_______________________________________________________

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_____________________________

FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2004
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities and Exchange Act of 1934
For the transition period from
______ to ______

Commission File Number: 0-22392

Prime Medical Services, Inc.
(Exact name of registrant as specified in its charter)

	DELAWARE				74-2652727
	(State or other jurisdiction of incorporation or organization)				(IRS Employer Identification No.)

1301 Capitol of Texas Highway, Suite 200B, Austin, Texas 78746
(Address of principal executive offices) (Zip Code)

(512) 328-2892
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES X NO

Indicate by check mark whether the registrant is an accelerated filer (as described in Rule 12b-2 of the Exchange Act).

YES X NO

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Title of Each Class
Common Stock, $.01 par value

Number of Shares Outstanding at
November 1, 2004
20,705,335

PART I

ITEM 1 — FINANCIAL INFORMATION

-2-

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands, except per share data)	2004			2003			2004			2003
Revenue:
Urology	$	20,003		$	15,658		$	55,989		$	45,756
Manufacturing		26,192			23,641			80,462			70,780
Other		237			260			712			785

Total revenue		46,432			39,559			137,163			117,321

Cost of services and general and
administrative expenses:
Urology		9,155			5,963			24,861			18,974
Manufacturing		24,076			22,503			73,287			64,923
Corporate		700			901			2,724			2,341
Depreciation and amortization		1,837			1,759			5,303			5,410

		35,768			31,126			106,175			91,648

Operating income		10,664			8,433			30,988			25,673

Other income (expenses):
Interest and dividends		58			43			207			264
Interest expense		(2,380	)		(2,338	)		(7,033	)		(6,875	)
Loan fees		--			(257	)		--			(257	)
Other, net		76			203			44			(55	)

		(2,246	)		(2,349	)		(6,782	)		(6,923	)

Income before provision for income
taxes and minority interests		8,418			6,084			24,206			18,750

Minority interest in consolidated income		6,592			4,910			16,856			12,803

Provision for income taxes		584			399			2,605			2,022

Net income	$	1,242		$	775		$	4,745		$	3,925

Basic earnings per share:
Net income	$	0.06		$	0.05		$	0.24		$	0.23

Weighted average shares outstanding		20,680			17,145			20,012			17,182

Diluted earnings per share:
Net income	$	0.06		$	0.04		$	0.23		$	0.23

Weighted average shares outstanding		21,013			17,366			20,282			17,387

See accompanying notes to consolidated financial statements.

-3-

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

($ in thousands)	September 30, 2004 (Unaudited)			December 31, 2003 (Audited)
ASSETS

Current assets:
Cash and cash equivalents	$	6,385		$	9,780
Accounts receivable, less allowance for doubtful
accounts of $444 in 2004 and $512 in 2003		24,456			27,245
Other receivables		731			795
Deferred income taxes		13,021			8,385
Prepaid expenses and other current assets		2,328			1,617
Inventory		30,506			21,288

Total current assets		77,427			69,110

Property and equipment:
Equipment, furniture and fixtures		42,104			40,161
Building and leasehold improvements		12,188			11,235

		54,292			51,396
Less accumulated depreciation and amortization		(26,776	)		(27,440	)

Property and equipment, net		27,516			23,956


Other investments		2,916			3,088
Goodwill, at cost		185,882			177,974
Other noncurrent assets		6,841			5,840

	$	300,582		$	279,968

See accompanying notes to consolidated financial statements.

-4-

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

($ in thousands, except share data)	September 30, 2004 (Unaudited)			December 31, 2003 (Audited)
LIABILITIES

Current liabilities:
Current portion of long-term debt	$	3,397		$	3,345
Accounts payable		9,362			8,617
Accrued distributions to minority interests		--			6,908
Accrued expenses		13,728			10,137
Customer deposits		6,904			6,259

Total current liabilities		33,391			35,266

Long-term debt, net of current portion		107,040			111,728
Other long term obligations		1,279			1,397
Deferred income taxes		21,003			17,889

Total liabilities		162,713			166,280

Minority interest		9,076			7,077

STOCKHOLDERS' EQUITY

Preferred stock, $.01 par value; 1,000,000 shares authorized; none outstanding		--			--
Common stock, $0.01 par value; 40,000,000 shares authorized; 21,078,633 shares issued
in 2004 and 17,324,585 issued in 2003; and 20,695,667 outstanding in 2004 and		211			173
17,081,869 outstanding in 2003
Capital in excess of par value		88,916			70,813
Accumulated earnings		41,584			36,839
Treasury stock, at cost, 382,966 shares in 2004 and 242,716 shares in 2003		(1,918	)		(1,214	)

Total stockholders' equity		128,793			106,611

	$	300,582		$	279,968

See accompanying notes to consolidated financial statements.

-5-

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

	Nine Months Ended September 30,
($ in thousands)	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Fee and other revenue collected	$	143,092		$	120,355
Cash paid to employees, suppliers of goods and others		(114,133	)		(92,421	)
Interest received		207			264
Interest paid		(4,991	)		(3,397	)
Taxes refunded		794			8

Net cash provided by operating activities		24,969			24,809

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of entities, net of cash acquired		3,155			(12,513	)
Escrow deposits		513			(1,742	)
Purchases of equipment and leasehold improvements		(6,403	)		(5,128	)
Distributions from investments		232			274
Proceeds from sales of equipment		568			243

Net cash used in investing activities		(1,935	)		(18,866	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable		1,491			19,572
Payments on notes payable, exclusive of interest		(5,776	)		(14,148	)
Distributions to minority interest		(22,509	)		(21,346	)
Contributions by minority interest, net of buyouts		153			(280	)
Purchase of treasury stock		--			(1,214	)
Exercise of stock options		212			--

Net cash used in financing activities		(26,429	)		(17,416	)

NET DECREASE IN CASH AND CASH EQUIVALENTS		(3,395	)		(11,473	)

Cash and cash equivalents, beginning of period		9,780			20,174

Cash and cash equivalents, end of period	$	6,385		$	8,701

See accompanying notes to consolidated financial statements.

-6-

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

	Nine Months Ended September 30,
($ in thousands)	2004			2003
Reconciliation of net income to net cash provided by operating activities:
Net income	$	4,745		$	3,925
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest in consolidated income		16,856			12,803
Depreciation and amortization		5,303			5,410
Provision for uncollectible accounts		(97	)		218
Provision for deferred income taxes		1,741			4,667
Stock buyback agreements		(816	)		850
Equity in earnings of affiliates		(60	)		(48	)
Proceeds from termination of interest rate swap		--			1,151
Other		(418	)		356

Changes in operating assets and liabilities, net of effect of purchase transactions:
Accounts receivable		5,515			1,946
Other receivables		(217	)		2,285
Other assets		(6,320	)		(2,961	)
Accounts payable		(1,630	)		(4,028	)
Accrued expenses		367			(1,765	)

Total adjustments		20,224			20,884

Net cash provided by operating activities	$	24,969		$	24,809

See accompanying notes to consolidated financial statements.

-7-

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(Unaudited)

1. General

The accompanying unaudited consolidated financial statements have been prepared in conformity with the accounting principles for interim financial statements and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These consolidated financial statements reflect all adjustments which are, in our opinion, necessary for a fair presentation of the statement of the financial position as of September 30, 2004 and the results of operations and cash flows for the periods presented. These statements have not been audited by our independent registered public accounting firm. 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 our Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and 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 and as discussed herein.

On June 11, 2004, we executed a definitive Agreement and Plan of Merger with HealthTronics Surgical Services, Inc. (HealthTronics) pursuant to which we will, if all closing conditions are met (including approval of the merger by our stockholders and HealthTronics shareholders), merge with and into HealthTronics, with HealthTronics as the surviving corporation. Under the terms of that agreement, as a result of the merger, our stockholders will receive one share of HealthTronics common stock for each share of our common stock. Because our stockholders will own approximately 62% of the shares of HealthTronics common stock after the merger, and because our directors and senior management will represent a majority of the combined company’s directors and senior management, we will be deemed to be the acquiring company for accounting purposes and the merger will be accounted for as a reverse acquisition under the purchase method of accounting for business combinations in accordance with accounting principles generally accepted in the United States. The consideration paid (purchase price) will be allocated to the tangible and intangible net assets of HealthTronics based on their fair values, and the net assets of HealthTronics will be recorded at fair values as of the completion of the merger and added to those of Prime. The assets acquired and liabilities assumed will be deemed to be those of HealthTronics because HealthTronics will be the surviving legal entity.

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

-8-

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 (continued)
(Unaudited)

2. Earnings per share (continued)

($ in thousands, except per share data)	Basic earnings per share		Diluted earnings per share

Nine Months Ended September 30, 2004

Net income	$	4,745	$	4,745

Weighted average shares outstanding		20,012		20,012
Effect of dilutive securities		--		270

Shares for EPS calculation		20,012		20,282

Net income per share	$	0.24	$	0.23


Nine Months Ended September 30, 2003

Net income	$	3,925	$	3,925

Weighted average shares outstanding		17,182		17,182
Effect of dilutive securities		--		205

Shares for EPS calculation		17,182		17,387

Net income per share	$	0.23	$	0.23

Three Months Ended September 30, 2004

Net income	$	1,242	$	1,242

Weighted average shares outstanding		20,680		20,680
Effect of dilutive securities		--		333

Shares for EPS calculation		20,680		21,013

Net income per share	$	0.06	$	0.06

Three Months Ended September 30, 2003

Net income	$	775	$	775

Weighted average shares outstanding		17,145		17,145
Effect of dilutive securities		--		221

Shares for EPS calculation		17,145		17,366

Net income per share	$	0.05	$	0.04

-9-

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 (continued)
(Unaudited)

2. Earnings per share (continued)

We did not include in our computation of diluted EPS unexercised stock options and warrants to purchase 1,625,000 and 3,050,000 shares of our common stock as of September 30, 2004 and 2003, respectively, because the effect would be antidilutive.

3. Segment Reporting

We have two reportable segments: urology and manufacturing. The urology segment provides services related to the operation of the lithotripters, including scheduling, staffing, training, quality assurance, maintenance, regulatory compliance and contracting with payors, hospitals and surgery centers. The manufacturing segment provides manufacturing services and installation, upgrade, refurbishment and repair of major medical equipment for mobile medical service providers and the mobile broadcast and communication industry.

We measure performance based on the pretax income or loss from our operating segments, which does not include unallocated corporate general and administrative expenses and corporate interest revenue and expense.

($ in thousands)	Urology		Manufacturing

Nine Months Ended
September 30, 2004

Revenue from
external customers	$	55,989	$	80,462

Intersegment revenues		--		--

Segment profit		10,044		6,308



Nine Months Ended
September 30, 2003

Revenue from
external customers	$	45,756	$	70,780

Intersegment revenues		--		603

Segment profit		9,775		5,039

-10-

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 (continued)
(Unaudited)

3.	Segment Reporting (continued)

The following is a reconciliation of the measure of segment profit per above to consolidated income before provision for income taxes per the consolidated statements of operations:

($ in thousands)	Nine Months Ended September 30, 2004 2003

Total segment profit	$	16,352		$	14,814
Corporate revenues		712			785
Unallocated corporate expenses:
General and administrative		(2,724	)		(2,341	)
Net interest expense		(6,574	)		(6,299	)
Loan Fees		--			(257	)
Other, net		(416	)		(755	)

Total unallocated corporate expenses		(9,714	)		(9,652	)

Income before income taxes	$	7,350		$	5,947

($ in thousands)	Urology		Manufacturing

Three Months Ended
September 30, 2004

Revenue from
external customers	$	20,003	$	26,192

Intersegment revenues		--		--

Segment profit		2,849		1,842



Three Months Ended
September 30, 2003

Revenue from
external customers	$	15,658	$	23,641

Intersegment revenues		--		--

Segment profit		3,756		840

-11-

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 (continued)
(Unaudited)

3.	Segment Reporting (continued)

The following is a reconciliation of the measure of segment profit per above to consolidated income before provision for income taxes per the consolidated statements of operations:

($ in thousands)	Three Months Ended September 30, 2004 2003

Total segment profit	$	4,691		$	4,596
Corporate revenues		237			260
Unallocated corporate expenses:
General and administrative		(700	)		(901	)
Net interest expense		(2,247	)		(2,165	)
Loan fees		--			(257	)
Other, net		(155	)		(359	)

Total unallocated corporate expenses		(3,102	)		(3,682	)

Income before income taxes	$	1,826		$	1,174

4. Stock-Based Compensation

Upon adoption of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“Statement 123”), in 1996, we have continued to measure compensation expense for our stock-based employee compensation plans using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. We have provided 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.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004		2003
Net income, as reported	$	1,242	$	775	$	4,745	$	3,925
Stock-based employee compensation
expense, net of tax		282		275		866		1,046
Pro forma net income	$	960	$	500	$	3,879	$	2,879
Pro forma earning per share:
Basic	$	0.05	$	0.03	$	0.19	$	0.17
Diluted	$	0.05	$	0.03	$	0.19	$	0.17

-12-

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 (continued)
(Unaudited)

5. Acquisitions

Effective February 20, 2004, we acquired Medstone International, Inc. (“Medstone”). Medstone manufactures, sells, and maintains lithotripters and makes them available for use by health care providers under various fee-for-service arrangements in both fixed and mobile settings. Medstone and its subsidiaries also market fixed and mobile tables for urological treatments and imaging, patient handling tables for use by pain management clinics and other users, and x-ray generators for medical imaging. A pioneer in the manufacture of shockwave lithotripsy, Medstone’s lithotripter was the first FDA approved device to treat both kidney stones and gallstones. With more than 130 lithotripters in operation worldwide, and more than 324 urology and patient handling tables in use, the Medstone devices are well established in the urology office and hospital market. The aggregate purchase price was approximately $19 million of our common stock for all outstanding shares of Medstone. We determined the value of our common stock by using an average closing price for the two trading days prior to and after the public announcement of the merger. Approximately 3.6 million shares were issued. We recognized $6 million of goodwill related to this transaction, none of which is tax deductible. We recognized approximately $1 million of intangibles, which are being amortized over three years. Medstone had total assets with an estimated fair value of $20.5 million and total liabilities with an estimated fair value of $7.2 million as of the purchase date.

6. Condensed Financial Information Regarding Guarantor Subsidiaries

Condensed consolidating financial information for us, our Guarantor Subsidiaries and our Non-guarantor Subsidiaries for September 30, 2004 and 2003 is presented below for purposes of complying with the reporting requirements of the Guarantor Subsidiaries. The Guarantor Subsidiaries are wholly owned subsidiaries of ours that have fully, unconditionally, jointly and severally guaranteed our 8.75% unsecured senior subordinated notes.

-13-

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Statement of Operations Nine Months Ended September 30, 2004 (Unaudited)

($ in thousands)	Prime Medical Services, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Total
Revenue:
Urology	$	7,625		$	19,621		$	42,617		$	(13,874	)	$	55,989
Manufacturing		6,181			80,462			--			(6,181	)		80,462
Other		--			712			--			--			712

Total revenue		13,806			100,795			42,617			(20,055	)		137,163

Cost of services and general and
administrative expenses:
Urology		--			8,454			16,407			--			24,861
Manufacturing		--			73,287			--			--			73,287
Corporate		160			2,564			--			--			2,724
Depreciation and amortization		--			2,466			2,837			--			5,303

		160			86,771			19,244			--			106,175

Operating income		13,646			14,024			23,373			(20,055	)		30,988

Other income (expenses):
Interest and dividends		66			119			22			--			207
Interest expense		(6,525	)		(279	)		(229	)		--			(7,033	)
Other, net		22			68			(46	)		--			44

Total other income (expenses)		(6,437	)		(92	)		(253	)		--			(6,782	)

Income before provision for income
taxes and minority interest		7,209			13,932			23,120			(20,055	)		24,206
Minority interest in consolidated income		--			--			--			16,856			16,856

Provision for income taxes		2,464			126			15			--			2,605

Net income	$	4,745		$	13,806		$	23,105		$	(36,911	)	$	4,745

-14-

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Statement of Operations Nine Months Ended September 30, 2003 (Unaudited)

($ in thousands)	Prime Medical Services, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Total
Revenue:
Urology	$	7,200		$	11,893		$	38,756		$	(12,093	)	$	45,756
Manufacturing		5,039			70,780			--			(5,039	)		70,780
Other		--			785			--			--			785

Total revenue		12,239			83,458			38,756			(17,132	)		117,321

Cost of services and general and
administrative expenses:
Urology		--			1,740			17,234			--			18,974
Manufacturing		--			64,923			--			--			64,923
Corporate		73			2,268			--			--			2,341
Depreciation and amortization		--			2,153			3,257			--			5,410

		73			71,084			20,491			--			91,648

Operating income		12,166			12,374			18,265			(17,132	)		25,673

Other income (expenses):
Interest and dividends		53			189			22			--			264
Interest expense		(6,285	)		(353	)		(237	)		--			(6,875	)
Loan fees		(257	)		--			--			--			(257	)
Other, net		--			299			(354	)		--			(55	)

Total other income (expenses)		(6,489	)		135			(569	)		--			(6,923	)

Income before provision for income
taxes and minority interest		5,677			12,509			17,696			(17,132	)		18,750
Minority interest in consolidated income		--			--			--			12,803			12,803
Provision for income taxes		1,752			270			--			--			2,022

Net income	$	3,925		$	12,239		$	17,696		$	(29,935	)	$	3,925

-15-

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Statement of Operations Three Months Ended September 30, 2004 (Unaudited)

($ in thousands)	Prime Medical Services, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Total
Revenue:
Urology	$	2,283		$	6,854		$	15,218		$	(4,352	)	$	20,003
Manufacturing		1,842			26,192			--			(1,842	)		26,192
Other		--			237			--			--			237

Total revenue		4,125			33,283			15,218			(6,194	)		46,432

Cost of services and general and
administrative expenses:
Urology		--			3,615			5,540			--			9,155
Manufacturing		--			24,076			--			--			24,076
Corporate		118			582			--			--			700
Depreciation and amortization		--			899			938			--			1,837

		118			29,172			6,478			--			35,768

Operating income		4,007			4,111			8,740			(6,194	)		10,664

Other income (expenses):
Interest and dividends		10			40			8			--			58
Interest expense		(2,206	)		(97	)		(77	)		--			(2,380	)
Other, net		1			70			5			--			76

Total other income (expenses)		(2,195	)		13			(64	)		--			(2,246	)

Income before provision for income
taxes and minority interest		1,812			4,124			8,676			(6,194	)		8,418
Minority interest in consolidated income		--			--			--			6,592			6,592
Provision for income taxes		570			(1	)		15			--			584

Net income	$	1,242		$	4,125		$	8,661		$	(12,786	)	$	1,242

-16-

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Statement of Operations Three Months Ended September 30, 2003 (Unaudited)

($ in thousands)	Prime Medical Services, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Total
Revenue:
Urology	$	2,686		$	4,126		$	13,603		$	(4,757	)	$	15,658
Manufacturing		840			23,641			--			(840	)		23,641
Other		--			260			--			--			260

Total revenue		3,526			28,027			13,603			(5,597	)		39,559

Cost of services and general and
administrative expenses:
Urology		--			562			5,401			--			5,963
Manufacturing		--			22,503			--			--			22,503
Corporate		20			881			--			--			901
Depreciation and amortization		--			732			1,027			--			1,759

		20			24,678			6,428			--			31,126

Operating income		3,506			3,349			7,175			(5,597	)		8,433

Other income (expenses):
Interest and dividends		--			35			8			--			43
Interest expense		(2,155	)		(92	)		(91	)		--			(2,338	)
Loan fees		(257	)		--			--			--			(257	)
Other, net		--			314			(111	)		--			203

Total other income (expenses)		(2,412	)		257			(194	)		--			(2,349	)

Income before provision for income
taxes and minority interest		1,094			3,606			6,981			(5,597	)		6,084
Minority interest in consolidated income		--			--			--			4,910			4,910
Provision for income taxes		319			80			--			--			399

Net income	$	775		$	3,526		$	6,981		$	(10,507	)	$	775

-17-

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Balance Sheet September 30, 2004 (Unaudited)

($ in thousands)	Prime Medical Services, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Total
ASSETS
Current assets:
Cash and cash equivalents	$	30		$	3,582		$	2,773		$	--		$	6,385
Accounts receivable, net		--			15,845			8,611			--			24,456
Other receivables		--			2,783			(2,052	)		--			731
Deferred income taxes		2,061			10,960			--			--			13,021
Prepaid expenses and other current assets		15			2,190			123			--			2,328
Inventory		--			30,506			--			--			30,506

Total current assets		2,106			65,866			9,455			--			77,427

Property and equipment:
Equipment, furniture and fixtures		--			13,891			28,213			--			42,104
Building and leasehold improvements		--			12,176			12			--			12,188

		--			26,067			28,225			--			54,292
Less accumulated depreciation
and amortization		--			(8,966	)		(17,810	)		--			(26,776	)

Property and equipment, net		--			17,101			10,415			--			27,516

Investment in subsidiaries
and other investments		251,223			7,439			--			(255,746	)		2,916
Goodwill, net of accumulated amortization		--			185,882			--			--			185,882
Other noncurrent assets		1,648			4,689			504			--			6,841

	$	254,977		$	280,977		$	20,374		$	(255,746	)	$	300,582

LIABILITIES
Current liabilities:
Current portion of long-term debt	$	188		$	311		$	2,898		$	--		$	3,397
Accounts payable		--			9,146			216			--			9,362
Accrued expenses		5,748			7,278			702			--			13,728
Customer deposits		--			6,904			--			--			6,904

Total current liabilities		5,936			23,639			3,816			--			33,391
Long-term debt, net of current portion		100,470			3,611			2,959			--			107,040
Other long term obligations		--			1,279			--			--			1,279
Deferred income taxes		19,778			1,225			--			--			21,003

Total liabilities		126,184			29,754			6,775			--			162,713

Minority interest		--			--			--			9,076			9,076
STOCKHOLDERS' EQUITY
Common stock		211			--			--			--			211
Capital in excess of par value		88,916			--			--			--			88,916
Accumulated earnings		41,584			--			--			--			41,584
Treasury stock		(1,918	)		--			--			--			(1,918	)
Subsidiary net equity		--			251,223			13,599			(264,822	)		--

Total stockholders' equity		128,793			251,223			13,599			(264,822	)		128,793

	$	254,977		$	280,977		$	20,374		$	(255,746	)	$	300,582

-18-

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Statement of Cash Flow Nine Months Ended September 30, 2004 (Unaudited)

($ in thousands)	Prime Medical Services, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Total
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net cash provided by (used in)
operating activities	$	(8,977	)	$	4,745		$	29,201		$	--		$	24,969

CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of equity investments and entities		--			3,155			--			--			3,155
Purchases of property and equipment		--			(3,733	)		(2,670	)		--			(6,403	)
Proceeds from sales of equipment		--			514			54			--			568
Distributions from subsidiaries		11,232			7,760			--			(18,992	)		--
Distributions from investments		--			232			--			--			232
Escrow deposits		513			--			--			--			513

Net cash provided by (used in)
investing activities		11,745			7,928			(2,616	)		(18,992	)		(1,935	)

CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings on notes payable		--			--			1,491			--			1,491
Payments on notes payable exclusive of
interest		(3,000	)		--			(2,776	)		--			(5,776	)
Contributions by minority interest,
net of buyouts		--			--			153			--			153
Distributions to minority interest		--			--			--			(22,509	)		(22,509	)
Exercise of stock options		212			--			--			--			212
Distributions to equity owners		--			(11,232	)		(30,269	)		41,501			--

Net cash provided by (used in)
financing activities		(2,788	)		(11,232	)		(31,401	)		18,992			(26,429	)

NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS		(20	)		1,441			(4,816	)		--			(3,395	)
Cash and cash equivalents, beginning of period		50			2,141			7,589			--			9,780

Cash and cash equivalents, end of period	$	30		$	3,582		$	2,773		$	--		$	6,385

-19-

PRIME MEDICAL SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidating Statement of Cash Flows Nine Months Ended September 30, 2003 (Unaudited)

($ in thousands)	Prime Medical Services, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminating Entries			Consolidated Total
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net cash provided by (used in)
operating activities	$	(6,997	)	$	9,384		$	22,422		$	--		$	24,809

CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of equity investments and entities		--			(12,513	)		--			--			(12,513	)
Purchases of property and equipment		--			(2,017	)		(3,111	)		--			(5,128	)
Proceeds from sales of equipment		--			186			57			--			243
Distributions from subsidiaries		18,371			8,569			--			(26,940	)		--
Investments		(12,000	)		--			--			12,000			--
Distributions from investments		--			274			--			--			274
Escrow deposits		(1,742	)		--			--			--			(1,742	)

Net cash provided by (used in)
investing activities		4,629			(5,501	)		(3,054	)		(14,940	)		(18,866	)

CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings on notes payable		16,000			--			3,572			--			19,572
Payments on notes payable exclusive of
interest		(12,500	)		--			(1,648	)		--			(14,148	)
Contributions by minority interest,
net of buyouts		--			--			(280	)		--			(280	)
Distributions to minority interest		--			--			--			(21,346	)		(21,346	)
Purchase of treasury stock		(1,214	)		--			--			--			(1,214	)
Contributions from parent		--			12,000			--			(12,000	)		--
Distributions to equity owners		--			(18,371	)		(29,915	)		48,286			--

Net cash provided by (used in)
financing activities		2,286			(6,371	)		(28,271	)		14,940			(17,416	)

NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS		(82	)		(2,488	)		(8,903	)		--			(11,473	)
Cash and cash equivalents, beginning of period		66			7,897			12,211			--			20,174

Cash and cash equivalents, end of period	$	(16	)	$	5,409		$	3,308		$	--		$	8,701

-20-

Item 2 — Management’s Discussion and Analysis
of Financial Condition and
Results of Operations

Forward-Looking Statements

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

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

	•	the effects of our indebtedness, which could adversely restrict our ability to operate, could make us vulnerable to general adverse economic and industry conditions, could place us at a competitive disadvantage compared to our competitors that have less debt, and could have other adverse consequences;

	•	uncertainties in our establishing or maintaining relationships with physicians and hospitals;

	•	the impact of current and future laws and governmental regulations;

	•	uncertainties inherent in third party payors’ attempts to limit health care coverages and levels of reimbursement;

	•	uncertainties in our establishing or maintaining relationships with our manufacturing suppliers;

	•	the effects of competition and technological changes;

	•	the availability (or lack thereof) of acquisition or combination opportunities; and

	•	general economic, market or business conditions.

-21-

General

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

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

Our services are provided principally through limited partnerships or other entities that we manage, which use lithotripsy devices. As of September 30, 2004, we owned 86 lithotripters, 68 of which are mobile and 18 of which are fixed site. We do not render any medical services. Rather, the physicians do.

We have two types of contracts, retail and wholesale. Retail contracts are contracts where we contract with the hospital and private insurance payors. Wholesale contracts are contracts where we contract only with the hospital. The two approaches functionally differ in that, under a retail contract, we generally bill for the entire non-physician fee for all patients other than governmental pay patients, for which the hospital bills the non-physician fee. Under a wholesale contract, the hospital generally bills for the entire non-physician fee for all patients. In both cases, the billing party contractually bears the costs associated with the billing service, including pre-certification, as well as non-collection. The non-billing party is generally entitled to its fees regardless of whether the billing party actually collects the non-physician fee. Accordingly, under the wholesale contracts where we are the non-billing party, the hospital generally receives a greater proportion of the total non-physician fee to compensate for its billing costs and collection risk. Conversely, under the retail contracts where we generally provide the billing services and bear the collection risk, we receive a greater proportion of the total non-physician fee.

Although the non-physician fee under both retail and wholesale contracts varies widely based on geographical markets and the identity of the third party payor, we estimate that nationally, on average, our share of the non-physician fee is roughly $3,400 and $1,600 under the retail and wholesale arrangements, respectively for 2004 and 2003. At this time, we do not anticipate a material shift between our retail and wholesale arrangements.

We also, through our Medstone subsidiary, manufacture, sell and maintain lithotripters, and market fixed and mobile tables for urological treatments and imaging, as well as patient handling tables for use by pain management clinics. See “Recent Developments” for a description of our Medstone subsidiary.

As the general partner of the limited partnerships, we also provide services relating to operating our lithotripters, including scheduling, staffing, training, quality assurance, maintenance, regulatory compliance, and contracting with payors, hospitals and surgery centers. We do not directly bill, nor do we collect for services rendered to, Medicare or Medicaid.

-22-

Although, for the three and nine months ended September 30, 2004 and 2003, manufacturing revenue was higher than urology revenue, the operating margins on urology revenue have been, historically, much higher than on manufacturing revenue. We recognize urology revenue primarily from the following sources:

•

Fees for urology services. A substantial majority of our urology revenue is derived from fees related to lithotripsy treatments performed using our lithotripters. We, through our partnerships or other entities, facilitate the use of our equipment and provide other support services in connection with these treatments at hospitals and other health care facilities. The professional fee payable to the physician performing the procedure is generally billed and collected by the physician.

•

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

•

Fees for equipment sales and licensing applications. We manufacture, sell and maintain lithotripters and certain medical tables. In addition to the original sales price we receive for lithotripter sales, we receive a licensing fee for each patient treated from the owner of the lithotripter. In exchange for this licensing fee, we also provide the owner of the lithotripter with certain consumables.

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

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

Recent Developments

In February 2004, we acquired Medstone International, Inc., or Medstone, for approximately $19 million of our common stock. Medstone manufactures, sells, and maintains lithotripters and makes them available for use by health care providers under various fee-for-service arrangements in both fixed and mobile settings. Medstone and its subsidiaries also market fixed and mobile tables for urological treatments and imaging, patient handling tables for use by pain management clinics and other users, and x-ray generators for medical imaging. A pioneer in the manufacture of shockwave lithotripsy, Medstone’s lithotripter was the first FDA approved device to treat both kidney stones and gallstones. With more than 130 lithotripters in operation worldwide, and more than 324 urology and patient handling tables in use, the Medstone devices are well established in the urology office and hospital market.

In April 2004, we announced our plans to reorganize our manufacturing segment in the last half of 2004. This reorganization will rationalize plant capacity accumulated through acquisitions, streamline production, and optimize synergies available through labor redundancies and purchasing and materials management.

-23-

On June 11, 2004, we executed a definitive Agreement and Plan of Merger with HealthTronics Surgical Services, Inc., or HealthTronics, pursuant to which we will, if all closing conditions are met (including approval of the merger by our stockholders and HealthTronics shareholders), merge with and into HealthTronics, with HealthTronics as the surviving corporation. Under the terms of that agreement, as a result of the merger, our stockholders will receive one share of HealthTronics common stock for each share of our common stock. Because our stockholders will own approximately 62% of the shares of HealthTronics common stock after the merger, and because our directors and senior management will represent a majority of the combined company’s directors and senior management, we will be deemed to be the acquiring company for accounting purposes and the merger will be accounted for as a reverse acquisition under the purchase method of accounting for business combinations in accordance with accounting principles generally accepted in the United States. The consideration paid (purchase price) will be allocated to the tangible and intangible net assets of HealthTronics based on their fair values, and the net assets of HealthTronics will be recorded at fair values as of the completion of the merger and added to those of Prime. The assets acquired and liabilities assumed will be deemed to be those of HealthTronics because HealthTronics will be the surviving legal entity.

Critical Accounting Policies and Estimates.

Management has identified the following critical accounting policies and estimates:

Impairments of goodwill and other intangible assets are both a critical accounting policy and estimate that requires judgment and is based on assumptions of future operations. We are required to test for impairments at least annually or if circumstances change that would reduce the fair value of a reporting unit below its carrying value. We test for impairment of goodwill during the fourth quarter. We have two reporting units, urology and manufacturing. The fair value of each reporting unit is calculated using estimated discounted future cash flow projections. As of September 30, 2004, we had goodwill of $186 million.

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

A third critical accounting policy is consolidation of our investment in partnerships where we, as the general partner, exercise effective control, even though our ownership is less than 50%. The consolidated financial statements include our accounts, our wholly-owned subsidiaries, and entities more than 50% owned and limited partnerships where we, as the general partner, exercise effective control, even though our ownership is less than 50%. The related partnership agreements provide for broad powers by the general partner. The limited partners do not participate in the management of the partnership and do not have the substantial ability to remove the general partner. Investment in entities in which our investment is less than 50% ownership and we do not have significant control are accounted for by the equity method if ownership is between 20% - 50%, or by the cost method if ownership is less than 20%. We have reviewed each of the underlying agreements and determined we have effective control; however, if it was determined this control did not exist, these investments would be reflected on the equity method of accounting. Although this would change individual line items within our consolidated financial statements, it would have no effect on our net income and/or total stockholders’ equity.

Nine months ended September 30, 2004 compared to the nine months ended September 30, 2003

Our total revenues for the nine months ended September 30, 2004 increased $19,842,000 (17%) as compared to the same period in 2003. Revenues from our urology operations increased by $10,233,000 (22%) due primarily to the acquisition of Medstone during February 2004. The actual numbers of procedures performed in the nine months ended September 30, 2004 increased by 3,235 (15%) compared to the same period in 2003 due primarily to the Medstone acquisition. Average revenue per procedures decreased by 8% because procedures from our Medstone acquisition have a lower average rate. For the nine months ended September 30, 2004, actual Medstone revenues from the acquisition date forward totaled $7.8 million on 3,983 procedures and 13,283 procedures generating per use license fees from the lithotripter sales. We also had $3 million in Medstone equipment sales. Revenues from our organic operations were down approximately $600,000 or 1% as compared to same period in 2003. Our manufacturing revenues increased $9,682,000 (14%) due to a significant increase in the average price per unit. The increase in price per unit is the result of an increase in the sale of command and control units, which usually have a significantly higher sales price. The total number of units actually shipped decreased from 285 during the nine months ended September 30, 2003 to 274 in the same period in 2004.

-24-

Our costs of services and general and administrative expenses for the nine months ended September 30, 2004 decreased from 78% to 77% of revenues. Our costs of services associated with our urology operations increased $5,887,000 (31%) in absolute terms and increased from 41% to 44% of our urology revenues. All of these increases relate to costs associated with our newly acquired Medstone operations, which totaled $7.8 million. Our costs related to organic operations actually decreased $1.3 million primarily due to reduced personnel costs, including a partial reversal of our discretionary bonus accrual, and a decrease in legal costs due to the hiring of an internal legal department in early 2004. Our cost of services associated with our manufacturing operations increased $8,364,000 (13%) in absolute terms and decreased from 92% to 91% of our manufacturing revenues. Our corporate expenses remained constant at 2% of revenues, increasing $383,000 (16%) in absolute terms, as we continue to successfully grow without proportionately adding corporate expenses.

Depreciation and amortization expense decreased $107,000 for the nine months ended September 30, 2004 compared to the same period in 2003. This decrease relates to several lithotripsy units becoming fully depreciated in late 2003 and early 2004 as well as certain computer equipment installed in our central business office in late 2000, partially offset by an increase from our newly acquired Medstone equipment.

Minority interest in consolidated income for the nine months ended September 30, 2004 increased $4,053,000 compared to the same period in 2003. This increase is consistent with the percentage increase in income from our urology segment.

Provision for income taxes for the nine months ended September 30, 2004 increased $583,000 compared to the same period in 2003 and is consistent with the percentage increase in taxable income.

Three months ended September 30, 2004 compared to the three months ended September 30, 2003

Our total revenues for the three months ended September 30, 2004 increased $6,873,000 (17%) as compared to the same period in 2003. Revenues from our urology operations increased by $4,345,000 (28%) due primarily to the acquisition of Medstone in February 2004. The actual number of procedures performed in the three months ended September 30, 2004 increased by 1,449 (20%) compared to the same period in 2003 due primarily to the Medstone acquisition. Average revenue per procedures decreased by 8% because procedures from our Medstone acquisition have a lower average rate. Actual revenues from Medstone in the quarter totaled $2.7 million on 1,585 procedures and 5,338 procedures generating per use license fees from the lithotripter sales. We also had $1 million in Medstone equipment sales. Revenues from our organic operations increased $633,000 for the three months ended September 30, 2004 compared to the same period in 2003. This increase is a result of an increase in lithotripsy procedures and the startup of our greenlight laser operations. Greenlight lasers are a devise used as a treatment for benign prostatic hyperplasia. Our manufacturing revenues increased $2,551,000 (11%) due to an increase in average price per unit. The total number of units shipped decreased from 96 during the three months ended September 30, 2003 to 95 during the same period in 2004. The price per unit increased as a result of an increase in the sale of larger command and control units, which usually have a significantly higher sales price.

-25-

Our costs of services and general and administrative expenses for the three months ended September 30, 2004 decreased from 79% to 77% of revenues. Our costs of services associated with our urology operations increased $3,192,000 (54%) in absolute terms and increased from 38% to 46% of our urology revenues. Costs associated with Medstone revenues discussed above totaled $2.9 million. Our costs related to organic operations remained relatively constant as increased costs from our new greenlight laser operations were offset by a partial reversal of our discretionary bonus plan accrual. Our cost of services associated with our manufacturing operations increased $1,573,000 (7%) in absolute terms and decreased from 95% to 92% of our manufacturing revenues. Our corporate expenses remained constant at 2% of revenues, decreasing $201,000 (22%) in absolute terms, as we continue to successfully grow without proportionately adding corporate expenses.

Depreciation and amortization expense increased $78,000 for the three months ended September 30, 2004 compared to the same period in 2003. This increase relates to several lithotripsy units being fully depreciated in late 2003 and early 2004, as well as certain computer equipment installed in our central business office late 2000, offset by an increase from our newly-acquired Medstone equipment.

Minority interest in consolidated income for the three months ended September 30, 2004 increased $1,682,000 compared to the same period in 2003, which was consistent with the increase in income from our urology segment

Provision for income taxes for the three months ended September 30, 2004 increased $185,000 compared to the same period in 2003 due to an increase in taxable income.

Liquidity and Capital Resources

Cash and cash equivalents were $6,385,000 and $9,780,000 at September 30, 2004 and December 31, 2003, respectively. Our subsidiaries generally distribute all of their available cash quarterly, after establishing reserves for estimated capital expenditures and working capital. For the nine months ended September 30, 2004 and 2003, our subsidiaries distributed approximately $22,509,000 and $21,346,000, respectively, to minority interest holders.

Cash provided by operations, after minority interest, was $24,969,000 for the nine months ended September 30, 2004 and was $24,809,000 for the nine months ended September 30, 2003. Fee and other revenue collected increased by $22,737,000 while cash paid to employees, suppliers of goods and others increased by $21,712,000. These fluctuations are attributable to increased operations in our manufacturing segment and from our acquisition of Medstone as well as the timing of accounts payable and accrued expense payments. An increase in interest payments of $1,594,000 was due primarily to proceeds received for the termination of our interest rate swap in May 2003.

-26-

Cash used in investing activities for the nine months ended September 30, 2004 was $1,935,000 primarily due to purchases of equipment and leasehold improvements totaling $6,403,000 partially offset by net cash received from our Medstone acquisition. Cash used in our investing activities for the nine months ended September 30, 2003 was $18,866,000 primarily due to $12,513,000 used in our acquisitions of Winemiller Communications and Aluminum Body Corporation, or ABC. We purchased equipment and leasehold improvements totaling $5,128,000 in 2003. We also had $1,742,000 remaining in an escrow account at September 30, 2003 related to certain contingent consideration for the ABC acquisition.

Cash used in our financing activities for the nine months ended September 30, 2004 was $26,429,000, primarily due to the distributions to minority interest of $22,509,000 and net payments on notes payable of $4,285,000. Cash used in our financing activities for the nine months ended September 30, 2003 was $17,416,000, primarily due to the distributions to minority interests of $21,346,000, partially offset by net borrowings on notes payable of $5,424,000.

Accounts receivable as of September 30, 2004 has decreased $2,789,000 from December 31, 2003. This decrease is primarily related to our manufacturing segment which normally has more unit sales at the end of the fourth quarter than the third quarter, partially offset by an increase in receivables in urology from our newly acquired Medstone operations. Bad debt expense was less than $100,000 for the nine months ended September 30, 2004 compared to approximately $200,000 for the same period in 2003.

Inventory as of September 30, 2004 totaled $30,506,000 and increased $9,218,000 from December 31, 2003. This increase relates primarily to work in process in our manufacturing segment and newly acquired inventory from our Medstone acquisition. Total backlog for the manufacturing segment was $33,720,000 and $30,372,000 as of September 30, 2004 and 2003, respectively.

Senior Credit Facility

Our senior credit facility is a revolving line of credit, and it expires on July 25, 2005. The revolving line of credit has a borrowing limit of $50 million, none of which was drawn at September 30, 2004 and $5 million of which was drawn as of November 1, 2004. Our senior credit facility contains covenants that, among other things, limit the payment of cash dividends on our common stock, limit repurchases of our common stock, restrict the amount of our consolidated debt, restrict our ability to make certain loans and investments, and provide that we must maintain certain financial ratios. As of September 30, 2004, we were not in compliance with one financial ratio, “Total Net Funded Debt to Adjusted EBITDA”. The maximum permitted ratio is 3.75 to 1 and our ratio as of September 30, 2004 was 3.9 to 1. We received a waiver of this noncompliance from the lenders under our credit facility and, as a result, there was no material impact on us.

8.75% Notes

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

The indenture governing our 8.75% notes contains covenants that, among other things: (1) limit the incurrence of additional indebtedness; (2) limit certain investments; (3) limit restricted payments; (4) limit the disposition of assets; (5) limit the payment of dividends and other payment restrictions affecting subsidiaries; (6) limit transactions with affiliates; (7) limit the creation of liens; and (8) restrict mergers, consolidations and transfers of assets. In the event of a change of control under the indenture, we will be required to make an offer to repurchase the 8.75% notes at 101% of the principal amount thereof, plus accrued and unpaid interest to the date of the repurchase. Our merger with HealthTronics described above will not be a change of control under the indenture.

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

Other

Interest Rate Swap . In August 2002, we entered into an interest rate swap which was designated as a fair value hedge pursuant to the provisions of FAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and FAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, An Amendment of FASB Statement No. 133. This swap was executed to convert $50 million of the 8.75% notes from a fixed to floating rate instrument. The floating rate was based on LIBOR plus 4.56%. In March 2003, we amended our interest rate swap agreement to add an additional $25 million with a floating rate based on LIBOR plus 5.11%. We terminated the swaps in May 2003. In August 2003, we entered into two new interest rate swaps for $25 million each which were also designated as fair value hedges. The floating rates of these two interest rate swap agreements were based on LIBOR plus 4.72% and 4.97%, respectively. In January 2004, we terminated these swaps. As of September 30, 2004, approximately $658,000 in proceeds from these swaps was capitalized and is being amortized as a reduction to future interest expense over the remaining life of the 8.75% notes.

Other long term debt. At September 30, 2004, we had approximately $3.9 million of debt related to our building in Austin, Texas, which bears interest at prime plus 1% and is due in monthly installments until November 2006. We also had notes totaling $5.9 million related to equipment purchased by our limited partnerships. These notes are paid from the cash flows of the related partnerships. They bear interest at LIBOR or prime plus a certain premium and are due over the next three years.

Other long term obligations. At September 30, 2004, we had an obligation totaling $1,125,000 related to payments to the previous owner of ABC for $75,000 per quarter until March 31, 2008 as consideration for a noncompetition agreement. Also at September 30, 2004, as part of our Medstone acquisition, we had an obligation totaling $704,000 related to payments to an employee for $20,833 a month until February 28, 2007 and $4,167 a month beginning March 1, 2007 and continuing until February 28, 2009 as consideration for a noncompetition agreement. We also had an obligation for $33,000 related to the estimated fair values of “puts” on our common stock held by two previous minority interest owners of one of our subsidiaries, AK Specialty Vehicles, each of which may be exercised for approximately 121,360 shares in June 2005 at a per share purchase price of $7.19.

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

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General

The following table presents our contractual obligations as of September 30, 2004 (in thousands):

	Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Long Term Debt (1)	$	110,437	$	3,397	$	6,921	$	100,119	$	--
Operating Leases (2)		4,617		1,299		2,198		768		352
Non-compete contracts (3)		1,829		550		983		296		--
Stock repurchase agreements (4)		33		33		--		--		--

Total	$	116,916	$	5,279	$	10,102	$	101,183	$	352

(1)

Represents long term debt as discussed above under “Senior Credit Facility”, “8.75% Notes” and “Other-Other Long Term Debt.”

(2)

Represents operating leases in the ordinary course of our business.

(3)

Represents an obligation of approximately $1,125 due to the previous owner of ABC, at a rate of $75 per quarter and an obligation of $704 due to an employee, at a rate of $21 per month until February 28, 2007 and $4 beginning March 1, 2007 and continuing until February 28, 2009.

(4)

Represents the estimated liability, in accordance with SFAS No. 150, of certain “put” rights on our common stock discussed above under “Other long term obligations.”

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

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

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

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Inflation

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

Adoption of Accounting Pronouncements

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

Item 3 — Quantitative and Qualitative Disclosures
About Market Risk

Interest Rate Risk

As of September 30, 2004, we had long-term debt (including current portion) totaling $110,437,000, of which $100 million has a fixed rate of interest of 8.75%, $37,000 has fixed rates of 5% to 11%, $3,885,000 bears interest at a variable rate equal to a specified prime rate and $5,857,000 bears interest at a variable rate equal to LIBOR + 1% to 3.75%. The remaining $658,000 relates to our interest rate swaps, which are discussed below. We are exposed to some market risk due to the floating interest rate debt totaling $9,742,000 on which we make monthly or quarterly payments of principal and interest. An increase in interest rates of 1% would result in a $97,000 annual increase in interest expense on this existing principal balance.

Additionally, in August 2002, we entered into an interest rate swap, which was designated as a fair value hedge pursuant to the provisions of FAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and FAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an Amendment of FASB Statement No. 133. This swap had the effect of converting $50 million of our 8.75% notes from a fixed to floating rate instrument with a rate of LIBOR plus 4.57%. In March 2003, we amended our interest rate swap agreement to add an additional $25 million with a floating rate based on LIBOR plus 5.11%. We terminated the swap in May 2003. In August 2003, we entered into two new interest rate swaps for $25 million each, which were also designated as fair value hedges. The floating rates of these two interest rate swap agreements were based on LIBOR plus 4.72% and 4.97%, respectively. In January 2004, we terminated these swaps for approximately $150,000. At September 30, 2004, approximately $658,000 in net proceeds from these swaps was capitalized and is being amortized as a reduction to future interest expense over the remaining life of the 8.75% notes.

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Item 4 – Controls and Procedures

At September 30, 2004, under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer), we evaluated the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of September 30, 2004, our disclosure controls and procedures are effective.

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

During the three months ended September 30, 2004, in response to an internal investigation related to a business transaction involving our manufacturing division, which is more fully described in a Form 8-K we filed on September 28, 2004, we implemented certain improvements to (1) strengthen our internal controls, including heightened authorization and documentation requirements for commissions, (2) establish clear guidelines and training protocol for the solicitation of and entering into government contracts, and (3) ensure that our personnel fully understand and appropriately execute internal control procedures.

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PART II

OTHER INFORMATION

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sales of Equity Securities.

During the third quarter of 2004, warrants were exercised at an average price of $4.87 resulting in the issuance of 32,990 shares of our common stock. These share were issued under an exception from registration pursuant to Section 4(2) of the Securities Act of 1933.

Item 6. Exhibits and Reports on Form 8-K.

(a)








(b)

Exhibits

12. Computation of ratio of earnings to fixed charges.
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer
32.2 Certification of Chief Financial Officer
99.1 Waiver of Certain Provisions of the Fifth Amended and Restated Loan Agreement dated November, 2004.

Current Reports on Form 8-K

On July 22, 2004, we filed a report on Form 8-K disclosing our second quarter 2004 earnings release.

On September 28, 2004, we filed a report on Form 8-K announcing the conclusion of an internal investigation of a business transaction involving our manufacturing division.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 5, 2004

PRIME MEDICAL SERVICES, INC.

By: /s/ John Q. Barnidge
     John Q. Barnidge, Senior Vice President
         and Chief Financial Officer

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PART I

ITEM 1 — FINANCIAL INFORMATION

1. General

2. Earnings per share

3. Segment Reporting

4. Stock-Based Compensation

5. Acquisitions

6. Condensed Financial Information Regarding Guarantor Subsidiaries

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 4 – Controls and Procedures

PART II

OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Item 6. Exhibits and Reports on Form 8-K.

SIGNATURES

Item 2 — Management’s Discussion and Analysis
of Financial Condition and
Results of Operations

PRIME MEDICAL SERVICES INC /TX/ 10-Q