Schedule I hereto

By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

By ___________________________________

-27-
<PAGE>

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PRUDENTIAL SECURITIES INCORPORATED

Acting severally on behalf of themselves and
the several International Managers named in
Schedule II hereto

By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

By ____________________________________

-28-
<PAGE>

SCHEDULE I
----------

Number of Firm Shares
U.S. Underwriters to be Purchased
----------------- --------------------------

Donaldson, Lufkin & Jenrette
Securities Corporation
Prudential Securities Incorporated

_______________________

Total [_______________]

-29-
<PAGE>

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

Number of Firm Shares
International Managers to be Purchased
---------------------- --------------------------

Donaldson, Lufkin & Jenrette
Securities Corporation
Prudential Securities Incorporated

_______________________

Total [___________]

-30-
<PAGE>

SCHEDULE III
------------

Selling Stockholders
--------------------

- ----------------------------------------------------------------
Name Number of Firm
Shares being Sold
- ----------------------------------------------------------------
<S> <C>
American Physicians Service Group, Inc. [2,500,000]
- ----------------------------------------------------------------
Alabama Lithotripsy Joint Venture [724,597]
- ----------------------------------------------------------------
FSC Corporation [352,000]
- ----------------------------------------------------------------
Atlantic Equity Corporation [168,000]
- ----------------------------------------------------------------
Kidney Stone Center of South Florida, Ltd. [305,467]
- ----------------------------------------------------------------
Sutter Health / California Healthcare System [226,771]
- ----------------------------------------------------------------
Health Advantage Ventures [303,021]
- ----------------------------------------------------------------
Robert L. Dale, M.D. [33,437]
- ----------------------------------------------------------------
Robert L. Dale, M.D., Inc. [28,824]
- ----------------------------------------------------------------
J. Kersten Kraft, M.D. [30,264]
- ----------------------------------------------------------------
J. Kersten Kraft, M.D., Inc. [27,806]
- ----------------------------------------------------------------
Mobile Kidney Stone Center, Inc. [65,053]
- ----------------------------------------------------------------
Paul R. Butrus [142,000]
- ----------------------------------------------------------------

</TABLE>

_______________________

Total 4,907,240

-31-

<PAGE>

EXHIBIT 23(b)

INDEPENDENT AUDITORS' CONSENT

The Board of Directors
Prime Medical Services, Inc.:

We consent to the use of our report included herein, to the use of our report
incorporated by reference herein, and to the reference to our firm under the
headings "Selected Consolidated Financial & Operating Data" and "Experts" in the
prospectus.

KPMG Peat Marwick LLP

Austin, Texas
June 11, 1996

<PAGE>

EXHIBIT 23(c)

ARTHUR ANDERSEN LLP

Consent of Independent Public Accountants

As independent public accountants, we hereby consent to the use of our report
dated March 1, 1996, on the consolidated financial statements of Lithotripters,
Inc. as of December 31, 1995, 1994 and 1993, and for the years then ended, in
Amendment No. 1 to the Registration Statement on Form S-3 and to all references
to our firm included in Amendment No. 1 to this Registration Statement, and as
incorporated by reference in the Form 8-K/A dated June 4, 1996, of Prime Medical
Services, Inc.

/s/ Arthur Andersen LLP
--------------------------
ARTHUR ANDERSEN LLP

Raleigh, North Carolina,
June 11, 1996.