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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ---------------------
 
                                   FORM 10-K
                             ---------------------
(MARK ONE)
[X]              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
 
                                       OR
 
[ ]            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
            OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
 
        FOR THE TRANSITION PERIOD FROM                TO
 
                         COMMISSION FILE NUMBER 0-21343
                             ---------------------
 
                             MEDICAL ALLIANCE, INC.
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                                             <C>
                    TEXAS                                        73-1347577
       (State of other jurisdiction of                        (I.R.S. Employer
       incorporation or organization)                        Identification No.)
 
        2445 GATEWAY DRIVE, SUITE 150
                IRVING, TEXAS                                       75063
  (Address of principal executive offices)                       (Zip Code)
</TABLE>
 
                             ---------------------
        Registrant's telephone number, including area code: 972-580-8999
 
        Securities registered pursuant to Section 12(b) of the Act: None
 
          Securities registered pursuant to Section 12(g) of the Act:
 
<TABLE>
<CAPTION>
                                                           NAME OF EACH EXCHANGE
             TITLE OF EACH CLASS                            ON WHICH REGISTERED
             -------------------                           ---------------------
<S>                                            <C>
        Common Stock, $.002 par value                     Nasdaq National Market
</TABLE>
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to be
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [ ]
 
     As of February 26, 1999, the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $10,388,213 based
upon the closing price of $2.50 per share on the Nasdaq National Market. As of
February 26, 1999, 6,117,079 shares of the registrant's Common Stock, $0.002 par
value, were issued and outstanding.
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<PAGE>   2
 
                             MEDICAL ALLIANCE, INC.
 
                               TABLE OF CONTENTS
 
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                                                                          PAGE
                                                                          ----
<S>         <C>                                                           <C>
PART I
  Item 1.   Business....................................................    1
  Item 2.   Properties..................................................   11
  Item 3.   Legal Proceedings...........................................   11
  Item 4.   Submission of Matters To A Vote of Security Holders.........   11
PART II
  Item 5.   Market For Registrant's Common Stock and Related Stockholder
            Matters.....................................................   12
  Item 6.   Selected Financial Data.....................................   13
  Item 7.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations...................................   14
  Item 8.   Financial Statements and Supplementary Data.................   19
  Item 9.   Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure....................................   19
PART III
  Item 10.  Directors and Executives of Company.........................   20
  Item 11.  Executive Compensation......................................   22
  Item 12.  Security Ownership of Certain Beneficial Owners and
            Management..................................................   24
  Item 13.  Certain Relationships and Related Transactions..............   26
PART IV
  Item 14.  Exhibits, Financial Statements Schedules, and Reports on
            Form 8-K....................................................   26
</TABLE>
 
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                                     PART I
 
ITEM 1. BUSINESS
 
GENERAL
 
     Medical Alliance, Inc. (the "Company or "Medical Alliance") provides a
complete range of services used to create temporary surgical environments in
hospitals, surgery centers and physician offices in 42 states. The Company
believes it is the leading provider of physician office based services in the
United States. The Company's services allow physicians to perform an increasing
number of established surgical procedures in the physician's office. These
services include:
 
     - Providing on-site technical personnel and medical equipment on a
       scheduled basis;
 
     - Monitoring and documenting preoperative, intraoperative and postoperative
       procedures;
 
     - Returning the surgery site to its pre-procedure condition;
 
     - Establishing procedural safety and quality assurance protocols for
       procedures;
 
     - Facilitating physician training and qualification; and
 
     - Physician credentialing pursuant to contracts with managed care
       organizations.
 
     The Company's services benefit payors, physicians and patients by lowering
costs for surgical procedures, increasing physician productivity, broadening
access to advanced medical technologies and improving patient satisfaction.
 
     The Company is a leader in facilitating the migration of established
surgical procedures and the latest advanced medical technologies from hospitals
and outpatient surgery centers to a lower-cost setting, the physician's office.
An increasing number of minimally invasive procedures are being performed with
local anesthesia in physicians' offices using technologically advanced medical
equipment. The Company currently maintains a network of approximately 3,000
physicians who have utilized the Company's services and has 164 managed care
contracts that in aggregate cover approximately 76 million lives. Currently,
physicians in the Company's network perform over 6,000 procedures monthly using
the Company's services.
 
     The Company provides its services along two primary business lines: medical
surgical and aesthetic elective services. The Company's medical surgical
services allow physicians to perform approximately 25 different office-based
surgical procedures across numerous specialties, including gynecology, podiatry,
urology and otolaryngology. The Company's aesthetic elective services are
utilized primarily by plastic surgeons and dermatologists for laser procedures
such as skin resurfacing, vascular and pigmented lesion treatment, and tattoo
removal. The Company is generally reimbursed for providing its medical surgical
services by third-party payors, including through its contracts with managed
care organizations, and is paid directly by patients for any required copayments
and deductibles. For providing its aesthetic elective services, the Company is
generally paid directly by patients or physicians. None of the Company's net
revenues are derived from Medicare or Medicaid reimbursement.
 
     On October 17, 1996, the Company consummated its initial public offering
(the "IPO") of 2,000,000 shares (and an additional 300,000 shares in connection
with the exercise of the underwriter over-allotment option on November 11, 1996)
of the common stock, par value $.002 per share (the "Common Stock") of the
Company.
 
RECENT DEVELOPMENTS
 
     On February 18, 1999, the Company, Diagnostic Health Services, Inc. ("DHS")
and a wholly-owned subsidiary of DHS ("Sub") entered into an Agreement and Plan
of Merger (the "Merger Agreement"), pursuant to which Sub will merge with and
into the Company, resulting in the Company becoming a wholly-owned subsidiary of
DHS (the "Merger"). Under the terms of the Merger Agreement, holders of the
Company's Common Stock will receive 1.57 shares of DHS common stock for each
share of the Company's Common Stock held. In connection with the execution of
the Merger Agreement, members of the Boards of
 
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Directors of the Company and DHS, in their capacities as shareholders,
(individually and on behalf of their affiliates), entered into a Voting
Agreement pursuant to which they agreed to vote their shares of capital stock in
favor of this transaction.
 
     The Merger, which is expected to be accounted for as a
pooling-of-interests, is subject to various conditions precedent, including
without limitation, approval by the shareholders of both companies and various
state and federal regulatory agencies. Closing of this transaction is expected
to occur by the end of the second quarter of 1999.
 
MARKET OVERVIEW
 
     Medical Surgical. The continued increase in health care costs at a rate
significantly higher than that of overall inflation has caused managed care
companies, indemnity insurers, government agencies and other payors to employ a
variety of strategies designed to reduce the cost and control the utilization of
health care services. In particular, payors have created incentives for health
care providers to deliver high-quality health care services in lower cost
settings. Initially, numerous surgical, diagnostic and other medical procedures
that were traditionally performed in a hospital were transferred to an
outpatient setting, predominantly the outpatient section of a hospital or an
ambulatory surgery center. In continuation of this trend, many established
procedures that are performed in an outpatient setting can now be transferred to
the physician's office because such procedures can be performed at a lower cost
and without the risk of general anesthesia while maintaining the quality of
care. The transfer of such procedures to the physician's office has continued to
accelerate as a result of: (i) the introduction of advanced medical technology
that reduces anethesia requirements and allows physicians to perform a broader
array of office-based procedures, (ii) the development of training programs and
clinical protocols for office-based procedures, and (iii) the patient's desire
to undergo procedures in a more comfortable setting, with reduced risk, pain and
recovery time. The migration of such procedures to the physician's office
benefits payors, providers and patients through lower procedure costs (as
compared to similar procedures performed in a hospital or outpatient surgery
center), increased provider productivity, broader access by physicians and
patients to advanced technologies and treatments, and an increased level of
patient satisfaction.
 
     Aesthetic Elective. The Company believes that the number of aesthetic
elective procedures performed annually in the United States will continue to
grow, primarily due to the development of new technologies for cosmetic
procedures, increased public awareness, shorter recovery times and the aging of
the "baby boom" generation. According to the American Academy of Cosmetic
Surgery Survey, approximately 2.7 million cosmetic procedures were performed in
the United States in 1994. The Company believes that a majority of such
procedures are or can be performed in a physician's office. According to the
American Society of Plastic and Reconstructive Surgeons Survey, patients between
the ages of 35 and 50 represented 41% of the cosmetic procedures performed in
the United States in 1994, and the number of people who say they approve of
cosmetic surgery, either for themselves or others, has increased 50% in the last
decade. According to the ASPRS Survey, approximately 36% of the cosmetic
procedures performed in 1994 were performed in a physician's office. The Company
believes that the vast majority of the aesthetic procedures are performed in an
outpatient setting and that such procedures will increasingly be transferred to
physician's offices. The benefits derived from performing aesthetic procedures
in an office-based setting are similar to those associated with medical surgical
procedures, and include lower procedure costs, increased provider productivity,
broader access by physicians and patients to advanced technologies and
treatments, and an increased level of patient satisfaction.
 
BUSINESS STRATEGY
 
     The Company's goal is to enhance its position as a provider of services to
the emerging market for physician office-based procedures. The Company intends
to achieve its goal by employing four primary strategies:
 
     Increasing Utilization of the Company's Services in Existing Markets. The
Company plans to expand by facilitating the transfer of an increasing percentage
of outpatient procedures to a physician's office where the
 
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Company's services may be utilized. The Company intends to achieve such
expansion through: (i) marketing efforts designed to cause existing network
physicians to transfer more outpatient procedures performed by them to their
offices, (ii) the expansion of the Company's physician network, either through
ongoing marketing efforts or the acquisition of mobile medical equipment
providers that maintain relationships with physicians, (iii) the provision of a
full range of applicable services to all physicians in its network and (iv) the
introduction of new services and technologies which will enable additional
procedures to be performed in a physician's office. In addition, the Company
plans to increase the services which are eligible for reimbursement under its
existing managed care contracts and to assist in the establishment of incentives
and/or mandates by payors for their network physicians to perform office-based
procedures using the Company's services.
 
     Expanding the Company's Operations into New Markets. The Company employs a
two-phase strategy to enter new markets. In the initial phase, the Company
offers aesthetic elective services (which are paid for directly by patients or
physicians) while establishing a network of physicians who utilize such
aesthetic elective services and seeks to develop relationships with local
managed care organizations for the provision of medical surgical services. This
initial phase may include acquisitions. In the second phase, the Company
negotiates managed care contracts and introduces its medical surgical services
to such managed care payors' network physicians and seeks to expand the network
of physicians using its medical surgical services. In some cases, the Company
will also seek to capitalize on its managed care relationships in existing
markets by gaining access to such payors' covered lives in markets not currently
served by the Company. This two-phase expansion strategy allows the Company to
utilize a single infrastructure to support both business lines and use cash flow
generated from aesthetic elective services to offset the relatively higher costs
associated with establishing reimbursement of medical surgical services under
third-party payor contracts.
 
     Continuing the Development of Managed Care Contracts. The Company is
designated as a preferred provider for medical surgical services in 164 payor
contracts, including contracts with health plans owned by United HealthCare
Corporation, Prudential Healthcare, CIGNA Healthcare and Blue Cross Blue Shield
entities in seven states, which contracts cover in aggregate approximately 76
million lives. The Company plans to establish additional contractual
relationships with managed care organizations and other third-party payors as a
preferred or mandated provider to physicians of office-based surgical services.
As a preferred provider, the Company negotiates a pre-determined fee schedule
for its services and obtains enhanced access to the payor's physician network in
order to market its services directly to such physicians. The Company believes
that payors contract with the Company because the Company's services provide a
turn-key solution that assists payors in transferring established surgical
procedures to a lower cost setting while maintaining the quality of care.
 
     Establishing Strategic Alliances with Medical Equipment Manufacturers. The
Company has strategic alliances with manufacturers and distributors of medical
equipment that enable it to provide advanced medical technology to physicians
while reducing the risk of ownership to the Company. The Company believes
manufacturers often encounter significant challenges in selling sophisticated
medical equipment to physicians. Physicians are generally reluctant to purchase
such medical equipment because: (i) physicians generally are not able to ensure
sufficient procedure volume to recover the cost of acquiring, using and
maintaining the equipment, (ii) physicians generally do not want to assume the
risk of technological obsolescence, and (iii) such equipment is generally
available to them through hospitals, outpatient surgery centers and mobile
medical equipment providers. The manufacturers benefit from the Company's
ability to introduce new technology to a large number of physicians in a short
period of time thereby increasing the rate of acceptance for the technology.
 
SERVICES PROVIDED BY THE COMPANY
 
     The Company offers a complete range of services used to create temporary
surgical environments in physicians' offices. The Company facilitates the
migration of established outpatient procedures and advanced
 
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<PAGE>   6
 
medical technologies to physicians' offices by providing a broad array of
services which enables physicians to provide high quality, cost-effective
medical care in their offices. The Company's services include the following:
 
     On-Site Technical Personnel. The Company provides on-site technical
personnel who create the temporary surgical environment in a physician's office,
assist the physician in the set-up and operation of medical equipment, and are
present during, and document relevant aspects of, the office-based procedure.
The Company provides training to its field technicians, including intensive
classroom instruction and hands-on training covering various technical and
clinical aspects of office-based procedures as well as the Company's surgical
services.
 
     Provision of On-Site Medical Technology. The Company provides medical
technology and services that include all of the necessary medical equipment and
related instruments, accessories, disposable supplies and technical support for
the Company's network physicians to perform certain office-based procedures. The
Company has organized its field units into the four configurations listed below,
the first two of which are used to provide medical surgical services and the
third of which is used to provide aesthetic elective services while the fourth
is used to provide hospital based services.
 
     Office Based Surgical Unit. The Office Based Surgical Unit may be
configured utilizing the following technologies: CO2 laser, flashlamp pulsed dye
laser, endometrial ablation controller unit, electrosurgical generator, hospital
grade smoke evacuator and related instruments and accessories. This equipment is
used to perform procedures in gynecology, podiatry, urology and otolaryngology.
As of December 31, 1998, the Company had 72 Office Based Surgical Units in
service.
 
     Office Based Endoscopy Unit. The Office Based Endoscopy Unit may be
configured utilizing the following technologies: medical digital camera system,
video monitor, printer and recorder, CO2 and fluid insufflation, related
instruments and accessories, and one of the following endoscopes: hysteroscope,
laparascope or arthroscope. This equipment is used to perform procedures in
gynecology and podiatry. As of December 31, 1998, the Company had 16 Office
Based Endoscopy Units in service.
 
     Office Based Aesthetic Unit. The Office Based Aesthetic Unit may be
configured utilizing the following technologies: KTP/532 laser, Q-Switched
Nd:YAG laser, flashlamp pulsed dye laser, UltraPulse CO2 laser, Erbium Yag laser
and Versapulse laser and related instrumentation and accessories. This equipment
is used to perform procedures in plastic surgery and dermatology. As of December
31, 1998, the Company had 126 Office Based Aesthetic Units in service.
 
     Hospital Based Mobile Unit. The Hospital Based Mobile Unit may be
configured utilizing the following technologies: Laser Lithotripter, Holmium Yag
laser and Ultrasonic Surgical Aspirator and related accessories. This equipment
is used to perform procedures in urology, orthopedics and neurology. As of
December 31, 1998, the Company had 5 Hospital Based Mobile Units.
 
     The physician's office simply contacts the Company to schedule the
procedure for a specific date and time. Then, the Company preregisters the
patient and, if necessary, begins verifying insurance coverage and obtaining any
necessary pre-certifications.
 
     On the day of surgery, the Company sends either an Office Based Surgical
Unit (for gynecological, podiatric, urological, and otolaryngological
procedures), an Office Based Endoscopy Unit (for minimally invasive
gynecological and podiatric procedures), an Office Based Aesthetic Unit (for
cosmetic surgeries and dermatological and podiatric procedures), or a Hospital
Based Mobile Unit. Each Unit is staffed by an experienced technician who
converts a room in the physician's office into a temporary surgical setting
according to recognized clinical protocols. The physician is required to inspect
the set-up and to test and accept all equipment before using it. During the
procedure, the Company's technician remains with the physician to ensure that
the technology functions correctly and that all equipment protocols are
followed. Then, after the procedure, the technician again follows clinical
protocols to return the room to its previous condition or to prepare it for the
next procedure.
 
     Procedure Monitoring and Documentation. The Company's on-site technical
personnel are present during, and document relevant aspects of, the office-based
procedures, including information regarding
 
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disposables consumed, sterilization procedures performed and adherence to the
Company's established guidelines and standards, including preoperative,
intraoperative and postoperative instructions.
 
     Establishment of Procedural Safety and Quality Assurance Protocols. The
Company has established procedural safety and quality assurance protocols and
standards for the use of its surgical services in physicians' offices that are
set forth in its Quality Protocol, Standards and Guidelines. The Company
utilizes this manual to assist managed care organizations in documenting the
Company's operations to satisfy accrediting organizations' requirements. The
Company's standard field operating procedures include Occupational Safety and
Health Administration safety procedures incorporating the use of personal
protective equipment and sterilization of equipment and provide step-by-step
preoperative, intraoperative and postoperative instructions. The Company
recognizes that there is an absence of documented office-based procedures and
clinical protocols in the physician marketplace, as well as methods for
measuring and documenting compliance therewith. The standards established by the
Company from review of nationally recognized guidelines and standard of care for
hospitals and ambulatory surgery centers serve as guidelines to assist
physicians in satisfying quality requirements set by managed care organizations
and accrediting authorities, as well as in complying with applicable government
regulations and manufacturers' specifications. Accreditation from JCAHO or a
similar independent body has never been sought by the Company. No model for
review currently exists through any accreditation body. However, the Company
plans to develop such a model and seek approval in the future.
 
     Physician Training Seminars. The Company conducts seminars to train
physicians and their staff in the use of medical equipment and related
technology provided by the Company through its services and receives a fee from
physicians for attending such seminars. Since 1993, approximately 4,000
physicians have participated in approximately 250 of the Company's seminars. The
Company developed and introduced its physician training seminars in response to
the high demand for physician training created by the introduction of new
medical technology. The Company retains highly qualified physician faculty to
conduct these seminars, which present such topics as medical laser physics and
safety, light and tissue interaction, clinical applications and treatment
parameters, and include procedure demonstrations, as well as hands-on laboratory
sessions. Physician participants in the Company's seminars generally receive a
peer reference manual, video tapes, patient awareness and marketing information,
and a certificate that documents completion of the Company's training seminar.
 
     Physician Credentialing. The Company performs physician credentialing on
behalf of managed-care payors, utilizing standards established by its Medical
Director which are based upon standards generally recognized by the medical
profession. The Company's services are offered only to those practitioners who
have provided documentation of certified training and/or competence relevant to
the procedures to be performed, including use of the technology provided in
conjunction with such services. For certain procedures, the Company requires
physicians to maintain hospital or surgery privileges relative to such
procedures, including the use of any technology for performance thereof.
Physician credentialing information is maintained by the Company and reviewed
periodically by the Medical Director and other key personnel.
 
     Aesthetic Surgery Network ("ASN"). The Company's objective of the Aesthetic
Surgery Network is to provide to subscribers of benefit plans access to a
credentialed quality network of plastic surgeons and dermatologists that will
offer the latest treatment options and a discount for covered cosmetic elective
procedures that are not typically covered by health insurance. The various
procedures performed by ASN physicians will include laser treatment involving
facial wrinkles, birthmarks, port wine stains, tattoos and skin lesions.
 
REIMBURSEMENT AND PAYMENT
 
     For its services, the Company charges fees that are payable by either the
patient, the physician, a managed care organization or an indemnity insurance
company. For medical surgical services rendered by the Company pursuant to a
contract with a managed care organization, the Company bills the managed care
payor based upon a pre-determined fee schedule. For medical surgical services
that are reimbursed under an indemnity plan, the Company generally bills and
collects 20% of the Company's charges from the patient at
 
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the time services are rendered and bills the patient's insurance indemnity
carrier for the remaining balance. For aesthetic elective services, generally
the Company charges on a per-case basis and its fees are payable by the patient
or physician. None of the Company's net revenues is derived from Medicare or
Medicaid reimbursement.
 
SALES AND MARKETING
 
     The Company currently operates in 42 states. The Company has divided its
service area into six regions ("Regions") encompassing an aggregate of 18
districts ("Districts"). The Company maintains an office in each District. Each
Region is managed by a Regional Vice President or Regional Manager who is
responsible for meeting the Company's sales and operational objectives within
his or her Region(s).
 
     Within most Districts, the Company employs a District Manager, a District
Operations Manager, a District Sales Representative and one or more field
technicians. The District Manager is responsible for the overall development of
the market. The District Operations Manager is responsible for operations
management and daily operations within the field operations. District Sales
Representatives are designated to oversee the marketing and development of a
particular product line or specialty focus within their respective designated
geographic area. Field technicians specialize in a particular clinical and/or
technical area within their respective designated geographic area and are
assigned office based field units for use in their assigned specialties.
 
SUPPLIERS OF MEDICAL TECHNOLOGY
 
     In conjunction with its other services, the Company offers a wide range of
medical technology for use in performing office-based procedures. Such medical
technology is obtained directly from manufacturers and distributors of medical
equipment. Prior to obtaining any medical equipment, the Company performs
extensive research on existing and developing medical technology in order to
determine the optimal equipment to acquire. In order to enhance its access to
medical technology, the Company seeks to establish strategic alliances with
manufacturers and distributors of medical equipment generally during the
development stage of a selected product. Such strategic alliances may include
agreements based upon per-procedure or other revenue sharing arrangements. In
certain circumstances, the Company may seek to become the exclusive mobile
provider for a certain technology.
 
INFORMATION SYSTEMS
 
     In 1995 the Company began implementation of an information system that
includes a wide area network to link its Districts to its corporate office and
information databases. The system is decentralized and allows for data
acquisition by field personnel within each District and maintenance of all data
captured at a central corporate database that is accessible on a real-time
basis. The Company has completed the first five of six implementation phases
which included the installation of a network driven by multiple file servers, an
in-house voice mail system, software to link the Districts to the corporate
billing and collection system, the installation of portable computers to all
field personnel, and implementation that included the integration of the
Company's general ledger and financial reporting systems. The last phase is
related to the installation of an electronic data storage system which will be
completed after the Year 2000 issues and concerns are fully addressed. See Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance.
 
GOVERNMENT REGULATION
 
     The health care industry is subject to extensive federal and state
regulation of physicians, other health care providers, managed care
organizations and other third-party payors. Health care regulation affects the
Company's operations both directly and indirectly. Many states require
regulatory approval, including certificates of need, before establishing or
expanding certain types of health care facilities or offering certain health
care services. Several states in which the Company operates prohibit the
corporate practice of medicine except by professional medical corporations or
associations. The Company provides only nonphysician services
 
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and does not exercise influence or control over the practice of medicine by the
physicians to whom it provides its services. In addition, the laws of many
states prohibit physicians from splitting fees with non-physicians, and some
states have promulgated statutes that prohibit the solicitation, payment,
receipt or offering of any direct or indirect remuneration for referral of
patients and that prohibit referrals by physicians for designated health
services to entities with which they have a financial relationship. The Company
believes that its current and planned activities are in material compliance with
applicable laws and regulation as currently interpreted. There can be no
assurance, however, that a review of the Company's business by courts or
regulatory authorities will not result in a determination that could adversely
affect the operations of the Company. In addition, there can be no assurance
that the regulatory environment in which the Company operates will not change
significantly in the future, which change could adversely affect the Company's
operations, financial condition, business opportunities or future expansion.
 
     The manufacturers of medical devices utilized by the Company are subject to
extensive regulation by the FDA. Failure of the manufacturer of such devices to
comply with FDA regulations could result in the loss of approval by the FDA of
such medical devices. In addition, physicians in the Company's network are
subject to significant federal and state regulation. The ability of the Company
to operate profitably will depend in part upon its network physicians, the
manufacturers of its medical devices and its third-party payors obtaining and
maintaining all necessary licenses, certificates of need and other approvals,
and operating in compliance with applicable health care regulations.
 
     The Company's services involve the handling of chemical and biological
substances and regulated waste materials, some of which may be considered
contaminated, hazardous or toxic. The Company is subject to state and federal
laws that regulate labor and environmental matters such as the handling and
disposal of regulated medical wastes, the release of pollutants and contaminants
into the air and water, and the protection of employees who may be exposed to
blood or other potentially infectious materials including those which may
contain bloodborne pathogens such as hepatitis B virus. The Company is also
subject to federal and state laws relating to business conduct and general
employee matters. The Company believes that it is in material compliance with
applicable laws.
 
COMPETITION
 
     The Company competes with companies that offer medical equipment to
physicians' offices on either a rental or a fee-for-service basis and with
hospitals and surgery centers that provide comparable surgical services. The
Company also competes with other providers in the health care industry for
access to technology, relationships with third-party payors and relationships
with physicians. The Company believes the trend toward managed care could
increase the competition to obtain contracts with third-party payors. The health
care industry is highly competitive and is subject to continuing changes in the
manner in which such services are provided and the manner in which providers are
selected and paid. Some of the Company's competitors have substantially greater
financial and other resources than the Company. In addition, competitors of the
Company could obtain exclusive rights to provide mobile surgical services for
products that the Company currently offers or expects to offer.
 
     The market for aesthetic elective services is highly competitive. The
Company believes that the heightened interest in aesthetic procedures among
physicians and patients, the development of advanced medical technologies to
perform aesthetic procedures and the industry practice of requiring immediate
cash payment for such services will create increased competition in this
segment. Competition in the provision of medical surgical services may also
increase because these services are becoming more accepted by physicians,
patients and third-party payors and the medical equipment used in providing such
services is readily available from various sources.
 
     The Company believes that competition in the provision of services to
create temporary office-based surgical environments is based on the price,
quality, breadth and availability of services. The Company considers its
comprehensive high quality services, trained on-site technical personnel, "per
case" billing for certain services and strategic relationships with payors and
medical device manufacturers to be important factors in enabling it to compete
effectively. The Company believes that it is the only national provider of
 
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medical surgical services for use in performing office-based procedures that has
developed contracts with managed care organizations.
 
INSURANCE
 
     The Company maintains professional, general and product liability insurance
in amounts deemed appropriate by management. The Company carries an aggregate of
$10 million of general and public liability insurance coverage, which covers
premises, operations and product liability, and a $2 million professional
liability insurance policy.
 
EMPLOYEES
 
     As of December 31, 1998, the Company had 149 employees, including 99
employees in field operations.
 
FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
 
     This Form 10-K contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of the Company's
management as well as assumptions made by and information currently available to
the Company's management. When used in this document, the words "anticipate,"
"believe," "estimate," "should," and "expect" and similar expressions as they
relate to the Company or management of the Company are intended to identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events and are subject to certain risks,
uncertainties and assumptions, including the risk factors described in the
Company's most recently filed registration statement. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated or expected. The Company does not intend to
update these forward-looking statements.
 
     Uncertainty of Market Acceptance. There can be no assurance that any of the
Company's existing or future services will gain or maintain market acceptance
among physicians, patients and third-party payors. The Company believes that
market acceptance of office-based procedures, including those performed using
the Company's services, depends upon various factors including: (i) the
Company's ability to provide evidence to the medical community of the safety and
efficacy of the office-based procedures and the corresponding benefits to
payors, physicians and patients, (ii) the willingness of physicians to perform
and patients to undergo procedures in the physician's office which have
traditionally been performed in a hospital or outpatient facility, (iii) the
willingness of physicians to perform and patients to undergo procedures under
local rather than under general anesthesia, (iv) the willingness of physicians
to utilize the Company's services rather than perform office-based procedures
utilizing their employees and medical equipment, and (v) the continued
availability of third-party reimbursement for certain procedures performed using
the Company's services.
 
     Acquisition, Obsolescence and Regulation of Advanced Technology. The
Company's future success will depend in large part on the Company's ability to
provide advanced medical technology to physicians. The medical device industry
is characterized by rapid and significant technological change. The acquisition
of medical technology requires substantial expenditures, and there can be no
assurance that the Company will be successful in identifying, acquiring and
receiving timely delivery of technology for which sufficient demand will exist
and that such technology will not become obsolete during its anticipated product
life cycle. Currently, there are alternative technologies to those offered by
the Company. Such technologies may gain broader market acceptance, which could
have a material adverse effect on the Company's operating results or financial
condition. There can be no assurance that the company's strategy to obtain
medical technology through relationships with medical equipment manufacturers
and distributors will be successful or, if successful, that such relationships
can be maintained. In addition, the medical equipment utilized by the Company
requires approval by the Food and Drug Administration (the "FDA"), and there can
be no assurance that such medical equipment will receive or retain FDA approval
for desired current and future applications. The loss of any FDA approval for
such equipment could have a material adverse effect on the Company's operating
results or financial condition, as the Company would be unable to utilize such
equipment
 
                                        8
<PAGE>   11
 
in the provision of its services. Furthermore, the medical equipment industry
has been characterized by extensive litigation regarding patents and other
intellectual property rights. There can be no assurance that manufacturers or
distributors of medical equipment utilized by the Company will obtain or retain
patents or other intellectual property rights related to the equipment used by
the Company. See "-- Regulation of and Change in the Health Care Industry" and
"Business -- Business Strategy -- Establishing Strategic Alliances with Medical
Equipment Manufacturers."
 
     Uncertainty of Acquisitions. The Company's strategy has included and will
continue to include growth through acquisitions. There can be no assurance that
the Company will be able to successfully identify, complete or integrate any
acquisition. In addition, there can be no assurance that any future acquisition
will not have a material adverse effect upon the Company's operating results or
financial condition, particularly during the period in which the operations of
the acquired business are being integrated into the Company. Furthermore, the
Company's ability to make acquisitions may depend upon its ability to obtain
financing, and there can be no assurance that financing will be available to the
Company on acceptable terms, or at all.
 
     Competition. The market for aesthetic elective services is highly
competitive due to: (i) low barriers to entry, (ii) low capital requirements,
and (iii) high profitability. Currently, the Company believes its competition is
primarily comprised of small, locally based equipment rental companies.
Competition in the provision of medical surgical services may also increase
because these services are becoming more accepted by physicians, patients and
third-party payors and because the medical equipment used in providing such
services is readily available from various sources. The Company competes with
companies that offer medical equipment to physicians' offices on either a rental
or a fee-for-services basis, and with hospitals and surgery centers that provide
comparable surgical services. The Company also competes with other providers in
the health care industry for access to technology, relationships with
third-party payors and relationships with physicians. Any of these competitors
may have greater financial and other resources than the Company. The health care
industry is highly competitive and is subject to continuing changes in the
manner in which health care services are provided and the manner in which
providers are selected and paid. There can be no assurance that competition will
not adversely affect the Company's operating results or its ability to maintain
or increase net revenues.
 
     Reimbursement Risk. The Company generally receives payment directly from
the patient or physician for its aesthetic elective services. In those instances
where payment is not received at the time of the service, the Company will
invoice the responsible party. If the invoice is not paid, the account is
subject to write-off as an uncollectible account. The Company relies almost
exclusively on third party payors for payment for its medical surgical services.
If the claim is invoiced to a noncontracted payor, (i.e., a noncontracted
managed care plan or an indemnity plan), the claim is subject to denial by the
payor. Denial of reimbursement may occur, among other reasons, because of the
claim examiner's lack of understanding regarding the Company's services or the
lack of a contractual arrangement with a managed care company. To the extent any
third party payor ultimately fails to recognize or accept Company's services as
being reimbursable, the Company may not be able to collect fees for its
services. In addition, the health care industry is experiencing a trend toward
cost containment, and third-party payors are seeking to reduce the cost and
control the utilization of health care services and to negotiate reduced payment
schedules with service providers. Reduced payment schedules could result in
lower revenues for the Company. There can be no assurance that the Company will
be able to negotiate satisfactory arrangements with managed care organizations
or other third-party payors under such conditions, or at all. See
"Business -- Business Strategy -- Continuing the Development of Managed Care
Contracts."
 
     Dependence on Key Personnel. The Company's future performance is
substantially dependent upon the continued services of its senior management and
other key personnel. Because the Company has a relatively small number of
employees, its dependence on retaining its employees is particularly
significant. The Company's success will depend, in part, on its ability to
attract and retain qualified management and professional personnel. In addition,
there can be no assurance that the Company's current employees will continue to
work for the Company. The loss of the services of one or more of the Company's
key employees could adversely affect the Company's operating results or
financial condition. Further, the Company's growth in revenue has resulted, to a
significant degree, from the hiring and training of new field personnel. The
                                        9
<PAGE>   12
 
Company's continued growth will depend, in part, on its ability to attract and
retain high quality field and other personnel. The Company may need to grant
additional stock options to key employees and to provide similar or other forms
of incentive compensation to attract and retain key personnel.
 
     Fluctuations in Quarterly Results; Volatility of Stock Price. The Company's
quarterly revenues and operating results have varied significantly in the past
and may continue to do so in the future. As a result, the Company's stock price
may by subject to significant volatility, particularly on a quarterly basis.
Quarterly revenues and operating results will depend upon, among other factors:
(i) seasonal demand for the Company's services, (ii) the timing of new service
introductions by the Company, (iii) the timing of regulatory and third-party
reimbursement approvals, (iv) the timing of acquisitions or entry into new
markets, and (v) the timing of expenditures for medical equipment. A shortfall
in revenues from anticipated levels, changes in general conditions in the
economy or the health care industry, or other developments affecting the Company
or its competitors, could cause the market of the Common Stock to fluctuate
substantially.
 
     Regulation of and Change in Health Care Industry. The health care industry
is subject to extensive federal and state regulation. The Company's services
generally are not directly subject to health care rules or regulations, although
such rules and regulations apply to the equipment provided to physicians by the
Company and to the medical personnel utilizing the Company's services and
products and therefore may indirectly affect the Company's business. In
addition, promulgation of new laws and regulations, or changes in or
reinterpretations of existing laws or regulations, may directly or indirectly
affect the Company's business, operating results or financial condition.
Further, the Company's services involve the handling of chemical and biological
substances, thereby subjecting the Company to certain labor and environmental
regulations. See "-- Hazardous Materials." There can be no assurance that a
review of the Company's operations by courts or regulatory authorities will not
result in a determination that could adversely affect the operations of the
Company.
 
     The manufacturers of medical equipment utilized by the Company are subject
to extensive regulation by the FDA. Failure of such manufacturers to obtain FDA
approval for new technologies which the Company wishes to offer may adversely
affect the Company's plans for future expansion. In addition, failure of medical
equipment manufacturers to comply with FDA regulations could result in the loss
of approval by the FDA of medical equipment utilized by the Company, which could
adversely affect the Company's operating results or financial condition.
 
     Subject to certain statutory exceptions, physicians who have a financial
relationship with an entity providing health services are prohibited by federal
law (the "Stark II Legislation") from referring or admitting patients to that
entity for the furnishing of certain designated services reimbursable under
Medicare or Medicaid, as well as certain other federally assisted state health
care programs. Possible sanctions for violations for the Stark II Legislation
include civil monetary penalties, exclusion from the Medicare and Medicaid
programs, and forfeiture of all amounts collected in violation of such
prohibition. Federal law generally prohibits certain activities under Medicare
and Medicaid programs (the "Fraud and Abuse Statutes"). Violations of
anti-kickback legislation are felonies punishable by monetary fines, civil and
criminal penalties and exclusion from participation in Medicare or Medicaid
programs. Several states in which the Company operates prohibit the corporate
practice of medicine except by professional medical corporations or
associations. Several states in which the Company operates also prohibit
physicians from splitting fees with non-physicians. Although the Company has
attempted to structure its business relations with physician groups to comply
with the Stark II Legislation, the Fraud and Abuse Statutes, and the state
corporate-practice-of-medicine and fee-splitting laws, there can be no assurance
that such laws will ultimately be interpreted in a manner consistent with the
Company's practices or that other laws or regulations will not be enacted in the
future which could have a material adverse effect on the Company's operating
results or financial condition.
 
     While the Company does not currently derive any of its net revenues from
Medicare or Medicaid programs, and therefore it is not subject to such federal
legislation, there can be no assurance in the future that: (i) future
legislation may not be expanded to include health care services other than those
subject to Medicare or Medicaid reimbursement, (ii) the Company will not derive
net revenues from Medicare or
 
                                       10
<PAGE>   13
 
Medicaid reimbursements, or (iii) managed care providers with which the Company
has contracts will not contract with Medicare or Medicaid.
 
     Certain of the states in which the Company currently operates or may
operate in the future have laws which prohibit physicians who have financial
relationships with an entity that provides health care services from referring
patients to that entity and that prohibit arrangements which provide
remuneration to physicians in order to induce the referral of business. Possible
sanctions for violation of these laws include civil monetary penalties,
forfeiture of amounts collected in violation of such laws and the requirement
that the Company discontinue the prohibited activity. Although the Company
believes it has structured its existing business relations with physician groups
to comply with these laws, there can be no assurance that such laws will be
interpreted in a manner consistent with the Company's practices. Such laws in
states where the Company may conduct operations in the future could prohibit the
Company from structuring its business relations with physician groups in the
same manner in which it conducts its current operations. Accordingly, such
prohibitions could adversely affect the future growth of the Company.
 
     In addition, there can be no assurance that the regulatory environment in
which the Company operates will not change significantly in the future, which
change could adversely affect the Company's operations, financial condition,
business opportunities or future expansion. As consolidation among physician
provider groups continues and provider networks continue to be created,
purchasing decisions may shift to persons with whom the Company has not had
prior contact. There can be no assurance that the Company will be able to
maintain its physician, payor or manufacturer relationships under such
circumstances. See "Risk of Acquiring Advanced Technology," "-- Competition" and
"Business -- Government Regulation."
 
ITEM 2. PROPERTIES
 
     The Company leases 18 offices within its service area that range in size
from approximately 200 to 10,000 square feet under agreements with varying terms
and renewal options, and annual rents ranging from $2,700 to $134,487. The
Company currently leases approximately 10,000 square feet for its corporate
executive offices located in Irving, Texas. The lease agreement for its
corporate headquarters stipulates annual rental payments that increase from
$124,525 to $134,487 during the term of the lease, which expires in 2002.
 
ITEM 3. LEGAL PROCEEDINGS
 
     As of date hereof, there are no legal proceedings pending against or
involving the Company that, in the opinion of management, could have a material
adverse effect on the business, financial condition or results of operations of
the Company.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
 
                                       11
<PAGE>   14
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS
 
MARKET INFORMATION
 
     The Common Stock began trading on the Nasdaq National Market on October 11,
1996 under the symbol "MAII". The initial public offering price was $11.00 per
share. The high and low closing sales prices (excluding retail markup, markdowns
and commissions) for the period October 11, 1996 to December 31, 1998 are as
follows:
 
<TABLE>
<CAPTION>
                                                               HIGH      LOW
                                                              ------    ------
<S>                                                           <C>       <C>
Fourth Quarter
  October 11, 1996 to December 31, 1996.....................  $12.50    $10.75
Fiscal year ended December 31, 1997
  First Quarter.............................................  $16.25    $11.00
  Second Quarter............................................   10.00      3.38
  Third Quarter.............................................    4.00      3.38
  Fourth Quarter............................................    5.00      3.43
Fiscal year ended December 31, 1998
  First Quarter.............................................  $ 4.13    $ 3.25
  Second Quarter............................................    4.25      3.12
  Third Quarter.............................................    3.87      2.00
  Fourth Quarter............................................    2.56      1.50
</TABLE>
 
     As of February 26, 1999, approximately 6,117,079 shares of Common Stock
were outstanding and held by approximately 104 holders of record.
 
     The Company did not pay cash dividends on its Common Stock during 1996,
1997 and 1998. The current policy of the Company's Board of Directors is to
retain any future earnings to provide funds for the operation and expansion of
the Company's business. Consequently, the Company does not anticipate that cash
dividends will be paid on the Company's Common Stock in the foreseeable future.
 
                                       12
<PAGE>   15
 
ITEM 6. SELECTED FINANCIAL DATA
 
     The following table sets forth selected consolidated financial data for the
Company for the periods and at the dates indicated. The Company's statement of
operations data for each of the years in the five year period ended December 31,
1998 and its balance sheet data as of December 31, 1994, 1995, 1996, 1997, and
1998 are derived from the Company's financial statements which have been audited
by PricewaterhouseCoopers LLP, independent certified public accountants. The
selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related notes included
elsewhere herein.
 
<TABLE>
<CAPTION>
                                                           YEARS ENDED DECEMBER 31,
                                                ----------------------------------------------
                                                 1994     1995      1996      1997      1998
                                                ------   -------   -------   -------   -------
                                                    (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                             <C>      <C>       <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA:
Net Revenues..................................  $5,262   $11,177   $17,350   $18,821   $16,132
Costs and Expenses:
  Salaries and benefits.......................   2,005     3,721     5,137     8,353     7,328
  Selling, general, and administrative........   1,817     3,620     5,510     7,857     6,306
  Depreciation and amortization...............     293       719     1,595     3,152     2,337
  Provision for uncollectible accounts........     781     1,885     3,408     3,871     1,690
                                                ------   -------   -------   -------   -------
          Total costs and expenses............   4,896     9,945    15,650    23,233    17,661
                                                ------   -------   -------   -------   -------
          Operating income (loss).............     365     1,232     1,700    (4,412)   (1,529)
Other (income) expense:
  Interest income and other, net..............      (6)       12      (172)     (778)     (814)
  Interest expense............................     179       247       270       111        59
                                                ------   -------   -------   -------   -------
          Income (loss) before income taxes...     192       973     1,602    (3,745)     (774)
Income tax expense (benefit)..................      --       395       683      (848)       --
                                                ------   -------   -------   -------   -------
          Net income (loss)...................  $  192   $   578   $   919   $(2,897)  $  (774)
                                                ======   =======   =======   =======   =======
Net income (loss) applicable to common
  stock.......................................  $  117   $   311   $   832   $(2,897)  $  (774)
                                                ======   =======   =======   =======   =======
Earnings (loss) per share (basic).............  $  .06   $   .15   $   .26   $  (.48)  $  (.12)
                                                ======   =======   =======   =======   =======
Earnings (loss) per share (diluted)...........  $  .06   $   .11   $   .26   $  (.48)  $  (.12)
                                                ======   =======   =======   =======   =======
Weighted average number of common shares
  outstanding (basic).........................   1,844     2,117     3,215     6,061     6,214
Weighted average number of common shares
  outstanding (diluted).......................   3,290     3,690     3,559     6,061     6,214
Dividends declared on convertible preferred
  stock.......................................  $   75   $    87   $    87   $     0   $     0
</TABLE>
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                ----------------------------------------------
                                                 1994      1995     1996      1997      1998
                                                -------   ------   -------   -------   -------
                                                                (IN THOUSANDS)
<S>                                             <C>       <C>      <C>       <C>       <C>
BALANCE SHEET DATA:
Cash and cash equivalents.....................  $   109   $1,409   $20,537   $14,903   $14,378
Working capital...............................      126    1,913    22,094    17,575    16,434
Total assets..................................    2,698    6,443    30,708    26,505    24,521
Total debt and capital lease obligations......    1,566    2,354       355       489       240
Retained earnings (accumulated deficit).......   (1,105)    (562)      393    (2,504)   (3,278)
Total shareholders' equity....................      123    2,431    26,085    23,678    22,554
</TABLE>
 
                                       13
<PAGE>   16
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
GENERAL
 
     The Company commenced operations in Oklahoma in August 1989 by providing
medical surgical services to gynecologists in their offices. The Company's
initial focus was to develop contracts with managed care organizations and other
third-party payors and to expand into new markets. By the end of 1991, the
Company had operations in 14 states. The Company continued to expand its range
of services, and introduced during 1993 its second business line by offering
aesthetic elective services. During 1997, the Company started to offer hospital
based services when the Stone Treatment Center of New England acquisition was
completed. Currently, the Company provides medical surgical, aesthetic elective
and hospital based services in 42 states to a network of approximately 3,000
physicians.
 
RESULTS OF OPERATIONS
 
     The following table sets forth certain statement of operations data
expressed as a percentage of net revenues for the periods indicated:
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                         -------------------------------------
                                                         1994    1995    1996    1997    1998
                                                         -----   -----   -----   -----   -----
<S>                                                      <C>     <C>     <C>     <C>     <C>
Net revenues...........................................  100.0%  100.0%  100.0%  100.0%  100.0%
Salaries and benefits expense..........................   38.1    33.3    29.6    44.4    45.4
Selling, general and administrative expense............   34.5    32.4    31.8    41.7    39.1
Depreciation and amortization..........................    5.6     6.4     9.2    16.7    14.5
Provision for uncollectible accounts...................   14.8    16.9    19.6    20.6    10.5
Operating income (loss)................................    6.9    11.0     9.8   (23.4)   (9.5)
Income tax expense (benefit)...........................     --     3.5     3.9    (4.5)     --
Net income (loss)......................................    3.7     5.2     5.3   (15.4)   (4.8)
</TABLE>
 
  Years Ended December 31, 1998 and 1997
 
     Net Revenues. Net revenues decreased from $18.8 million for the year ended
December 31, 1997, to $16.1 million for the year ended December 31, 1998, a
decrease of $2.7 million or 14%. Total net patient service revenue per case
decreased from $213 for the year ended December 31, 1997, to $208 for the year
ended December 31, 1998, a decrease of $5 per case or 2%.
 
     Medical surgical net revenues decreased from $9.9 million for the year
ended December 31, 1997, to $7.7 million for the year ended December 31, 1998, a
decrease of $2.2 million or 22%. This decrease was attributable to the medical
surgical net revenue per case decreasing from $274 for the year ended December
31, 1997, to $236 for the year ended December 31, 1998, a decrease of $38 or
14%. The lower net revenue per case is a result of a shift from noncontracted to
contracted payors related to the insurance billable business. Revenues related
to contracted payors typically yield a lower reimbursement per case, but also
provide a revenue dollar that is of a higher quality and is more collectible.
Contracted revenues as a percentage of insurance billable revenues increased
from 51% for the year ended December 31, 1997, to 70% for the year ended
December 31, 1998, an increase of 19%. The remainder of the medical surgical net
revenue decrease of $1 million is related to a case volume decrease. Medical
surgical procedures decreased from 36,088 for the year ended December 31, 1997,
to 32,478 for the year ended December 31, 1998, a decrease of 3,610 or 10%.
 
     Aesthetic elective net revenues remained flat at $8.4 million for the year
ended December 31, 1997 and 1998. Procedure volume decreased from 49,731 for the
year ended December 31, 1997, to 44,490 for the year ended December 31, 1998, a
decrease of 5,241 or 11%. The procedure volume decrease was mainly attributable
to the Company performing 3,460 hair removal procedures during the year ended
December 31, 1997. The hair removal product line was discontinued during the
fourth quarter of 1997 due to the ineffectiveness of the product, and the
significant amount of infrastructure cost associated with it. The procedure
volume decrease was offset by an increase in the aesthetic elective net revenue
per case which increased from $169 for the year ended December 31, 1997, to $188
for the year ended December 31, 1998, an
 
                                       14
<PAGE>   17
 
increase of $19 or 11% which is due to a change in the product line mix within
the aesthetic elective line of business.
 
     The remainder of the net revenue decrease was attributable to a decrease in
revenues related to Company sponsored seminars, which decreased from $525,000
for the year ended December 31, 1997, to $117,000 for the year ended December
31, 1998, a decrease of $408,000 or 78%. During the year ended December 31,
1997, the Company derived seminar revenues related to the hair removal product
line which was discontinued in the fourth quarter of 1997.
 
     Salaries and Benefits Expense. Salaries and benefits expense decreased from
$8.4 million for the year ended December 31, 1997, to $7.3 million for the year
ended December 31, 1998, a decrease of $1.1 million or 13%. This decrease was
primarily attributable to a decrease in the total number of employees from 171
as of December 31, 1997, to 149 as of December 31, 1998, a decrease of 22 or
13%. Twenty-five (25) account representatives were added in the first quarter of
1997 to accommodate growth anticipated, but not realized, from the national
rollout of the Softlight laser for hair removal. Furthermore, the Company
incurred a $250,000 charge during the second quarter of 1997 for a restructuring
of its field operations. This charge included expenses related to severance
packages, relocation allowances, and recruitment fees as a result of the
restructuring and realignment of personnel.
 
     Selling, General and Administration. Selling, general and administrative
expense decreased from $7.9 million for the year ended December 31, 1997, to
$6.3 million for the year ended December 31, 1998, a decrease of $1.6 million or
20%. The following items were attributable to the decrease in selling, general,
and administrative expenses:
 
     Vehicle expense decreased from $1.7 million for the year ended December 31,
1997, to $1.2 million for the year ended December 31, 1998, a decrease of
$500,000 or 29%. This decrease is due mainly to the Company having a reduced
fleet of vehicles of 97 at December 31, 1998 compared to 125 at December 31,
1997 along with a vehicle lease buyout of the entire fleet which occurred during
the third quarter of 1998.
 
     Professional fees decreased from $956,000 for the year ended December 31,
1997, to $443,000 for the year ended December 31, 1998, a decrease of $513,000
or 54%. The Company incurred a $250,000 charge during the second quarter of 1997
for a restructuring of its field operations. This charge included expenses
related to the divestiture of certain delivery vans and certain medical
equipment currently under operating leases and legal/professional fees related
to accounts receivable and managed care initiatives.
 
     Leasing expense decreased from $707,000 for the year ended December 31,
1997, to $507,000 for the year ended December 31, 1998, a decrease of $200,000
or 28%. During 1997 there was $133,000 in leasing of video conferencing
equipment which was used for the Company sponsored seminars related to the hair
removal product line.
 
     The remainder of the decrease is related to the downsizing of the Company's
infrastructure and the Company's overall effort in reducing various costs on the
corporate and field operation levels.
 
     Selling, general and administrative expense as a percentage of net revenues
decreased slightly from 41.7% for the year ended December 31, 1997, to 39.1% for
the year ended December 31, 1998. Without the $250,000 nonrecurring charge,
selling, general and administrative expense as a percentage of net revenues
would have been 40.4% for the year ended December 31, 1997.
 
     Depreciation and Amortization. Depreciation and amortization decreased from
$3.2 million for the year ended December 31, 1997, to $2.3 million for the year
ended December 31, 1998, a decrease of $900,000 or 28%. This decrease was due
mainly to a change in useful lives on certain medical equipment from three to
five years as well as the establishment of residual values on such equipment
based on historical experience which was effective January 1, 1998 and a
nonrecurring charge of $150,000 for the second quarter of 1997, related to the
redeployment and or disposition of certain medical equipment in selected
markets. The change in useful lives had an effect of reducing depreciation
expense and decreasing the net loss by approximately $803,000 for the year ended
December 31, 1998.
 
                                       15
<PAGE>   18
 
     Provision for Uncollectible Accounts. Provision for uncollectible accounts
decreased from $3.9 million for the year ended December 31, 1997, to $1.7
million for the year ended December 31, 1998, a decrease of $2.2 million or 56%.
As a percentage of net patient service revenue, provision for uncollectible
accounts decreased from 21.2% for the year ended December 31,1997 to 10.6% for
the year ended December 31, 1998. During the second quarter of 1997, the Company
recorded a $1.2 million charge to increase reserves for uncollectible accounts.
These additional reserves were necessary to offset a significant shift in the
payment trends experienced from certain third party payors during the second
quarter of 1997. Without the charge of $1.2 million, provision for uncollectible
accounts as a percentage of net patient service revenue would have been 14.6%
for the year ended December 31, 1997. This 4% improvement is primarily
attributable to the Company's new processes including scheduling,
preregistration, and preverification.
 
     Operating Loss. As a result of the items discussed above, operating loss
decreased from $4.4 million for the year ended December 31, 1997, to a loss of
$1.5 million for the year ended December 31, 1998, a decrease of $2.9 million.
 
     Interest Income & Other, Net. Interest income and other, net increased
slightly from $778,000 for the year ended December 31, 1997 to $815,000 for the
year ended December 31, 1998, an increase of $37,000.
 
     Income Tax Benefit. For the year ended December 31, 1997, the Company
recorded a tax benefit of $848,000. For the year ended December 31, 1998, the
Company did not record a current or deferred tax benefit due to the Company's
continuing operating loss trend and the uncertainty of utilization of net
operating loss carryforwards in future periods.
 
     Net Loss. As a result of the items discussed above, the Company's net loss
decreased from $2.9 million for the year ended December 31, 1997, to a loss of
$774,000 for the year ended December 31, 1998, a decrease of $2.1 million.
 
  Years Ended December 31, 1997 and 1996
 
     Net Revenues. Net revenues increased from $17.4 million for the year ended
December 31, 1996, to $18.8 million for the year ended December 31, 1997, an
increase of $1.4 million or 8%. This increase was primarily attributable to
growth in procedure volume, which increased from 68,585 for the year ended
December 31, 1996, to 85,819 for the year ended December 31, 1997, an increase
of 17,234 or 25%. Medical surgical procedures increased from 26,769 for the year
ended December 31, 1996, to 36,088 for the year ended December 31, 1997, an
increase of 9,319 or 35%. Aesthetic elective procedures increased from 41,816
for the year ended December 31, 1996, to 49,731 for the year ended December 31,
1997, an increase of 7,915 or 19%.
 
     The net patient service revenue per case decreased from $248 for the year
ended December 31, 1996, to $213 per case for the year ended December 31, 1997,
a decrease of $35 or 14%. This decrease was attributable to a change in case mix
to include a larger percentage of aesthetic elective procedures. The net revenue
per case for aesthetic elective procedures was $169 during 1997, compared to net
revenue per case for medical surgical procedures of $274 during 1997.
 
     Salaries and Benefits Expense. Salaries and benefits expense increased from
$5.1 million for the year ended December 31, 1996, to $8.4 million for the year
ended December 31, 1997, an increase of $3.3 million or 65%. This increase was
primarily attributable to an increase in the total number of employees from 118
as of December 31, 1996, to 171 as of December 31, 1997, an increase of 45%. The
Company added scheduling coordinators and preverification personnel during the
first quarter of 1997 as a continuation of its efforts to reduce provisions for
uncollectible accounts. In addition, each medical surgical district added a
district operations manager to relieve the district manager of operational
responsibility. Furthermore, the Company incurred a $250,000 nonrecurring charge
during the second quarter of 1997 for a restructuring of its field operations.
This charge included expenses related to severance packages, relocation
allowances, and recruitment fees as a result of the restructuring and
realignment of personnel. Finally, (25) twenty five technicians were added in
the first quarter to accommodate growth anticipated, but not realized, from the
national rollout of the Softlight laser for hair removal. Salaries and benefits
expense as a percentage of net revenues increased from 29.6% to 44.4% due to the
reasons discussed above.
 
                                       16
<PAGE>   19
 
     Selling, General and Administration. Selling, general and administrative
expense increased from $5.5 million for the year ended December 31, 1996, to
$7.9 million for the year ended December 31, 1997, an increase of $2.4 million
or 44%. The following items were attributable to the increase in selling,
general, and administrative expenses:
 
     Vehicle expense increased from $1.1 million for the year ended December 31,
1996 to $1.7 million for the year ended December 31, 1997, an increase of
$600,000 or 55%. This increase was primarily due to an increase in field
personnel from 77 as of December 31, 1996 to 109 as of December 31, 1997, an
increase of 32 or 42%.
 
     Repair and maintenance expense increased from $610,000 for the year ended
December 31, 1996 to $966,000 for the year ended December 31, 1997, an increase
of $356,000 or 58%. This increase was due primarily to the addition of annual
service contracts on medical equipment that was previously covered under
manufacturers warranty.
 
     Communications expense increased from $584,000 for the year ended December
31, 1996 to $944,000 for the year ended December 31, 1997, an increase of
$360,000 or 62%. This increase was primarily due to an increase in field
personnel and communication costs related to the Company's wide area network
linking its district's offices to its corporate office and information database.
 
     Professional fees increased from $288,000 for the year ended December 31,
1996, to $956,000 for the year ended December 31, 1997, an increase of $668,000
or 232%. This increase was primarily due to the additional costs related to
being a publicly held company. Furthermore, the Company incurred a $250,000
nonrecurring charge during the second quarter of 1997 which included
professional fees related to accounts receivable and managed care initiatives.
 
     Occupancy costs increased from $156,000 for the year ended December 31,
1996, to $327,000 for the year ended December 31, 1997, an increase of $171,000
or 110%. This increase was primarily attributable to field offices added in
January of 1997.
 
     Depreciation and Amortization. Depreciation and amortization increased from
$1.6 million for the year ended December 31, 1996, to $3.2 million for the year
ended December 31, 1997, an increase of $1.6 million or 100%, resulting from the
addition of approximately $3.3 million in new medical equipment during the year
ended December 31, 1997.
 
     Provision for Uncollectible Accounts. Provision for uncollectible accounts
increased from $3.4 million for the year ended December 31, 1996, to $3.9
million for the year ended December 31, 1997, an increase of $500,000 or 15%. As
a percentage of net patient service revenue, provision for uncollectible
accounts increased from 20.0% for the year ended December 31,1996 to 21.2% for
the year ended December 31, 1997. During the second quarter of 1997, the Company
recorded a $1.2 million charge to increase reserves for uncollectible accounts.
These additional reserves were necessary to offset a significant shift in the
payment trends experienced from certain third party payors during the second
quarter of 1997. Without the charge of $1.2 million, provision for uncollectible
accounts as a percentage of net patient service revenue would have been 14.6%
for the year ended December 31, 1997. This decrease is primarily attributable to
the Company's new processes including scheduling, preregistration, and
preverification.
 
     Operating Income (Loss). As a result of the items discussed above,
including but not limited to the additional infrastructure added for
anticipated, but not realized, growth, operating income decreased from $1.7
million for the year ended December 31, 1996, to a loss of $4.4 million for the
year ended December 31, 1997, a decrease of $6.1 million.
 
     Interest Income & Other, Net. Interest income and other, net increased from
$172,000 for the year ended December 31, 1996, to $778,000 for the year ended
December 31, 1997, an increase of $606,000 or 352%. This increase was due mainly
to interest being earned on the initial public offering proceeds for the full
calendar year of 1997.
 
     Income Tax Provision. Income tax provision decreased from $683,000 for the
year ended December 31, 1996 to a benefit of $848,000 for the year ended
December 31, 1997, a decrease of $1.5 million. The
 
                                       17
<PAGE>   20
 
Company's effective tax rate decreased from 42.6% for the year ended December
31, 1996, to a benefit of 22.6% for the year ended December 31, 1997 (See Note 9
to the Notes to Consolidated Financial Statements)
 
     Net Income(Loss). As a result of the items discussed above, the Company's
net income decreased from $919,000 for the year ended December 31, 1996, to a
loss of $2.9 million for the year ended December 31, 1997, a decrease of $3.8
million. As a percentage of net revenues, net income decreased from 5.3% for the
year ended December 31, 1996, to a loss of 15.4% for the year ended December 31,
1997.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     From its inception through 1993, the Company's operating expenses
significantly exceeded its net revenues, resulting in an accumulated retained
deficit of approximately $1.3 million as of December 31, 1993. From 1994 until
March 31, 1997, the Company recorded positive earnings, which resulted in
retained earnings of $431,290 as of March 31, 1997. As of December 31, 1998, the
Company has an accumulated retained deficit of $3.3 million, due to losses
incurred during 1997 and 1998. Until October 1996, the Company funded its
operations primarily through the private placement of equity securities, bank
borrowings and cash provided by operations. Prior to its initial public
offering, which was completed on October 11, 1996, the majority of the capital
raised by the Company had been raised from the private placement of $2.2 million
of equity securities, including $750,000 raised in July 1992 and approximately
$1.5 million raised in November 1995. The Company obtained a $2.0 million credit
facility from Nations Bank of Texas, N.A. ("NationsBank") in June 1995. This
facility was composed of several tranches bearing interest rates ranging from
prime plus 0.5% to prime plus 1.5%. The net proceeds from such facility were
used to retire outstanding debt and to purchase medical equipment. The Company's
facility with NationsBank was increased to $4.3 million in March 1996. The
NationsBank debt was paid off in full during October 1996 with a portion of the
net proceeds from the Company's initial public offering.
 
     Net cash provided by (used in) operating activities were $2.5 million,
($1.6 million), and $2.6 million for the years ended December 31, 1996, 1997 and
1998, respectively. For its investing activities, the Company consumed $3.8
million, $3.8 million, and $2.5 million for the years ended December 31, 1996,
1997 and 1998, respectively, primarily for the purchase of medical equipment and
acquisitions of other companies. Capital expenditures were $3.2 million, $3.3
million, and $2.6 million for the years ended December 31, 1996, 1997 and 1998,
respectively. Net cash provided by (used in) financing activities were $20.4
million, ($197,000), and ($599,000) for the years ended December 31, 1996, 1997
and 1998, respectively. The cash provided from financing activities in 1996 is
primarily from the net proceeds from the Company's initial public offering of
2.3 million shares of Common Stock in October 1996.
 
     The Company estimates that its total capital expenditures will be
approximately $1.8 million in 1999. The Company believes that the current cash
reserves and cash provided by operating activities will be sufficient to fund
its operations through 2000. However, there can be no assurance that the Company
will not require additional financing in the near future, and that if needed, it
will be available on terms satisfactory to the Company, or at all.
 
YEAR 2000 COMPLIANCE
 
     The Company is in the process of evaluating its Year 2000 ("Y2K")
compliance status. The Company is testing its information technology, such as
software regarding Y2K compliance and is seeking certification of Y2K compliance
from its third party vendors. Because its software and information technology
come from third party vendors, who would be called on to replace or upgrade
non-compliant software, the Company does not expect that its Y2K-related
expenditures with respect to information technology will be significant. Based
upon the Company's current evaluation of the Y2K compliance of its information
technology, its polling of third party vendors, and its intention to replace or
upgrade any non-compliant information technology, the Company does not
anticipate that there will be a material Y2K problem with respect thereto.
 
     In addition, certain of the Company's medical equipment contains embedded
technology that could have Y2K-related problems. The Company has polled the
manufacturers and vendors of such equipment regarding Y2K compliance and, based
on such polling, all equipment known to the Company to be non-Y2K compliant
                                       18
<PAGE>   21
 
has been replaced or upgraded. The Company does not expect to conduct
independent tests of all its medical equipment to assess Y2K compliance. Based
upon the Company's actions in preparation for Y2K, and responses received from
its third-party vendors, the Company does not anticipate that there will be a
material Y2K problem with respect to its equipment. Furthermore, because its
equipment comes from third party vendors, which are being requested to replace
or upgrade all non-compliant equipment, the Company does not expect that its
Y2K-related expenditures with respect to embedded technology will be
significant.
 
     Notwithstanding the foregoing, there can be no assurances (a) that the
representations provided by third party vendors with respect to Y2K compliance
will be accurate, or (b) that the Company will have any recourse against such
vendors if the representations prove to be inaccurate. A Y2K-related failure of
the Company's medical equipment and/or information technology could have a
material adverse effect on the Company and its results of operations.
Furthermore, there can be no assurances that Y2K-related failure caused by third
parties, such as utility providers, transportation companies or others, will not
have a material adverse effect on the Company. The Company is currently in the
process of preparing contingency plans related to possible Y2K-related failure
caused by third parties.
 
     Based on the Company's process of evaluating its Y2K compliance status, the
Company has currently expended an estimated $10,000 related to addressing Y2K
issues. The Company expects the total costs in regard to addressing Y2K issues
to be an estimated $50,000. The Company also anticipates the project to be
substantially completed by the third quarter of 1999. Furthermore, there can be
no assurance that all Y2K issues will be addressed which could result in
additional costs for the Company.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The information required by this item is listed under Item 14(a) and begins
at page F-1 herein.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
     None.
 
                                       19
<PAGE>   22
 
                                    PART III
 
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF COMPANY
 
     The following table sets forth certain information with respect to the
executive officers and directors of the Company.
 
<TABLE>
<CAPTION>
NAME                                        AGE                    POSITION
----                                        ---                    --------
<S>                                         <C>   <C>
Paul R. Herchman..........................  42    Chairman of the Board and Chief Executive
                                                  Officer
Gary B. Hill..............................  50    President, Chief Operating Officer and
                                                  Director
David A. Kallenberger, M.D................  49    Medical Director and Director
Tony J. LeVecchio.........................  52    Director
Thomas A. Montgomery......................  42    Director
Leon Pritzker.............................  76    Director
Jim Silcock...............................  48    Director
</TABLE>
 
     PAUL R. HERCHMAN is a co-founder of the Company and has served as Chairman
of the Board, Chief Executive Officer since its inception in 1989. Mr. Herchman
served as President from 1989 until December 1997. From 1986 to 1989, Mr.
Herchman was a sales representative for Sun Medical, Inc., a distributor of
medical equipment. Prior thereto, Mr. Herchman served in sales positions with
Chesebrough-Ponds USA Co. in its Hospital Products Division, from 1984 to 1986,
and with Johnson & Johnson in its Ortho Pharmaceutical Division, from 1982 to
1984. Mr. Herchman received a Bachelor of Science degree from Texas Tech
University.
 
     GARY B. HILL has served as President and Chief Operating Officer of the
Company since December 1997. Mr. Hill has served as a director of the Company
since February 1998. From January 1994 to April 1996, Mr. Hill served as
President of the North Texas Division of Columbia/HCA. Prior thereto, Mr. Hill
was Senior Vice President of Region II for Galen Health Care Inc. and Columbia
from 1992 to 1994. From 1976 to 1992, Mr. Hill served in various capacities with
Humana Inc., most recently as Vice President for its hospital and insurance
operations in central Kentucky and Cincinnati. Mr. Hill received a Bachelor of
Science degree from the University of North Alabama.
 
     DAVID A. KALLENBERGER, M.D. is a co-founder of the Company and has served
as a director and as the Medical Director since its inception in 1989. Dr.
Kallenberger is a practicing physician specializing in obstetrics and
gynecology, and has been practicing at Integris Baptist Medical Center in
Oklahoma City, Oklahoma since 1981. Dr. Kallenberger serves as a Clinical
Professor in the Department of Obstetrics/ Gynecology at the University of the
Oklahoma Health Science Center and as a Program Director of the Henry G. Bennett
Fertility Institute at Integris Baptist Medical Center. Dr. Kallenberger
received his Medical Doctorate degree from The University of Oklahoma.
 
     TONY J. LEVECCHIO has been a director of the Company since 1997 and an
advisor to the Company since 1990. Mr. Levecchio is a member of the Audit
Committee, the Compensation Committee, and the Incentive Plan Committee. Mr.
LeVecchio is President of The James Group, a business advisor firm, where he has
been a principal since 1989. Prior to The James Group, Mr. LeVecchio was Senior
Vice President and Chief Financial Officer for VHA Southwest Inc., a regional
health care division of Voluntary Hospitals of America, Inc. Mr. LeVecchio
received a Bachelor of Economics degree and a Master of Business Administration
degree from Rollins College in 1968 and 1969, respectively.
 
     THOMAS A. MONTGOMERY is a co-founder of the Company and has served as a
director of the Company since 1989. In addition, Mr. Montgomery is a member of
the Audit Committee, the Compensation Committee, and the Incentive Plan
Committee. Mr. Montgomery is a partner of Montgomery, Baggett & Drews, L.L.P.,
an accounting firm. From December 1982 to December 1990, Mr. Montgomery served
in various capacities with Arthur Andersen & Co., and as the Senior Tax Manager
of the Enterprise Group from
 
                                       20
<PAGE>   23
 
1985 to 1990. Mr. Montgomery received a Bachelor of Business Administration
degree from Texas Tech University and a Master of Science degree from Texas Tech
University.
 
     LEON PRITZKER has been a director of the Company since 1989. Since 1990 Mr.
Pritzker has been self-employed as a management consultant. From 1985 to 1990,
Mr. Pritzker served as the Executive Vice President of Campbell Taggart, Inc.
From 1967 to 1984, Mr. Pritzker served in various capacities with Anheuser-Busch
Companies, Inc., most recently as Director, Management Systems Group. Mr.
Pritzker is a fellow of the American Statistical Association and received a
Bachelor of Science degree from College of the City of New York and a Master of
Arts degree from the University of Pennsylvania.
 
     JIM SILCOCK has been a director of the Company since February 1996 and is a
member of the Audit, Compensation and Incentive Plan Committees. Mr. Silcock has
served as a general partner of Mapleleaf Capital Ltd., a general partner of
Sunwestern Associates III, a general partner of Sunwestern Investment Fund III,
a venture capital fund, since 1988 and as a general partner of T.V.P. Associates
Limited, the general partner of Texas Venture Partners, a venture capital fund,
since 1984. Mr. Silcock received a Bachelor of Arts from Dartmouth College and a
Master of Business Administration from the Amos Tuck School of Business
Administration at Dartmouth College.
 
  Section 16(a) Beneficial Ownership Reporting Compliances
 
     Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of a registered class of the
Company's equity securities, to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission (the "SEC").
Such persons are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.
 
     Based solely on its review of the copies of such forms received by it with
respect to fiscal year 1998, or written representations from certain reporting
persons, the Company believes that all filing requirements applicable to its
officers, directors and persons who own more than 10% of a registered class of
the Company's equity securities have been complied with.
 
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
 
     The business of the Company is managed under the direction of the Board of
Directors. The Board meets on a regularly scheduled basis to review significant
developments affecting the Company and to act on matters requiring approval of
the Board. It also holds special meetings when an important matter requires
action by the Board between scheduled meetings. The Board met seven (7) times
and acted by unanimous written consent six (6) times during 1998. During 1998,
each member of the Board participated in at least 75% of all Board and
applicable committee meetings held during the period for which he was a
director.
 
     The Board has three standing committees: the Audit Committee, the
Compensation Committee and the Incentive Plan Committee. The functions of these
committees, their current members, and the number of meetings held during the
fiscal year ending December 31, 1998, are described below.
 
     Audit Committee. The Audit Committee makes recommendations to the Board
regarding the appointment of independent auditors, reviews the plan and scope of
any audit to the Company's financial statements and reviews the Company's
significant accounting policies and related matters. The Audit Committee is
comprised of Messrs. Montgomery, LeVecchio and Silcock. The Audit Committee met
one (1) time during 1998.
 
     Compensation Committee. The Compensation Committee makes recommendations to
the Board regarding the compensation of executive officers. The Compensation
Committee is comprised of Messrs. LeVecchio, Montgomery, and Silcock. The
Compensation Committee did not meet during 1998.
 
     Incentive Plan Committee. The Incentive Plan Committee was established in
1997 and administers the Company's 1994 Amended and Restated Long-Term Incentive
Plan (the "Incentive Plan"). The Incentive Plan Committee is comprised of
Messrs. Montgomery, LeVecchio and Silcock. The Incentive Plan Committee met four
(4) times and acted by unanimous written consent three (3) times during 1998.
 
                                       21
<PAGE>   24
 
     The Company does not have a nominating committee. The functions customarily
performed by a nominating committee are performed by the Board as a whole.
 
ITEM 11. EXECUTIVE COMPENSATION
 
     The following table sets forth certain information regarding compensation
paid during each of the Company's last three fiscal years to the Company's Chief
Executive Officer and the Company's only other executive officer earning at
least $100,000, (the "Named Executive Officers") based on salary and bonus
earned during 1996, 1997 and 1998.
 
<TABLE>
<CAPTION>
                                                                                          LONG-TERM
                                                                                     COMPENSATION AWARDS
                                                ANNUAL COMPENSATION               -------------------------
                                     ------------------------------------------   SECURITIES
NAME AND                             FISCAL                        OTHER ANNUAL   UNDERLYING    ALL OTHER
PRINCIPAL POSITION                    YEAR     SALARY     BONUS    COMPENSATION    OPTIONS     COMPENSATION
------------------                   ------   --------   -------   ------------   ----------   ------------
<S>                                  <C>      <C>        <C>       <C>            <C>          <C>
Paul R. Herchman...................   1998    $200,000         0        0                0        $5,240(1)
  Chairman of the Board and Chief     1997     155,510         0        0            1,000         5,700
  Executive Officer                   1996     145,000   $36,000        0           11,708         5,700
Gary Hill(3).......................   1998     200,000         0        0          151,540         5,420(2)
  President & Chief Operating
     Officer.......................   1997      16,667         0        0           98,460           350
</TABLE>
 
---------------
 
(1) Represents a $350 per month automobile allowance paid to Mr. Herchman, and
    $1,040 of annual premiums on a life insurance policy, of which Mr.
    Herchman's spouse is the beneficiary, paid by the Company on Mr. Herchman's
    behalf.
 
(2) Represents a $350 per month automobile allowance paid to Mr. Hill and $1,220
    of annual premiums on a life insurance policy, of which Mr. Hill's spouse is
    the beneficiary, paid by the Company on Mr. Hill's behalf.
 
(3) Mr. Hill's employment term with the Company began in December 1997.
 
                             OPTION GRANTS IN 1998
 
     The following table provides information related to options granted to the
Named Executive Officers during 1998.
 
<TABLE>
<CAPTION>
                                                              INDIVIDUAL GRANTS
                                 ----------------------------------------------------------------------------
                                                                                    POTENTIAL REALIZED VALUE
                                              PERCENT OF                                AT ASSUMED ANNUAL
                                 NUMBER OF      TOTAL                                 RATES OF STOCK PRICE
                                 SECURITIES    OPTIONS                               APPRECIATION FOR OPTION
                                 UNDERLYING   GRANTED TO   EXERCISE                         TERM (1)
                                  OPTIONS     EMPLOYEES    PRICE PER   EXPIRATION   -------------------------
                                  GRANTED      IN 1998       SHARE        DATE          5%            10%
                                 ----------   ----------   ---------   ----------   -----------   -----------
<S>                              <C>          <C>          <C>         <C>          <C>           <C>
Gary B. Hill...................   151,540        54%         $4.06      12/02/03     $209,245      $474,705
</TABLE>
 
---------------
 
(1) The dollar amounts in these columns represent potential value that might be
    realized upon exercise of the options immediately prior to the expiration of
    their term, assuming that the market price of the Common Stock appreciates
    in value from the date of grant at the 5% and 10% annual rates prescribed by
    regulation, and therefore are not intended to forecast possible future
    appreciation, if any, of the price of the Common Stock.
 
(2) The exercise price of each option was equal to the fair market value of the
    Common Stock on the date of the grant.
 
                                       22
<PAGE>   25
 
                  AGGREGATE OPTION VALUES AT DECEMBER 31, 1998
 
<TABLE>
<CAPTION>
                                                   NUMBER OF SECURITIES
                                                  UNDERLYING UNEXERCISED         VALUE OF UNEXERCISED
                                                        OPTIONS AT               IN-THE-MONEY OPTIONS
                                                     DECEMBER 31, 1998           AT DECEMBER 31, 1998
                                                ---------------------------   ---------------------------
NAME                                            EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
----                                            -----------   -------------   -----------   -------------
<S>                                             <C>           <C>             <C>           <C>
Paul R. Herchman..............................    77,710           1,000        12,344            0
Gary B. Hill..................................    62,500         187,500             0            0
</TABLE>
 
---------------
 
(1) These values assume a valuation of $2.00 per share at December 31, 1998.
    Value is calculated based on the difference between the option price and
    $2.00 multiplied by the number of shares of Common Stock underlying the
    options.
 
  Compensation of Directors
 
     It is the policy of the Company that directors who are not employees of the
Company ("Independent Directors") receive $500 for each Board meeting attended.
All directors of the Company are reimbursed for travel, lodging and other
out-of-pocket expenses in connection with their attendance at Board and
committee meetings. Under the terms of the Incentive Plan, so long as the
Company is a reporting company subject to the terms of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), Independent Directors will receive
an option to purchase 2,500 shares of Common Stock upon his or her initial
election to the Board and an option to purchase 5,000 shares of Common Stock at
each annual meeting of the shareholders thereafter while he or she continues to
serve as a director of the Company. Such options will be non-qualified stock
options, will have an exercise price equal to the fair market value of the
Common Stock at the date of grant, will become exercisable one-third on each of
the first, second and third anniversaries thereof, and will expire ten years
from the date of grant.
 
  Employment Contracts and Termination of Employment and Change of Control
Agreements
 
     The Company entered into an Employment Agreement with Paul Herchman, dated
as of January 1, 1998, (the "Herchman Agreement"). The Herchman Agreement may be
terminated by the Company upon (12) twelve months prior notice and may be
terminated by Mr. Herchman upon (3) three months prior notice. The Herchman
Agreement provides that Mr. Herchman receive a base salary of $200,000 per year
and is eligible to receive bonuses based upon the Company's financial
performance. The Herchman Agreement requires Mr. Herchman to maintain the
confidentiality of the Company's proprietary information during his employment
and thereafter and prohibits Mr. Herchman from competing with the Company during
his employment and for a period of one year thereafter.
 
     On February 17, 1999, the Company entered into a Severance Agreement with
Paul Herchman (the"Severance Agreement") that takes effect only upon the
consummation of the Merger with DHS or Sub as described under Part I, Item 1.
Business -- Recent Developments. Pursuant to the Severance Agreement, Mr.
Herchman will resign as Chief Executive Officer of the Company and act as the
President of the Company's Office Division for a period of six months following
the closing of the Merger. In addition to the current employee benefits he
currently receives under the Herchman Agreement, Mr. Herchman will receive a
salary during his employment as President of the Office Division and,
thereafter, will receive severance payments over a two-year period. Mr.
Herchman, to the extent he has available time, will assist the Company, as
reasonably requested by the Chief Executive Officer of DHS, during that two year
period.
 
     The Company has entered into an Employment Agreement with Gary Hill, dated
as of December 2, 1997, (the "Hill Agreement"). The Hill Agreement may be
terminated by the Company upon (12) twelve months prior notice and may be
terminated by Mr. Hill upon (3) three months prior notice. The Hill Agreement
provides that Mr. Hill receive a base salary of $200,000 per year and is
eligible to receive bonuses based upon the Company's financial performance. The
Hill Agreement requires Mr. Hill to maintain the confidentiality of the
Company's proprietary information during his employment and thereafter and
prohibits Mr. Hill from competing with the Company during his employment and for
a period of one year thereafter.
 
                                       23
<PAGE>   26
 
  Compensation Committee Interlocks and Insider Participation
 
     During 1998, the Compensation Committee made recommendations to the Board
regarding compensation of the Company's executive officers and the Board
approved all of such recommendations. The Compensation Committee was comprised
of Tom Montgomery, Tony LeVecchio and Jim Silcock during 1998. No executive
officer of the Company served as a member of the Compensation Committee or
similar committee or board of directors of any other entity which an executive
officer thereof served on the Compensation Committee or Board.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The following table sets forth information with respect to beneficial
ownership of Common Stock as of February 26, 1999, by (i) all persons known to
the Company to be the beneficial owner of 5% or more of the Common Stock, (ii)
each director of the Company, (iii) the chief executive officer and each of the
Company's other most highly compensated executive officers whose total annual
compensation for 1998 based on salary and bonus earned during 1998 exceeded
$100,000 (the "Named Executive Officers") and (iv) all the Company directors and
executive officers as a group. This table does not include shares of Common
Stock that may be purchased pursuant to options not exercisable within 60 days
of February 26, 1999. All persons listed have sole voting and investment power
with respect to their shares unless otherwise indicated.
 
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER                                    NUMBER OF SHARES       PERCENTAGE OF SHARES
AND DIRECTORS                                            BENEFICIALLY OWNED(1)    BENEFICIALLY OWNED(1)
------------------------                                 ---------------------    ---------------------
<S>                                                      <C>                      <C>
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Paul R. Herchman(2)....................................          563,966                    9.1%
Gary B. Hill(3)........................................           77,500                    1.3%
David A. Kallenberger, M.D.(4).........................          197,942                    3.2%
Tony J. LeVecchio(5)...................................           42,648                    0.7%
Thomas A. Montgomery(6)................................          244,626                    4.0%
Leon Pritzker(7).......................................           82,954                    1.4%
Jim Silcock(8).........................................        1,001,693                   16.4%
All named executive officers and directors as a group
  (7 persons)(9).......................................        2,214,329                   35.1%
OTHER 5% SHAREHOLDERS
Peter K. Hilal, M.D.(10)...............................          769,662                   12.6%
Mapleleaf Capital, Ltd(11).............................          740,830                   12.1%
Patrick Rivelli(12)....................................        1,010,593                   16.5%
Satana Corporation(13).................................          494,645                    8.1%
Dimensional Fund Advisors, Inc.(14)....................          364,100                    6.0%
</TABLE>
 
---------------
 
 (1) Unless otherwise indicated below, the persons and entities named in the
     table have sole voting and sole investment power with respect to all shares
     beneficially owned, subject to community property laws where applicable.
     Shares of Common Stock subject to options or warrants that are currently
     exercisable or exercisable within 60 days are deemed to be outstanding and
     to be beneficially owned by the person or entity holding such options.
 
 (2) Includes 77,710 shares underlying currently exercisable options to purchase
     Common Stock and 15,610 shares underlying currently exercisable warrants to
     purchase Common Stock. The business address of Mr. Herchman is 2445 Gateway
     Drive, Suite 150, Irving, Texas 75063.
 
 (3) Includes 62,500 shares underlying currently exercisable options to purchase
     Common Stock.
 
 (4) Includes 30,915 shares underlying currently exercisable options to purchase
     Common Stock.
 
 (5) Includes 833 shares underlying currently exercisable options to purchase
     Common Stock and 1,100 shares owned by Mr. LeVecchio's spouse.
 
 (6) Includes 2,500 shares underlying currently exercisable options to purchase
     Common Stock, 7,805 shares of Common Stock held by Mr. Montgomery's
     spouse's profit sharing plan and 46,610 shares of
 
                                       24
<PAGE>   27
 
     Common Stock held by the profit sharing plan of Montgomery/Jessup L.L.P.,
     of which Mr. Montgomery is a partner. As a partner of Montgomery/Jessup
     L.L.P., Mr. Montgomery may be deemed to be the indirect owner of the shares
     beneficially owned by Montgomery/Jessup L.L.P.'s profit sharing plan by
     virtue of his authority to make investment decisions regarding the voting
     and disposition of such shares.
 
 (7) Includes 2,500 shares underlying currently exercisable options to purchase
     Common Stock.
 
 (8) Includes 740,830 shares beneficially owned by Mapleleaf Capital, Ltd.,
     which includes 2,500 shares underlying currently exercisable options to
     purchase Common Stock; 135,649 shares beneficially owned by Sunwestern
     Cayman 1988 Partners, and 125,214 shares beneficially owned by Sunwestern
     Investment Fund III, all of which are affiliates of Mr. Silcock. Mr.
     Silcock may be deemed to be the indirect beneficial owner of shares
     beneficially owned by such entities by virtue of his authority to make
     investment decisions regarding the voting and disposition of such shares.
     Mr. Silcock disclaims beneficial ownership of the shares owned by Mapleleaf
     Capital, Ltd., Sunwestern Cayman 1988 Partners and Sunwestern Investment
     Fund III. Mr. Silcock's business address is 12221 Merit Drive, Suite 935,
     Dallas, Texas 75251.
 
 (9) Includes the shares referenced in footnotes(2)-(8).
 
(10) Includes 24,826 shares beneficially owned by Hilal Capital, LP, 332,900
     shares beneficially owned by Peter K. Hilal, M.D., 79,036 shares
     beneficially owned by Hilal Capital QP, LP, 103,862 shares beneficially
     owned by Hilal Capital Partners LLC and 229,038 shares beneficially owned
     by Hilal Capital Management LLC both of which are affiliates of Mr. Hilal.
     Mr. Hilal may be deemed to be the indirect beneficial owner of shares
     beneficially owned by such entities by virtue of his authority to make
     investment decisions regarding the voting and disposition of such shares.
     The business address of Mr. Hilal is 60 East 42nd Street, Suite 1946, New
     York, New York 10165.
 
(11) Includes 2,500 shares underlying currently exercisable options to purchase
     Common Stock. The business address for Mapleleaf Capital, Ltd is 12221
     Merit Drive, Suite 935, Dallas, Texas 75251.
 
(12) Includes 740,830 shares beneficially owned by Mapleleaf Capital, Ltd.,
     which includes 2,500 shares underlying currently exercisable options to
     purchase Common Stock; 135,649 shares beneficially owned by Sunwestern
     Cayman 1988 Partners; and 125,214 shares beneficially owned by Sunwestern
     Investment Fund III, all of which are affiliates of Mr. Rivelli. Mr.
     Rivelli may be deemed to be the indirect beneficial owner of shares
     beneficially owned by such entities by virtue of his authority to make
     investment decisions regarding the voting and disposition of such shares.
     Mr. Rivelli disclaims beneficial ownership of the shares owned by Mapleleaf
     Capital, Ltd., Sunwestern Cayman 1988 Partners and Sunwestern Investment
     Fund III. The business address for Mr. Rivelli is 12221 Merit Drive, Suite
     935, Dallas, Texas 75251.
 
(13) The business address of Satana Corporation is National Plaza 2, Suite 102,
     Amarillo, Texas 79101.
 
(14) The business address of Dimensional Fund Advisors, Inc. is 1299 Ocean
     Avenue, 11th Floor, Santa Monica, California 90401.
 
  Change in Control
 
     Pursuant to the Voting Agreement entered into by the members of the Board
of Directors of the Company in connection with the Merger, which is described
under Part 1, Item 1. Business-Recent Developments, the members of the Board
have agreed, in their capacities as Shareholders (individually and on behalf of
their affiliates), to vote their Common Stock in favor of the Merger. The
consummation of the Merger will result in the Company becoming a wholly owned
subsidiary of DHS and will, therefore, result in a change in control of the
Company.
 
                                       25
<PAGE>   28
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     Effective September 11, 1998, the Company entered into an arrangement
whereby the Company would agree to repurchase 242,000 shares of Common Stock
pledged by Paul Herchman to a banking institution. The stock was pledged to the
bank to collaterize payment on a $170,000 loan between Paul Herchman and the
bank. The pledged stock would be repurchased by the Company upon request from
the bank if the loan is in default.
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
 
     (a) The following documents are filed as a part of this Annual Report on
Form 10-K:
 
          (1) Financial Statements:
 
<TABLE>
<CAPTION>
                                                               PAGE
                                                               ----
<S>                                                            <C>
Report of Independent Accountants...........................    F-2
Consolidated Balance Sheets as of December 31, 1997 and
  1998......................................................    F-3
Consolidated Statements of Operations for the years ended
  December 31, 1996, 1997 and 1998..........................    F-4
Consolidated Statements of Stockholders' Equity for the
  years ended December 31, 1996, 1997 and 1998..............    F-5
Consolidated Statements of Cash Flows for the years ended
  December 31, 1996, 1997 and 1998..........................    F-6
Consolidated Notes to Financial Statements..................    F-7
</TABLE>
 
          (2) Financial Statement Schedules:
 
             Schedule II -- Valuation and Qualifying Accounts.
 
          (3) Exhibits
 
             The exhibits filed as a part of this report are listed under
        "Exhibits" at subsection (c) of this Item 14.
 
     (b) Reports on Form 8-K:
 
     No report on Form 8-K was filed on behalf of the Registrant during the last
quarter of the Company's 1998 fiscal year.
 
                                       26
<PAGE>   29
 
     (c) Exhibits:
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
           2.1           -- Asset Purchase Agreement, dated March 18, 1996 between
                            the Company and Maasai Inc.(1)(5)
           2.2           -- Asset Purchase Agreement, dated June 10, 1996 between the
                            Company and Mobile Laser Services, Inc.(1)(5)
           2.3           -- Asset Purchase Agreement, dated as of January 21, 1997
                            among Stone Treatment Center of New England, Inc.,
                            Gregory A. Mercurio, Vincent A. Catallozzi, M.D.,
                            Alexander Calenda, M.D., Gerald Marsocci, M.D., Joseph C.
                            Cambio, M.D. and the Company.(6)(5)
           2.4           -- Agreement and Plan of Merger, dated as of February 18,
                            1999 between Diagnostic Health Services, Inc. and the
                            Company.(3)
           3.1           -- Amended and Restated Articles of Incorporation of the
                            Company.(1)
           3.2           -- Amended and Restated Bylaws of the Company.(1)
           4.1           -- Specimen of Company Common Stock Certificate.(1)
           4.2           -- Warrant to Purchase 15,651 shares of Common Stock of the
                            Company dated July 27, 1995 between the Company and Paul
                            R. Herchman.(1)
           4.3           -- Warrant to Purchase 23,416 shares of Common Stock of the
                            Company dated August 15, 1993 between the Company and
                            Columbia General Corporation.(1)
           4.4           -- Warrant to Purchase 2,810 shares of Common Stock of the
                            Company dated October 17, 1993 between the Company and
                            Robert J. Matthews, M.D.(1)
           4.5           -- Warrant to Purchase 2,342 shares of Common Stock of the
                            Company dated May 31, 1994 between the Company and Shelly
                            Burks.(1)
           4.6           -- Warrant to Purchase 1,873 shares of Common Stock of the
                            Company dated May 31, 1994 between the Company and Thomas
                            A. Montgomery.(1)
           4.7           -- Warrant to Purchase 6,556 shares of Common Stock of the
                            Company dated May 31, 1994 between the Company and Thomas
                            A. Montgomery.(1)
          10.1           -- Agreement between the Company and Coherent Medical
                            Group.(1)
          10.2           -- Master Lease Agreement dated July 20, 1995 between the
                            Company and Cabot Medical Corporation.(1)
          10.3           -- Master services Agreement dated June 3, 1996 between the
                            Company and Cosmetic Technologies International.(1)
          10.4           -- Joint Venture Agreement dated March 25, 1996 between the
                            Company and Coherent-AMT Inc.(1)
          10.5           -- Medical Alliance, Inc. 1994 Amended and Restated
                            Long-Term Incentive Plan.(2)(4)
          10.6           -- Employment Agreement between the Company and Paul
                            Herchman.(1)(4)
          10.7           -- Employment Agreement between the Company and Gary
                            Hill.(7)(4)
          10.8           -- Employment Agreement between the Company and Kevin
                            O'Brien.(1)(4)
          10.9           -- Employment Agreement between the Company and Michael G.
                            Wallace.(1)(4)
          10.10          -- Lease Agreement.(1)
          10.11          -- Strategic Alliance Agreement, dated as of December 19,
                            1996, by and between Laserscope and the Company.(6)
          10.12          -- Exclusive Provider Agreement, dated as of January 21,
                            1997, by and between Thermolase Corporation and the
                            Company.(6)
</TABLE>
 
                                       27
<PAGE>   30
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
          10.13          -- Strategic Alliance Agreement, dated as of January 1,
                            1997, by and between Valleylab, Inc. and the Company.(6)
          10.14          -- Exclusive Provider Agreement, dated as of February 9,
                            1997, by and between Imagyn Medical, Inc. and the
                            Company.(6)
          10.15          -- Paul Herchman Severance Agreement.(3)
          10.16          -- Voting Agreement, dated as of February 18, 1999, by and
                            between Diagnostic Health Services, Inc., MAI Acquisition
                            Corp., and Medical Alliance, Inc.(3)
          12.1           -- Subsidiaries of the Company.(1)
          23.1           -- Consent of PricewaterhouseCoopers LLP.(3)
          27.1           -- Financial Data Schedule.(3)
</TABLE>
 
---------------
 
(1) Previously filed as an exhibit to the Company's Registration Statement on
    Form S-1 (No. 333-09815) and incorporated herein by reference.
 
(2) Previously filed as an exhibit to the Company's Registration Statement on
    form S-8 (No. 333-18545) and incorporated herein by reference.
 
(3) Filed herewith.
 
(4) Management contract or compensatory plan or arrangement, which is being
    identified as such pursuant to Item 14(a)3 of Form 10-K.
 
(5) Schedules and similar attachments to this Exhibit have not been filed
    herewith. The Company agrees to furnish a copy of any such omitted schedules
    and attachments to the Commission upon request.
 
(6) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
    for the fiscal year ended December 31, 1996, and incorporated herein by
    reference.
 
(7) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
    for the fiscal year ended December 31, 1997, and incorporated herein by
    reference.
 
                                       28
<PAGE>   31
 
                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
                         FINANCIAL STATEMENT SCHEDULES
 
<TABLE>
<CAPTION>
                                                               PAGE
                                                               ----
<S>                                                            <C>
Report of Independent Accountants...........................    F-2
Consolidated Balance Sheets as of December 31, 1997 and
  1998......................................................    F-3
Consolidated Statements of Operations for the years ended
  December 31, 1996, 1997 and 1998..........................    F-4
Consolidated Statements of Stockholders' Equity for the
  years ended December 31, 1996, 1997 and 1998..............    F-5
Consolidated Statements of Cash Flows for the years ended
  December 31, 1996, 1997 and 1998..........................    F-6
Consolidated Notes to Financial Statements..................    F-7
Schedule II -- Valuation and Qualifying Accounts for the
  years ended December 31, 1996, 1997 and 1998..............   F-16
</TABLE>
 
     All other schedules are not submitted because they are not applicable or
not required or because the information is included in the consolidated
financial statements.
 
                                       F-1
<PAGE>   32
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholders of
Medical Alliance, Inc. and Subsidiaries:
 
     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Medical Alliance, Inc. and Subsidiaries ("the Company") at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, 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 audits. We conducted our
audits 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
audits provide a reasonable basis for the opinion expressed above.
 
                                            PRICEWATERHOUSECOOPERS LLP
 
Dallas, Texas
February 18, 1999
 
                                       F-2
<PAGE>   33
 
                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1998
 
<TABLE>
<CAPTION>
                                        ASSETS
                                                                    DECEMBER 31,
                                                              -------------------------
                                                                 1997          1998
                                                              -----------   -----------
<S>                                                           <C>           <C>
Current assets:
  Cash and cash equivalents.................................  $14,902,578   $14,377,781
  Accounts receivable, less allowance for doubtful accounts
     of $2,554,705 and $1,001,851, respectively.............    2,715,446     1,711,558
  Prepaid expenses and other current assets.................    1,290,038     1,090,736
  Refundable federal and state income taxes.................    1,253,910       205,297
  Deferred taxes............................................           --       488,918
                                                              -----------   -----------
          Total current assets..............................   20,161,972    17,874,290
Property and equipment, net.................................    5,473,485     5,868,543
Intangible assets, net of amortization of approximately
  $159,346, and $265,934, respectively......................      869,080       778,232
                                                              -----------   -----------
          Total assets......................................  $26,504,537   $24,521,065
                                                              ===========   ===========
 
                         LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
  Accounts payable..........................................  $   976,150   $   356,509
  Accrued expenses..........................................    1,197,785       789,238
  Capital lease obligations.................................      248,650       202,593
  Deferred revenue..........................................      163,976        92,139
                                                              -----------   -----------
          Total current liabilities.........................    2,586,561     1,440,479
  Capital lease obligations, net of current maturities......      239,929        37,336
  Deferred taxes............................................           --       488,918
                                                              -----------   -----------
          Total liabilities.................................    2,826,490     1,966,733
                                                              -----------   -----------
Commitments (Note 9)
Stockholders' equity:
  Common stock, $0.002 par value, 30,000,000 shares
     authorized and 6,157,300 and 6,117,079 shares issued
     and outstanding, respectively..........................       12,331        12,753
  Capital in excess of par value............................   26,236,053    26,664,309
  Accumulated deficit.......................................   (2,504,393)   (3,277,976)
  Treasury stock at cost, 25,703 and 277,203 shares,
     respectively...........................................      (65,944)     (844,754)
                                                              -----------   -----------
          Total stockholders' equity........................   23,678,047    22,554,332
                                                              -----------   -----------
          Total liabilities and stockholders' equity........  $26,504,537   $24,521,065
                                                              ===========   ===========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       F-3
<PAGE>   34
 
                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
 
<TABLE>
<CAPTION>
                                                               YEARS ENDED DECEMBER 31,
                                                        ---------------------------------------
                                                           1996          1997          1998
                                                        -----------   -----------   -----------
<S>                                                     <C>           <C>           <C>
Net revenue...........................................  $17,350,384   $18,821,125   $16,132,206
                                                        -----------   -----------   -----------
Costs and expenses:
  Salaries and benefits...............................    5,136,732     8,352,623     7,327,343
  Selling, general and administrative.................    5,510,614     7,857,136     6,306,234
  Depreciation and amortization.......................    1,595,101     3,152,491     2,337,183
  Provision for uncollectible accounts................    3,408,360     3,870,925     1,690,293
                                                        -----------   -----------   -----------
          Total costs and expenses....................   15,650,807    23,233,175    17,661,053
                                                        -----------   -----------   -----------
Operating income (loss)...............................    1,699,577    (4,412,050)   (1,528,847)
                                                        -----------   -----------   -----------
Other (income) expense:
  Interest income and other, net......................     (172,195)     (778,351)     (814,570)
  Interest expense....................................      269,532       111,578        59,306
                                                        -----------   -----------   -----------
          Total other (income) expense................       97,337      (666,773)     (755,264)
                                                        -----------   -----------   -----------
Income (loss) before income taxes.....................    1,602,240    (3,745,277)     (773,583)
Provision (benefit) for income taxes..................      683,240      (848,267)           --
                                                        -----------   -----------   -----------
Net income (loss).....................................      919,000    (2,897,010)     (773,583)
Less preferred stock dividend.........................      (87,000)           --            --
                                                        -----------   -----------   -----------
Net income (loss) applicable to common stock..........  $   832,000   $(2,897,010)  $  (773,583)
                                                        ===========   ===========   ===========
Net income (loss) per share (basic)...................  $      0.26   $     (0.48)  $     (0.12)
                                                        ===========   ===========   ===========
Net income (loss) per share (diluted).................  $      0.26   $     (0.48)  $     (0.12)
                                                        ===========   ===========   ===========
Weighted average number of common shares outstanding
  (in thousands) (basic)..............................        3,215         6,061         6,214
Weighted average number of common shares outstanding
  (in thousands) (diluted)............................        3,559         6,061         6,214
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       F-4
<PAGE>   35
 
                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
                                    SERIES A            SERIES B                                              RETAINED
                                 PREFERRED STOCK     PREFERRED STOCK       COMMON STOCK       CAPITAL IN      EARNINGS
                                -----------------   -----------------   -------------------    EXCESS OF    (ACCUMULATED
                                 SHARES    AMOUNT    SHARES    AMOUNT    SHARES     AMOUNT     PAR VALUE     (DEFICIT)
                                --------   ------   --------   ------   ---------   -------   -----------   ------------
<S>                             <C>        <C>      <C>        <C>      <C>         <C>       <C>           <C>
Balance at December 31,
  1995........................   435,000   $ 870     362,500   $ 725    2,339,421   $ 4,678   $ 2,959,586   $  (526,383)
  Issuance of common stock....                                              4,293         9        10,991
  Options exercised...........                                             85,605       171        90,370
  Series A preferred stock
    dividend..................                                                                    (87,000)
  Treasury stock purchase.....                                             (8,473)
  Series A and Series B
    preferred stock converted
    into common stock.........  (435,000)   (870)   (362,500)   (725)   1,244,898     2,490          (895)
  Initial Public Offering of
    common stock, net.........                                          2,300,000     4,600    22,773,240
  Net income..................                                                                                  919,000
                                --------   -----    --------   -----    ---------   -------   -----------   -----------
Balance at December 31,
  1996........................         0       0           0       0    5,965,744    11,948    25,746,292       392,617
  Issuance of common stock....                                             22,174        44       252,183
  Options and warrants
    exercised.................                                            169,382       339       237,578
  Net loss....................                                                                               (2,897,010)
                                --------   -----    --------   -----    ---------   -------   -----------   -----------
Balance at December 31,
  1997........................         0       0           0       0    6,157,300    12,331    26,236,053    (2,504,393)
  Options exercised...........                                            211,279       422       428,256
  Treasury stock purchases....                                           (251,500)
  Net loss....................                                                                                 (773,583)
                                --------   -----    --------   -----    ---------   -------   -----------   -----------
Balance at December 31,
  1998........................         0   $   0           0   $   0    6,117,079   $12,753   $26,664,309   $(3,277,976)
                                ========   =====    ========   =====    =========   =======   ===========   ===========
 
<CAPTION>
 
                                                TOTAL
                                TREASURY    STOCKHOLDERS'
                                  STOCK        EQUITY
                                ---------   -------------
<S>                             <C>         <C>
Balance at December 31,
  1995........................  $  (8,950)   $ 2,430,526
  Issuance of common stock....                    11,000
  Options exercised...........                    90,541
  Series A preferred stock
    dividend..................                   (87,000)
  Treasury stock purchase.....    (56,994)       (56,994)
  Series A and Series B
    preferred stock converted
    into common stock.........                         0
  Initial Public Offering of
    common stock, net.........                22,777,840
  Net income..................                   919,000
                                ---------    -----------
Balance at December 31,
  1996........................    (65,944)    26,084,913
  Issuance of common stock....                   252,227
  Options and warrants
    exercised.................                   237,917
  Net loss....................                (2,897,010)
                                ---------    -----------
Balance at December 31,
  1997........................    (65,944)    23,678,047
  Options exercised...........                   428,678
  Treasury stock purchases....   (778,810)      (778,810)
  Net loss....................                  (773,583)
                                ---------    -----------
Balance at December 31,
  1998........................  $(844,754)   $22,554,332
                                =========    ===========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       F-5
<PAGE>   36
 
                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
 
<TABLE>
<CAPTION>
                                                                     YEARS ENDED DECEMBER 31,
                                                              ---------------------------------------
                                                                 1996          1997          1998
                                                              -----------   -----------   -----------
<S>                                                           <C>           <C>           <C>
Cash flows from operating activities:
  Net income (loss).........................................  $   919,000   $(2,897,010)  $  (773,583)
  Adjustments to reconcile net income (loss) to net cash
    used in operating activities:
    Loss on joint venture...................................       38,776        56,540            --
    Gain from disposal of equipment.........................           --            --       (18,513)
    Provision for uncollectible accounts....................    3,408,360     3,870,925     1,690,293
    Depreciation and amortization...........................    1,595,101     3,152,491     2,337,183
    Deferred income taxes...................................     (317,521)      (64,642)           --
  Changes in assets and liabilities net of effects from
    acquisitions:
    Accounts receivable.....................................   (5,254,534)   (2,171,511)     (686,405)
    Prepaid expenses and other current assets...............     (231,421)   (2,021,322)    1,247,915
    Accounts payable and accrued expenses...................    2,274,315    (1,518,457)   (1,120,869)
    Deferred revenue........................................       22,325       (17,686)      (71,837)
    Other...................................................        6,102        (2,773)           --
                                                              -----------   -----------   -----------
        Net cash provided by (used in) operating
          activities........................................    2,460,503    (1,613,445)    2,604,184
                                                              -----------   -----------   -----------
Cash flows from investing activities:
  Capital expenditures......................................   (3,236,750)   (3,301,515)   (2,566,243)
  Net proceeds from sale of equipment.......................           --        83,753        51,784
  Payment for acquisitions..................................     (518,840)     (605,978)           --
  Change in restricted cash.................................       (8,146)       31,000            --
  Other.....................................................           --            --       (15,740)
                                                              -----------   -----------   -----------
        Net cash used in investing activities...............   (3,763,736)   (3,792,740)   (2,530,199)
                                                              -----------   -----------   -----------
Cash flows from financing activities:
  Payment of dividends on preferred stock...................      (87,000)           --            --
  Repayment of capital lease obligations....................     (317,989)     (444,542)     (248,650)
  Repayment of long-term debt...............................   (3,901,521)           --            --
  Purchase of treasury shares...............................           --            --      (778,810)
  Proceeds from issuance of common stock....................   22,822,387       237,917       428,678
  Proceeds from issuance of long-term debt..................    2,091,035            --            --
  Other.....................................................     (183,546)        9,601            --
                                                              -----------   -----------   -----------
        Net cash provided by (used in) financing
          activities........................................   20,423,366      (197,024)     (598,782)
                                                              -----------   -----------   -----------
Net increase (decrease) in cash and cash equivalents........   19,120,133    (5,603,209)     (524,797)
Cash and cash equivalents at beginning of year..............    1,385,654    20,505,787    14,902,578
                                                              -----------   -----------   -----------
Cash and cash equivalents at end of year....................  $20,505,787   $14,902,578   $14,377,781
                                                              ===========   ===========   ===========
Supplemental disclosures of cash flow information:
  Interest paid.............................................  $   276,090   $   111,578   $    63,906
  Income taxes paid.........................................      216,571     1,256,854            --
Supplemental schedule of noncash investing and financing
  activities:
  Capital lease obligations incurred........................      130,554            --            --
The Company has acquired businesses, as follows:
  Fair value of assets acquired.............................      351,198       831,082            --
  Goodwill recorded.........................................      167,642       812,362            --
  Less:
    Fair value of common stock..............................           --      (255,000)           --
    Cash paid...............................................     (518,840)     (605,978)           --
                                                              -----------   -----------   -----------
  Liabilities assumed.......................................  $        --   $   782,466   $        --
                                                              ===========   ===========   ===========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       F-6
<PAGE>   37
 
                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
 
                   CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION:
 
     Medical Alliance, Inc. ("Medical Alliance") provides office based surgical
services which allow certain minimally invasive operative and diagnostic
procedures to be performed in the physician's office. Medical Alliance was
incorporated in Texas in 1989 and is headquartered in Irving, Texas. Medical
Alliance provides its services throughout the United States. Medical Alliance
entered into two new lines of business in 1993 through wholly-owned
subsidiaries. MAI Safety Compliance Services, Inc. provided assistance to
physician offices and other alternate site healthcare facilities to comply with
O.S.H.A. standards. Physicians Marketing Services, Inc. provided group
advertising services to physicians who utilize Medical Alliance's office based
medical services.
 
     The accompanying consolidated financial statements include the accounts of
Medical Alliance and its wholly-owned subsidiaries (the "Company"). All
significant intercompany transactions have been eliminated.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
     Cash and Cash Equivalents. The Company considers all investments with
maturities of 90 days or less at the time of purchase to be cash equivalents.
The Company maintains a significant portion of its cash balances with one
financial institution. These deposit accounts are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to a limit of $100,000 per account. At
December 31, 1997 and December 31, 1998, the Company had approximately
$14,000,000 and $13,000,000 invested in high quality and high investment grade
instruments which mainly consist of commercial paper. As a result of the
foregoing, the Company believes that credit and market risk in such instruments
is minimal.
 
     Property and Equipment. Property and equipment are recorded at cost.
Depreciation is provided by the straight-line method over existing useful lives
ranging from three to five years. Repairs and maintenance are charged directly
to expense as incurred. Maintenance contracts are amortized over their
respective contracted period. Upon sale or retirement of equipment the cost and
related accumulated depreciation are eliminated and the resulting gain or (loss)
is included in the consolidated statement of operations as other income
(expense).
 
     Intangibles. Goodwill is the excess of the purchase price over the fair
value of net assets acquired and is being amortized on a straight-line basis
over three to thirty years. The carrying value of goodwill is continually
reviewed for recoverability. If the review indicates that goodwill will not be
recoverable, as determined based on undiscounted cash flows, the carrying value
of the goodwill is reduced by the estimated shortfall of discounted cash flows.
 
     Income Taxes. The Company recognizes deferred tax liabilities and assets
for the expected future tax consequences of events that have been recognized in
the Company's consolidated financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. Valuation allowances, if any, are
established when necessary to reduce deferred tax assets to the amount that is
more likely than not to be realized. Income tax expense is the tax payable for
the period and the change during the period in deferred tax assets and
liabilities.
 
     Revenue Recognition. The Company recognizes revenue in most instances upon
completion of the surgical procedures performed with the Company's equipment.
Revenue for procedures that require two or more treatments and is collected as a
global fee, is recognized in equal amounts over the course of the treatments.
Revenue is presented net of negotiated contractual discounts and field
discounts.
 
     Deferred Revenue. The Company organizes certain training seminars for
physician utilizers. Revenues are recognized when the seminars are held.
Additionally, certain procedures require multiple treatments and revenues
received in advance are deferred until subsequent procedures are performed.
 
                                       F-7
<PAGE>   38
                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
 
           CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     Stock-Based Compensation. The Company has elected to account for employee
stock-based compensation as prescribed in Accounting Principles Board (APB) No.
25 as opposed to the fair value method prescribed by (SFAS) No. 123 "Accounting
for Stock-Based Compensation." However, pro forma disclosure as prescribed by
SFAS No. 123 for all such equity awards is included in these annual financial
statements.
 
     Earnings Per Share. Basic earnings per share have been computed by dividing
net income applicable to common stock by the weighted average of shares of
common stock outstanding. Diluted earnings per share have been computed by
dividing net income by the weighted average number of common shares and
equivalents outstanding.
 
     Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets,
particularly accounts receivable, 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
may, in some instances, differ from previously estimated amounts.
 
     Recently Issued Accounting Standards. Recently issued Statements of
Financial Accounting Standards (SFAS), effective for the Company for 1998 are
summarized below. These accounting standards have no current effect on the
Company's financial statements as the Company currently has no transactions or
operations that are subject to these standards.
 
     SFAS No. 130 "Reporting Comprehensive Income" -- generally requires that
changes in the balances of items that previously were reported directly in a
separate component of equity in a statement of financial position be reported in
a financial statement that is displayed as prominently as other financial
statements.
 
     SFAS No. 131 "Disclosure about Segments of an Enterprise and Related
Information" -- requires enterprises to provide information about the different
types of business activities in which an enterprise engages and the different
economic environments in which it operates.
 
     SFAS No. 132 "Employers Disclosures about Pensions and Other Postretirement
Benefits -- an amendment to FASB Statements no. 87, 88 and 106" -- revises
employers' disclosures about pension and other postretirement benefit plans,
however, it does not change the measurement or recognition of those plans.
 
3. PROPERTY AND EQUIPMENT:
 
     Property and equipment consisted of the following:
 
<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                             -------------------------
                                                                1997          1998
                                                             -----------   -----------
<S>                                                          <C>           <C>
Medical equipment..........................................  $ 8,231,052   $ 9,155,481
Furniture and fixtures.....................................    1,763,602     2,140,049
Vehicles...................................................      117,778     1,255,940
Leasehold improvements.....................................       52,961        53,361
Equipment under capital leases.............................    1,493,533     1,493,533
                                                             -----------   -----------
                                                              11,658,926    14,098,364
Less accumulated depreciation and amortization.............   (6,185,441)   (8,229,821)
                                                             -----------   -----------
Net property and equipment.................................  $ 5,473,485   $ 5,868,543
                                                             ===========   ===========
</TABLE>
 
                                       F-8
<PAGE>   39
                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
 
           CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     Depreciation expense related to property and equipment was $1,522,000,
$3,065,000 and $2,231,000 for the years ended December 31, 1996, 1997 and 1998,
respectively. Accumulated amortization related to equipment under capital leases
was approximately $1,028,000 and $1,195,000 at December 31, 1997 and December
31, 1998, respectively.
 
     Property and equipment are recorded at cost. Depreciation is provided by
the straight-line method over existing useful lives from three to five years.
Effective January 1, 1998, the Company extended the estimated useful lives on
certain medical equipment and established residual values on such equipment
based on historical experience. The change in accounting estimate had the effect
of reducing depreciation expense and the net loss by approximately $803,000 for
the year ended December 31, 1998.
 
4. SERIES A PREFERRED STOCK AND PREFERRED STOCK WARRANTS:
 
     On July 10, 1992 the Company entered into a Preferred Stock Purchase
Agreement (the "Series A Agreement") with Mapleleaf Capital, Ltd. The Company
issued an aggregate of 375,000 shares of Series A Convertible Preferred Stock
("Series A Preferred Stock") in exchange for cash of $2.00 per share. In
connection with this transaction, the Company converted subordinated debt of
certain shareholders into shares of common stock at a conversion rate of one
share of common stock for every $2.00 of subordinated debt as described above.
The shares of Series A Preferred Stock were issued with warrants attached to
purchase up to 60,000 shares of Series A Preferred Stock. The warrants were
exercisable at $2.00 per share and expired in 1995. The warrants were exercised
on July 1, 1994 at $1.67 per share which approximated the fair value for other
trades in the Company's common stock. The Series A Preferred Stock was
convertible into common stock at a ratio of 1 to 1 initially. However, upon
issuance of common stock or common stock equivalents, the conversion ratio was
subject to an anti-dilution adjustment pursuant to the Series A Agreement for
all convertible preferred stock. Effective with the stock dividend discussed in
Note 6, the conversion ratio for the Series A Preferred Stock was 1.561 to 1 as
approved by the Board of Directors. The Series A Preferred Stock was convertible
at the election of the holder at any time, or automatically with the closing of
an underwritten qualified public offering (as defined in the Series A
Agreement). If the Company had not completed a qualified public offering on or
prior to December 31, 1997, the Company had the right, but not the obligation to
repurchase all remaining shares of Series A Preferred Stock.
 
     The Series A Preferred Stock required a $.20 per share annual dividend
commencing on June 30, 1993 which was cumulative if unpaid. Dividends paid for
the years ended December 31,1994, 1995, and 1996 were $115,000, $122,000, and
$87,000, respectively. During 1995, the Company was not in compliance with
certain covenants of the Series A Agreement, including the timely issuance of
its year-end audited consolidated financial statements, the timely issuance of a
budgeted operating forecast and a loan to an employee which exceeded the
designated limit. The Company obtained appropriate waivers from the Series A
Preferred Stock shareholder effective until January 1, 1997.
 
     In connection with the Initial Public Offering on October 11, 1996, the
Series A Preferred Stock was converted into common stock on a 1.561 to one
basis, which was effected through a stock dividend declared on September 9,
1996.
 
5. SERIES B PREFERRED STOCK:
 
     On November 17, 1995 the Company entered into a Preferred Stock Purchase
Agreement (the "Series B Agreement") with various investors. The Company issued
an aggregate of 362,500 shares of Series B Convertible Preferred Stock ("Series
B Preferred Stock") in exchange for cash of $4.00 per share.
 
     The Series B Preferred Stock was convertible into common stock at a ratio
of 1 to 1 initially. However, upon issuance of common stock or common stock
equivalents, the conversion ratio was subject to an anti-dilution adjustment
pursuant to the Series B Agreement for all convertible preferred stock.
Effective with the
 
                                       F-9
<PAGE>   40
                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
 
           CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
stock dividend discussed in Note 6, the conversion ratio for the Series B
Preferred Stock was 1.561 to 1 as approved by the Board of Directors. The Series
B Preferred Stock was convertible at the election of the holders at any time, or
automatically with the closing of an underwritten qualified public offering (as
defined in the Series B Agreement). There was no annual dividend requirement in
the Series B Agreement. During 1995, the Company was not in compliance with
certain covenants of the Series B Agreement including, the timely issuance of
its year-end audited consolidated financial statements, the timely issuance of a
budgeted operating forecast, and a loan to an employee which exceeded the
designated limit. The Company obtained appropriate waivers from all Series B
Preferred Stock shareholders effective until January 1, 1997.
 
     In connection with the Initial Public Offering on October 11, 1996, the
Series B Preferred Stock was converted into common stock on a 1.561 to one
basis, which was effected through a stock dividend declared on September 9,
1996.
 
6. COMMON STOCK AND COMMON STOCK WARRANTS:
 
     On September 9, 1996, the Board of Directors approved and paid a 1.561 to 1
stock split, effected through a stock dividend, whereby each common stock
shareholder received an additional .561 shares for each share owned. In
connection with the split, effected through a stock dividend, common stock was
credited and capital in excess of par value was charged for the aggregate par
value of the shares that were issued. In accordance with SAB Topic 4-C, the
accompanying consolidated financial statements and related footnotes have been
retroactively adjusted to give effect for this stock split effected through a
stock dividend.
 
     Furthermore, during the fourth quarter of 1996, the Company completed an
Initial Public Offering of its common stock in which 2,300,000 shares of common
stock were sold raising net proceeds of approximately $23 million.
 
     A warrant to purchase up to 374,640 shares of common stock was granted to
Satana Corporation ("Satana") on January 17, 1991 as part of a subordinated note
to Satana. This warrant included a put feature, whereby the holder of the shares
acquired via the exercise of the warrant could have required the Company to
redeem the shares based on a formula price. The Satana subordinated note payable
was modified in July 1992, at which time Satana was granted a warrant to
purchase an additional 93,660 shares of the Company's common stock. During the
year ended December 31, 1994, the holder exercised the $.64 per share warrant to
purchase 93,660 shares of common stock at a price of $0.53 per share. The
Company recorded interest expense of approximately $10,000 as a result of this
transaction. During the year ended December 31, 1995, the holder exercised the
warrant to acquire 374,640 shares of common stock in exchange for the
outstanding debt owed to Satana and cancellation of the put feature. The
difference between the carrying value of the debt instrument, which approximated
fair value, and the exercise price of the warrants has been accounted for as a
reduction of capital in excess of par value and has been deducted from net
income for purposes of computing net income applicable to common stock in the
accompanying statement of operations.
 
     A warrant to purchase up to 23,415 shares of common stock at $1.28 per
share was granted to Columbia General Corporation on August 15, 1993 as part of
the restructured note payable to MJ Capital Partners note. The warrant was
exercised in March of 1997.
 
     A warrant to purchase 2,810 shares of common stock was granted in 1993 as
part of the restructured MJ Capital Partners note. The warrant was exercised in
March of 1997. Warrants to purchase up to 10,771 shares of common stock at $1.28
per share were granted in 1994 in connection with advances under the MJ Capital
Partners note. Warrants to purchase 3,278 shares of common stock at $1.28 per
share were canceled in 1995 as part of the early retirement of the MJ Capital
Partners note. These remaining warrants were exercised in March of 1997. A
warrant to purchase up to 15,610 shares of common stock at $2.56 per share was
granted in 1995 to a major stockholder in return for a personal guarantee of the
debt with NationsBank. This warrant vested immediately and expires in September
of 1999.
 
                                      F-10
<PAGE>   41
                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
 
           CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Company had previously reserved 49,328 shares of common stock for the
conversion of all outstanding common stock warrants. As of December 31, 1998,
33,718 of the warrants have been exercised and 15,610 shares of common stock are
reserved for the conversion of all remaining outstanding common stock warrants.
 
7. SHARE REPURCHASE PROGRAM:
 
     On May 14, 1998, the Company commenced a share repurchase program of up to
one million shares of the Company's Common Stock. The purchases were to be made
from time to time over the next 12 months at prices then prevailing on the
Nasdaq National Market System or in privately negotiated transactions. From May
14, 1998 thru October 31, 1998, the Company repurchased 251,500 shares of the
Company's stock at a total cost of $778,810. The share repurchase program was
terminated by the Company's Board of Directors in November 1998.
 
8. STOCK-BASED COMPENSATION PLANS:
 
     The Company sponsors the "Medical Alliance, Inc. Amended and Restated 1994
Long-Term Incentive Plan"(the "1994 Plan"), a stock-based incentive compensation
plan which is described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for the 1994 Plan. In 1995, the FASB issued FASB
Statement No. 123 "Accounting for Stock Based Compensation" ("SFAS 123") which,
if fully adopted by the Company, would change the methods the Company applies in
recognizing the cost of the 1994 Plan. Adoption of the cost recognition
provisions of SFAS 123 is optional and the Company has decided not to elect
these provisions of SFAS 123. However, pro forma disclosures as if the Company
adopted the cost recognition provisions of SFAS 123 in 1995 are required by SFAS
123 and are presented below.
 
     Under the Amended and Restated Long-Term Incentive Plan of 1994, the
Company is authorized to issue up to 1,624,290 shares of common stock pursuant
to awards granted in the form of incentive stock options (intended to qualify
under Section 422 of the Internal Revenue Code of 1986, as amended), non-
qualified stock options, shares of restricted stock, stock appreciation rights,
performance shares, and/or stock units. Awards may be granted to selected
employees, directors, consultants or advisors of the Company or any subsidiary.
However, incentive stock options may be granted only to employees, and
non-employee directors may be granted awards only in the manner and on the terms
and conditions set forth in Section 4.2 of the 1994 Plan.
 
                             EMPLOYEE STOCK OPTIONS
 
     The 1994 Plan provides that the exercise price of any incentive stock
option may not be less than the fair market value of the common stock on the
date of grant. The stock options granted in 1996, 1997, and 1998 have varying
contractual terms, ranging from approximately two to five years, and varying
vesting dates, which range from the day immediately following the date of grant
to three years following the date of grant. In accordance with APB 25, the
Company has not recognized compensation cost for stock options granted in 1996,
1997 and 1998.
 
                                      F-11
<PAGE>   42
                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
 
           CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     A summary of the Company's stock options as of December 31, 1996, 1997 and
1998 and the changes during the years then ended on those dates is presented
below:
 
<TABLE>
<CAPTION>
                                             1996                     1997                     1998
                                    ----------------------   ----------------------   ----------------------
                                                  WEIGHTED                 WEIGHTED                 WEIGHTED
                                    # SHARES OF   AVERAGE    # SHARES OF   AVERAGE    # SHARES OF   AVERAGE
                                    UNDERLYING    EXERCISE   UNDERLYING    EXERCISE   UNDERLYING    EXERCISE
                                      OPTIONS      PRICES      OPTIONS      PRICES      OPTIONS      PRICES
                                    -----------   --------   -----------   --------   -----------   --------
<S>                                 <C>           <C>        <C>           <C>        <C>           <C>
Outstanding at beginning of the
  year............................    798,983      $1.89       837,478      $2.41       971,086      $3.35
Granted...........................    219,321       3.79       508,760       7.54       282,040       3.71
Exercised.........................     85,605       1.09       135,661       1.44       211,279       2.03
Forfeited.........................     95,221       2.48       239,491       8.62       132,305       5.03
Outstanding at the end of year....    837,478       2.41       971,086       3.35       909,542       3.60
Exercisable at end of year........    344,990       1.44       559,201       2.14       429,125       2.82
Weighted-average fair value of
  options granted during the
  year............................                 $1.00                    $4.78                    $1.90
</TABLE>
 
     The fair value of each stock option granted is estimated on the date of
grant using the "minimum value" option-pricing model with the following
weighted-average assumptions for grants in 1996, 1997 and 1998, respectively:
dividend yield of 0.00% for all years; risk-free interest rates are different
for each grant and range from 7.80%, 6.15% and 5.41%; and the expected lives of
options are different for each grant and range from 4.71 years, 3.94 years, and
5.0 years.
 
     The following table summarizes information about stock options outstanding
at December 31, 1998:
 
<TABLE>
<CAPTION>
                                          OPTIONS OUTSTANDING                   OPTIONS EXERCISABLE
                                       -------------------------   ---------------------------------------------
                                         NUMBER      WGTD. AVG.                       NUMBER
                                       OUTSTANDING    REMAINING      WGTD. AVG.     EXERCISABLE     WGTD. AVG.
RANGE OF EXERCISE PRICES               AT 12/31/98   CONTR. LIFE   EXERCISE PRICE   AT 12/31/98   EXERCISE PRICE
------------------------               -----------   -----------   --------------   -----------   --------------
<S>                                    <C>           <C>           <C>              <C>           <C>
$1.28 to $5.00.......................    867,542        3.43           $3.17          414,292         $ 2.53
$5.01 to $13.50......................     42,000        3.81           $8.83           14,833         $10.92
                                         -------        ----           -----          -------         ------
          Total......................    909,542        3.46           $3.60          429,125         $ 2.82
                                         =======        ====           =====          =======         ======
</TABLE>
 
                              PRO FORMA NET INCOME
                                      AND
                          NET INCOME PER COMMON SHARE
 
     Had the compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS 123, the Company's net income and net
income per common share for 1996, 1997, and 1998 would approximate the pro forma
amounts below.
 
<TABLE>
<CAPTION>
                             REPORTED   PRO FORMA    REPORTED      PRO FORMA    REPORTED    PRO FORMA
                             12/31/96   12/31/96     12/31/97      12/31/97     12/31/98    12/31/98
                             --------   ---------   -----------   -----------   ---------   ---------
<S>                          <C>        <C>         <C>           <C>           <C>         <C>
SFAS 123 charge............  $   0.00   $ 49,773    $      0.00   $   204,567   $    0.00   $  42,731
APB25 charge...............      0.00       0.00           0.00          0.00        0.00        0.00
Net income (loss)
  applicable to common
  stock....................   832,000    782,227     (2,897,010)   (3,101,577)   (773,583)   (816,314)
Net income (loss) per
  common share.............  $   0.26   $   0.24    $     (0.48)  $     (0.51)  $   (0.12)  $   (0.13)
</TABLE>
 
                                      F-12
<PAGE>   43
                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
 
           CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards granted prior to
1995, and the Company anticipates making awards in the future under its
stock-based compensation plans.
 
9. INCOME TAXES:
 
     The income tax provisions consisted of the following:
 
<TABLE>
<CAPTION>
                                                       FOR YEARS ENDED DECEMBER 31,
                                                     ---------------------------------
                                                        1996        1997        1998
                                                     ----------   ---------   --------
<S>                                                  <C>          <C>         <C>
Current provisions:
  Federal..........................................  $  816,931   $(820,952)  $     --
  State............................................     183,830      37,327         --
                                                     ----------   ---------   --------
          Total current............................   1,000,761    (783,625)        --
                                                     ----------   ---------   --------
Deferred provisions:
  Federal..........................................    (261,859)    (51,477)   (26,570)
  State............................................     (55,662)    (13,165)    26,570
                                                     ----------   ---------   --------
          Total deferred...........................    (317,521)    (64,642)        --
                                                     ----------   ---------   --------
          Total provisions (benefit)...............  $  683,240   $(848,267)  $     --
                                                     ==========   =========   ========
</TABLE>
 
     For the years ended December 31, 1997 and 1998 the Company generated tax
operating losses. To the extent allowed, the losses generated in 1997 were
carried back to the year ended December 31, 1996. The remaining net operating
loss carryforward at December 31, 1997 is $662,728. The net operating loss
carryforward at December 31, 1998 approximates $1,785,000 and, if not utilized,
will expire in 2013.
 
     The components of the net deferred tax asset (liability) as of December 31,
1997 and 1998 were as follows:
 
<TABLE>
<CAPTION>
                                              DECEMBER 31, 1997         DECEMBER 31, 1998
                                           -----------------------   -----------------------
                                            ASSETS     LIABILITIES    ASSETS     LIABILITIES
                                           ---------   -----------   ---------   -----------
<S>                                        <C>         <C>           <C>         <C>
Deferred revenue.........................  $  61,163    $     --     $  34,368    $     --
Depreciation.............................    236,198          --            --      28,270
Doubtful accounts........................    128,685          --       373,690          --
Compensation.............................     41,575          --        48,645          --
State and sales tax......................     47,965          --        47,990          --
Section 481(a) adjustment................         --     647,312            --     777,133
Net operating loss carryforward..........    413,104          --       832,508
Other....................................    139,795          --       110,568          --
Valuation allowance......................   (421,173)         --      (642,366)         --
                                           ---------    --------     ---------    --------
          Total..........................  $ 647,312    $647,312     $ 805,403    $805,403
                                           =========    ========     =========    ========
</TABLE>
 
     Deferred income taxes totaling $0 and $488,918 at December 31, 1997 and
1998, are included in current assets, respectively. Noncurrent deferred income
tax liabilities totaled $0 and $488,918 at December 31, 1997 and 1998,
respectively. Due to uncertainty regarding the realization of the Company's net
deferred tax asset, the Company has booked a valuation allowance of $642,366 in
the current year. The valuation allowance will be reduced in future years as the
Company realizes the deferred tax assets or it is determined the deferred tax
asset is more likely than not to be realized.
 
                                      F-13
<PAGE>   44
                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
 
           CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     The effective income tax rate varies from the federal statutory rate for
the years ended December 31, 1996, 1997 and 1998 as follows:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                            -------------------------
                                                            1996     1997       1998
                                                            ----     -----     ------
<S>                                                         <C>      <C>       <C>
Federal statutory rate....................................  34.0%     34.0%      34.0%
Disallowance of meals and entertainment...................   1.5      (0.8)     (3.17)
Addition to valuation allowance...........................    --     (11.3)    (28.59)
State taxes (net of federal benefit)......................   5.3      (0.5)     (2.27)
Other.....................................................   1.8       1.2        .41
Officers life insurance...................................    --        --       (.38)
                                                            ----     -----     ------
Effective income tax rate.................................  42.6%     22.6%         0%
                                                            ====     =====     ======
</TABLE>
 
10. LEASE COMMITMENTS:
 
     The Company leases office space and vans under operating leases and certain
medical equipment under both capital and operating leases. The Company currently
leases office space under noncancellable operating leases which expire on
various dates through July 2002. Future minimum rental payments under these
capital and operating leases subsequent to December 31 are as follows:
 
<TABLE>
<CAPTION>
                                                               CAPITAL    OPERATING
                                                               LEASES      LEASES
                                                              ---------   ---------
<S>                                                           <C>         <C>
Year ending December 31
  1999......................................................    229,400    284,820
  2000......................................................     38,630    181,840
  2001......................................................         --    135,954
  2002......................................................         --     67,244
  2003......................................................         --         --
                                                              ---------   --------
  Total future minimum lease payments.......................  $ 268,030   $669,858
                                                                          ========
  Less amounts representing interest........................    (28,101)
                                                              ---------
  Present value of future minimum lease payments............    239,929
  Less current maturities...................................   (202,593)
                                                              ---------
  Long-term capital lease obligations.......................  $  37,336
                                                              =========
</TABLE>
 
     Rent expense for the years ended December 31, 1996, 1997 and 1998 under
operating leases was approximately $1,637,000, $1,960,000, and $1,308,000,
respectively.
 
                                      F-14
<PAGE>   45
                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
 
           CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
11. EARNINGS PER SHARE:
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                         --------------------------------------
                                                           1996          1997           1998
                                                         ---------    -----------    ----------
<S>                                                      <C>          <C>            <C>
BASIC:
Weighted average of common shares outstanding
  (basic)..............................................  3,215,318      6,060,950     6,213,747
Net income (loss)......................................  $ 919,000    $(2,897,010)   $ (773,583)
Less: Series A Preferred dividends.....................     87,000             --            --
Net income (loss) applicable to common stock...........    832,000    $(2,897,010)   $ (773,583)
Net income (loss) per share (basic)....................  $    0.26    $     (0.48)   $    (0.12)
                                                         =========    ===========    ==========
DILUTED:
Weighted average of common shares outstanding
  (basic)..............................................  3,215,318      6,060,950     6,213,747
SAB Topic 4-D computation:
  Incremental common shares outstanding applicable to
     "In the Money" options and warrants based on the
     estimated year end fair market value of the
     stock.............................................    344,138               (a)           (a)
                                                         ---------    -----------    ----------
Weighted average of common shares outstanding
  (diluted)............................................  3,559,456      6,060,950     6,213,747
                                                         =========    ===========    ==========
Net income (loss) applicable to common stock...........  $ 832,000    $(2,897,010)   $ (773,583)
Add: Series A Preferred dividends......................     87,000             --            --
                                                         ---------    -----------    ----------
Net income (loss) assuming dilution....................  $ 919,000    $(2,897,010)   $ (773,583)
Net income (loss) per share (diluted)..................  $    0.26    $     (0.48)   $    (0.12)
                                                         =========    ===========    ==========
</TABLE>
 
---------------
 
(a) Incremental common shares outstanding applicable to "in the money" options
    and warrants were not included in the computation of diluted earnings per
    share for the years ended December 31, 1997 and 1998 as their inclusion
    would be antidilutive for the respective periods. The shares not included
    totaled 231,653 for the year ended December 31, 1997 and 32,059 for the year
    ended December 31, 1998.
 
12. CONCENTRATION OF SUPPLIERS:
 
     The Company currently buys its laser equipment, the main component of its
services, from four suppliers. Although there are a limited number of
manufacturers of this equipment, management believes that other suppliers could
provide similar laser equipment on comparable terms.
 
13. RELATED PARTIES:
 
     The Company paid Montgomery, Baggett and Drews, L.L.P. ("MBD"), certified
public accountants, and affiliates of MJ Capital Partners, L.P. and MJ Capital
Corporation, approximately $44,000 in 1996, $58,000 in 1997, and $55,000 in 1998
for professional fees. MJ and its affiliates own 244,626 shares of the Company's
common stock.
 
     Approximately $347,000 in medical supplies and equipment were purchased
from a company owned by the relative of a shareholder of the Company during
1997.
 
     Effective September 11, 1998, the Company entered into an arrangement
whereby the Company would agree to repurchase 242,000 shares of common stock
pledged by an officer of the Company to a banking institution. The stock was
pledged to the bank to collateralize payment on a $170,000 loan between the
officer of the Company and the bank. The pledged stock would be repurchased by
the Company upon request from the bank if the loan is in default.
 
                                      F-15
<PAGE>   46
                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
 
           CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
14. EMPLOYEE BENEFITS:
 
     Effective January 1, 1993, a tax deferred savings plan under Section 401(k)
of the Internal Revenue Code was established. The plan covers all full-time
employees who are twenty-one years of age with one year of service. Employees
may contribute to the plan up to a maximum of 20% of their salary with a maximum
contribution of $10,000 in 1998. Employees are immediately vested in their
contributions. The Company may contribute an amount as determined by the Board
of Directors. Effective January 1, 1996, the Company began matching 15% of
employee contributions totaling approximately $25,000 in 1996, $28,000 in 1997,
and $35,000 in 1998.
 
15. ACQUISITIONS:
 
     During 1996, the Company completed the acquisitions of Maasai, Inc. in Salt
Lake City, Utah and Mobile Laser Services, Inc. in Chicago, Illinois for a total
purchase price of approximately $494,000. These asset purchases were accounted
for under the purchase method of accounting resulting in the recording of
approximately $143,000 in goodwill and approximately $351,000 in property and
equipment. The pro forma effect of the acquisitions was not material to the
results of operations or financial position of the Company.
 
     On January 21, 1997, the Company completed the acquisition of substantially
all of the assets of Stone Treatment Center of New England, Inc., a Rhode Island
corporation. For cash paid of $238,280 and 22,174 shares of common stock valued
at $11.50 per share, the Company recorded assets and assumed liabilities as
follows:
 
<TABLE>
<S>                                                            <C>
Property, equipment, and other assets.......................   $ 583,676
Goodwill....................................................     619,571
Accounts payable............................................    (709,966)
                                                               ---------
                                                               $ 493,281
                                                               =========
</TABLE>
 
     The purchase agreement contained a contingent consideration clause whereby
the Company would pay between $250,000 and $1,250,000 if specific EBITDA
(earnings before interest, taxes, depreciation, and amortization) levels ranging
from $445,835 and $778,000 were attained during calendar year 1997. During the
calendar year 1997, the minimum EBITDA level was not achieved; therefore, the
contingent earnout related to the purchase agreement was not paid. The
acquisition has been accounted for under the purchase method of accounting and,
accordingly, the operating results of Stone Treatment Center of New England,
Inc. is included in the consolidated operating results from the date of
acquisition. The pro forma effect of the acquisition was not material to the
results of operations or financial position of the Company.
 
     Additionally, the Company completed the acquisitions of Continuum
Biomedical, Inc., Southeast Medical Distributors of Louisiana, Inc., and Mobile
Laser Services in California during the calendar year of 1997. The total
purchase price was $367,699. These asset purchases were accounted for under the
purchase method of accounting resulting in the recording of $192,791 in
goodwill, $247,408 in property and equipment, and a contingent payable of
$72,500 if certain revenue levels were achieved. The revenue levels were not
achieved during 1997; therefore, the contingent payable of $72,500 was not paid.
The pro forma effect of the acquisitions was not material to the results of
operations or financial position of the Company.
 
                                      F-16
<PAGE>   47
                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
 
           CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
16. FAIR VALUE OF FINANCIAL INSTRUMENTS:
 
     The following methods and assumptions were used in estimating fair values:
 
          Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and
     Accrued Expenses
 
     The carrying value in the balance sheet approximates fair value.
 
17. SUBSEQUENT EVENT:
 
     On February 18, 1999, the Company, Diagnostic Health Services, Inc. ("DHS")
and a wholly-owned subsidiary of DHS ("Sub") entered into an Agreement and Plan
of Merger (the "Merger Agreement"), pursuant to which Sub will merge with and
into the Company, resulting in the Company becoming a wholly-owned subsidiary of
DHS. Under the terms of the Merger Agreement, holders of the Company's Common
Stock will receive 1.57 shares of DHS common stock for each share of the
Company's Common Stock held. In connection with the execution of the Merger
Agreement, members of the Boards of Directors of the Company and DHS, in their
capacities as shareholders, (individually and on behalf of their affiliates),
entered into a Voting Agreement pursuant to which they agreed to vote their
shares of capital stock in favor of this transaction.
 
     The Merger, which is expected to be accounted for as a
pooling-of-interests, is subject to various conditions precedent, including
without limitation, approval by the shareholders of both companies and various
state and federal regulatory agencies. Closing of this transaction is expected
to occur by the end of the second quarter of 1999.
 
                                      F-17
<PAGE>   48
 
                                                                     SCHEDULE II
 
                             MEDICAL ALLIANCE, INC.
 
                       VALUATION AND QUALIFYING ACCOUNTS
 
<TABLE>
<CAPTION>
COLUMN A                                       COLUMN B      COLUMN C     COLUMN D       COLUMN E
--------                                     ------------   ----------   ----------     ----------
                                              BALANCE AT    CHARGED TO                  BALANCE AT
                                             BEGINNING OF   COSTS AND                     END OF
                                                PERIOD       EXPENSES    DEDUCTIONS       PERIOD
                                             ------------   ----------   ----------     ----------
<S>                                          <C>            <C>          <C>            <C>
Year Ended December 31, 1998
  Allowance for doubtful accounts..........   $2,554,705    $1,690,293   $3,243,147(A)  $1,001,851
Year Ended December 31, 1997
  Allowance for doubtful accounts..........    1,859,621     3,870,925    3,175,841(A)   2,554,705
Year Ended December 31, 1996
  Allowance for doubtful accounts..........    1,113,314     3,408,360    2,662,053(A)   1,859,621
</TABLE>
 
---------------
 
(A)  Uncollectible accounts written off, net of recoveries.
 
                                      F-18
<PAGE>   49
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the Undersigned, thereunto duly authorized.
 
                                            MEDICAL ALLIANCE, INC.
 
                                            By        /s/ MARK NOVY
                                             -----------------------------------
                                                          Mark Novy
                                                  Vice President of Finance
 
Date: March 15, 1999
 
     Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following person on behalf of the
registrant and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                      SIGNATURE                                    TITLE                     DATE
                      ---------                                    -----                     ----
<C>                                                    <S>                              <C>
 
                  /s/ PAUL HERCHMAN                    Chairman of the Board and        March 15, 1999
-----------------------------------------------------    Chief Executive Officer
                    Paul Herchman
 
                    /s/ GARY HILL                      President, Chief Operating       March 15, 1999
-----------------------------------------------------    Officer, and Director
                      Gary Hill
 
               /s/ DAVID KALLENBERGER                  Director                         March 15, 1999
-----------------------------------------------------
                 David Kallenberger
 
                 /s/ TONY LEVECCHIO                    Director                         March 15, 1999
-----------------------------------------------------
                   Tony LeVecchio
 
                 /s/ TOM MONTGOMERY                    Director                         March 15, 1999
-----------------------------------------------------
                   Tom Montgomery
 
                  /s/ LEON PRITZKER                    Director                         March 15, 1999
-----------------------------------------------------
                    Leon Pritzker
 
                   /s/ JIM SILCOCK                     Director                         March 15, 1999
-----------------------------------------------------
                     Jim Silcock
</TABLE>
 
                                       S-1
<PAGE>   50
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
           2.1           -- Asset Purchase Agreement, dated March 18, 1996 between
                            the Company and Maasai Inc.(1)(5)
           2.2           -- Asset Purchase Agreement, dated June 10, 1996 between the
                            Company and Mobile Laser Services, Inc.(1)(5)
           2.3           -- Asset Purchase Agreement, dated as of January 21, 1997
                            among Stone Treatment Center of New England, Inc.,
                            Gregory A. Mercurio, Vincent A. Catallozzi, M.D.,
                            Alexander Calenda, M.D., Gerald Marsocci, M.D., Joseph C.
                            Cambio, M.D. and the Company.(6)(5)
           2.4           -- Agreement and Plan of Merger, dated as of February 18,
                            1999 between Diagnostic Health Services, Inc. and the
                            Company.(3)
           3.1           -- Amended and Restated Articles of Incorporation of the
                            Company.(1)
           3.2           -- Amended and Restated Bylaws of the Company.(1)
           4.1           -- Specimen of Company Common Stock Certificate.(1)
           4.2           -- Warrant to Purchase 15,651 shares of Common Stock of the
                            Company dated July 27, 1995 between the Company and Paul
                            R. Herchman.(1)
           4.3           -- Warrant to Purchase 23,416 shares of Common Stock of the
                            Company dated August 15, 1993 between the Company and
                            Columbia General Corporation.(1)
           4.4           -- Warrant to Purchase 2,810 shares of Common Stock of the
                            Company dated October 17, 1993 between the Company and
                            Robert J. Matthews, M.D.(1)
           4.5           -- Warrant to Purchase 2,342 shares of Common Stock of the
                            Company dated May 31, 1994 between the Company and Shelly
                            Burks.(1)
           4.6           -- Warrant to Purchase 1,873 shares of Common Stock of the
                            Company dated May 31, 1994 between the Company and Thomas
                            A. Montgomery.(1)
           4.7           -- Warrant to Purchase 6,556 shares of Common Stock of the
                            Company dated May 31, 1994 between the Company and Thomas
                            A. Montgomery.(1)
          10.1           -- Agreement between the Company and Coherent Medical
                            Group.(1)
          10.2           -- Master Lease Agreement dated July 20, 1995 between the
                            Company and Cabot Medical Corporation.(1)
          10.3           -- Master services Agreement dated June 3, 1996 between the
                            Company and Cosmetic Technologies International.(1)
          10.4           -- Joint Venture Agreement dated March 25, 1996 between the
                            Company and Coherent-AMT Inc.(1)
          10.5           -- Medical Alliance, Inc. 1994 Amended and Restated
                            Long-Term Incentive Plan.(2)(4)
          10.6           -- Employment Agreement between the Company and Paul
                            Herchman.(1)(4)
          10.7           -- Employment Agreement between the Company and Gary
                            Hill.(7)(4)
          10.8           -- Employment Agreement between the Company and Kevin
                            O'Brien.(1)(4)
          10.9           -- Employment Agreement between the Company and Michael G.
                            Wallace.(1)(4)
          10.10          -- Lease Agreement.(1)
          10.11          -- Strategic Alliance Agreement, dated as of December 19,
                            1996, by and between Laserscope and the Company.(6)
          10.12          -- Exclusive Provider Agreement, dated as of January 21,
                            1997, by and between Thermolase Corporation and the
                            Company.(6)
</TABLE>
<PAGE>   51
 
<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                                  DESCRIPTION
        -------                                  -----------
<C>                      <S>
          10.13          -- Strategic Alliance Agreement, dated as of January 1,
                            1997, by and between Valleylab, Inc. and the Company.(6)
          10.14          -- Exclusive Provider Agreement, dated as of February 9,
                            1997, by and between Imagyn Medical, Inc. and the
                            Company.(6)
          10.15          -- Paul Herchman Severance Agreement.(3)
          10.16          -- Voting Agreement, dated as of February 18, 1999, by and
                            between Diagnostic Health Services, Inc., MAI Acquisition
                            Corp., and Medical Alliance, Inc.(3)
          12.1           -- Subsidiaries of the Company.(1)
          23.1           -- Consent of PricewaterhouseCoopers LLP.(3)
          27.1           -- Financial Data Schedule.(3)
</TABLE>
 
---------------
 
(1) Previously filed as an exhibit to the Company's Registration Statement on
    Form S-1 (No. 333-09815) and incorporated herein by reference.
 
(2) Previously filed as an exhibit to the Company's Registration Statement on
    form S-8 (No. 333-18545) and incorporated herein by reference.
 
(3) Filed herewith.
 
(4) Management contract or compensatory plan or arrangement, which is being
    identified as such pursuant to Item 14(a)3 of Form 10-K.
 
(5) Schedules and similar attachments to this Exhibit have not been filed
    herewith. The Company agrees to furnish a copy of any such omitted schedules
    and attachments to the Commission upon request.
 
(6) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
    for the fiscal year ended December 31, 1996, and incorporated herein by
    reference.
 
(7) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
    for the fiscal year ended December 31, 1997, and incorporated hereby
    reference.