<PAGE>
 
                   U. S. SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549
                             --------------------
                                  FORM 10-KSB

 (Mark One)
 [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934

                  For the fiscal year ended December 31, 1996

 [ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
     of 1934

                          Commission File No. 0-21721

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

                                CLINICOR, INC.
                (Name of Small Business Issuer in Its Charter)

           NEVADA                                      88-0309093
 (State or Other Jurisdiction of                    (I.R.S. Employer
  Incorporation or Organization)                   Identification No.)

1717 WEST SIXTH STREET, SUITE 400, AUSTIN, TEXAS            78703
  (Address of Principal Executive Offices)                (Zip Code)

                                (512) 344-3300
               (Issuer's Telephone Number, Including Area Code)

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

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

        Securities registered under Section 12(g) of the Exchange Act:
                         Common Stock, $.001 par value
                               (Title of Class)

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

  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     No X
                                                               ---    ---

  Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not 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-KSB or any amendment to
this Form 10-KSB.  [X]

 Issuer's revenues for fiscal year ended December 31, 1996:  $3,581,402

  As of March 21, 1997, the aggregate market value of the voting stock held
by non-affiliates of the Registrant, computed by reference to the last quoted
price at which such stock was sold on such date as reported on the Over-the-
Counter Bulletin Board was $12,942,637.

 As of March 21, 1997, 4,086,400 shares of the Issuer's Common Stock were
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

  Portions of the Proxy Statement for the Registrant's 1997 Annual Meeting of
Shareholders are incorporated by reference into Part III (Items 9, 10, 11 and
12) hereof.

 Transitional Small Business Disclosure Format (check one):  Yes    No X
                                                                ---   ---
<PAGE>
 
                               TABLE OF CONTENTS

                                                                            Page
                                                                            ----
                                    PART I
 
    Item 1.    Description of Business.....................................   3
    Item 2.    Description of Property.....................................   9
    Item 3.    Legal Proceedings...........................................   9
    Item 4.    Submission of Matters to a Vote of Security Holders.........   9

                                    PART II

    Item 5.    Market For Common Equity and Related Shareholder Matters....   9
    Item 6.    Management's Discussion and Analysis or Plan of Operation...  11
    Item 7.    Financial Statements........................................  18
    Item 8.    Changes in and Disagreements With Accountants on
               Accounting and Financial Disclosure.........................  18

                                   PART III

    Item 9.    Directors, Executive Officers, Promoters and Control
               Persons; Compliance With Section 16(a) of the Exchange Act..  18
    Item 10.   Executive Compensation......................................  18
    Item 11.   Security Ownership of Certain Beneficial Owners and
               Management..................................................  18
    Item 12.   Certain Relationships and Related Transactions..............  19
    Item 13.   Exhibits, List and Reports on Form 8-K......................  19

               Signatures..................................................  22
               Audited Financial Statements................................ F-1

                                       2
<PAGE>
 
                                    PART I


ITEM 1.   DESCRIPTION OF BUSINESS

GENERAL

     Clinicor, Inc. (together with its predecessor, described below, "Clinicor"
or the "Company") is a full service clinical research organization ("CRO")
serving the pharmaceutical, biotechnology and medical device industries. The
Company designs, manages and monitors clinical trials in North America and
Europe and provides clinical and product development services, including data
management, statistical and regulatory consultation services for its clients.
The Company generates substantially all of its revenue from the clinical testing
of new pharmaceutical, medical device and biotechnology products.

     A predecessor company, also named Clinicor, Inc. (the "Predecessor
Company"), was formed as a Texas corporation in September 1992. On February 27,
1995, the Predecessor Company was merged into Pegasus Tax and Financial Planning
Services, Inc., a Nevada corporation which had been formed in December 1993. The
surviving Nevada corporation changed its name to Clinicor, Inc. References
herein to "Clinicor" or the "Company" denote the existing Nevada corporation and
the Predecessor Company. References herein to "Pegasus" denote the Nevada
corporation prior to the merger. Since the merger, the Company has not continued
to conduct any of the pre-merger operations of Pegasus.

     The Company performs and manages clinical trials in locations in North
America and the United Kingdom through the use of its centralized patient
recruiting department and computer database system located in its facility in
Austin, Texas.  In addition, the Company has designated four cities as Regional
Research Centers where it maintains clinical management staff (Austin, Denver,
Phoenix and San Antonio).  In December 1996, the Company established an office
in the United Kingdom.

     The Company's principal executive offices are located at 1717 West 6th
Street, Suite 400, Austin, Texas  78703, and its telephone number is (512) 
344-3300.

BUSINESS

     The Company designs, manages and monitors clinical trials in North
America and Europe and provides clinical and product development services,
including data management and statistical and regulatory consultation services
for its clients.  In addition to these services, the Company directly controls
study patient recruitment and performance of clinical trials.  Other CROs
typically subcontract these functions to individual investigative sites.

NEW PRODUCT DEVELOPMENT

     Before a new pharmaceutical, biotechnology, medical device or diagnostic
product may be marketed, it generally must undergo extensive testing and
regulatory review to determine that it is safe and effective. This development
process consists of two stages, pre-clinical and clinical. In the pre-clinical
stage, the sponsor of the new product conducts laboratory analyses and animal
tests, generally over a one to three year period, to determine the basic
biological activity and clinical processes and safety of the product. Upon
successful completion of the pre-clinical phase, the product undergoes a series
of clinical tests in humans, including healthy volunteers as well as patients
with the targeted disease or condition. These tests are generally longer in
duration, at times averaging from two to six years. In the United States, pre-
clinical and clinical testing must comply with the requirements of Good Clinical
Practices ("GCP") and other standards promulgated by the Food and Drug
Administration ("FDA") and other federal and state governmental authorities. GCP
stipulates procedures which are designed to ensure the quality and integrity of
data obtained from clinical testing and to protect the rights and safety of
clinical subjects.

                                       3
<PAGE>
 
     In the United States, a sponsor must file an Investigational New Drug
Application ("IND"), an Investigational Device Exemption ("IDE") or other filing
with the FDA before the commencement of human testing of an investigational
product.  The filing includes pre-clinical testing results and sets forth the
sponsor's plans for conducting human clinical trials. The design of these plans,
also referred to as study "protocols," is critical to the success of the
development effort because the protocol must correctly anticipate the data and
results that the FDA will require before approving the product.

     Human trials usually start on a small scale to assess safety and then
expand to larger trials to test for both safety and efficacy.  Trials are
usually grouped into four phases, with multiple trials generally conducted
within each phase.

          Phase I.  Phase I trials are usually conducted on healthy volunteers,
typically 20 to 80 persons, to develop basic safety data relating to toxicity,
metabolism, absorption and other pharmacological actions.

          Phase II.  Phase II trials are conducted on a relatively small number
of subjects, typically 100 to 200 patients, who suffer from the product's
targeted disease or condition. Phase II trials offer the first evidence of
clinical efficacy, as well as additional safety data.

          Phase III.  Phase III trials are typically conducted on a larger
population of several hundred to several thousand patients who suffer from the
targeted disease or condition.  Phase III trials are designed to measure safety
and efficacy on a large scale as well as side effects.  Before granting an
approval to market, the FDA generally requires completion of two pivotal, multi-
site Phase III trials to demonstrate and confirm safety and efficacy.

          Phase IV.  As a condition of granting marketing approval, the FDA may
require that a sponsor continue to conduct additional clinical trials, known as
Phase IV trials, to monitor long-term risks and benefits, study different dosage
levels, or evaluate different safety and efficacy parameters in target patient
populations.  In addition, Phase IV trials may be necessary to support a
sponsor's promotional claims.

     Clinical trials often represent the most expensive and time-consuming part
of the overall development process. The information generated during these
trials is critical for gaining marketing approval from the FDA or other
regulatory agencies. After the completion of Phase III trials, the sponsor of a
new product must submit a New Drug Application ("NDA") or other approval to
market application to the FDA. This application is a comprehensive filing that
includes, among other things, the results of all pre-clinical and clinical
studies, information about the product's composition, and the sponsor's plans
for producing, packaging and labelling the product.

     A clinical trial is a scientific experiment to test the efficacy and safety
of an investigational product in accordance with a detailed plan as documented
in the protocol. The investigational product is administered to patients who
meet specific inclusion/exclusion criteria. Typically, the investigational
product is compared to another approved product and/or a placebo. Usually,
neither the patient nor the physician investigator knows which patients receive
which substance, although that information is readily available if needed. The
protocol will specify when, how often and how much of the study product a
patient will receive, how often they will be examined by the investigator during
the study (i.e., the number and timing of patient visits) and what measurements
and assessments will be made and recorded at each patient visit. The resulting
data is recorded in source documents and transcribed into Case Report Forms
("CRFs"). The recorded data is monitored to verify its accuracy and consistency
with source documents. The data from the CRFs is entered into a computer
database for biostatistical analysis.

                                       4
<PAGE>
 
CLINICAL TRIAL MANAGEMENT MODEL

     Traditionally, clinical trials have been managed by pharmaceutical
companies' in-house staffs of Clinical Research Associates ("CRAs") who in turn
subcontract (outsource) the actual performance of the trials to physician
investigators serving as investigational sites.  The investigators enroll
qualified patients into studies from their practices one-by-one.  Administrative
tasks are handled by a clinical coordinator, typically a nurse who has
additional duties within the physician's practice.

     The function of CRAs is primarily to monitor compliance of the
investigative site with the protocol and adherence to GCP. If investigational
sites fail to produce qualified patients, they must be replaced with additional
sites to reach overall and minimal per site patient recruitment quotas in order
to maintain statistical validity.

     The major full-service CROs have organized themselves along the same lines
as pharmaceutical companies. They employ the same traditional methodology of
subcontracting the actual performance of the clinical trials to investigational
sites. The Company also manages studies utilizing this traditional approach.  
However, for studies not requiring critical care or hospital confinement, the 
Company utilizes a clinical trial management model on a nationwide basis to 
expedite patient enrollment, speed study completion and improve the quality and 
uniformity of study data.

     The Company's model removes the physician investigator as the primary
source of study patients.  Rather than relying on the patient population of one
investigator in a particular city, the Company's approach is to recruit from all
of the potential study patients in an entire geographic area.  Patients are
recruited via advertising, referral programs and other means.  Potential
patients call the Company's centralized patient recruiting department where
trained personnel prescreen, schedule and capture relevant data on each patient
included in the Company's customized patient database system.

     Whenever possible, the Company assembles a number of patients to enter a
study in group clinics which are generally scheduled on evenings and weekends.
This approach works particularly well for studies involving chronic medical
conditions. A group clinic may include from as few as ten to as many as 300
patients. The Company contracts with a physician to serve as the independent
investigator, and the Company staffs the clinic with experienced, part-time
Company employees who perform all of the study coordinator functions.

SERVICES

     The Company's services include clinical trials management, clinical data
management, biostatistical analysis and product registration services. The
Company will provide these products separately or as an integrated, "turn-key"
package. Services from each of these categories can be utilized for the
development and preparation of a variety of regulatory filings, e.g., NDA,
Premarket Approval Applications ("PMA"), and Product License Applications
("PLA").

     Clinical Trials Management Services.  The Company offers complete services 
     -----------------------------------                              
for the design, placement, performance, recruitment, monitoring and management
of clinical trial programs. The Company has performed services in connection
with trials in many therapeutic areas. The Company has the ability to examine a
product's existing pre-clinical and clinical data for the purpose of designing
protocols for clinical trials in order to demonstrate the product's safety and
efficacy in the treatment of the targeted disease.

     The Company manages every aspect of trials in Phases I through IV,
including design of operations manuals, identification and recruitment of trial
investigators, initiation of sites, recruitment of patients, site monitoring
visits to determine compliance with protocol procedures, adherence to GCP and
proper collection of data, data management, interpretation of trial results and
report preparation. The Company's current projects involve Phase I, II, III and
IV clinical trials. The Company does not own or maintain a Phase I facility for
the confinement of study subjects.

     The Company assists clients with one or more of the following steps of
clinical trials:

                                       5
<PAGE>
 
     .    Study Protocol. The protocol defines the disease and treatment the
study seeks to examine and the statistical tests that will be conducted.
Accordingly, the protocol defines: (i) the targeted patient population; (ii) the
frequency and type of laboratory and clinical measures that are to be recorded
and analyzed; (iii) the number of patients required to produce a statistically
valid result; (iv) the period of time over which the measurements must be
recorded; and (v) the frequency and dosage of drug or other product
administration.

     .    Case Report Forms. Once the study protocol has been finalized, special
forms for recording study-specific data must be developed. These forms are
called CRFs. Study data are transcribed onto CRFs from original source
documents. The CRF for one patient in a given study may consist of as many as
100 pages or more.

     .    Site and Investigator Recruitment. The drug or other product is
administered to patients by investigators at hospitals, clinics or other
locations, referred to as sites. Potential investigators may be identified by
the sponsor or the CRO. The investigators are then solicited to participate in
the study. Generally, the Company locates properly qualified investigators who
contract directly with the Company. Many studies with which the Company is
involved are performed at Company-managed sites.

     .    Patient Enrollment. One of the Company's main competitive strengths is
its ability to quickly and efficiently recruit patients using mass marketing
techniques and a centralized patient management system. Patients are prescreened
for eligibility by trained personnel using an on-line computer scheduling and
database system which captures relevant data for each patient. Prospective
patients are required to review information about the study drug or other
product and possible side effects and sign an informed consent to record their
knowledge and acceptance of potential risks. Patients also undergo a medical
examination performed by the investigator to determine whether they meet the
requirements of the study protocol. Patients then receive the study drug or
other product and are examined by the investigator as specified by the study
protocol.

     .    Study Monitoring and Data Collection. As patients are examined and
tests are conducted in accordance with the study protocol, data are recorded on
source documents and laboratory reports and are then transcribed onto CRFs. The
data are collected from study sites by specially trained CRAs. CRAs visit sites
regularly to ensure that the CRFs are completed correctly and are consistent
with the underlying source documents and that all data specified in the protocol
are collected. The CRAs take completed CRFs to the study coordinating site,
where the CRFs are reviewed for consistency and accuracy before the information
is entered into an electronic database.

     .    Report Writing. The results of statistical analysis of data collected
during the trial, together with other clinical data, are included in a final
report generated for inclusion in regulatory documents.

     .    Medical Affairs. Throughout the course of a clinical trial, the
Company may provide various medical and research services, including medical
monitoring of clinical trials, interpretation of clinical trial results, and
preparation of clinical study reports.

     Clinical Data Management and Biostatistical Services.  The Company's data 
     ----------------------------------------------------                
management professionals assist in the design of protocols and CRFs, as well as
training manuals and training sessions for investigational staff, to ensure that
data are collected in an organized and consistent format. Databases are designed
according to the analytical specifications of the project and the particular
needs of the client. Prior to data entry, the Company's personnel screen CRFs
for errors, omissions and other deficiencies. The Company provides clients with
data abstraction, data review and coding, data entry, database verification and
editing, and problem data resolution.

     The Company's biostatistics professionals provide biostatistical
consulting, database design, data analysis, statistical reporting, and
assistance in all phases of drug development. These professionals

                                       6
<PAGE>
 
develop and review protocols, design appropriate analysis plans and design
report formats to address the objectives of the study protocol as well as the
client's individual objectives. Working with the programming staff,
biostatisticians perform appropriate analyses and produce tables, graphs,
listings and other applicable displays of results according to the analysis
plan. Biostatisticians assist clients before panel hearings at the FDA.

     These services are utilized by clients to process data that have previously
been collected by either the client itself or the Company as part of a distinct
phase in the drug development process. The Company believes that its data
management and biostatistical services capabilities can be utilized by a client
more effectively when packaged as part of its total clinical trials management
services. This permits a faster and less costly clinical trial process, because
the data are collected and analyzed more rapidly. The Company emphasizes its
"turn-key" approach in its marketing efforts.

     Product Registration Services.  The Company provides comprehensive product 
     -----------------------------                                     
registration services in the United States and Europe. The Company provides
regulatory strategy formulation, document preparation, and Good Manufacturing
Practice consultation. The Company also acts as liaison with the FDA and other
regulatory agencies. Although these services have not generated material revenue
to date, the Company offers them in order to provide a full range of services
for its clients.

     The Company works closely with clients to devise regulatory strategies and
comprehensive product development programs. The Company's scientific and
regulatory affairs experts review existing published literature, assess the
scientific background of a product, assess the competitive and regulatory
environment, identify deficiencies and define the steps necessary to obtain
registration in the most expeditious manner. Through this service, the Company
helps its clients determine the feasibility of developing a particular product
or product line.

     The Company's scientific and regulatory affairs professionals have
experience in the analysis, preparation and submission of regulatory
documents covering a wide range of products, including drugs and over-the-
counter products. The Company also offers the preparation of regulatory
documentation for submission to regulatory authorities.

CLIENTS

     The Company has performed or is currently performing studies for 27
different clients, including five of the 15 largest pharmaceutical companies in
the world.  The Company's clients include companies based in the United States,
Great Britain, Ireland, Japan, Mexico and Switzerland.  All of the Company's
foreign-based clients have operations in the United States.  The Company's
revenues have historically been derived primarily from services performed in the
United States.  During the fourth quarter of 1995, the Company began work on an
estimated $400,000 study in Mexico which is still ongoing.  In January 1997, the
Company began work on a multi-center clinical trial, with a total estimated
budget in excess of $1,000,000, which will be performed in Europe.

     The Company derives a significant portion of its revenue from a relatively
limited number of projects or clients. Concentrations of business in the CRO
industry are typical, and the Company is likely to experience such
concentrations in 1997 and future years. In 1995, four clients each accounted
for more than 10% of the Company's total revenue, or 27%, 19%, 12% and 11%,
respectively. In 1996, five clients each accounted for more than 10% of the
Company's total revenue, or 23%, 17%, 13%, 11% and 11%. The Company's total
revenues for 1995 and 1996 were provided from 16 and 20 separate clients,
respectively.

                                       7
<PAGE>
 
COMPETITION

     The Company primarily competes against in-house departments of
pharmaceutical companies, other full service CROs, and, to a lesser extent,
universities and teaching hospitals. Some of these competitors have
substantially greater capital, technical and other resources than the Company.
CROs generally compete on the basis of previous experience, medical and
scientific expertise in specific therapeutic areas, quality of contract
research, ability to organize and manage large-scale trials on a global basis,
ability to manage large, complex medical databases, ability to provide
statistical and regulatory services, ability to recruit investigators, ability
to integrate information technology with systems to improve the efficiency of
contract research, an international presence, financial viability and price. The
Company believes that it competes favorably in these areas with the exception of
a significant international presence.

     The CRO industry is highly fragmented, with participants ranging from
several hundred small, limited-service providers to several large, full-service
CROs with global operations.  Some of the largest CROs are Covance, Inc.,
Quintiles Transnational Corporation, Parexel International Corporation, PPD
Pharmaco, Inc. and ClinTrials Research, Inc.  The trend toward CRO industry
consolidation has resulted in heightened competition among the larger CROs for
clients and acquisition candidates.  In addition, consolidation within the
pharmaceutical industry as well as a trend toward the concentration by
pharmaceutical companies of outsourcing among fewer CROs has led to heightened
competition for CRO contracts.

GOVERNMENT REGULATION

     The clinical investigation of new pharmaceutical, biotechnology and
medical device products is highly regulated by governmental agencies.  The
purpose of these regulations is to ensure that only those products which have
been proven to be safe and effective are made available to the public.  The FDA
has set forth regulations and guidelines that pertain to applications to
initiate trials of products, approval and conduct of studies, report and record
retention, informed consent, applications for the approval of new products, and
post-marketing requirements.  Pursuant to these regulations, CROs that assume
obligations of a drug sponsor are required to comply with applicable 
regulations and are subject to regulatory action for failure to comply with such
regulations.  In the United States, the historical trend has been in the
direction of increased regulation by the FDA, although the FDA in the last four
years has made some modifications to expedite certain processes and recent
legislative initiatives have been proposed to accelerate that trend.  The
Company believes that many pharmaceutical, biotechnology and medical device
companies do not have the staff and/or the available expertise to comply with
all of the regulations and standards, and this has contributed and will continue
to contribute to the growth of the CRO industry.

     The services provided by the Company are ultimately subject to FDA
regulation in the United States and comparable agencies in other countries,
although the level of applicable regulation in other countries can be less
comprehensive than regulation present in the United States.  The Company is
obligated to comply with FDA regulations governing such activities as selecting
qualified investigators, obtaining required forms from investigators, recruiting
patients, verifying that patient informed consent is obtained, monitoring the
validity and accuracy of data, verifying drug/device accountability, and
instructing investigators to maintain records and reports.  The Company must
also maintain records for each study for specified periods for inspection by the
study sponsor and the FDA.  The FDA has the authority to audit the Company's
compliance with Federal regulations and guidelines, and if such audits document
that the Company has failed to adequately comply, it could have a material
adverse effect on the Company.  In addition, the Company's failure to comply
with applicable regulations could possibly result in termination of ongoing
research or the disqualification of data, either of which could have a material
adverse effect on the Company, including, without limitation, damage to the
Company's reputation.

                                       8
<PAGE>
 
INTELLECTUAL PROPERTY

     The Company has registered CLINICO/(R)/ as a service mark with the United
States Patent and Trademark Office.

EMPLOYEES

     At December 31, 1996, the Company had approximately 150 employees,
approximately 50 of which were full-time.


ITEM 2.   DESCRIPTION OF PROPERTY

     In October 1996, in order to accommodate the growth in its business and
operations, the Company leased approximately 15,200 square feet for a five-year
term in Austin, Texas. The Company moved its corporate offices to this location
in December 1996. In connection with this lease the Company has also exercised a
right of first refusal on an adjacent 6,200 square feet. The Company believes it
will not encounter any unusual difficulty obtaining additional leased office
space at acceptable terms and rates if required for future expansion. The 
Company also leases office space in London.


ITEM 3.   LEGAL PROCEEDINGS

     The Company and Mr. Robert S. Sammis, Executive Vice President of the
Company, were both named as defendants in a lawsuit filed by Barton Research,
Inc. ("Barton"), the former employer of Mr. Sammis and of Mr. Thomas P.
O'Donnell, the Company's Chief Executive Officer. In August 1994, Barton filed
the lawsuit, styled Barton Research, Inc. vs. Robert Sammis, Cause No. 94-09866,
98th Judicial District Court of Travis County, Texas, against Mr. Sammis. The
Company agreed to indemnify Mr. Sammis with respect to the lawsuit. In October
1996, Barton filed an amended petition naming Clinicor as a defendant in the
lawsuit. Among other things, the lawsuit alleged that Mr. Sammis breached
fiduciary duties owed to Barton and committed fraud against Barton, that Messrs.
Sammis and O'Donnell and the Company tortiously interfered with Barton's
business relationships and that Messrs. Sammis and O'Donnell and Clinicor, among
others, conspired to damage and destroy Barton. In April 1997, the parties
agreed to settle the lawsuit and a related third-party action brought by Mr.
Sammis. Pursuant to the settlement, Clinicor agreed to pay $200,000 to the
plaintiffs no later than April 23, 1997, and the parties executed full and final
releases of all claims brought in the litigation.


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

     Effective November 7, 1996, a majority of the holders of Common Stock of
the Company, together with all of the holders of the Preferred Stock of the
Company, took action by written consent to increase the number of directors of
the Company from three to five and to elect all of the existing members of the
Board of Directors to serve as Directors until their respective successors are
chosen and qualify.  The Directors elected at the meeting by the holders of
Common Stock were Arthur P. Haag, Thomas P. O'Donnell and Robert S. Sammis, all
of whom had previously been Directors of the Company.  The holders of the
Company's Preferred Stock elected Dr. Zola P. Horovitz and Dr. Stuart Weisbrod
to serve as Directors.  The action by written consent was in lieu of a special
meeting of shareholders.


                                    PART II


ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

     The Company's Common Stock has, since March 1995, traded on the Over-the-
Counter Bulletin Board ("OTCBB").  Set forth below for the fiscal quarters
indicated are the range of high and low bids of the Common Stock on the OTCBB:

                                       9
<PAGE>
 
<TABLE>
<CAPTION>
 
                              1995                     1996 
                              ----                     ----
                       High          Low        High          Low
                       -----        -----       -----        -----
<S>                    <C>          <C>         <C>          <C>
First Quarter          4-3/4        3           2-1/4        1-1/2
Second Quarter         4-1/4        2           4-5/8        1-7/8
Third Quarter          3-5/8        2           4            2-5/8
Fourth Quarter         3-1/2        1-3/4       4-3/8        3-1/16
</TABLE>                                                  
                                                          
The foregoing quotations, which were obtained from Bridge Information Systems,
Inc., reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.

     As of March 21, 1997, there were 61 shareholders of record of the Company's
Common Stock.

     The Company has never paid dividends on its Common Stock and does not
anticipate that it will do so in the foreseeable future.  The Company is
prohibited from paying dividends on its Common Stock without the consent of the
holders of at least two-thirds of the Company's Preferred Stock.

     The Company has made the following sales of its Common Stock and Preferred
Stock during the fiscal year ended December 31, 1996.  None of the sales have
involved the use of underwriters.
<TABLE>
<CAPTION>
                                        Amount of
     Date of Sale           Class of    Securities                           Total
     or Issuance           Securities    (Shares)      Purchasers        Consideration
     ------------          ----------   ----------     ----------        -------------
<S>                        <C>         <C>          <C>                  <C>
1. October 1995 through    Common         573,400   28 individuals       $1,433,500.00
   February 1996                                    and entities
 
2. May 1996                Common          12,000   1 entity             services rendered

3. July 1996               Preferred        3,500   4 entities           $3,500,000.00

4. December 1996           Preferred          131   4 entities           dividend
</TABLE>

     Sales pursuant to item 1 were made in reliance upon Section 4(2) of the
Securities Act of 1933 and Rule 506 thereunder. A Form D was timely filed with
respect to such offering. Purchasers in the offering included eight unaccredited
investors and 20 accredited investors. There was no general solicitation or
advertising involved in the offering, and all offerees received extensive
disclosure materials. Based upon questionnaires completed by the investors, the
issuer believes that each purchaser who was not an accredited investor had
sufficient knowledge and experience in financial and business matters to
evaluate the merits and risks of an investment in the Company. All purchasers
received stock certificates with restrictive legends indicating that the shares
represented thereby had not been registered under the Securities Act of 1933 and
could not be assigned or transferred absent registration or an exemption
therefrom. The transaction described in item 1 above also included the sale of
Warrants and the issuance of Sales Agent Warrants. For a description of the 
Warrants and Sales Agent Warrants, see Note 9 of Notes to Financial Statements.

     The sale pursuant to item 2 above was made in reliance upon Section 4(2) of
the Securities Act of 1933. Based upon representations made by the purchaser of
the stock, the Company believes that such purchaser has sufficient knowledge and
experience in financial and business matters to evaluate the merits and risks of
an investment in the Company. The purchaser received a stock certificate
legended in the manner described above.

                                       10
<PAGE>
 
     Sales pursuant to item 3 above were made in reliance upon Section 4(2) of
the Securities Act of 1933 and Rule 506 thereunder. A Form D was timely filed
with respect thereto. The purchasers consisted of four investment funds, each of
which was accredited. Extensive due diligence was conducted in connection with
the sale by the purchasers and their legal counsel. Certificates representing
securities issued pursuant to item 3 bore restrictive legends, as described
above. For a description of the terms of the Preferred Stock, see Note 8 of 
Notes to Financial Statements.

     The issuance described in item 4 above was a scheduled dividend on the
Company's outstanding shares of Preferred Stock. The Preferred Stock terms
provide for semi-annual dividends, which are payable in kind at the rate of 8%
per annum. The recipients of the Preferred Stock dividend are the same four
purchasers which purchased the Preferred Stock pursuant to item 3 above. The
Company does not believe that payment of these dividends constitutes a separate
sale and believes that, to the extent the issuance may be deemed to be a sale,
it is exempt pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506
thereunder. Certificates representing securities issued in payment of the
dividend bore restrictive legends, as described above. For a description of the
terms of the Preferred Stock, see Note 8 of Notes to Financial Statements.


ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION

     Portions of this report, including portions of Management's Discussion
and Analysis or Plan of Operation, contain certain "forward-looking" statements
within the meaning of the federal securities laws. In addition, the Company and
its representatives may from time to time make oral and other written forward-
looking statements. The Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results expressed in the Company's forward-looking statements. The
risks and uncertainties that may affect the operations, performance, development
and results of the Company's business include the factors set out in the
following section.

RISK FACTORS

     Operating History; Unprofitability.  The Company was organized in September
     ----------------------------------                                         
1992.  As of December 31, 1996, the Company had an accumulated deficit of
$3,735,349 and had reported net losses since its organization, including net
losses of $1,177,226 and $1,966,196 for the years ended December 31, 1995 and
1996, respectively.  There can be no assurance that the Company will be able to
operate profitably in the future.  See the discussion in the remainder of this
Item 6, below.

     Loss of Clinical Research Contracts.  Clients of the Company generally have
     -----------------------------------                                        
the right to terminate a clinical research contract upon 60 to 90 days notice,
potentially causing periods of excess capacity and reductions in service revenue
and net income.  Contracts may be terminated for various reasons, including
unexpected or undesired results, inadequate patient enrollment or investigator
recruitment, production problems resulting in shortages of the drug, adverse
patient reactions to the drug, or the client's decision to de-emphasize a
particular trial.  The loss of a large contract or the simultaneous loss of
multiple contracts could result in unplanned periods of excess capacity and
materially and adversely affect the Company's backlog, revenue and
profitability.  In most instances, if a contract is terminated, the Company is
entitled to receive revenue earned to date.  However, since the Company's
contracts are predominantly fixed price contracts, the Company bears the risk of
cost overruns.  See "Description of Business--Clients" and the discussion in the
remainder of this Item 6, below.

    Dependence on Certain Industries and Clients.  The Company provides services
    --------------------------------------------
primarily to the pharmaceutical and biotechnology industries. Accordingly, the
Company's service revenue is substantially dependent on these industries'
expenditures on research and development. Although these expenditures are large,
the number of potential CRO clients is relatively limited, and concentrations of
business in the CRO industry are not uncommon. In fiscal 1995, the Company's top
four clients accounted for 69% of the Company's revenue. In fiscal 1996, the
Company's top five clients accounted for 75% of the Company's revenue. The
Company is likely to continue to derive a substantial portion of its revenue
from a relatively

                                       11
<PAGE>
 
limited number of major projects or clients. The loss of business from a
significant client could have a material adverse effect on the Company.
Additionally, the Company's operations could be materially and adversely
affected by, among other factors, any economic downturn in the pharmaceutical or
biotechnology industries, any decrease in their research and development
expenditures, or a change in the governmental regulations pursuant to which
these industries operate. Furthermore, management believes that the Company has
benefited to date from the increasing tendency of pharmaceutical and
biotechnology companies to outsource the performance and analysis of clinical
research projects to independent outside organizations. A reversal or slowing of
this trend could have a material adverse effect on the Company. See "Description
of Business--Clients."

     Impact of Government Regulation; Compliance with Regulatory Standards.  The
     ---------------------------------------------------------------------      
market for the Company's services depends upon the comprehensive government
regulation of the drug development process. In the United States, the historical
trend has been in the direction of continued or increased regulation by the FDA
and other governmental agencies, although the FDA recently announced regulatory
changes intended to streamline the approval process for biotechnology products
by applying the same standards as are in effect for conventional drugs. Changes
in regulation, including a relaxation in regulatory requirements or the
introduction of simplified drug approval procedures, could materially and
adversely affect the demand for the services offered by the Company. In
addition, failure on the part of the Company to comply with applicable
regulations could result in the termination of ongoing research or the
disqualification of data, either of which could have a material and adverse
affect on the Company, including damage to the Company's reputation in the CRO
industry. See "Description of Business--Government Regulation."

     Competition; Industry Consolidation.  The CRO industry is not capital
     -----------------------------------                                  
intensive and the financial costs of entry into this industry are relatively
low.  The industry, therefore, is highly fragmented with many small, limited-
service providers in addition to several medium-sized CROs and a few large,
full-service CROs with global operations.  Clinicor competes primarily against
other CROs, pharmaceutical companies' in-house research departments, and
universities and teaching hospitals, many of which have substantially greater
financial and other resources than the Company.  CROs generally compete on the
basis of previous experience, medical and scientific expertise in specific
therapeutic areas, the quality of contract research, the ability to organize and
manage large-scale trials on a global basis, the ability to manage large and
complex medical databases, the ability to provide statistical and regulatory
services, the ability to recruit investigators, the ability to integrate
information technology with systems to improve the efficiency of contract
research, an international presence with strategically located facilities,
financial viability and price.  There can be no assurance that the Company will
be able to compete favorably in these areas.   Competitive pressures have
resulted in an increasing consolidation of the CRO industry, which is likely to
result in heightened competition among the larger CROs for both clients and
acquisition candidates.  In addition, consolidation within the pharmaceutical
industry as well as a trend by pharmaceutical companies of outsourcing among
fewer CROs has led to heightened competition for CRO contracts.  Increased
competition may lead to price and other forms of competition that may affect the
Company's profit margins.  See "Description of Business--Competition."

     Fluctuation in Quarterly Operating Results; Potential Volatility of Stock
     -------------------------------------------------------------------------
Price.  The Company's quarterly operating results have fluctuated as a result of
-----                                                                           
factors such as client delays in implementing particular clinical trials and the
costs associated with start-up operations.  Because a high percentage of the
Company's operating costs are relatively fixed while revenue recognition is
subject to fluctuation, minor variations in the timing of contracts or the
progress of clinical trials may cause significant variations in quarterly
operating results.  Results of one quarter are not necessarily indicative of
results for future quarters. In addition, the market price of the Company's
Common Stock could be subject to wide fluctuations in response to quarter-to-
quarter variations in operating results, changes in earnings estimates by
analysts, market conditions in the industry, prospects of health care reform,
changes in government regulation and general economic conditions. In addition,
the stock market has from time to time experienced significant price and volume
fluctuations that have been unrelated to the operating performance of particular
companies. These market fluctuations may adversely affect the market price of
the Company's Common Stock. Investors in the Company's Common Stock must be
willing to bear the risk of such fluctuations in earnings and stock price.

                                       12
<PAGE>
 
     Potential Liability from Operations.  Clinical trials involve the testing 
     -----------------------------------
of approved and experimental drugs on human volunteers pursuant to study
protocols. Such testing involves a risk of liability for personal injury or
death to participants due to, among other reasons, possible unforeseen adverse
reactions or side effects. The Company may be subject to claims in the event of
personal injury or death of persons participating in clinical trials.
Additionally, the Company, on behalf of its clients, contracts with physicians
who render professional services, including the administration of the substance
being tested, to trial participants. As a result, the Company may be subject to
claims arising from professional malpractice of such physicians. The Company
does not carry insurance against the aforementioned risks. The Company attempts
to manage its liability risk through contractual indemnification provisions with
clients and its physician investigators. The contractual indemnifications
generally do not protect the Company against certain of its own actions such as
negligence. The contractual arrangements are subject to negotiation with
clients, and the terms and scope of such indemnification vary from client to
client and from trial to trial. Although most of the Company's clients are
large, well-capitalized companies, the financial performance of these
indemnities is not secured. Therefore, the Company bears the risk that the
indemnifying party may not have the financial ability to fulfill its
indemnification obligations. The financial position of the Company could be
materially and adversely affected if it were required to pay damages or incur
defense costs in connection with a claim that is beyond the scope of an
indemnity provision or where the indemnifying party does not fulfill its
indemnification obligations.

     Potential Adverse Impact of Health Care Reform.  In the last several years,
     ----------------------------------------------                             
several comprehensive health care reform proposals have been introduced in the
U.S. Congress.  The intent of the proposals was, generally, to expand health
care coverage for the uninsured and control growing health care costs.  While
none of the proposals were adopted, health care reform may again be addressed by
the U.S. Congress.  Implementation of government health care reform may
adversely affect research and development expenditures by pharmaceutical and
biotechnology companies, resulting in a decrease of the business opportunities
available to the Company.  See "Description of Business--Clients."  Management
is unable to predict the likelihood of health care reform proposals being
enacted into law or the effect such law would have on the Company.

     Dependence on Personnel.  The Company relies on a number of key executives,
     -----------------------                                                    
including Thomas P. O'Donnell, its President, Chief Executive Officer and
Chairman, and Robert S. Sammis, its Executive Vice President and Chief Operating
Officer, upon both of whom the Company maintains key man life insurance.  The
loss of the services of any of the Company's key executives could have a
material adverse effect on the Company.  The Company's performance also depends
on its ability to attract and retain qualified professional, scientific and
technical operating staff.  See "Description of Business--Services."  The level
of competition among employers for skilled personnel, particularly those with
M.D., Ph.D. or equivalent degrees, is high.  There can be no assurance the
Company will be able to continue to attract and retain sufficient numbers of
qualified personnel.

     Management of Business Expansion; Need for Improved Systems; Expansion of
     -------------------------------------------------------------------------
Foreign Operations.  Since the Company was organized, its business and
------------------                                                    
operations have experienced substantial expansion.  The Company believes that
such expansion places a strain on operational, human and financial resources.
In order to manage such expansion, the Company must continue to improve on its
operating, administrative and information systems, accurately predict its future
personnel and resource needs to meet client contract commitments, track the
progress of ongoing client projects and attract and retain qualified management,
professional, scientific and technical operating personnel.  Expansion of
foreign operations also may involve the additional risks of adjusting to
differences in foreign business practices, hiring and retaining qualified
personnel, and overcoming language barriers.  Failure of the Company to meet the
demands of and to manage expansion of its business and operations could have a
material adverse effect on the Company's business.

                                       13
<PAGE>
 
OVERVIEW

     The Company is a contract research organization ("CRO") providing Phase I
through Phase IV clinical trials management, monitoring, regulatory consulting
and data management services for the pharmaceutical, biotechnology and medical
device industries.  Most of the Company's competitors provide study monitoring,
consulting and data management services.  Clinicor provides these services in
addition to managing clinical trials, including recruitment of eligible
patients.  The Company commenced operations in September 1992 and has achieved
its growth through internal development.

       The Company's contracts for services generally vary from a few months to
over one year in duration.  A portion of the contract fee is typically required
to be paid when the contract is initiated, with the balance payable in
installments over the contract's duration.  The installment payments are either
performance-based, relating payment to previously negotiated events such as
patient enrollment, patient completion or delivery of databases, or periodic,
based on personnel fees and actual expenses, typically billed on a monthly
basis.

       Clients generally may terminate or delay the performance of a contract,
potentially causing periods of excess capacity and reductions in service revenue
and net income.  Trials may be terminated or delayed for a variety of reasons,
including unexpected or undesired results, production problems resulting in
shortages of the product or delays in supplying the product, adverse patient
reaction to the product, or the client's decision to de-emphasize a particular
trial.  If a trial is terminated, the contract generally provides for a short
continuation or wind-down period, as the Company manages required investigator
obligations through the termination date; therefore, the Company is typically
entitled to all amounts owed for work performed through the notice of
termination and all costs associated with termination of the study.  In
addition, contracts may require the payment of a separate, early termination
fee, the amount of which usually declines as the trial progresses.

       Revenue from contracts is recognized as work is performed. Some contracts
contain a fixed price per patient plus either fixed or variable fees for
additional service components such as monitoring, project management,
advertising, travel, data management, consulting and report writing. Other
contracts are time and materials based. Payments received on contracts in excess
of amounts earned are recorded as deferred revenue.

       The Company's backlog consists of anticipated service revenue from
clinical trials and other services that have not been completed and which
generally specify completion dates within 24 months. To qualify as "backlog,"
anticipated projects must be represented by contracts or letter agreements or
must be projects for which the Company has commenced a significant level of
effort based upon client commitment and approval of a written budget. Once work
commences, service revenue is recognized over the life of the contract. At
December 31, 1995 and 1996, the Company's backlog was approximately $7.5 million
and $16.5 million, respectively. The Company believes that its backlog at any
given date is not necessarily a meaningful predictor of future results, and no
assurances can be given that the Company will fully realize all of its backlog
as service revenue.

                                       14
<PAGE>
 
       Direct costs include project personnel costs, investigator fees, patient
stipends, contractors' fees, laboratory costs, medical supply costs, patient
recruitment costs and any study-related reimbursable costs.  Selling, general
and administrative expenses consist primarily of compensation and benefits,
selling, general and administrative personnel, professional services, facility
costs for the Company's corporate headquarters, equipment, information systems
and other overhead items.

RESULTS OF OPERATIONS

       The following table sets forth for the periods indicated, certain items
included in the Company's audited statements of operations for the years ended
December 31, 1995, and 1996, and the percentage of revenues for each item. The
trends illustrated in the following table may not be indicative of future
results.

<TABLE>
<CAPTION>
                                               FOR THE YEARS ENDED DECEMBER 31,
                                               --------------------------------
 
                                                  1995                     1996
                                        ----------------------------------------------
 
<S>                                     <C>           <C>        <C>           <C>
Service revenue                         $ 2,005,582    100.0 %   $ 3,581,402      100%
                                        -----------              -----------
Operating costs and expenses                                    
   Direct costs                           1,790,861     89.3 %     2,291,075     64.0 %
   Selling, general and administrative    1,303,437     65.0 %     3,104,355     86.7 %
   Depreciation and amortization             60,217      3.0 %       157,597      4.4 %
                                        -----------              -----------
Total operating costs and expenses        3,154,515    157.3 %     5,553,027    155.1 %
                                        -----------              -----------
Loss from operations                     (1,148,933)   (57.3)%    (1,971,625)   (55.1)%
Interest income (expense), net              (28,293)    (1.4)%         5,429       .02%
                                        -----------              -----------
Net loss                                $(1,177,226)   (58.7)%   $(1,966,196)   (54.9)%
                                        ===========              ===========
</TABLE>

YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------------

     Service revenue increased $1,575,000, or 79 percent, from $2,006,000 to
$3,581,000 for the year ended December 31, 1995 and 1996, respectively. The
increase is attributable primarily to an increase in the volume and size of
clinical trials and, to a lesser extent, an increase in data management and
consulting engagements. During 1995, most of the Company's revenues arose from
fixed price per patient contracts. Beginning in 1996, the Company is entering
into more time and materials contracts and expects this trend to continue.

     Direct costs increased from $1,791,000 for the year ended December 31, 1995
to $2,291,000 for the year ended December 31, 1996, an increase of $500,000, or
28 percent. The increase in direct costs is attributable to a $240,000 increase
in project personnel costs resulting from the addition of 21 full time study,
patient and data management staff, a $160,000 increase in consulting fees and a
$100,000 increase in contract monitoring expense due primarily to the use of
contract monitors on a project in Mexico. Direct costs represent 64 percent of
service revenue for the year ended December 31, 1996, compared to 89 percent for
the same period in

                                       15
<PAGE>
 
1995. The reduced percentage of direct costs to service revenue resulted from
higher profit margins realized in 1996 due to improving utilization of project
personnel. As the Company's backlog and revenue base have grown, project
personnel have been added, and the Company increased utilization of contract
consultants. There is typically a lag from the time project personnel are hired
and related personnel expenses are incurred until those personnel can be
profitably utilized on studies. Management anticipates this trend will continue
during the first half of 1997.

     Selling, general and administrative expense increased $1,801,000, or 138
percent, from $1,303,000 (65 percent of revenue) to $3,104,000 (87 percent of
revenue) for the year ended December 31, 1995 and 1996, respectively.
The increase in selling, general and administrative expense is attributable to a
$550,000 increase in related personnel costs resulting from the addition of 12
finance, information technology, marketing and administrative employees. Non-
employee costs such as travel, trade shows, printed materials, etc. increased
$470,00 during 1996. The Company has historically invested in business promotion
activities in order to build its client base and study contract backlog. It is
the Company's policy to expense these costs as they are incurred. During 1996, a
noncash charge of approximately $535,000 for compensation expense was recorded
in selling, general and administrative expense relating to certain performance
based stock options as well as options granted with strike prices below fair
market value. This charge did not affect the Company's net worth. In early 1997
the vesting provisions were restated. As a result, future compensation expense
will be limited to a total of approximately $160,000 in 1997 and 1998. The
compensation expense recorded in 1995 related to stock options was $45,000. Also
included in selling, general and administrative expense in 1996 was $243,000
related to litigation against the Company and an officer and director. This
matter was settled subsequent to December 31, 1996, and all costs related
thereto were accrued at year end.

     Management expects selling, general and administrative expenses to decrease
as a percentage of sales during 1997 as the sales base increases and expenses to
develop the Company's infrastructure decrease.

     Depreciation and amortization expense increased $98,000, or 163 percent,
from $60,000 to $158,000 from 1995 to 1996. This increase is a result of
purchasing approximately $1 million in property, plant and equipment during
1996. Included in the capital purchases were additions to the Company's computer
information systems and facility expansion costs related to the Company's
expanded corporate headquarters.

     Interest income/(expense), net for 1996 totaled $5,000 of income as a
result of earnings on the Company's working capital invested in a money market
account and the certificate of deposit held as collateral on the line of credit
offset by interest expense on the line of credit. Interest income/(expense), net
in 1995 was a net expense of $28,000.

     The Company has not recorded an income tax benefit in either 1995 or 1996
as a result of its operating losses due to the uncertainty that the loss
carryforwards will be utilized. Due to the sales of stock during 1995 and 1996,
the annual utilization of these loss carryforwards will be limited.

     The net loss was $1,177,226 in 1995 and $1,966,196 in 1996. The net loss
applicable to common shareholders per share was $0.36 and $0.52 in 1995 and
1996, respectively. The preferred stock dividend of $131,444 increased the loss
applicable to common shareholders in 1996.


LIQUIDITY AND CAPITAL RESOURCES

     Net cash used in operating activities for the years ended December 31, 1995
and 1996, was $1,536,000 and $2,018,000, respectively. The increase in net cash
used is attributable to increases in accounts receivable and to a lesser extent
to the increased operating loss in 1996.

     Typically, cash flows from contracts include a payment at the time a
contract commences and the balance in installments over the contract's duration,
in some cases on a

                                       16
<PAGE>
 
milestone completion basis. Consequently, cash receipts do not necessarily
correspond to costs incurred and revenue recognized on contracts. The Company's
cash flow is influenced by the changes in levels of billed and unbilled accounts
receivable, net of amounts billed representing unearned revenue. Accounts
receivable increased from $634,000 at December 31, 1995 to $1,490,000 at
December 31, 1996. The $856,000, or 135 percent, increase is a result of higher
revenues in 1996 and timing of payments by sponsors. Cash collections for the
year ended December 31, 1996, totaled $2,700,000.

     Since its inception, the Company has financed its operations and growth
with proceeds from private placements of equity securities, advances from
shareholders and borrowing arrangements under capital lease obligations and
lines of credit.  Investing activities have consisted of capital expenditures,
primarily for leasehold improvements and information systems in addition to
medical and office equipment.  The Company expects purchases of property and 
equipment in 1997 to be significantly less than 1996 levels. Late in 1996, the
Company leased new office space (22,000 square feet) to house its Austin
operations.

     On February 27, 1995, Clinicor was merged into a non-reporting publicly
held, inactive Nevada corporation ("Pegasus") in a reverse merger transaction
which has been accounted for in a manner similar to a "pooling of interests."
Immediately prior to its merger with the Company, Pegasus issued 750,000 shares
of Common Stock for total proceeds of  $750,000.  Effective September 15, 1995,
the Company initiated a private placement offering, which concluded on February
16, 1996.  In connection with the offering, the Company sold 573,400 Units
consisting of shares of Common Stock and Warrants, for gross proceeds of
$1,434,000, which provided the Company net proceeds of $1,274,000 after
deducting related offering expenses and commissions.

     On July 15, 1996, the Company sold 3,500 shares of Preferred Stock to 
institutional investors for gross proceeds of $3,500,000, which provided the
Company net proceeds of approximately $3,180,000 after deducting related
issuance expenses of approximately $320,000, including $125,000 of expense to 
cancel preemptive rights held by certain shareholders.

     In September 1996, the Company obtained a one-year $1,000,000 secured line
of credit with an independent financial institution of which $850,000 was
outstanding as of December 31, 1996. The line of credit is secured by a
$1,000,000 certificate of deposit. Based on increases in the Company's backlog
and revenues, Management anticipates the Company will need additional working
capital funds to finance accounts receivable during 1997. The Company has
initiated discussions to increase the maximum borrowing limits and modify the
collateralization terms for the line of credit in order to provide additional
working capital funds. There can be no assurances that the Company will be able
to obtain additional working capital funds under acceptable terms.

                                       17

<PAGE>
 
ITEM 7.   FINANCIAL STATEMENTS

Index to Financial Statements:
                                                                         Page
                                                                      ----------

   Report of Price Waterhouse LLP, Independent Accountants            F-1

   Report of BDO Seidman, LLP, Independent Certified 
     Public Accountants                                               F-2

   Balance Sheet - December 31, 1995 and 1996                         F-3

   Statement of Operations - Years ended December 31, 1995 and 1996   F-4

   Statement of Shareholders' Equity - December 31, 1995 and 1996     F-5

   Statement of Cash Flows - Years ended December 31, 1995 and 1996   F-6

   Notes to Financial Statements                                      F-7 - F-16


ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

   On December 2, 1996, the Company dismissed BDO Seidman, LLP as its
independent public accountant and retained Price Waterhouse LLP. Neither of BDO
Seidman's reports on the Company's financial statements for the past two years
contained an adverse opinion or disclaimer of opinion, or was modified as to
uncertainty, audit scope or accounting principles. The decision to change
accountants was approved by the Company's Board of Directors. There were no
disagreements with BDO Seidman on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to BDO Seidman's satisfaction, would have caused it to
make reference to the subject matter of the disagreement in connection with its
report.


                                   PART III

   The Company plans to file with the Securities and Exchange Commission a 
definitive proxy statement for its 1997 Annual Meeting of Shareholders (the 
"Proxy Statement") not later than April 30, 1997, and certain information 
included therein is incorporated herein by reference.


ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
          COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

   The information regarding the Company's directors and executive officers 
required by this Item is incorporated by reference to the sections in the 
Company's Proxy Statement entitled "Election of Directors" and "Management."

   The information regarding compliance with Section 16(a) of the Securities 
Exchange Act of 1934 by the directors, executive officers and beneficial owners 
of more than ten percent of the Common Stock of the Company required by this 
Item is incorporated by reference to the section in the Company's Proxy 
Statement entitled "Compliance Under Section 16(a) of the Securities Exchange 
Act of 1934."

ITEM 10.  EXECUTIVE COMPENSATION

   The information regarding compensation of directors and executive officers of
the Company required by this Item is incorporated by reference to the section in
the Company's Proxy Statement entitled "Executive Compensation."

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

   The information regarding security ownership of certain beneficial owners and
management required by this Item is incorporated herein by reference to the
section in the Company's Proxy Statement entitled "Ownership of Common Stock and
Preferred Stock."
                                       18
<PAGE>
 
ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information regarding certain relationships and related transactions 
required by this Item is incorporated by reference to the section in the 
Company's Proxy Statement entitled "Certain Transactions."


ITEM 13.  EXHIBITS, LIST AND REPORTS ON FORM 8-K

(A) EXHIBITS.

        2       Not applicable

        3(a)    Articles of Incorporation, as amended*

        3(b)    Amended and Restated Bylaws*

        4(a)    Stock Purchase Agreement dated as of July 15, 1996 between the
                registrant and Oracle Partners, L.P., Quasar International
                Partners, C.V., Oracle Institutional Partners, L.P. and GSAM
                Oracle Fund, Inc.*

        4(b)    Certificate of Amendment of Articles of Incorporation of the
                registrant, incorporated herein by reference to Exhibit 3(a)*

        4(c)    Amended and Restated Bylaws of the registrant, incorporated
                herein by reference to Exhibit 3(b)*

        4(d)    Terms of Warrants issued by the registrant*

        4(e)    Registration Rights Agreement effective December 1, 1995 by and
                among the registrant and certain individuals and entities*

        4(f)    Sales Agent Warrant dated May 20, 1996 issued to SJ Capital,
                Inc.*

        4(g)    Preemptive Rights Agreement effective February 27, 1995 among
                the registrant and Randolph Haag, Russell Armstrong and Irawan
                Onggara*

        4(h)    Settlement Agreement dated as of July 8, 1996 between the
                registrant and Russell Armstrong, Irawan Onggara and Century
                Financial Partners, Inc.*

        9       Not applicable

        10(a)   Voting and Pre-Merger Agreement dated February 14, 1995 among
                the registrant, Thomas P. O'Donnell, Robert S. Sammis and Steven
                J. Dell, M.D.*

        10(b)   Voting and Pre-Merger Agreement dated February 14, 1995 among
                the registrant, Thomas P. O'Donnell, Robert S. Sammis and
                William M. Ramsdell, M.D.*

        10(c)   Voting and Pre-Merger Agreement dated February 14, 1995 among
                the registrant, Thomas P. O'Donnell, Robert S. Sammis and David
                Shulman, M.D.*

____________________
    *Incorporated herein by reference to the exhibit with the same number
     previously filed with the Registration Statement on Form 10-SB, as amended,
     declared effective January 13, 1997.

                                       19
<PAGE>
 
        10(d)   Sales Agent Agreement effective September 15, 1995 between the
                registrant and SJ Capital, Inc.*

        10(e)   Agreement and Plan of Merger effective February 27, 1995 between
                Pegasus Tax and Financial Planning Services, Inc., Randolph
                Haag, Russell Armstrong, Clinicor, Inc., Robert S. Sammis and
                Thomas P. O'Donnell*

        10(f)   Covenant Not to Compete Agreement effective February 27, 1995
                among the registrant, Thomas P. O'Donnell and Robert S. Sammis*

        10(g)   Statement Regarding Employee Proprietary Information and
                Inventions Agreement dated February 27, 1995 between the
                registrant and Thomas P. O'Donnell*

        10(h)   Statement Regarding Employee Proprietary Information and
                Inventions Agreement dated February 27, 1995 between the
                registrant and Robert S. Sammis*

        10(i)   Agreement dated March 5, 1996 between the registrant and
                Randolph J. Haag*

        10(j)   Option Agreement dated March 5, 1996 between the registrant and
                Randolph J. Haag*

        10(k)   Clinicor, Inc. 1995 Employee and Consultant Stock Option
                Plan*/**

        10(l)   Stock Option Agreement dated February 27, 1995 between the
                registrant and Thomas P. O'Donnell*/**

        10(m)   Stock Option Agreement dated February 27, 1995 between the
                registrant and Robert S. Sammis*/**

        10(n)   Employment Agreement dated July 15, 1996 between the registrant
                and Thomas P. O'Donnell*/**

        10(o)   Employment Agreement dated July 15, 1996 between the registrant
                and Robert S. Sammis*/**

        10(p)   Employment Agreement dated May 1, 1995 between the registrant
                and Robert M. Day*/**

        10(q)   Unsecured Note dated October 1, 1995 executed by the registrant
                and payable to Robert Sammis*

        10(r)   Unsecured Note dated October 1, 1995 executed by the registrant
                and payable to Patricia J. O'Donnell*

        10(s)   Letter Agreement dated August 21, 1996 between the registrant
                and Zola P. Horovitz*/**

        10(t)   Lease dated October 23, 1996 between the registrant and Lake
                Austin Commons, Ltd.*

        10(u)   First Amendment to Office Lease Agreement dated November 21,
                1996 between the registrant and Lake Austin Commons, Ltd.

____________________
    *Incorporated herein by reference to the exhibit with the same number
     previously filed with the Registration Statement on Form 10-SB, as amended,
     declared effective January 13, 1997.
   **A management contract or compensatory plan required to be filed as an
     exhibit to Form 10-KSB.

                                       20
<PAGE>
 
        10(v)   Unsecured Promissory Note dated December 31, 1996 executed by
                Thomas P. O'Donnell and payable to the registrant

        10(w)   Agreement Regarding Option Grant effective January 1, 1997 
                between the registrant and Thomas P. O'Donnell**

        10(x)   Agreement Regarding Option Grant effective January 1, 1997 
                between the registrant and Robert S. Sammis**

        11      Not applicable

        13      Not applicable

        16      Letter on Change in Certifying Accountant*

        18      Not applicable

        21      Not applicable

        22      Not applicable

        23      Not applicable

        24      Not applicable

        27      Financial Data Schedule

        99      Not applicable

____________________
    *Incorporated herein by reference to the exhibit with the same number
     previously filed with the Registration Statement on Form 10-SB, as amended,
     declared effective January 13, 1997.

   **A management contract or compensatory plan required to be filed as an 
     exhibit to Form 10-KSB.

(B)  REPORTS ON FORM 8-K.

     No reports on Form 8-K were filed during the last quarter of the fiscal
year covered by this report.

                                       21
<PAGE>
 
                                  SIGNATURES

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

                                          CLINICOR, INC.


Date  April 14, 1997                      By /s/ Thomas P. O'Donnell
      ------------------                    ------------------------------------
                                            Thomas P. O'Donnell
                                            Chairman of the Board, President and
                                            Chief Executive Officer


     In accordance with 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.
 
         Signature                         Title                  Date
         ---------                         -----                  ----
 
 
/s/ Thomas P. O'Donnell        Chairman of the Board, President,  April 14, 1997
-------------------------      Chief Executive Officer, Director  --------------
(Thomas P. O'Donnell)
 
/s/ Robert S. Sammis            Executive Vice President, Chief   April 14, 1997
-------------------------        Operating Officer, Secretary,    --------------
(Robert S. Sammis)                         Director
 
 
/s/ Arthur P. Haag                         Director               April 14, 1997
-------------------------                                         --------------
(Arthur P. Haag)
 
 
/s/ Stuart T. Weisbrod                     Director               April 14, 1997
-------------------------                                         --------------
(Stuart T. Weisbrod, Ph.D.)
 
 
/s/ Zola P. Horovitz                       Director               April 14, 1997
-------------------------                                         --------------
(Zola P. Horovitz, Ph.D.)
 
 
/s/ Amy B. Russell               Principal Financial Officer,     April 14, 1997
-------------------------                 Controller              --------------
(Amy B. Russell)

                                       22
<PAGE>
 
                       Report of Independent Accountants



To the Board of Directors and
  Shareholders of Clinicor, Inc.

In our opinion, the accompanying balance sheet and the related statements of 
operations, of shareholders' equity and of cash flows present fairly, in all 
material respects, the financial position of Clinicor, Inc. at December 31, 
1996, and the results of its operations and its cash flows for the year in 
conformity with generally accepted accounting principles. These financial 
statements are the responsibility of the Company's management; our 
responsibility is to express an opinion on these financial statements based on 
our audit. We conducted our audit of these statements in accordance with 
generally accepted auditing standards which 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, 
assessing the accounting principles used and significant estimates made by 
management, and evaluating the overall financial statement presentation. We 
believe that our audit provides a reasonable basis for the opinion expressed 
above.



PRICE WATERHOUSE LLP

Austin, Texas
April 9, 1997

                                                                             F-1

<PAGE>
 
Independent Auditors' Report

Clinicor, Inc.
Board of Directors
Austin, Texas

We have audited the accompanying balance sheet of Clinicor, Inc. (the "Company")
as of December 31, 1995, and the related statements of operations, stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Clinicor, Inc. at December 31,
1995, and the results of its operations and cash flows for the year then ended
in conformity with generally accepted accounting principles.


                                                  BDO Seidman, LLP

Austin, Texas
April 18, 1996, except for
 Note 8 which is as of July 16, 1996

                                                                             F-2

<PAGE>

CLINICOR, INC.
BALANCE SHEET

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------

                                                                            December 31,   December 31,
                                                                                1995           1996
                                                                            -----------    -----------
Assets
<S>                                                                         <C>            <C> 
Current assets:
    Cash, restricted cash and cash equivalents (Note 1)                     $   267,281    $ 1,483,974
    Accounts receivable (Notes 2 and 10)                                        633,540      1,489,555
    Prepaid and other current assets                                              7,570        143,992
                                                                            -----------    -----------
      Total current assets                                                      908,391      3,117,521

Property and equipment, net (Note 3)                                            192,897      1,118,877

Other assets                                                                      6,445         39,739
                                                                            -----------    -----------
      Total assets                                                          $ 1,107,733    $ 4,276,137
                                                                            ===========    ===========

Liabilities and shareholders' equity

Current liabilities:
    Current portion of obligations under capital leases (Note 6)            $    25,751    $    11,733
    Accounts payable                                                            495,301        574,113
    Accrued liabilities                                                         133,239        313,751
    Accrued payroll and payroll taxes                                           168,990        200,641
    Line of credit (Note 4)                                                           -        850,000
    Deferred revenue                                                             45,000         35,000
    Notes payable to shareholders (Note 5)                                      181,000        181,000
                                                                            -----------    -----------
      Total current liabilities                                               1,049,281      2,166,238

Obligations under capital leases, less current portion (Note 6)                  35,167         16,047
                                                                            -----------    -----------
      Total liabilities                                                       1,084,448      2,182,285
                                                                            -----------    -----------
Commitments and contingencies (Note 6)

Shareholders' equity (Notes 8 and 9):
    Common stock, $0.001 par value, 75,000,000 shares authorized,
      3,939,000 and 4,086,400 shares issued and outstanding, respectively         3,939          4,086
    Convertible preferred stock, no par value, 5,181 shares authorized,
      0 and 3,631 shares issued and outstanding, respectively                         -      3,631,000
    Additional paid-in capital                                                1,938,499      2,418,915
    Deferred compensation                                                      (150,000)      (224,800)
    Accumulated deficit                                                      (1,769,153)    (3,735,349)
                                                                            -----------    -----------
      Total shareholders' equity                                                 23,285      2,093,852
                                                                            -----------    -----------
      Total liabilities and shareholders' equity                            $ 1,107,733    $ 4,276,137
                                                                            ===========    ===========
</TABLE>


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

                                                                             F-3

<PAGE>

CLINICOR, INC.
STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------

                                                                   YEARS ENDED DECEMBER 31,
                                                                   ------------------------
                                                                    1995              1996
                                                                    ----              ----
<S>                                                             <C>                <C>  

   Service revenue                                             $ 2,005,582         $ 3,581,402
                                                               -----------         -----------      
   Operating costs and expenses:
       Direct costs                                              1,790,861           2,291,075
       Selling, general and administrative                       1,303,437           3,104,355
       Depreciation and amortization                                60,217             157,597
                                                               -----------         ----------- 
         Total operating costs and expenses                      3,154,515           5,553,027

   Loss from operations                                         (1,148,933)         (1,971,625)

   Other income and expenses:
       Interest income                                                   -              49,851
       Interest expense                                             28,293              44,422
                                                               -----------         -----------
         Other income and expenses                                 (28,293)              5,429
                                                               -----------         -----------
   NET LOSS                                                    $(1,177,226)        $(1,966,196)
                                                               ===========         ===========
                                                                
   Net loss                                                    $(1,177,226)        $(1,966,196)
   Preferred stock dividends                                             -            (131,444)
                                                               -----------         -----------
   Net loss applicable to common stock                         $(1,177,226)        $(2,097,640)
                                                               ===========         ===========
   NET LOSS APPLICABLE TO COMMON STOCK PER SHARE               $     (0.36)        $     (0.52)
                                                               ===========         =========== 

   WEIGHTED AVERAGE NUMBER OF COMMON
       SHARES EQUIVALENT OUTSTANDING                             3,262,690           4,059,433
                                                               ===========         =========== 
</TABLE>

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

                                                                             F-4

<PAGE>

CLINICOR, INC.
STATEMENT OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------

                                                                       Convertible Additional
                                               Common        Stock      Preferred   Paid-In     Deferred   Accumulated
                                               Shares        Amount      Stock      Capital   Compensation   Deficit     Total
                                              ---------     -------    --------    ---------  ------------ -----------   -----
<S>                                         <C>            <C>         <C>         <C>        <C>          <C>          <C>
                                                                                                         
Balance at December 31, 1994                  2,183,500    $  3,421    $      -    $  30,329  $      -     $ (591,927)  $ (558,177)
                                                                                                         
Common stock issued on                                                                                   
  February 27, 1995 (Note 9)                    750,000         750           -      749,250          -             -      750,000
Common stock retired on                                                                                  
  February 27, 1995 (Note 9)                 (1,500,000)     (1,500)          -        1,500          -             -            -
Conversion of common stock in                                                                            
  connection with the                                                                                    
  February 27, 1995 merger (Note 9):                                                                     
      Common stock retired                      (12,500)     (1,250)          -        1,250          -             -            -
      Common stock issued                     2,080,000       2,080           -       (2,080)         -             -            -
Common stock issued in connection with the                                                               
   Company's private placement dated-                                                                    
   September 15, 1995 (Note 9)                  438,000         438           -      963,250          -             -      963,688
Deferred stock option compensation                    -           -           -      195,000   (195,000)            -            -
Amortization of deferred compensation                 -           -           -            -     45,000             -       45,000
Net loss                                              -           -           -            -          -    (1,177,226)  (1,177,226)
                                              ---------     -------  ----------    ---------   --------    ----------   ----------
Balance at December 31, 1995                  3,939,000       3,939           -    1,938,499   (150,000)   (1,769,153)      23,285
                                                                                                         
Common stock issued in connection with                                                                   
   the continuation of the Company's                                                                     
   private placement dated                                                                               
   September 15, 1995 (Note 9)                  135,400         135           -      309,715          -             -      309,850
Common stock issued on May 20, 1996              12,000          12           -       11,988          -             -       12,000
Convertible preferred stock issued on                                                                    
  July 15, 1996, 3,500 shares, net (Note 8)           -           -   3,500,000     (319,823)          -            -    3,180,177
Deferred stock option compensation                    -           -           -      609,980    (609,980)           -            -
Amortization of deferred compensation                 -           -           -            -     535,180            -      109,740
Dividends on convertible preferred stock              -           -     131,000     (131,444)          -            -         (444)
Net loss                                              -           -           -            -           -   (1,966,196)  (1,966,196)
                                              ---------    --------  ----------   ----------  ----------   ----------   ----------
Balance at December 31, 1996                  4,086,400    $  4,086  $3,631,000   $2,418,915  $ (224,800)  $(3,735,349) $2,093,852
                                              =========    ========  ==========   ==========  ==========   ===========  ==========
</TABLE>

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

                                                                             F-5

<PAGE>

CLINICOR, INC.
STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------

                                                               Years Ended December 31,
                                                              --------------------------
                                                                   1995          1996
                                                              -----------    -----------
<S>                                                           <C>            <C>    
Operating activities:                

   Net loss                                                   $(1,177,226)   $(1,966,196)
   Adjustments to reconcile net loss to cash used in
    operating activities:
       Depreciation and amortization                               60,217        157,597
       Noncash stock option compensation expense                   45,000        535,180
       Net changes in assets and liabilities:
           Accounts receivable                                   (306,803)      (856,015)
           Prepaid expenses and other assets                          546       (169,716)
           Accounts payable                                      (130,261)        78,812
           Accrued liabilities                                    (52,837)       180,512
           Accrued payroll and payroll taxes                      (19,879)        31,651
           Deferred revenue                                        45,000        (10,000)
                                                              -----------    -----------
Net cash used in operating activities                          (1,536,243)    (2,018,175)
                                                              -----------    -----------
Investing activities:
   Purchases of property and equipment                            (54,964)    (1,094,040)
                                                              -----------    -----------
Financing activities:
   Payments on capital leases                                     (50,125)       (23,119)
   Proceeds from notes payable to shareholders                    181,000              -
   Net proceeds from issuing common stock                       1,713,688        321,850
   Net proceeds from issuing preferred stock                            -      3,180,177
   Borrowings under line of credit                                      -        850,000
   Restricted cash securing line of credit (Note 4)                     -     (1,009,840)
                                                              -----------    -----------
Net cash provided by financing activities                       1,844,563      3,319,068
                                                              -----------    -----------
Net increase in unrestricted cash and cash equivalents            253,356        206,853
Unrestricted cash and cash equivalents at beginning of year        13,925        267,281
                                                              -----------    -----------
Unrestricted cash and cash equivalents at end of year         $   267,281    $   474,134
                                                              ===========    ===========
Supplemental cash flow disclosures:

   Interest paid                                              $    23,556    $    29,942
                                                              ===========    ===========
   Non-cash financing activities:
     Preferred stock dividends                                $         -    $   131,000
                                                              ===========    ===========

</TABLE>


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

                                                                             F-6

<PAGE>
 
CLINICOR, INC.
Notes to Financial Statements
--------------------------------------------------------------------------------

NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------

         DESCRIPTION OF BUSINESS

         Clinicor, Inc. ("Clinicor" or the "Company") is a contract research
         organization serving companies in the pharmaceutical, biotechnology and
         medical device industries. Clinicor manages, monitors and performs
         clinical trials which are studies of investigational drugs and medical
         devices performed with human patients to support sponsors' applications
         to the Food and Drug Administration and other governmental authorities.
         The Company operates in one business segment.

         BASIS OF PRESENTATION

         On February 27, 1995, Clinicor was merged into a non-reporting publicly
         held, inactive Nevada corporation ("Pegasus") in a reverse merger
         transaction (the "Merger") which has been accounted for as a "pooling
         of interests." The surviving corporation assumed the name Clinicor,
         Inc., and effective January 13, 1997, became a publicly reporting
         company.

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the reported amounts of assets and
         liabilities and disclosure of contingent assets and liabilities at the
         date of the financial statements and the reported amounts of revenues
         and expenses during the reporting period. Actual results could differ
         from those estimates.
         
         CASH, RESTRICTED CASH AND CASH EQUIVALENTS

         Cash and cash equivalents consist primarily of funds invested in short-
         term interest bearing accounts. The Company considers all highly liquid
         investments purchased with initial maturities of three months or less
         to be cash equivalents.
         
         Included in cash, restricted cash and cash equivalents at December 31,
         1996, is a $1,009,840 certificate of deposit pledged as collateral for
         the $1,000,000 revolving line of credit discussed in Note 4. This
         certificate of deposit is excluded from cash and cash equivalents for
         statement of cash flow purposes.

         CONCENTRATION OF CREDIT RISK

         Financial investments which potentially expose the Company to
         concentrations of credit risk, as defined by Statement of Financial
         Accounting Standards No. 105, consist primarily of trade accounts
         receivable.

         The majority of the Company's customer base are large pharmaceutical
         companies. Although the Company is directly affected by the well being
         of the pharmaceutical industry, management does not believe significant
         credit risks existed at December 31, 1996.

         PROPERTY AND EQUIPMENT

         Property and equipment is stated at cost, net of accumulated
         depreciation and amortization. Depreciation is calculated on the 
         double-declining balance method and the straight-line method over the
         estimated useful lives of the assets ranging from five to seven years.
         Repair and maintenance costs are charged to expense as incurred.

                                                                            F-7

<PAGE>
 
CLINICOR, INC.
Notes to Financial Statements
--------------------------------------------------------------------------------

         REVENUE RECOGNITION

         Fixed price contract revenue is recognized using the percentage of
         completion method based upon the ratio of services provided to date
         compared to total services to be provided under each contract. Revenue
         from other contracts is recognized as the services are provided. Losses
         on contracts, if any, are accrued when they become probable.

         Study contracts generally provide for payments based upon the
         achievement of defined benchmarks. Deferred revenue represents amounts
         invoiced prior to rendering the related services while unbilled revenue
         represents the billing value of services rendered prior to being
         invoiced. Substantially all the deferred revenue and unbilled revenue
         will be earned and billed, respectively, within one year.

         DIRECT COSTS

         Direct costs are direct expenses of performing studies, including
         compensation and related benefits for project personnel, investigator
         fees, patient stipends, laboratories, advertising, labor and other
         clinical costs.

         NET LOSS PER COMMON SHARE

         Net loss applicable to common stock per share has been calculated by
         dividing the Company's net loss applicable to common stock by the
         weighted average number of shares of the Company's outstanding common
         stock. Common stock equivalent shares are not included in the per share
         calculations where the effect of their inclusion would be antidilutive.

         INCOME TAXES

         Prior to the Merger, Clinicor was an S Corporation, as defined by the
         Internal Revenue Code (the "Code"), for income tax reporting purposes.
         Pegasus was a C Corporation, as defined by the Code. Subsequent to the
         Merger, the Company became a C Corporation for income tax reporting
         purposes. In accordance with the Code, Clinicor's premerger accumulated
         net operating loss of approximately $500,000 will not be available to
         the Company as a carry-forward to offset future taxable income.

         The Company accounts for income taxes in accordance with Statement of
         Financial Accounting Standards No. 109, "Accounting for Income Taxes"
         ("SFAS 109") under which deferred tax assets and liabilities are
         provided on differences between carrying value for financial reporting
         purposes and tax bases of assets and liabilities using the enacted tax
         rates. A valuation allowance is recognized, if on the weight of
         available evidence, it is more likely than not that some portion or all
         of the deferred tax asset will not be realized.

         RECENT PRONOUNCEMENT

         Effective January 1, 1996, the Company adopted SFAS No. 123,
         "Accounting for Stock-Based Compensation." SFAS No. 123 introduces a
         fair-value based method of accounting for stock-based compensation. It
         encourages, but does not require, companies to recognize compensation
         expense for grants of stock, stock options and other equity instruments
         to employees based on their estimated fair market value on the date of
         grant. The Company has opted to continue to apply the existing
         accounting rules contained in Accounting Principles Board Opinion
         ("APB") No. 25, "Accounting for Stock Issued to Employees." As such,
         SFAS No. 123 did not have any effect on the Company's financial
         position or results of operations.

                                                                             F-8

<PAGE>
 
CLINICOR, INC.
Notes to Financial Statements
--------------------------------------------------------------------------------

         COMPARATIVE INFORMATION

         Certain amounts related to the prior year have been reclassified to
         conform to the current year presentation.

NOTE 2 - ACCOUNTS RECEIVABLE
----------------------------
 
         Accounts receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
                                                 1995          1996
                                               ---------   -----------
         <S>                                   <C>         <C>
         Billed receivables                    $ 383,906   $ 1,145,076
         Unbilled receivables                    249,634       344,479
                                               ---------   -----------
                                               $ 633,540   $ 1,489,555
                                               =========   ===========
</TABLE>
         The Company does not believe an allowance for doubtful accounts is
         necessary at December 31, 1996 or 1995.

NOTE 3 - PROPERTY AND EQUIPMENT
-------------------------------

         Property and equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
 
                                                  1995         1996
                                               ---------   ----------
<S>                                            <C>         <C>
         Computer systems                      $ 153,504   $  549,596
         Leasehold improvements                       -       413,404
         Office equipment                         98,164      331,220
         Medical equipment                        57,717       57,987
                                               ---------    ---------
                                                 309,385    1,352,207
         Less accumulated depreciation
           and amortization                      116,488      233,330
                                               ---------   ----------
                                               $ 192,897   $1,118,877
                                               =========   ==========
</TABLE>
         Depreciation expense was $56,534 and $153,914 for the years ended
         December 31, 1995 and 1996, respectively.

         Included in the December 31, 1995 and 1996 balances of equipment are
         $171,000 and $64,000, respectively, of assets acquired under capital
         leases. Accumulated depreciation of these assets was $63,000 and
         $35,000 at December 31, 1995 and 1996, respectively, and depreciation
         expense was $24,483 and $25,871, respectively, for the years ended
         December 31, 1995 and 1996.

                                                                             F-9

<PAGE>
 
CLINICOR, INC.
Notes to Financial Statements
--------------------------------------------------------------------------------

NOTE 4 - LINE OF CREDIT
-----------------------

         At December 31, 1996, the Company had a $1,000,000 secured revolving
         line of credit with a bank. Interest on the line accrues at the rate
         the bank offers on certificates of deposit for a similar term and
         amount, plus 150 basis points (6.22% at December 31, 1996). The line
         matures on September 30, 1997, and is collateralized by a $1,009,840
         certificate of deposit at December 31, 1996. The Company has drawn
         $850,000 on this line of credit as of December 31, 1996.

NOTE 5 - NOTES PAYABLE TO SHAREHOLDERS
--------------------------------------

         Certain shareholders, including an officer and director, advanced
         $181,000 to the Company during 1995 under the terms of unsecured demand
         notes of the Company. The notes bear interest at 8% and at December 31,
         1996, accrued interest payable in connection with these notes totaled
         $19,217.

NOTE 6 - COMMITMENTS AND CONTINGENCIES
--------------------------------------

         The Company leases office space, computers and other equipment under
         noncancellable operating and capital lease agreements. These leases
         have expiration dates ranging from 1997 through 2001. Rent expense
         under operating leases totaled $71,000 and $81,000 for the years ended
         December 31, 1995 and 1996, respectively. During December 1996, the
         Company leased 21,634 square feet of new office space to house its
         expanding operations.

         Future minimum lease payments under all leases as of December 31, 1996
         were as follows: 
<TABLE>
<CAPTION>
                                      Capital       Operating
                                      Leases          Leases
                                     ---------      ---------
                            <S>      <C>            <C> 
                            1997     $ 14,778       $  366,088
                            1998       13,534          337,862
                            1999        4,231          323,284
                            2000            -          334,101
                            2001            -          344,918
                                     --------       ----------
   Total minimum lease payments        32,543       $1,706,253
                                                    ==========
   Less amount representing interest    4,763
                                     --------
   Present value of net minimum
     lease payments                    27,780
 
   Less current portion of capital
     lease obligations                 11,733
                                     --------
                                     $ 16,047
                                     ========
</TABLE>

                                                                            F-10
<PAGE>
 
CLINICOR, INC.
Notes to Financial Statements
--------------------------------------------------------------------------------

         The Company and an officer and director whom the Company has
         indemnified were involved in a lawsuit brought by a former employer.
         Subsequent to December 31, 1996, this matter was resolved. Amounts
         expended during 1996 relating to the settlement and associated legal
         fees aggregated $243,000.

NOTE 7 - INCOME TAXES
---------------------

         At December 31, 1996, the Company had a net operating loss carryforward
         of approximately $2,300,000 for federal tax purposes. The carryforward
         along with smaller temporary differences including depreciation,
         miscellaneous accruals and deferred compensation result in a deferred
         tax asset of approximately $1,000,000. This asset has been fully
         reserved through a valuation allowance. Due to sales of stock in 1995
         and 1996, the annual utilization of these loss carryforwards will be
         limited under Internal Revenue Code Section 382.

NOTE 8 - PREFERRED STOCK
------------------------

         On July 15, 1996, the Company issued to Oracle Partners, L.P. and
         certain affiliates 3,500 shares of convertible preferred stock, no par
         value (the "Preferred Stock"), for total consideration of $3,500,000,
         which provided the Company net proceeds of $3,180,177 after deducting
         offering costs of $319,823. Included in these offering costs was
         $125,000 of expense to cancel certain preemptive rights held by three
         shareholders. The Preferred Stock carries a liquidation preference of
         $1,000 per share. The Preferred Stock provides for annual cumulative
         dividends, which for a five-year period following issuance are payable
         in kind and which accrue at the rate of 8% per annum. On the fifth
         anniversary of the date of issuance, the dividend rate increases to 10%
         per annum, and the rate thereafter increases by an additional 2% on
         each successive anniversary date. Dividends accruing after the fifth
         anniversary date are payable in cash. On December 31, 1996, the Company
         issued a preferred stock dividend of 131 shares.

         The Preferred Stock is redeemable at the option of the Company at any
         time after July 9, 1998; there is no mandatory redemption. The
         Preferred Stock is convertible into that number of shares of Common
         Stock of the Company as is equal to the liquidation preference of the
         Preferred Stock being converted divided by a "conversion value," which
         is initially $1.50 and which is subject to adjustment if certain events
         occur. No such events had occurred as of December 31, 1996.

         The holders of the Preferred Stock have various additional rights,
         including registration rights, pursuant to the Company's Articles of
         Incorporation, as amended, and pursuant to a Stock Purchase Agreement
         entered into with the holders of the Preferred Stock.

NOTE 9 - COMMON STOCK
---------------------

         The authorized capital stock of the Company consists of 75,000,000
         shares of Common Stock with par value per share of $0.001. At the time
         of the Merger, Pegasus had 1,421,000 shares of Common Stock issued and
         outstanding, of which 750,000 were issued immediately prior to the
         Merger for total proceeds of $750,000. In connection with the Merger,
         Clinicor shareholders converted 100% of Clinicor's 12,500 issued and
         outstanding shares of Common Stock into 2,080,000 new shares of the
         surviving corporation's Common Stock, and the surviving corporation
         changed its name to Clinicor. Immediately subsequent to the Merger, the
         Company had 3,501,000 shares of Common Stock issued and outstanding.

                                                                            F-11
<PAGE>
 
CLINICOR, INC.
Notes to Financial Statements
--------------------------------------------------------------------------------

         PRIVATE PLACEMENT

         Effective September 15, 1995, the Company initiated a private placement
         offering (the "Offering") whereby Units were offered for sale to
         qualified investors at $2.50 per Unit. Each Unit provides the purchaser
         one share of the Company's Common Stock and one Warrant which enables
         Warrant holders the right to purchase one share of the Company's Common
         Stock for every two Warrants exercised at a price of $1.00 per share.
         In addition, the Sales Agent for the Offering received Sales Agent
         Warrants equal to 20% of the number of Units sold. Each Sales Agent
         Warrant provides the holder the right to buy one Unit (as described
         above) at an exercise price of $2.50 per Unit. Through December 31,
         1995, there were 438,000 Warrants and 87,600 Sales Agent Warrants
         outstanding as a result of the offering. The total amount of Warrants
         and Sales Agent Warrants issued in connection with the Offering and
         outstanding at December 31, 1996 was 573,400 and 114,680, respectively.
         The Company has reserved 458,720 shares of Common Stock for future
         issuance in connection with these warrants.

         The exercise period for the Warrants expires September 30, 1998,
         subject to certain rights of the Company to accelerate or delay such
         expiration. The exercise period for the Sales Agent Warrants is three
         years from the date of issuance of the Warrants.

         The Offering was concluded on February 16, 1996. In connection with the
         Offering, the Company sold 573,400 Units for gross proceeds of
         $1,433,500, which provided the Company net proceeds of $1,273,538 after
         deducting Offering expenses of $45,282 and commissions of $114,680, as
         shown in the following table:
<TABLE>
<CAPTION>
                                              Gross    Commission      Net
                                   Units    Proceeds  and Expenses   Proceeds
                                  -------  ---------- ------------  ----------
         <S>                      <C>      <C>        <C>           <C>
         Units sold prior to
         December 31,  1995       438,000  $1,095,000   $131,312    $  963,688
     
         Units sold after
         December 31, 1995        135,400     338,500     28,650       309,850
                                  -------  ----------   --------    ----------
         Total units sold in
         the offering             573,400  $1,433,500   $159,962    $1,273,538
                                  =======  ==========   ========    ==========
</TABLE>
 
         STOCK OPTION PLAN
 
         In December 1994, the Company and the shareholders approved the 1995
         Employees and Consultants Stock Option Plan (the "Option Plan"), which
         provides for the grant of both incentive and non-qualified stock
         options to directors, employees and certain other persons affiliated
         with the Company. The stock options granted under the Option Plan are
         generally granted at the fair value of the Common Stock on the date of
         grant. The terms of each option (including duration of the options,
         which is typically 5 to 10 years, and provisions as to vesting) are
         determined by the Board of Directors at the time of grant and are set
         forth in an option agreement between the Company and the optionee. At
         December 31, 1996, the Company had reserved 2,000,000 shares of Common
         Stock under the Option Plan.

         The Company adopted Statement of Financial Accounting Standards No. 123
         (Accounting for Stock-Based Compensation) effective January 1, 1996 and
         has elected to continue to apply APB No. 25 and related interpretations
         in accounting for the Option Plan. Accordingly, no compensation expense
         has been recognized for option grants made at fair value and containing
         fixed vesting terms. The Company has recorded $195,000 and $609,980 in
         deferred compensation during 1995 and 1996, respectively. This
         compensation is for the fair value of fixed option grants made to
         individuals other than employees and
                                                                            F-12
<PAGE>
 
CLINICOR, INC.
Notes to Financial Statements
--------------------------------------------------------------------------------

         directors and fixed option grants to employees made below fair value,
         as well as performance based stock option grants. This deferred
         compensation is being amortized to income over the vesting period of
         the options and amounted to $45,000 and $535,180 in 1995 and 1996,
         respectively.

         Of the 487,720 options outstanding at December 31, 1996, 212,720 have
         performance based vesting provisions which allow for 108,481 of such
         options to vest anytime after January 1, 1998, if for any previous
         twelve-month period the Company achieves revenues of $12 million or 
         pre-tax earnings of $2 million. The remaining 104,239 of these options
         vest anytime after January 1, 1999, if for any previous twelve-month
         period the Company achieves revenues of $18 million or pre-tax earnings
         of $3 million. In early 1997, the vesting provisions of these options
         were restated to make clear that all of the options that have not
         previously vested will vest on February 27, 2000.

         Had compensation cost of all stock option grants been determined based
         on their fair value at the grant date consistent with the method
         prescribed by SFAS No. 123, the Company's net loss and loss per share
         would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
 
                                          For the Year Ended  For the Year Ended
                                          December 31, 1995    December 31, 1996
                                          ------------------  ------------------
         <S>                     <C>          <C>                 <C>
         Net loss                As reported  $(1,177,226)        $(1,966,196)
                                 Pro forma     (1,281,430)         (1,627,944)
         Net loss applicable to                                
           common stock          As reported   (1,177,226)         (2,097,640)
                                 Pro forma     (1,281,430)         (1,759,388)
                                                      
         Net loss applicable to                                
           common stock per                                     
           share                 As reported        (0.36)              (0.52)
                                 Pro forma          (0.39)              (0.43)
</TABLE>

         The fair value of each option grant is estimated on the date of grant
         using Black-Scholes option pricing model with the following weighted
         average assumptions used for grants in 1995 and 1996:
<TABLE>
<CAPTION>
 
                                                 1995            1996
                                                 ----            ----
              <S>                                <C>             <C>
              Dividend yield                       0%              0%
              Expected volatility                 60%             60%
              Risk-free interest rate            6.9%            6.1%
              Expected life (years)              3.7             5.0
</TABLE>

                                                                            F-13
<PAGE>
 
CLINICOR, INC.
Notes to Financial Statements
--------------------------------------------------------------------------------

         A summary of the status of the Option Plan is presented below at
         December 31:
<TABLE>
<CAPTION>
                                               1995               1996
                                        -------------------  ------------------
                                                  Weighted-          Weighted-
                                                   Average            Average
                                                  Exercise            Exercise 
                                         Shares     Price    Shares     Price
                                        -------------------  ------------------
<S>                                     <C>       <C>        <C>     <C> 
Outstanding, beginning of year                 -    $0.00    427,720     $1.09
Granted:                                                                  
                                                                          
    At market                            329,679     1.25     10,000      1.50
    Below market                         215,000     0.84     50,000      1.00
Exercised                                      -        -          -         -
Canceled                                (116,959)    1.25          -         -
                                        --------             -------      
Outstanding at end of year               427,720     1.04    487,720      1.05
                                        ========             =======      
Options exercisable at                                                    
    year end                              55,000     0.18    173,334      0.76
Weighted-average fair value of         
 options granted during year:          
                                       
    At market                           $   0.50              $0.81
    Below market                        $   1.25              $0.90
</TABLE> 
 
         The following table summarizes information about stock options
         outstanding at December 31, 1996:
<TABLE> 
<CAPTION> 
                                 OPTIONS OUTSTANDING         OPTIONS EXERCISABLE
                            -------------------------------  -------------------
                                      Weighted-                   
                                       Average                             
                                      Remaining   Weighted-           Weighted- 
            Range of                 Contractual   Average             Average  
         Exercise Prices     Number      Life       Price    Number    Price    
                            -------  -----------  ---------  ------   ---------
                                       (Years)
         <S>                <C>      <C>          <C>        <C>      <C> 
         $0.10               50,000     2.24        $0.10     50,000    $0.10
         $1.00 to $1.50     437,720     3.52         1.16    123,334     1.03
                            -------                          -------
                            487,720                          173,334
                            =======                          ======= 
</TABLE>

                                                                            F-14
<PAGE>
 
CLINICOR, INC.
Notes to Financial Statements
--------------------------------------------------------------------------------

NOTE 10 - SIGNIFICANT CLIENTS
-----------------------------

         The Company has had up to five clients who each accounted for more than
         10% of the Company's revenues as follows:
<TABLE>
<CAPTION>
                                                 1995             1996
                                                 ----             ----
                         <S>                     <C>              <C>
                         Client A                27%              13%
                         Client B                 -               17%
                         Client C                 -               23%
                         Client D                11%              11%
                         Client E                19%              11%
                         Client F                12%               7%
</TABLE>

         Additionally, at December 31, 1995 and 1996, certain clients had
         accounts receivable and unbilled revenue balances with the Company
         which represented the following amounts of total net accounts
         receivable and unbilled revenues:
<TABLE>
<CAPTION>
                                                 1995             1996
                                                 ----             ----
                         <S>                     <C>              <C>
                         Client A                39%               -
                         Client B                16%               6%
                         Client C                16%               -
                         Client D                16%              14%
                         Client E                 -               36%
                         Client F                 -               19%
</TABLE>

NOTE 11 - EMPLOYEES' SAVINGS PLAN
---------------------------------

         The Company's 401(k) Savings and Retirement Plan, effective January 1,
         1996, is a defined contribution retirement plan as described in Section
         401(k) of the Internal Revenue Code (the "401(k) Plan"). The 401(k)
         Plan is intended to be qualified under Section 401(a) of the Code. All
         full time employees of the Company are eligible to participate in the
         401(k) Plan after approximately 90 days of employment. The 401(k) Plan
         provides that each participant make elective contributions up to 15% of
         his or her compensation, subject to statutory limits. The Company did
         not make contributions to the 401(k) Plan for the year ended December
         31, 1996.

                                                                            F-15