<PAGE>   1

                                    FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

(Mark One)

   [X]   ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
         OF 1934

                   For the fiscal year ended December 31, 1998

                                       OR

   [ ]   TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
         ACT OF 1934 [NO FEE REQUIRED]

                         Commission file number 0-19283

                           OMEGA HEALTH SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

           DELAWARE                                        13-3220466
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)                

                          5350 POPLAR AVENUE, SUITE 900
                            MEMPHIS, TENNESSEE 38119
              (Address of principal executive offices and Zip Code)

         Issuer's telephone number, including area code: (901) 683-7868

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:

                               Title of each class
                               -------------------
                          COMMON STOCK, $.06 PAR VALUE

         Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X  No
                                                                      ----  ----

         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]



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         The registrant's revenues for the twelve months ended December 31, 1998
were $97,264,552.

         The aggregate market value of the shares of Common Stock held by
nonaffiliates of the registrant as of February 28, 1999 is approximately
$32,200,000. (For purposes of this calculation only, all executive officers and
directors are classified as affiliates.)

                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)

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

            CLASS                               OUTSTANDING AT FEBRUARY 28, 1999
----------------------------                    --------------------------------
Common Stock, $.06 par value                              9,033,192


                       DOCUMENTS INCORPORATED BY REFERENCE

         Documents incorporated by reference and the part of Form 10-K into
which the document is incorporated:

                                      None.



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                                     PART I

ITEM 1.  BUSINESS

THE COMPANY

         Omega is an eye care company that provides facilities and services to
ophthalmologists and optometrists to assist in the integration of primary,
medical and surgical eye care. Omega manages 22 affiliated practices at which 50
affiliated ophthalmologists provide medical and surgical eye care at the
Company's Centers, which include 112 service locations and 8 ambulatory surgery
centers (ASCs). The Company generates revenues from (i) professional fees from
affiliated practices and facility fees for services provided at the Company's
ASCs, (ii) the sale of supplies and equipment and the provision of related
administrative services to optometrists, (iii) the provision of mobile surgical
and other supplies and services to eye care providers, and a wholesale optical
laboratory.

         In early 1999, the Company announced plans to focus its resources on
its core business of operating eye care and surgery centers including a major
new initiative to expand its laser vision correction capabilities. During the
first half of 1999, the Company plans to have excimer laser technology available
on-site in all of its 22 markets. In connection with this new initiative, Omega
has agreed to acquire 12 VISX STAR S2(TM) Excimer Laser Systems from VISX(TM),
Inc. VISX, Inc. is the U.S. market leader among manufacturers of excimer lasers
for ophthalmic use. Its VISX STAR S2 Excimer Laser System is currently the only
excimer laser in the U.S. market approved by the United States Food and Drug
Administration to treat nearsightedness, farsightedness and astigmatism.

         In addition, as part of the new strategic focus on center operations
and the laser vision correction initiative, the Company has adopted a plan to
transition the ownership and operation of its managed care subsidiary, The Eye
Health Network, Inc. (EHN) to a strategic partner. While the Company does not
expect to retain any ownership interest in these operations, it does expect to
have an ongoing relationship with a strategic partner in developing managed care
opportunities which include the Company's eye care and surgery centers and their
networks of referring optometrists. As a result of these plans, the operations
of EHN have been classified as discontinued operations in the Company's
financial statements.

EYE CARE INDUSTRY

         According to industry sources, total United States expenditures on eye
care were $31.2 billion in 1995. Expenditures for medical and surgical
ophthalmology care in 1995 were approximately $11.6 billion, including
approximately $6.9 billion of professional charges and approximately $4.7
billion of related hospital and ASC facility charges. Approximately $19.6
billion was spent on primary eye care such as eye exams, treatment of vision
disorders and prescriptions for eye glasses and contact lenses. Eye care
expenditures are expected to increase as the population continues to age and as
technological advances make complex ophthalmic procedures more accessible and
affordable.

         Ophthalmologists generally specialize in medical and surgical eye care
procedures, including cataract surgery, glaucoma surgery, laser procedures for
retinal conditions, eyelid surgery, corneal surgery and strabismus surgery.
Ophthalmologists are medical doctors who have completed four years of medical
school training, a one year internship and at least three additional years of
ophthalmic training. In 1994, there were approximately 15,600 ophthalmologists
in the United States who performed approximately 2.4 million major surgical
procedures. Optometrists specialize in primary eye care and have completed a
four-year training program following college to earn a doctor of optometry
degree. In 1994 approximately 28,000 optometrists were actively involved in
patient care in the United States.



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         Unlike the majority of medical specialties, eye care professionals do
not depend on traditional primary care physicians for patient referrals.
Patients develop primary eye care relationships directly with either an
ophthalmologist or, more typically, an optometrist. Professional tension between
ophthalmologists and optometrists, due to this overlap in the provision of
primary eye care, is a significant factor that the Company believes leads to
inefficient patient management in the eye care industry. For example,
optometrists have attempted to expand their practice revenue by securing
regulatory approval to perform more complex medical procedures that
traditionally have been performed by ophthalmologists, and ophthalmologists have
attempted to retain exclusive authority to perform existing specialty services
while expanding their primary care patient relationship base. Traditional
ophthalmologists who maintain primary care practices tend to perform fewer
medical and surgical procedures.

         Large retail optical centers are emerging as a significant point of
initial patient contact for eye care. Patients increasingly are seeking
convenient and accessible primary eye care through discount optical centers that
typically feature convenient locations, walk-in service, extended hours of
operation, name brand eyeglass frames and contact lenses at low prices and an
optometrist on the premises. Such retailers generate the patient volume to
support purchases of expensive clinical equipment, allowing affiliated
optometrists to further expand their practices. Because of lower patient
volumes, independent office-based optometrists typically must expend a greater
portion of practice revenue to support the practice's administrative, billing
and collections, capital and other overhead costs. The Company believes that the
emerging prominence of volume retailers and their affiliated optometric
practices is creating significant competitive pressure on independent
office-based optometrists to reduce their prices and increase their marketing
efforts in order to maintain adequate patient volume.

         Competitive pressures within the eye care industry and between
ophthalmologists and optometrists, the increasing influence of managed care, the
capital costs associated with provision of innovative laser-based surgical
procedures and the administrative demands of operating a profitable practice are
influencing individual ophthalmologists and optometrists to affiliate with
larger eye care organizations. These organizations provide services and
resources to ophthalmologists and optometrists based on their practice-specific
needs. Much of the consolidation is occurring through affiliations with
physician practice management companies which offer eye care professionals
access to administrative, accounting, and information services, managed care
contracting, volume purchasing, equipment and capital resources. Certain other
programs provide only the service or services that meet the specific needs of an
ophthalmic or optometric practice. The Company believes that consolidation
remains in the early stages, with less than 2.0% of ophthalmologists and
optometrists affiliated with a practice management company.

STRATEGY

         Omega's objective is to develop and provide management and other
services to comprehensive eye care networks that deliver quality, cost-effective
eye care in convenient locations through the cooperative efforts of optometrists
and ophthalmologists. The Company seeks to achieve this objective by
implementing the following strategy: (i) expanding its base of affiliated
ophthalmologists in targeted markets; (ii) developing and managing primary care
optometric networks; and (iii) providing value-added management, purchasing and
related administrative services to enhance productivity of affiliated
ophthalmologists and network optometrists. The Company believes its strategy of
organizing ophthalmologists, optometrists, and related ancillary services into
cooperative, integrated eye care networks enhances its ability to manage the
delivery of quality eye care services cost-effectively. The following is a
discussion of the primary components of the Company's strategy.



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Expand Base of Affiliated Ophthalmologists

         Omega intends to expand its network of affiliated ophthalmologists in
targeted markets throughout the United States. The Company evaluates potential
affiliation candidates based on a variety of factors, including (i) commitment
to cooperate with optometrists in the effective co-management of patient care;
(ii) medical credentials and reputation; (iii) competitive market position; and
(iv) recognition of the need for outside managerial, financial and systems
expertise to maximize practice opportunities in a managed care environment.
Omega believes that its experience in the eye care industry, its reputation in
the optometric community, the depth of its management team and its affiliation
and cooperative operating model make it an attractive partner for
ophthalmologists.

Develop and Manage Optometric Networks

         Omega believes that optometrists are best positioned to provide the
primary care component of an integrated eye care delivery system, freeing
ophthalmologists to focus on complex medical and surgical procedures. To
facilitate the optometrist's role as a primary care provider, Omega develops and
manages optometric networks that position member eye care providers to work
cooperatively with affiliated ophthalmologists in delivering a full range of
services through Omega's eye care Centers. These primary care oriented networks
result in medically appropriate referrals from network optometrists to
affiliated ophthalmologists for medical and surgical procedures. This
cooperative approach to patient management enhances the
optometrist-to-ophthalmologist referral pattern and increases ophthalmologist
productivity. The Company believes that coordination of patient care between
optometrists and ophthalmologists is essential to the delivery of quality eye
care services on a cost-effective basis, particularly considering recent trends
in managed care and cost containment in the health care industry.

Provide Value-Added Management, Purchasing and Ancillary Services

         In an effort to enhance the productivity and efficiency of eye care
network professionals, Omega provides a variety of value-added services to
optometrists and ophthalmologists. The Company's PEN division operates a
nationwide volume purchasing program that affords its participating optometrists
access to discounted rates on eye care supplies and clinical equipment. The
Omega Medical Services division provides mobile ophthalmic surgical equipment
and supplies on a per-case basis to surgical facilities, primarily in rural
areas, including hospitals and ASCs. PEN offers administrative and back-office
assistance on a contracted basis to its 700 member optometrists. Services are
designed to meet optometrists' needs in several areas such as accounting and
financial reporting, billing and collections and staff management. These
complementary offerings expand Omega's line of services and allow the Company to
meet the needs of eye care providers even if not affiliated with the Company. By
adding clinical and operational value to these providers, Omega enhances its
relationship with existing as well as potential future members of its eye care
networks.

Expand Laser Vision Correction Services

         In early 1999, the Company announced the launch of a major new
initiative to expand its laser vision correction capabilities. During the first
half of 1999, the Company plans to have excimer laser technology available
on-site in all of its 22 markets. In connection with this new initiative, Omega
has agreed to acquire 12 VISX STAR S2(TM) Excimer Laser Systems from VISX(TM),
Inc. VISX, Inc. is the U.S. market leader among manufacturers of excimer lasers
for ophthalmic use. Its VISX STAR S2 Excimer Laser System is currently the only
excimer laser in the U.S. market approved by the United States Food and Drug
Administration to treat nearsightedness, farsightedness and astigmatism.

OMEGA SERVICES

         In order to meet the strategic needs of ophthalmologists and
optometrists associated with its eye care networks and other health care
providers, Omega provides a wide range of practice management and other
services. The Company's services not only allow eye care professionals to devote
more of their time to delivery of quality 




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primary, medical and surgical eye care, they are also intended to enable the
providers to expand and position their practices effectively in an increasingly
competitive health care services environment.

Ophthalmologist Practice Management Services

         Omega provides a wide range of practice management services in an
effort to increase the revenues and manage the expenses of its Affiliated
Practices. Affiliated Practices are practices with which Omega has entered into
a management agreement. The Affiliated Practices, together with their physical
facilities, are sometimes referred to as Centers. Omega seeks to increase
Affiliated Practices' revenues primarily by building optometric networks to
increase patient referrals, by adding medical and surgical eye care services and
by expanding a practice's geographic coverage through satellite offices.

-        BUILDING OPTOMETRIC NETWORKS. Before affiliating with an
         ophthalmologist, Omega surveys the local eye care community to identify
         those optometrists who share an interest in co-management of patient
         care by ophthalmologists and optometrists. The Company typically enters
         into a new ophthalmology affiliation only after organizing a network of
         optometrists who concur in the reputation and quality of eye care
         provided by such ophthalmologist. In an effort to ensure patient and
         referring provider satisfaction, the Centers maintain data bases on the
         referral patterns and treatment preferences of optometrists in such
         networks, sponsor monthly continuing education presentations and
         solicit clinical and operating input from advisory boards of local
         optometrists. Because affiliated ophthalmologists focus their time and
         resources on medical and surgical procedures, Omega Centers frequently
         refer primary care patients, as well as certain pre- or post-operative
         patients, to local optometrists. Since Omega's affiliated
         ophthalmologists generally do not provide primary eye care, they
         concentrate on surgical procedures and have the opportunity to refine
         and improve their surgical skills, which enhances the quality of
         patient care and potential optometric referrals.

-        ADDING MEDICAL AND SURGICAL SERVICES. The majority of an
         ophthalmologist's practice typically is devoted to cataract and
         refractive surgeries. Omega seeks to expand the range of procedures
         performed by Affiliated Practices by adding new eye care sub-specialty
         surgeons in areas such as glaucoma, retinal surgery, pediatric eye care
         and cosmetic eye surgery. The Company recruits new sub-specialists to
         join the Affiliated Practices and, in some instances, contracts with
         sub-specialists to visit satellite locations on a part-time basis.

-        EXPANDING PATIENT TERRITORY. The Company responds to untapped patient
         demand in suburban or rural areas by leasing space for satellite
         ophthalmologist offices on a part-time basis. Affiliated
         ophthalmologists travel to these locations periodically to perform
         medical and some surgical eye care using primarily leased equipment.
         The Affiliated Practices' broader geographic coverage increases their
         appeal to managed care payors.

         In addition to efforts to increase the revenues of Affiliated
Practices, the Company assists in managing their practices more effectively.
Omega recruits a local optometrist to serve as Center Director at each
Affiliated Practice and employs all non-physician personnel. The Company is
responsible for billing and collections, accounting and financial management,
assisting in credentialing affiliated ophthalmologists, negotiating managed care
contracts, marketing, supply and equipment purchasing, outcomes assessment,
human resources and other administrative services. These services are
coordinated through its corporate offices in Memphis, Tennessee, its four
regional offices and on-site at each Center.

         Omega implements appropriate financial management procedures and
resources at its Centers. The Company's employees provide billing and
collections, cash management, financial reporting and capital budgeting services
and typically arrange for the provision of equipment financing, auditing, legal
and tax services, as well as appropriate insurance coverage. The Company
identifies the information requirements of each Affiliated Practice and
implements the appropriate systems resources. The Centers are linked by a
virtual private network utilizing the internet. The Company plans to link its
eye care practice management systems with a corporate data repository. The 



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EHN division also maintains a managed care information system designed to meet
the utilization review and medical management needs of its panels of eye care
providers. The Company's information technology strategic plan includes
enhancing technology resources throughout the system and comtemplates
system-wide year 2000 compliance.

         Omega coordinates purchasing of ophthalmic supplies and equipment at
all Centers. In an effort to minimize such costs, the Company leverages its
vendor relationships, evaluates and plans equipment requirements, and compares
bids on specific items. The Company provides facilities planning assistance
including market surveys, lease negotiation and construction oversight for
leasehold improvements at Centers, satellites and ASCs.

         To facilitate communications with patients and referring optometrists,
the Company supplies Affiliated Practices with standardized clinical and
promotional brochures, newsletters and other materials. The Company retains
public relations and advertising agencies to develop such materials and to
coordinate broader campaigns. The Company maintains a site on the world wide web
at www.omegahealth.com which provides information to patients, doctors and the
public about the Company's services. The Company also provides human resource
services for its Centers, including payroll, employee benefits and related
administrative services.

         Based on local market conditions, requests from optometrists, and other
factors, from time-to-time Omega affiliates with optometric practices on a
selective basis.

         On December 31, 1997, Omega acquired the assets of Providers Optical,
Inc., a wholesale optical laboratory focused on managed eye care. 

Optometric Purchasing and Administrative Services

         Through its Primary Eyecare Network (PEN) subsidiary, Omega operates a
discount purchasing program for the products used in the day-to-day practices of
optometrists. These products include eye glass frames and lenses, contact
lenses, clinical equipment and other supplies. This purchasing program leverages
the purchasing strength of approximately 1,200 participating optometrists and
buys from a national panel of approximately 50 vendors, as of December 31, 1998.
Omega also provides administrative services on a contracted basis to meet the
optometrists' needs in several areas such as accounting and financial reporting,
billing and collections and staff management.

Mobile Surgical and Other Services

         Through the Omega Medical Services division, the Company operates a
mobile surgical program that provides ophthalmic surgical equipment, related
supplies and technical support personnel to surgical facilities, including
hospitals and ASCs, on a per-case basis. This service provides ophthalmologists
in suburban or rural areas access to equipment to meet the local demand for
complex eye care procedures, and allows the associated facilities to avoid the
otherwise substantial capital costs associated with such equipment. Omega's
mobile surgical equipment was used in approximately 2,200 medical and surgical
eye care procedures in the year ended December 31, 1998. The Company also
provides certain equipment and supply purchasing services to ophthalmologists,
hospitals and ASCs.

         On December 31, 1997, Omega acquired the assets of Providers Optical,
Inc., a wholesale optical laboratory . The laboratory was relocated from
Concord, California to Memphis, Tennessee in May 1998.

Laser Vision Correction Services

         In early 1999, the Company announced plans to focus its resources on
its core business of operating eye care and surgery centers including a major
new initiative to expand its laser vision correction capabilities. During 




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the first half of 1999, the Company plans to have excimer laser technology
available on-site in all of its 22 markets. In connection with this new
initiative, Omega has agreed to acquire 12 VISX STAR S2(TM) Excimer Laser
Systems from VISX(TM), Inc. VISX, Inc. is the U.S. market leader among
manufacturers of excimer lasers for ophthalmic use. Its VISX STAR S2 Excimer
Laser System is currently the only excimer laser in the U.S. market approved by
the United States Food and Drug Administration to treat nearsightedness,
farsightedness and astigmatism.

         According to industry sources, over 400,000 excimer laser procedures
were performed in the United States during 1998. These sources estimate that
800,000 excimer laser procedures will be performed in the United States during
1999. This is a significant growth opportunity and the Company is continuing to
take steps to position its Affiliated Practices for success in the refractive
surgery marketplace. The Company seeks to provide a comprehensive refractive
surgery program for its Affiliated Practices. In addition to providing access to
state-of-the-art laser technology, the Company has employed a national director
to coordinate all aspects of developing this program. The Company is providing
support in all aspects of the program, including access to technology, marketing
programs, educational programs for doctors, patient information programs, and
patient finance programs. The Company maintains a refractive surgery information
and referral program on its world wide web site, www.omegahealth.com. In
addition, Company representatives monitor all aspects of the refractive surgery
marketplace, including emerging technologies, arrange case schedules for
affiliated ophthalmologists and their patients, provides the required technical
personnel and supplies and sponsors co-management education programs for laser
vision correction.

EYE CARE CENTER OPERATIONS

         The Company operates Centers in which affiliated ophthalmologists
conduct their practice under management agreements with the Company. Each Center
is typically operated through the joint efforts of one or more affiliated
ophthalmologists and an optometrist employed by the Company who serves as a
Center Director. The affiliated ophthalmologists examine patients and perform
medical and surgical eye care in the Center and are responsible for all medical
decisions affecting patient care. The affiliated ophthalmologists, in
coordination with the Center Director, establish ongoing continuing education
programs, patient support and other programs for the benefit of the network
optometrists and other health care professionals. Although the Centers do not
focus on primary eye care and typically do not dispense eyeglasses and contact
lenses, Center Directors provide eye care in connection with ophthalmologists as
necessary. In general, patients receive primary care, including eye exams,
prescriptions, and the preparation of corrective lenses and contact lenses, from
network optometrists.

         Typically, the Company's Centers are in 3,000 to 10,000 square feet of
leased space, generally containing four or more examination rooms, specialty
areas for lasers and fundus photography and administrative offices. In addition
to the affiliated ophthalmologists and Center Director, the Center's staff
typically includes a business office manager and both administrative and medical
support personnel. Depending upon the medical procedure required, most surgeries
are conducted at nearby hospitals and ASCs. Common surgical procedures include
cataract surgery, glaucoma surgery, laser procedures for retinal conditions, eye
lid surgery, cosmetic surgery, corneal surgery, strabismus surgery, retina
surgery and refractive surgery.

         Eight Centers maintain ASCs. These surgical facilities generally are
located within or adjacent to the Centers' physical facilities. The Company
plans to develop additional ASCs to support Centers where permitted by state law
and where, in management's judgment, the characteristics of the surgical
component of the practice provide potential for increased return on investment.



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The table below lists the name and primary location of each Center, the date the
Center was opened or acquired, the number of affiliated ophthalmologists and the
number of locations.

<TABLE>
<CAPTION>
                                                                             DATE       
                                                                             OPENED        NUMBER OF      
                                                      PRIMARY                  OR          AFFILIATED        SERVICE
       NAME OF CENTER                                 LOCATION              ACQUIRED    OPHTHALMOLOGISTS    LOCATIONS
       --------------                                 --------              --------    ----------------    ---------
<S>                                                  <C>                    <C>          <C>                <C>
Omega Eye Care Center...........................     Birmingham, AL           6/89              3             23
                                                                                                        
Capital Eye Center(1)...........................     Tallahassee, FL          3/96              1              1
                                                                                                        
Omega Eye Associates(1).........................     Clearwater, FL           1/92              1              2
                                                                                                        
Eye Institute(2)................................     Newport Richey, FL       1/98              0              1
                                                                                                        
Dillman Eye Care................................     Danville, IL             8/97              1              1
                                                                                                        
Eye Consultants & Surgeons......................     Janesville, WI           9/97              4              6
                                                                                                        
Faust-Gelvin Eye Center(1)......................     Marion, IN               5/97              3              3
                                                                                                        
Missouri Eye Institute..........................     Springfield, MO          1/92              2              7
                                                                                                        
Missouri Eye Institute..........................     St. Louis, MO            1/92              2              2
                                                                                                        
Omaha Eye Institute(1)..........................     Omaha, NE                4/88              2             10
                                                                                                        
Omega Eye Care Center...........................     Albuquerque, NM          11/87             2              5
                                                                                                        
Central Ohio Eye Institute(1)...................     Circleville, OH          12/97             3              5
                                                                                                        
Omega Eye Center................................     Jackson, TN              5/88              3              6
                                                                                                        
Southern Eye Associates.........................     Memphis, TN              1/90              2              2
                                                                                                        
VisionAmerica...................................     Nashville, TN            9/90              4             15
                                                                                                        
Eye Associates of Houston.......................     Houston, TX              7/86              3              2
                                                                                                        
EyeCare and Surgery Center of North Texas(1)....     Dallas, TX               9/96              4              5
                                                                                                        
Omega Eye Center................................     El Paso, TX              8/89              2              3
                                                                                                        
Cataract and Laser Institute(1).................     San Antonio, TX          11/97             1              5
                                                                                                        
Capital Eye Consultants.........................     Fairfax, VA              4/88              2              1
                                                                                                        
Levin Eye Center................................     Kissimmee, FL            7/98              2              2
                                                                                                        
Straus Eye Center...............................     Metairie, LA             9/98              3              5
                                                                                               --            ---
         Total..................................                                               50            112
                                                                                               ==            ===
</TABLE>

(1) This Center maintains an ambulatory surgical unit.

(2) This Center includes an optometry practice and is served by the
    ophthalmologist associated with the Clearwater center.

QUALITY ASSURANCE

         The Company's National Medical Director and National Optometric
Director are responsible for the Company's quality assurance activities under
the direction of the quality assurance committee of the Board of Directors. They
are responsible for all quality improvement activities, including establishing
and monitoring quality standards for all operations.



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CORPORATE COMPLIANCE PROGRAM

The Company is implementing a Corporate Compliance Program. The program includes
a Corporate Integrity Statement and Code of Conduct, Fraud and Abuse Policy and
other policies and procedures intended to support the Company's commitment to
conducting its business in compliance with law. The program is being implemented
under the direction of the Audit and Compliance Committee of the Board of
Directors and includes the designation of a senior officer as chief compliance
officer.

MANAGEMENT AGREEMENTS

         The Company has entered into Management Agreements with each of the
Affiliated Practices, and intends to enter into long-term service agreements
with each additional practice with which it affiliates in the future, to provide
management, administrative and development services. Under the Management
Agreements, the Affiliated Practices are solely responsible for all aspects of
the practice of medicine, and the Company has the primary responsibility for the
business and administrative aspects of the Affiliated Practices. The Company
employs optometrist Center Directors and all other non-physician personnel at
each Center. Pursuant to the Management Agreements, the Company provides or
arranges for various management, administrative and development services for the
Affiliated Practices relating to the day-to-day non-medical operations of the
Affiliated Practices.

         The following discussion of the Management Agreements is a general
summary of the form of a "typical" Management Agreement. The Company expects to
enter into similar agreements with other Affiliated Practices in the future. The
actual terms of the individual Management Agreements, and other service
agreements into which the Company may enter in the future, may vary in certain
respects from the description below as a result of negotiations with the
individual practices and the requirements of local regulations. The Omega
Centers established prior to 1991 were formed by establishing a network of
optometrists to support co-management centers at which ophthalmologists'
practices provided medical and surgical eye care pursuant to an independent
management contract (the "Independent Contracts"). These Centers generally did
not involve the purchase of equipment or other assets from the ophthalmologists
or other initial payments from Omega to the ophthalmologists. The term
"Management Agreements" includes the Independent Contracts, unless specifically
noted. The term "Affiliated Practice" includes ophthalmologists practicing at
the Centers, unless specifically noted. The Independent Contracts have certain
differing provisions from the current form of Management Agreement, as noted
below.

         Pursuant to the Management Agreement, the Company, among other things,
(i) acts as the exclusive manager and administrator of non-medical services
relating to the operation of the Affiliated Practices, (ii) bills patients,
insurance companies and other third party payors and collects, on behalf of the
Affiliated Practices, the fees for professional medical and other services
rendered, including goods and supplies sold by the Affiliated Practices, (iii)
provides or arranges for, as necessary, clerical, accounting, purchasing,
payroll, legal, bookkeeping and computer services and personnel, information
management, preparation of certain tax returns, printing, postage and
duplication services and medical transcribing services, (iv) supervises and
maintains custody of substantially all files and records (medical records of the
Affiliated Practices remain the property of the Affiliated Practices), (v)
provides facilities for the Affiliated Practices, (vi) prepares annual and
capital operating budgets, (vii) orders and purchases equipment, inventory and
supplies as reasonably requested by the Affiliated Practices, (viii) implements,
in consultation with the Affiliated Practices, local public relations or
marketing programs, (ix) provides financial and business assistance in the
negotiation, establishment, supervision and maintenance of contracts and
relationships with managed care and other similar providers and payors, and (x)
coordinates with the optometric network to arrange for continuing education
programs and to provide other information and services requested by the
optometric network.

         Under the Management Agreements, the Affiliated Practices retain the
responsibility for, among other things, (i) employing ophthalmologists, subject
to the terms of the Management Agreement, (ii) ensuring that ophthalmologists
have the required licenses, credentials, approvals and other certifications
needed to perform their duties and (iii) complying with certain federal and
state laws and regulations applicable to the practice of medicine. The
Affiliated Practices maintain exclusive control of the practice of medicine and
the delivery of medical services. The Company assists the Affiliated Practices
in obtaining professional liability and worker's compensation insurance 



                                       10
<PAGE>   11

for the physicians and other medical employees of the Affiliated Practices, as
well as general liability umbrella coverage. The Company is responsible for
obtaining professional liability and worker's compensation insurance for
employees of the Company and general liability and property insurance for the
Affiliated Practices.

         Under the Management Agreements (excluding the Independent Contracts)
the Company receives a set monthly fee for managing the Affiliated Practices,
plus an additional fee in the event the revenues or earnings of the Affiliated
Practice exceed certain levels, and such management fees may be reduced in the
event of significant reductions in the revenues of the Affiliated Practices. The
management fees paid to the Company typically range from 25% to 50% of the funds
available after payment of all operating expenses of the Affiliated Practice.
Under the Independent Contracts the Company typically is paid 60% to 70% of the
revenues of the Affiliated Practice, and from this amount the Company pays all
of the operating expenses of the Center and retains a management fee.

         The Management Agreements (excluding the Independent Contracts) have
initial terms of 40 years, with automatic extensions (unless specified notice is
given) of additional five-year terms. The Independent Contracts have terms
ranging from one to five years, automatically renewing for successive one year
periods, unless a four month notice is given. The Management Agreement may be
terminated by either party if the other party (i) files a petition in bankruptcy
or other similar events occur or (ii) defaults on the performance of a material
duty or obligation, which default continues for a specified term after notice.
In addition, the Company may terminate the agreement if the Affiliated
Practice's participation in the Medicare or Medicaid program is terminated or
suspended, or an ophthalmologist's license is terminated or suspended, or the
Affiliated Practice is unable to obtain professional liability insurance, as a
result of some act or omission of the Affiliated Practice or the
ophthalmologists. The Affiliated Practice may terminate the agreement if the
Company, after notice, fails to remit funds due to the Affiliated Practice.
Under the Independent Contracts the parties may more easily terminate the
agreements, generally with notice of 180 days or less. Generally upon
termination of a Management Agreement (excluding the Independent Contracts) by
the Company during the first five years of the term, the Company is required to
sell and the Affiliated Practice is required to purchase and assume the assets
and liabilities related to the Affiliated Practice at the purchase price paid by
the Company for such assets, less certain annual reductions.

         Generally under the Management Agreements (excluding the Independent
Contracts), each physician owner must give the Company 24 months notice of an
intent to retire from the Affiliated Practice, which notice may not be given
during the first three years of the term.

         The Affiliated Practices and the physician owners of the Affiliated
Practices generally agree not to compete with the Company in providing services
similar to those provided by the Company under the Management Agreements, and
the physician owners also generally agree with the Company not to compete with
an Affiliated Practice, within a specified geographic area. Non-competition
restrictions generally apply to physician owners during their affiliation with
the Affiliated Practices and for two to five years thereafter. In addition, the
Management Agreement requires the Affiliated Practice to enter into a
non-competition agreement with each ophthalmologist in the Affiliated Practice,
and the Company is a third-party beneficiary of such agreements. The Management
Agreements generally require the Affiliated Practices to pursue enforcement of
the non-competition agreement with ophthalmologists or assign to the Company the
right to pursue enforcement.

         The Management Agreements contain indemnification provisions, pursuant
to which the Company indemnifies the Affiliated Practices for damages resulting
from negligent acts or omissions by the Company or its agents, employees or
shareholders. In addition, the Affiliated Practices indemnify the Company for
any damages resulting from any negligent act or omissions by any affiliated
ophthalmologists, agents or employees of the Affiliated Practice. The Management
Agreements provide that in the event disputes arise between the parties, or new
issues arise, and such issues are not resolved, then such issues will be
submitted to binding arbitration.



                                       11
<PAGE>   12




COMPETITION

         The Company competes with other private and publicly-traded physician
practice management companies which seek to affiliate with eye care
professionals. Additionally, certain hospitals, clinics, health care companies,
HMOs and retail eye centers engage in similar activities and are, or may become,
competitors in providing management to providers of eye care services. Some of
these competitors have substantially greater financial resources than the
Company. The Company believes that it competes for affiliation candidates
primarily on the basis of its management experience in the eye care industry,
its reputation in the optometric community, the depth of its management team and
its affiliation and cooperative operating model. The Company's Centers compete
with the practices of local ophthalmologists as well as with formal and informal
organizations of eye care professionals for eye care patients. The Company
believes that it competes for eye care patients primarily on the basis of the
quality of its medical and surgical eye care services, patient satisfaction with
the staff and service at the Centers and the strength of its networks of
referring optometrists.

GOVERNMENT REGULATION AND SUPERVISION

         The delivery of health care services has become one of the most highly
regulated of professional and business endeavors in the United States. Both the
federal government and the individual state governments are responsible for
overseeing the activities of individuals and businesses engaged in the delivery
of health care services. Federal law and regulations are based primarily upon
the Medicare program and the Medicaid program, each of which is financed, at
least in part, with federal funds. State jurisdiction is based upon the state's
interest in regulating the quality of health care in the state, regardless of
the source of payment.

         Although the Company believes its operations are in material compliance
with applicable laws, it has not received or applied for a legal opinion from
counsel or from any federal or state judicial or regulatory authority to that
effect. Many of such laws are broad and subject to varying interpretations, and
many aspects of the Company's business operations have not been the subject of
state or federal regulatory interpretation. The laws applicable to the Company
are subject to evolving interpretations, and therefore, there can be no
assurance that a review of the Company or the Affiliated Practices by a court or
law enforcement or regulatory authority will not result in a determination that
could have a material adverse effect on the Company or the Affiliated Practices.
Furthermore, there can be no assurance that the laws applicable to the Company
will not be amended in a manner that could have a material adverse effect on the
Company.

FEDERAL LAW

         The federal health care laws apply in any case in which an Affiliated
Practice is providing an item or service that is reimbursable under Medicare or
Medicaid or in which the Company is claiming reimbursement from Medicare or
Medicaid on behalf of physicians with whom the Company has a Management
Agreement. The principal federal laws include those that prohibit the filing of
false or improper claims with the Medicare or Medicaid programs, those that
prohibit unlawful inducements for the referral of business reimbursable under
Medicare or Medicaid and those that prohibit the provision of certain services
by a provider to a patient if the patient was referred by a physician with which
the provider has certain types of financial relationships.



                                       12
<PAGE>   13


         False and Other Improper Claims. The federal government is authorized
to impose criminal, civil and administrative penalties on any health care
provider that files a false claim for reimbursement from Medicare or Medicaid.
Criminal penalties are also available in the case of claims filed with private
insurers if the government can show that the claims constitute mail fraud or
wire fraud. While the criminal statutes are generally reserved for instances
evidencing an obviously fraudulent intent, the criminal and administrative
penalty statutes are being applied by the government in an increasingly broad
range of circumstances. The government has taken the position, for example, that
a pattern of claiming reimbursement for unnecessary services violates these
statutes if the claimant should have known that the services were unnecessary.
The government has also taken the position that claiming reimbursement for
services that are substandard is a violation of these statutes if the claimant
should have known that the care was substandard.

          The Company believes that its billing activities on behalf of the
Affiliated Practices are in material compliance with such laws, but there can be
no assurance that the Company's activities will not be challenged or scrutinized
by governmental authorities. A determination that the Company had violated such
laws could have a material adverse impact on the Company.

         Anti-Kickback Law. A federal law commonly known as the 'Anti-kickback
Amendments' prohibits the offer, solicitation, payment or receipt of anything of
value (direct or indirect, overt or covert, in cash or in kind) which is
intended to induce the referral of Medicare or Medicaid patients, or the
ordering of items or services reimbursable under those programs. The law also
prohibits remuneration that is intended to induce the recommendation of, or the
arranging for, the provision of items or services reimbursable under Medicare
and Medicaid. The law has been broadly interpreted by a number of courts to
prohibit remuneration that is offered or paid for otherwise legitimate purposes
if the circumstances show that one purpose of the arrangement is to induce
referrals. Even bona fide investment interests in a health care provider may be
questioned under the Anti-kickback Amendments if the government concludes that
the opportunity to invest was offered as an inducement for referrals. The
penalties for violations of this law include criminal sanctions and exclusion
from the Medicare and Medicaid programs.

         In part to address concerns regarding the implementation of the
Anti-kickback Amendments, the federal government in 1991 published regulations
that provide exceptions, or 'safe harbors,' for certain transactions that will
not be deemed to violate the Anti-kickback Amendments. Among the safe harbors
included in the regulations were provisions relating to the sale of physician
practices, management and personal services agreements and employee
relationships. Subsequently, regulations were published offering safe harbor
protection to additional activities, including referrals within group practices
consisting of active investors. Proposed amendments clarifying the existing safe
harbor regulations were published in 1994. If any of the proposed regulations
are ultimately adopted, they would result in substantive changes to existing
regulations. The failure of an activity to qualify under a safe harbor
provision, while potentially leading to greater regulatory scrutiny, does not
render the activity illegal per se.

         There are several aspects of the Company's relationships with
physicians to which the anti-kickback law may be relevant. Although neither the
investments in the Company by physicians nor the Management Agreements between
the Company and the Affiliated Practices qualify for protection under the safe
harbor regulations, the Company does not believe that these activities fall
within the type of activities the Anti-kickback Amendments were intended to
prohibit. A determination that the Company had violated the Anti-kickback
Amendments would have a material adverse effect on the Company.

         The Stark Self-Referral Laws. The Stark Self-Referral Law (the 'Stark
Law') prohibits a physician from referring a patient to a health care provider
for certain designated health services reimbursable by Medicare or Medicaid if
the physician has a financial relationship with that provider, including an
investment interest, a loan or debt relationship or a compensation relationship.
In addition to the conduct directly prohibited by the law, the statute also
prohibits schemes that are designed to obtain referrals indirectly that cannot
be made directly. The penalties for violating the law include (i) a refund of
any Medicare or Medicaid payments for services that resulted from an unlawful
referral, (ii) civil fines and (iii) exclusion from the Medicare and Medicaid
programs.



                                       13
<PAGE>   14

         The Company does not currently provide any designated health service
under the Stark Law. However, because the Company may provide management
services related to those designated health services provided by physicians
affiliated with the Affiliated Practices, there can be no assurance that the
Company will not be deemed the provider for those services for purposes of the
Stark Law and, accordingly, the recipient of referrals from physicians
affiliated with the Affiliated Practices. In that event, such referrals will be
permissible only if (i) the financial arrangements under the management
agreements with the Affiliated Practices meet certain exceptions in the Stark
Law and (ii) the ownership of stock in the Company by the referring physicians
meets certain investment exceptions under the Stark Law. The Company believes
that the financial arrangements under the Management Agreements qualify for
applicable exceptions under the Stark Law; however, there can be no assurance
that a review by courts or regulatory authorities would not result in a contrary
determination. In addition, the Company will not meet the Stark Law safe harbor
related to investment interest until the Company's stockholders' equity exceeds
$75 million.

Antitrust Risks

         The federal and state antitrust laws prohibit activities which
constitute unfair competition, price-fixing, restraints on trade or the creation
of a monopoly. Potential violations of the federal antitrust laws may be
challenged by the United States Department of Justice, the Federal Trade
Commission or private plaintiffs. If a violation of the federal or state
antitrust laws is found by the courts to have occurred, courts may impose treble
damages, injunctions, civil penalties, criminal sanctions, substantial fines and
other assessments of court costs and attorney's fees. If a violation of the
federal or state antitrust laws is found by the courts to have occurred, then
the Company could be subjected to criminal and/or civil liability. The
Department of Justice and the Federal Trade Commission have stated that managed
care networks will be closely scrutinized for potential violations of the
federal antitrust laws. The Company has adopted certain antitrust compliance
guidelines which must be strictly followed by the Company.

STATE LAW

         State Anti-Kickback Laws. Many states have laws that prohibit payment
of kickbacks in return for the referral of patients. Some of these laws apply
only to services reimbursable under state Medicaid programs. However, a number
of these laws apply to all health care services in the state, regardless of the
source of payment for the service. Based on court and administrative
interpretation of federal anti-kickback laws, the Company believes that these
laws prohibit payments to referral sources where a purpose for payment is for
the referral. However, the laws in most states regarding kickbacks have been
subjected to limited judicial and regulatory interpretation and therefore, no
assurances can be given that the Company's activities will be found to be in
compliance. Noncompliance with such laws could have an adverse effect upon the
Company and subject it and physicians affiliated with the Affiliated Practices
to penalties and sanctions.

         State Self-Referral Laws. A number of states have enacted self-referral
laws that are similar in purpose to the Stark Law but which impose different
restrictions. Some states, for example, only prohibit referrals when the
physician's financial relationship with a health care provider is based upon an
investment interest. Other state laws apply only to a limited number of
designated health services. Some states do not prohibit referrals, but require
only that a patient be informed of the financial relationship before the
referral is made. The Company believes that its operations are in material
compliance with the self-referral law of the states in which the Centers are
located.

         Fee-Splitting Laws. Many states prohibit a physician from splitting
with a referral source the fees generated from physician services. Other states
have a broader prohibition against any splitting of a physician's fees,
regardless of whether the other party is a referral source. In most states, it
is not considered to be fee-splitting when the payment made by the physician is
reasonable reimbursement for services rendered on the physician's behalf.

         The Florida Board of Medicine (the "Florida Medical Board") in October
1997, based on the facts of a specific case, ruled that physicians would violate
the fee-splitting prohibitions in the state's Medical Practices Act if they pay
a percentage of revenues to a physician practice management company charged with
practice expansion duties. These arrangements could also violate the state's
patient brokering laws, which carry criminal penalties. 



                                       14
<PAGE>   15

While the Florida Medical Board does not enforce those laws, it does control
physician licensing and has also coordinated its position on fee-splitting with
the Florida Attorney General's Office. The Company is monitoring the situation
until clarification or modification of this ruling by the Florida Medical Board
or until a ruling by a court or the Florida Attorney General's office. The
Company cannot predict whether the courts ultimately will uphold the Florida
Medical Board's position or whether the Florida Medical Board's actions will
trigger criminal prosecutions of physician practice management companies and/or
physicians under the patient brokering ban. Although the Company can not predict
the outcome of such challenge at this time, any adverse determination by the
Florida Medical Board, if judicially upheld, could render the Company's
management agreements in Florida not enforceable, and if such agreements could
not be reformed with the same economic benefit to the Company, the Company could
experience a material adverse effect on its financial condition or results of
operations.

         The Company is reimbursed by physicians on whose behalf the Company
provides management services. The compensation provisions of the Management
Agreements have been designed to comply with applicable state laws relating to
fee-splitting. There can be no certainty, however, that, if challenged, the
Company and its Affiliated Practices will be found to be in compliance with each
state's fee-splitting laws. A determination in any state that the Company is
engaged in any unlawful fee-splitting arrangement could render any Management
Agreement between the Company and an Affiliated Practice located in such state
unenforceable or subject to modification in a manner adverse to the Company.

         Corporate Practice of Medicine. Most states prohibit corporations from
engaging in the practice of medicine. Many of these state doctrines prohibit a
business corporation from employing a physician. States differ, however, with
respect to the extent to which a licensed physician can affiliate with corporate
entities for the delivery of medical services. Some states interpret the
'practice of medicine' broadly to include activities of corporations such as the
Company that have an indirect impact on the practice of medicine, even where the
physician rendering the medical services is not an employee of the corporation
and the corporation exercises no discretion with respect to the diagnosis or
treatment of a particular patient.

         The Company intends that, pursuant to its Management Agreements, it
will not exercise any responsibility on behalf of affiliated physicians that
could be construed as affecting the practice of medicine. Accordingly, the
Company believes that its operations do not violate applicable state laws
relating to the corporate practice of medicine. Such laws and legal doctrines
have been subjected to only limited judicial and regulatory interpretation and
there can be no assurance that, if challenged, the Company would be considered
to be in compliance with all such laws and doctrines. A determination in any
state that the Company is engaged in the corporate practice of medicine could
render any Management Agreement between the Company and an Affiliated Practice
located in such state unenforceable or subject to modification in a manner
adverse to the Company.

EXECUTIVE OFFICERS OF THE REGISTRANT

                  The following table sets forth certain information concerning
the Company's executive officers.

<TABLE>
<CAPTION>

NAME                           AGE       POSITION WITH COMPANY
----                           ---       ---------------------
<S>                            <C>       <C>
Thomas P. Lewis                44        President, Chief Executive Officer and Director

Ronald L. Edmonds              43        Executive Vice President, Chief Financial Officer and Director

Donald A. Hood, O.D.           54        Senior Vice President - Managed Care and Director

Robert C. Kelly                46        Senior Vice President - Center Operations

Allen D. Leck                  51        Senior Vice President - Value Added Services

Cassandra T. Speier            40        Senior Vice President - Development and Chief Compliance Officer

</TABLE>



                                       15


<PAGE>   16

<TABLE>
<S>                            <C>       <C>
Randall N. Reichle, O.D.       46        National Optometric Director and Vice President

David M. Dillman, M.D.         47        National Medical Director and Director
</TABLE>


         Set forth below is biographical information concerning the executive
officers of the Company:

THOMAS P. LEWIS has been with the Company since its start-up and has been a
principal architect in the structure and growth of the Company. Mr. Lewis has
been a director since June 1986 when he was first promoted to President and
Chief Executive Officer. As part of a merger agreement, Mr. Lewis served as
Executive Vice President and Chief Operating Officer from 1988 to 1990 and
resumed his position as President and Chief Executive Officer in March 1990. Mr.
Lewis received his Bachelor's degree from Rice University and a Master's degree
in Health Care Administration from Trinity University.

RONALD L. EDMONDS has served as the Company's Executive Vice President since
January 1997 and its Chief Financial Officer since September 1992. From
September 1992 until December 1996, he served as Senior Vice President. He was
elected a director in February 1993 and Secretary in October 1994. From 1978
until 1992, he served in various positions with KPMG Peat Marwick in Memphis,
Tennessee, Oklahoma City, Oklahoma and New York City, New York. Mr. Edmonds is a
certified public accountant and holds B.S. and M.S. degrees in accounting from
Oklahoma State University.

DONALD A. HOOD, O.D. has served as the Chairman of The Eye Health Network, Inc.
since 1988. He was elected to the Company's Board of Directors in April 1994.
Dr. Hood has maintained a private optometry practice in the Denver, Colorado
area since 1972. Dr. Hood graduated from the Pacific University College of
Optometry.

ROBERT C. KELLY has served as the Company's Senior Vice President of Operations
since January 1998. From February 1996 to November 1997, he served as Corporate
Development Officer and Development Vice President of Physicians Resource Group
in Dallas, Texas. From 1984 to 1996, he served in various positions with
Allergan, Inc. Mr. Kelly received his Bachelor's degree from the University of
Saint Thomas in St. Paul, Minnesota.

ALLEN D. LECK has served as President of Primary Eyecare Network since 1990.
Prior to 1990, Mr. Leck held senior marketing positions with Cooper Vision, 
Inc., UCO Optics and Bausch and Lomb. Mr. Leck earned a B.A. degree from the
University of South Dakota and attended the Graduate School of Sales Management
and Marketing at Syracuse University.

CASSANDRA T. SPEIER has served as Senior Vice President of the Company since
July 1994 with responsibilities in operations and development. In January 1998,
she was named to the additional position of chief compliance officer. From 1990
to 1994, Ms. Speier served in various management positions with MedCath, Inc.,
of Charlotte, North Carolina. She was previously employed as a regional director
of Medivision, Inc. Ms. Speier has a Bachelor's Degree from the University of
Colorado and a Master's Degree from Loma Linda University.

RANDALL N. REICHLE, O.D., F.A.A.O., is National Optometric Director of the
Company and has served as a Company Vice President since July 1986. Dr. Reichle
has maintained a private optometric practice in Houston, Texas since July 1976.
He has also served as Center Director for the Company's Eye Center in Houston,
Texas since July 1986. Dr. Reichle is a graduate of the University of Houston
College of Optometry.

DAVID M. DILLMAN, M.D. has served as a director of the Company since August
1997, and at that date became the Company's National Medical Director. Dr.
Dillman has been in private ophthalmic practice since 1981 and is currently the
Medical Director of Dillman Eye Care, an Omega Affiliated Practice, in Danville,
Illinois. He serves on the Scientific Advisory Board for the American Society of
Cataract and Refractive Surgery and on the board of directors for the American
College of Eye Surgeons. Dr. Dillman is a graduate of the University of Notre
Dame,



                                       16
<PAGE>   17

received his medical degree from Indiana University and completed his
ophthalmology residency at the Mayo Clinic in Rochester, Minnesota.

EMPLOYEES

              As of December 31, 1998, the Company employed 660 persons, 606 of
whom were full-time employees. Under the terms of the Management Agreements with
the Affiliated Practices, the Company employs the non-physician personnel of the
Centers, primarily clerical, administrative, and technical, that support such
Affiliated Practices. No employee of the Company or of any affiliated
ophthalmologist is a member of a labor union or subject to a collective
bargaining agreement. The Company believes that its employee relations are good.

ITEM 2. PROPERTIES

              The Company does not own any real estate. The Company leases
11,000 square feet of space at 5350 Poplar Avenue in Memphis, Tennessee, where
the Company's headquarters are located. The lease expires in 2005. Additionally,
the Company leases approximately 10,647 square feet used for EHN in Denver,
Colorado, approximately 2,270 square feet used for PEN in San Ramon, California
and leases an aggregate of approximately 166,000 square feet used for Centers
and ASCs managed by the Company. Monthly lease payments for these facilities
aggregate approximately $254,000.

ITEM 3. LEGAL PROCEEDINGS

              The Company is not aware of any litigation which is currently
pending or threatened against the Company or any outstanding claims against any
affiliated ophthalmologist that would have a material adverse effect on the
Company's financial condition or results of operations. The Company's affiliated
ophthalmologists are from time-to-time involved in legal proceedings incident to
their business, most of which involve claims related to the alleged medical
malpractice of the affiliated ophthalmologists.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

   None.

                                     PART II

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

        The Company's common stock was traded on The Nasdaq Small-Cap Market
under the symbol OHSI until January 1998 when it became traded on the Nasdaq
National Market. The following table sets forth the quarterly high and low sales
price information for the Company's common stock during the period from January
1, 1997 through December 31, 1998. Such prices represent prices between dealers
and do not include retail mark-ups, mark-downs or commissions.


<TABLE>
<CAPTION>

                                    1998                          1997
                         -------------------------      ------------------------
                             High         Low             High            Low
                             ----         ---             ----            ---
        <S>                  <C>          <C>            <C>            <C>
        First Quarter        $8.00        $6.75           $7.00          $6.38
        Second Quarter        7.44         5.88            7.63           6.50
        Third Quarter         7.13         3.75            9.25           6.75
        Fourth Quarter        5.00         3.03            9.00           6.88

</TABLE>



                                       17


<PAGE>   18


         There were 431 holders of record of the Common Stock as of February 28,
1999. The Company believes it had in excess of 1,000 beneficial owners of Common
Stock as of February 28, 1999. The Company has not paid any cash dividends and
does not anticipate paying cash dividends in the foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES

         On May 17, 1996, the Company completed the sale of 729 shares of its
Series A convertible preferred stock. The placement agent for the issue was
Swartz Investments, LLC. The preferred stock was issued to qualified foreign
investors pursuant to Regulation S under the Securities Act . The aggregate
offering price was $7,290,000. The placement agent fee was $729,000. Each share
of preferred stock was issued at a purchase price of $10,000 and is convertible
into common stock at an exercise price equal to the lesser of $5.75 or 85% of
the average bid price of the common stock at the time of conversion. The
preferred stock automatically converts at the end of three years if not already
converted. Until conversion, the preferred stock has a 8% dividend, payable in
kind. In connection with the placement, the purchasers of the preferred stock
were granted options to acquire 633,913 additional shares of the Registrant's
common stock at an exercise price of $5.75, which options are exercisable until
May 17, 2001. The placement agent was issued warrants to purchase an additional
126,782 shares of common stock with the same exercise price and term. As of
December 31, 1997, all of the convertible preferred stock has been converted.

         The common stock issued in connection with each of the following
transactions was issued in connection with a private placement made to
accredited investors.

         In connection with the purchase on March 12, 1996, by the Company from
Paul E. Garland, M.D., of the Capital Eye Surgery Center, Inc., the Company
issued to Dr. Garland its 7% Convertible Subordinated Note in the principal
amount of $1,400,000, which note is convertible into Omega Common Stock, at the
option of the holder of the note, at a conversion price of $6.50 per share. No
portion of the Note has been converted at this date.

         In connection with the purchase on August 31, 1996, by the Company 
from Wesley K. Herman, M.D. and his wife, Joellen Herman, and Bradford B.
Pazandak, M.D. and his wife, Joyce Pazandak, of the assets of Eyecare and
Surgery Center of North Texas, P.A. and ECSC Retina, P.A., the Company issued to
Drs. Herman and Pazandak and their respective wives 771,429 shares of Omega
Common Stock, valued at $4,540,000.

         In connection with the acquisition by merger as of March 1, 1997, of
Refractive Surgery Center of Birmingham, a professional corporation, the Company
issued to Sarah J. Hayes, M.D., 108,081 shares of Omega Common Stock, valued at
$714,414.

         In connection with the purchase as of March 31, 1997, by the Company 
from Nathan L. Lipton, M.D., P.A. of substantially all of its assets, the
Company issued to Dr. Lipton 15,267 shares of Omega Common Stock, valued at
$100,000.

         In connection with the acquisition as of April 30, 1997, by merger of
Primary Eyecare Network and P.E.N. Resources, Inc., the Company issued to
Leonard Osias, O.D. and his wife, Irene Osias, 195,365 shares of Omega Common
Stock, valued at $1,275,928.

         In connection with the acquisition by merger as of May 1, 1997, of
Faust Eye Center, P.C., the Company issued to Joseph Faust, M.D. 169,186 shares
of Omega Common Stock, valued at $1,112,400.

         In connection with the acquisition by merger as of August 29, 1997, of
Dillman Eye Care Optical Department, Inc., the Company issued to David M.
Dillman, M.D., 76,925 shares of Omega Common Stock, valued at $500,000.




                                       18
<PAGE>   19

         In connection with the acquisition by merger as of September 30, 1997,
of Golden Eye Surgeons and Consultants, Ltd., the Company issued to Bruce
Golden, M.D. 89,694 shares of Omega Common Stock, valued at $672,700. In
addition, the Company granted to Dr. Golden the option to purchase 10,000 shares
of Omega Common Stock at $8.25 per share, exercisable at various dates on or
before September 26, 2003.

         In connection with the acquisition by merger as of November 24, 1997 of
Alan D. Baribeau, M.D., P.A., the Company issued to Alan D. Baribeau, M.D.,
131,250 shares of Omega Common Stock valued at $1,050,000.

         In connection with the purchase as of December 16, 1997 of 100% of the
outstanding stock of Central Ohio Eye Institute, Inc., the Company issued
440,625 shares of Omega Common Stock valued at $3,525,000.

         In connection with the acquisition of certain assets of Physicians
Eyecare Network, Inc. as of December 31, 1997, the Company issued to Physicians
Eyecare Network, Inc. 175,000 shares of Omega Common Stock, valued at
$1,500,000.

         In connection with the acquisition by merger as of January 1, 1998 of
Hunter, Schulz and Horton, O.D., P.A., the Company issued to Drs. Hunter, Schulz
and Horton 130,718 shares of Omega Common Stock, valued at $1,000,000.

         In connection with the purchase as of July 11, 1998, of Levin Eye
Center, P.A., the Company issued to Mitchell L. Levin, M.D., 151,257 shares of
Omega Common Stock, valued at $1,022,500.

         In connection with the purchase as of September 1, 1998 of Louisiana
Eye Center of New Orleans, P.C., the Company issued to Jeffrey G. Straus, M.D.
106,473 of Omega Common Stock, valued at $625,000.



                                       19
<PAGE>   20

ITEM 6. SELECTED FINANCIAL DATA

         The following selected financial data should be read in conjunction
with the consolidated financial statements included elsewhere herein. Selected
financial data for all periods have been reclassified to present the operations
of the Company's managed care subsidiary as discontinued operations. See note 10
to the consolidated financial statements.

<TABLE>
<CAPTION>
                                                                    Years ended December 31,

                                              1994            1995            1996           1997            1998
                                              ----            ----            ----           ----            ----
<S>                                       <C>              <C>             <C>            <C>             <C>
Net revenues                              $19,871,140      21,840,434      28,044,201     64,956,717      97,264,552
Net earnings (loss) from
continuing operations                        (334,104)         12,829       1,545,296      3,530,437       2,274,593
Net earnings (loss) from 
continuing
Operations per common share:
   Basic                                        (0.07)           0.00            0.01           0.49            0.26
   Diluted                                      (0.07)           0.00            0.01           0.47            0.26
Net earnings (loss)                           112,407         480,874       1,303,126      3,882,932       1,213,981
Earnings  (loss) available to
common shareholders (1)                   $   112,407         480,874        (170,597)     3,863,056       1,213,981
Net earnings (loss) per common 
Share: (1)
   Basic                                  $      0.02            0.10           (0.03)          0.52            0.14
   Diluted                                $      0.02            0.10           (0.03)          0.50            0.14

<CAPTION>
                                                                          December 31,
                                                                          ------------

                                              1994            1995            1996           1997            1998
                                              ----            ----            ----           ----            ----
<S>                                       <C>              <C>             <C>            <C>             <C>
Total assets                              $ 8,261,569      10,292,509      26,121,860     59,767,045      71,772,374
Long-term obligations, net                $ 1,100,690       1,596,209       1,318,055     23,059,160      31,470,599
Stockholders' equity                      $ 3,400,724       3,961,247      15,043,163     27,399,822      30,824,614
</TABLE>

(1) after adjustment in 1996 for imputed dividends on convertible preferred
stock as required by a Securities and Exchange Commission announcement on March
28, 1997. Absent the impact of this announcement, the Company would have
reported earnings per share of $.20 for the year ended December 31, 1996. See
note 1 to the consolidated financial statements included elsewhere herein.





                                       20

<PAGE>   21




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

         The following discussion and analysis should be read in conjunction
with the consolidated financial statements and notes thereto included elsewhere
herein.

OVERVIEW

         Omega is an eye care company that provides facilities and services to
ophthalmologists and optometrists to assist in the integration of primary,
medical and surgical eye care. Omega manages 22 Affiliated Practices at which 50
affiliated ophthalmologists provide medical and surgical eye care at the
Company's Centers, which include 112 service locations and 8 ambulatory surgery
centers (ASCs). The Company generates revenues from (i) professional fees from
Affiliated Practices and facility fees for services provided at the Company's
ASCs, (ii) the sale of supplies and equipment and the provision of related
administrative services to optometrists, (iii) the provision of mobile surgical
and other supplies and services to eye care providers, and a wholesale optical
laboratory.

         In early 1999, the Company announced plans to focus its resources on
its core business of operating eye care and surgery centers including a major
new initiative to expand its laser vision correction capabilities. During the
first half of 1999, the Company plans to have excimer laser technology available
on-site in all of its 22 markets. In connection with this new initiative, Omega
has agreed to acquire 12 VISX STAR S2(TM) Excimer Laser Systems from VISX(TM),
Inc. VISX, Inc. is the U.S. market leader among manufacturers of excimer lasers
for ophthalmic use. Its VISX STAR S2 Excimer Laser System is currently the only
excimer laser in the U.S. market approved by the United States Food and Drug
Administration to treat nearsightedness, farsightedness and astigmatism.

         In addition, as part of the new strategic focus on center operations
and the laser vision correction initiative, the Company has adopted a plan to
transition the ownership and operation of its managed care subsidiary, The Eye
Health Network, Inc. (EHN) to a strategic partner. While the Company does not
expect to retain any ownership interest in these operations, it does expect to
have an ongoing relationship with a strategic partner in developing managed care
opportunities which include the Company's eye care and surgery centers and their
networks of referring optometrists. As a result of these plans, the operations
of EHN have been classified as discontinued operations in the Company's
financial statements.

         Omega provides comprehensive management and other services for its
Affiliated Practices. The Company has individual Management Agreements with each
affiliated ophthalmologist or, in some cases, with a professional corporation
employing more than one ophthalmologist. These Management Agreements are
generally long-term and provide for the participation of the affiliated
ophthalmologists in a comprehensive patient co-management program developed with
the Company and implemented at the Center. Center net revenues represent gross
charges for patient services rendered and ASC facility charges, net of estimated
contractual adjustments. The Company is responsible for the payment of
materially all Center clinical and operating expenses and is entitled to retain
a fee that varies with the operating results of the Affiliated Practice. The
amounts remitted to the Affiliated Practices under the Management Agreements are
included in Center operating expenses. See "Management Agreements."

         Optometric practice service revenues include sales of optometric
supplies and equipment through a group purchasing program and fees generated
from administrative, educational and other optometric practice support services.
Other revenues are comprised primarily of rental and sales of ophthalmic
equipment and supplies to hospitals, ASCs and eye care providers.

         The Company operates a mobile surgical service which provides
ophthalmic surgical equipment and supplies to surgical facilities and is
reimbursed by such facilities on a per-case basis. In addition, the Company




                                       21
<PAGE>   22

acquired an optical laboratory in December 1997 which was relocated from
Concord, California to Memphis, Tennessee in May 1998. The laboratory operates
retail dispensaries on 25 military installations.

         Center operating expenses include all direct expenses of Center
operations, including the amounts received by affiliated ophthalmologists under
their Management Agreements. Cost of sales includes the cost of goods sold
through the Company's optometric practice services, mobile surgical and other
divisions. Selling, general and administrative expenses represent the cost of
corporate support functions and the general and administrative expenses of the
Company's managed eye care, optometric practice services, mobile surgical and
other divisions.

         The Company intends to expand its business through affiliations with
additional ophthalmologists in connection with additional Centers and expansion
of existing Centers. The Company anticipates that it will pay consideration to
ophthalmologists in the form of cash, Common Stock and assumed indebtedness of
the practices in conjunction with future affiliations. The amounts of such
consideration will vary and will depend on the anticipated amount of Center
operating income retained by affiliated ophthalmologists. The Company plans to
expand the revenues of its Centers by increasing optometric referrals, expanding
the scope of the practice by adding additional ophthalmology sub-specialists,
expanding the territory by developing satellite locations, utilizing the
Company's mobile surgical services program and positioning the Centers to
negotiate effectively for managed care contracts.

RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                                      ------------------------

                                                    1998        1997       1996
                                                    ----        ----       ----
<S>                                                <C>        <C>         <C>
Revenues:

   Center net revenues..........................    52.2%       58.0%       91.2%
   Optometric practice services.................    40.9        38.8          --
   Other                                             6.9         3.2         8.8
                                                  ------      ------      ------
   Total revenues...............................   100.0       100.0       100.0

Center operating expenses.......................    42.5        48.1        77.3
Selling, general and administrative expenses....     7.7         6.0         8.6
Cost of sales...................................    41.2        38.4         5.1
Provision for doubtful accounts.................     1.6         1.1         1.3
                                                  ------       -----       -----
Earnings from operations........................     7.0%        6.4%        7.7%
                                                  ======      ======      ======

</TABLE>

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

         TOTAL REVENUES. Total revenues increased from $64,957,000 for the year
ended December 31, 1997 to $97,265,000 for the year ended December 31, 1998, an
increase of $32,308,000, or 49.7%.



                                       22

<PAGE>   23
         Center net revenues increased from $37,645,000 for the 1997 period to
         $50,813,000 for the 1998 period, an increase of $13,168,000, or 35.0%.
         The increase resulted primarily from the additions of Centers in
         Birmingham, Alabama; Marion, Indiana; Danville, Illinois; Chicago,
         Illinois; San Antonio, Texas; Circleville, Ohio; Kissimmee, Florida;
         and Metairie, Louisiana during 1997 and 1998 as well as the additions
         of ASC's in Dallas, San Antonio, Circleville and Kissimmee. In
         addition, same-center revenues increased 6% for the 1998 period.

         Optometric practice service revenues increased from $25,201,000 for the
         1997 period to $39,769,000 for the 1998 period, an increase of
         $14,568,000 or 57.8%. Optometric practice services provides products
         and services to independent optometrists, including purchasing,
         education, training, management, and publications and is related to the
         acquisition of PEN in May 1997.

         Other revenues increased from $2,111,000 for the 1997 period to
         $6,445,000 for the 1998 period, an increase of $4,334,000 or 205.3%.
         The increase reflected the addition of the optical laboratory in
         December 1997 and an increase in mobile surgical revenues.

         CENTER OPERATING EXPENSES. Center operating expenses increased from
$31,245,000 for the year ended December 31, 1997 to $41,357,000 for the year
ended December 31, 1998, an increase of $10,112,000 or 32.4%. The increase
reflected the additions of the practices in Birmingham, Marion, Danville, San
Antonio, Circleville, Kissimmee and Metairie, as well as a 6% increase in
same-center operating expenses during the 1998 period. As a percentage of center
net revenues, center operating expenses decreased from 83.0% in the 1997 period
to 81.4% in the 1998 period, reflecting the impact of the added centers and
improved performance in certain Centers.

         Based on recent guidance from the Securities and Exchange Commission, 
the Company reduced the maximum amortization period for management agreements 
to 25 years. Previously, management agreements were amortized over their 
contractual term to a maximum of 40 years. This change had the effect of 
increasing amortization expense by approximately $120,000 in 1998.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $3,884,000 for the year ended December
31, 1997 to $7,418,000 for the year ended December 31, 1998, an increase of
$3,534,000, or 91.0%. The increase primarily reflected (i) the acquisition and
expansion of operations at the optical laboratory, (ii) development costs
associated with expansion of the Company's practice affiliation program and
(iii) expenses of PEN which was acquired in May 1997. As a percentage of total
revenues, selling, general and administrative expenses increased from 6.0% in
the 1997 period to 7.7% in the 1998 period.

         COST OF SALES. Cost of sales increased from $24,915,000 for the year
ended December 31, 1997 to $40,089,000 for the year ended December 31, 1998, an
increase of $15,174,000, or 60.9%. This increase primarily reflected the
acquisition of PEN in May 1997 and the increase in mobile surgical sales. As a
percentage of total revenues, cost of sales increased from 38.3% in the 1997
period to 41.2% in the 1998 period, primarily as a result of the acquisition.

         PROVISION FOR DOUBTFUL ACCOUNTS. Provision for doubtful accounts
increased from $752,000 for the year ended December 31, 1997 to $1,594,000 for
the year ended December 31, 1998, an increase of $842,000, or 112.0%. This
increase reflected the additions of the practices in Birmingham, Marion,
Danville, San Antonio, Circleville, Kissimmee and Metairie. As a percentage of
total revenues, provision for doubtful accounts increased from 1.1% in the 1997 
period to 1.6% in the 1998 period.

         INTEREST INCOME (EXPENSE), NET. Interest expense increased from
$1,136,000 for the year ended 1997 to $2,615,000 for the year ended December
31, 1998, an increase of $1,479,000, or 130.2%. This increase related to the
increase in bank borrowings in 1997 and 1998 used to finance acquisitions and
working capital.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

         TOTAL REVENUES. Total revenues increased from $28,044,000 for the year
ended December 31, 1996 to $64,957,000 for the year ended December 31, 1997, an
increase of $36,913,000, or 131.6%.



                                       23

<PAGE>   24


         Center net revenues increased from $25,577,000 for the 1996 period to
         $37,645,000 for the 1997 period, an increase of $12,068,000, or 47.2%.
         The increase resulted primarily from the additions of Centers in
         Tallahassee, Florida; Dallas, Texas; Birmingham, Alabama; Marion,
         Indiana; Danville, Illinois; San Antonio, Texas; and Circleville, Ohio
         during the 1997 period as well as the additions of ASC's in Dallas, San
         Antonio, and Circleville. In addition, same-center revenues increased 
         9% for the 1997 period.

         Optometric practice service revenues were $25,201,000 for the year
         ended December 31, 1997. Optometric practice services provides products
         and services to independent optometrists, including purchasing,
         education, training, management, and publications and is related to the
         acquisition of PEN in May 1997.

         Other revenues decreased from $2,467,000 for the 1996 period to
         $2,111,000 for the 1997 period, a decrease of $356,000 or 14.4%. The
         decrease reflected the reduction in equipment sales, which have lower
         margins, and was partially offset by an increase in higher margin
         mobile surgical revenues.

         CENTER OPERATING EXPENSES. Center operating expenses increased from
$21,676,000 for the year ended December 31, 1996 to $31,245,000 for the year
ended December 31, 1997, an increase of $9,569,000 or 44.1%. The increase
reflected the additions of the practices in Tallahassee, Dallas, Birmingham,
Marion, Danville, San Antonio and Circleville as well as a 8.4% increase in 
same-center operating expenses during the 1997 period. As a percentage of center
net revenues, center operating expenses decreased from 84.8% in the 1996 period
to 83.0% in the 1997 period, reflecting improved performance in certain Centers
and the impact of the added Centers.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $2,421,000 for the year ended December
31, 1996 to $3,884,000 for the year ended December 31, 1997, an increase of
$1,463,000, or 60.1%. The increase primarily reflected (i) development costs
associated with expansion of the Company's practice affiliation program and (ii)
expenses of PEN during the 1997 period. As a percentage of total revenues,
selling, general and administrative expenses decreased from 8.6% in the 1996
period to 6.0% in the 1997 period.

         COST OF SALES. Cost of sales increased from $1,416,000 for the year
ended December 31, 1996 to $24,915,000 for the year ended December 31, 1997, an
increase of $23,499,000, or 1,659.5%. This increase primarily reflected the
acquisition of PEN in May 1997 and the increase in higher margin mobile surgical
sales partially offset by the reduction in equipment sales which have lower
margins. As a percentage of total revenues, cost of sales increased from 5.1 %
in the 1996 period to 38.3% in the 1997 period, primarily as a result of the
acquisition.

         PROVISION FOR DOUBTFUL ACCOUNTS. Provision for doubtful accounts
increased from $367,000 for the year ended December 31, 1996 to $752,000 for the
year ended December 31, 1997, an increase of $385,000, or 104.9%. This increase
reflected the additions of the practices in Tallahassee, Dallas, Birmingham,
Marion, Danville, and San Antonio. As a percentage of total revenues, provision
for doubtful accounts decreased from 1.3% in the 1996 period to 1.1% in the 1997
period.

         INTEREST INCOME (EXPENSE), NET. Interest expense increased from
$569,000 for the year ended 1996 to $1,136,000 for the year ended December 31,
1997, an increase of $567,000, or 99.6%. This increase related to the increase
in bank borrowings in late 1996 and the 1997 period used to finance
acquisitions.

         PREFERRED DIVIDENDS. Preferred dividends decreased from $1,474,000 for
the year ended December 31, 1996 to $20,000 for the year ended December 31,
1997, a decrease of $1,454,000, or 98.6%. This decrease resulted from the
conversion of Series A Convertible Preferred Stock into Common Stock by
preferred stockholders subsequent to June 30, 1996.



                                       24
<PAGE>   25

LIQUIDITY

         The Company requires capital primarily to fund the cash portion of
consideration paid in affiliation transactions, to fund the purchase of clinical
equipment and for working capital purposes. As of December 31, 1998, the Company
had working capital of $11,441,000 compared to $7,092,000 at December 31, 1997.
As of December 31, 1998, the Company had cash totaling $3,100,000, compared to
$2,742,000 at December 31, 1997. Long-term debt and capital lease obligations
increased to $24,488,000 in 1997, primarily reflecting borrowings associated
with practice affiliations. As of December 31, 1998 the long-term debt and
capital lease obligations were $32,760,000, primarily reflecting borrowings
associated with acquisitions and practice affiliations and working capital
requirements.

         For the year ended December 31, 1998, the operating activities of the
Company generated $1,435,000. The Company used $7,840,000 in investing
activities and generated $6,762,000 in financing activities. Cash flows from
operations included significant adjustments for depreciation and amortization
($3,140,000) as well as provision for doubtful accounts ($1,594,000). Investing
activities during the period included $1,235,000 in capital expenditures for
equipment as well as acquisitions of the assets of ophthalmic practices in
Florida, Louisiana and New Mexico. Financing activities included an increase in
borrowings and distributions to minority interests.

         For the year ended December 31, 1997, the Company generated $2,563,000
in cash from operating activities and used $15,284,000 in investing activities.
Financing activities generated cash of $14,043,000. Cash flows from operations
included significant adjustments for depreciation and amortization ($1,795,000)
and the provision for doubtful accounts ($752,000). The investing cash flows
represented the acquisition program and capital expenditures of $1,129,000.
Financing activities included borrowings used to finance the acquisition
program.

         For the year ended December 31, 1996, the Company generated cash of
$303,000 in operating activities and used $8,345,000 in investing activities.
Financing activities generated $8,714,000. Cash flows from operations included
significant adjustments for depreciation and amortization ($1,149,000) and the
provision for doubtful accounts ($367,000). Cash flows from investing activities
consisted principally of capital expenditures and acquisitions. Significant
financing activities included the sale of $7,290,000 in Series A Convertible
Preferred Stock and borrowings used to finance the acquisition program.

         On May 17, 1996, the Company completed the sale of 729 shares of Series
A Convertible Preferred Stock (the "Series A Preferred Stock"), for total gross
proceeds of $7,290,000. In addition, the investors received warrants to purchase
approximately 634,000 additional shares of Common Stock at an exercise price of
$5.75. All of the 729 shares of Series A Preferred Stock have been converted
into 1,483,750 shares of Common Stock. The net proceeds to the Company were
approximately $6,490,000 and were used to repay the bridge financing incurred in
the Tallahassee practice affiliation, to finance a portion of the cost of the
Dallas affiliation and for working capital.

         The Company used $1,235,000 for capital expenditures in 1998, compared
to $1,129,000 in 1997 and $635,000 in 1996. In addition, the Company incurred
capital lease obligations of $1,105,000 in 1998, $597,000 in 1996 and $981,000
in 1996. These capital expenditures consisted primarily of purchases of
ophthalmic equipment for use in the Company's Centers and satellite locations.
Capital expenditures in 1999 are estimated at approximately $5,000,000,
exclusive of the purchase of assets of practice locations in additional
affiliations. This higher level of capital expenditures reflects the Company's
new initiative to expand laser vision correction services.

         In February 1997, the Company entered into the $15,000,000 Credit
Facility for the purpose of refinancing certain existing debt, providing working
capital and financing acquisitions. The facility was amended in December 1997 to
increase availability to $30,000,000 and again in December 1998 to increase
availability to $50,000,000. The Credit Facility is a $50 million committed
facility, comprised of a $42 million acquisition facility (the 



                                       25
<PAGE>   26

"Acquisition Facility") and an $8 million working capital facility (the "Working
Capital Facility"). The Credit Facility is fully revolving until January 2000
and matures in equal installments over the following four years. The Credit
Facility bears interest at a variable rate equal to the 30-day commercial paper
rate quoted in The Wall Street Journal plus 4.25%.

         As of December 31, 1998, the Company had approximately $3,100,000 of
cash and cash equivalents and $21,000,000 of additional borrowing availability
under the Credit Facility. Management believes the combination of these sources
and funds generated from operations, will be sufficient to satisfy the Company's
capital requirements for future affiliations as well as its capital expenditure,
working capital and debt repayment requirements for the 1999 calendar year. In
order to provide funds to continue its growth strategy, the Company will incur,
from time to time, additional bank indebtedness and may issue, in public or
private transactions, equity or debt securities, the availability and terms of
which will depend on market and other conditions. There can be no assurance that
any such additional financing will be available on terms acceptable to the
Company.

IMPACT OF INFLATION AND CHANGING PRICES

         Approximately 42%, 4% and 32% of the Company's total revenues for the
year ended December 31, 1998 were reimbursed directly by Medicare, Medicaid and
private insurers, respectively. Revenues from these sources may be subject to
reduction or other changes not related to the actual costs of eye care
procedures performed.

         Effective January 1, 1996, 1997 and again in January 1998, Medicare
reimbursement rates for certain procedures performed by affiliated
ophthalmologists were decreased in various amounts. If the Company is not able
to offset these reductions by a combination of increases in volume and decreases
in operating costs, these reductions will have a negative impact on the results
of Center operations.

YEAR 2000

         The year 2000 computer issue is caused by computer programs being
written using two digits to identify the applicable year rather than four. Since
most application software only contains the two digits, many systems will
identify January 1, 2000 as January 1, 1900, which could result in malfunctions
involving dates. There can be no guarantee that the systems of other companies
on which the Company relies will be in compliance.

         To address the year 2000 issue, the Company has established a task
force including representatives of top management, management information
systems representatives, equipment purchasing and maintenance personnel and the
accounting department. The task force has been assigned responsibility for
developing and implementing the Company's year 2000 activities. The Company's
audit and compliance committee monitors the task force's activities.

         The Company is continuing its efforts to address operational concerns
raised by the so-called year 2000 issue. The principal areas of concern include
ensuring that the systems used in practice management, managed care
administration and accounting are year 2000 compliant, addressing issues related
to "imbedded systems" in equipment, including medical equipment, and assessing
and addressing the potential impact of year 2000 problems with other entities
with which the Company has business relationships.

         The Company is in the process of upgrading all of its internal systems,
including practice management, managed care administration and accounting. This
is a complex project with many aspects, but addressing the year 2000 issue is a
part of the project. The overall cost of this systems project will be in excess
of $1 million, but a relatively small part is exclusively related to the Year
2000 issue. The Company expects its systems to be fully compliant in the third
quarter of 1999.



                                       26

<PAGE>   27

         The Company is continuing to inventory equipment which has imbedded
systems which may be affected by the year 2000 issue and contacting the
appropriate vendors to ascertain risks and solutions. This project is
substantially complete. The cost of this project is not expected to be material
to the Company's financial statements at this time.

         The Company is also corresponding with other entities with which it has
business relationships to assess their progress in addressing the year 2000
issue for the purpose of assessing the risks to the Company which may result
from this problem.

         Based on the Company's progress to date and the status of its upgrade
activities, the Company believes that its greatest risk related to the year 2000
problem lies in its outside relationships, especially third party payors on
which the Company relies for much of its Center revenues. The Company is
continuing to monitor the progress of these payors, especially the Health Care
Financing Administration and Medicare fiscal intermediaries, in developing year
2000 compliance. A significant failure of these groups in maintaining payments
would have a material adverse impact on the Company.

         Although the cost to bring systems and equipment into compliance has
not been and is not expected to be material to the Company's consolidated
financial statements, failure to comply and/or failure of other entities with
which the Company transacts business to comply could have a material adverse
effect on the Company's business and financial results.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

         In the normal course of business, the financial position of the Company
is routinely subjected to a variety of risks. Among these risks is the market
risk associated with interest rate movements on outstanding debt. The Company
regularly assesses these risks and has established policies and business
practices to protect against the adverse effects of these and other potential
exposures. The Company's borrowings under the Credit Facility contain an element
of market risk from changes in interest rates. The Company may manage this risk,
in part, through the use of interest rate swaps. To date, the Company has not
done so. The Company does not enter into interest rate swaps or hold other
derivative financial instruments for speculative purposes. For purposes of
specific risk analysis, the Company uses sensitivity analysis to determine the
impact that market risk exposures may have on the Company. The financial
instruments included in the sensitivity analysis consist of all of the Company's
cash and equivalents, long-term and short-term debt and all derivative financial
instruments. To perform sensitivity analysis, the Company assesses the risk of
loss in fair values from the impact of hypothetical changes in interest rates on
market sensitive instruments. The market values for interest rate risk is
computed based on the present value of future cash flows as impacted by the
changes in the rates attributable to the market risk being measured. The
discount rates used for the present value computations were selected based on
market interest rates in effect at December 31, 1998. The market values that
result from these computations are compared with the market values of these
financial instruments at December 31, 1998. The differences in this comparison
are the hypothetical gains or losses associated with each type of risk. A one
percent increase or decrease in the levels of interest rates on variable rate
debt with all other variables held constant would result in a reduction in
pre-tax earnings of approximately $300,000 ($200,000 after tax) but would not
have a material effect on the fair value of the Company's financial instruments
or its financial position.



                                       27

<PAGE>   28


         ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

(A) FINANCIAL STATEMENTS

<TABLE>
<CAPTION>

                                                                           Page
                                                                           ----
         <S>                                                               <C>
         Index to Consolidated Financial Statements:

         Independent Auditors' Report                                       33

         Consolidated Balance Sheets as of
                  December 31, 1998 and 1997                                34

         Consolidated Statements of Operations
                  for the Years Ended December 31, 1998, 1997 and 1996      36

         Consolidated Statements of Stockholders' Equity
                  for the Years Ended December 31, 1998, 1997 and 1996      37

         Consolidated Statements of Cash Flows
                  for the Years Ended December 31, 1998, 1997 and 1996      38

         Notes to Consolidated Financial Statements                         39
</TABLE>




                                       28

<PAGE>   29

(B) SUPPLEMENTARY DATA - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

<TABLE>
<CAPTION>
                                                                                   1998(1)
                               
                                                         First            Second           Third           Fourth
                                                        Quarter           Quarter          Quarter         Quarter
                                                    -----------------------------------------------------------------
<S>                                                  <C>                 <C>             <C>              <C>
Total revenues                                        23,182,476         24,509,514      25,515,421       24,057,148
Earnings from operations                               1,576,489          1,801,505       1,792,264        1,566,434
Net earnings from continued operations                   573,389            635,681         576,793          488,731
Net earnings                                             523,077            544,079         571,622         (424,797)
Earnings (loss) available to common
shareholders                                             523,077            544,079         571,622         (424,797)
Earnings from continued operations per
common share
  Basic                                                     0.07               0.07            0.06             0.05
  Diluted                                                   0.06               0.07            0.06             0.05
Earnings (loss) per common share
  Basic                                                     0.06               0.06            0.06            (0.05)
  Diluted                                                   0.06               0.06            0.06            (0.05)
</TABLE>

(1) Quarterly financial data for 1998 have been restated to give effect to an
    adjustment to contractual allowances and the provision for doubtful
    accounts.

<TABLE>
<CAPTION>
                                                                                   1997                            

                                                        First             Second          Third           Fourth
                                                       Quarter            Quarter        Quarter          Quarter
                                                   ------------------------------------------------------------------
<S>                                                <C>                   <C>             <C>              <C>
Total revenues                                         8,021,814         16,063,303      20,263,059       20,608,541
Earnings from operations                                 644,993          1,159,060         915,208        1,442,092
Net earnings from continued operations                   499,389            739,166       1,658,665          633,217
Net earnings                                             552,296            734,208       2,035,972          560,455
Earnings available to common shareholders                541,797            727,559       2,033,247          560,455
Earnings from continued operations per
common share
  Basic                                                     0.07               0.10            0.22             0.09
  Diluted                                                   0.07               0.10            0.21             0.08
Earnings per common share
  Basic                                                     0.08               0.10            0.27             0.07
  Diluted                                                   0.08               0.10            0.26             0.07
</TABLE>



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

         None.




                                       29
<PAGE>   30


                                    PART III

         The information called for by Item 10, Directors, Executive Officers of
the Registrant, Promoters and Control Persons; Compliance with Section 16(a) of
the Exchange Act; Item 11, Executive Compensation; Item 12, Security Ownership
of Certain Beneficial Owners and Management; and Item 13, Certain Relationships
and Related Transactions, is to be filed by amendment. Such amendment will be
filed with the Securities and Exchange Commission in April 1999.

ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K

(1) Exhibits

<TABLE>
<CAPTION>

Exhibit
Number            Description
------            -----------
<S>      <C>
3.1      Articles of Incorporation*
3.2      Amendment to Articles of Incorporation**
3.3      Bylaws*
4.1      Form of Common Stock Certificate*
11       Statement Re: Computation of Per Share Earnings
22       Subsidiaries of the Registrant
23       Consent of Independent Accountants
27       Financial Data Schedule (For SEC use only)

*        Incorporated by reference to exhibits filed with the Registrant's 
         Registration Statement on Form S-18, Registration No. 33-35262-A.

**       Incorporated by reference to exhibits filed with the Registrant's 
         Registration Statement on Form S-1, registration Statement 
         No. 333-38885.
</TABLE>


(2)  Reports on Form 8-K

None



                                       30

<PAGE>   31



                                   SIGNATURES

In accordance with the requirements of Section 13 or 15(d) of the Exchange Act,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


                                          OMEGA HEALTH SYSTEMS, INC.
                                       By /s/ Thomas P. Lewis 
                                          -------------------------------------
                                           Thomas P. Lewis
                                           President and Chief Executive Officer

                                           Date   April 22, 1999 
                                                -------------------------------

In accordance with the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>

                SIGNATURE                          TITLE                    DATE

<S>                                  <C>                                  <C>
/s/ Andrew W. Miller                 Chairman of the Board                 4/22/99
-----------------------------
Andrew W. Miller

/s/ Thomas P. Lewis                  President,                            4/22/99                 
-----------------------------        Chief Executive Officer and 
Thomas P. Lewis                      Director

/s/ Ronald L. Edmonds                Executive Vice President,             4/22/99
-----------------------------        Chief Financial Officer and 
Ronald L. Edmonds                    Director

/s/ Donald A. Hood, O.D.             Senior Vice President - Managed       4/22/99
-----------------------------        Care and Director
Donald A. Hood, O.D.                 

/s/ Mary Elizabeth Porter            Vice President and                    4/22/99
-----------------------------        Controller
Mary Elizabeth Porter                

/s/ Donald Beisner, M.D.             Director                              4/22/99
-----------------------------
Donald Beisner, M.D.

/s/ David M. Dillman, M.D.           Director                              4/22/99
-----------------------------
David M. Dillman, M.D.

/s/ Herman L. Tacker, O.D.           Director                              4/22/99
-----------------------------
Herman L. Tacker, O.D.

</TABLE>




                                       31
<PAGE>   32











                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                        Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996

                   (With Independent Auditors' Report Thereon)









                                       32
<PAGE>   33









                          Independent Auditors' Report



The Board of Directors
Omega Health Systems, Inc.:

We have audited the accompanying consolidated balance sheets of Omega Health
Systems, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1998. 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 Omega Health
Systems, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.


                                               KPMG LLP

Memphis, Tennessee
April 15, 1999





                                       33
<PAGE>   34




                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                           Consolidated Balance Sheets

                           December 31, 1998 and 1997


<TABLE>
<CAPTION>

                        Assets                             1998               1997
                        ------                             ----               ----
<S>                                                    <C>                  <C>
Current assets:
    Cash                                               $  3,100,145         2,742,444
    Accounts receivable, net of allowances for
       contractual adjustments and doubtful
       accounts of $3,456,000 and $3,142,000 at
       December 31, 1998 and 1997, respectively
       (note 3)                                          14,469,802        11,829,998
    Other current assets                                  2,774,845         1,304,445
                                                       ------------      ------------
                    Total current assets                 20,344,792        15,876,887
                                                       ------------      ------------
Equipment, furniture and fixtures (notes 4 and 5):
    Owned                                                17,530,490        14,614,605
    Held under capital lease                              4,046,613         2,872,412
                                                       ------------      ------------
                                                         21,577,103        17,487,017

    Less accumulated depreciation and
       amortization                                      (8,581,509)       (6,679,329)
                                                       ------------      ------------
                   Equipment, furniture and
                       fixtures, net                     12,995,594        10,807,688
                                                       ------------      ------------

Management agreements, net of
   accumulated amortization of $2,228,742
   and $1,094,390 at December 31, 1998 and
   1997, respectively (note 2)                           34,748,320        29,260,811

Deferred tax asset (note 7)                               1,923,000         1,356,000
Net assets of discontinued operations (note 10)                  --         1,180,397
Other assets (note 6)                                     1,760,668         1,285,262
                                                       ------------      ------------


                                                       $ 71,772,374        59,767,045
                                                       ============      ============

</TABLE>



                                       34

<PAGE>   35



                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                           Consolidated Balance Sheets

                                  (continued)
<TABLE>
<CAPTION>


                                                                       1998             1997
                                                                       ----              ----
<S>                                                             <C>                 <C>
             Liabilities and Stockholders' Equity

Current liabilities:
     Accounts payable                                           $    5,498,968          4,710,233
     Accrued expenses                                                2,115,580          2,646,288
     Current installments of obligations under
        capital leases and long-term debt
        (notes 4 and 5)                                              1,289,335          1,428,477
                                                                --------------       ------------
                    Total current liabilities                        8,903,883          8,784,998

Obligations under capital leases, excluding current
     installments (note 4)                                           1,746,094          1,365,448

Long-term debt, excluding current installments (note 5)             29,724,505         21,693,712
                                                                --------------       ------------
                    Total liabilities                               40,374,482         31,844,158
                                                                --------------       ------------

Minority interests in partnerships                                     573,278            523,065

Stockholders' equity (notes 2 and 8):                                                 
     Common stock; par value of $0.06;
        authorized 25,000,000 shares; issued
        9,005,588 and 8,566,546 shares at
        December 31, 1998 and 1997, respectively                       540,178            513,991
     Treasury stock                                                   (138,346)                --
     Additional paid-in capital                                     33,885,353         31,562,383
     Accumulated deficit                                            (3,462,571)        (4,676,552)
                                                                --------------       ------------
                    Total stockholders' equity                      30,824,614         27,399,822
                                                                --------------       ------------

Commitments and contingencies (notes 4 and 12)

                                                                $   71,772,374         59,767,045
                                                                ==============       ============
</TABLE>





See accompanying notes to consolidated financial statements.

 


                                       35

<PAGE>   36
                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                      Consolidated Statements of Operations

                  Years ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                                       1998               1997               1996
                                                                  ------------        -----------        -----------
<S>                                                               <C>                  <C>                <C>       
Center net revenues                                               $ 50,813,330         37,645,150         25,576,743
Optometric practice services                                        39,768,987         25,200,784                 --
Other revenues                                                       6,682,235          2,110,783          2,467,458
                                                                  ------------        -----------        -----------
                    Total revenues                                  97,264,552         64,956,717         28,044,201

Center operating expenses                                           41,356,886         31,244,702         21,675,900
Selling, general and administrative expenses                         7,418,150          3,883,992          2,420,893
Cost of sales                                                       40,088,979         24,914,938          1,415,800
Provision for doubtful accounts                                      1,594,336            751,782            367,037
                                                                  ------------        -----------        -----------
                    Earnings from operations                         6,806,201          4,161,303          2,164,571

Non-operating revenue (expense):
     Interest income                                                   124,135             74,651             58,763
     Interest expense                                               (2,738,787)        (1,210,512)          (628,730)
                                                                  ------------        -----------        -----------

                    Earnings before minority
                    interests and income taxes                       4,191,549          3,025,442          1,594,604

Minority interests in income of partnerships                          (624,956)          (405,005)           (49,308)
                                                                  ------------        -----------        -----------
                    Earnings before income taxes                     3,566,593          2,620,437          1,545,296

Income tax (expense) benefit (note 7)                               (1,292,000)           910,000                 --
                                                                  ------------        -----------        -----------
                    Net earnings from continuing operations          2,274,593          3,530,437          1,545,296
Discontinued operations (note 10):
     Loss on disposal, net of tax                                     (768,000)                --                 --
     Operations, net of tax                                           (292,612)           352,495           (242,170)
                                                                  ------------        -----------        -----------
                                                                    (1,060,612)           352,495           (242,170)
                                                                  ------------        -----------        -----------
Net earnings                                                         1,213,981          3,882,932          1,303,126
                                                                                                           
Preferred dividends, principally those imputed
     as described in note 1                                                 --            (19,874)        (1,473,723)
                                                                  ------------        -----------        -----------
Earnings (loss) available to common
     shareholders                                                 $  1,213,981          3,863,058           (170,597)
                                                                  ============        ===========        ===========
Earnings from continuing operations per
     common share:
     Basic                                                        $        .26                .47                .01
                                                                  ============        ===========        ===========
     Diluted                                                      $        .26                .45                .01
                                                                  ============        ===========        ===========

Earnings (loss) from discontinued 
     operations per common share,
     net of tax:
     Basic                                                        $       (.12)               .05               (.04)
                                                                  ============        ===========        ===========
     Diluted                                                      $       (.12)               .05               (.04)
                                                                  ============        ===========        ===========

Earnings (loss) per common share:
     Basic                                                        $        .14                .52               (.03)
                                                                  ============        ===========        ===========
     Diluted                                                      $        .14                .50               (.03)
                                                                  ============        ===========        ===========
Weighted average shares outstanding:
     Basic                                                           8,821,995          7,417,878          5,434,040
                                                                  ============        ===========        ===========
     Diluted                                                         8,915,453          7,769,656          5,598,926
                                                                  ============        ===========        ===========
</TABLE>

See accompanying notes to consolidated financial statements.





                                       36
<PAGE>   37


                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                 Consolidated Statements of Stockholders' Equity

                  Years ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                                             Additional                         Total
                                   Preferred       Common      Treasury        paid-in     Accumulated      stockholders'
                                     stock          stock       stock          capital       deficit           equity
                                  -----------      -------     --------      ----------     ----------      -----------
<S>                               <C>              <C>         <C>           <C>            <C>              <C>      
Balances at December 31, 1995     $        --      282,369           --      12,047,891     (8,369,013)       3,961,247
Issuance of 729 shares of
     preferred stock                6,494,292           --           --              --             --        6,494,292
Issuance of 1,370,097 shares
     of common stock with
     conversion of 670 shares
     of preferred stock            (6,009,243)      82,206           --       5,927,037             --               --
Issuance of 789,515 shares
     of common stock                       --       47,371           --       3,237,127             --        3,284,498
In-kind dividends on
     preferred stock                       --           --           --         187,252       (187,252)              --
Imputed dividends on
     preferred stock                       --           --           --       1,286,471     (1,286,471)              --
Net earnings                               --           --           --              --      1,303,126        1,303,126
                                  -----------      -------     --------      ----------     ----------      -----------
Balances at December 31, 1996         485,049      411,946           --      22,685,778     (8,539,610)      15,043,163
Issuance of 113,653 shares of
     common stock with
     conversion of 59 shares
     of preferred stock              (485,049)       6,819           --         478,230             --               --
Issuance of 1,587,106 shares
     of common stock                       --       95,226           --       8,378,501             --        8,473,727
In-kind dividends on
     preferred stock                       --           --           --          19,874        (19,874)              --
Net earnings                               --           --           --              --      3,882,932        3,882,932
                                  -----------      -------     --------      ----------     ----------      -----------
Balances at December 31, 1997              --      513,991           --      31,562,383     (4,676,552)      27,399,822

Purchase of treasury stock                 --           --     (138,346)             --             --         (138,346)
Issuance of 436,755 shares
     of common stock                       --       26,187           --       2,322,970             --        2,349,157
Net earnings                               --           --           --              --      1,213,981        1,213,981
                                  -----------      -------     --------      ----------     ----------      -----------
Balances at December 31, 1998     $        --      540,178     (138,346)     33,885,353     (3,462,571)      30,824,614
                                  ===========      =======     ========      ==========     ==========      ===========
</TABLE>



See accompanying notes to consolidated financial statements.




                                       37
<PAGE>   38
                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                      Consolidated Statements of Cash Flows

                  Years ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                                           1998                 1997                 1996
                                                                       -----------          -----------          -----------
<S>                                                                    <C>                    <C>                  <C>      
Cash flows from operating activities:
     Net earnings                                                      $ 1,213,981            3,882,932            1,303,126
     Adjustments to reconcile net earnings to net cash
        provided by operating activities:
           Depreciation and amortization                                 3,140,307            1,794,838            1,148,547
           Discontinued operations, net                                  1,180,397             (260,831)             218,948
           Income tax (benefit) expense                                   (567,000)            (910,000)                  --
           Provision for doubtful accounts                               1,594,336              751,782              367,037
           Minority interests in income of partnerships                    624,956              405,005               49,308
           Changes, net of acquisition effects, in
               operating assets and liabilities:
                  Accounts receivable, net                              (3,814,188)          (2,617,303)          (1,649,661)
                  Other receivables                                       (195,078)            (137,061)             133,125
                  Inventory and other current assets                    (1,950,690)            (613,576)            (655,236)
                  Accounts payable and accrued expenses                    208,186              266,801             (612,091)
                                                                       -----------          -----------          -----------
                  Net cash provided by
                         operating activities                            1,435,207            2,562,587              303,103
                                                                       -----------          -----------          -----------
Cash flows from investing activities:
     Capital expenditures                                               (1,235,108)          (1,129,204)            (635,277)
     Acquisition of net assets of physician practices (note 2)          (6,604,640)         (12,734,977)          (7,128,466)
     Acquisition of Primary Eyecare Network,
        net of cash acquired                                                    --           (1,420,148)                  --
     Investment in Clearvision Laser Centers, Inc.                              --                   --             (500,000)
     Other                                                                      --                   --              (81,180)
                                                                       -----------          -----------          -----------
                    Net cash used in investing activities               (7,839,748)         (15,284,329)          (8,344,923)
                                                                       -----------          -----------          -----------
Cash flows from financing activities:
     Financing costs incurred                                              (87,312)            (542,145)             (50,400)
     Principal payments on long-term debt                                 (855,074)          (5,626,083)          (8,186,792)
     Principal payments on obligations under capital leases               (545,569)            (659,653)            (497,889)
     Proceeds from issuance of debt                                      8,963,286           20,762,826           10,986,715
     Proceeds from issuance of common stock                                     --              501,087                6,499
     Proceeds from issuance of preferred stock                                  --                   --            6,494,292
     Purchase of treasury stock                                           (138,346)                  --                   --
     Distributions to minority interests                                  (574,743)            (392,934)             (38,412)
                                                                       -----------          -----------          -----------
                    Net cash provided by
                         financing activities                            6,762,242           14,043,098            8,714,013
                                                                       -----------          -----------          -----------
                    Net increase in cash                                   357,701            1,321,356              672,193
Cash at beginning of period                                              2,742,444            1,421,088              748,895
                                                                       -----------          -----------          -----------
Cash at end of period                                                  $ 3,100,145            2,742,444            1,421,088
                                                                       ===========          ===========          ===========
</TABLE>

See accompanying notes to consolidated financial statements.



                                       38
<PAGE>   39


                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                  Years ended December 31, 1998, 1997 and 1996

(1)    Summary of Significant Accounting Policies

       (a)   Nature of Operations

             Omega Health Systems, Inc. (the Company) is an eye care company
             that provides facilities services to ophthalmologists and
             optometrists to assist in the integration of primary, medical and
             surgical eye care. The Company emphasizes cooperative professional
             relationships between ophthalmologists and optometrists in the
             formation of integrated eye care networks and co-management of
             patient care. The Company's services allow eye care professionals
             to devote their time to the delivery of quality primary, medical
             and surgical eye care and enable them to expand and position their
             practices effectively in an increasingly competitive eye care
             environment. The Company manages 22 affiliated ophthalmology
             practices through which 50 affiliated ophthalmologists provide
             medical and surgical eye care at the Company's co-management eye
             care centers through 112 service locations and 8 ambulatory surgery
             centers. The Company also provides supply and equipment purchasing;
             mobile surgical equipment and support services, excimer laser
             support services, and certain administrative services to
             ophthalmologists, networks of associated optometrists, and other
             eye care providers.

             The Company has a managed eye care subsidiary, The Eye Health 
             Network, Inc. (EHN). The Company has adopted a plan to discontinue 
             operations of EHN. See note 10.

       (b)   Principles of Consolidation

             The consolidated financial statements include the accounts of the
             Company, its wholly-owned subsidiaries and majority-owned 
             partnerships. All significant intercompany accounts and 
             transactions have been eliminated in consolidation.

                                                                     (Continued)



                                       39
<PAGE>   40


                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

       (c)   Equipment, Furniture and Fixtures

             Equipment, furniture and fixtures are stated at cost. Equipment,
             furniture and fixtures under capital leases are stated at the lower
             of the present value of minimum lease payments at the beginning of
             the lease term or fair value at the inception of the lease.

             Provisions for depreciation on equipment, furniture and fixtures
             are computed by the straight-line method based on the estimated
             useful lives of the assets ranging from five to ten years.
             Leasehold improvements are amortized using the straight-line method
             over the lesser of the respective lease term or their estimated
             useful lives.

       (d)   Center Net Revenues

             Center net revenues are gross charges for patient services
             rendered, recorded net of estimated third-party payor contractual
             adjustments. The physicians associated with the Company have
             agreements with governmental and other third-party payors that
             provide for reimbursement at amounts different from their
             established rates. Contractual adjustments under third-party
             reimbursement programs represent the difference between the
             billings at established rates for services and amounts reimbursed
             by third-party payors. Services rendered under the Medicare
             program, the largest third-party payor, are principally reimbursed
             based upon predetermined fee schedules for the procedures
             performed.

                                                                     (Continued)



                                       40
<PAGE>   41


                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

       (e)   Optometric Practice Services

             The Company operates a discount purchasing program for the products
             used in the day-to-day practices of optometrists. These products
             include eye glass frames and lenses, contact lenses, clinical
             equipment and other supplies. The Company also provides
             administrative services on a contracted basis to meet the
             optometrists' needs in several areas such as accounting and
             financial reporting, billing and collections and staff management.
             The costs related to such product sales are included in cost of
             sales.

       (f)   Other Revenues

             The Company operates a mobile surgical service which provides
             ophthalmic surgical equipment and supplies to surgical facilities,
             including hospitals and ambulatory surgery centers, on a per-case
             basis. The costs related to these sales are included in cost of
             sales. In addition, the Company operates a wholesale optical
             laboratory.

       (g)   Management Agreements

             Assets related to management agreements arise from business
             acquisitions made by the Company. The excess of cost of purchased
             assets over the fair value of net assets acquired (including other
             identifiable intangible assets) is allocated to management
             agreements and amortized straight-line over terms ranging from ten
             to twenty-five years, generally the term of the related management
             agreement. The recoverability of such assets is reevaluated when
             warranted by business events and circumstances. The Company
             believes that no impairment of such assets has occurred and that no
             revisions of estimated useful lives are currently necessary.

             At each reporting period, the Company reviews the carrying value 
             of Management Agreements on a practice-by-practice basis to
             determine if facts and circumstances exist which would suggest that
             the value of the Service Agreements may be impaired or that the
             amortization period needs to be modified. Among the factors
             considered by the Company in making the evaluation are changes in
             the practices' market position, reputation, profitability and
             geographical penetration. Using these factors, if circumstances are
             present which may indicate impairment is probable, the Company will
             prepare a projection of the undiscounted cash flows before interest
             charges of the specific practice and determine if the Management
             Agreements are recoverable based on these undiscounted cash flows.
             If impairment is indicated, then an adjustment will be made to
             reduce the carrying value of intangible assets to fair value.

             Based on recent guidance from the Securities and Exchange
             Commission, the Company reduced the maximum amortization period for
             management agreements to 25 years. Previously, management
             agreements were amortized over their contractual term to a maximum
             of 40 years. This change had the effect of increasing amortization
             expense by approximately $120,000 in 1998.

       (h)   Income Taxes

             Deferred tax assets and liabilities are recognized for the future
             tax consequences attributable to differences between the financial
             statement carrying amounts of existing assets and liabilities and
             their respective tax bases. Deferred tax assets and liabilities are
             measured using enacted tax rates expected to apply to taxable
             income in the years in which the deferred tax liability or asset is
             expected to be settled or realized.

                                                                     (Continued)



                                       41
<PAGE>   42


                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

       (i)   Earnings (Loss) Per Share

             Effective December 31, 1997, the Company adopted Statement of
             Financial Accounting Standards (SFAS) No. 128, Earnings Per Share.
             SFAS No. 128 establishes standards for computing and presenting
             earnings per share. Basic net earnings per share is based on net
             earnings available to common shareholders divided by the weighted
             average number of shares outstanding during each year. Diluted net
             earnings per share reflects the potential dilution that could occur
             if securities or other contracts to issue common stock were
             exercised or converted into common stock or resulted in the
             issuance of common stock that then shared in the Company's
             earnings. The dilutive effect of securities and contracts
             potentially convertible to common stock is calculated using the
             treasury stock method. Prior periods have been restated to conform
             to the new presentation.

       (j)   Use of Estimates

             The preparation of financial statements in conformity with
             generally accepted accounting principles requires that management
             make estimates and assumptions affecting the reported amounts of
             assets, liabilities, revenue and expenses, as well as disclosure of
             contingent assets and liabilities. Actual results could differ from
             these estimates.

       (k)   Reclassifications

             Certain prior year balances have been reclassified to conform to
             the 1998 presentation.

                                                                     (Continued)



                                       42
<PAGE>   43


                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

 (2)   Mergers, Acquisitions and Divestitures

       In January 1996, the Company completed the acquisition of the stock of
       Warren R. Berrie, M.D., P.C. of Nashville, Tennessee. This acquisition
       included substantially all of the assets of the medical practice of Dr.
       Berrie. Simultaneously with the acquisition, the Company entered into a
       five-year management agreement with Dr. Berrie. The total consideration
       for the acquisition of the assets of the Berrie practice was $650,000, of
       which $50,000 was paid in cash, with the balance in the form of a
       five-year subordinated note. The note is due in monthly installments,
       bears interest at 7% and is convertible into common stock at a conversion
       price of $5.89 per share.

       In March 1996, the Company completed the acquisition of the assets of the
       ophthalmology practice of Paul R. Garland, M.D., of Tallahassee, Florida.
       In addition, the Company acquired all of the capital stock of the surgery
       center associated with Dr. Garland's practice, Capital Eye Surgery
       Center, Inc. Simultaneously with the acquisition, the Company entered
       into a 25-year management agreement with Dr. Garland's professional
       corporation. The total consideration for the Garland transactions was
       $3.4 million, of which $2 million was paid in cash, with the balance in
       the form of a five-year subordinated note. The note is due in monthly
       installments, bears interest at 7% and is convertible into common stock
       at a conversion price of $6.50 per share.

       In September 1996, the Company completed the acquisition of substantially
       all of the assets of EyeCare and SurgeryCenter of North Texas, P.A. and
       ECSC Retina, P.A., two Dallas, Texas professional associations which
       practice ophthalmology, in exchange for 771,429 shares of common stock. A
       subsidiary of the Company manages the practices pursuant to long-term
       management agreements.

       Also in September 1996, a subsidiary of the Company and SurgEyeCare, Inc.
       entered into a partnership agreement to form SurgEyeCare General
       Partnership (the "Partnership"). Under the terms of the partnership
       agreement, the Company contributed $4,550,000 cash to the Partnership,
       and SurgEyeCare, Inc. contributed assets with an agreed-upon value of
       $6,100,000. After these initial capital contributions, the Partnership
       distributed $4,476,438 in cash to SurgEyeCare, Inc. After these
       transactions, the Company owned a 75% interest in the Partnership and
       SurgEyeCare, Inc. owned a 25% interest. Under the terms of the
       partnership agreement, the subsidiary of the Company is designated as
       managing partner. The Company financed its contribution to the
       Partnership, in part, with the proceeds of a $3,280,000 acquisition term
       loan from a commercial bank, which was refinanced in February 1997.

                                                                     (Continued)



                                       43
<PAGE>   44


                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

       In March 1997, the Company completed the acquisition of the assets of the
       ophthalmology practice of Sarah J. Hays, M.D. of Birmingham, Alabama.
       Simultaneously with the acquisition, the Company entered into a long-term
       management agreement with Dr. Hays' professional corporation. The assets
       were acquired in exchange for 108,081 shares of the Company's common
       stock and $859,500 in cash. The cash portion of the transaction was
       financed under the Company's Credit Agreement described in note 5.

       In May 1997, the Company completed the acquisition of the assets of the
       ophthalmology practice of Joseph F. Faust, M.D. of Marion, Indiana and a
       50% interest in the ambulatory surgery center associated with such
       practice. Simultaneously with the acquisitions, the Company entered into
       long-term management agreements to manage both the practice and the
       surgery center. The assets were acquired in exchange for 169,186 shares
       of the Company's common stock and $1.7 million in cash. The cash portion
       of the transaction was financed under the Credit Agreement.

       In May 1997, the Company completed a merger with Primary Eyecare Network
       (PEN), based in San Ramon, California. PEN provides products and services
       to independent optometrists, including management, purchasing, education,
       training and publications. In connection with the merger, the Company
       issued 195,365 shares of its common stock to the shareholders of PEN and
       paid $1.9 million in cash. The cash portion of the transaction was
       financed under the Credit Agreement.

       In August 1997, the Company completed the acquisition of substantially
       all of the assets of Dillman Eye Care Associates, an ophthalmology
       practice, and Dillman Eye Care Optical Department, Inc. in exchange for
       66,667 shares of common stock and $725,000 in cash. Simultaneously with
       the acquisitions, the Company entered into a long-term management
       agreement to manage the Dillman practice. The cash portion of the
       transaction was financed under the Credit Agreement.

       In September 1997, the Company completed the acquisition of substantially
       all of the assets of Eye Surgeons and Consultants and Golden Eye
       Surgeons, two affiliated ophthalmology practices, in exchange for 89,694
       shares of common stock and $672,700 in cash. Simultaneously with the
       acquisitions, the Company entered into a long-term management agreement
       to manage the practices. The cash portion of the transaction was financed
       under the Credit Agreement.

       In December 1997, the Company completed the acquisition of the assets of
       the ophthalmology practice of Alan D. Baribeau, M.D., P.A. of San
       Antonio, Texas and a 50% interest in the ambulatory surgery center
       associated with such practice. Simultaneously with the acquisitions, the
       Company entered into long-term management agreements to manage both the
       practice and the surgery center. The assets were acquired in exchange for
       131,250 shares of the Company's common stock and $1.9 million in cash.
       The cash portion of the transaction was financed under the Credit
       Agreement.

       In December 1997, the Company completed the acquisition of the stock of
       Central Ohio Eye Institute, Inc., an Ohio Corporation, in exchange for
       463,206 shares of common stock and $5.0 million in cash. Simultaneously
       with the acquisition, the Company entered into a long-term management
       agreement to manage the practice. The cash portion of the transaction was
       financed under the Credit Agreement.

                                                                     (Continued)



                                       44
<PAGE>   45


                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

       In December 1997, the Company completed the acquisitions of substantially
       all of the assets of Providers Optical, Inc., a wholesale optical
       laboratory focused on managed eye care, in exchange for 175,000 shares of
       common stock.

       In January 1998, the Company completed the acquisition of substantially
       all of the assets of Hunter, Schulz and Horton, O.D., P.A. of New Port
       Richey, Florida. Simultaneously with the acquisition, the Company entered
       into a long-term management agreement to manage the practice. In
       connection with the merger, the Company issued 130,718 shares of the
       Company's common stock and $1,000,000 in cash. The cash portion of the
       transaction was financed under the Credit Agreement.

       In July 1998, the Company completed the acquisitions of substantially all
       of the assets of the ophthalmology practice of Mitchell L. Levin, M.D. of
       Kissimmee, Florida and a 50% interest in the ambulatory surgery center
       associated with such practice. Simultaneously with the acquisitions, the
       Company entered into a long-term management agreement to manage the Levin
       practice. The assets were acquired in exchange for 151,257 shares of the
       Company's common stock and $1.8 million in cash. The cash portion of the
       transaction was financed under the Credit Agreement.

       In September 1998, the Company completed the acquisition of substantially
       all of the assets of the ophthalmology practice of Jeffrey Straus, M.D.
       of Metairie, Louisiana. Simultaneously with the acquisition, the Company
       entered into a long-term management agreement to manage the Straus
       practice. The assets were acquired in exchange for 106,473 shares of the
       Company's common stock and $937,000 in cash. The cash portion of the
       transaction was financed under the Credit Agreement.

       The following sets forth certain unaudited pro forma financial
       information for the years ended December 31, 1998 and 1997, as if the
       transactions described above, which were all accounted for as purchases,
       had been completed as of January 1, 1997:

<TABLE>
<CAPTION>
                                                                         Unaudited                     
                                                             -------------------------------
                                                                 1998               1997    
                                                             ------------         ----------
<S>                                                          <C>                  <C>       
             Revenues                                        $100,383,803         69,590,024
             Net earnings from continuing operations            2,413,729          3,779,531
             Net earnings from continuing operations
                per common share:
                Basic                                        $        .27                .48
                Diluted                                      $        .27                .46
             Weighted average common shares:
                Basic                                           8,933,115          8,614,183
                Diluted                                         9,026,573          8,965,961
</TABLE>


                                                                     (Continued)




                                       45
<PAGE>   46

                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(3)    Business and Credit Concentrations

       Affiliated ophthalmologists provide health care services through the
       Company's eye care centers. These ophthalmologists grant credit to
       patients, substantially all of whom are residents local to each center.
       The ophthalmologists generally do not require collateral or other
       security in extending credit to patients; however, they routinely obtain
       assignment of (or are otherwise entitled to receive) patients' benefits
       payable under their health insurance programs, plans or policies (e.g.
       Medicare, Medicaid, Blue Cross and commercial insurance policies).

       The mix of receivables from patients and third-party payors follows:

<TABLE>
<CAPTION>
                                                    1998                1997
                                                    ----                 ---

<S>                                                   <C>                 <C>
             Medicare                                 47%                 48%
             Other third-party payors                 34                  35
             Patients                                 11                   9
             Medicaid                                  8                   8
                                                    ----                 ---
                                                     100%                100%
                                                    ====                 ===
</TABLE>

(4)    Leases

       The Company and its wholly-owned subsidiaries are obligated under capital
       leases for equipment, furniture and fixtures that expire within the next
       five years. Capital lease obligations for such assets of approximately
       $1,105,000, $642,000, and $981,000 were incurred in 1998, 1997 and 1996,
       respectively. The Company and its subsidiaries also are obligated under
       noncancellable operating leases for equipment and office space that
       expire within the next ten years.

                                                                     (Continued)



                                       46
<PAGE>   47


                  OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

       Future minimum lease payments under noncancellable operating leases and
       the present value of future minimum capital lease payments as of December
       31, 1998 follow:

<TABLE>
<CAPTION>
                                                                             Capital                Operating
                                                                             leases                   leases
                                                                          -----------               ----------
<S>                                                                      <C>                        <C>      
             Year ending December 31:
                1999                                                      $ 1,003,983                2,917,816
                2000                                                          968,553                2,596,343
                2001                                                          547,778                2,575,125
                2002                                                          329,402                1,858,162
                2003                                                          131,359                1,496,931
                Thereafter                                                         --                2,666,678
                                                                          -----------               ----------
                                                                            2,981,075               14,111,055
                                                                                                    ==========

                Less amount representing interest
                   at an average rate of 11%                                  454,743
                                                                          -----------
                                                                            2,526,332
                Less current installments                                     780,238
                                                                          -----------
                Obligations under capital leases, excluding
                   current installments                                   $ 1,746,094
                                                                          ===========
</TABLE>

       Total rental expense for operating leases was approximately $3,939,000,
       $2,562,000 and $1,811,000 in 1998, 1997 and 1996, respectively.

(5)    Long-term Debt

       Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                             1998                     1997
                                                                                         -----------               ----------

<S>                                                                                      <C>                       <C>       
             Borrowings under revolving credit facility                                  $28,937,684               20,002,965

             Subordinated note payable in monthly installments of $27,504,
             including interest at 7%, through February 2001, convertible
             into common stock at $6.50 per share                                                 --                  930,160

             Subordinated note payable in monthly installments of $11,881,
             including interest at 7%, through January 2001, convertible
             into common stock at $5.89 per share                                            275,630                  394,355
</TABLE>

                                                                     (Continued)



                                       47
<PAGE>   48


                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(5), Continued
<TABLE>
<CAPTION>
                                                                                             1998                     1997
                                                                                         -----------               ----------

<S>                                                                                      <C>                       <C>       
             Subordinated note payable in monthly installments of $7,425,
             including interest at 7%, through September 2002                                293,140                  359,194

             Unsecured note payable in annual installments of $166,667,
             plus interest at 9.5%, through March 2000                                       333,333                  500,000

             Unsecured note payable in monthly installments of $4,747,
             including interest at 8.5%, through March 2002                                  161,278

             Various notes payable in monthly installments, including
             interest at 6% to 15%, through June 2004, secured by equipment                  232,537                  334,425
                                                                                         -----------               ----------

                           Total long-term debt                                           30,233,602               22,521,099

             Less current installments                                                       509,097                  827,387
                                                                                         -----------               ----------
                           Long-term debt, excluding current
                               installments                                              $29,724,505               21,693,712
                                                                                         ===========               ==========
</TABLE>

                                                                     (Continued)



                                       48
<PAGE>   49


                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

       In February 1997, the Company entered into a $15,000,000 revolving credit
       agreement with NationsCredit Commercial Corporation. In December 1997,
       the agreement was increased to $30,000,000 and in December 1998, the
       agreement was increased again to $50,000,000. Borrowings under the
       agreement bear interest at the 30-day commercial paper rate plus 4.25%,
       which was 9.18% at December 31, 1998. Interest only is due monthly until
       January 2000, at which time the borrowings will be due in installments
       over a four-year period. Substantially all the Company's assets are
       pledged under the agreement. Under the terms of the agreement, the
       Company is required to maintain compliance with certain financial
       covenants.

       Future maturities of long-term debt follow:

<TABLE>
<S>                                                               <C>          
             1999                                                  $     509,097
             2000                                                      7,716,956
             2001                                                      7,417,071
             2002                                                      7,340,125
             2003                                                      7,249,043
             Thereafter                                                    1,309
                                                                   -------------
                                                                   $  30,233,602
                                                                   =============
</TABLE>

       Interest paid totaled $2,796,000, $1,182,000 and $674,000 in 1998, 1997
       and 1996, respectively.

(6)    Other Assets

       In December 1996, the Company acquired $500,000 face amount of
       convertible preferred stock of Clearvision Laser Centers, Inc.
       ("Clearvision"). The preferred stock is convertible into common stock of
       Clearvision based on an exchange ratio of one share of Clearvision common
       stock for each $14.85 in face value of convertible preferred stock. In
       exchange for the preferred stock, the Company paid $250,000 in cash and
       contributed certain marketing and educational materials with an
       agreed-upon value of $250,000. Were the preferred stock converted, the
       Company's investment is expected to represent less than 5% of
       Clearvision's outstanding common stock and would therefore be accounted
       for using the cost method.

                                                                     (Continued)



                                       49
<PAGE>   50


                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(7)    Income Taxes

       Total income tax expense for the years ended December 31, 1998, 1997 and 
       1996 was allocated as follows:

<TABLE>
<CAPTION>
                                                 1998           1997          1996
                                              ---------        -------       -------
<S>                                           <C>              <C>           <C>
       Income from continuing operations      $1,292,000       (910,000)        --
       Discontinued operations                  (585,000)            --         --
                                              ----------        -------      -------
                                              $  707,000       (910,000)        --
                                              ==========        =======      =======
</TABLE> 

       Income tax attributable to continuing operations for the years ended 
       December 31, 1998 and 1997 consists of:

<TABLE>
<CAPTION>
                                                  Current                  Deferred               Total
                                                ----------               -----------            ----------
<S>                                             <C>                      <C>                    <C>            
       Year ended December 31, 1998:
                  U.S. Federal                  $1,172,000               $   (16,000)           $1,156,000
                  State                            138,000                    (2,000)              136,000
                                                ----------               -----------            ----------
                           Total                 1,310,000                   (18,000)            1,292,000
                                                ==========               ===========            ==========

       Year ended December 31, 1997:
                  U.S. Federal                     326,000                (1,208,000)             (882,000)
                  State                            120,000                  (148,000)              (28,000)
                                                ----------               -----------             ---------
                           Total                   446,000                (1,356,000)             (910,000)
                                                ==========               ===========             =========
</TABLE>

       Income tax expense (benefit) attributable to income from continuing 
       operations differs from the amount computed by applying a federal income
       tax rate of 34% to pretax income from continuing operations due to the 
       following:

<TABLE>
<CAPTION>
                                                                       1998                1997              1996
                                                                   -----------          ----------          -------
<S>                                                                <C>                   <C>                <C>    
             Tax expense at statutory rate                         $ 1,213,000             891,000           525,000
             Increase (reduction) in taxes resulting from:
                State income taxes                                      90,000              79,000                --
                Non-deductible expenses                                 45,000              40,000            33,000
                Other                                                  (56,000)             80,000            82,000
                Change in the valuation allowance
                   for deferred assets                                      --          (2,000,000)         (476,000)
                                                                   -----------          ----------          -------- 
                                                                   $ 1,292,000            (910,000)               --
                                                                   ===========          ==========          ========
</TABLE>








                                                                     (Continued)



                                       50
<PAGE>   51


                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

       The tax effect of temporary differences that give rise to significant
       portions of the deferred tax assets are as follows:

<TABLE>
<CAPTION>
                                                                       1998                1997       
                                                                   -----------          ----------    
<S>                                                                <C>                   <C>          
             Deferred tax assets:
                Equipment, furniture and fixtures, principally
                   due to differences in depreciation               $   96,000             201,000    
                Intangible assets, principally recognition
                   of amortization                                     277,000             283,000    
                Receivables, principally due to allowance
                   for doubtful accounts                               107,000             123,000    
                Accrued expenses                                       158,000              17,000    
                Net operating loss carryforwards                     1,200,000           2,032,000
                Alternative minimum tax carryforward                     --                300,000 
                Discontinued operations                                585,000               --    
                                                                    ----------          ----------    
                           Gross deferred tax assets                 2,423,000           2,656,000    
             Valuation allowance                                      (500,000)         (1,600,000)   
                                                                    ----------          ----------    
                           Net deferred tax assets                  $1,923,000           1,356,000    
                                                                    ==========          ==========    
</TABLE>



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

       Management considers the scheduled reversal of deferred tax liabilities,
       projected future taxable income, and tax planning strategies in making
       this assessment. Based on expectations for future taxable income over the
       periods in which the deferred tax assets are deductible, management
       believes the Company has established a reasonable valuation allowance. As
       of December 31, 1998, the Company had available net operating loss
       carryforwards, subject to Internal Revenue Code Section 382 limitations,
       of approximately $3,500,000 expiring from the year 2000 to 2007.

       The Company paid income taxes totaling approximately $958,000 in 1998 and
       $130,000 in 1997.

                                                                     (Continued)




                                       51
<PAGE>   52
                                        
                  OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES
                                        
                   Notes to Consolidated Financial Statements

(8)    Stockholders' Equity

       The Company accounts for stock options in accordance with the provisions
       of Accounting Principles Board Opinion No. 25, Accounting for Stock
       Issued to Employees, and related interpretations (APB 25). As such,
       compensation expense is recorded on the date of grant only if the current
       market price of the underlying stock exceeds the exercise price.

       The Company maintained the 1985 Stock Option Plan (the "1985 Plan") which
       was made available to selected employees, including officers of the
       Company, directors, key advisors and selected physicians practicing at
       Company facilities. The 1985 Plan allowed options to be granted for up to
       450,000 shares. The following table summarizes information about options
       under the 1985 Plan:

<TABLE>
<CAPTION>
                                                  Number      Weighted average
                                                 of shares      exercise price
                                                 ---------      --------------
<S>                                               <C>             <C>     
             Balance at December 31, 1995         389,376         $   3.60
                Granted                                --               --
                Exercised                           4,999             3.00
                Forfeited                          26,000             3.67
                Expired                             2,376             4.80
                                                  -------         --------

             Balance at December 31, 1996         356,001             3.60
                Granted                                --               --
                Exercised                          28,132             3.62
                Forfeited                          35,000             3.87
                Expired                            10,000             6.50
                                                  -------         --------

             Balance at December 31, 1997         282,869             3.44
                Granted                                --               --
                Exercised                          51,832             3.00
                Forfeited                              --               --
                Expired                            15,000             3.42
                                                  -------         --------
             Balance at December 31, 1998         216,037         $   3.55
                                                  =======         ========
</TABLE>









                                                                     (Continued)



                                       52
<PAGE>   53


                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

       At December 31, 1998, the range of exercise prices and weighted-average
       remaining contractual life of outstanding options under the 1985 Plan was
       $3.00 - $4.50 and 1.15 years, respectively. At December 31, 1998 and
       1997, the number of options exercisable was 181,537 and 163,358,
       respectively, and the weighted average exercise price of those options
       was, $3.47 and $3.28, respectively.

       In 1995 the Company adopted its 1995 Stock Option Plan (the "1995 Plan")
       which is made available to selected employees, including officers of the
       Company, directors, key advisors and selected physicians practicing at
       Company facilities. The 1995 Plan allows options to be granted for up to
       450,000 shares. The following table summarizes information about options
       under the 1995 Plan:

<TABLE>
<CAPTION>
                                                    Number      Weighted average
                                                   of shares      exercise price
                                                   ---------      --------------
<S>                                               <C>             <C>     
             Balance at December 31, 1995              2,500         $   5.00
                Granted                              180,000             5.75
                Exercised                                 --               --
                Forfeited                                 --               --
                Expired                                   --               --
                                                     -------         --------
                Balance at December 31, 1996         182,500             5.73
                Granted                               81,500             7.60
                Exercised                                 --               --
                Forfeited                                 --               --
                Expired                                   --               --
                                                     -------         --------
             Balance at December 31, 1997            264,000             6.34
                Granted                               90,000             6.94
                Exercised                                 --               --
                Forfeited                             10,000             6.13
                Expired                                   --               --
                                                     -------         --------
             Balance at December 31, 1998            344,000         $   4.50
                                                     =======         ========
</TABLE>


       At December 31, 1998, the range of exercise prices and weighted-average
       remaining contractual life of outstanding options under the 1995 Plan was
       $4.50 and 4.07 years, respectively. At December 31, 1998, the number of
       options exercisable were 833, and the weighted average exercise price was
       $4.50. No options were exercisable at December 31, 1997. In December
       1998, all options with exercise prices above $4.50 per share were
       repriced to $4.50 per share.

       The per share weighted-average fair value of stock options granted during
       1998, 1997 and 1996 was $7.57, $8.32 and $4.63, respectively, on the date
       of grant using the Black Scholes option-pricing model with the following
       weighted-average assumptions: 1998, 1997 and 1996 - expected dividend
       yield of 0%, risk-free interest rate of 6%, an expected life of 6 years,
       and volatility of 46.08%, 46.85% and 56.84%, respectively.

                                                                     (Continued)



                                       53
<PAGE>   54


                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

       Since the Company applies APB 25 in accounting for its plans, no
       compensation cost has been recognized for its stock options in the
       consolidated financial statements. Had the Company recorded compensation
       cost based on the fair value at the grant date for its stock options
       under SFAS No. 123, Accounting for Stock-based Compensation, the
       Company's net earnings and earnings per share would have been reduced to
       the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                              1998               1997               1996
                                                          -----------         ----------         ----------
<S>                                                       <C>                  <C>               <C>    
       As reported
            Net earnings from continuing operations       $ 2,274,598          3,530,437          1,545,296
            Basic earnings per share                      $       .26                .47                .01
            Diluted earnings per share                    $       .26                .45                .01

       Pro forma
            Net earnings from continuing operations       $ 1,716,395          3,155,969          1,418,215
            Basic earnings per share                      $       .19                .42               (.01)
            Diluted earnings per share                    $       .19                .40               (.01)
</TABLE>

       Pro forma net earnings reflect only options granted in 1998, 1997 and
       1996. Therefore, the full impact of calculating compensation cost for
       stock options under SFAS No. 123 is not reflected in the pro forma net
       earnings amounts presented above because compensation costs are reflected
       over the option's vesting period of three years and compensation cost for
       options granted prior to January 1, 1995 is not considered.

       The Company's 1991 Employee Stock Purchase Plan (the "Purchase Plan")
       provides for the implementation of stock purchases by employees of shares
       of common stock either on the open market or from such available
       authorized but unissued shares. The Company has reserved 75,000 shares
       for issuance under the Purchase Plan. Each eligible employee is granted
       on the grant date of each Purchase Plan year options to purchase 1,250
       shares of the Company's common stock during that Purchase Plan year. The
       issue price of the common stock is equal to the lesser of (1) 85% of the
       market price on the exercise date of that Purchase Plan year or (2) 85%
       of the market price on the grant date of that Purchase Plan year. As of
       December 31, 1998, 53,578 shares have been purchased by the Purchase
       Plan, and 27,604 shares were issued in 1999 for contributions made
       through December 31, 1998.

       In May 1996, the Company completed the sale of $7,290,000 in convertible
       preferred stock to qualified foreign investors pursuant to Regulation S.
       Subject to certain limitations, the preferred stock was convertible into
       common stock at an exercise price equal to the lesser of $5.75 or 85% of
       the average bid price of the common stock at the time of conversion. In
       addition, the investors received warrants to purchase approximately
       634,000 additional shares at an exercise price of $5.75. The net proceeds
       were approximately $6.49 million and were used to repay bridge financing
       incurred in the Tallahassee practice affiliation, to finance a portion of
       the cost of the Dallas practice affiliation and for working capital. The
       shares of preferred stock had been converted into common stock at
       December 31, 1997.

                                                                     (Continued)



                                       54
<PAGE>   55


                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(9)    Benefit Plan

       In 1996, the Company established a 401(k) Profit Sharing Plan (the
       "Plan") which allows qualifying employees electing participation to defer
       a portion of their income on a pretax basis through contributions to the
       Plan. The Plan also permits discretionary contributions to be made by the
       Company, as determined by the Company's Board of Directors. No
       contributions to the Plan were made by the Company during 1998, 1997 or
       1996.

(10)   Discontinued Operations

       The Company has adopted a plan to transition the ownership and operation
       of its managed care subsidiary to a strategic partner. While the Company
       does not expect to retain any ownership interest in these operations, it
       does expect to have an ongoing relationship with a strategic partner in
       developing managed care opportunities which include the Company's eye
       care and surgery centers and their networks of referring optometrists.
       The Company expects to complete the transition in the second quarter of
       1999.

       As a result of these plans, the operations of EHN have been classified as
       discontinued operations for each period presented in the accompanying
       financial statements, and an estimated loss on disposal of $1.2 million
       ($768,000 after tax) was recognized in the fourth quarter of 1998.
       Accounting recognition of the loss on disposal is consistent with the
       timing of the Board of Directors' adoption of a formal plan of disposal.

       The following summarizes the assets and liabilities of EHN included in
       the consolidated financial statements at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                     (in thousands of dollars)
                                                         1998            1997
                                                     -------------------------
<S>                                                    <C>               <C>  
             Cash                                      $   983           2,886
             Receivables, net                            1,886             669
             Claims liability                           (2,166)         (2,472)
             Accrued loss on disposal                   (1,200)
             Other assets and liabilities, net             497              97
                                                    --------------------------
             Net assets                                $    --           1,180
                                                     =========================
</TABLE>







                                                                     (Continued)


                                       55
<PAGE>   56

                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(11)   Segment Information

       The Company's operations have been classified into three business
       segments: center operations, optometric practices services and other. The
       center operations segment includes all activity related to managing the
       ophthalmology practices and ambulatory surgical centers. The optometric
       practices services segment includes the operations of Primary Eyecare
       Network, Inc. which provides support services to optometry practices. The
       other segment includes the operations of Omega Medical Services, Inc.,
       which provides mobile surgical and other supplies and services to eye
       care providers and of Providers Optical, Inc., a wholesale optical
       laboratory. The corporate category includes general and administrative
       expenses associated with the operation of the Company's corporate office.

       The accounting policies of the segments are the same as those described 
       in the summary of significant accounting policies. There are no material 
       intersegment sales and operating income by business segment excludes 
       interest income, interest expense, and corporate expenses. 

       Summarized financial information by business segment for 1998, 1997 and
       1996 is as follows:

<TABLE>
<CAPTION>
                                                           1998               1997                1996
                                                       ------------        -----------        ------------
<S>                                                    <C>                  <C>                 <C>       
             Revenues:
                 Center operations                     $ 52,161,812         38,289,761          25,421,814
                 Optometric practice services            39,768,987         25,200,784                  --
                 Other                                    5,333,753          1,466,172           2,622,387
                                                       ------------        -----------        ------------
                     Total segments                      97,264,552         64,956,717          28,044,201      
                 Corporate                                       --                 --                  --
                                                       ------------        -----------        ------------
             Total revenues                            $ 97,264,552         64,956,717          28,044,201
                                                       ============        ===========        ============

             Earnings:
                 Center operations                     $  9,341,886          6,196,598           3,982,102
                 Optometric practice services               772,182            364,325                  --
                 Other                                      612,768            148,835              96,558
                                                       ------------        -----------        ------------
                     Total segments                      10,726,836          6,709,758           4,078,660         
                 Corporate                               (3,920,635)        (2,548,455)         (1,914,095)
                 Net interest expense                     2,614,652          1,135,861             569,961
                 Minority interest                          624,956            405,005              49,308
                 Income tax expense (benefit)             1,292,000           (910,000)                 -- 
                                                       ------------        -----------        ------------
             Total earnings from continuing 
                 operations                            $  2,274,593          3,530,437           1,545,296
                                                       ============        ===========        ============

             Depreciation and amortization:
                 Center operations                     $  2,496,101          1,514,099             909,013
                 Optometric practice services                91,868             57,178                  --
                 Other                                      104,065              5,349              10,726
                                                       ------------        -----------        ------------
                     Total segments                       2,692,034          1,576,626             919,739
                 Corporate                                  448,271            218,213             228,808
                                                       ------------        -----------        ------------
             Total depreciation and amortization       $  3,140,305          1,794,839           1,148,547
                                                       ============        ===========        ============
             Capital additions:
                 Center operations                     $    304,597            667,577             434,859
                 Optometric practice services                11,349                 --                  --
                 Other                                      338,630            300,000             121,191
                                                       ------------        -----------        ------------
                     Total segments                         654,575            967,577             556,050
                                                       ------------        -----------        ------------
                 Corporate                                  580,532            161,627              79,227
                                                       ------------        -----------        ------------
             Total capital additions                   $  1,235,108          1,129,204             635,277
                                                       ============        ===========        ============

             Identifiable assets:
                 Center operations                     $ 54,313,307         44,338,991          21,427,935
                 Optometric practice services             6,795,313          6,242,896                  --
                 Other                                    5,316,337          2,598,069           1,533,101
                                                       ------------        -----------        ------------
                     Total segments                      66,424,957         53,179,956          22,961,036
                 Corporate                                5,347,417          6,587,089           1,983,149
                                                       ------------        -----------        ------------
             Total assets                              $ 71,772,374         59,767,045          24,944,185
                                                       ============        ===========        ============
</TABLE>






                                       56
<PAGE>   57

                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

 (12)  Contingencies

       The Company maintains professional liability coverage on a claims-made
       basis for its centers, employees, and independent contractors, including
       center directors, with minimum requirements of $3,000,000 per occurrence
       and $3,000,000 annually. The Company's management agreement requires its
       affiliated ophthalmologists to maintain professional liability coverage,
       generally with minimum requirements of $1,000,000 per occurrence and
       $3,000,000 annually. The Company also maintains general liability
       coverage. Providing support associated with health care services may give
       rise to claims from patients or others for damages, and the Company has
       in fact been named in certain professional liability claims. The Company
       believes that the ultimate resolution of these matters will not have a
       material effect on the Company's financial position or results of
       operations. To the extent that any claims-made coverage is not renewed or
       replaced with equivalent insurance, claims based on occurrences during
       the term of such coverage, but reported subsequently, would be uninsured.
       Management anticipates that the claims-made coverage currently in place
       will be renewed or replaced with equivalent insurance as the term of such
       coverage expires.

(13)   Financial Instruments

       Statement of Financial Accounting Standards No. 107, Disclosures about
       Fair Value of Financial Instruments, requires that the Company disclose
       estimated fair values for its financial instruments (as defined). The
       Company's financial instruments principally consist of cash, net
       receivables, accounts payable and various debt instruments. Due to their
       short-term nature, the fair values of net receivables and accounts
       payable approximate their carrying value. The fair value of the various
       debt instruments has been estimated using interest rates currently
       offered to the Company for borrowings having similar character,
       collateral and duration. The fair value of such instruments approximates
       the Company's carrying amounts.

                                                                     (Continued)





                                       57
<PAGE>   58

                   OMEGA HEALTH SYSTEMS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

(14)   Subsequent Events

       On January 31, 1999, the Company completed the acquisition of the assets
       of the ophthalmology practice of George M. Kopf, M.D. of Zanesville, Ohio
       in exchange for $430,000 in cash financed under the Credit Agreement.
       Simultaneously with the acquisition, the Company entered into a
       management agreement to manage the practice.

(15)   Supplementary Information

       The following sets forth supplementary information regarding the
       allowance for contractual adjustments and doubtful accounts:

<TABLE>
<CAPTION>
                         Balance at      Additions                        Change in
           Year ended    beginning       charged                         contractual       Balance at
          December 31,    of year       to expense     Charge-offs       adjustments      end of year
          ------------    -------       ----------     -----------       -----------      -----------
<S>                     <C>             <C>             <C>              <C>              <C>      
             1996       $1,674,000         367,037         135,302         (145,735)       1,760,000
             1997       $1,760,000         751,782         536,393        1,166,611        3,142,000
             1998       $3,142,000       1,594,336       1,485,481          205,145        3,456,000
</TABLE>





                                       58