<PAGE>   1



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

                                   FORM 10-KSB

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                         Commission File Number 1-11922

                              MEDICALCONTROL, INC.
                         -----------------------------
                 (Name of small business issuer in its charter)

         Delaware                                            75-2297429
-------------------------------                         ---------------------
(State or other jurisdiction of                         (I.R.S. Employer
incorporation or organization)                          Identification Number)

8625 King George Drive, Suite 300
Dallas, Texas                                                   75235
-------------------------------                         ---------------------
(Address of principal executive offices)                      (Zip Code)

Issuer's telephone number: (214) 630-6368

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

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

                          Common Stock, $.01 Par Value
                          ----------------------------
                                (Title of Class)

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

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

State issuer's revenues for its most recent fiscal year: $15,340,060.

State the aggregate market value of the voting stock held by non-affiliates of
the Registrant: As of March 24, 2000: $33,235,040*

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 4,664,567 shares of Common Stock,
$.01 par value as of March 24, 2000.

                       DOCUMENTS INCORPORATED BY REFERENCE

             Portions of the Proxy Statement for 2000 Annual Meeting of
        Shareholders of MedicalControl, Inc. are incorporated by reference into
        Part III of this Form 10-KSB.

Transitional Small Business Disclosure Format:         Yes [ ]        No [X]

*The aggregate market value was determined by multiplying the number of
outstanding shares (excluding those shares held of record by officers, directors
and greater than five percent shareholders) by $7.125, the last sales price of
the Registrant's common stock as of March 24, 2000, such date being within 60
days prior to the date of filing.





<PAGE>   2



CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

The Company desires to take advantage of the "safe harbor" provisions contained
in Section 27A of the Private Securities Litigation Reform Act and is including
this statement in its Annual Report on Form 10-KSB in order to do so. From time
to time the Company's management may wish to make forward-looking statements
based upon management expectations to inform more fully existing and potential
shareholders regarding various matters, including without limitation,
projections regarding future income, completion of networks, future growth,
future products and plans, as well as predictions as to the timing and success
of specific projects. Such forward looking statements are generally accompanied
by words such as "believes," "anticipates," "estimate," "predict" or "expect"
and similar expressions that convey the uncertainty of future events or
outcomes.

The factors identified in this Form 10-KSB under "Risk Factors" are believed to
be important factors (but not necessarily all of the important factors) that
could cause actual results to differ materially from those expressed in any
forward-looking statement made by or on behalf of the Company. Such statements
are subject to certain risks and uncertainties, over which the Company has no
control, which could cause actual results to differ materially from those
projected. Such forward looking information could be affected by changes in laws
and regulations, interest rates, liquidity issues, the rate of sales growth,
price and product competition, new product introduction and social and economic
conditions, such as increased competition in the managed care or healthcare
industry and the amount, type and cost of financing available to the Company.
Unpredictable or unknown factors not discussed herein could also have material
adverse effects on forward-looking projections. Readers are cautioned not to
place undue reliance on these forward-looking statements that speak only as of
the date hereof. The Company undertakes no obligation to republish revised
forward-looking statements to reflect events or circumstances after the date
thereof or to reflect the occurrence of unanticipated events. Readers are also
urged to carefully review and consider the various disclosures made by the
Company, in this report, as well as the Company's periodic reports on Forms
10-QSB and 8-K filed with the Securities and Exchange Commission.


                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                               PAGE NO.
                                                                                               --------
                                     PART I

<S>      <C>                                                                                   <C>
Item 1   Description of Business .............................................................    3
Item 2   Description of Properties ...........................................................   22
Item 3   Legal Proceedings ...................................................................   22
Item 4   Submission of Matters to a Vote of Security Holders .................................   22

                                     PART II

Item 5   Market for the Registrant's Common Equity and Related Stockholder Matters ...........   23
Item 6   Management's Discussion and Analysis of Financial Condition and Results of Operations   23
Item 7   Financial Statements ................................................................   25
Item 8   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    25

                                    PART III

Item 9   Directors and Executive Officers, Promoters and Control Persons; Compliance with
         Section 16(a) of the Exchange Act....................................................   26
Item 10  Executive Compensation ..............................................................   26
Item 11  Security Ownership of Certain Beneficial Owners and Management ......................   26
Item 12  Certain Relationships and Related Transactions ......................................   26

                                     PART IV

Item 13  Exhibits and Reports on Form 8-K ....................................................   26
</TABLE>

IMPULSE(TM) and ppoONE.com(TM) are trademarks of ppoONE.com, inc. All other
trademarks or trade names referred to in this Annual Report are the property of
their respective owners.




                                       2
<PAGE>   3

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

         MedicalControl, Inc. (the "Company") is a holding company comprised of
related operating companies serving the managed care industry and providing
health benefit plan administration services. The Company's four subsidiaries are
ppoONE.com, inc. ("ppoONE.com"), providing Internet e-health solutions for
preferred provider organizations ("PPO"), MedicalControl Network Solutions, Inc.
("MedicalControl"), providing managed care services primarily through its
preferred provider networks, ValueCheck, Inc. ("ValueCheck"), providing
utilization review and case management, and Diversified Group Administrators,
Inc. ("Diversified"), providing third party administration ("TPA") services.
Each subsidiary is accounted for as a separate segment of the Company. For
financial information on each segment, see Note 3 to the Consolidated Financial
Statements.

DESCRIPTION OF OPERATING COMPANIES

GENERAL

         ppoONE.com, using its proprietary application software, database
structures and reports, is an Internet based Application Service Provider (ASP)
delivering enterprise software solutions for PPOs and other healthcare provider
network organizations. ppoONE.com enables such entities and their clients to
manage provider data, contract data and client data, reprice healthcare claims
to reflect negotiated rates and to produce data analyses. During the first
quarter of 1998, ppoONE.com began formally marketing its ASP software and
Internet-based data center services.

         MedicalControl, acting as a preferred provider organization ("PPO"),
contracts with hospitals, physicians and ancillary providers providing access to
comprehensive healthcare services on behalf of its clients and their employees
or members at negotiated, discounted rates. MedicalControl reprices resulting
network provider claims to reflect negotiated terms as well as provides
healthcare data analyses, reporting and related healthcare cost containment
programs.

         ValueCheck, a utilization review and case management company, began
doing business January 1, 1999. Utilization review and case management
represents a complementary product for both MedicalControl's PPO and
Diversified's TPA businesses and has potential value for many of the same target
clients and market segments. Diversified and MedicalControl began marketing
ValueCheck services in the fall of 1998 to their clients. As of January 1, 2000,
ValueCheck was providing service to over 200 employer clients representing
62,000 member lives.

         Diversified provides a comprehensive range of administration services
to self-funded benefit plans, insurance companies, provider-based organizations
and other benefit management organizations. Diversified provides complete
benefit plan review, design and administrative services in the administration of
comprehensive employee benefit programs and risk management activities.
Diversified currently administers over 250 self-funded benefit plans with
clients ranging from 50 to 4,000 employees. Current total covered lives exceed
90,000 members located in 49 states. In 1998, Diversified entered the
Taft-Hartley and student accident markets.

         The Company was incorporated in October 1989 as a Delaware corporation.
Unless the context otherwise requires, the term the "Company" refers to
MedicalControl, Inc. and its direct and indirect wholly-owned subsidiaries.
Effective January 1, 1998, the Company established MedicalControl and ppoONE.com
as subsidiaries and transferred its managed care operations to MedicalControl
and its repricing and administrative services operations to ppoONE.com. All
references to the operations of MedicalControl or ppoONE.com prior to January 1,
1998, are to operations of the Company. The Company's executive offices are
located at 8625 King George Drive, Suite 300, Dallas, Texas 75235 and its
telephone number is (214) 630-6368.

INDUSTRY OVERVIEW

         It has been estimated that there are over 700,000,000 healthcare claims
repricing transactions per year. Historically, many PPOs and other networks have
developed specialized in-house software applications to reprice claims and
maintain provider data. Such systems are typically expensive, costly to support
and maintain and do not offer flexible and enterprise-wide access to data. Most
of these systems are not designed to meet the need for real-time information or
actions. The widespread adoption of distributed client-server computing has
provided



                                       3
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organizations with a much greater ability to access and manipulate stored
information but also has created the need for third-party vendors of packaged
software solutions that provide better functionality and reliability than
traditional in-house applications.

         The managed care industry has experienced tremendous growth and change
over the past fifteen years. Primary among the available managed care solutions
offering access to healthcare services at reduced rates are Health Maintenance
Organizations ("HMOs") and PPOs. Among other factors, HMOs are distinguished
from PPOs in that HMOs are responsible for the delivery of medical services to
their members and assume the financial risk for the costs associated with that
healthcare. PPOs, including MedicalControl, instead offer employers and
healthcare purchasers access to a network of contracted facilities and providers
who have agreed to provide services for discounted rates from their standard
fees. In such PPO arrangements, the self-insured employer or benefit plan
typically remains responsible for the cost of care. Currently, approximately 85%
of all Americans with private insurance are enrolled in an HMO, PPO or other
form of managed care. A growing number of health insurance carriers, HMOs, TPAs
and provider groups have also established their own PPO networks. A trend in the
managed care industry is the development or expansion of provider-owned
networks. In some areas, these provider-owned or operated organizations require
a plan or PPO to access their network exclusively in a service area. Such
situations limit the ability of the PPO to provide the broadest network offering
or limits access altogether.

         Utilization review and case management services are provided by various
companies including companies that specialize in such services as well as PPOs,
TPAs and insurance companies that perform the services as a complement to their
other products. In November 1999, United Health Care, the nation's second
largest health insurer, announced that they would reduce the number of providers
requiring precertification (utilization review). Other HMOs and insurers have
follow suit, which could adversely impact ValueCheck's market opportunity.

         Employers and other healthcare purchasers have encouraged the
development or expansion of alternative forms of healthcare delivery and
financing. Currently, over 78% of employers have opted for some type of
self-insurance. Under a self-funded benefit program, an employer retains the
obligation of funding claims, frequently acquiring reinsurance to provide
protection against claims exceeding specific or aggregate amounts. By adopting
self-funding programs and using the plan administration services of TPAs and
other managed care services, employers may experience lower costs and obtain
other advantages over traditional insurance. The stop-loss market has
experienced significant losses recently leading to diminishing capacity and
significantly higher premiums for existing and potential clients. In addition,
some self-insured plans have been unable to obtain affordable stop-loss
coverage, which required the employer to use a fully insured product.

APPLICATION SERVICE PROVIDER AND PPO ENTERPRISE SOFTWARE SERVICES - PPOONE.COM

         ppoONE.com is dedicated to providing PPOs with enterprise PPO
administration software and Internet data center services. Currently, ppoONE.com
offers two types of products: (i) its proprietary PPO management software
referred to as IMPULSE(TM) and (ii) ppoONE.com's ASP solution for Internet
claims repricing and PPO data management solutions. Target markets for
ppoONE.com products are PPOs, medical provider groups, insurance carriers, third
party administrators and other managed care companies offering or utilizing
healthcare provider networks. During the spring of 1997, ppoONE.com began
servicing its first client, MedicalControl, and its second client in the fall of
1997, Business Health Companies, Inc., which the Company subsequently purchased
in September 1998. During 1999, ppoONE.com signed several new clients including
a large insurance conglomerate and independent and provider owned PPOs.

         ppoONE.com's PPO claims repricing and data management software is a
comprehensive PPO enterprise solution based on a client/server technology
architecture. A new product, expected to be available in the second quarter of
2000, is Internet based and utilizes an n-tiered, scaleable, redundant and
distributed architecture that can support virtually unlimited capacity and
growth. Both platforms employ an Oracle(TM) relational database and
state-of-the-art user interfaces. ppoONE.com's technology allows clients to
reprice claims, perform customer service and manage enterprise PPO data via
Internet access to ppoONE.com's data center. ppoONE.com's products provide
faster response times and require fewer keystrokes than most systems therefore
reducing errors while increasing efficiency. The system also has the ability to
track claims status for improved customer service.

         Among many other state-of-the-art features, ppoONE.com allows the
electronic transmission and receipt of healthcare provider claims. ppoONE.com is
well positioned to assist clients in complying with governmental, HIPAA and HCFA
regulations. ppoONE.com can receive and transmit electronic claims from
facilities and





                                       4
<PAGE>   5


physicians which reduces the costs associated with manual input of claims data.
Once ppoONE.com receives the claims data electronically, certain claims can be
automatically repriced without human intervention, again reducing manual input
costs.

ppoONE.com SOLUTION

         ppoONE.com intends to continue to redefine and streamline the claims
repricing process and dramatically reduce expenses and improve service for its
clients by providing a high value proposition, an e-health B2B (business to
business) PPO claims repricing solution accessible by both PPOs and payor
organizations. Payors will be able to access ppoONE.com's e-health B2B solution
for (i) web-browser, XML and EDI claims repricing, (ii) network provider
information, (iii) marketing information and (iv) extensive reporting.
ppoONE.com's e-health solution may alter the fundamental industry equation
between payors and PPOs by eliminating significant expense, redundancy, errors
and claims payment delays.

         ppoONE.com is leading a revolution in the distribution and information
exchange between healthcare payors and PPOs as the first Application Service
Provider (ASP) solution available via the Internet. ppoONE.com member PPOs are
charged a small up-front installation fee and an ongoing transaction fee based
on claims repricing volumes and optional service usage. For PPOs, ppoONE.com's
ASP product represents a complete enterprise solution as well as a link to
ppoONE.com's e-health B2B claims repricing solution.

Market Size and Revenue Sources

         The basic business model calls for ppoONE.com to derive its primary
revenue source from claims repricing transaction fees in addition to other
optional services including reports, implementation fees, custom programming,
directory production, web site hosting and more. The current annual market size
for ppoONE.com's product solution approaches $175,000,000 based upon 700,000,000
claims repricing transactions.

         ppoONE.com is projected to process in excess of 10,000,000 claims per
year in 2000, and additional sales may increase volumes. While the primary
revenue source is from claims repricing transaction fees, other revenue
generators include reports, product implementation, custom programming,
professional services and PPO directory production.

PRODUCTS AND SERVICES FOR PAYOR ORGANIZATIONS

         The central role and value proposition provided by ppoONE.com is in
service of two primary as well as several secondary constituencies. The most
important services relate to healthcare benefit payor organizations and their
access to and exchange of PPO services, claims repricing information and related
services.

1.   ppoONE.com intends to make available to all payor organizations one source,
     24x7 Internet access to claims repricing, healthcare provider data
     administration, reference information and administrative support.

2.   ppoONE.com intends to consolidate and streamline payors interface with all
     participating PPOs providing a state-of-the-art, Internet-accessible claims
     repricing and administration solution.

Benefits

   o     Administrative Simplicity and Reduced Costs: Payors will not need to
         load, maintain or update PPO data on their adjudication system. All PPO
         claims repricing will be achieved through ppoONE.com's e-health B2B
         solution.

   o     Maximize Client/Plan Savings: Payor reduces the frequency of "missed"
         discount opportunities due to non-current information or delayed
         processing.

   o     Achieve Superior Client Service and Claim Turnaround: Claims may be
         received by payor directly from healthcare provider. PPO repricing lag,
         lost/misrouted claims and claim repricing errors are reduced and
         immediate claims data capture and payor system claim recognition allows
         superior customer service response/assistance. Claims may be repriced
         on-line, real time versus a common 5 to 30 day turnaround by the PPO.







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<PAGE>   6

PRODUCTS AND SERVICES FOR PPOS

1.   ppoONE.com provides an ASP enterprise software solution for each member PPO
     and their client/payors accessible via the Internet.

2.   ppoONE.com provides PPOs the capability to support payor-clients with
     Internet access, marketing, distribution and repricing services 24 hours a
     day, 365 days per year.

Benefits:

 o   Superior Payor Services and Options: PPO sells payor convenience, simple
     administration, reduced payor costs, superior repricing services and
     excellent potential claims turnaround.

 o   Simplify Administration and Payor Service: PPO will be able to load, update
     and maintain all network provider demographic and fee schedule data on
     ppoONE.com's Internet Data Center - once. This will eliminate the
     requirement to distribute/support "n" payors with "n" instances of initial
     provider and fee schedule data loads, monthly/quarterly updates, payor
     system installations, remote terminals/users, payor training and more.

 o   State-of-the-Art Technology/System Support: Member PPOs utilize the latest
     technology, state-of-the-art administration and repricing system from
     ppoONE.com permitting focus on core competencies, i.e., marketing, network
     development, provider relations, client and customer services.

 o   Reduce Technology and Systems Overhead: Reduce or eliminate member PPO
     requirement to purchase and maintain PPO administration and repricing
     software, hardware and telecommunications network. Through ppoONE.com,
     member PPOs gain state-of-the-art information systems, claims outsourcing
     options and ability to deliver exceptional client services.

 o   Reduce Claims Department Costs: Member PPOs reduce operating costs
     utilizing ppoONE.com's state-of-the-art repricing and data management
     systems achieving highest rates of accuracy and productivity. Additionally,
     where affiliate networks are ppoONE.com members, the work associated with
     the maintenance of affiliate network provider data and fee schedules can be
     eliminated.


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<PAGE>   7

MANAGED CARE BUSINESS

         MedicalControl provides access to preferred provider networks for its
clients and their enrolled plan members. It also provides clients with
healthcare data analyses, reporting and related healthcare cost containment
programs. MedicalControl principally markets its managed healthcare services to
self-insured employers, insurance companies, third party administrators and
managed care organizations with large concentrations of employees or
participants within the southwestern United States. MedicalControl has
established and continues to enhance networks of healthcare providers providing
medical services to clients' plan members at negotiated, discounted rates. After
the provider renders service, MedicalControl, its client or its client's third
party administrator reviews and reprices the provider's bill to apply the PPO's
negotiated rates prior to adjudication and payment. MedicalControl also offers a
variety of management reports to clients designed to measure and evaluate the
cost-effectiveness and quality of the employers' healthcare benefit programs.
These reports provide summary and detailed information on network utilization,
services provided, claims processing activity, accounting data and cost savings.

         In September 1998, MedicalControl purchased Business Health Companies,
Inc. ("BHC"), a leading Houston, Texas-based managed care organization that
enhanced significantly MedicalControl's Texas network offering. BHC owns the
Houston Healthcare Purchasing Organization ("HHPO") preferred provider
organization. The HHPO network currently includes 70 hospitals, over 7,200
contracted physicians in addition to ancillary providers. In addition to
managing its provider network, the HHPO issues an annual Quality Data Study of
Houston Hospitals which evaluates the quality performance of 46 Houston area
hospitals in 4 categories: mortality rates, medical complications, length of
stay and average charge per patient. Since the acquisition, BHC operates as a
subsidiary of MedicalControl providing its greater Houston PPO network and as
the Houston component of MedicalControl's Texas network.

         As of December 31, 1999, MedicalControl had over 428 clients comprising
more than 280,000 employees or plan members and representing over 640,000
covered lives. Through the Company's directly-contracted and affiliate provider
networks, the Company's clients have access to more than 2,300 hospitals and
185,000 physicians and other healthcare providers nationwide. Significant
concentrations of covered employees or plan members reside in Dallas, Fort
Worth, San Antonio and Houston, Texas in addition to the States of Louisiana,
New Mexico, California, Florida, Illinois, Ohio, Oklahoma and Pennsylvania.

PRODUCTS AND SERVICES

         MedicalControl provides a variety of managed care products including
quality, cost effective PPO networks, claims repricing, and healthcare data
analyses and reports. MedicalControl is also exploring ways to expand service
offerings by selling third party services complementing the PPO such as
prescription drug cards, dental PPOs or vision programs.

         MedicalControl offers the following types of PPO networks:

         MedicalControl Hospital Network -- a network of more than 2,354 acute
         care hospitals and 4,516 ancillary facilities available through both
         direct agreements and affiliate network agreements in 43 states.

         MedicalControl Physician Network -- a network of more than 185,000
         physicians in addition to chiropractors, physical therapists and other
         healthcare professionals through both direct agreements and affiliate
         network agreements.

         Contracted network providers have agreed to accept, as payment in full,
negotiated fee schedules in place of the current charges providers bill to
non-network patients for the same procedures and services. As a result of the
Company's negotiated fee schedules available through its Texas hospital network,
the Company's clients achieve average savings of over 30% between billed charges
and MedicalControl's negotiated, discounted rates. In addition to hospitals and
facilities, MedicalControl also contracts with physicians. MedicalControl
evaluates and verifies the credentials of physicians in MedicalControl's
directly contracted Texas and New Mexico networks in accordance with established
standards and the American Accreditation HealthCare Commission/URAC accredits
its credentialing process.

         MedicalControl reprices network provider claims based on negotiated fee
schedules and provides clients the option to reprice their own claims. In
providing in-house claims repricing services for the year-ended December





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31, 1999, the Company processed over 498,000 claims in an average of 1.8
calendar days with an accuracy rate of over 97% for all errors and 97% for those
errors affecting repriced amounts. MedicalControl uses ppoONE.com's proprietary
software system, IMPULSE(TM), to reprice network provider claims. This system
allows claims payors to reprice claims and perform customer service functions
remotely via Internet access to the system, provides faster response times and
requires fewer keystrokes, therefore reducing errors while increasing
efficiency. ppoONE.com's system also has the ability to track claims status for
improved customer service.

         MedicalControl provides extensive client specific healthcare reports to
its clients. ppoONE.com's system automatically produces a variety of
comprehensive utilization and savings reports on a scheduled basis.
MedicalControl can also create efficient ad hoc and custom reports with advanced
report writing tools. Clients have access to a catalog of over 180 standard
reports identifying information related to services and network utilization,
savings analyses, provider networks and claims production activity.
MedicalControl can produce these reports and other needed data in hard copy or
electronically, providing it to clients via diskette or the Internet.

         MedicalControl works with clients to design cost-effective benefit
programs or other healthcare management programs and to adopt appropriate cost
containment controls. Through benefit plan design, MedicalControl assists
clients in maximizing in-network utilization through the client's implementation
of co-pay differentials, waiver or reduction of deductible amounts for
in-network hospitalization or similar incentive programs for in-network use.
Greater utilization of in-network providers decreases the average cost per claim
and the costs to the client's employee benefit plan.

         Although MedicalControl is expanding its product portfolio to include
other services for the benefit of its clients, MedicalControl expects its core
business and primary revenue source to continue to be its PPO networks.

PROVIDER ARRANGEMENTS AND SERVICES

         MedicalControl provides clients with savings on hospital, physician and
related healthcare expenditures through geographically tailored networks of
quality, cost-effective providers. MedicalControl's strategy is to create a
network of healthcare providers that meet the healthcare needs of their covered
employees or plan members and the financial needs of clients. MedicalControl
uses the group purchasing leverage of multiple clients to negotiate competitive
discounts with such providers. Healthcare providers join MedicalControl's PPO
network to maintain or increase patient volumes as members are directed to them
through the client's health benefit plans, identification cards, utilization
review oversight and other channeling mechanisms.

          The network development process begins with evaluation of
MedicalControl's current client needs, projected future needs and the supply of
and demand for healthcare providers in a given geographic area in
MedicalControl's southwestern United States target market. Other demographic and
environmental information gathered in the development process, such as the
economic condition of the area and major businesses in the community, assists in
identifying essential factors that can impact network development and the
negotiating process.

         In addition, MedicalControl contracts with other PPO networks to
provide PPO network access, as needed, in many regions outside of Texas and New
Mexico. MedicalControl also maintains affiliate relationships in the
southwestern United States to supplement its own network. MedicalControl has
such affiliate network relationships in the States of Alabama, Arizona,
Arkansas, California, Colorado, Florida, Georgia, Illinois, Indiana, Louisiana,
Nevada, Michigan, Mississippi, Montana, New Jersey, North Carolina, Ohio,
Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Virginia,
Washington and Wisconsin.

         As of December 31, 1999, the approximate number of MedicalControl's
contracted providers was:


<TABLE>
<CAPTION>
                                                                 Primary Care     Specialists        Total
                                   Hospitals      Ancillaries    Physicians(1)    Physicians      Physicians
                                 -------------   -------------   -------------   -------------   -------------
<S>                              <C>             <C>             <C>             <C>             <C>
Directly Contracted                        554           1,176           6,301           7,703          15,734
Contracted through Affiliates            1,800           3,340          65,900          99,200         170,240
                                 -------------   -------------   -------------   -------------   -------------
Total                                    2,354           4,516          72,201         106,903         185,974
                                 =============   =============   =============   =============   =============
</TABLE>

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

(1) Primary care physicians include general practitioners, family practitioners,
pediatricians and internal medicine physicians.





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<PAGE>   9

         In the event that current contracts with providers are not continued,
MedicalControl believes that in most areas there are other physician groups,
hospitals and other providers sufficient to serve its clients' employees and
members adequately. MedicalControl believes that its relationships with its
providers are generally good; however, there is increasing competition for
physicians and other healthcare providers from other PPOs, HMOs, provider-owned
networks and other healthcare plans. There can be no assurance that
MedicalControl will in all cases be successful in maintaining existing
relationships or attracting necessary healthcare providers with adequate
discounts.

         In order to promote effective, long-term and positive business
relationships with network providers, the Company also considers its providers
to be clients of MedicalControl and has established a provider services program.
A dedicated staff performs a variety of activities including responding to
hospital and physician claims inquiries and conducting site visits.

         MedicalControl was the first PPO in the nation to have its physician
credentialing process accredited by the American Accreditation HealthCare
Commission/URAC as applied to its Texas and New Mexico directly contracted
networks. Management believes that MedicalControl's credential standards are
more stringent than many other PPOs. In the credentialing process,
MedicalControl, using primary source verification, confirms that a physician
meets the established MedicalControl standards. In instances when contracting
with larger physician or provider groups, having confirmed that a provider group
credentials to MedicalControl's standards, MedicalControl may delegate the
credentialing function to that provider group.

MARKETING

         MedicalControl principally markets its managed healthcare services to
self-insured employers, insurance companies, third party administrators and
managed care organizations with large concentrations of employees or
participants within the southwestern United States. MedicalControl markets its
products and services through an employed sales staff, independent sales agents
and third parties such as TPAs and insurance companies. MedicalControl has
placed greater emphasis on marketing to TPAs, insurance companies and other
third parties that, in turn, market MedicalControl's PPO to their clients.
MedicalControl has developed marketing programs designed to emphasize the unique
aspects of its network products, other managed care services and its reputation
for quality service. MedicalControl provides marketing services through its
corporate office in Dallas, Texas and in its Houston, Texas office.

         As is customary in the PPO industry, clients generally offer
MedicalControl's PPO to their employees or members as an alternative to either
traditional indemnity insurance coverage or an HMO. MedicalControl believes that
the most significant factors in the selection of MedicalControl's PPO by
employers and employees include the location and size of the provider network,
provider choice, depth of negotiated discounts, quality of services,
administrative support services, access fees, market presence and reputation.
MedicalControl believes its clients' employees and members select
MedicalControl's PPO rather than an HMO due to the significantly greater freedom
of choice of providers offered by MedicalControl in addition to other factors.

         MedicalControl believes the costs incurred by its clients for
healthcare services rendered, along with the fees paid to MedicalControl, result
in significant net savings to the client, and are competitive with like
PPOs/managed care companies. In addition, MedicalControl believes that its
proprietary PPO networks tend to be more extensive than its competitors in
certain geographic regions, providing greater access for a client's employees or
members.

         MedicalControl charges its clients for access to its PPO network or
networks on either a percentage of savings or a per employee per month ("PEPM")
basis. For the fiscal years ending December 31, 1999, 1998 and 1997,
MedicalControl derived 44%, 67% and 72%, respectively, of its PPO revenue from
access fees based on the percentage of savings method. For percentage of savings
clients, the actual savings upon which MedicalControl's fees are based is the
difference between what the client or payor would have paid without
MedicalControl's intervention and the final bill (reflecting the discounted
adjustment) actually paid. The percentage and aggregate revenue recognized by
MedicalControl varies depending on the number of enrollees, their levels of
utilization of PPO provider services and the networks selected by the client.
The PEPM fee basis provides MedicalControl with an expected level of payment
that is not contingent or dependent upon utilization levels or savings. The
number of clients that use the PEPM basis has increased during the past three
years. MedicalControl believes that its pricing is competitive with the market.






                                       9
<PAGE>   10

UTILIZATION REVIEW AND CASE MANAGEMENT

         ValueCheck began providing utilization review and case management as of
January 1, 1999. The Company launched ValueCheck because of what management
believes is an unmet market need for efficient, basic and cost-effective
utilization review and case management services. In addition, utilization review
and case management is a complementary product for PPO and TPA services.
ValueCheck products can be sold to the same customer and ValueCheck adds value
to the PPO and TPA offering. ValueCheck's management team brings over 50 years
of sales, product, operations and Medical Director experience in the utilization
review and case management industry to this business.

         ValueCheck's basic utilization review program combines review of
medical necessity and the appropriateness of an inpatient setting. High-risk
medical cases are identified for special tracking because such cases have the
greatest potential for financial impact. According to data derived from more
than 500,000 hospital admissions, more than 50% of all inpatient admissions
generally follow a consistent treatment course, therefore, outcomes are not
significantly influenced by aggressive utilization review. ValueCheck monitors
these medically uncomplicated cases from pre-certification through discharge to
ensure they do not become complicated or deviate from their expected treatment
course. However, in cases where treatments and outcomes are not consistent,
ValueCheck employs intensive management techniques to optimize patient outcomes
and maximize cost savings. ValueCheck incorporates three components to its
utilization review process: review of procedure and medical necessity,
length-of-stay determination and negotiation of the treatment plan and
alternative care.

         Throughout the utilization review process, ValueCheck nurses review the
medical necessity of an inpatient stay using nationally accepted medical
guidelines. In instances where the treating physician requests days that are
unsupported by these guidelines, a ValueCheck physician advisor will review and
discuss the case with the treating physician. This process continues until the
patient is discharged or until medical guidelines are no longer met by the
patient's condition or treatment plan. ValueCheck's review specialists maintain
on-going contact with the treating physician to ensure the patient stay in an
acute care setting lasts only as long as medically necessary.

         ValueCheck uses a range of medical guidelines to support the
utilization review process. They are designed to promote discussion and
negotiation with the patient's treating physician, ensure consistent case
reviews, enhance review nurses' cross-discipline clinical knowledge and
establish proactive information exchange and negotiation capabilities. These
guidelines are screening tools used by ValueCheck's review specialists that
allow consistent evaluation of the appropriate level of care and treatment
planning. The use of such guidelines does not, however, replace the expertise
and important contribution of ValueCheck's nurses or physicians. ValueCheck uses
the following guidelines for evaluation and decision making during the review
process:

          MILLIMAN AND ROBERTSON OPTIMAL RECOVERY GUIDELINES (ORGs): ORGs
          provide day-by-day treatment plans for patients under age 65 with no
          significant co-morbidities or complications. They are based on the CPT
          (procedure) and ICD-9 (diagnosis) codes relevant to the patient's
          condition and planned treatment. ORGs provide the equivalent of
          medical guidelines, length-of-stay guidelines and outpatient
          procedure/treatment alternatives for uncomplicated medical, surgical
          and pediatric admissions. They also include guidelines for extending
          an admission.

          MEDADVICE 2001 CLINICAL GUIDELINES: These guidelines provide on-line
          diagnosis specific review guidelines that are used by clinical staff
          to support medical review decisions. They were developed by the
          vendor's research and development team and are thoroughly reviewed and
          approved by the vendor's medical director and physician panel prior to
          implementation.

          HCIA LENGTH-OF-STAY (LOS) TABLES: HCIA LOS standards are based on all
          payor data gathered from nearly 11 million actual inpatient records,
          representing 1 of every 3 discharges from hospitals in the United
          States annually. These standards provide norms for both simple and
          more complex patients. Each patient is unique, and HCIA's LOS tables
          are sensitive to those differences.

         ValueCheck's case management program targets cases requiring more
attention which can result in better medical outcomes for patients and greater
cost savings for plan sponsors. ValueCheck's early identification of and
intervention in case management candidates gives ValueCheck the greatest
opportunity to impact outcomes. ValueCheck's criteria and systems are
specifically designed not only to identify catastrophic and chronic illness or





                                       10
<PAGE>   11

injury cases, but also to prompt our reviewer to ask questions about seemingly
routine, uncomplicated cases that may reveal additional factors indicating
increased risk. Once cases are identified, ValueCheck matches the level and
method of case management services to the intensity of the case to improve
outcomes in the most cost-efficient manner possible.

         Case managers identify, coordinate, and negotiate alternative treatment
plans and related costs. Nurses help expedite discharge from costly inpatient
settings to a patient's home or outpatient care facility, placing the patient in
the most appropriate setting possible. Nurses interface with the patient,
family, treating providers, and facilities in addition to a variety of ancillary
vendors such as home health aid and local support groups to coordinate
patient-focused, caring treatment plans that incorporate effective use of
benefit dollars.

         ValueCheck's case managers will direct patients to network providers
whenever possible. If the patient does not participate in a PPO plan or there is
not a network provider available, the case manager will negotiate a discounted
fee with the service provider with the goal of securing high quality, lower cost
outpatient and home health care services.

THIRD PARTY ADMINISTRATION BUSINESS

         Diversified provides a comprehensive range of administration services
to self-funded benefit plans, insurance companies, provider-based organizations
and other benefit management organizations. Diversified provides complete
benefit plan review, design and administration services to administer
comprehensive employee benefit programs and risk management activities.
Diversified currently administers over 250 self-funded benefit plans fully
insured with clients ranging from 50 to 4,000 employees. Current total covered
lives exceed 90,000 members located in 49 states. Diversified administers
fully-insured student accident policies covering an additional 200,000
participants.

PRODUCTS AND SERVICES

         Diversified's services include placement of insurance products, design
of benefit programs, composition of plan documents and summary plan
descriptions, employee enrollment and orientation services, claim processing and
payment reporting, total plan or policy reporting, collection and disbursement
of premiums, fees and commissions. Diversified also manages and interacts with
auxiliary service providers such as utilization review firms, prescription drug
firms, employee assistance programs, subrogation recovery firms, PPOs and other
related entities on behalf of its clients. Other services provided include COBRA
continuation, portability certification, Internal Revenue Service and Department
of Labor reporting, Section 125/129 programs and medical savings account plans.

         Diversified also maintains and manages the relationships and interfaces
with insurance carriers who provide risk-taking products for Diversified's
clients. Diversified files claims with carriers on behalf of clients in many
lines of coverage including specific and aggregate stop-loss, life and
accidental death, disability income and insured medical, dental and vision
products.

         The stop-loss market has experienced significant losses recently
leading to diminishing capacity and significantly higher premiums for existing
and potential clients. In addition, some self-insured plans have been unable to
obtain affordable stop-loss coverage, which required the employer to use a
fully-insured product.

         In 1996, Diversified entered into a joint venture arrangement with The
Initial Group, a Knoxville, Tennessee provider-owned PPO. St. Mary's Health
System and Baptist Health System of Knoxville, both of whom are clients of
Diversified, own The Initial Group. The Initial Group contracts with hospitals
and doctors in an eight county area of Northeastern Tennessee. Diversified and
the Initial Group formed the joint venture known as East Tennessee
Administrative Services ("ETAS") to develop and market in Knoxville, Tennessee
and surrounding areas both self-funded programs and a fully-insured managed care
program underwritten by an insurance company. Diversified and The Initial Group
each owned 50% of the joint venture and shared equally in revenues and expenses.
ETAS introduced a fully-insured product, the Initial Advantage, in July 1997.
This product was designed for small and medium-sized employer groups in eastern
Tennessee. The insurance company underwriting these products terminated the
program in 1999. All groups will replace the program by July 31, 2000. Revenue
from this product in 1999 was approximately $275,000. Due to the termination of
this program, the ETAS partnership was dissolved in 1999.





                                       11
<PAGE>   12

         In November 1998, Diversified acquired certain assets located in
Harrisburg, Pennsylvania and opened a TPA office in Harrisburg. Harrisburg is
important to attracting potential new TPA clients on the East Coast. This new
office also administers Taft-Hartley plans and a fully-insured student accident
plan which were new markets for Diversified.

MARKETING

         Diversified markets its products and services directly through in-house
personnel and through a national network of licensed/approved brokers. Over 95%
of new revenues are generated through relationships with existing brokers and
clients.

         Diversified believes that clients select Diversified's TPA services for
a variety of reasons including flexibility, data processing and claims
administration system capabilities, personalized client services, competitive
pricing, reputation, market presence and longevity in the industry.
Diversified's TPA operations have been in existence for 18 years - significantly
longer than most TPAs.

         Diversified believes that future opportunities will be concentrated in
marketing risk assumption products of insurance companies and other risk
assumers such as fully-insured managed care programs and provider-based risk
assumption organizations. Diversified is constantly reviewing auxiliary
suppliers for quality products to supplement offerings to clients. As a TPA,
Diversified currently offers auxiliary service providers to its clients in the
form of 18 insurance carriers, 7 utilization review firms, 36 managed care or
PPO networks, 2 employee assistance programs, 2 subrogation firms, 9
prescription drug plans and various other services.

         TPA revenues are derived from administrative fees, auxiliary service
provider fees, consulting fees, commission income from insurance contracts,
override and bonus arrangements with insurance carriers, override arrangements
with auxiliary service providers and fee-for-service arrangements with brokerage
firms. Administrative fees are based upon capitation, percentage or periodic
basis. Insurance policy administration and commissions are based upon a
percentage of total premiums. Overrides and bonuses are based upon
profitability, volume and persistency. Other fees are on a negotiated basis.

         Diversified maintains full client service offices in Canonsburg and
Harrisburg, Pennsylvania and Knoxville, Tennessee. In addition to sales and
marketing, client service personnel interact with clients on an ongoing basis
related to problem resolution, plan modifications and communications with other
Diversified personnel.

MANAGEMENT INFORMATION SYSTEMS AND SOFTWARE SYSTEMS

         Effective September 30, 1996, Diversified entered into an agreement
with Resource Information Management Systems ("RIMS") for the use of their most
current version of software through access to the RIMS Data Center located in
Naperville, Illinois. RIMS offers application software serving TPAs and claims
administrators performing benefit plan administration, claims adjudication and
related functions. Conversion from its former systems to the RIMS Data Center
was completed in 1999. Using frame relay telephone lines, each TPA location
accesses the RIMS Data Center. Diversified's agreement with RIMS provides
continuous access to the most current software versions as may be available and
requires that RIMS ensure satisfactory response time and system support,
including a disaster recovery program. In addition, Diversified, as a
third-party administrator, benefits from improved functionality and productivity
through the enhanced software programs and assured year 2000 compliance. The
full array of standard as well as ad hoc reporting capabilities is available to
Diversified's clients making it easier to exchange data with clients and
vendors. RIMS' software includes features allowing electronic claim submission,
automatic batch adjudication, PPO repricing and point-of-service plan
administration and adjudication, among others, that are considered essential in
today's managed care marketplace. Diversified believes that its systems are
equal or superior to those offered by like size TPAs operating on a national
basis.

GOVERNMENT REGULATION AND LEGISLATION

         To date, PPOs that are not part of an insured product are not highly
regulated. Since 1993, many competing proposals introduced in Congress and
various state legislatures have called for general healthcare market reforms
aimed at increasing access and availability of group health insurance and at
requiring all businesses to offer health insurance coverage to their employees.
It is uncertain what additional healthcare reform legislation will






                                       12
<PAGE>   13

ultimately be implemented or whether other changes in the administration or
interpretation of governmental healthcare programs will occur. At both the
federal and state level, there is also growing interest in legislation to
regulate how managed care companies interact with providers and health plan
members. Such proposed legislation is primarily aimed at the practices of HMOs
but could affect the operations expense structure of PPOs as well. The Company
cannot predict what effect federal or state healthcare legislation or private
sector initiatives will have on its PPO or TPA operations. There can be no
assurance that future health care reforms or PPO regulations will not be adopted
that would have a material adverse effect on the Company.

         The Employee Retirement Income Security Act of 1974 ("ERISA"),
governing employee benefit plans, among other mandates, permits employers to
self-insure their health insurance by acting as a quasi-insurer. The courts are
narrowing the application of ERISA which limits its protections for Diversified.
 .Employers viewed the ability to underwrite their own health claims as a result
of ERISA as an opportunity to better control health costs. Regulation of such
self-insured benefit plans falls under the auspices of the United States
Department of Labor, which has strict, enforceable guidelines relative to the
operation of TPAs in the administration of such plans. In addition, TPAs are
subject to licensing and regulation on the state level. Typically, the only
state requirements for TPA are a completed application, errors and omissions
coverage and proof of a fidelity bond in the amount of $500,000. Diversified is
licensed as a TPA in the states of California, Illinois, Kentucky, Pennsylvania,
Tennessee, Texas and West Virginia and has filed for ERISA exemptions where
required. Diversified is in the process of filing for a New Mexico license.

          Each state's government regulates the utilization review and case
management industry and regulations vary from state to state. ValueCheck is
licensed in the State of Texas and has either received or applied for licensure
in all states that require utilization review licensure or certification. In
October 1999, ValueCheck was awarded a full 2-year accreditation for Health
Utilization Management Standards by URAC.

         The Company anticipates that federal and state legislatures will
continue to review and consider alternative healthcare solutions and payment
methods. The Company is unable to determine to what extent PPOs and TPAs will be
subject to any managed care initiatives of the federal and state governments or
private sector initiatives, as there is increasing emphasis on market-driven
modifications. Also, the Company is unable to determine the favorable or
unfavorable impact, if any, such initiatives would have on its operations.

COMPETITION

ppoONE.com

         The market for network software solutions is competitive and subject to
rapid change. Competitors, many of which have substantially greater financial
resources than ppoONE.com, vary in size and in the scope of the products and
services they offer. ppoONE.com encounters competition from a number of sources
including other application software companies, PPO and TPA software vendors and
management information systems departments of customers and potential customers.
ppoONE.com expects to experience additional competition from other established
and emerging companies. Increased competition, whether from other products or
new technologies, could result in price reductions, fewer customer orders,
reduced gross margins and loss of market share, any of which could materially
adversely affect our business, financial condition and results of operations.

         ppoONE.com expects that it will face increasing pricing pressures from
its current competitors and new market entrants. Current major competitors
include, but not limited to, NetworX, Healtheon and Nichols TXEN. Price
competition could adversely affect ppoONE.com's ability to obtain new long-term
contracts and renewals of existing long-term contracts on terms favorable to
ppoONE.com. Any reduction in the price of ppoONE.com's products could materially
adversely affect the Company's business, financial condition and results of
operations. Some of ppoONE.com's current competitors and many of ppoONE.com's
potential competitors have significantly greater financial, technical, marketing
and other resources than ppoONE.com and broader integrated product lines. As a
result, they may have competitive advantages over ppoONE.com including the
ability to respond more quickly than ppoONE.com to new or emerging technologies
and changes in customer requirements and the ability to devote greater resources
to the development, promotion and sale of their products.

         New competitors or alliances among competitors may emerge and rapidly
gain significant market share. ppoONE.com's customers, most of which have
significantly greater financial and marketing resources than ppoONE.com, may
compete with ppoONE.com in the future or otherwise discontinue their
relationships with or






                                       13
<PAGE>   14

support of ppoONE.com. ppoONE.com may not be able to compete successfully
against current and future competitors and competitive pressures faced by
ppoONE.com may materially adversely affect its business, financial condition and
results of operations.

MANAGED CARE AND THIRD PARTY ADMINISTRATION SERVICES

         Some of the Company's current competitors and many of the Company's
potential competitors have significantly greater financial, technical, marketing
and other resources than the Company and broader integrated product lines. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products than the Company and may
possess marketing advantages due to their ability to market integrated suites of
related products that are vital to the customer's computing infrastructure. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address the needs of the Company's prospective
customers. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly gain significant market share. Also, the
Company relies upon its customers to provide data, expertise and other support
for the ongoing updating of the Company's models. The Company's customers, most
of which have significantly greater financial and marketing resources than the
Company, may compete with the Company in the future or otherwise discontinue
their relationships with or support of the Company. There can be no assurance
that the Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, financial condition and results of
operations.

         The Company competes with national, regional and local organizations
who have developed PPOs and TPAs as well as with major insurance carriers. The
industry is highly competitive and significant consolidation has occurred within
the industry, creating stronger competitors. The current competitive environment
may limit our ability to price our products at levels we believe are
appropriate. The Company's managed care subsidiaries also face competition from
hospitals, healthcare facilities and other healthcare providers who have
combined and formed their own networks to contract directly with employer groups
and other prospective customers for the delivery of healthcare services. Large
employer groups have demanded a variety of healthcare options such as
traditional indemnity insurance, health maintenance organizations ("HMOs"),
point-of-service plans and PPOs, offered either through self-funding or third
parties. The Company competes with providers of all of these products, many of
which have substantially greater financial resources than the Company.
Management believes that a limited number of companies provide all of the
services offered by the Company within the geographic areas in which it
presently operate. The Company's managed care subsidiaries may encounter
competition from companies with broader networks, narrower networks (which allow
for greater cost control and lower prices), greater market share or more
established marketplace name or reputation. These competitive factors could
adversely affect the Company's financial results. The Company's TPA subsidiary
may encounter competition from larger TPAs with greater resources and regional
TPAs with greater market penetration. All subsidiaries of the Company will be
subject to significant competition in any new geographic areas they may enter.

         "Indemnity insurance" is the "traditional" insurance plan that pays
specific benefits to an insured individual to reimburse them for a portion of
the cost of medical care. Reimbursement for medical care in this situation is
based on the providers' regular charges to the public and the insureds are not
limited with regard to choice of providers. HMOs are managed healthcare plans
that require their members, with the exception of certain medical emergency
situations, to use the services of specific designated physicians, hospitals or
other providers for their healthcare needs. Restriction of access to a limited
number of providers allows the HMO to control the utilization of services and
resources in the delivery of care. One method used by HMOs to reward providers
with cost-effective management of care is through "capitation." "Capitation" is
a provider payment method that reimburses each provider a fixed monthly fee per
member for the total cost of all care for enrolled patients regardless of use.
"Point of service" plans offer an individual the choice of seeking services from
a participating provider or any other provider of their choice each time
services are rendered. Patients who choose a participating provider to provide
healthcare services will receive a higher level of reimbursement than patients
choosing a non-participating provider. "Preferred provider organizations",
including our PPO subsidiary, offer employers and healthcare purchasers access
to a broad network of facilities and physicians who have agreed, by contract, to
provide services at a fixed rate or at discounted rates from their standard
fees. In such PPO arrangements, the cost of care is borne by the self-insured
employer or benefit plan and not the PPO.







                                       14
<PAGE>   15

UTILIZATION REVIEW AND CASE MANAGEMENT

         There are nearly 100 million lives enrolled in indemnity and PPO plans
in the United States today and 95% of those covered lives are required to comply
with utilization review procedures as defined in their benefit plan. This mature
market is dominated by a handful of national firms that together control about
40% of the market. The remaining market is fragmented among a variety of smaller
competitors. Most of the larger national firms have built products for the
high-end Fortune 500 company market, and product design tends to feature a great
deal of customization, product enhancements, ad hoc reporting capabilities, and
corresponding premium pricing at or above $1.50 per employee per month. Smaller
vendors fall into several categories including software vendors, disease and
demand management specialty boutiques that have entered the utilization review
business, and turnkey consultants. Few vendors, large or small, offer both
Utilization Management and PPO provider discounts, the two managed care tools
necessary to effectively manage both the utilization of health care and the unit
cost of services rendered. ValueCheck, when integrated with the MedicalControl
network offering, addresses both critical components of the cost of health care.
The integration of both services in one location, with one toll-free number for
members and providers, offers seamless delivery, a key advantage in a market
that seeks administrative ease of doing business and one-stop shopping.
ValueCheck was not designed to be all-things-to-all-buyers. Rather, ValueCheck's
target markets are TPAs, Taft-Hartley plans, associations, and select
self-insured employers who value customer service and early identification of
high dollar claims - all at a price that is generally 40% or more below market
pricing.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

         The Company relies on a combination of copyright, trademark and trade
secret laws and confidentiality procedures to protect its proprietary rights.
There can be no assurance that patents will be issued with respect to potential
future patent applications or that the Company's potential future patents will
be upheld as valid or will prevent the development of competitive products. The
Company seeks to protect its software, documentation and other written materials
under trade secret and copyright laws, which afford only limited protection. As
part of its confidentiality procedures, the Company generally enters into
ownership acknowledgements and non-disclosure agreements with its employees and
independent contractors and nondisclosure agreements with its distributors,
corporate partners and licensees, and limits access to and distribution of its
software, documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise to obtain
and use the Company's products or technology without authorization, or to
develop similar technology independently. In addition, to ensure that customers
will not be adversely affected by an interruption in the Company's business, the
Company has placed source code for one of its products into escrow, which may
increase the likelihood of misappropriation or other misuse of the Company's
intellectual property.

         As the number of software products increases and the functionality of
these products further overlap, the Company believes that software developers
may become increasingly subject to infringement claims. Any such claims, with or
without merit, can be time consuming and expensive to defend and could
materially and adversely affect the Company's business, financial condition and
results of operations.

         During 1999 and 1998, the Company incurred approximately $307,000 and
$243,000 of software development costs, respectively, all of which were expensed
as incurred.

CUSTOMERS

         For the fiscal years ended December 31, 1999, 1998 and 1997, the
National Rural Electric Cooperative Association ("NRECA") accounted for
approximately 10.6%, 9.6% and 9.4%, respectively, of the consolidated net
revenues of the Company. The loss of NRECA or any principal customers could have
a material adverse effect on the Company and its business. PPO revenues derived
from the percentage of savings pricing methodology decreased by approximately
$1,000,000 due to loss of clients, decrease in utilization and clients changing
to a PEPM rate. The percentage of savings pricing methodology yields higher
returns for the Company. In addition, Diversified's revenues relating to its
fully-insured product will cease by July 31, 2000. Revenues from that product in
1999 were $275,000. Management believes that the Company will be able to replace
this revenue loss in 2000 by increased penetration of other current clients, new
PPO and TPA business development, marketing of its PPO repricing software
business and new utilization review and case management business as well as
through potential acquisitions.

EMPLOYEES

         As of December 31, 1999, the Company and its wholly owned subsidiaries
had 202 full-time employees and 1 part-time employee. The Company believes that
it has a good relationship with its employees. None of the Company's employees
are covered by collective bargaining agreements.

         The Company's success depends to a significant degree upon the
continued service of members of the Company's senior management and other key
research, development, sales and marketing personnel. Accordingly, the loss of
any of the Company's senior management or key research, development, sales or
marketing personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. Only a small number of
employees have employment agreements with the Company, and there can be no
assurance that such agreements will result in the retention of these employees
for any significant period of time. In addition, the untimely loss of a member
of the management team or a key employee of a business acquired by the Company
could have a material adverse effect on the Company's business, financial
condition and results of operations, particularly if such loss occurred before
the Company has had adequate time to familiarize itself with the operating
details of that business and provide a suitably experienced replacement for such
employee. In the past, the Company has experienced difficulty in recruiting a
sufficient number of qualified sales and technical employees. In addition,
competitors may attempt to recruit the Company's key employees. There can be no
assurance that the Company will be successful in attracting, assimilating and
retaining such personnel. The failure to attract, assimilate and retain key
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations.







                                       15

<PAGE>   16

RISK FACTORS

         This report contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements can be identified by the use of
predictive, future tense or forward-looking terminology, such as "believes,"
"anticipates," "expects," "estimates," "may," "will" or similar terms.
Forward-looking statements also include projections of financial performance,
statements regarding management's plans, statements regarding new products and
objectives and statements concerning any assumptions relating to the foregoing.
The Company's actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including those
set forth in the following risk factors and elsewhere in this Form 10-KSB.

DEPENDENCE ON KEY CLIENTS; LOSS OF REVENUES

         The Company has contracts with several key clients that account for a
substantial portion of its total revenues. The Company's largest client
accounted for approximately 10.6%, 9.6% and 9.4%, respectively, of the Company's
net revenues for the fiscal years ended December 31, 1999, 1998 and 1997. The
loss of any principal customer could have a material adverse effect on the
operating results of the Company.

         PPO revenues derived from the percentage of savings pricing methodology
decreased by approximately $1,000,000 due to loss of clients, decrease in
utilization and clients changing to a PEPM rate. The percentage of savings
pricing methodology yields higher returns for the Company. In addition,
Diversified's revenues relating to its fully-insured product will cease by July
31, 2000. Revenues from that product in 1999 were $275,000. Although we cannot
assure you, we believe we will be able to replace this revenue loss in 2000 by
increased penetration of other current clients, new PPO and TPA business
development, marketing of its PPO repricing software business and new
utilization review and case management business as well as through potential
acquisitions.

COMPETITION

ppoONE.com

         The market for network software solutions is competitive and subject to
rapid change. Competitors, many of which have substantially greater financial
resources than ppoONE.com, vary in size and in the scope of the products and
services they offer. ppoONE.com encounters competition from a number of sources
including other application software companies, PPO and TPA software vendors and
management information systems departments of customers and potential customers.
ppoONE.com expects to experience additional competition from other established
and emerging companies. Increased competition, whether from other products or
new technologies, could result in price reductions, fewer customer orders,
reduced gross margins and loss of market share, any of which could materially
adversely affect the Company's business, financial condition and results of
operations.

         ppoONE.com expects that it will face increasing pricing pressures from
its current competitors and new market entrants. Current major competitors
include, but not limited to, NetworX, Healtheon and Nichols TXEN. Price
competition could adversely affect ppoONE.com's ability to obtain new long-term
contracts and renewals of existing long-term contracts on terms favorable to
ppoONE.com. Any reduction in the price of ppoONE.com's products could materially
adversely affect the Company's business, financial condition and results of
operations. Some of ppoONE.com's current competitors and many of ppoONE.com's
potential competitors have significantly greater financial, technical, marketing
and other resources than ppoONE.com and broader integrated product lines. As a
result, they may have competitive advantages over ppoONE.com including:

     o    the ability to respond more quickly than ppoONE.com to new or emerging
          technologies and changes in customer requirements; and

     o    the ability to devote greater resources to the development, promotion
          and sale of their products.

         New competitors or alliances among competitors may emerge and rapidly
gain significant market share. ppoONE.com's customers, most of which have
significantly greater financial and marketing resources than ppoONE.com, may
compete with ppoONE.com in the future or otherwise discontinue their
relationships with or support of ppoONE.com. ppoONE.com may not be able to
compete successfully against current and future competitors and competitive
pressures faced by ppoONE.com may materially adversely affect its business,
financial condition and results of operations. See "Description of Business -
Competition."






                                       16
<PAGE>   17

MANAGED CARE AND THIRD PARTY ADMINISTRATION SERVICES

         Some of the Company's current competitors and many of the Company's
potential competitors have significantly greater financial, technical, marketing
and other resources than the Company and broader integrated product lines. As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
development, promotion and sale of their products than the Company and may
possess marketing advantages due to their ability to market integrated suites of
related products that are vital to the customer's computing infrastructure. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address the needs of the Company's prospective
customers. Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly gain significant market share. Also, the
Company relies upon its customers to provide data, expertise and other support
for the ongoing updating of the Company's models. The Company's customers, most
of which have significantly greater financial and marketing resources than the
Company, may compete with the Company in the future or otherwise discontinue
their relationships with or support of the Company. There can be no assurance
that the Company will be able to compete successfully against current and future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, financial condition and results of
operations.

         We compete with national, regional and local organizations who have
developed PPOs and TPAs as well as with major insurance carriers. The industry
is highly competitive and significant consolidation has occurred within the
industry, creating stronger competitors. The current competitive environment may
limit our ability to price our products at levels we believe are appropriate.
The Company's managed care subsidiaries also face competition from hospitals,
healthcare facilities and other healthcare providers who have combined and
formed their own networks to contract directly with employer groups and other
prospective customers for the delivery of healthcare services. Large employer
groups have demanded a variety of healthcare options such as traditional
indemnity insurance, health maintenance organizations ("HMOs"), point-of-service
plans and PPOs, offered either through self-funding or third parties. We compete
with providers of all of these products, many of which have substantially
greater financial resources than we do. We believe that a limited number of
companies provide all of the services offered by us within the geographic areas
in which we presently operate. The Company's managed care subsidiaries may
encounter competition from companies with broader networks, narrower networks
(which allow for greater cost control and lower prices), greater market share or
more established marketplace name or reputation. These competitive factors could
adversely affect the Company's financial results. The Company's TPA subsidiary
may encounter competition from larger TPAs with greater resources and regional
TPAs with greater market penetration. All subsidiaries of the Company will be
subject to significant competition in any new geographic areas they may enter.

         "Indemnity insurance" is the "traditional" insurance plan that pays
specific benefits to an insured individual to reimburse them for a portion of
the cost of medical care. Reimbursement for medical care in this situation is
based on the providers' regular charges to the public and the insureds are not
limited with regard to choice of providers. HMOs are managed healthcare plans
that require their members, with the exception of certain medical emergency
situations, to use the services of specific designated physicians, hospitals or
other providers for their healthcare needs. Restriction of access to a limited
number of providers allows the HMO to control the utilization of services and
resources in the delivery of care. One method used by HMOs to reward providers
with cost-effective management of care is through "capitation." "Capitation" is
a provider payment method that reimburses each provider a fixed monthly fee per
member for the total cost of all care for enrolled patients regardless of use.
"Point of service" plans offer an individual the choice of seeking services from
a participating provider or any other provider of their choice each time
services are rendered. Patients who choose a participating provider to provide
healthcare services will receive a higher level of reimbursement than patients
choosing a non-participating provider. "Preferred provider organizations",
including our PPO subsidiary, offer employers and healthcare purchasers access
to a broad network of facilities and physicians who have agreed, by contract, to
provide services at a fixed rate or at discounted rates from their standard
fees. In such PPO arrangements, the cost of care is borne by the self-insured
employer or benefit plan and not the PPO.

UTILIZATION REVIEW AND CASE MANAGEMENT

         There are nearly 100 million lives enrolled in indemnity and PPO plans
in the United States today and 95% of those covered lives are required to comply
with utilization review procedures as defined in their benefit plan. This mature
market is dominated by a handful of national firms that together control about
40% of the market. The





                                       17
<PAGE>   18

remaining market is fragmented among a variety of smaller competitors. Most of
the larger national firms have built products for the high-end Fortune 500
company market, and product design tends to feature a great deal of
customization, product enhancements, ad hoc reporting capabilities, and
corresponding premium pricing at or above $1.50 per employee per month. Smaller
vendors fall into several categories including software vendors, disease and
demand management specialty boutiques that have entered the utilization review
business, and turnkey consultants. Few vendors, large or small, offer both
Utilization Management and PPO provider discounts, the two managed care tools
necessary to effectively manage both the utilization of health care and the unit
cost of services rendered. ValueCheck, when integrated with the MedicalControl
network offering, addresses both critical components of the cost of health care.
The integration of both services in one location, with one toll-free number for
members and providers, offers seamless delivery, a key advantage in a market
that seeks administrative ease of doing business and one-stop shopping.
ValueCheck was not designed to be all-things-to-all-buyers. Rather, ValueCheck's
target markets are TPAs, Taft-Hartley plans, associations, and select
self-insured employers who value customer service and early identification of
high dollar claims - all at a price that is generally 40% or more below market
pricing.

THE SALES CYCLE FOR PPOONE.COM PRODUCTS IS LENGTHY AND UNPREDICTABLE

         Due in part to the business-critical nature of ppoONE.com's
applications, potential customers perceive high risk in connection with adoption
of ppoONE.com's products. As a result, customers have been cautious in making
decisions to acquire ppoONE.com's products. In addition, because the purchase of
ppoONE.com's products typically involves a significant commitment of capital and
may involve shifts by the customer to a new software platform, delays in
completing sales can arise while customers complete their internal procedures to
approve large capital expenditures and test and accept new technologies that
affect key operations. For these and other reasons, the sales cycle associated
with the purchase of ppoONE.com's products is typically lengthy, unpredictable
and subject to a number of significant risks over which ppoONE.com has little or
no control, including customers' budgetary constraints and internal acceptance
reviews. The sales cycle associated with the licensing of ppoONE.com's products
can typically range from 60 days to 18 months. As a result of the length of the
sales cycle and the typical size of customers' orders, ppoONE.com's ability to
forecast the timing and amount of specific sales is limited. A lost or delayed
sale could have a material adverse effect on our business, financial condition
and results of operations.

PPOONE.COM'S NEW PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE

         The market for network software solutions is still emerging. The rate
at which businesses have adopted ppoONE.com's type products has varied
significantly and ppoONE.com expects to continue to experience such variations
with respect to its products in the future. ppoONE.com has introduced products
for the PPO markets. The Company has recently announced its new Internet-based
product currently under development and national clearinghouse concept. To date,
none of its products has achieved any significant degree of market acceptance,
and such products may never be widely accepted. Although businesses in
ppoONE.com's target markets have recognized the advantages of using network
software solutions to automate its processes, many have developed systems
internally rather than licensing them from outside vendors. The markets for
ppoONE.com's products may not continue to develop, and ppoONE.com's products may
not be accepted. If the markets for ppoONE.com's current or proposed products
fail to develop, or develop more slowly than anticipated, ppoONE.com's sales
would be negatively impacted, which would have a material adverse effect on the
Company's business, financial condition and results of operations.

PPOONE.COM MUST KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGIES

         In the markets served by ppoONE.com, technology changes rapidly and
computer hardware, network operating systems, programming tools, programming
languages, operating systems and database technology are constantly being
improved. ppoONE.com's success will depend upon its ability to continue to
develop and maintain competitive technologies, enhance its current products and
develop, in a timely and cost-effective manner, new products that meet changing
market conditions. In particular, ppoONE.com must respond to evolving customer
needs, new competitive product offerings, emerging industry standards and
changing technology. For example, the rapid growth of the Internet environment
creates new opportunities, risks and uncertainties for businesses, such as
ppoONE.com, which develop software solutions that now must be designed to
operate in Internet environments. ppoONE.com may not be able to develop and
market, on a timely basis, or at all, product enhancements or new products that
respond to changing technologies. (ppoONE.com has previously experienced
significant delays in the development and introduction of new products and
product enhancements, primarily due to capital resource








                                       18
<PAGE>   19

constraints as well as difficulties with model development, which has in the
past required multiple iterations, difficulties with adapting to particular
operating environments. The length of these delays has varied depending upon the
size and scope of the project and the nature of the problems encountered.) Any
significant delay in the completion of new products, or the failure of such
products, if and when installed, to achieve any significant degree of market
acceptance, would have a material adverse effect on the Company's business,
financial condition and results of operations. Any failure by ppoONE.com to
anticipate or to respond adequately to changing technologies, or any significant
delays in product development or introduction, could cause customers to delay or
decide against purchases of ppoONE.com's products and would have a material
adverse effect on the Company's business, financial condition and results of
operations.

PPOONE.COM DERIVES SUBSTANTIAL REVENUES FROM ONE PRODUCT

         ppoONE.com currently has two products that accounts for all of
ppoONE.com's total revenues. ppoONE.com expects that its current products will
continue to account for a substantial portion of ppoONE.com's total revenues for
the foreseeable future. The quality and timely introduction of future product
enhancements and competition will affect continued market acceptance of its
current products. Demand for, or use of, its current product could decline as a
result of competition, risks to self insured industry, technological change,
saturation of market demand, industry consolidation or other factors. Decline in
demand for its current products would result in decreased revenues, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.

PPOONE.COM MUST PROTECT ITS INTELLECTUAL PROPERTY

         ppoONE.com relies on a combination of copyright, trademark and trade
secret laws and confidentiality procedures to protect its proprietary rights.
ppoONE.com also seeks to protect its software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. Despite ppoONE.com's measures to protect confidentiality of
intellectual property, it may be possible for a third party to copy or otherwise
to obtain and use ppoONE.com's products or technology without authorization, or
to develop similar technology independently. Patents may not be issued with
respect to ppoONE.com's future patent applications and ppoONE.com's future
patents may not be upheld as valid or prevent the development of competitive
products. In addition, to ensure that customers will not be adversely affected
by an interruption in ppoONE.com's business, ppoONE.com places source code for
certain of its products into escrow, which may increase the likelihood of
misappropriation or other misuse of ppoONE.com's intellectual property. See
"Description of Business - Intellectual Property and Other Proprietary Rights."

         The Company's business, financial condition and results of operations
would be materially and adversely affected. As the number of software products
increases and the functionality of these products further overlaps, ppoONE.com
believes that software developers may become increasingly subject to
infringement claims. Any such claims, with or without merit, can be time
consuming and expensive to defend and could materially and adversely affect the
Company's business, financial condition and results of operations. See "Business
- Intellectual Property and Other Proprietary Rights."

PPOONE.COM'S PRODUCTS ARE COMPLEX AND ARE VULNERABLE TO PRODUCT DEFECTS AND
PRODUCT LIABILITY CLAIMS

         Software products as complex as those offered by ppoONE.com often
contain undetected errors or failures when first introduced or as new versions
are released. As ppoONE.com develops new products that operate in new
environments, such as the Internet, the possibility for program errors and
failures may increase due to factors such as the use of new technologies or the
need for more rapid product development that is characteristic of the Internet
market. Despite pre-release testing by ppoONE.com and by current and potential
customers, there still may be errors in new products, even after post-testing
distribution. The occurrence of errors could result in delay in, or failure to
achieve, market acceptance of ppoONE.com's products, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Although ppoONE.com's license agreements with its customers
typically contain provisions designed to limit ppoONE.com's exposure to
potential product liability claims, it is possible that such limitation of
liability provisions may not be effective as a result of existing or future laws
or judicial decisions. Because ppoONE.com's products are used in
business-critical applications, any errors or failures in such products may give
rise to substantial product liability claims, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.






                                       19
<PAGE>   20

GOVERNMENT REGULATION AND HEALTHCARE REFORM

         To date, PPOs that are not part of an insured product are not highly
regulated. Since 1993, many competing proposals have been introduced in Congress
and various state legislatures have called for general healthcare market reforms
to insure access to quality healthcare services. These reforms relate to certain
"patient rights," network or healthcare quality and the measurement and
reporting of certain quality indicators. These reforms could have a negative
impact on limiting certain practices, introducing new liability exposures and
increasing cost as a result of required quality measures or reporting. We cannot
predict what additional healthcare reform legislation, if any, will ultimately
be implemented or whether other changes in the administration or interpretation
of governmental healthcare programs will occur. We cannot predict if proposals
calling for broad insurance market reform will be reintroduced in Congress or in
any state legislature in the future or if any such proposals may be enacted. At
both the federal and state levels, interest is growing in legislation to
regulate how managed care companies interact with providers and health plan
members. Such proposed legislation is primarily aimed at the practices of HMOs
but could affect the operations expense structure of PPOs as well. We cannot
predict what effect federal or state healthcare legislation or private sector
initiatives will have on our PPO or TPA operations, although we believe we may
benefit from some proposals that favor the growth of managed care. We cannot
assure you that future healthcare reforms or PPO regulations will not be adopted
which would have a material adverse effect on us.

         ERISA, governing employee benefit plans, permitted employers, among
other mandates, permits employers to self-insure their health insurance by
acting as a quasi-insurer. The courts are narrowing the application of ERISA
which limits its protections for our TPA subsidiary. Employers viewed the
ability to underwrite their own health claims as a result of ERISA as an
opportunity to better control healthcare costs. The United States Department of
Labor regulates TPAs and has adopted strict, enforceable guidelines for the
operation of TPAs. In addition, TPAs are subject to licensing and regulation on
the state level. Typically, the only state requirements are a completed
application and proof of a fidelity bond in the amount of $500,000. The
Company's wholly owned subsidiary, Diversified, is licensed as a TPA in the
states of California, Illinois, Kentucky, Pennsylvania, Tennessee, Texas, and
West Virginia and has filed for ERISA exemptions where required. Diversified is
in the process of filing for a New Mexico license.

          Each state's regulates the utilization review and case management
industry and regulations vary from state to state. ValueCheck is licensed in the
State of Texas and has either received or applied for licensure in all states
that require utilization review licensure or certification. In October 1999,
ValueCheck was awarded a full 2-year accreditation for Health Utilization
Management Standards by URAC.

         We anticipate that federal and state legislatures will continue to
review and consider alternative healthcare solutions and payment methods. We are
unable to determine to what extent PPOs and TPAs will be subject to any managed
care initiatives of the federal and state governments or private sector
initiatives, as there is increasing emphasis on market-driven modifications.
Also, we are unable to determine the favorable or unfavorable impact, if any,
such initiatives would have on our operations.

DEPENDENCE ON HEALTHCARE PROVIDERS

         The Company's PPO profitability and long-range business plans are
dependent upon attracting and retaining qualified physicians, hospitals and
other healthcare providers under contract and preferred pricing terms which
permit the Company to compete with other managed care companies and insurance
companies on favorable terms. We believe there is increasing competition from
HMOs, PPOs and other healthcare plans for physicians, hospitals and other
healthcare providers. We cannot assure you that we will be successful in
maintaining existing relationships or attracting necessary healthcare providers.

CANCELLATION RIGHTS ON CONTRACTS

         Although the Company generally enters into written contracts with its
clients, the majority of such PPO contracts, including the contracts with the
Company's major clients, permit cancellation upon 30 to 90 days' notice.
Additionally, the Company's PPO and TPA contracts with its clients do not
require minimum payments or minimum levels of services. The exercise of these
cancellation rights or a significant reduction in the volume of services by the
Company's largest clients or by a number of the Company's other clients could
have a material adverse effect on the Company. See "Risk Factors - Dependence on
Key Clients; Loss of Revenues." PPO




                                       20
<PAGE>   21

revenues derived from the percentage of savings pricing methodology decreased by
approximately $1,000,000 due to loss of clients, decrease in utilization and
clients changing to a PEPM rate. The percentage of savings pricing methodology
yields higher returns for the Company. We cannot assure you that we will
maintain our current client relationships or that our clients will not decrease
their volume or change their fee structure.

THE COMPANY MUST RECRUIT AND RETAIN QUALIFIED PERSONNEL

         The Company's success depends to a significant degree upon the
continued service of members of the Company's senior management and other key
research, development, sales and marketing personnel. Accordingly, the loss of
any of the Company's senior management or key research, development, sales or
marketing personnel could have a material adverse effect on the Company's
business, financial condition and results of operations. Only a small number of
employees have employment agreements with the Company, and these agreements may
not result in the retention of these employees for any significant period of
time. We have experienced difficulty in recruiting a sufficient number of
qualified sales and technical employees. In addition, competitors may attempt to
recruit key employees. We may not be successful in attracting, assimilating and
retaining such personnel. The failure to attract, assimilate and retain key
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Description of Business --
Employees."

MANAGEMENT INFORMATION SYSTEMS; PROPRIETARY TECHNOLOGY

         Our management information systems are critical to our operations
because the information generated allows us to negotiate price discounts for
provider services, monitor network utilization and perform other client
services. In addition, these systems are critical to the timely, efficient
processing and/or review of provider claims. We rely on a combination of trade
secrets and copyright protections to establish and protect our proprietary
rights to these information systems. We cannot assure you, however, that the
legal protections and the precautions taken by us will be adequate to prevent
misappropriation of our technology. In addition, these protections and
precautions will not prevent development by independent third parties of
competitive technology or products, and some companies have already developed
products which, to some extent, perform functions similar to those performed by
our information systems.

CONTROL OF THE COMPANY

         Currently, The Answer Partnership, Ltd. owns 2,696,157 shares, or 58%,
of the Company's Common Stock. As a result, The Answer Partnership, Ltd. in
essence elects the entire Board of Directors of the Company and controls the
direction and operations of the Company. J. Ward Hunt, President of the Company,
controls The Answer Partnership, Ltd. due to his position as its managing
partner.

CONFLICTS OF INTEREST

         The Company is a party to a loan arrangement with Mr. Hunt, the
Company's Chairman of the Board, principal shareholder, President and Chief
Executive Officer. From time to time during the term and course of such
arrangement, the officers and directors of the Company may be faced with
potential conflicts of interest between the Company and Mr. Hunt. The officers
and directors of the Company are limited only by their fiduciary duty under
Delaware law to conduct themselves in a manner that is fair to the shareholders
of the Company, the requirements under Delaware law of disclosure to the Board
of Directors of transactions that involve interested director(s) and approval by
a majority of the disinterested directors, and disclosure of interested
transactions to shareholders (for transactions that require shareholder
approval) and approval by a majority of the disinterested shareholders (for
transactions that require shareholder approval). Management undertakes to abide
by Delaware law and its fiduciary duty of fairness to shareholders if faced with
conflicts in this ongoing relationship with Mr. Hunt. We have established no
other guidelines or procedures for resolving potential conflicts. Failure by
management to resolve conflicts of interest in favor of the Company may have a
materially adverse effect on the Company.






                                       21
<PAGE>   22

POSSIBLE ANTI-TAKEOVER EFFECTS OF CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW
PROVISIONS

         The Company's Certificate of Incorporation and Bylaws contain
provisions that may discourage acquisition bids for the Company. The Company has
substantial authorized but unissued capital stock available for issuance. The
Company's Certificate of Incorporation contains provisions which authorize the
Board of Directors, without the consent of stockholders, to issue additional
shares of Common Stock and issue shares of Preferred Stock in series, including
establishment of the rights, powers and preferences, including voting rights, of
holders of the Preferred Stock, and grant authority to the Board to amend the
Company's Bylaws. Additionally, the Company's Bylaws empower the Board to
increase or decrease the number of directors, subject to certain limitations,
and specify that directors will generally hold office until the next annual
meeting of stockholders. These provisions may have the effect, either alone or
in combination with each other, of (i) limiting the price that certain investors
might be willing to pay in the future for the Common Stock, (ii) delaying,
deferring or otherwise discouraging an acquisition or change in control of the
Company deemed undesirable by the Board of Directors or (iii) adversely
affecting the voting power of stockholders who own Common Stock.

ITEM 2. DESCRIPTION OF PROPERTY.

         In August 1996, the Company signed a ten-year lease for 8,000 square
feet for its TPA operations in Dallas. In January 1997, the Company exercised an
option to lease an additional 20,200 square feet in the same building complex
for its executive offices and PPO operations. The total monthly rental was
approximately $20,800. In connection with the Company's relocation of its
corporate offices and operations for its PPO in January 1997, management secured
a purchase option on their new office facility. During September 1997, the
Company sold this option to a third party for $910,000 cash, who subsequently
exercised the option. Concurrent with the sale, the Company executed a ten-year
lease extension at a fixed monthly rental of approximately $26,500.

         The Company also leases approximately 5,000 square feet in Canonsburg,
Pennsylvania at a monthly rent of approximately $2,750 plus all maintenance and
repairs. The Company owns a 9,100 square foot building in Canonsburg,
Pennsylvania with an outstanding mortgage in the principal amount of
approximately $250,000 and monthly principal payments of approximately $2,100.
The Company leases approximately 400 square feet in Knoxville, Tennessee and
5,000 square feet in Houston, Texas.

         The Company does not invest in, and has not adopted any policy with
respect to investments in, real estate or interests in real estate, real estate
mortgages or securities of or interests in persons primarily engaged in real
estate activities. It is not the Company's policy to acquire assets primarily
for possible capital gain or primarily for income.

ITEM 3. LEGAL PROCEEDINGS.

         There are no material pending legal proceedings, other than routine
litigation incidental to the Company's business, to which the Company is a party
or of which any of its property is the subject, and no such proceedings are
known by the Company to be contemplated.

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

         No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.







                                       22
<PAGE>   23

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         (a) The Common Stock is traded in the over-the-counter market and is
quoted on The NASDAQ SmallCap Market under the symbol "MDCL." The following
table sets forth the high and low bid prices of the Common Stock for the last
two fiscal years as reported to the Company by the National Association of
Securities Dealers, Inc.:


<TABLE>
<CAPTION>
Quarter Ended                                                        High Bid                  Low Bid
<S>                                                                  <C>                       <C>
March 31, 1999                                                        9 5/8                     7 3/8
June 30, 1999                                                         9 3/8                     7 3/8
September 30, 1999                                                    8 3/4                     6 3/4
December 31, 1999                                                     8 3/4                     5 3/4

March 31, 1998                                                        6                         5 1/8
June 30, 1998                                                         5 3/4                     5 1/8
September 30, 1998                                                    7 1/2                     3 3/4
December 31, 1998                                                     8 5/8                     5 3/8
</TABLE>


         The over-the-counter quotations set forth herein reflect inter-dealer
prices without retail mark-up, markdown or commission and may not represent
actual transactions.

         (b) As of March 23, 2000, there were approximately 400 record and
beneficial holders of the Company's Common Stock.

         (c) The Company has not paid cash dividends on its Common Stock in the
last two years and in any subsequent interim period. The Company's bank
agreement with its senior lender prohibits the payment of dividends.

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

FISCAL YEAR ENDED DECEMBER 31, 1999, COMPARED TO DECEMBER 31,1998

         Net revenues for 1999 were up $768,000 or 5% to $15,340,000 from
$14,572,000 in 1998. PPO revenues increased approximately $691,000 for the year
primarily due to acquired BHC revenues, which were in the prior year for only
the last four months of 1998, reduced by lower Dallas PPO revenues of $920,000,
primarily because of lost percentage of savings business, and lower large claim
negotiation revenues beginning in 1999 when this activity was outsourced. TPA
revenues decreased approximately $270,000 for the year primarily due to the sale
of a division of the TPA subsidiary sold effective August 1, 1999 and lost
customers in the first nine months of 1999 which were not completely offset by
revenues from new business.

         The Company reported a net loss of $1,556,000 or $.35 per share for
1999 compared with a net loss of $1,189,000 or $.30 per share in 1998. The loss
in 1999 included the $1,225,000 loss from the sale of a division of the TPA
subsidiary, reduced by a deferred tax benefit of $441,000 resulting in a net
loss of $784,000, or $.18 per share. 1998 was impacted by post acquisition
charges of $648,000 associated with the BHC acquisition. These charges consisted
of a $483,000 write-off of certain capitalized software development costs,
$125,000 of special bonuses related to the acquisition and $40,000 of severance
related costs.

         Salaries and wages increased $454,000 for 1999, approximately a 5%
increase over 1998. Organizational restructuring during the first quarter of
1999 resulted in PPO personnel cost savings but there was an overall increase as
the result of the BHC acquisition, the systems conversion efforts and the
Harrisburg acquisition in the TPA.

         Other operating expenses increased less than 1% for the year, as
compared with 1998 as the result of cost cutting measures adopted beginning in
the first quarter of 1999.








                                       23
<PAGE>   24

         Depreciation and amortization declined approximately $172,000 for 1999,
because of the Company's write-off of capitalized software development costs in
September 1998.

         Other income (expense) declined for the year from income of
approximately $94,000, primarily interest income, to expense of approximately
$91,000, mainly as the result of interest expense on debt incurred to acquire
BHC.

LIQUIDITY AND CAPITAL REQUIREMENTS

         The Company had net working capital of approximately $681,000 at
December 31, 1999, compared with $253,000 at December 31, 1998. Unrestricted
cash and cash equivalents were $641,000 at December 31, 1999, compared with
$1,113,000 at December 31, 1998. Cash provided by operations during 1999 was
approximately $107,000 compared with cash used in operations of approximately
$197,000 during 1998.

         Capital expenditures for the purchase of tangible property and
equipment were approximately $235,000 for the twelve months ended December 31,
1999. These expenditures were primarily for data processing equipment for the
Company's TPA operations and for leasehold improvements in the ppoONE.com and
ValueCheck operations.

         Effective September 1, 1998, a wholly-owned subsidiary of the Company
purchased BHC for approximately $4,600,000 plus liabilities assumed of $264,138
and accrued acquisition costs of $150,000. The purchase consideration consisted
of $2,150,000 cash, an aggregate of $1,000,000 in subordinated convertible notes
to the previous shareholders of BHC and common stock of the Company valued at
approximately $1,422,000. In connection with the acquisition, the Company
obtained bank financing in the form of a $1,600,000 term loan which bears
interest at the bank's prime rate plus 1% (9.5% at December 31, 1999) and is
payable in equal monthly principal installments of $26,667 plus interest. The
8.5% convertible seller notes were payable in quarterly principal installments
of $50,000 plus interest through October 2003 and were convertible into common
stock of the Company at a conversion rate of $5.25 per share. On July 6, 1999,
the remaining principal balance of $850,000 of convertible seller notes was
converted into 161,903 shares of the Company's common stock.

         At December 31, 1999, the Company had no outstanding borrowings under
its revolving line of credit arrangement. This credit facility, secured by
accounts receivable, allows for maximum borrowings of $400,000 and bears
interest at the bank's prime rate plus 1.25% (9.75% at December 31, 1999).

         In March, May and September 1999, the Company restructured certain
covenants and other terms of the bank agreement. Under the revised terms, the
Company made principal reductions of $200,000 on March 31, 1999, $50,000 on June
15, 1999, $147,000 from a portion of the proceeds from the sale of 38,000 shares
of the Company's common stock for $294,500 on August 16, 1999 and $407,000 on
August 18, 1999 paid with the proceeds from an income tax refund. The revised
term note includes covenants which impose minimum requirements for net income,
stockholders' equity and working capital, and is secured by a pledge of certain
shares of the Company's wholly-owned subsidiaries. Concurrently, maximum
borrowings under the Company's revolving credit facility were reduced from
$500,000 to $400,000. As of December 31, 1999, the Company was not in compliance
with certain debt covenants and, in March 2000, it received the necessary
waivers.

         Management believes that cash flows from operations, cash on hand, and
the borrowing capacity under the Company's line of credit or otherwise will be
sufficient to fund liquidity needs and capital requirements for the fiscal year
1999. During the first quarter of 1999, the Company eliminated certain employee
positions and reduced certain other expenses that resulted in approximately
$70,000 in salary and other cost savings per month.

         The Company has not paid dividends in the past and does not anticipate
the payment of such in the future.

RELIANCE ON DATA PROCESSING

         The Company began a formal program in 1998 to evaluate, assess and make
the needed changes to its core information technology ("IT") systems and
applications to comply with Year 2000 issues. No major problems were encountered
with the exception of IT systems used in providing TPA services. Beginning in
1996, the TPA started converting its clients from an operating system that was
not Year 2000 compliant to a current Year 2000 compliant claims processing
system operated in the software vendor's data center. Such conversion took
longer than expected




                                       24
<PAGE>   25

but now is completed. The cost to the Company was approximately $1,000,000 in
non-recurring expenses over the past four years.

         The Company's primary PPO IT systems and applications have been
developed and placed into production within the past twenty-four months.
Accordingly, such systems and applications were developed employing contemporary
software tools to be Year 2000 compliant from their initial design phase.
Management used best efforts to inventory and evaluate all non-essential
software programs and hardware used in the Company's business. Non-compliant
systems were replaced, modified or outsourced.

         With regard to non-IT systems, such as general office security systems
and phone systems, the Company evaluated such systems and has remediated and
upgraded the systems so that they now are compliant. The expenditures related to
these activities approximated $15,000.

         Other than the system conversion in the TPA mentioned above, direct
expenditures associated with Year 2000 issues, excluding costs associated with
the development of the underlying core IT systems, have been immaterial to date
and have been funded through the Company's normal IT operations budget.

ITEM 7.  FINANCIAL STATEMENTS.

MEDICALCONTROL, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS

HISTORICAL FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MedicalControl, Inc. and Subsidiaries ........................................................................   Page

<S>                                                                                                              <C>
Report of Independent Public Accountants for the 1999 Financial Statements ...................................   F-1
Report of Independent Public Accountants for the 1998 Financial Statements....................................   F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 .................................................   F-3
Consolidated Statements of Operations for the years ended December 31, 1999 and 1998 .........................   F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999 and 1998 ...............................................................   F-5
Consolidated Statements of Cash Flows for the years ended
         December 31, 1999 and 1998 ..........................................................................   F-6
Notes to Consolidated Financial Statements ...................................................................   F-7
</TABLE>

The Financial Statements are located after the signature page.

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

         There is no required disclosure for this Item.



                                       25
<PAGE>   26
                                    PART III

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

         The information called for by this Item is incorporated by reference
from the Company's definitive Proxy Statement, which involves, among other
things, the election of the Board of Directors, to be filed pursuant to
Regulation 14A and which the Company intends to file with the Securities and
Exchange Commission not later than 120 days after December 31, 1999, the end of
the year covered by this Form 10-KSB.

ITEM 10. EXECUTIVE COMPENSATION.

         The information called for by this Item is incorporated by reference
from the Company's definitive Proxy Statement, which involves, among other
things, the election of the Board of Directors, to be filed pursuant to
Regulation 14A and which the Company intends to file with the Securities and
Exchange Commission not later than 120 days after December 31, 1999, the end of
the year covered by this Form 10-KSB.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The information called for by this Item is incorporated by reference
from the Company's definitive Proxy Statement, which involves, among other
things, the election of the Board of Directors, to be filed pursuant to
Regulation 14A and which the Company intends to file with the Securities and
Exchange Commission not later than 120 days after December 31, 1999, the end of
the year covered by this Form 10-KSB.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information called for by this Item is incorporated by reference
from the Company's definitive Proxy Statement, which involves, among other
things, the election of the Board of Directors, to be filed pursuant to
Regulation 14A and which the Company intends to file with the Securities and
Exchange Commission not later than 120 days after December 31, 1999, the end of
the year covered by this Form 10-KSB.

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

         (a) EXHIBITS

3.1 Restated Certificate of Incorporation of the Company - incorporated by
reference to the Exhibits to the Registration Statement on Form SB-2, file
number 33-58334-FW, declared effective May 13, 1993.

3.2 Amended and Restated Corporate Bylaws of the Company - incorporated by
reference to the Exhibits to the Registration Statement on Form SB-2, file
number 33-58334-FW, declared effective May 13, 1993.

10.1 Amended and Restated Non-Qualified Stock Option Agreement - incorporated by
reference to the Exhibits to the Registration Statement on Form SB-2, file
number 33-58334-FW, declared effective May 13, 1993.

10.2 Outside Directors Stock Option Plan of MedicalControl, Inc., - incorporated
by reference to the Exhibits to the Registration Statement on Form SB-2, file
number 33-58334-FW, declared effective May 13, 1993.

10.3 First Amendment to the Outside Directors Stock Option Plan of
MedicalControl, Inc. - incorporated by reference to the Exhibits to the
Registration Statement on Form SB-2, file number 33-58334-FW, declared effective
May 13, 1993.






                                       26
<PAGE>   27

10.4 Amendment to the Outside Directors Stock Option Plan of MedicalControl,
Inc. dated August 20, 1996 - incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1997.

10.5 Amended and Restated Non-Qualified Stock Option Agreement (Issued Under
Outside Directors Stock Option Plan). - incorporated by reference to the
Exhibits to the Registration Statement on Form SB-2, file number 33-58334-FW,
declared effective May 13, 1993.

10.6 Qualified Employee Stock Purchase Plan of MedicalControl, Inc. -
incorporated by reference to the Exhibits to Post Effective Amendment Number 1
to the Registration Statement on Form SB-2, file number 33-58334-FW, dated
January 30, 1995.

10.7 Amendment to Qualified Employee Stock Purchase Plan of MedicalControl, Inc.
dated as of March 18, 1997 - incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1997.

10.8 1993 Stock Compensation Plan of MedicalControl, Inc. - incorporated by
reference to the Exhibits to Post Effective Amendment Number 1 to the
Registration Statement on Form SB-2, file number 33-58334-FW, dated January 30,
1995.

10.9 Amendment to 1993 Stock Compensation Plan of MedicalControl, Inc. dated as
of August 20, 1996 - incorporated by reference to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1997.

10.10 Form of Agreement by and between the Company and each of its directors and
officers - incorporated by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996.

10.11 Commercial Lease, dated March 1, 1993, by and among Diversified and David
C. and Janice L. Bramer - incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1996.

10.12 Letter Agreement, dated September 29, 1994, by and between the Company and
David C. Bramer - incorporated by reference to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996.

10.13 Transfer Agreement, dated as of January 1, 1998, by and among the Company,
MedicalControl Network Solutions, Inc., PPO Management Solutions, Inc.,
Genesis/ValueCheck, Inc., MedicalControl Holdings, Inc., and its direct and
indirect wholly owned subsidiaries. (All exhibits have been omitted and will be
provided to the Commission upon request.) - incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1997.

10.14 Stock Purchase Agreement, dated September 10, 1998, by and between
MedicalControl Network Solutions, Inc., Business Health Companies, Inc., Ralph
T. Smith, Donald Richard Huntington and Douglas Elden. - incorporated by
reference to the Company's Special Report on Form 8-K filed October 9, 1998.

10.15 Employment, Confidentiality and Non-Competition Agreement, dated September
25, 1998, by and among MedicalControl Network Solutions, Inc., the Company and
Donald Richard Huntington - incorporated by reference to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1998.

10.16 Employment, Confidentiality and Non-Competition Agreement, dated September
25, 1998, by and among MedicalControl Network Solutions, Inc., the Company and
Ralph T. Smith - incorporated by reference to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1998.

10.17 Loan Agreement, dated September 25, 1998, by and between the Company and
Bank One, Texas, N.A. - incorporated by reference to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1998.

10.18 First Amendment to Loan Agreement, dated as of March 31, 1999, by and
between Bank One, Texas N.A. and the Company - incorporated by reference to the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1998.







                                       27
<PAGE>   28

10.19 Second Amendment to Loan Agreement, dated as of May 15, 1999, by and
between Bank One, Texas N.A. and the Company.

10.20 Third Amendment to Loan Agreement, dated as of September 25, 1999, by and
between Bank One, Texas N.A. and the Company.

10.21 Asset Purchase Agreement, dated July 30, 1999, by and between Diversified
Group Administrators, Inc. and Group Resources, Inc. - incorporated by reference
to the Company's Quarterly Report on Form 10-QSB for the quarter ended September
30, 1999.

10.22 Employee Incentive Stock Option Plan.

10.23 Non-Employee Director Stock Compensation Plan.

10.24 Employment Agreement dated January 1, 1998, by and between PPO Management
Solutions, Inc. (now known as ppoONE.com) and Patrick W. Kennedy.

10.25 First Amendment to Employment Agreement dated June 24, 1999 by and between
ppoONE.com, inc. and Patrick W. Kennedy.

21 Subsidiaries of the Company, incorporated by reference to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1998.

23.1 Consent of Grant Thornton LLP, independent public accountants.

23.2 Consent of Arthur Andersen LLP, independent public accountants.

27.1 Financial Data Schedule.

         (b) REPORTS ON FORM 8-K. The Company filed a Current Report Form 8-K on
October 20, 1999 regarding a change in accountants.






                                       28
<PAGE>   29




                                   SIGNATURES

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

Registrant:

Date: March 29, 2000                    MedicalControl, Inc.



                                        By:  /s/ John Ward Hunt
                                             ---------------------------------
                                             John Ward Hunt,
                                             President and Chief Executive
                                             Officer

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

<TABLE>
<CAPTION>
    Name                                     Title                                                 Date
    ----                                     -----                                                 ----

<S>                                          <C>                                                   <C>
/s/ John Ward Hunt                           President, Chief Executive Officer                    March 29, 2000
------------------------------------         and Chairman of the Board of Directors
John Ward Hunt                               (principal executive officer)


/s/ Bob E. Buddendorf                        Senior Vice President and Chief Financial             March 29, 2000
------------------------------------         Officer (principal accounting officer)
Bob E. Buddendorf


/s/ Frank M. Burke, Jr.                      Director                                              March 29, 2000
------------------------------------
Frank M. Burke, Jr.


/s/ William L. Amos, Jr., M. D.              Director                                              March 29, 2000
------------------------------------
William L.  Amos, Jr., M.D.


/s/ D. Samuel Coats                          Director                                              March 29, 2000
------------------------------------
D.  Samuel Coats


/s/Donald Richard Huntington                 Director                                              March 29, 2000
------------------------------------
Donald Richard Huntington
</TABLE>






                                       29
<PAGE>   30




               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors
MedicalControl, Inc.


We have audited the accompanying consolidated balance sheet of MedicalControl,
Inc. and subsidiaries as of December 31, 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MedicalControl,
Inc. and subsidiaries as of December 31, 1999, and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.



GRANT THORNTON, LLP

Dallas, Texas
February 18, 2000 except for Note 8, as to which the date is March 29, 2000







                                       F-1
<PAGE>   31





REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Board of Directors of MedicalControl, Inc.:

We have audited the accompanying consolidated balance sheet of MedicalControl,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998, and the
related consolidated statement of operations, stockholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MedicalControl, Inc. and
subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States.





                                           ARTHUR ANDERSEN LLP

Dallas, Texas
March 31, 1999












                                      F-2
<PAGE>   32


                      MEDICALCONTROL, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 1999 and 1998


<TABLE>
<CAPTION>
                                         ASSETS                                    1999           1998
                                                                                -----------   -----------
<S>                                                                             <C>           <C>
CURRENT ASSETS
       Cash and cash equivalents                                                $   640,803   $ 1,112,653
       Restricted cash                                                              313,665       308,002
       Accounts receivable - trade, net of allowance
         for doubtful accounts of $156,000 and $119,000
         at December 31,1999 and  December 31, 1998, respectively                 1,395,536     1,312,043
       Accounts receivable - premium                                                482,420       466,980
       Accounts receivable - other                                                   96,317        90,671
       Income tax refundable                                                        300,093       472,691
       Prepaid expenses and other current assets                                    312,049       227,391
       Deferred income taxes                                                        235,169       169,028
                                                                                -----------   -----------
          Total current assets                                                    3,776,052     4,159,459

NOTE RECEIVABLE - OFFICER, including accrued interest                               448,328       421,175
RECEIVABLE FROM SALE OF DIVISION                                                    300,000            --
PROPERTY AND EQUIPMENT, NET                                                       1,544,279     1,697,698
GOODWILL, NET                                                                     6,019,463     7,772,833
INTANGIBLE AND OTHER ASSETS, NET                                                      4,402        97,991
DEFERRED INCOME TAXES                                                               368,961        85,270
                                                                                -----------   -----------

          TOTAL ASSETS                                                          $12,461,485   $14,234,426
                                                                                ===========   ===========

                                         LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
       Accounts payable - trade                                                 $   842,266   $   916,826
       Accounts payable - premium                                                   796,084       774,982
       Accrued liabilities                                                        1,044,803       773,749
       Borrowings under bank line of credit                                              --       325,000
       Current portion of long-term debt                                            411,970     1,115,515
                                                                                -----------   -----------
          Total current liabilities                                               3,095,123     3,906,072

NON-CURRENT LIABILITIES
       Long-term debt, net of current portion                                       218,719     1,554,484
       Deferred gain on sale of option on real estate                               698,417       789,417

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
       Preferred stock - $.10 par; 4,000,000
          shares authorized, no shares issued or outstanding                             --            --
       Common stock - $.01 par: 8,000,000 shares
          authorized, 4,625,579 and 4,115,409 issued
          in 1999 and 1998, respectively                                             46,256        41,154
       Additional paid-in capital                                                 8,225,281     6,210,002
       Retained earnings                                                            177,689     1,733,297
                                                                                -----------   -----------
          Total stockholders' equity                                              8,449,226     7,984,453
                                                                                -----------   -----------

          TOTAL  LIABILITIES AND STOCKHOLDERS' EQUITY                           $12,461,485   $14,234,426
                                                                                ===========   ===========
</TABLE>


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


                                      F-3
<PAGE>   33


                      MEDICALCONTROL, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

                     YEARS ENDED DECEMBER 31, 1999 and 1998


<TABLE>
<CAPTION>
                                                 1999            1998
                                             ------------    ------------
<S>                                          <C>             <C>
NET REVENUES                                 $ 15,340,060    $ 14,571,673
                                             ------------    ------------

OPERATING EXPENSES
       Salaries and wages                       9,756,187       9,302,168
       Other operating expenses                 5,721,607       5,690,897
       Depreciation and amortization              653,948         825,659
       Post acquisition charges                        --         648,098
                                             ------------    ------------

          Total operating expenses             16,131,742      16,466,822
                                             ------------    ------------

LOSS FROM OPERATIONS                             (791,682)     (1,895,149)
                                             ------------    ------------

OTHER INCOME (EXPENSE)
       Interest expense                          (181,878)        (56,604)
       Investment income                           87,263         121,479
       Loss on sale of division                (1,225,000)             --
       Other income                                 3,832          29,391
                                             ------------    ------------

          Total other income (expense)         (1,315,783)         94,266
                                             ------------    ------------

LOSS BEFORE INCOME TAXES                       (2,107,465)     (1,800,883)

Income tax benefit                               (551,857)       (612,076)
                                             ------------    ------------

NET LOSS                                     $ (1,555,608)   $ (1,188,807)
                                             ============    ============


Basic and diluted loss per share             $      (0.35)   $      (0.30)
                                             ============    ============

Weighted average common shares outstanding      4,389,605       3,900,439
                                             ============    ============
</TABLE>


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


                                      F-4
<PAGE>   34


                      MEDICALCONTROL, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                     YEARS ENDED DECEMBER 31, 1999 and 1998


<TABLE>
<CAPTION>
                                               Common Stock
                                        --------------------------
                                                                      Additional                                     Total
                                           Shares                      Paid-in        Retained       Treasury     Stockholders'
                                        Outstanding      Amount        Capital        Earnings        Stock          Equity
                                        -----------    -----------   -----------    -----------    -----------    -------------
<S>                                     <C>            <C>           <C>            <C>            <C>            <C>
Balance at December 31, 1997              3,825,023    $    39,086   $ 5,231,265    $ 2,922,104    $  (518,896)   $ 7,673,559

Acquisition of treasury stock               (88,000)            --            --             --       (451,000)      (451,000)

Exercise of stock options                    97,486            975       424,322             --             --        425,297

Issuance of treasury stock upon
conversion of note payable                   10,000             --       (12,500)            --         52,500         40,000

Issuance of common stock in
connection with BHC acquisition             270,900          1,093       503,737             --        917,396      1,422,226

Tax benefit of stock option exercises            --             --        63,178             --             --         63,178

Net Loss                                         --             --            --     (1,188,807)            --     (1,188,807)
                                        -----------    -----------   -----------    -----------    -----------    -----------

Balance at December 31, 1998              4,115,409         41,154     6,210,002      1,733,297             --      7,984,453

Issuance of common stock upon
conversion of note payable                  161,903          1,619       848,381             --             --        850,000

Exercise of stock options                   310,267          3,103       806,209             --             --        809,312

Issuance of common stock in
private placement                            38,000            380       294,120             --             --        294,500

Tax benefit of stock option exercises            --             --        66,569             --             --         66,569

Net Loss                                         --             --            --     (1,555,608)            --     (1,555,608)
                                        -----------    -----------   -----------    -----------    -----------    -----------

Balance at December 31, 1999              4,625,579    $    46,256   $ 8,225,281    $   177,689    $        --    $ 8,449,226
                                        ===========    ===========   ===========    ===========    ===========    ===========
</TABLE>


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


                                      F-5
<PAGE>   35
                      MEDICALCONTROL, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                     YEARS ENDED DECEMBER 31, 1999 and 1998


<TABLE>
<CAPTION>
                                                                            1999           1998
                                                                        -----------    -----------
<S>                                                                     <C>            <C>
CASH FLOWS RELATED TO OPERATING ACTIVITIES
   Net loss                                                             $(1,555,608)   $(1,188,807)
      Adjustments to reconcile net loss
         to net cash provided by operations:
         Depreciation and amortization                                      653,948        825,659
         Amortization of deferred gain on real estate transaction           (91,000)       (91,000)
         Post acquisition charges                                                --        483,097
         Loss on sale of division                                         1,225,000             --
         Deferred income taxes                                             (349,832)      (251,755)
         Net changes in certain assets and liabilities
            Accounts receivable - trade                                     (83,493)       963,372
            Accounts receivable - other                                     153,914             --
            Income tax refundable                                           172,598       (792,552)
            Prepaid expenses and other current assets                      (193,550)        75,888
            Other assets                                                     93,589         47,851
            Accounts payable - trade                                        (74,560)       159,297
            Accrued expenses                                                155,873       (427,780)
                                                                        -----------    -----------

Net cash provided by (used in) operating activities                         106,879       (196,730)
                                                                        -----------    -----------

CASH FLOWS RELATED TO INVESTING ACTIVITIES
      Acquisition costs                                                          --       (495,645)
      Purchases of property and equipment                                  (234,799)      (387,889)
                                                                        -----------    -----------

Net cash used in investing activities                                      (234,799)      (883,534)
                                                                        -----------    -----------

CASH FLOWS RELATED TO FINANCING ACTIVITIES
      Loan to officer, including accrued interest                                --        (26,521)
      Net (repayments) drawdowns on revolving line of credit               (325,000)       325,000
      Payments on long-term debt                                         (1,189,310)      (174,587)
      Proceeds from issuance of common stock                              1,170,380        488,475
      Acquisition of treasury stock                                              --       (451,000)
                                                                        -----------    -----------

Net cash provided by (used in) financing activities                        (343,930)       161,367
                                                                        -----------    -----------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                  (471,850)      (918,897)

Cash and cash equivalents at beginning of period                          1,112,653      2,031,550
                                                                        -----------    -----------

Cash and cash equivalents at end of period                              $   640,803    $ 1,112,653
                                                                        ===========    ===========

SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid                                                           $   204,933    $    56,638
                                                                        ===========    ===========
Income taxes paid                                                       $        --    $   464,774
                                                                        ===========    ===========

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTMENTS AND FINANCING ACTIVITIES
      Fair value of assets acquired                                     $        --    $(5,087,246)
      Liabilities assumed                                                        --        419,375
      Acquisition debt                                                           --      2,600,000
      Common stock issued                                                        --      1,422,226
      Accrued acquisition costs                                                  --        150,000
                                                                        -----------    -----------
      Cash paid for acquisition of Business Health Companies, Inc.      $        --    $  (495,645)
                                                                        ===========    ===========

      Restricted cash at end of period                                  $   313,665    $   308,002
                                                                        ===========    ===========
</TABLE>


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


                                      F-6
<PAGE>   36


                      MEDICALCONTROL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998


NOTE 1 - BACKGROUND AND ORGANIZATION

MedicalControl, Inc. ("Company"), a Delaware corporation, is a holding company
of healthcare cost management and administrative services companies. The Company
is comprised of four main subsidiaries: MedicalControl Network Solutions, Inc.,
providing managed care services, primarily through its preferred provider
organization ("PPO") networks, Diversified Group Administrators, Inc., providing
third party administration ("TPA") services, ppoONE.com, inc., providing
e-health solutions to the PPO and healthcare payor industry and ValueCheck, Inc.
("ValueCheck"), providing utilization review and case management services. The
Company's contracts with its customers are renewable annually and permit
cancellation upon 30 to 60 days' notice.

In September 1998, the Company acquired all the outstanding shares of Business
Health Companies, Inc. ("BHC"). See Note 5 for further discussion.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements are prepared in accordance with generally
accepted accounting principles and include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.

Cash and Cash Equivalents

Cash equivalents consist of certificates of deposit and other highly liquid
investments with original maturities of three months or less. Restricted cash
represents cash collected from customers for the payment of insurance premiums
and other ancillary fees to third parties.

Accounts Receivable - Trade

In the normal course of business, the Company extends unsecured credit to
virtually all of its customers that are located throughout the United States.
Because of the credit risk involved, management has provided an allowance for
doubtful accounts, which reflects its estimate of amounts that will eventually
become uncollectible.


                                      F-7
<PAGE>   37


                      MEDICALCONTROL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Accounts Receivable - Premium and Accounts Payable - Premium

Accounts receivable - premium represent amounts owed by customers for insurance
premiums and related ancillary fees. The Company bears no substantial collection
risk, as nonpayment of premiums constitutes grounds for cancellation of
insurance coverage. As a result, the Company does not provide an allowance for
doubtful accounts on these accounts receivable. Premiums and fees owed to
insurance carriers and service providers are classified as accounts payable -
premium.

Property and Equipment

Property and equipment are recorded at cost and are depreciated on a
straight-line basis, over their estimated useful lives (generally 3 to 40
years). Major additions and betterments are capitalized and depreciated over the
remaining estimated useful lives of the related assets. Maintenance, repairs and
minor improvements are expensed as incurred.

Software Development Costs

Software development costs (included in intangible and other assets) consisted
of outside services and incremental salaries and wages incurred to develop
discrete proprietary software for internal use. These assets were being
amortized over their remaining estimated useful lives (12 to 36 months). As a
result of the acquisition in 1998, as discussed in Note 5, the Company had a
requirement to consolidate database administration, network access and like
product offerings of the separate entities. As a result of this requirement, the
Company determined that it would not be able to recover its investment in
certain capitalized software development costs over their remaining economic
life, and accordingly, recognized an impairment in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121").
As a result of this impairment, approximately $483,000 of remaining capitalized
software costs were written off effective September 1, 1998, and are included in
the post acquisition charges in the accompanying consolidated statements of
operations. Maintenance and other minor updates to all of the Company's various
software programs are expensed as incurred.

Goodwill

Goodwill is being amortized under the straight-line method over periods ranging
from 25 to 30 years.


                                      F-8
<PAGE>   38


                      MEDICALCONTROL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Long-Lived Assets

Subsequent to its initial recording, the Company periodically evaluates whether
later events and circumstances have occurred that indicate the remaining
estimated useful life of long-lived assets (including property and equipment,
software development costs and goodwill) may warrant revision or that the
remaining balance of the assets may not be recoverable. When factors indicate
these assets should be evaluated for possible impairment, the Company uses an
estimate of the related operating unit's or specific asset's undiscounted future
cash flows in determining whether an impairment has occurred, and the operating
unit's or specific asset's fair value in measuring the impairment. Also, see
Note 4 relating to an impairment of goodwill in connection with the sale of a
division of the TPA in 1999.

Income Taxes

Deferred income taxes are provided for temporary differences between the tax
bases of assets and liabilities and their financial reporting amounts. Deferred
taxes are recorded for temporary differences based upon enacted tax rates
anticipated to be in effect when the temporary differences are expected to
reverse.

Revenue Recognition

Revenue is recognized (i) at the completion of the processing of a customer's
hospital or physician claim (regardless of the period in which the underlying
hospital charge was incurred) for cost management services, (ii) per month based
upon a fixed fee per employee in a customer's benefit plan for TPA services or
PPO services or (iii) at the time commissions are earned for the placement of
insurance coverage. One customer accounted for 10.6% and 9.6% of consolidated
revenues in 1999 and 1998, respectively. The loss of this customer could have a
material effect on the Company.

Earnings (Loss) Per Share

Basic earnings (loss) per share are computed by dividing net income by the
weighted average common shares outstanding during the period. Diluted earnings
per share are computed by dividing net income by the weighted average common
shares and dilutive shares outstanding during the period. There was no impact
from dilutive common equivalent shares since losses were reported in both 1999
and 1998.

In 1999 and 1998, 1,155,502 and 1,544,528 common equivalent shares were excluded
from the calculation of diluted earnings per share because the effect would have
been anti-dilutive for the periods presented.


                                      F-9
<PAGE>   39


                      MEDICALCONTROL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Use of Estimates

Preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities and the
reported amounts of revenues and expenses. Actual results could differ from
these estimates.

Stock Based Compensation

The Company has adopted the footnoted disclosure approach of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123"). The Company's pro forma disclosure can be found
in Note 13 to the consolidated financial statements.

Reclassifications

Certain reclassifications have been made to the 1998 financial statements to
conform them to the 1999 presentation.

NOTE 3 - BUSINESS SEGMENT REPORTING

During 1998, the Company adopted Statement of Financial Accounting Standards No.
131, "Disclosure About Segments of an Enterprise and Related Information" ("SFAS
No. 131"). SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for
Segments of an Enterprise," replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal reporting
that is used by management for making operating decisions and assessing
performance as the source of the Company's reportable segments. SFAS No. 131
also requires disclosures about products and services, geographic areas and
major customers. The adoption of SFAS No. 131 did not affect results of
operations or the financial position of the Company but did affect the
disclosure of segment information.

The Company manages its business segments primarily on a products and services
basis. The Company's reportable segments are comprised of managed care services,
primarily through its PPO, TPA services, e-health solutions to the PPO and
healthcare payor industry offered through ppoONE.com and utilization review and
case management services performed by ValueCheck.


                                      F-10
<PAGE>   40


                      MEDICALCONTROL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998


NOTE 3 - BUSINESS SEGMENT REPORTING - continued

The accounting policies of the various business segments are the same as those
described in "Summary of Significant Accounting Policies" in Note 2. The Company
evaluates the performance of its business units based on segment operating
profit. Segment revenues include an intercompany allocation for services
performed by ppoONE.com for the PPO segment. Segment operating profit includes
personnel, sales and marketing expenses and other operating expenses directly
attributable to the segment and excludes certain expenses that are managed
outside the segment. Costs excluded from the segment operating profit consist of
corporate expenses, including income taxes, and interest income and interest
expense. Corporate expenses are comprised primarily of executive compensation,
post acquisition charges and other general and administrative expenses that are
separately managed. Corporate assets are not included in segment assets.
Corporate assets consist primarily of cash and cash equivalents, deferred taxes,
and intangible assets.

Summary information by segment as of and for the years ended December 31, 1999
and 1998, are as follows:

<TABLE>
<CAPTION>
                                       1999            1998
                                    -----------    -----------
<S>                                 <C>            <C>
PPO Segment:
    Revenues                       $ 8,186,854     $ 7,496,303
    Operating expenses               6,696,047       6,272,869
                                   -----------     -----------
         Operating profit            1,490,807       1,223,434

    Depreciation                       145,228         163,515
    Segment assets                   1,903,317       2,027,275

TPA Segment:
    Revenues                       $ 6,268,295     $ 6,538,289
    Operating expenses               6,135,591       5,791,565
                                   -----------     -----------
         Operating profit              132,704         746,724

    Depreciation                   $   158,293     $   133,303
    Segment assets                   2,530,790       3,864,714

ppoONE.com Segment:
    Revenues                       $ 2,792,976     $ 1,676,512
    Operating expenses               3,042,580       3,183,765
                                   -----------     -----------
         Operating loss               (249,604)     (1,507,253)

    Depreciation                        60,836          91,312
    Segment assets                     309,480         329,365
</TABLE>


                                      F-11
<PAGE>   41


                      MEDICALCONTROL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998


NOTE 3 - BUSINESS SEGMENT REPORTING - continued


<TABLE>
<S>                         <C>          <C>
ValueCheck Segment:
     Revenues               $ 192,272    $      --
     Operating expenses       501,424       39,705
                            ---------    ---------
           Operating loss    (309,152)     (39,705)

     Depreciation               4,607          307
     Segment assets           117,310       24,197
</TABLE>


A reconciliation of the Company's segment revenues, operating profit (loss) and
segment assets to the corresponding consolidated amounts as of and for the years
ended December 31, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                       1999            1998
                                   ------------    ------------

<S>                                <C>             <C>
Segment revenues                   $ 17,440,397    $ 15,711,104
Intercompany revenues                (2,100,337)     (1,139,431)
                                   ------------    ------------
     Consolidated revenues         $ 15,340,060    $ 14,571,673
                                   ============    ============

Segment Operating profit           $  1,064,755    $    423,200
Corporate expenses, net              (1,856,438)     (2,318,349)
                                   ------------    ------------
     Consolidated operating loss   $   (791,683)   $ (1,895,149)
                                   ============    ============

Segment assets                     $  4,860,897    $  6,245,551
Corporate assets                      7,600,588       7,988,875
                                   ------------    ------------
     Consolidated assets           $ 12,461,485    $ 14,234,426
                                   ============    ============
</TABLE>


NOTE 4 - SALE OF DIVISION

In August 1999, the Company's TPA subsidiary completed the sale of its
unprofitable division located in Dallas, Texas. The sale resulted in a loss in
the amount of $1,225,000, which was reflected as a charge against earnings as of
June 30, 1999, reduced by a deferred tax benefit of $441,000.


                                      F-12
<PAGE>   42


                      MEDICALCONTROL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998


NOTE 5 - ACQUISITION

Effective September 1, 1998, a wholly owned subsidiary of the Company acquired
all of the issued and outstanding common stock of Business Health Companies,
Inc. ("BHC") for approximately $4,600,000 plus liabilities assumed of $264,138
and accrued acquisition costs of $150,000. BHC provides managed care services,
primarily through its PPO networks within the 15-county Houston, Texas market.
The purchase consideration consisted of $2,150,000 in cash, 270,900 shares of
Company stock, valued at approximately $1,422,000, and an aggregate of
$1,000,000 in subordinated convertible notes to the previous shareholders of
BHC. The acquisition was accounted for under the purchase method of accounting.
The purchase price exceeded the fair value of assets acquired and liabilities
assumed which resulted in the recording of goodwill of approximately $4,500,000,
which will be amortized over 25 years. Liabilities assumed included $110,000 for
severance related expenses for certain employees and other identified
contingencies.

In connection with the acquisition discussed above, the Company recognized
certain post acquisition charges of approximately $648,000. These charges
consisted of a $483,000 write-off of certain capitalized software development
costs, $125,000 of special bonuses payable related to the acquisition, and
$40,000 of severance related costs. Due to the acquisition of BHC, the Company
had a requirement to consolidate database administration, network access, and
like product offerings of the separate entities. As a result of this
requirement, the Company determined that it would not be able to recover its
investment in certain capitalized software development costs over their
remaining economic life, and accordingly, recognized an impairment in accordance
with Statement of Financial Accounting Standards No. 121.

Pro Forma Results of Operations (Unaudited)

The following unaudited pro forma information is presented to illustrate the
estimated effects of the BHC acquisition as if it had occurred on January 1,
1998, and is not necessarily indicative of what operations would have been if
the acquisition had been consummated at the assumed date, nor is it indicative
of future results of operations. The pro forma information does not include the
post acquisition charges included in the accompanying consolidated statement of
operations for 1998.

<TABLE>
<CAPTION>
                                    For the Year Ended
                                    ------------------
                                    December 31, 1998
                                    -----------------
<S>                                 <C>
Net revenues                          $ 15,913,691
Operating loss                        $ (1,317,691)
Net loss                              $   (694,106)
Loss per share                        $      (0.17)
Weighted average shares outstanding      4,081,039
</TABLE>


                                      F-13
<PAGE>   43


                      MEDICALCONTROL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998

NOTE 6 - PROPERTY AND EQUIPMENT, NET

Property and equipment at December 31, 1999 and 1998, consisted of the
following:

<TABLE>
<CAPTION>
                                    Estimated
                                   Useful Life      1999            1998
                                   -----------   -----------    -----------
<S>                                <C>           <C>            <C>
Land                                        --   $    60,000    $    60,000
Buildings                            40 years        240,000        240,000
Furniture and fixtures              5-10 years       773,937        714,731
Data processing equipment           3-6 years      1,454,902      1,368,345
Auto                                 5 years           4,941             --
Leasehold improvements               40 years        118,099        116,343
                                                 -----------    -----------
                                                   2,651,879      2,243,690
Less - accumulated depreciation                   (1,107,600)      (801,721)
                                                 -----------    -----------
      Property and equipment, net                $ 1,544,279    $ 1,697,698
                                                 ===========    ===========
</TABLE>


NOTE 7 - GOODWILL, NET

Goodwill at December 31, 1999 and 1998, consisted of the following:


<TABLE>
<CAPTION>
                                      1999           1998
                                  -----------    -----------
<S>                               <C>            <C>
Goodwill                          $ 6,642,076    $ 8,392,856
Less - accumulated amortization      (622,613)      (620,023)
                                  -----------    -----------
      Goodwill, net               $ 6,019,463    $ 7,772,833
                                  ===========    ===========
</TABLE>


NOTE 8 - DEBT

In connection with the acquisition of BHC, the Company obtained bank financing
in the form of a $1,600,000 term loan. The Company also issued an aggregate of
$1,000,000 in subordinated convertible notes to the selling shareholders of BHC.
The bank note bears interest at the bank's prime rate plus 1% (9.5% and 8.75% at
December 31, 1999 and 1998 respectively) and is payable in monthly installments
of principal of $26,667 plus interest. The 8.5% subordinated convertible seller
notes were payable in quarterly installments of principal and interest through
October 2003 and were convertible into common stock of the Company upon 30 days'
notice, in $25,000 increments, at a conversion rate of $5.25 per share. On July
6, 1999, the remaining principal balance of $850,000 of convertible seller notes
was converted into 161,903 shares of the Company's common stock.


                                      F-14
<PAGE>   44


                      MEDICALCONTROL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998


NOTE 8 - DEBT - Continued

In conjunction with the bank financing above, the Company's previously existing
$1,000,000 line of credit was terminated and a new revolving credit facility was
obtained. This credit facility, secured by accounts receivable, allowed for
maximum borrowings of $500,000, since reduced to $400,000 in March 1999, and
bears interest at the bank's prime rate plus 1% (9.5% at December 31, 1999).
Availability under this credit facility was $400,000 at December 31, 1999. The
credit facility contains certain affirmative financial covenants, such as
minimum net worth and financial statement ratios.

During March and May 1999, the Company restructured the terms and financial
covenants of its existing bank term note and revolving line of credit. Under the
revised terms of the note agreement, the Company was required to make principal
reductions of $200,000 on March 31, 1999, $50,000 on June 15, 1999, $147,000 on
August 16, 1999 paid with a portion of the proceeds from the sale of common
stock and $407,000 on August 18, 1999 paid with the proceeds from an income tax
refund. The revised new term note includes certain revised financial covenants,
including minimum net income, stockholders' equity and working capital
requirements, and is secured by a pledge of certain shares of the Company's
wholly owned subsidiaries. The Company is required to make monthly payments of
principal and interest, as described above, until the loan is paid in full in
April 2001. As of December 31, 1999, the Company was not in compliance with
certain debt covenants and, in March 2000, it received the necessary waivers.


Long-Term Debt

Long-term debt consisted of the following at December 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                            1999         1998
                                                         ----------   ----------
<S>                                                      <C>          <C>
Mortgage note payable, monthly installments of           $  235,428   $       --
approximately $3,100, plus interest at 8.0% through
January 2009

Note payable to bank, secured by substantially all          395,261    1,558,428
assets of the Company, monthly installments of
approximately $26,700, plus interest at bank's
prime rate plus 1% (9.5% and 8.75% at December
31, 1999 and 1998 respectively) through 2003
</TABLE>


                                      F-15
<PAGE>   45


                      MEDICALCONTROL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998


NOTE 8 - DEBT - Continued

<TABLE>
<CAPTION>
                                                         1999          1998
                                                     -----------    -----------

<S>                                                  <C>            <C>
Mortgage note payable, monthly installments of       $        --    $    84,071
approximately $1,500, plus interest at a bank's
prime rate plus .25% (8.0% at December 31,
1998) through September 2003

Note payable, due in quarterly installments of                --         27,500
$13,750 plus interest at 8% through June 1999

Subordinated convertible notes payable to                     --      1,000,000
previous stockholders of subsidiary, principal
payable in quarterly installments of $50,000,
interest at 8.5% due monthly                         -----------    -----------
                                                         630,689      2,669,999

                                                        (411,970)    (1,115,515)
                                                     -----------    -----------
Less - current portion                               $   218,719    $ 1,554,484
                                                     ===========    ===========
Total long-term debt, net of current portion

</TABLE>


Scheduled future principal maturities of long-term debt at December 31, 1999,
are as follows:

<TABLE>
<CAPTION>
Year ended
December 31,       Amount
------------      --------
<S>               <C>
2000              $411,970
2001                19,697
2002                21,355
2003                23,152
2004                25,101
Thereafter         129,414
                  --------
                  $630,689
</TABLE>


                                      F-16
<PAGE>   46


                      MEDICALCONTROL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998


NOTE 9 - BENEFIT PLANS

401(k) Profit Sharing Plan

The Company has a 401(k) profit sharing plan that covers all employees of the
Company who have one year of service, as defined, and have reached age 21.
Company contributions are discretionary based upon determinations made by the
plan trustees. Employees become 100% vested in employer contributions after 5
years of service (accruing 20% per year of service, as defined). The Company
recorded expense of $127,207 and $103,965 for plan contributions for the years
ended December 31, 1999 and 1998, respectively.

Deferred Compensation

The Company has a deferred compensation agreement with its chief executive
officer. The agreement provides benefits estimated at $540,000 upon the sooner
of termination of employment, death, change in control of the Company or January
2007. The Company has made an investment in a life insurance policy to fund
approximately two-thirds of this benefit.

Other than stated above, the Company does not provide any post-retirement or
post-employment benefits to any of its employees.

NOTE 10 - INCOME TAXES

The income tax benefit at December 31, 1999 and 1998, consisted of the
following:

<TABLE>
<CAPTION>
                 1999          1998
               ---------    ---------
<S>            <C>          <C>
Current:
     Federal   $(237,200)   $(320,805)
     State       (31,394)     (39,516)

Deferred:
     Federal    (250,154)    (222,329)
     State       (33,109)     (29,426)
               ---------    ---------
Total          $(551,857)   $(612,076)
               =========    =========
</TABLE>


                                      F-17
<PAGE>   47


                      MEDICALCONTROL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998

NOTE 10 - INCOME TAXES - Continued

The differences between the statutory federal income tax rate and the Company's
effective income tax rate are as follows:

<TABLE>
<CAPTION>
                                             1999     1998
                                             ----     ----
<S>                                          <C>      <C>
Statutory federal income tax rate            (34.0%)  (34.0%)
State income taxes, net of federal benefit    (3.1)    (2.6)
Meals and entertainment expenses                .6       .8
Goodwill amortization                          4.1      2.4
Adjustment of prior year's estimate            5.1       --
Other                                          1.1      (.5)
                                             -----    -----
      Total                                  (26.2%)  (33.9%)
                                             =====     ====
</TABLE>

The components of and changes in net deferred tax assets (liabilities) as of
December 31, 1999 and 1998, are as follows:

<TABLE>
<CAPTION>
                                                            1999         1998
                                                          ---------    ---------
<S>                                                       <C>          <C>
Current Deferred Taxes:
Assets:
      Nondeductible reserves                              $ 133,545    $ 169,028
       Deferred revenue                                     101,624           --
                                                          ---------    ---------
                                                            235,169      169,028
Noncurrent Deferred Taxes:
Assets:
      Deferred gain from sale of option on
           real estate                                      268,891      303,926
      Net operating loss carryforward                       277,944           --
      Other                                                      --       50,800

Liabilities:
     Excess tax over book depreciation and amortization    (146,327)    (269,456)
     Other                                                  (31,547)          --
                                                          ---------    ---------

Noncurrent deferred taxes, net                              368,961       85,270
                                                          ---------    ---------
Total deferred taxes                                      $ 604,130    $ 254,298
                                                          =========    =========
</TABLE>


                                      F-18
<PAGE>   48


                      MEDICALCONTROL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998


NOTE 10 - INCOME TAXES - Continued

A valuation allowance must be provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company has not
established a valuation allowance because, in the opinion of management, the
Company will fully realize its deferred tax asset. The company has net operating
loss carryovers at December 31, 1999 of approximately $744,000. The carryovers
expire if not utilized by 2019.

NOTE 11 - DEFERRED GAIN ON SALE OF OPTION ON REAL ESTATE

In connection with the Company's relocation of its corporate offices and
principal operations in January 1997, management secured a purchase option on
their new office facility. During September 1997, the Company sold this option
for $910,000 cash to a third party, who subsequently exercised the option.
Concurrent with the sale, the Company executed a ten-year lease extension. The
gain from this transaction is being recognized on a straight-line basis over the
life of the lease extension and is reflected as a deferred gain on the
accompanying balance sheet. The amount of gain amortization included in
operating results for each of the years ended December 31, 1999 and 1998 was
$91,000.

NOTE 12 - COMMITMENTS AND CONTINGENCIES

Leases

The Company leases certain office space, automobiles, furniture, and equipment
under noncancelable operating leases that expire at various dates through 2007.
During 1997, the Company relocated its principal operations and corporate
offices and executed a ten-year extension of its operating lease. In connection
with this move, the Company leased approximately $300,000 of certain furniture
and fixtures under terms of a 5-year operating lease. These commitments are
reflected in the table of future minimum lease payments.


                                      F-19
<PAGE>   49


                      MEDICALCONTROL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998


NOTE 12 - COMMITMENTS AND CONTINGENCIES - Continued

At December 31, 1999, scheduled future minimum payments for operating leases
with initial terms in excess of one year are as follows:

<TABLE>
<CAPTION>
Year ended
December 31,            Amount
------------          ----------
<S>                   <C>
2000                  $  735,168
2001                     564,011
2002                     461,502
2003                     349,941
2004                     319,740
Thereafter               865,963
                      ----------
                      $3,296,325
                      ==========
</TABLE>

Rental expense for all operating leases for the years ended December 31, 1999
and 1998, was $848,239 and $530,803, respectively.

During 1996, a subsidiary of the Company entered into a service agreement,
commencing January 1997, with a third party for use of their claims adjudication
software via on-line access to a data center. The term of this service agreement
is ten years and fees paid to the third party will be $1.00 per month for each
individual plan member served by the Company's subsidiary. Fees paid under this
agreement were $175,504 and $170,065 in 1999 and 1998, respectively.

Litigation

The Company is involved in certain legal actions and claims arising in the
ordinary course of business. Management believes that such litigation and claims
will be resolved without material effect on the Company's financial position,
results of operations, or cash flows.


                                      F-20
<PAGE>   50


                      MEDICALCONTROL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998


NOTE 13 - STOCKHOLDERS' EQUITY

Stock Options

The Company has stock option plans adopted in 1992 and 1993 which provide that
options for shares of the Company common stock may be granted to officers,
directors, and key employees of the Company at the fair market value on the date
of grant. The options expire 10 years from the date of grant (or earlier if
specified in the grant) and generally vest over a five year period. In 1993, the
Company also adopted a qualified stock option plan under Section 423 of the
Internal Revenue Code which provides that options for shares of the Company
stock may be granted to eligible employees of the Company at 85% of the fair
market value on the date of grant. The options vest one year from the date of
grant and expire 27 months thereafter. During 1998, the qualified plan was
terminated by the Company's Board of Directors.

The following table sets forth summarized information regarding the plans:

<TABLE>
<CAPTION>
                                                                          Weighted
                                                                          Average
                                        Shares       Option Price       Option Price
                                      ----------    --------------      ------------
<S>                                   <C>           <C>                 <C>
Outstanding at December 31, 1997       1,397,908    $3.30 to $9.00         $6.10
     Granted                             286,995     4.46 to 7.81           6.39
     Exercised                           (96,835)    3.38 to 5.13           4.40
     Forfeited                           (43,540)    3.38 to 4.50           3.81
                                      ----------    --------------         -----
Outstanding at December 31, 1998       1,544,528    $3.38 to $9.00         $6.30
     Granted                             446,000     7.63 to 8.88           7.88
     Exercised                          (452,110)    3.38 to 5.25           4.30
     Forfeited                          (392,287)    4.36 to 7.54           7.28
                                      ----------    --------------         -----
Outstanding at December 31, 1999       1,146,131    $3.38 to $8.88         $7.35
                                      ==========    ==============         =====
Exercisable options:
     December 31, 1998                   946,551
                                      ==========
     December 31, 1999                   723,600
                                      ==========

Options available for future grants      400,050
                                      ==========

</TABLE>


In 1994, the Company granted a stock option to a third party for financial
advisory services whereby the third party has the option to purchase up to
100,000 shares of the Company common stock at prices ranging from $6.00 to $9.00
per share. The option became fully vested as of November 12, 1994, and expired
during 1999.


                                      F-21

<PAGE>   51


                      MEDICALCONTROL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998


NOTE 13 - STOCKHOLDERS' EQUITY - Continued

Accounting for Stock-Based Compensation

The Company accounts for stock options under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123, the Company's pro forma net income
and diluted earnings per share would have been the amounts shown below:

<TABLE>
<CAPTION>
                                 1999             1998
                                 ----             ----
<S>                        <C>              <C>
Pro forma net loss         $  (1,862,090)   $  (1,381,804)
Pro forma loss per share   $        (.42)   $        (.35)
</TABLE>

The fair value of each option grant was estimated on the grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions:

<TABLE>
<CAPTION>
                          1999    1998
                          ----    ----
<S>                       <C>     <C>
Risk free interest rate    5.1%    5.1%
Expected dividend yield    0.0%    0.0%
Expected volatility       35.2%   43.9%
Expected lives               5       5
</TABLE>

The weighted average fair value of options granted in 1999 and 1998 was $3.13
and $3.03, respectively.

Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.

NOTE 14 - RELATED PARTY TRANSACTIONS

In October 1994, the Company loaned $300,000 to its chief executive officer. The
loan is secured by the pledge of 70,000 shares of the Company's common stock
held by the majority stockholder and is also guaranteed by the majority
stockholder. The loan accrues interest at a bank's prime rate plus 1% (9.5% at
December 31, 1999). The principal and any unpaid accrued interest are due in its
entirety by October 27, 2000. Accrued interest on this note was $148,328 and
$121,175 at December 31, 1999 and 1998, respectively.


                                      F-22
<PAGE>   52


                      MEDICALCONTROL, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

                           December 31, 1999 and 1998


NOTE 14 - RELATED PARTY TRANSACTIONS - Continued

During March 1998, the Company filed a registration statement with the
Securities and Exchange Commission to register certain existing outstanding
shares of common stock owned by the majority shareholder of the Company. During
December 1998, the Company filed a second registration statement to register
shares of common stock issued in connection with the BHC acquisition. In
connection with these registration statements, the Company paid approximately
$6,500 of legal and accounting expenses.

During August 1999, the Company filed a registration statement with the
Securities and Exchange Commission to register certain additional outstanding
shares of common stock owned by the majority shareholder of the Company. The
majority shareholder has indicated no present intention of selling any stock but
such stock may serve as collateral for certain loans of the majority
shareholder. In connection with this registration statement, the Company paid
approximately $6,600 of legal and accounting expenses.


                                      F-23
<PAGE>   53




                                  EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number                             Description
-------                            -----------
<S>         <C>
3.1         Restated Certificate of Incorporation of the Company - incorporated
            by reference to the Exhibits to the Registration Statement on Form
            SB-2, file number 33-58334-FW, declared effective May 13, 1993.

3.2         Amended and Restated Corporate Bylaws of the Company - incorporated
            by reference to the Exhibits to the Registration Statement on Form
            SB-2, file number 33-58334-FW, declared effective May 13, 1993.

10.1        Amended and Restated Non-Qualified Stock Option Agreement -
            incorporated by reference to the Exhibits to the Registration
            Statement on Form SB-2, file number 33-58334-FW, declared effective
            May 13, 1993.

10.2        Outside Directors Stock Option Plan of MedicalControl, Inc., -
            incorporated by reference to the Exhibits to the Registration
            Statement on Form SB-2, file number 33-58334-FW, declared effective
            May 13, 1993.

10.3        First Amendment to the Outside Directors Stock Option Plan of
            MedicalControl, Inc. - incorporated by reference to the Exhibits to
            the Registration Statement on Form SB-2, file number 33-58334-FW,
            declared effective May 13, 1993.
</TABLE>





<PAGE>   54




<TABLE>
<S>         <C>
10.4        Amendment to the Outside Directors Stock Option Plan of
            MedicalControl, Inc. dated August 20, 1996 - incorporated by
            reference to the Company's Annual Report on Form 10-KSB for the year
            ended December 31, 1997.

10.5        Amended and Restated Non-Qualified Stock Option Agreement (Issued
            Under Outside Directors Stock Option Plan). - incorporated by
            reference to the Exhibits to the Registration Statement on Form
            SB-2, file number 33-58334-FW, declared effective May 13, 1993.

10.6        Qualified Employee Stock Purchase Plan of MedicalControl, Inc. -
            incorporated by reference to the Exhibits to Post Effective
            Amendment Number 1 to the Registration Statement on Form SB-2, file
            number 33-58334-FW, dated January 30, 1995.

10.7        Amendment to Qualified Employee Stock Purchase Plan of
            MedicalControl, Inc. dated as of March 18, 1997 - incorporated by
            reference to the Company's Annual Report on Form 10-KSB for the year
            ended December 31, 1997.

10.8        1993 Stock Compensation Plan of MedicalControl, Inc. - incorporated
            by reference to the Exhibits to Post Effective Amendment Number 1 to
            the Registration Statement on Form SB-2, file number 33-58334-FW,
            dated January 30, 1995.

10.9        Amendment to 1993 Stock Compensation Plan of MedicalControl, Inc.
            dated as of August 20, 1996 - incorporated by reference to the
            Company's Annual Report on Form 10-KSB for the year ended December
            31, 1997.

10.10       Form of Agreement by and between the Company and each of its
            directors and officers - incorporated by reference to the Company's
            Annual Report on Form 10-KSB for the year ended December 31, 1996.

10.11       Commercial Lease, dated March 1, 1993, by and among Diversified and
            David C. and Janice L. Bramer - incorporated by reference to the
            Company's Annual Report on Form 10-KSB for the year ended December
            31, 1996.

10.12       Letter Agreement, dated September 29, 1994, by and between the
            Company and David C. Bramer - incorporated by reference to the
            Company's Annual Report on Form 10-KSB for the year ended December
            31, 1996.

10.13       Transfer Agreement, dated as of January 1, 1998, by and among the
            Company, MedicalControl Network Solutions, Inc., PPO Management
            Solutions, Inc., Genesis/ValueCheck, Inc., MedicalControl Holdings,
            Inc., and its direct and indirect wholly owned subsidiaries. (All
            exhibits have been omitted and will be provided to the Commission
            upon request.) - incorporated by reference to the Company's Annual
            Report on Form 10-KSB for the year ended December 31, 1997.

10.14       Stock Purchase Agreement, dated September 10, 1998, by and between
            MedicalControl Network Solutions, Inc., Business Health Companies,
            Inc., Ralph T. Smith, Donald Richard Huntington and Douglas Elden. -
            incorporated by reference to the Company's Special Report on Form
            8-K filed October 9, 1998.

10.15       Employment, Confidentiality and Non-Competition Agreement, dated
            September 25, 1998, by and among MedicalControl Network Solutions,
            Inc., the Company and Donald Richard Huntington - incorporated by
            reference to the Company's Annual Report on Form 10-KSB for the year
            ended December 31, 1998.

10.16       Employment, Confidentiality and Non-Competition Agreement, dated
            September 25, 1998, by and among MedicalControl Network Solutions,
            Inc., the Company and Ralph T. Smith - incorporated by reference to
            the Company's Annual Report on Form 10-KSB for the year ended
            December 31, 1998.

10.17       Loan Agreement, dated September 25, 1998, by and between the Company
            and Bank One, Texas, N.A. - incorporated by reference to the
            Company's Annual Report on Form 10-KSB for the year ended December
            31, 1998.

10.18       First Amendment to Loan Agreement, dated as of March 31, 1999, by
            and between Bank One, Texas N.A. and the Company - incorporated by
            reference to the Company's Annual Report on Form 10-KSB for the year
            ended December 31, 1998.
</TABLE>








<PAGE>   55



<TABLE>
<S>         <C>
10.19       Second Amendment to Loan Agreement, dated as of May 15, 1999, by and
            between Bank One, Texas N.A. and the Company.

10.20       Third Amendment to Loan Agreement, dated as of September 25, 1999,
            by and between Bank One, Texas N.A. and the Company.

10.21       Asset Purchase Agreement, dated July 30, 1999, by and between
            Diversified Group Administrators, Inc. and Group Resources, Inc. -
            incorporated by reference to the Company's Quarterly Report on Form
            10-QSB for the quarter ended September 30, 1999.

10.22       Employee Incentive Stock Option Plan.

10.23       Non-Employee Director Stock Compensation Plan.

10.24       Employment Agreement dated January 1, 1998, by and between PPO
            Management Solutions, Inc. (now known as ppoONE.com) and Patrick W.
            Kennedy.

10.25       First Amendment to Employment Agreement dated June 24, 1999 by and
            between ppoONE.com, inc. and Patrick W. Kennedy.

21          Subsidiaries of the Company - incorporated by reference to the
            Company's Annual Report on Form 10-KSB for the year ended December
            31, 1998.

23.1        Consent of Grant Thornton LLP, independent public accountants.

23.2        Consent of Arthur Andersen LLP, independent public accountants.

27.1        Financial Data Schedule.
</TABLE>