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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, 1999

                                       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)

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<S>                                             <C>
                   TEXAS                                         73-1347577
      (State or 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>
            TITLE OF EACH CLASS                  NAME OF EACH EXCHANGE 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 March 27, 2000, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $19,099,741 based upon the
closing price of $4.63 per share on the Nasdaq National Market. As of March 27,
2000, 6,114,523 shares of the registrant's Common Stock, $0.002 par value, were
issued and outstanding.

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                             MEDICAL ALLIANCE, INC.

                               TABLE OF CONTENTS

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                                                                        PAGE
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<S>       <C>                                                           <C>
                                   PART I
Item 1.   Business....................................................    3
Item 2.   Properties..................................................   13
Item 3.   Legal Proceedings...........................................   13
Item 4.   Submission of Matters To A Vote of Security Holders.........   13

                                  PART II
Item 5.   Market For Registrant's Common Stock and Related Stockholder   14
          Matters.....................................................
Item 6.   Selected Financial Data.....................................   15
Item 7.   Management's Discussion and Analysis of Financial Condition    16
          and Results of Operations...................................
Item 7A.  Quantitative and Qualitative Disclosures About Market          20
          Risk........................................................
Item 8.   Financial Statements and Supplementary Data.................   20
Item 9.   Changes in and Disagreements with Accountants on Accounting    20
          and Financial Disclosure....................................

                                  PART III
Item 10.  Executive Officers and Directors of Company.................   21
Item 11.  Executive Compensation......................................   23
Item 12.  Security Ownership of Certain Beneficial Owners and            25
          Management..................................................
Item 13.  Certain Relationships and Related Transactions..............   26

                                  PART IV
Item 14.  Exhibits, Financial Statement Schedule, and Reports on Form    27
          8-K.........................................................
</TABLE>

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                                     PART I

ITEM 1. BUSINESS

     This item should be read in conjunction with the Company's consolidated
financial statements included elsewhere in this report.

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 168 managed care
contracts that in the aggregate cover approximately 82 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 three primary business lines:
medical surgical, aesthetic elective services and medical equipment and device
sales. 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 through its existing
sales force is meeting physicians demand to purchase medical devices and
equipment because its low cost does not fit the Company's traditional per case
model. 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.

RECENT DEVELOPMENTS

     On January 24, 2000, the Company announced that it has retained
Dallas-based Hoak Breedlove Wesneski & Co. to act as its financial advisor in
connection with the possible sale of its medical business. The Company also
announced that it intends to consider opportunities to merge with or acquire a
business or businesses in high growth industries, with a focus on the Internet
and technology sectors.

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     On February 7, 2000 the Company announced that it will provide its medical
surgical physician customers -- primarily OB/GYNs with access to the Gynecare
Versascope Hysteroscopy System, a less invasive new generation fiber optic
technology for diagnostic and operative hysteroscopy procedures. The Versascope
diagnostic and operative hysteroscopy system enables obstetricians and
gynecologists to see abnormal uterine growths including endometriosis, polyps,
fibroids and pre-cancerous lesions with a wider field of view within the uterine
cavity. The system is small enough to be inserted through most cervixes without
a need for dilation or anesthesia. The hysteroscope and sheath are designed to
minimize patient trauma and discomfort. Advanced optics technology ensures
precise imaging for accurate diagnostic and therapeutic procedures. The unique
expandable channel of the Versascope Sheath allows delivery of 2mm instruments
including the biopsy cup, grasper and scissors.

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 anesthesia 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's aesthetic elective services are offered
to physicians, primarily plastic surgeons, dermatologists, and
otolaryngologists, enabling them to perform such cosmetic procedures as laser
skin resurfacing, tattoo removal and treatment of vascular and pigmented
lesions. These services are paid for by the patient or physician at the time of
service and are not typically covered by insurance. Research indicates cosmetic
procedures in the aesthetic market are reaching an all time high, and Medical
Alliance's aesthetic product specialists continually pursue new technologies to
support the push for cosmetic procedures. Data from the American Society for
Plastic and Reconstructive Surgery (ASPRS) shows that the top 27 cosmetic
procedures performed each year have increased 50% from 1996 to 1998. The ASPRS
also indicates that 36% of these procedures are performed in the physician's
office. Medical Alliance researches new aesthetic technology and makes it
possible to bring that technology safely and effectively to the physician's
office.

     Medical Equipment and Device Sales. There is physician demand for medical
equipment or devices that, primarily due to their low costs, do not fit the
Company's traditional per case model. The Company believes that its existing
sales force is uniquely positioned to meet this demand because of their strong
physician relationships and continuing presence in the physicians office. The
Company through its due diligence has identified the microdermabrasion device to
market to its plastic surgeons and dermatologist customer base.

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BUSINESS STRATEGY

     The Company's goal is to enhance its position as a service provider 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 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 168 payor
contracts, including contracts with health plans owned by United HealthCare
Corporation, Prudential Healthcare, CIGNA Healthcare and Blue Cross Blue Shield
entities in ten states, which contracts cover in aggregate approximately 82
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 physicians. 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.

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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 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, 1999, the Company had 75 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, 1999, 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, 1999, the Company had 131 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, 1999, 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.

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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 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 ("OSHA") 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 Joint Commission on Accreditation of Healthcare Organizations
("JCAHO ") is currently being sought by the Company. No model for review
currently exists with JCAHO. However, the Company is developing such a model and
will seek approval from JCAHO in the near 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"). Under the Company's aesthetic elective
line of products is the ASN. The ASN, formed under the Company's wholly owned
subsidiary PMSI (Physicians Marketing Services, Inc.), is comprised of over 600
licensed and credentialed plastic surgeons, dermatologists and otolaryngologists
throughout the United States who offer a 20% discount on their professional fee
to subscribers of the ASN. Benefit plans or employer plans contract with the ASN
to offer this discount to their subscribing members. The ASN's toll free
referral phone line provides subscribers with access to physician referrals
throughout the United States.

     Medical Equipment and Device Sales. The Company may sell medical devices or
equipment to physicians in those instances where the medical equipment or
devices do not fit the Company's traditional per
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case model, primarily because of low price. The Company, through its due
diligence, will continue to identify new medical devices and equipment in the
future to market to the physicians.

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 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 two regions ("Regions") encompassing an aggregate of 20
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 business
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 sale 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.

SUPPLIES 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 researched by the Company's product specialists and 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.

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 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

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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 Food and Drug Administration ("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
medical surgical services for use in performing office-based procedures that has
developed contracts with managed care organizations.

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INSURANCE

     The Company maintains professional, general and product liability insurance
in amounts deemed appropriate by management. The Company carries an aggregate of
$11 million of general and public liability insurance coverage, which covers
premises, operations and product liability, and a $3 million professional
liability insurance policy.

EMPLOYEES

     As of December 31, 1999, the Company had 156 employees, including 111
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 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 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

                                       10
<PAGE>   11

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 may
continue to include growth through acquisitions. The Company intends to consider
opportunities to acquire a business in high growth industries, with a focus on
the Internet and technology sectors. 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. The Company's 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.
                                       11
<PAGE>   12

     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 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

                                       12
<PAGE>   13

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 20 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 material 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 1999.

                                       13
<PAGE>   14

                                    PART II

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

MARKET INFORMATION

     The Company's common stock is listed on the Nasdaq National Market under
the symbol "MAII". The high and low closing sales prices (excluding retail
markup, markdowns and commissions) for the period January 1, 1997 to December
31, 1999 are as follows:

<TABLE>
<CAPTION>
                                                               HIGH      LOW
                                                              ------    ------
<S>                                                           <C>       <C>
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
Fiscal year ended December 31, 1999
  First Quarter.............................................  $ 3.75    $ 1.81
  Second Quarter............................................    3.13      1.75
  Third Quarter.............................................    2.13      1.66
  Fourth Quarter............................................    2.28      1.09
</TABLE>

     As of March 27, 2000, 6,114,523 shares of common stock were outstanding and
held by approximately 90 holders of record, and the closing price of the
Company's common stock listed on the Nasdaq National Market was $4.63 per share.

     The Company did not pay cash dividends on its common stock during 1997,
1998 and 1999. 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.

                                       14
<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,
1999 and its balance sheet data as of December 31, 1995, 1996, 1997, 1998, and
1999 are derived from the Company's financial statements. 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,
                                            ---------------------------------------------------
                                             1995       1996       1997       1998       1999
                                            -------    -------    -------    -------    -------
                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                         <C>        <C>        <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
Net Revenues..............................  $11,177    $17,350    $18,821    $16,132    $17,105
Costs and Expenses:
  Salaries and benefits...................    3,721      5,137      8,353      7,328      7,751
  Selling, general, and administrative....    3,620      5,510      7,857      6,306      6,710
  Depreciation and amortization...........      719      1,595      3,152      2,337      2,401
  Provision for uncollectible accounts....    1,885      3,408      3,871      1,690      1,130
                                            -------    -------    -------    -------    -------
          Total costs and expenses........    9,945     15,650     23,233     17,661     17,992
                                            -------    -------    -------    -------    -------
          Operating income (loss).........    1,232      1,700     (4,412)    (1,529)      (887)
Other (income) expense:
  Interest income and other, net..........       12       (172)      (778)      (814)      (723)
  Interest expense........................      247        270        111         59         41
                                            -------    -------    -------    -------    -------
          Income (loss) before income
            taxes.........................      973      1,602     (3,745)      (774)      (205)
Income tax expense (benefit)..............      395        683       (848)        --         --
                                            -------    -------    -------    -------    -------
          Net income (loss)...............  $   578    $   919    $(2,897)   $  (774)   $  (205)
                                            =======    =======    =======    =======    =======
Net income (loss) applicable to common
  stock...................................  $   311    $   832    $(2,897)   $  (774)   $  (205)
                                            =======    =======    =======    =======    =======
Earnings (loss) per share (basic).........  $   .15    $   .26    $  (.48)   $  (.12)   $  (.03)
                                            =======    =======    =======    =======    =======
Earnings (loss) per share (diluted).......  $   .11    $   .26    $  (.48)   $  (.12)   $  (.03)
                                            =======    =======    =======    =======    =======
Weighted average number of common shares
  outstanding (basic).....................    2,117      3,215      6,061      6,214      6,131
Weighted average number of common shares
  outstanding (diluted)...................    3,690      3,559      6,061      6,214      6,131
Dividends declared on convertible
  preferred stock.........................  $    87    $    87    $     0    $     0    $     0
</TABLE>

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                            --------------------------------------------------
                                             1995      1996       1997       1998       1999
                                            ------    -------    -------    -------    -------
                                                              (IN THOUSANDS)
<S>                                         <C>       <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................  $1,409    $20,537    $14,903    $14,378    $13,394
Working capital...........................   1,913     22,094     17,575     16,434     15,927
Total assets..............................   6,443     30,708     26,505     24,521     23,946
Total debt and capital lease
  obligations.............................   2,354        355        489        240         89
Retained earnings (accumulated deficit)...    (562)       393     (2,504)    (3,278)    (3,483)
Total shareholders' equity................   2,431     26,085     23,678     22,554     22,282
</TABLE>

                                       15
<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. During the fourth quarter of 1999, the Company entered the medical
equipment and device sales market with the introduction of the Rejuvasilk(TM)
2000 microdermabrasion device. 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,
                                                 -------------------------------------
                                                 1995    1996    1997    1998    1999
                                                 -----   -----   -----   -----   -----
<S>                                              <C>     <C>     <C>     <C>     <C>
Net revenues...................................  100.0%  100.0%  100.0%  100.0%  100.0%
Salaries and benefits expense..................   33.3    29.6    44.4    45.4    45.3
Selling, general and administrative expense....   32.4    31.8    41.7    39.1    39.2
Depreciation and amortization..................    6.4     9.2    16.7    14.5    14.0
Provision for uncollectible accounts...........   16.9    19.6    20.6    10.5     6.6
Operating income (loss)........................   11.0     9.8   (23.4)   (9.5)   (5.2)
Income tax expense (benefit)...................    3.5     3.9    (4.5)     --      --
Net income (loss)..............................    5.2     5.3   (15.4)   (4.8)   (1.2)
</TABLE>

YEARS ENDED DECEMBER 31, 1999 AND 1998

     Net Revenues. Net revenues increased from $16.1 million for the year ended
December 31, 1998, to $17.1 million for the year ended December 31, 1999, an
increase of $1.0 million or 6%. Total net patient service revenue per case
increased from $208 for the year ended December 31, 1998, to $213 for the year
ended December 31, 1999, an increase of $5 per case or 2.4%.

     Medical surgical net revenues increased from $7.9 million for the year
ended December 31, 1998, to $8.9 million for the year ended December 31, 1999,
an increase of $1 million or 12.7%. This increase was attributable to the
medical surgical net revenue per case increasing from $283 for the year ended
December 31, 1998, to $296 for the year ended December 31, 1999, an increase of
$13 or 4.6%, which is mainly due to the Company's focus on maximizing contracted
reimbursement rates on existing and new managed care contracts. The remainder of
the medical surgical net revenue increase of $1 million is related to a case
volume increase. Medical surgical procedures increased from 27,849 for the year
ended December 31, 1998, to 30,044 for the year ended December 31, 1999, an
increase of 2,195 or 7.8%.

     Aesthetic elective net revenues decreased from $8.1 million for the year
ended December 31, 1998, to $7.6 million for the year ended December 31, 1999, a
decrease of $500,000 or 6.2%. Aesthetic elective procedures decreased from
49,122 for the year ended December 31, 1998, to 47,685 for the year ended
December 31, 1999, a decrease of 1,437 or 2.9%. Aesthetic elective net revenue
per case also decreased from $166 for the year ended December 31, 1998, to $160
for the year ended December 31, 1999, a decrease of $6 or 3.6%. The remainder of
the net revenue increase is related to the equipment sales generated from the
Rejuvasilk 2000 microdermabrasion devices of $546,000 during the three months
ended December 31, 1999.

     Salaries and Benefits Expense. Salaries and benefits expense increased from
$7.3 million for the year ended December 31, 1998, to $7.8 million for the year
ended December 31, 1999, an increase of $500,000 or

                                       16
<PAGE>   17

6.8%. The increase is related to pay rate increases given to employees on
January 1, 1999 and additional bonuses and commissions earned by field
employees. The average total number of employees increased from 152 as of
December 31, 1998, to 156 as of December 31, 1999, an increase of 4 or 2.6%.
Salaries and benefits expense as a percentage of net revenues decreased slightly
from 45.4% for the year ended December 31, 1998, to 45.3% for the year ended
December 31, 1999.

     Selling, General and Administration. Selling, general and administrative
expense increased from $6.3 million for the year ended December 31, 1998, to
$6.7 million for the year ended December 31, 1999, an increase of $400,000 or
6.3%. The following items were attributable to the change in selling, general
and administrative expenses:

     The Company incurred an $850,000 nonrecurring charge during the second
quarter of 1999 related to the termination of the merger agreement between
Diagnostic Health Services Inc. and the Company.

     Vehicle expense decreased from $1.2 million for the year ended December 31,
1998, to $719,000 for the year ended December 31, 1999, a decrease of $481,000
or 40.1%. The decrease is primarily attributable to a vehicle lease buyout of
the entire fleet which occurred during the third quarter of 1998.

     Selling, general and administrative expense as a percentage of net revenues
increased slightly from 39.1% for the year ended December 31, 1998, to 39.2% for
the year ended December 31, 1999. Without the $850,000 nonrecurring charge,
selling, general and administrative expense as a percentage of net revenues
would have been 34.3% for the year ended December 31, 1999.

     Depreciation and Amortization. Depreciation and amortization increased from
$2.3 million for the year ended December 31, 1998, to $2.4 million for the year
ended December 31, 1999, an increase of $100,000 or 4.3%. For the year ended
December 31, 1999, the Company incurred capital expenditures of $2.3 million
which was offset by various equipment and vehicles being fully depreciated
during 1999.

     Provision for Uncollectible Accounts. Provision for uncollectible accounts
decreased from $1.7 million for the year ended December 31, 1998, to $1.1
million for the year ended December 31, 1999, a decrease of $600,000 or 35.3%.
As a percentage of net patient service revenue, provision for uncollectible
accounts decreased from 10.5% for the year ended December 31,1998, to 6.8% for
the year ended December 31, 1999. This 3.7% improvement is due to a shift from
noncontracted to contracted payors and the Company's continued success on
scheduling, preregistration, preverification and collections to generate better
quality revenues.

     Operating Loss. As a result of the items discussed above, operating loss
decreased from $1.5 million for the year ended December 31, 1998, to a loss of
$887,000 for the year ended December 31, 1999, a decrease of $613,000 or 40.9%.
During the second quarter of 1999, there was a nonrecurring charge of $850,000
related to the termination of a proposed merger. Without the nonrecurring charge
of $850,000, the operating loss for the year ended December 31, 1999 would have
been only $37,000.

     Interest Income & Other, Net. Interest income and other, net decreased
slightly from $815,000 for the year ended December 31, 1998 to $724,000 for the
year ended December 31, 1999, a decrease of $91,000 or 11.2%. This decrease is
primarily attributable to the Company earning less interest on a lower
commercial paper balance.

     Income Tax Benefit. For the year ended December 31, 1998 and 1999 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 $774,000 for the year ended December 31, 1998, to a loss of
$205,000 for the year ended December 31, 1999, a decrease of $569,000 or 73.5%.
Without the nonrecurring charge of $850,000, there would have been net income of
$645,000.

                                       17
<PAGE>   18

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 14.3%. 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 2.3%.

     Medical surgical net revenues decreased from $9.9 million for the year
ended December 31, 1997, to $7.9 million for the year ended December 31, 1998, a
decrease of $2 million or 20.2%. Medical surgical procedures decreased from
36,088 for the year ended December 31, 1997, to 27,849 for the year ended
December 31, 1998, a decrease of 8,239 or 22.8%.

     Aesthetic elective net revenues decreased from $8.4 million for the year
ended December 31, 1997 to $8.1 million for the year ended December 31, 1998, a
decrease of $300,000 or 3.6%. Aesthetic elective procedures decreased from
49,731 for the year ended December 31, 1997, to 49,122 for the year ended
December 31, 1998, a decrease of 609 or 1.2%.

     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 77.7%. 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 13.1%. 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
12.9%. 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
20.3%. 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 29.4%. 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 53.7%. 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 28.3%. 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.

                                       18
<PAGE>   19

     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 28.1%. 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.

     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
56.4%. 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.

LIQUIDITY AND CAPITAL RESOURCES

     As of December 31, 1999 the Company has an accumulated retained deficit of
$3.5 million due to losses incurred during the years ended December 31, 1997,
1998, and 1999.

     Net cash (used in) provided by operating activities was ($1,613,000),
$2,604,000 and $1,535,000 for the years ended December 31, 1997, 1998 and 1999,
respectively, primarily from generated EBITDA (earnings before interest, taxes,
depreciation and amortization). For its investing activities, the Company
consumed $3,793,000, $2,530,000 and $2,231,000 for the years ended December 31,
1997, 1998 and 1999, respectively, primarily for the purchase of medical
equipment and vehicles. Capital expenditures were $3,302,000, $2,566,000 and
$2,282,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
Net cash consumed by financing activities was $197,000, $599,000 and $288,000
for the years ended December 31, 1997, 1998 and 1999, respectively, primarily
for the repayment of capital lease obligations and purchase of treasury shares.

                                       19
<PAGE>   20

YEAR 2000 COMPLIANCE

     The Company completed its evaluation of the Year 2000 ("Y2K") compliance
status in 1999. The Company tested its information technology, such as software
regarding Y2K compliance and received certification of Y2K compliance from its
third party vendors related to the billing and accounting systems. The Company
conducted further tests on its accounting system during the fourth quarter of
1999. Based upon the Company's evaluation of the Y2K compliance of its
information technology, its polling of third party vendors, and its receipt of
certification of Y2K compliance from its third party vendors related to the
billing and accounting systems, the Company does not anticipate that there will
be a material Y2K problem and has not experienced any material Y2K problems to
date.

     However, 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 has
been replaced or upgraded. The Company does not expect to conduct independent
tests of 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 material
and has not experienced any material Y2K problems to date.

     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. To date, the Company has not
experienced any Y2K-related failure caused by third parties.

     Based on the Company's process of evaluating its Y2K compliance status, the
Company expended an estimated $50,000 related to addressing Y2K issues.
Furthermore, there can be no assurance that all Y2K issues will be addressed
which could result in additional costs for the Company. To date, the Company has
not experienced any material Y2K problems.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     None.

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.

                                       20
<PAGE>   21

                                    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 Herchman.............................  43    Chairman of the Board and Chief Executive
                                                    Officer
Gary Hill.................................  51    President, Chief Operating Officer and
                                                  Director
David Kallenberger, M.D...................  51    Medical Director and Director
Tony LeVecchio............................  53    Director
Thomas Montgomery.........................  42    Director
Leon Pritzker.............................  77    Director
Jim Silcock...............................  49    Director
</TABLE>

     PAUL HERCHMAN is a co-founder of the Company and has served as Chairman of
the Board and 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 HILL, has served as President and Chief Operating Officer of the
Company since December 1997 and has served as a director 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 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 Oklahoma Health
Science Center and as the 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 LEVECCHIO, has been a director of the Company since 1997 and 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 advisory 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 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.,
and has recently been appointed as Chief Financial Officer of Solution 6
Holdings, Ltd., an Australian Public Company. 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 since 1985. Mr.

                                       21
<PAGE>   22

Montgomery received a Bachelor of Business Administration degree from Texas Tech
University and a Master of Science degree from Texas Tech University.

     LEON PRITZKER, a director of the Company since 1989, has been self-employed
as a management consultant since 1990. 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. Mr. Pritzker 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 a
member of the Audit Committee, the Compensation Committee, and the Incentive
Plan Committees, 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 degree
from Dartmouth College and a Master of Business Administration degree 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 1999, 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 other than Paul Herchman
who filed one late form reporting two transactions.

MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS

     The business of the Company is managed under the direction of the Board.
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. In 1999, the Board met seventeen
(17) times and acted by unanimous written consent five (5) times. During 1999,
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, 1999, 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. In 1999, the Audit
Committee met one (1) time.

     Compensation Committee. The Compensation Committee makes recommendations to
the Board regarding the compensation of executive officers. Prior to the
formation of the Incentive Plan Committee in 1997, the Compensation Committee
was responsible for the administration of the Company's 1994 Amended and
Restated Long-Term Incentive Plan (the "Incentive Plan"). The Compensation
Committee is comprised of Messrs. LeVecchio, Montgomery, and Silcock. In 1999,
the Compensation Committee met two (2) times.

     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

                                       22
<PAGE>   23

Plan Committee is comprised of Messrs. Montgomery, LeVecchio and Silcock. In
1999, the Incentive Plan Committee met two (2) times.

     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 1997, 1998 and 1999.

<TABLE>
<CAPTION>
                                                                                     LONG-TERM
                                                                                COMPENSATION AWARDS
                                                 ANNUAL COMPENSATION         -------------------------
                                           -------------------------------   SECURITIES
                                  FISCAL                      OTHER ANNUAL   UNDERLYING    ALL OTHER
NAME AND PRINCIPAL POSITION        YEAR     SALARY    BONUS   COMPENSATION    OPTIONS     COMPENSATION
---------------------------       ------   --------   -----   ------------   ----------   ------------
<S>                               <C>      <C>        <C>     <C>            <C>          <C>
Paul R. Herchman................   1999    $200,000    $0          $0         100,000        $5,240(1)
  Chairman of the Board and        1998     200,000     0           0               0         5,700
  Chief Executive Officer          1997     155,510     0           0           1,000         5,700
Gary Hill(3)....................   1999     200,000     0           0               0         5,420(2)
  President & Chief                1998     200,000     0           0         151,540         5,420
  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 1999

     The following table provides information related to options granted to the
Named Executive Officers during 1999.

<TABLE>
<CAPTION>
                                                           INDIVIDUAL GRANTS
                            -------------------------------------------------------------------------------
                                                                                   POTENTIAL REALIZED VALUE
                                          PERCENT OF                               AT ASSUMED ANNUAL RATES
                            NUMBER OF       TOTAL                                       OF STOCK PRICE
                            SECURITIES     OPTIONS                                 APPRECIATION FOR OPTION
                            UNDERLYING    GRANTED TO    EXERCISE                           TERM(1)
                             OPTIONS      EMPLOYEES     PRICE PER    EXPIRATION    ------------------------
                             GRANTED       IN 1999      SHARE(2)        DATE           5%           10%
                            ----------    ----------    ---------    ----------    ----------    ----------
<S>                         <C>           <C>           <C>          <C>           <C>           <C>
Paul Herchman.............   100,000          22%         $1.91       12/15/09      $120,119      $304,405
</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.

                                       23
<PAGE>   24

                  AGGREGATE OPTION VALUES AT DECEMBER 31, 1999

<TABLE>
<CAPTION>
                                                 NUMBER OF SECURITIES            VALUE OF UNEXERCISED
                                                UNDERLYING UNEXERCISED         IN-THE-MONEY OPTIONS AT
                                             OPTIONS AT DECEMBER 31, 1999       DECEMBER 31, 1999 (1)
                                             ----------------------------    ----------------------------
NAME                                         EXERCISABLE    UNEXERCISABLE    EXERCISABLE    UNEXERCISABLE
----                                         -----------    -------------    -----------    -------------
<S>                                          <C>            <C>              <C>            <C>
Paul Herchman..............................          0         101,000           $0            $15,000
Gary Hill..................................    125,000         125,000            0                  0
</TABLE>

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

(1) These values assume a valuation of $2.06 per share at December 31, 1999.
    Value is calculated based on the difference between the option price and
    $2.06 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 has 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.

     The Company has entered into an Employment Agreement with Gary Hill, dated
as of December 2, 1997, (the "Hill Agreement"). The Hill Agreement provides that
Mr. Hill will 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 is terminable by the Company with (12) twelve months prior notice and
may be terminated by Mr. Hill upon (3) three months prior notice. 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.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     During 1999, 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 1999. 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.

                                       24
<PAGE>   25

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 March 17, 2000, 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 1999 based on salary and bonus earned during 1999 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 March 17, 2000. All persons listed have sole voting and investment power with
respect to their shares unless otherwise indicated.

<TABLE>
<CAPTION>
                                                    NUMBER OF SHARES      PERCENTAGE OF SHARES
NAME OF BENEFICIAL OWNER AND DIRECTORS            BENEFICIALLY OWNED(1)   BENEFICIALLY OWNED(1)
--------------------------------------            ---------------------   ---------------------
<S>                                               <C>                     <C>
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Paul Herchman(2)................................          486,646                  7.7%
Gary Hill(3)....................................          140,000                  2.2%
David Kallenberger, M.D(4)......................          185,498                  2.9%
Tony LeVecchio(5)...............................           46,481                  0.7%
Thomas Montgomery(6)............................          254,792                  4.0%
Leon Pritzker(7)................................           86,120                  1.4%
Jim Silcock(8)..................................        1,004,859                 15.9%
All named executive officers and directors as a
  group (7 persons)(9)..........................        2,204,396                 34.8%
OTHER 5% SHAREHOLDERS
Mapleleaf Capital, Ltd(10)......................          743,996                 11.8%
Patrick Rivelli(11).............................        1,013,759                 16.0%
Satana Corporation(12)..........................          494,645                  7.8%
Dimensional Fund Advisors, Inc.(13) ............          383,600                  6.1%
</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 51,000 shares underlying currently exercisable options to purchase
    Common Stock. The business address of Mr. Herchman is 2445 Gateway Drive,
    Suite 150, Irving, Texas 75063.

(3) Includes 125,000 shares underlying currently exercisable options to purchase
    Common Stock. The business address of Mr. Hill is 2445 Gateway Drive, Suite
    150, Irving, Texas 75063.

(4) Includes 18,471 shares underlying currently exercisable options to purchase
    Common Stock. The business address of Dr. Kallenberger is 3433 N.W. 56th
    Street, Suite 310, Oklahoma City, Oklahoma 73112.

(5) Includes 4,666 shares underlying currently exercisable options to purchase
    Common Stock. The business address of Mr. LeVecchio is 4975 Preston Park
    Blvd., Suite 150, Plano, Texas 75093.

(6) Includes 5,666 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 53,610 shares of Common Stock held by Montgomery,
    Jessup and Company L.L.P.'s ("MJC") profit sharing plan, of which Mr.
    Montgomery participates. Mr. Montgomery may be deemed to be the indirect
    owner of the shares beneficially owned by the profit sharing plan by virtue
    of his authority to make investment decisions regarding the voting and
    disposition of such shares. The business address of Mr. Montgomery is 5220
    Spring Valley, Suite 600, Dallas, Texas 75240.

(7) Includes 5,666 shares underlying currently exercisable options to purchase
    Common Stock. The business address of Mr. Pritzker is 3825 Echo Brook Lane,
    Dallas, Texas 75229.

                                       25
<PAGE>   26

(8) Includes 743,996 shares beneficially owned by Mapleleaf Capital, Ltd., which
    includes 5,666 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 5,666 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.

(11) Includes 743,996 shares beneficially owned by Mapleleaf Capital, Ltd.,
     which includes 5,666 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.

(12) Includes 2,000 shares underlying currently exercisable options to purchase
     Common Stock. The business address of Satana Corporation is National Plaza
     2, Suite 102, Amarillo, Texas 79101.

(13) Dimensional Fund Advisors, Inc. ("Dimensional"), an investment advisor
     registered under Section 203 of the Investment Advisors Act of 1940,
     furnishes investment advice to four investment companies registered under
     the Investment Company Act of 1940, and serves as investment manager to
     certain other commingled group trusts and separate accounts. These
     investment companies trusts and accounts are the "Funds". In its role as
     investment advisor or manager , Dimensional possesses voting and/or
     investment power over the securities of the Issuer described in this
     schedule that are owned the Funds. All securities reported in this schedule
     are owned by the Funds. Dimensional disclaims beneficial ownership of such
     securities. The business address of Dimensional Fund Advisors, Inc. is 1299
     Ocean Avenue, 11th Floor, Santa Monica, California 90401.

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, Chairman of the Board and Chief Executive Officer of
the Company, to a banking institution. The stock was pledged to the bank to
collateralize payment on a $170,000 loan between Paul Herchman and the bank. The
current balance on the loan as of March 27, 2000 is approximately $89,000. The
pledged stock would be repurchased by the Company upon request from the bank if
the loan is in default.

                                       26
<PAGE>   27

                                    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, 1998 and
  1999......................................................  F-3
Consolidated Statements of Operations for the years ended
  December 31, 1997, 1998 and 1999..........................  F-4
Consolidated Statements of Stockholders' Equity for the
  years ended December 31, 1997, 1998 and 1999..............  F-5
Consolidated Statements of Cash Flows for the years ended
  December 31, 1997, 1998 and 1999..........................  F-6
Consolidated Notes to Financial Statements..................  F-7
(2) Financial Statement Schedule:
     Schedule II -- Valuation and Qualifying Accounts.......  F-16
</TABLE>

        (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 1999 fiscal year.

                                       27
<PAGE>   28

     (c) Exhibits:

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                              EXHIBIT DESCRIPTION
        -------                              -------------------
<C>                      <S>
           2.1           -- Agreement and Plan of Merger, dated as of February 18,
                            1999 between Diagnostic Health Services, Inc. and the
                            Company.(8)
           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)
          10.1           -- Medical Alliance, Inc. 1994 Amended and Restated
                            Long-Term Incentive Plan.(2)(4)
          10.2           -- Employment Agreement between the Company and Paul
                            Herchman.(1)(4)
          10.3           -- Employment Agreement between the Company and Gary
                            Hill.(7)(4)
          10.4           -- Lease Agreement.(1)
          10.5           -- Strategic Alliance Agreement, dated as of December 19,
                            1996, by and between Laserscope and the Company.(6)
          10.6           -- Strategic Alliance Agreement, dated as of January 1,
                            1997, by and between Valleylab, Inc. and the Company.(6)
          10.7           -- Exclusive Provider Agreement, dated as of February 9,
                            1997, by and between Imagyn Medical, Inc. and the
                            Company.(6)
          10.8           -- Paul Herchman Severance Agreement.(8)
          10.9           -- Voting Agreement, dated as of February 18, 1999, by and
                            between Diagnostic Health Services, Inc., MAI Acquisition
                            Corp., and Medical Alliance, Inc.(8)
          12.1           -- Subsidiaries of the Company.(1)
          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.

(8) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
    for the fiscal year ended December 31, 1998, and incorporated herein by
    reference.

                                       28
<PAGE>   29

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                       AND FINANCIAL STATEMENT SCHEDULES

<TABLE>
<CAPTION>
                                                                PAGE
                                                               NUMBER
                                                               ------
<S>                                                            <C>
Report of Independent Accountants...........................   F-2

Consolidated Balance Sheets as of December 31, 1998 and
  1999......................................................   F-3

Consolidated Statements of Operations for the years ended
  December 31, 1997, 1998
  and 1999..................................................   F-4

Consolidated Statements of Stockholders' Equity for the
  years ended December 31, 1997, 1998 and 1999..............   F-5

Consolidated Statements of Cash Flows for the years ended
  December 31, 1997,
  1998 and 1999.............................................   F-6

Consolidated Notes to Financial Statements..................   F-7

Schedule II -- Valuation and Qualifying Accounts for the
  years ended December 31, 1997, 1998 and 1999..............   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>   30

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Medical Alliance, Inc.:

     In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 27 present fairly, in all material
respects, the financial position of Medical Alliance, Inc. and its subsidiaries
at December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedule listed in the
index appearing under item 14(a)(2) on page 27 present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States, 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 4, 2000

                                       F-2
<PAGE>   31

                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1999

<TABLE>
<CAPTION>
                                                                 1998          1999
                                                              -----------   -----------
<S>                                                           <C>           <C>
                                        ASSETS

Current assets:
  Cash and cash equivalents.................................  $14,377,781   $13,393,646
  Accounts receivable, less allowance for doubtful accounts
     of approximately $1,002,000 and $624,000,
     respectively...........................................    1,711,558     2,080,143
  Prepaid expenses and other current assets.................    1,033,129     1,525,576
  Refundable federal and state income taxes.................      205,297        49,508
  Deferred income taxes.....................................      488,918       263,331
                                                              -----------   -----------
          Total current assets..............................   17,816,683    17,312,204
Property and equipment, net.................................    5,926,150     5,905,091
Intangible assets, net of amortization of approximately
  $266,000 and $315,000, respectively.......................      778,232       729,143
                                                              -----------   -----------
          Total assets......................................  $24,521,065   $23,946,438
                                                              ===========   ===========

                         LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable..........................................  $   356,509   $   673,539
  Accrued expenses..........................................      789,238       634,890
  Capital lease obligations.................................      202,593        73,123
  Deferred revenue..........................................       92,139         3,546
                                                              -----------   -----------
          Total current liabilities.........................    1,440,479     1,385,098
Capital lease obligations, net of current maturities........       37,336        15,689
Deferred income taxes.......................................      488,918       263,331
                                                              -----------   -----------
          Total liabilities.................................    1,966,733     1,664,118
                                                              -----------   -----------
Commitments (Note 7)
Stockholders' equity:
  Common stock, $0.002 par value, 30,000,000 shares
     authorized, 6,394,282 and 6,423,355 shares issued and
     6,117,079 and 6,090,052 shares outstanding,
     respectively...........................................       12,753        12,812
  Capital in excess of par value............................   26,664,309    26,701,496
  Accumulated deficit.......................................   (3,277,976)   (3,482,837)
Treasury stock at cost, 277,203 and 333,303 shares,
  respectively..............................................     (844,754)     (949,151)
                                                              -----------   -----------
          Total stockholders' equity........................   22,554,332    22,282,320
                                                              -----------   -----------
          Total liabilities and stockholders' equity........  $24,521,065   $23,946,438
                                                              ===========   ===========
</TABLE>

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

                                       F-3
<PAGE>   32

                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

<TABLE>
<CAPTION>
                                                           1997          1998          1999
                                                        -----------   -----------   -----------
<S>                                                     <C>           <C>           <C>
Net revenue...........................................  $18,821,125   $16,132,206   $17,104,682
                                                        -----------   -----------   -----------
Costs and expenses:
  Salaries and benefits...............................    8,352,623     7,327,343     7,751,062
  Selling, general and administrative.................    7,857,136     6,306,234     6,709,966
  Depreciation and amortization.......................    3,152,491     2,337,183     2,400,575
  Provision for uncollectible accounts................    3,870,925     1,690,293     1,130,183
                                                        -----------   -----------   -----------
          Total costs and expenses....................   23,233,175    17,661,053    17,991,786
                                                        -----------   -----------   -----------
          Operating loss..............................   (4,412,050)   (1,528,847)     (887,104)
                                                        -----------   -----------   -----------
Other (income) expense:
  Interest income and other, net......................     (778,351)     (814,570)     (723,522)
  Interest expense....................................      111,578        59,306        41,279
                                                        -----------   -----------   -----------
          Total other (income) expense................     (666,773)     (755,264)     (682,243)
                                                        -----------   -----------   -----------
Loss before income taxes..............................   (3,745,277)     (773,583)     (204,861)
Benefit for income taxes..............................     (848,267)           --            --
                                                        -----------   -----------   -----------
Net loss..............................................  $(2,897,010)  $  (773,583)  $  (204,861)
                                                        ===========   ===========   ===========
Net loss per share (basic)............................  $     (0.48)  $     (0.12)  $     (0.03)
                                                        ===========   ===========   ===========
Net loss per share (diluted)..........................  $     (0.48)  $     (0.12)  $     (0.03)
                                                        ===========   ===========   ===========
Weighted average number of common shares outstanding
  (in thousands) (basic)..............................        6,061         6,214         6,131
Weighted average number of common shares outstanding
  (in thousands) (diluted)............................        6,061         6,214         6,131
</TABLE>

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

                                       F-4
<PAGE>   33

                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

<TABLE>
<CAPTION>
                                                                           RETAINED
                                        COMMON STOCK       CAPITAL IN      EARNINGS                     TOTAL
                                     -------------------    EXCESS OF    (ACCUMULATED   TREASURY    STOCKHOLDERS'
                                      SHARES     AMOUNT     PAR VALUE     (DEFICIT)       STOCK        EQUITY
                                     ---------   -------   -----------   ------------   ---------   -------------
<S>                                  <C>         <C>       <C>           <C>            <C>         <C>
Balance at December 31, 1996.......  5,965,744   $11,948   $25,746,292   $   392,617    $ (65,944)   $26,084,913
  Issuance of common stock.........     22,174        44       252,183                                   252,227
  Options and warrants exercised...    169,382       339       237,578                                   237,917
  Net loss.........................                                       (2,897,010)                 (2,897,010)
                                     ---------   -------   -----------   -----------    ---------    -----------
Balance at December 31, 1997.......  6,157,300   $12,331    26,236,053    (2,504,393)     (65,944)    23,678,047
                                     ---------   -------   -----------   -----------    ---------    -----------
  Options exercised................    211,279       422       428,256                                   428,678
  Treasury stock purchases.........   (251,500)                                          (778,810)      (778,810)
  Net loss.........................                                         (773,583)                   (773,583)
                                     ---------   -------   -----------   -----------    ---------    -----------
Balance at December 31, 1998.......  6,117,079   $12,753   $26,664,309   $(3,277,976)   $(844,754)   $22,554,332
                                     ---------   -------   -----------   -----------    ---------    -----------
  Options exercised................     29,073        59        37,187                                    37,246
  Treasury stock purchases.........    (56,100)                                          (104,397)      (104,397)
  Net loss.........................                                         (204,861)                   (204,861)
                                     ---------   -------   -----------   -----------    ---------    -----------
Balance at December 31, 1999.......  6,090,052   $12,812   $26,701,496   $(3,482,837)   $(949,151)   $22,282,320
                                     =========   =======   ===========   ===========    =========    ===========
</TABLE>

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

                                       F-5
<PAGE>   34

                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

<TABLE>
<CAPTION>
                                                              1997           1998           1999
                                                           -----------    -----------    -----------
<S>                                                        <C>            <C>            <C>
Cash flows from operating activities
  Net loss...............................................  $(2,897,010)   $  (773,583)   $  (204,861)
  Adjustments to reconcile net loss to net cash (used in)
    provided by operating activities:
    Loss on joint venture................................       56,540             --             --
    Gain from disposal of equipment......................           --        (18,513)       (29,849)
    Provision for uncollectible accounts.................    3,870,925      1,690,293      1,130,183
    Depreciation and amortization........................    3,152,491      2,337,183      2,400,575
    Deferred income taxes................................      (64,642)            --             --
  Changes in assets and liabilities net of effects from
    acquisitions:
    Accounts receivable..................................   (2,171,511)      (686,405)    (1,498,767)
    Prepaid expenses and other current assets............   (2,021,322)     1,247,915       (336,658)
    Accounts payable and accrued expenses................   (1,518,457)    (1,120,869)       162,683
    Deferred revenue.....................................      (17,686)       (71,837)       (88,593)
    Other................................................       (2,773)            --             --
                                                           -----------    -----------    -----------
         Net cash (used in) provided by operating
           activities....................................   (1,613,445)     2,604,184      1,534,713
                                                           -----------    -----------    -----------
Cash flows from investing activities:
  Capital expenditures...................................   (3,301,515)    (2,566,243)    (2,281,917)
  Net proceeds from sale of equipment....................       83,753         51,784         51,223
  Payment for acquisitions...............................     (605,978)            --             --
  Change in restricted cash..............................       31,000             --             --
  Other..................................................           --        (15,740)            --
                                                           -----------    -----------    -----------
         Net cash used in investing activities...........   (3,792,740)    (2,530,199)    (2,230,694)
                                                           -----------    -----------    -----------
Cash flows from financing activities:
  Repayment of capital lease obligations.................     (444,542)      (248,650)      (221,003)
  Purchase of treasury shares............................           --       (778,810)      (104,397)
  Proceeds from issuance of common stock.................      237,917        428,678         37,246
  Other..................................................        9,601             --             --
                                                           -----------    -----------    -----------
         Net cash used in financing activities...........     (197,024)      (598,782)      (288,154)
                                                           -----------    -----------    -----------
Net decrease in cash and cash equivalents................   (5,603,209)      (524,797)      (984,135)
Cash and cash equivalents at beginning of year...........   20,505,787     14,902,578     14,377,781
                                                           -----------    -----------    -----------
Cash and cash equivalents at end of year.................  $14,902,578    $14,377,781    $13,393,646
                                                           ===========    ===========    ===========
Supplemental disclosures of cash flow information:
  Interest paid..........................................  $   111,578    $    63,906    $    31,317
  Income taxes paid......................................    1,256,854             --             --
Supplemental schedule of noncash investing and financing
  activities:
  Capital lease obligations incurred.....................           --             --         69,886
The Company has acquired businesses, as follows:
  Fair value of assets acquired..........................      831,082             --             --
  Goodwill recorded......................................      812,362             --             --
  Less:
    Fair value of common stock...........................     (252,227)            --             --
    Cash paid............................................     (605,978)            --             --
                                                           -----------    -----------    -----------
         Liabilities assumed.............................  $   785,239    $        --    $        --
                                                           ===========    ===========    ===========
</TABLE>

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

                                       F-6
<PAGE>   35

                    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 in
1993 created two new 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 and currently sells medical
equipment and devices to physicians.

     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 bank. At December
31, 1998 and December 31, 1999, the Company had approximately $13,000,000 and
$12,800,000 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 purchases are recorded at
cost. Depreciation is provided by the straight-line method over existing useful
lives ranging 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 or $0.13 per share for the year ended December
31, 1998. 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.

                                       F-7
<PAGE>   36
                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

           CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     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.

     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. In years when the Company incurs a net loss,
equivalents are excluded from the calculation as inclusion of such shares would
be antidilutive.

     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 accounting
standards, effective for the Company for 1999 are summarized below. These
accounting standards have no current effect on the Company's financial
statements.

     In December 1999, the SEC issued SAB No. 101, "Revenue Recognition in
Financial Statements." SAB No. 101 expresses the views of the SEC staff in
applying generally accepted accounting principles to certain revenue recognition
issues. The Company has concluded that this standard does not have a material
impact on its financial position or its results of operations.

     Reclassifications -- During 1999, reclassifications of prior year
information have been made to conform with current year presentation. These
reclassifications had no effect on net loss, stockholders equity, or cashflows.

3. PROPERTY AND EQUIPMENT

     Property and equipment consisted of the following:

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                          ----------------------------------------------
                                             1998        LIFE         1999        LIFE
                                          -----------   -------   ------------   -------
<S>                                       <C>           <C>       <C>            <C>
Medical equipment.......................  $ 9,213,089   5 years   $ 10,529,256   5 years
Furniture and fixtures..................    2,140,049   3 years      2,301,362   3 years
Vehicles................................    1,255,940   4 years      1,997,208   4 years
Leasehold improvements..................       53,361   3 years         53,361   3 years
Equipment under capital leases..........    1,493,533   5 years      1,563,419   5 years
                                          -----------             ------------
                                           14,155,972               16,444,606
Less accumulated depreciation and
  amortization..........................   (8,229,822)             (10,539,515)
                                          -----------             ------------
          Net property and equipment....  $ 5,926,150             $  5,905,091
                                          ===========             ============
</TABLE>

     Depreciation expense related to property and equipment was $3,065,000,
$2,231,000 and $2,351,000 for the years ended December 31, 1997, 1998 and 1999,
respectively. Accumulated amortization related to

                                       F-8
<PAGE>   37
                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

           CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

equipment under capital leases was approximately $1,195,000 and $1,388,000 at
December 31, 1998 and December 31, 1999, respectively.

4. 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 twelve 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. This share repurchase program was
terminated by the Company's Board of Directors in November 1998.

     Furthermore, on November 10, 1999, 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 twelve months at prices then
prevailing on the Nasdaq National Market System or in privately negotiated
transactions. From November 10, 1999 through December 14, 1999, the Company
repurchased 56,100 shares of the Company's stock at a total cost of $104,397.
The share repurchase program was terminated by the Company's Board of Directors
in December 1999.

5. 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 stockunits. 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 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 1997, 1998, and 1999 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 1997,
1998 and 1999.

                                       F-9
<PAGE>   38
                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

           CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of the Company's stock options as of December 31, 1997, 1998, and
1999 and the changes during the years then ended on those dates is presented
below:

<TABLE>
<CAPTION>
                                              1997                     1998                     1999
                                     ----------------------   ----------------------   ----------------------
                                                   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.............................    837,478      $2.41       971,086      $3.35       909,542      $3.60
Granted............................    508,760       7.54       282,040       3.71       471,369       2.02
Exercised..........................    135,661       1.44       211,279       2.03        29,073       1.28
Forfeited..........................    239,491       8.62       132,305       5.03       178,997       3.98
Expired............................                                                      278,695       2.38
Outstanding at the end of year.....    971,086       3.35       909,542       3.60       894,146       3.05
Exercisable at end of year.........    559,201       2.14       429,125       2.82       236,534       3.90
Weighted-average fair value of
  options granted during the
  year.............................                 $4.78                    $1.90                    $1.27
</TABLE>

     The fair value of each stock option granted is estimated on the date of
grant using the "Black Scholes" option-pricing model with the following
weighted-average assumptions for grants in 1997, 1998 and 1999, respectively:
dividend yield of 0.00% for all years; risk-free interest rates are different
for each grant and range from 6.04%, 5.41% and 6.12%; the expected lives of
options are different for each grant and range from 4.42 years, 5.0 years, and
5.0 years; and volatility of the options range from 83.31%, 61.69% and 70.12%.

     The following table summarizes information about stock options outstanding
at December 31, 1999:

<TABLE>
<CAPTION>
                                    OPTIONS OUTSTANDING                             OPTIONS EXERCISABLE
                                 --------------------------                      -------------------------
                                   NUMBER       WGTD. AVG.                         NUMBER       WGTD. AVG.
                                 OUTSTANDING     REMAINING       WGTD. AVG.      EXERCISABLE     EXERCISE
RANGE OF EXERCISE PRICES         AT 12/31/99    CONTR. LIFE    EXERCISE PRICE    AT 12/31/99      PRICE
------------------------         -----------    -----------    --------------    -----------    ----------
<S>                              <C>            <C>            <C>               <C>            <C>
$0.03 to $5.00.................    871,146         7.29            $2.88           218,367        $3.40
$5.01 to $13.50................     23,000         5.51             9.44            18,167         9.90
                                   -------         ----            -----           -------        -----
          Total................    894,146         7.24            $3.05           236,534        $3.90
                                   =======         ====            =====           =======        =====
</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 1997, 1998, and 1999 would approximate the pro forma
amounts below.

<TABLE>
<CAPTION>
                                       REPORTED       PRO FORMA     REPORTED      PRO FORMA     REPORTED     PRO FORMA
                                       12/31/97       12/31/97      12/31/98      12/31/98      12/31/99     12/31/99
                                      -----------    -----------    ---------    -----------    ---------    ---------
<S>                                   <C>            <C>            <C>          <C>            <C>          <C>
SFAS 123 charge.....................  $      0.00    $   321,607    $    0.00    $   324,794    $    0.00    $ 264,939
APB25 charge........................         0.00           0.00         0.00           0.00         0.00         0.00
Net loss applicable to common
  stock.............................   (2,897,010)    (3,101,577)    (773,583)    (1,098,377)    (204,861)    (469,800)
Net loss per common share...........  $     (0.48)   $     (0.51)   $   (0.12)   $     (0.18)   $   (0.03)   $   (0.08)
</TABLE>

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.

                                      F-10
<PAGE>   39
                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

           CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

6. INCOME TAXES

     The income tax provisions consisted of the following:

<TABLE>
<CAPTION>
                                                      FOR YEARS ENDED DECEMBER 31,
                                                    ---------------------------------
                                                      1997         1998        1999
                                                    ---------    --------    --------
<S>                                                 <C>          <C>         <C>
Current provisions:
  Federal.........................................  $(820,952)   $     --    $     --
  State...........................................     37,327          --          --
                                                    ---------    --------    --------
          Total current...........................   (783,625)         --          --
                                                    ---------    --------    --------
Deferred provisions:
  Federal.........................................    (51,477)    (26,570)         --
  State...........................................    (13,165)     26,570          --
                                                    ---------    --------    --------
          Total deferred..........................    (64,642)         --          --
                                                    ---------    --------    --------
          Total provisions benefit)...............  $(848,267)   $     --    $     --
                                                    =========    ========    ========
</TABLE>

     For the years ended December 31, 1997, 1998, and 1999 the Company generated
tax operating losses. The net operating loss carryforward at December 31, 1999
approximates $2,268,168 and, if not utilized, will expire between 2012 and 2019.

     The components of the net deferred tax asset (liability) as of December 31,
1998 and 1999 were as follows:

<TABLE>
<CAPTION>
                                              DECEMBER 31, 1998         DECEMBER 31, 1999
                                           -----------------------   -----------------------
                                            ASSETS     LIABILITIES    ASSETS     LIABILITIES
                                           ---------   -----------   ---------   -----------
<S>                                        <C>         <C>           <C>         <C>
Deferred revenue.........................  $  34,368    $     --     $   1,323    $     --
Depreciation.............................         --      28,270            --     146,017
Doubtful accounts........................    373,690          --       232,861          --
Compensation.............................     48,645          --        52,696          --
State and sales tax......................     47,990          --        27,129          --
Section 481(a) adjustment................         --     777,133            --     302,319
Net operating loss carryforward..........    832,508          --       771,177
Other....................................    110,568          --        60,115          --
Valuation allowance......................   (642,366)         --      (696,965)         --
                                           ---------    --------     ---------    --------
          Total..........................  $ 805,403    $805,403     $ 448,336    $448,336
                                           =========    ========     =========    ========
</TABLE>

     Deferred income taxes totaling $488,918 and $263,331 at December 31, 1998
and 1999, are included in current assets, respectively. Noncurrent deferred
income tax liabilities totaled $488,918 and $263,331 at December 31, 1998 and
1999, respectively. Due to uncertainty regarding the realization of the
Company's net deferred tax asset, the Company has booked a valuation allowance
of $696,965 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-11
<PAGE>   40
                    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, 1997, 1998 and 1999 as follows:

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                            -------------------------
                                                            1997      1998      1999
                                                            -----    ------    ------
<S>                                                         <C>      <C>       <C>
Federal statutory rate....................................   34.0%     34.0%     34.0%
Disallowance of meals and entertainment...................   (0.8)    (3.17)   (11.44)
Addition to valuation allowance...........................  (11.3)   (28.59)   (26.65)
State taxes (net of federal benefit)......................   (0.5)    (2.27)     5.01
Other.....................................................    1.2       .41     (0.09)
Officers life insurance...................................     --      (.38)     (.83)
                                                            -----    ------    ------
          Effective income tax rate.......................   22.6%        0%        0%
                                                            =====    ======    ======
</TABLE>

7. 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 February 2005. Future minimum rental payments under these
capital and operating leases subsequent to December 31 are as follows:

<TABLE>
<CAPTION>
                                                              CAPITAL    OPERATING
YEAR ENDING DECEMBER 31                                        LEASES     LEASES
-----------------------                                       --------   ---------
<S>                                                           <C>        <C>
2000........................................................  $ 77,197   $293,206
2001........................................................    16,091    181,226
2002........................................................        --    103,812
2003........................................................        --     25,440
2004........................................................        --     25,440
                                                              --------
          Total future minimum lease payments...............  $ 93,288
Less amounts representing interest..........................    (4,476)
                                                              --------
          Present value of future minimum lease payments....    88,812
Less current maturities.....................................   (73,123)
                                                              --------
          Long-term capital lease obligations...............  $ 15,689
                                                              ========
</TABLE>

Rent expense for the years ended December 31, 1997, 1998 and 1999 under
operating leases was approximately $1,960,000, $1,308,000, and $664,000
respectively.

8. EARNINGS PER SHARE

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                          -------------------------------------
                                                             1997          1998         1999
                                                          -----------   ----------   ----------
<S>                                                       <C>           <C>          <C>
BASIC AND DILUTED:
Weighted average of common shares outstanding...........    6,060,950    6,213,747    6,130,882
Net loss................................................  $(2,897,010)  $ (773,583)  $ (204,861)
Net loss per share......................................  $     (0.48)  $    (0.12)  $    (0.03)
                                                          ===========   ==========   ==========
</TABLE>

Options and warrants excluded from the dilutive earnings per share computation
because to do so would have been antidilutive (including contingent options and
warrants) totaled 986,696, 925,152 and 894,146 as of December 31, 1997, 1998 and
1999, respectively.

                                      F-12
<PAGE>   41
                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

           CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

9. 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.

10. 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 $58,000 in 1997, $55,000 in 1998, and $65,000 in 1999
for professional fees. MBD and its affiliates own 249,126 shares of the
Company's common stock.

     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 current balance on the loan as of March
27, 2000 is approximately $89,000. The pledged stock would be repurchased by the
Company upon request from the bank if the loan is in default.

11. 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 15% of their salary with a maximum
contribution of $10,000 in 1999. 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 $28,000 in
1997, $35,000 in 1998 and $42,000 in 1999.

12. ACQUISITIONS

     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 $252,227 of common stock, the Company
recorded assets and assumed liabilities as follows:

<TABLE>
<S>                                                        <C>
Property, equipment, and other assets...................   $ 583,676
Goodwill................................................     616,797
Accounts payable........................................    (709,966)
                                                           ---------
                                                           $ 490,507
                                                           =========
</TABLE>

     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. The pro forma effect of the acquisitions was not material to the
results of operations or financial position of the Company.

                                      F-13
<PAGE>   42
                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

           CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

13. FAIR VALUE OF FINANCIAL INSTRUMENTS

     The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximates fair value because of their
short term nature.

14. REPORTABLE SEGMENTS

     The table below presents information about the reported operating results
and net assets of the Company's reportable segments.

<TABLE>
<CAPTION>
                                                               FOR THE YEAR ENDED DECEMBER 31, 1997
                                                              --------------------------------------
                                                               MEDICAL       AESTHETIC
                                                               SURGICAL      ELECTIVE        TOTAL
                                                              ----------    -----------    ---------
                                                                          (IN THOUSANDS)
<S>                                                           <C>           <C>            <C>
Operating revenues from external customers (1)..............    $10,143       $ 8,678       $18,821
Operating costs.............................................     11,743         8,338        20,081
Depreciation and amortization...............................      1,387         1,765         3,152
Interest income and other, net..............................        417           361           778
Interest expense............................................         56            56           112
Benefit for income taxes....................................        424           424           848
Segment loss................................................     (2,201)         (696)       (2,897)
Segment assets..............................................     12,376        14,129        26,505
</TABLE>

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

(1) Includes company sponsored seminar revenues of $525,000 allocated evenly
    between medical surgical and aesthetic elective.

<TABLE>
<CAPTION>
                                                               FOR THE YEAR ENDED DECEMBER 31, 1998
                                                              --------------------------------------
                                                               MEDICAL       AESTHETIC
                                                               SURGICAL      ELECTIVE        TOTAL
                                                              ----------    -----------    ---------
                                                                          (IN THOUSANDS)
<S>                                                           <C>           <C>            <C>
Operating revenues from external customers..................    $ 7,941       $ 8,191       $16,132
Operating costs.............................................      8,598         6,726        15,324
Depreciation and amortization...............................        929         1,408         2,337
Interest income and other, net..............................        407           408           815
Interest expense............................................         30            29            59
Segment income (loss).......................................     (1,209)          435          (774)
Segment assets..............................................     10,889        13,632        24,521
</TABLE>

<TABLE>
<CAPTION>
                                                           FOR THE YEAR ENDED DECEMBER 31, 1999
                                                        ------------------------------------------
                                                        MEDICAL    AESTHETIC   EQUIPMENT
                                                        SURGICAL   ELECTIVE      SALES      TOTAL
                                                        --------   ---------   ---------   -------
                                                                      (IN THOUSANDS)
<S>                                                     <C>        <C>         <C>         <C>
Operating revenues from external customers............  $ 8,902     $ 7,657      $546      $17,105
Operating costs.......................................    8,441       6,598       553       15,592
Depreciation and amortization.........................      798       1,602         0        2,401
Interest income and other, net........................      362         362         0          724
Interest expense......................................       21          20         0           41
Segment income (loss).................................        3        (202)       (6)        (205)
Segment assets........................................   10,444      13,111       391       23,946
</TABLE>

                                      F-14
<PAGE>   43
                    MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

           CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

15. SUBSEQUENT EVENT

     On January 24, 2000, the Company announced that is has retained
Dallas-based Hoak Breedlove Wesneski & Co. to act as its financial advisor in
connection with the possible sale of its medical business. The Company also
announced that it intends to consider opportunities to merge with or acquire a
business or businesses in high growth industries, with a focus on the Internet
and technology sectors.

                                      F-15
<PAGE>   44

                                                                     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, 1999
  Allowance for doubtful accounts.........   $1,001,851    $1,130,183   $1,507,743(A)  $  624,291
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
</TABLE>

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

(A) Uncollectible accounts written off, net of recoveries.

                                      F-16
<PAGE>   45

                                   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 30, 2000

     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 30, 2000
-----------------------------------------------------    Chief Executive Officer
                    Paul Herchman

                    /s/ GARY HILL                      President, Chief Operating       March 30, 2000
-----------------------------------------------------    Officer, and Director
                      Gary Hill

               /s/ DAVID KALLENBERGER                  Director                         March 30, 2000
-----------------------------------------------------
                 David Kallenberger

                 /s/ TONY LEVECCHIO                    Director                         March 30, 2000
-----------------------------------------------------
                   Tony LeVecchio

                 /s/ TOM MONTGOMERY                    Director                         March 30, 2000
-----------------------------------------------------
                   Tom Montgomery

                  /s/ LEON PRITZKER                    Director                         March 30, 2000
-----------------------------------------------------
                    Leon Pritzker

                   /s/ JIM SILCOCK                     Director                         March 30, 2000
-----------------------------------------------------
                     Jim Silcock
</TABLE>

                                       S-1
<PAGE>   46

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
        EXHIBIT
         NUMBER                              EXHIBIT DESCRIPTION
        -------                              -------------------
<C>                      <S>
           2.1           -- Agreement and Plan of Merger, dated as of February 18,
                            1999 between Diagnostic Health Services, Inc. and the
                            Company.(8)
           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)
          10.1           -- Medical Alliance, Inc. 1994 Amended and Restated
                            Long-Term Incentive Plan.(2)(4)
          10.2           -- Employment Agreement between the Company and Paul
                            Herchman.(1)(4)
          10.3           -- Employment Agreement between the Company and Gary
                            Hill.(4)(7)
          10.4           -- Lease Agreement.(1)
          10.5           -- Strategic Alliance Agreement, dated as of December 19,
                            1996, by and between Laserscope and the Company.(6)
          10.6           -- Strategic Alliance Agreement, dated as of January 1,
                            1997, by and between Valleylab, Inc. and the Company.(6)
          10.7           -- Exclusive Provider Agreement, dated as of February 9,
                            1997, by and between Imagyn Medical, Inc. and the
                            Company.(6)
          10.8           -- Paul Herchman Severance Agreement.(8)
          10.9           -- Voting Agreement, dated as of February 18, 1999, by and
                            between Diagnostic Health Services, Inc., MAI Acquisition
                            Corp., and Medical Alliance, Inc.(8)
          12.1           -- Subsidiaries of the Company.(1)
          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.

(8) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
    for the fiscal year ended December 31, 1998, and incorporated herein by
    reference.