MEDICAL ALLIANCE INC, 424B1, 1996-10-11

MEDICAL ALLIANCE INC
424B1, 1996-10-11
SPECIALTY OUTPATIENT FACILITIES, NEC

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<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-9815

PROSPECTUS

2,000,000 SHARES

LOGO

COMMON STOCK

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

All of the 2,000,000 shares of Common Stock, $0.002 par value per share
(the "Common Stock"), offered hereby are being sold by Medical Alliance, Inc.
("Medical Alliance" or the "Company"). Prior to this offering (the "Offering"),
there has been no public market for the Common Stock of the Company. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The Company's Common Stock has been approved for
listing on the Nasdaq National Market under the symbol "MAII" subject to notice
of issuance.

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

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................... $11.00 $0.77 $10.23
- ----------------------------------------------------------------------------------------------
Total(3)................................ $22,000,000 $1,540,000 $20,460,000
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $500,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
300,000 additional shares of Common Stock, on the same terms and conditions
as set forth above, to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $25,300,000, $1,771,000 and
$23,529,000, respectively. See "Underwriting."

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

The shares of Common Stock are being offered severally by the Underwriters,
subject to prior sale, when, as and if accepted by the Underwriters and subject
to conditions including their right to reject orders, in whole or in part. It is
expected that delivery of the shares will be made at the offices of Bear,
Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167, on or about
October 17, 1996.
------------------------------

BEAR, STEARNS & CO. INC. EQUITABLE SECURITIES CORPORATION

THE DATE OF THIS PROSPECTUS IS OCTOBER 11, 1996
<PAGE> 2

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

MEDICAL ALLIANCE, INC.

[LOGO]

A LEADING NATIONAL PROVIDER OF SERVICES TO
CREATE TEMPORARY SURGICAL SITES IN THE PHYSICIAN OFFICE

SERVING APPROXIMATELY 2,500 PHYSICIANS
ACROSS THE U.S.

MEDICAL SURGICAL SERVICES

AESTHETIC ELECTIVE SERVICES

DISTRICT OFFICES

FACILITATING PROCEDURES IN GYNECOLOGY, UROLOGY, PODIATRY,
DERMATOLOGY, OTOLARYNGOLOGY AND PLASTIC SURGERY.

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

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

The Company intends to furnish to its shareholders annual reports
containing audited consolidated financial statements certified by independent
public accountants for each year and quarterly reports containing unaudited
consolidated financial statements for the first three quarters of each fiscal
year.
<PAGE> 3

[LOGO]

CREATING TEMPORARY SURGICAL SITES IN THE PHYSICIAN'S OFFICE
TO BENEFIT PAYORS, PHYSICIANS AND PATIENTS*

<TABLE>
<S> <C>
ENHANCED PATIENT SATISFACTION INCREASED PHYSICIAN PRODUCTIVITY
- Shorter recovery times - Ability to perform a broad array
- Reduced anesthesia requirements of procedures
- Increased scheduling flexibility - On-site technical assistance
- Optimizes procedure scheduling
[Photograph of technician demonstrating
equipment to physician]

BENEFICIARIES
- PAYORS
- PHYSICIANS
- PATIENTS

HIGH QUALITY MEDICAL SERVICES
- Physician training and credentialing
- Protocols and standards for office-based
procedures
- Procedure documentation
[Photograph of Company representative
conducting training session]
GREATER ACCESS TO ADVANCED MEDICAL IMPROVED PROCEDURAL COST-EFFECTIVENESS
TECHNOLOGIES - Lower facility cost
- State-of-the-art laser technologies - Lower personnel cost
- Devices for minimally invasive surgery - Lower out-of-pocket expenditures for
- Integrated medical systems delivered in patients
office
[Photograph of technician unloading
medical equipment from van]
</TABLE>

* Photographs depict medical equipment leased to the Company.
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed financial data, including the
Consolidated Financial Statements and the notes thereto, appearing elsewhere in
this Prospectus. Unless otherwise indicated, all information contained in this
Prospectus: (i) assumes that the Underwriters' over-allotment option is not
exercised, (ii) has been adjusted to give effect to a 1.561-for-1 stock split,
effected through a stock dividend, prior to the consummation of the Offering,
and (iii) has been adjusted to give effect to the conversion of the outstanding
shares of Convertible Preferred Stock into Common Stock upon consummation of the
Offering. "Medical Alliance" or the "Company" refers to Medical Alliance, Inc.
and its subsidiaries.

THE COMPANY

Medical Alliance provides a complete range of services used to create
temporary surgical sites in physician offices in 40 states and Canada and
believes it is a leading national provider of such services. The Company's
services facilitate the migration of established surgical procedures and
advanced medical technologies from hospitals and outpatient surgery centers to a
lower-cost setting, the physician's office. Payors, physicians and patients
benefit from the Company's services through reduced costs for surgical
procedures, increased physician productivity, greater access to advanced medical
technologies and improved patient satisfaction. The Company has over 100 managed
care contracts that in aggregate cover approximately 16 million lives. Managed
care contracts are made directly between the Company and managed care
organizations, and typically have automatically renewable one-year terms. The
Company has served approximately 2,500 physicians during the six months ended
June 30, 1996, and currently, physicians perform approximately 6,000 procedures
monthly using the Company's services. The Company's services include:

- Providing on-site technical personnel and medical equipment on a
scheduled basis;

- Monitoring and documenting preoperative, intraoperative and postoperative
procedures;

- Returning the physician's office to its pre-procedure condition;

- Establishing procedural safety and quality assurance protocols for
office-based procedures;

- Facilitating physician training and qualification; and

- Physician credentialing pursuant to contracts with managed care
organizations.

The Company provides its services along two primary business lines: medical
surgical and aesthetic elective services. The Company's medical surgical
services allow physicians to perform approximately 25 different office-based
surgical procedures across numerous specialties, including gynecology, podiatry,
urology and otolaryngology. The Company's aesthetic elective services are
utilized primarily by plastic surgeons and dermatologists for cosmetic
procedures such as skin resurfacing, vascular and pigmented lesion treatment,
and tattoo removal. The Company is generally reimbursed for providing its
medical surgical services by third-party payors, including through its contracts
with managed care organizations, and is paid directly by patients for any
required copayments and deductibles. For providing its aesthetic elective
services, the Company is paid directly by patients, generally at the time of
service. The Company derived approximately 64% and 33% of its net revenues in
1995 from the provision of medical surgical and aesthetic elective services,
respectively. None of the Company's net revenues is derived from Medicare or
Medicaid reimbursement.

The Company markets its services directly to physicians and managed care
organizations. If a managed care organization decides to enter into a contract
with the Company, a formal agreement is negotiated stipulating each party's
responsibilities and a structure for financial reimbursement. If a physician
decides to utilize the Company's services, the physician will enter into a
contract with the Company certifying as to the physician's credentials and
training in the use of the technology. The contract will also define the
relative responsibilities of the Company and the physician. Generally, the
Company does not require the physician to exclusively utilize the Company's
services.

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<PAGE> 5

precertification from the third-party payor. Prior to arrival of the patient,
the Company's field technician will create a temporary surgical setting in the
physician's office that meets the Company's preoperative protocol and will
configure the transportable medical equipment in accordance with the Company's
procedure guidelines. Prior to performing the procedure, the physician and/or
his or her staff is required to inspect the temporary surgical setting, test and
accept all medical equipment, and record such acceptance in the field
technician's delivery log. After the physician has finished using the Company's
services, the field technician returns the physician's office to its
pre-procedure condition. An invoice for the Company's services is then either
presented to the patient or sent to the third-party payor.

According to Medical Data International, Inc. ("MDI"), total surgical
procedures in the United States have increased by 12.4% from 25.8 million
procedures in 1990 to 29.0 million procedures in 1994. Over this period, the
number of surgeries performed in an outpatient setting as a percentage of total
surgeries performed annually in the United States has increased. The volume of
outpatient surgical procedures has grown by 71.8% over this period, from 11.0
million procedures, or approximately 43% of total surgeries in 1990, to 18.9
million procedures, or approximately 65% of total surgeries in 1994.
Furthermore, the prevalence of surgical procedures occurring in a physician's
office has increased, representing approximately 12% of total outpatient
procedures performed in 1994 as compared to approximately 6% in 1990. The
Company believes that a broader array of procedures, including more complex
surgeries, is currently being performed in an outpatient setting than was
performed in a similar setting in 1990 and believes that the migration of
outpatient procedures to a physician's office will continue.

The Company also believes that the number of aesthetic elective procedures
performed annually in the United States will continue to grow, primarily due to
the development of new technologies for cosmetic procedures, increased public
awareness, shorter recovery times and the aging of the "baby boom" generation.
According to an American Academy of Cosmetic Surgery survey (the "AACS Survey"),
approximately 2.7 million cosmetic procedures were performed in the United
States in 1994. The Company believes that a majority of such procedures are or
can be performed in a physician's office. According to a survey by the American
Society of Plastic and Reconstructive Surgeons (the "ASPRS Survey"), patients
between the ages of 35 and 50 represented 41% of the cosmetic procedures
performed in the United States in 1994, and the number of people who say they
approve of cosmetic surgery, either for themselves or others, has increased 50%
in the last decade. According to the ASPRS Survey, approximately 36% of the
cosmetic procedures performed in 1994 were performed in a physician's office.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company.............. 2,000,000 shares
Common Stock to be outstanding after the
Offering(1).................................... 5,623,596 shares
Use of proceeds.................................. To repay indebtedness, make capital
expenditures, including the acquisition
of medical equipment, and hire additional
personnel, and for working capital and
general corporate purposes, including
possible acquisitions. See "Use of
Proceeds."
Reserved Nasdaq National Market symbol........... MAII
</TABLE>

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

(1) Excludes 902,315 shares of Common Stock issuable upon the exercise of
outstanding stock options granted under the Company's Amended and Restated
1994 Long-Term Incentive Plan (the "Incentive Plan") (60,106 of which are
exercisable at the initial offering price of $11.00) at a weighted average
exercise price of $2.62 per share, 294,436 shares of Common Stock reserved
for future option grants or awards under the Incentive Plan and 49,328
shares of Common Stock issuable upon the exercise of outstanding warrants
at a weighted average exercise price of $1.69 per share. See "Management --
Incentive Plan" and "Description of Capital Stock -- Warrants."

4
<PAGE> 6

SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)

<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED(5)
------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash.................................................................. $1,432 $ 21,392
Working capital....................................................... 2,345 22,305
Total assets.......................................................... 8,931 28,891
Total debt and capital lease obligations.............................. 3,813 457
Convertible preferred stock........................................... 2 --
Total shareholders' equity............................................ 2,758 22,718
</TABLE>

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

(1) Operating expenses include salaries and benefits expense, selling, general
and administrative expense and provision for uncollectible accounts.

(2) Adjusted to give effect to the sale of the 2,000,000 shares of Common Stock
offered hereby at $11.00 per share, the application of a portion of the
estimated net proceeds therefrom to repay indebtedness and the conversion
of the outstanding Convertible Preferred Stock into shares of Common Stock
as if each had occurred on January 1, 1995. See "Use of Proceeds."

(3) Number of physicians who have used the Company's services to perform an
office-based procedure during the last six months of the period.

(4) Number of mobile field units in service is as of end of period.

(5) "As Adjusted" amounts reflect the sale of 2,000,000 shares of Common Stock
offered hereby at $11.00 per share and the application of a portion of the
estimated net proceeds therefrom to repay indebtedness. See "Use of
Proceeds."

5
<PAGE> 7

RISK FACTORS

In addition to the other information contained in this Prospectus,
prospective investors should carefully consider the risk factors set forth below
in evaluating an investment in the shares of Common Stock offered hereby.

UNCERTAINTY OF MARKET ACCEPTANCE

There can be no assurance that any of the Company's existing or future
services will gain or maintain market acceptance among physicians, patients and
third-party payors. The Company believes that market acceptance of office-based
procedures, including those performed using the Company's services, depends upon
various factors including: (i) the Company's ability to provide evidence to the
medical community of the efficacy of office-based procedures and the
corresponding benefits to payors, physicians and patients, (ii) the willingness
of physicians to perform and patients to undergo procedures in the physician's
office which have traditionally been performed in a hospital or outpatient
facility, (iii) the willingness of physicians to perform and patients to undergo
procedures under local rather than under general anesthesia, (iv) the
willingness of physicians to utilize the Company's services rather than perform
office-based procedures utilizing their employees and medical equipment, and (v)
the continued availability of third-party reimbursement for certain procedures
performed using the Company's services.

ACQUISITION, OBSOLESCENCE AND REGULATION OF ADVANCED TECHNOLOGY

The Company's future success will depend in large part on the Company's
ability to provide advanced medical technology to physicians. The medical device
industry is characterized by rapid and significant technological change. The
acquisition of medical technology requires substantial expenditures, and there
can be no assurance that the Company will be successful in identifying,
acquiring and receiving timely delivery of technology for which sufficient
demand will exist and that such technology will not become obsolete during its
anticipated product life cycle. Currently, there are alternative technologies to
those offered by the Company. Such technologies may gain broader market
acceptance, which could have a material adverse effect on the Company's
operating results or financial condition. There can be no assurance that the
Company's strategy to obtain medical technology through relationships with
medical equipment manufacturers and distributors will be successful or, if
successful, that such relationships can be maintained. In addition, the medical
equipment utilized by the Company requires approval by the Food and Drug
Administration (the "FDA"), and there can be no assurance that such medical
equipment will receive or retain FDA approval for desired current and future
applications. The loss of any FDA approval for such equipment could have a
material adverse effect on the Company's operating results or financial
condition, as the Company would be unable to utilize such equipment in the
provision of its services. Furthermore, the medical equipment industry has been
characterized by extensive litigation regarding patents and other intellectual
property rights. There can be no assurance that manufacturers or distributors of
medical equipment utilized by the Company will obtain or retain patents or other
intellectual property rights related to the equipment used by the Company. See
"-- Regulation of and Change in the Health Care Industry" and
"Business -- Business Strategy -- Establishing Strategic Alliances with Medical
Equipment Manufacturers."

INABILITY TO MANAGE GROWTH

The Company has recently experienced, and may continue to experience,
growth in its geographic area of operations, the breadth of services it provides
and the number of its employees. During 1996, the Company has expanded into five
new markets, introduced four new services and increased its employee base by
approximately 40%. To accommodate this recent growth, compete effectively and
manage any future growth, the Company will be required to continue to implement
and improve operational, financial and management information systems,
procedures and controls on a timely basis and to expand, train, and manage its
work force, the failure of any of which could have a material adverse effect on
the Company's operating results or financial condition. In 1995, the Company
began implementation of a new management information system and expects to
continue such implementation through 1997. The Company's future success will
depend, in

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<PAGE> 8

part, on the successful implementation of the Company's management information
system. See "Business -- Information Systems."

UNCERTAINTY OF ACQUISITIONS

The Company's strategy has included and will continue to include growth
through acquisitions. The market for potential acquisitions is primarily limited
to those entities renting medical equipment used to facilitate aesthetic
elective services. There can be no assurance that the Company will be able to
successfully identify, complete or integrate any acquisition. In addition, there
can be no assurance that any future acquisition will not have a material adverse
effect upon the Company's operating results or financial condition, particularly
during the period in which the operations of the acquired business are being
integrated into the Company. In order to successfully integrate acquired
operations the Company will need to establish relationships with new or existing
physicians and will be reliant on local management who may have important
relationships with local physicians. As a result, it may be necessary for the
Company to give a significant amount of autonomy to local managers. In addition,
the Company will be required to comply with laws and regulations of states that
differ from those in which the Company currently operates, and may face
competitors with greater knowledge of such local markets. Furthermore, the
Company's ability to make acquisitions may depend upon its ability to obtain
financing, and there can be no assurance that financing will be available to the
Company on acceptable terms, or at all. The Company continually assesses
potential acquisition candidates. The Company currently has no agreement or
understanding with respect to any future acquisitions. See "Business -- Business
Strategy."

COMPETITION

The market for aesthetic elective services is highly competitive due to:
(i) low barriers to entry, (ii) low capital requirements, and (iii) high
profitability. Currently, the Company believes its competition is primarily
comprised of small, locally based equipment rental companies. In the future, the
Company may face competition from groups that have consolidated other
competitive operations. Further, the Company believes that the heightened
interest in aesthetic procedures among physicians and patients, the development
of advanced technologies used for aesthetic procedures and the industry practice
of requiring immediate cash payment for such services will create increased
competition in this segment. Competition in the provision of medical surgical
services may also increase because these services are becoming more accepted by
physicians, patients and third-party payors and because the medical equipment
used in providing such services is readily available from various sources. The
Company competes with companies that offer medical equipment to physicians'
offices on either a rental or a fee-for-service basis, and with hospitals and
surgery centers that provide comparable surgical services. In addition, other
health care providers may enter the market for the provision of temporary
office-based surgical services. The Company also competes with other providers
in the health care industry for access to technology, relationships with
third-party payors and relationships with physicians. Any of these competitors
may have greater financial and other resources than the Company. It is also
possible that competitors of the Company could obtain exclusive rights to
technology that the Company currently offers or expects to offer. The health
care industry is highly competitive and is subject to continuing changes in the
manner in which health care services are provided and the manner in which
providers are selected and paid. The Company believes that the trend toward
managed care could increase the competition to obtain contracts with managed
care organizations and other third-party payors. There can be no assurance that
competition will not adversely effect the Company's operating results or its
ability to maintain or increase net revenues. As a consequence of the foregoing,
the Company may not be able to execute its business strategies or may be
required to significantly alter such strategies, either of which actions could
have a material adverse effect upon the Company's operating results or financial
condition. See "Business -- Business Strategy" and "Business -- Competition."

REIMBURSEMENT RISK

The Company generally receives payment directly from the patient for its
aesthetic elective services at the time of the service. In those instances where
the patient is unable to pay at the time of the service, the Company will
invoice the patient. If the invoice is not paid, the account is subject to
write-off as an uncollectible account. The Company relies almost exclusively on
third party payors for payment for its medical surgical services. If the claim
is invoiced to a noncontracted payor, (i.e., a noncontracted managed

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<PAGE> 9

care plan or an indemnity plan), the claim is subject to denial by the payor.
Denial of reimbursement may occur, among other reasons, because of the claim
examiner's lack of understanding regarding the Company's services or the lack of
a contractual arrangement with a managed care company. To the extent any third
party payor ultimately fails to recognize or accept the Company's services as
being reimbursable, the Company may not be able to collect fees for its
services. In addition, the health care industry is experiencing a trend toward
cost containment, and third-party payors are seeking to reduce the cost and
control the utilization of health care services and to negotiate reduced payment
schedules with service providers. Reduced payment schedules could result in
lower revenues for the Company. There can be no assurance that the Company will
be able to negotiate satisfactory arrangements with managed care organizations
or other third-party payors under such conditions, or at all. See
"Business -- Business Strategy -- Continuing the Development of Managed Care
Contracts."

DEPENDENCE ON KEY PERSONNEL

The Company's future performance is substantially dependent upon the
continued services of its senior management and other key personnel. Because the
Company has a relatively small number of employees, its dependence on retaining
its employees is particularly significant. The Company's success will depend, in
part, on its ability to attract and retain qualified management and professional
personnel. Competition for such personnel in the health care industry is
intense. In addition, there can be no assurance that the Company's current
employees will continue to work for the Company. The loss of the services of one
or more of the Company's key employees could adversely affect the Company's
operating results or financial condition. Further, the Company's growth in
revenues has resulted, to a significant degree, from the hiring and training of
new field personnel. The Company's continued growth will depend, in part, on its
ability to attract and retain high quality field and other personnel. The
Company may need to grant additional stock options to key employees and to
provide similar or other forms of incentive compensation to attract and retain
key personnel. See "Management."

REGULATION OF AND CHANGE IN THE HEALTH CARE INDUSTRY

The health care industry is subject to extensive federal and state
regulation. The Company's services generally are not directly subject to health
care rules or regulations, although such rules and regulations apply to the
equipment provided to physicians by the Company and to the medical personnel
utilizing the Company's services and products and therefore may indirectly
affect the Company's business. In addition, promulgation of new laws and
regulations, or changes in or reinterpretations of existing laws or regulations,
may directly or indirectly affect the Company's business, operating results or
financial condition. Further, the Company's services involve the handling of
chemical and biological substances, thereby subjecting the Company to certain
labor and environmental regulations. See "-- Hazardous Materials." There can be
no assurance that a review of the Company's operations by courts or regulatory
authorities will not result in a determination that could adversely affect the
operations of the Company.

The manufacturers of medical equipment utilized by the Company are subject
to extensive regulation by the FDA. Failure of such manufacturers to obtain FDA
approval for new technologies which the Company wishes to offer may adversely
affect the Company's plans for future expansion. In addition, failure of medical
equipment manufacturers to comply with FDA regulations could result in the loss
of approval by the FDA of medical equipment utilized by the Company, which could
adversely affect the Company's operating results or financial condition.

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<PAGE> 10

the corporate practice of medicine except by professional medical corporations
or associations. Several states in which the Company operates also prohibit
physicians from splitting fees with non-physicians. Although the Company has
attempted to structure its business relations with physician groups to comply
with the Stark II Legislation, the Fraud and Abuse Statutes, and the state
corporate-practice-of-medicine and fee-splitting laws, there can be no assurance
that such laws will ultimately be interpreted in a manner consistent with the
Company's practices or that other laws or regulations will not be enacted in the
future which could have a material adverse effect on the Company's operating
results or financial condition.

While the Company does not currently derive any of its net revenues from
Medicare or Medicaid programs, and therefore it is not subject to such federal
legislation, there can be no assurance that in the future that: (i) future
legislation may not be expanded to include health care services other than those
subject to Medicare or Medicaid reimbursement, (ii) the Company will not derive
net revenues from Medicare or Medicaid reimbursements, or (iii) that managed
care providers with which the Company has contracts will not contract with
Medicare or Medicaid.

Certain of the states in which the Company currently operates or may
operate in the future have laws which prohibit physicians who have financial
relationships with an entity that provides health care services from referring
patients to that entity and that prohibit arrangements which provide
remuneration to physicians in order to induce the referral of business. Possible
sanctions for violation of these laws include civil monetary penalties,
forfeiture of amounts collected in violation of such laws and the requirement
that the Company discontinue the prohibited activity. Although the Company
believes it has structured its existing business relations with physician groups
to comply with these laws, there can be no assurance that such laws will be
interpreted in a manner consistent with the Company's practices. Such laws in
states where the Company may conduct operations in the future could prohibit the
Company from structuring its business relations with physician groups in the
same manner in which it conducts its current operations. Accordingly, such
prohibitions could adversely effect the future growth of the Company.

In addition, there can be no assurance that the regulatory environment in
which the Company operates will not change significantly in the future, which
change could adversely affect the Company's operations, financial condition,
business opportunities or future expansion. As consolidation among physician
provider groups continues and provider networks continue to be created,
purchasing decisions may shift to persons with whom the Company has not had
prior contact. There can be no assurance that the Company will be able to
maintain its physician, payor or manufacturer relationships under such
circumstances. See "-- Risk of Acquiring Advanced Technology," "-- Competition"
and "Business -- Government Regulation."

POTENTIAL EXPOSURE TO LIABILITY

Physicians, hospitals and other providers in the health care industry are
subject to lawsuits which may allege medical malpractice or other claims. Many
of these lawsuits result in substantial defense costs and judgments or
settlements. The Company does not engage in the practice of medicine, nor does
it control the practice of medicine by physicians utilizing its services or
their compliance with regulatory requirements directly applicable to such
physicians or physician groups. However, the services provided by the Company to
physicians could give rise to liability claims. The primary sources of potential
liability include actions by technicians in the set-up, monitoring and removal
of Company equipment, and the establishment by the Company of protocols
regarding the use of its equipment, instruments and disposables. The Company
maintains professional and general liability insurance in amounts deemed
appropriate by management. Although the Company has to date not been a party to
any material litigation, including litigation relating to the practice of
medicine, there can be no assurance that the Company will not become involved in
such litigation in the future, that any claim or claims arising from such
litigation will not exceed the Company's insurance coverage or that such
coverage will continue to be available. See "Business -- Insurance."

HAZARDOUS MATERIALS

The Company's services involve the handling of chemical and biological
substances, some of which may be considered contaminated, hazardous or toxic.
The Company is subject to state and federal laws that regulate labor and
environmental matters such as the handling and disposal of regulated medical
wastes, the release of pollutants and contaminants into the air and water, and
the protection of employees who may be

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<PAGE> 11

exposed to blood or other potentially infectious material. In particular, the
Company is subject to Occupational Safety and Health Administration regulations
governing bloodborne and airborne pathogens and hazard communications. Further,
the use and operation of lasers is subject to state regulation. The Company
believes it is in substantial compliance with all applicable material labor and
environmental laws. However, there can be no assurance that there will be no
environmental matters for which the Company might be liable in the future. In
addition, future regulatory action, as well as compliance with future laws
governing the handling and disposition of hazardous materials may require the
Company to incur costs that could have a material adverse effect on the
Company's financial condition and results of operations.

CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS

Following the consummation of the Offering, the directors and executive
officers of the Company will beneficially own approximately 45.7% of the
outstanding shares of Common Stock of the Company. Although such directors and
executive officers do not have any arrangements or understandings among
themselves with respect to the voting of the shares of Common Stock beneficially
owned by them, acting together such persons may be able to effectively control
the Company and direct its affairs and business, including making determinations
with respect to a change in control of the Company, future issuance of Common
Stock or other securities by the Company, declaration of dividends on the Common
Stock and the election of directors. Such control by such existing shareholders
could have the effect of delaying, deferring or preventing a change of control
of the Company which could deprive the Company's shareholders of the opportunity
to sell their shares of Common Stock at prices higher than prevailing market
prices. See "Principal Shareholders."

FLUCTUATIONS IN QUARTERLY RESULTS

The Company's quarterly revenues and operating results have varied
significantly in the past and may continue to do so in the future. Quarterly
revenues and operating results will depend upon, among other factors: (i)
seasonal demand for the Company's services, (ii) the timing of new service
introductions by the Company, (iii) the timing of regulatory and third-party
reimbursement approvals, (iv) the timing of acquisitions or entry into new
markets, and (v) the timing of expenditures for medical equipment. Accordingly,
period-to-period comparisons of the Company's revenues and operating results
should not be relied upon as an indication of future performance, and the
results of any quarterly period may not be indicative of the results for a full
year. See "Selected Consolidated Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK
PRICE

Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market for the
Common Stock will develop or be sustained after the Offering. The initial public
offering price of the Common Stock will be determined by negotiations between
the Company and the Underwriters and may not be indicative of the market price
of the Common Stock after the Offering. From time to time after the Offering,
there may be significant volatility in the market price for the Common Stock.
Quarterly operating results of the Company, changes in general conditions in the
economy or the health care industry, or other developments affecting the Company
or its competitors, could cause the market price of the Common Stock to
fluctuate substantially. The equity markets have, on occasion, experienced
significant price and volume fluctuations that have affected the market prices
for many companies' securities and that have often been unrelated to the
operating performance of such companies. Any fluctuations that occur in the
equity markets following consummation of the Offering may adversely affect the
market price of the Common Stock. See "Underwriting."

ADVERSE IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE

Sale of shares of Common Stock (including shares issued upon the exercise
of outstanding options and warrants) in the public market after the Offering, or
the perception that such sales could occur, could adversely affect the market
price of the Common Stock. Such sales also might make it more difficult for the
Company to sell equity or equity-related securities in the future at times and
prices that the Company deems appropriate. Upon consummation of the Offering,
the Company will have 5,623,596 shares of Common Stock outstanding. The
2,000,000 shares offered hereby will be freely tradable without restriction,
unless purchased by an affiliate of the Company. The remaining 3,623,596 shares
are restricted securities (the "Restricted Shares") that may be sold only if
registered under the Securities Act of 1933, as amended (the "Securities

10
<PAGE> 12

Act"), or sold in accordance with an applicable exemption from registration,
such as Rule 144 promulgated under the Securities Act ("Rule 144"). Of these
shares, less than 2% will be available for sale upon the effective date of the
Registration Statement (the "Effective Date") of which this Prospectus is a
part. Beginning 180 days after the Effective Date, the remainder of these
Restricted Shares will become eligible for sale under Rule 144 or Rule 701
promulgated under the Securities Act ("Rule 701") upon the expiration of
agreements not to sell such shares (the "Lock-up Agreements"). In addition,
348,103 shares subject to currently vested stock options and warrants will
become eligible for sale in the public market upon the expiration of the Lock-up
Agreements. Further, the holders of 1,713,198 shares of Common Stock have the
right to demand that the Company register shares of Common Stock under the
Securities Act, subject to certain conditions. Pursuant to the Lock-up
Agreements, such persons have agreed not to exercise such rights for a period of
one year following the Effective Date, without the prior written consent of Bear
Stearns & Co., Inc. See "Underwriting" and "Shares Eligible for Future Sale."

ANTI-TAKEOVER PROVISIONS

Concurrent with the completion of the Offering, the Company's Restated and
Amended Articles of Incorporation and Restated and Amended Bylaws will provide
for the Board of Directors to be divided into three classes of as equal size as
possible, with the term of each class expiring in consecutive years with
approximately one-third of the Board of Directors being elected each year.
Holders of Common Stock will not be entitled to vote cumulatively for directors,
but directors will be permitted to be removed with or without cause by the
affirmative vote of at least two-thirds of the outstanding shares of stock of
the Company entitled to vote thereon. The Company's Restated and Amended
Articles of Incorporation and Restated and Amended Bylaws will also provide that
the Company's Bylaws may be adopted, amended, or repealed only by the Board of
Directors and that the number of directors shall be fixed from time to time by
resolution of the Board of Directors. In addition, a calling of a special
meeting by the shareholders of the Company will require the written request of
holders of at least 50% of all the outstanding shares of the Company entitled to
vote. Shareholders of the Company entitled to take action at annual or special
meetings of the shareholders may take action by written consent only with the
unanimous written consent of all the shareholders entitled to vote thereon.
Concurrent with the completion of the Offering, the Company's Restated and
Amended Articles of Incorporation and Restated and Amended Bylaws will also
authorize shares of Preferred Stock with respect to which the Board of Directors
will have the power to fix the rights, preferences, privileges, and restrictions
without any further vote or action by the shareholder. The provisions of the
Company's Restated and Amended Articles of Incorporation and Restated and
Amended Bylaws may have the effect of delaying, deferring or preventing a change
in control of the Company, which could deprive the Company's shareholders of the
opportunity to sell their shares of Common Stock at prices higher than
prevailing market prices. Such provisions could also limit the price that
certain investors might be willing to pay in the future for shares of Common
Stock. See "Description of Capital Stock -- Certain Anti-Takeover Provisions."

BROAD DISCRETION WITH RESPECT TO ALLOCATION OF NET PROCEEDS

The Company expects to use a portion of the net proceeds of the Offering to
make capital expenditures, including the acquisition of medical equipment and to
hire additional personnel. The Company has not yet identified the specific uses
for such net proceeds and will, therefore, retain broad discretion as to the
allocation of a significant portion of the net proceeds of the Offering. Pending
such uses, the Company intends to invest the net proceeds in short-term,
interest-bearing, investment-grade securities. See "Use of Proceeds."

SUBSTANTIAL DILUTION AND ABSENCE OF DIVIDENDS

The purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value equal to $7.00
per share of Common Stock as a result of the Offering. In the event the Company
issues additional Common Stock in the future, including shares that may be
issued in connection with future acquisitions or upon the exercise of
outstanding options or warrants, purchasers of Common Stock in the Offering may
experience further dilution in the net tangible book value per share of the
Common Stock of the Company. See "Dilution." Certain of the Company's debt
agreements prohibit it from paying cash dividends on its Common Stock. The
Company has never paid any cash dividends on its Common Stock and it does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
See "Dividend Policy."

11
<PAGE> 13

THE COMPANY

The Company was incorporated under Texas law in August 1989. The Company's
principal executive offices are located at 2445 Gateway Drive, Suite 150,
Irving, Texas 75063. The Company's telephone number is (972) 580-8999.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the Common Stock offered
hereby will be $19,960,000 ($23,029,000 if the Underwriters' over-allotment
option is exercised in full) after deducting underwriting discounts and
commissions, and estimated Offering expenses payable by the Company.

The Company intends to use approximately $3.4 million of the net proceeds
to repay indebtedness under the Company's term loans and revolving credit
facility, which loans bear interest at rates ranging from 0.5% to 1.5% over the
prime rate (which rates ranged from 8.75% to 9.75% as of June 30, 1996) and have
maturity dates ranging from May 30, 1997 to May 15, 2000. The proceeds of such
loans were used to retire indebtedness of the Company and acquire medical
equipment. See "Certain Transactions." The Company anticipates that it will also
use approximately $5.9 million of the net proceeds of the Offering to acquire
additional medical equipment during the remainder of 1996 and 1997. In addition,
the Company estimates that it will use approximately $3.5 million of the net
proceeds of the Offering to employ and train additional corporate and field
personnel. Due to the timing of possible acquisitions, the availability of new
technology and the results of Company operations, there can be no assurance as
to the amount and timing of all such expenditures. In the event such
contingencies cause a deviation in these planned expenditures, the redirected
proceeds and the remaining net proceeds will be used for working capital and
general corporate purposes, including possible acquisitions. Various factors,
including but not limited to the terms of strategic alliances currently in
negotiation, products currently awaiting FDA approvals, and other business
factors may affect the nature of all of the Company's capital expenditures. The
Company currently has no agreement or understanding with respect to any future
acquisitions. Pending such uses, the Company intends to invest the net proceeds
of the Offering in short-term, interest-bearing, investment-grade securities.

DIVIDEND POLICY

The Company has never paid any cash dividends on its Common Stock. The
Company does not anticipate paying cash dividends on its Common Stock in the
foreseeable future and intends to continue its present policy of retaining
earnings for use in the operations of the Company.

12
<PAGE> 14

DILUTION

The pro forma net tangible book value of the Company as of June 30, 1996,
after giving effect to the conversion of all outstanding shares of Convertible
Preferred Stock into Common Stock on a 1.561 to 1 basis upon consummation of the
Offering, was $2,573,677 or $0.71 per share of Common Stock. Pro forma net
tangible book value per share is determined by dividing the Company's total net
tangible book value (total tangible assets less total liabilities) by the pro
forma number of shares of Common Stock outstanding after giving effect to such
conversion. Without taking into account any other changes in such pro forma net
tangible book value after June 30, 1996, other than to give effect to the sale
of 2,000,000 shares of Common Stock offered hereby at $11.00 per share and the
application of the estimated net proceeds therefrom, the pro forma net tangible
book value of the Company as of June 30, 1996 would have been $22,533,677
million or $4.00 per share. This represents an immediate increase in pro forma
net tangible book value of $3.29 per share to existing shareholders and an
immediate dilution of $7.00 per share to new investors purchasing Common Stock
in the Offering. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share(1).......................... $11.00
------
Pro forma net tangible book value per share before the Offering... $ 0.71
------
Increase per share attributable to the Offering................... 3.29
------
Pro forma net tangible book value per share after the Offering...... 4.00
------
Dilution per share to new investors(2).............................. $ 7.00
======
</TABLE>

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

(1) Initial offering price before deduction of underwriting discounts and
commissions and estimated expenses of the Offering to be paid by the
Company.

(2) As of June 30, 1996, there were options outstanding to purchase a total of
902,315 shares of Common Stock (60,106 of which are exercisable at the
initial offering price of $11.00) at a weighted average exercise price of
$2.62 per share and warrants outstanding to purchase a total of 49,328
shares of Common Stock at a weighted average exercise price of $1.69 per
share. To the extent that any of such options and warrants are exercised,
there will be further dilution to new investors. See "Management --
Incentive Plan."

The following table summarizes, as of June 30, 1996, the difference between
the existing shareholders and the new investors with respect to the number of
shares of Common Stock purchased (or to be purchased) from the Company, the
total consideration paid (or to be paid) and the average price per share paid
(or to be paid) by the existing shareholders and the new investors, including
net proceeds from the Offering:

<TABLE>
<CAPTION>
PRO FORMA
SHARES PURCHASED(1)(2) TOTAL CONSIDERATION(2) AVERAGE
------------------------ -------------------------- PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
--------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.............. 3,632,069 64.4% $ 3,393,807 13.4% $ 0.93
New investors...................... 2,000,000 35.6 22,000,000 86.6 11.00
--------- ----- ----------- -----
Total.................... 5,632,069 100.0% $25,393,807 100.0%
========= ===== =========== =====
</TABLE>

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

(1) Assumes no exercise of outstanding options and warrants. See
"Management -- Incentive Plan."

(2) Gives effect to the conversion of the Convertible Preferred Stock into
Common Stock upon consummation of the Offering.

13
<PAGE> 15

CAPITALIZATION

The following table sets forth: (i) the total capitalization of the Company
as of June 30, 1996, (ii) the pro forma capitalization of the Company as of June
30, 1996, reflecting the conversion of the outstanding shares of Convertible
Preferred Stock into Common Stock, and (iii) such pro forma capitalization as
adjusted to give effect to the sale of the 2,000,000 shares of Common Stock
offered hereby at $11.00 per share and the application of a portion of the
estimated net proceeds therefrom to repay approximately $3.4 million of
indebtedness.

<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt (including current portion of long-term
debt)(1)............................................... $ 700 $ 700 $ --
Long-term debt (excluding current portion)(1)............ 2,655 2,655 --
------ ------
Total debt..................................... 3,356 3,356 --
------ ------
Shareholders' equity:
Preferred Stock, par value $0.002; authorized:
2,000,000 shares actual, 5,000,000 shares pro forma
and pro forma as adjusted; issued and outstanding:
797,500 actual, no shares pro forma and pro forma as
adjusted(2)......................................... 2 -- --
Common Stock, par value $0.002; authorized 10,000,000
shares actual, 30,000,000 shares pro forma and pro
forma as adjusted; issued and outstanding: 2,387,172
shares actual, 3,632,069 shares pro forma and
5,632,069 shares pro forma as adjusted(3)........... 5 7 11
Capital in excess of par value......................... 2,918 2,918 22,878
Accumulated deficit.................................... (157) (157) (157)
Treasury shares at cost, 17,230 shares of Common
Stock............................................... (9) (9) (9)
------ ------ -------
Total shareholders' equity..................... 2,758 2,758 22,718
------ ------ -------
Total capitalization........................... $6,114 $6,114 $22,718
====== ====== =======
</TABLE>

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

(1) Excludes capital lease obligations.

(2) Includes 435,000 shares of Series A Convertible Preferred Stock issued and
outstanding and 362,500 shares of Series B Convertible Preferred Stock
issued and outstanding.

(3) Excludes 902,315 shares of Common Stock issuable upon the exercise of
outstanding stock options granted under the Incentive Plan, (60,106 of which
are exercisable at the initial offering price of $11.00) at a weighted
average exercise price of $2.62 per share, 294,436 shares of Common Stock
reserved for future option grants or rewards under the Incentive Plan and
49,328 shares of Common Stock issuable upon the exercise of outstanding
warrants at a weighted average exercise price of $1.69 per share. See
"Management -- Incentive Plan" and "Description of Capital
Stock -- Warrants."

14
<PAGE> 16

SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data for the
Company for the periods and at the dates indicated. The Company's statement of
operations data for each of the years in the four year period ended December 31,
1995 and its balance sheet data as of December 31, 1992, 1993, 1994 and 1995 are
derived from the Company's financial statements which have been audited by
Coopers & Lybrand L.L.P., independent certified public accountants. The
Company's statement of operations data for the year ended December 31, 1991 and
the balance sheet data as of December 31, 1991, as well as the Company's
statement of operations data for each of the six months ended June 30, 1995 and
1996, and its balance sheet data as of June 30, 1995 and 1996, are derived from
the Company's unaudited financial statements, which in the opinion of management
reflect all adjustments, consisting of only normal recurring adjustments,
necessary for a fair presentation of the information set forth therein. Results
for the six months ended June 30, 1996 are not necessarily indicative of the
results that may be expected for the full fiscal year. The selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and related notes included elsewhere herein.

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Revenues........................................... $1,827 $3,148 $3,720 $5,262 $11,177 $4,854 $8,395
Costs and Expenses:
Salaries and benefits................................ 980 1,358 1,643 2,005 3,721 1,686 2,749
Selling, general, and administrative................. 601 1,089 1,214 1,817 3,620 1,539 2,801
Depreciation and amortization........................ 193 283 333 293 719 265 653
Provision for uncollectible accounts................. 400 605 551 781 1,885 743 1,423
------ ------ ------ ------ ------- ------ ------
Total costs and expenses....................... 2,174 3,335 3,741 4,896 9,945 4,233 7,625
------ ------ ------ ------ ------- ------ ------
Operating income (loss)........................ (347) (187) (21) 365 1,232 621 770
Other (income) expense:
Interest income and other, net....................... (1) (3) (2) (6) 12 10 (12)
Interest expense..................................... 126 143 158 179 247 131 151
------ ------ ------ ------ ------- ------ ------
Income (loss) before income taxes.............. (472) (327) (177) 192 973 480 632
Income tax expense (benefit)........................... -- 26 (26) -- 395 195 263
------ ------ ------ ------ ------- ------ ------
Net income (loss).............................. $(472) $(353) $(150) $192 $578 $285 $369
====== ====== ====== ====== ======= ====== ======
Net income (loss) applicable to common stock........... $(472) $(353) $(225) $117 $311 $18 $282
====== ====== ====== ====== ======= ====== ======
Earnings (loss) per share.............................. $(.20) $(.14) $(.09) $.04 $.10 $.01 $.08
====== ====== ====== ====== ======= ====== ======
Weighted average number of common shares and common
share equivalents.................................... 2,349 2,512 2,523 2,605 3,005 2,722 3,547
Dividends declared on convertible preferred stock...... $0 $0 $75 $75 $87 $87 $87
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
----------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------ ------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................................. $ 12 $ 34 $ 101 $ 109 $ 1,409 $ 65 $ 1,432
Working capital...................................... 123 191 121 126 1,913 50 2,345
Total assets......................................... 839 1,382 1,544 2,698 6,443 4,098 8,931
Total debt and capital lease obligations............. 1,077 855 1,101 1,566 2,354 1,825 3,813
Convertible preferred stock.......................... -- 1 1 1 2 1 2
Retained earnings (deficit).......................... (793) (1,146) (1,297) (1,105) (526) (819) (157)
Total shareholders' equity........................... (548) 70 (154) 123 2,431 792 2,758
</TABLE>

15
<PAGE> 17

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Consolidated
Financial Statements and the notes thereto that appear elsewhere in this
Prospectus.

GENERAL

The Company commenced operations in Oklahoma in August 1989 by providing
medical surgical services to gynecologists in their offices. The Company's
initial focus was to develop contracts with managed care organizations and other
third-party payors and to expand into new markets. By the end of 1991, the
Company had operations in 14 states. The Company continued to expand its range
of services, and introduced during 1993 its second business line by offering
aesthetic elective services. Currently, the Company provides medical surgical
and aesthetic elective services in 40 states and Canada to a network of
approximately 2,500 physicians.

The Company has completed the following three acquisitions: (i) in October
1995, the Company acquired the assets of Mobile Surgical Services of Central
Florida, Inc., a company that offered medical equipment rental services in
central Florida; (ii) in March 1996, the Company acquired the assets of Maasai
Mobile Surgical Services, Inc., a company that offered medical equipment rental
services throughout Utah, Colorado, Washington, Arizona, Nevada and Oregon; and
(iii) in June 1996, the Company acquired the assets of Mobile Laser Services,
Inc., a company that offered medical equipment rental services in Illinois. All
of such acquisitions were accounted for under the purchase method and,
accordingly, are included in the Company's consolidated financial statements
from their respective dates of acquisition. See Note 14 of the Notes to
Consolidated Financial Statements.

The following table sets forth certain information regarding the Company's
net revenues generated from its medical surgical and aesthetic elective
services.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
-------------------------------------------------- ENDED
1991 1992 1993 1994 1995 JUNE 30, 1996
------ ------ ------ ------ ------ -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Medical Surgical Services:
Net revenues.................... $1,827 $3,148 $3,565 $4,189 $7,148 $ 4,416
Percentage of total net
revenues..................... 100% 100% 95.8% 79.6% 64.0% 52.6%
Aesthetic Elective Services:
Net revenues.................... -- -- $82 $863 $3,653 $ 3,783
Percentage of total net
revenues..................... -- -- 2.2% 16.4% 32.7% 45.1%
Other:
Net revenues.................... -- -- $73 $210 $376 $196
Percentage of total net
revenues..................... -- -- 2.0% 4.0% 3.3% 2.3%
</TABLE>

The net revenues generated by aesthetic elective procedures are derived
primarily from charges that are typically collected directly from the patient at
the time of service. The collection of such charges by the Company at the time
of service allows the Company to receive payment and to monitor the collection
of its charges thereby minimizing the likelihood of uncollected charges. In
addition, charges for aesthetic elective procedures generally are not subject to
reimbursement review by third-party payors. The charges for medical surgical
services may have a co-pay or deductible portion which is generally collected
from the patient at the time of service. The amount of co-pay or deductible
typically represents 20% or less of the total charges for a medical surgical
procedure, and although such co-pay or deductible portion for a medical surgical
procedure is collected directly from the patient, the Company has historically
experienced a higher percentage of uncollectible charges from patients who
undergo medical surgical procedures. A charge that becomes uncollectible from a
patient, whether such patient has undergone an aesthetic elective or a medical
surgical procedure, is written off as a bad debt. The remainder of the Company's
charges for a medical surgical procedure are submitted to third party payors,
such as managed care payors or indemnity carriers, for reimbursement directly to
the Company.

16
<PAGE> 18

The Company, as a courtesy to the patient, will submit the claim to the
patient's insurance company on the patient's behalf. When the insurance company
pays the claim, the money is applied against the patient's account. If the
insurance company denies the claim, an appeal will be filed with the insurance
company and a statement will be sent to the patient informing them of such
denial and subsequent appeal. If the insurance company denies the claim for a
second time, the patient will be sent a statement requesting payment in full.
The Company's policy is to collect the balance due from the patient and assist
the patient, upon request, in further appeal to the insurance company. If the
patient is unwilling to pay the balance, or if the Company is not able to locate
the patient, the account will be written off as a bad debt and the account
considered for referral to a collection agency.

The charges that the Company submits for reimbursement to a third party
payor are subject to reimbursement review, and potentially may be denied by such
third party payor. Although the Company has no basis for determining in advance
which specific claims may be denied, the Company does anticipate, based upon
historical experience with denied reimbursements, that a portion of its claims
will be subject to review and denied by non-contracted third-party payors. The
Company records the estimated expense of such denials as a Provision for
Uncollectible Accounts. Further, the Company only recognizes revenue when
collection is probable. Because charges for medical surgical procedures are
subject to reimbursement review and to uncollectibility from patients, the
Company has historically experienced a higher percentage of uncollectible
accounts on charges for medical surgical procedures. However, the Company has
not witnessed a significant trend with regard to the Provision for Uncollectible
Accounts for either aesthetic elective or medical surgical procedure charges.
The Company records a Provision for Uncollectible Accounts based upon current
trends in collections and write-offs experienced by the Company, on a market by
market basis.

The Company is currently developing new processes to reduce the likelihood
of denials of reimbursements. These processes include a more comprehensive
pre-certification and insurance verification policy. The Company is implementing
a new wide-area network information system to enhance controls over the
Company's pre-certification and verification processes, as well as to provide
for more timely feedback to Company collectors and field personnel, in order to
allow them to contact patients and third-party payors in a more timely fashion
should a denial occur.

RESULTS OF OPERATIONS

The following table sets forth certain statement of operations data
expressed as a percentage of net revenues for the periods indicated:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- -------------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0%
Salaries and benefits expense.......... 44.2 38.1 33.3 34.7 32.7
Selling, general and administrative
expense.............................. 32.6 34.5 32.4 31.7 33.4
Depreciation and amortization.......... 9.0 5.6 6.4 5.5 7.8
Provision for uncollectible
accounts............................. 14.8 14.8 16.9 15.3 16.9
Operating income (loss)................ (0.6) 6.9 11.0 12.8 9.2
Interest expense....................... 4.2 3.3 2.3 2.9 1.7
Income tax expense (benefit)........... (0.7) -- 3.5 4.0 3.1
Net income (loss)...................... (4.0) 3.7 5.2 5.9 4.4
</TABLE>

SIX MONTHS ENDED JUNE 30, 1996 AND 1995

NET REVENUES. Net revenues increased from $4.9 million to $8.4 million, an
increase of $3.5 million or 73%. This increase was attributable to the growth in
total procedure volume, which increased from 16,671 for the six months ended
June 30, 1995, to 32,909 for the six months ended June 30, 1996, an increase of
16,238 or 97%. Medical surgical procedures increased from 8,736 for the six
months ended June 30, 1995, to 12,690 for the six months ended June 30, 1996, an
increase of 3,954 or 45%, which contributed to 24% of the total

17
<PAGE> 19

increase in procedure volume. Aesthetic elective procedures increased from 7,935
for the six months ended June 30, 1995, to 20,219 for the six months ended June
30, 1996, an increase of 12,284 or 155%, which contributed to 76% of the total
increase in procedure volume.

The average net revenue per case decreased from $291 for the six months
ended June 30, 1995, to $255 for the six months ended June 30, 1996, a decrease
of $36 per case or 12%. This decrease was attributable to a change in case mix
with aesthetic elective procedures, which had a lower average net revenue per
case of $187, increasing as a percentage of total procedures from 48% for the
six months ended June 30, 1995, to 61% for the six months ended June 30, 1996.

SALARIES AND BENEFITS EXPENSE. Salaries and benefits expense increased from
$1.7 million for the six months ended June 30, 1995, to $2.7 million for the six
months ended June 30, 1996, an increase of $1.0 million or 63%. This increase
was due to the hiring of additional field and corporate personnel to support the
Company's growth in procedure volume. Total employees for the Company increased
from 77 on June 30, 1995, to 113 on June 30, 1996, an increase of 47%. Salaries
and benefits expense as a percentage of net revenues decreased from 34.7% to
32.7%.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased from $1.5 million for the six months ended June
30, 1995, to $2.8 million for the six months ended June 30, 1996, an increase of
$1.3 million or 82%. This increase was primarily due to an increase in operating
lease expense from $175,000 for the six months ended June 30, 1995, to $654,000
for the six months ended June 30, 1996, an increase of $479,000 or 274%. This
was related to a laser manufacturer revenue sharing arrangement whereby the
manufacturer receives a fixed percentage of revenues generated using lasers
covered by such agreement. The Company had in service 13 such shared lasers at
the end of June 30, 1996 compared to 7 such shared lasers at the end of June 30,
1995. In addition, vehicle expense increased from $246,000 for the six months
ended June 30, 1995 to $535,000 for the six months ended June 30, 1996, an
increase of $289,000 or 117%. This increase resulted from the increase in field
personnel from 55 as of June 30, 1995, to 79 as of June 30, 1996, each of whom
is supplied with a van for the delivery of equipment to physicians' offices.

Repair and maintenance expense increased from $72,000 for the six months
ended June 30, 1995 to $260,000 for the six months ended June 30, 1996, an
increase of $188,000 or 261%. This increase was due primarily to annual service
contracts on pulsed dye lasers.

Communications expense increased from $185,000 for the six months ended
June 30, 1995 to $281,000 for the six months ended June 30, 1996, an increase of
$96,000 or 52%. This increase was related to the hiring of additional field
personnel. Selling, general and administrative expense as a percentage of net
revenue increased from 31.7% to 33.4% primarily as a result of increases in
operating lease expense as a percent of net revenues.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$265,000 for the six months ended June 30, 1995, to $653,000 for the six months
ended June 30, 1996, an increase of $388,000 or 146%. This increase was due to
the addition of $2.6 million in capital equipment which is depreciated over
three years with no residual value, utilizing the straight line method during
the six months ended June 30, 1996.

PROVISION FOR UNCOLLECTIBLE ACCOUNTS. Provision for uncollectible accounts
increased from $743,000 for the six months ended June 30, 1995, to $1.4 million
for the six months ended June 30, 1996, an increase of $680,000 or 91%. This
increase was primarily due to the increase in revenues. As a percentage of net
revenue, provision for uncollectible accounts increased from 15.3% to 16.9%.
This increase was primarily due to an increase in provisions relating to medical
surgical revenues.

OPERATING INCOME (LOSS). Operating income increased from $621,000 for the
six months ended June 30, 1995, to $770,000 for the six months ended June 30,
1996, an increase of $149,000 or 24%. As a percentage of net revenues, operating
income decreased from 12.8% for the six months ended June 30, 1995, to 9.2% for
the six months ended June 30, 1996. This decrease was primarily due to an
increase in selling, general and administrative expense, provision for
uncollectible accounts and depreciation of new capital as a percentage of net
revenues.

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<PAGE> 20

INTEREST EXPENSE. Interest expense increased from $131,000 for the six
months ended June 30, 1995, to $151,000 for the six months ended June 30, 1996,
an increase of $20,000 or 15%. The Company's average debt balance increased from
$1.7 million for the six months ended June 30, 1995, to $3.1 million for the six
months ended June 30, 1996.

INCOME TAX PROVISION (BENEFIT). Income tax provision increased from
$195,000 for the six months ended June 30, 1995, to $263,000 for the six months
ended June 30, 1996, an increase of $68,000 or 35%. The income tax provision
increased primarily as a result of income before income taxes increasing from
$480,000 for the six months ended June 30, 1995, to $632,000 for the six months
ended June 30, 1996. The Company's effective tax rate increased from 40.6% for
the six months ended June 30, 1995, to 41.6% for the six months ended June 30,
1996.

NET INCOME (LOSS). As a result of the items discussed above, the Company's
net income increased from $285,000 for the six months ended June 30, 1995, to
$369,000 for the six months ended June 30, 1996.

YEARS ENDED DECEMBER 31, 1995 AND 1994

NET REVENUES. Net revenues increased from $5.3 million for the year ended
December 31, 1994, to $11.2 million for the year ended December 31, 1995, an
increase of $5.9 million or 112%. This increase was attributable to growth in
procedure volume, which increased from 15,153 for the year ended December 31,
1994, to 39,640 for the year ended December 31, 1995, an increase of 24,487 or
162%. Medical surgical procedures increased from 9,656 for the year ended
December 31, 1994, to 19,509 for the year ended December 31, 1995, an increase
of 9,853 or 102%, which contributed to 40% of the total increase in procedure
volume. Aesthetic elective procedures increased from 5,497 for the year ended
December 31, 1994, to 20,131 for the year ended December 31, 1995, an increase
of 14,634 or 266%.

The average net revenue per case decreased from $347 for the year ended
December 31, 1994, to $282 per case for the year ended December 31, 1995, a
decrease of $65 or 19%. This decrease was attributable to a change in case mix
to include a larger percentage of aesthetic elective procedures. The average net
revenue per case for aesthetic elective procedures was $181 during 1995,
compared to average net revenue per case for medical surgical procedures of
$366.

SALARIES AND BENEFITS EXPENSE. Salaries and benefits expense increased from
$2.0 million for the year ended December 31, 1994, to $3.7 million for the year
ended December 31, 1995, an increase of $1.7 million or 86%. This increase was
primarily attributable to the hiring of additional employees to support the
growth and capacity in the Company's procedure volume, the introduction of two
new procedures, and an increase in total number of employees from 50 as of
December 31, 1994, to 81 at December 31, 1995, an increase of 62%. Salaries and
benefits expense as a percentage of net revenues decreased from 38.1% to 33.3%
due to increases in net revenues exceeding the increases in salaries and
benefits expense.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased from $1.8 million for the year ended December
31, 1994, to $3.6 million for the year ended December 31, 1995, an increase of
$1.8 million or 99%. A portion of the increase was due to an increase in
operating lease expense from $159,000 for the year ended December 31, 1994, to
$599,000 for the year ended December 31, 1995, an increase of $440,000 or 277%,
which was attributable to a laser manufacturer revenue sharing arrangement.
There were nine lasers subject to such agreement as of December 31, 1995. In
1994, the Company did not have any lasers subject to such agreement.

Vehicle expense increased from $306,000 for the year ended December 31,
1994 to $641,000 for the year ended December 31, 1995, an increase of $335,000
or 109%. This increase resulted from the increase in field personnel from 34 as
of December 31, 1994, to 66 as of December 31, 1995, each of whom is supplied a
van for the delivery of equipment to physicians' offices.

Communications expense increased from $246,000 for the year ended December
31, 1994 to $426,000 for the year ended December 31, 1995, an increase of
$180,000 or 73%. This increase was due to the hiring of additional field
personnel. Selling, general and administrative expense as a percentage of net
revenues decreased slightly from 34.5% for the year ended December 31, 1994, to
32.4% for the year ended

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<PAGE> 21

December 31, 1995, due to increases in net revenues exceeding the increases in
selling, general, and administrative expense.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased from
$293,000 for the year ended December 31, 1994, to $719,000 for the year ended
December 31, 1995, an increase of $426,000 or 145%, resulting primarily from the
addition of approximately $2.0 million in new medical equipment which is
depreciated over three years, utilizing the straight-line method, during the
year ended December 31, 1995.

PROVISION FOR UNCOLLECTIBLE ACCOUNTS. Provision for uncollectible accounts
increased from $781,000 for the year ended December 31, 1994, to $1.9 million
for the year ended December 31, 1995, an increase of $1.1 million or 141%. This
increase was primarily due to the increase in revenues. Additionally, a new
medical surgical procedure was introduced in 1995 that did not receive immediate
payor acceptance. As a percentage of net revenue, provision for uncollectible
accounts increased from 14.8% for the year ended December 31, 1994, to 16.9% for
the year ended December 31, 1995.

OPERATING INCOME (LOSS). Operating income increased from $365,000 for the
year ended December 31, 1994, to $1.2 million for the year ended December 31,
1995, an increase of $867,000 or 237%. As a percentage of net revenues,
operating income increased from 6.9% for the year ended December 31, 1994, to
11.0% for the year ended December 31, 1995. This increase was primarily the
result of the Company's ability to increase net revenue per employee during
1995.

INTEREST EXPENSE. Interest expense increased from $179,000 for the year
ended December 31, 1994, to $247,000 for the year ended December 31, 1995, an
increase of $68,000 or 38%. This increase was due to an increase in the average
debt outstanding from $1.3 million for the year ended December 31, 1994, to $2.0
million for the year ended December 31, 1995.

INCOME TAX PROVISION (BENEFIT). Income tax provision was $395,000 for the
year ended December 31, 1995. The Company did not record an income tax provision
for the year ended December 31, 1994. The Company's effective tax rate increased
to 40.6% for the year ended December 31, 1995, due to the utilization of the net
operating loss carryforward during 1994.

NET INCOME. As a result of the items discussed above, the Company's net
income increased from $192,000 for the year ended December 31, 1994, to $578,000
for the year ended December 31, 1995.

YEARS ENDED DECEMBER 31, 1994 AND 1993

NET REVENUES. Net revenues increased from $3.7 million for the year ended
December 31, 1993, to $5.3 million for the year ended December 31, 1994, an
increase of $1.6 million or 41%. This increase was attributable to growth in
procedure volume, which increased from 9,154 for the year ended December 31,
1993, to 15,153 for the year ended December 31, 1994, an increase of 5,999 or
66%. Medical surgical procedures increased from 8,494 for the year ended
December 31, 1993, to 9,656 for the year ended December 31, 1994, an increase of
1,162 or 14%, which contributed to 19% of the total increase in procedure
volume. Aesthetic elective procedures increased from 660 for the year ended
December 31, 1993, to 5,497 for the year ended December 31, 1994, an increase of
4,837 or 733%.

Average net revenue per case decreased from $406 for the year ended
December 31, 1993, to $347 for the year ended December 31, 1994, a decrease of
$59 or 15%. This decrease was attributable to a change in case mix to include a
larger percentage of aesthetic elective procedures. The average net revenue per
case for aesthetic elective procedures was $133 during the year ended December
31, 1994, compared to average net revenue per case for medical surgical
procedures of $448.

SALARIES AND BENEFITS EXPENSE. Salaries and benefits expense increased from
$1.6 million for the year ended December 31, 1993, to $2.0 million for the year
ended December 31, 1994, an increase of $362,000 or 22%. This increase was due
to an increase in the number of employees from 41 as of December 31, 1993, to 50
as of December 31, 1994, an increase of 22% to support the growth in the
Company's procedure volume. Salaries and benefits expense as a percentage of net
revenues decreased from 44.2% to 38.1% due to increases in net revenues
exceeding the increases in salaries and benefits expense.

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<PAGE> 22

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administration expenses increased from $1.2 million for the year ended December
31, 1993, to $1.8 million for the year ended December 31, 1994, an increase of
$603,000 or 50%. This increase was primarily due to an increase in operating
lease expense from $29,000 for the year ended December 31, 1993 to $159,000 for
the year ended December 31, 1994, an increase of $130,000 or 448% which was
attributable to five operating leases of Q-switched yag lasers in 1994.

Vehicle expense increased from $226,000 for the year ended December 31,
1993 to $306,000 for the year ended December 31, 1994, an increase of $80,000 or
35%. This increase resulted from the increase in field personnel, each of whom
is supplied a van for the delivery of equipment to physicians' offices,

The remaining $393,000 increase in selling, general and administrative
expenses was due to increases in several expense components which supported the
growth in procedure volume. Selling, general and administrative expenses as a
percentage of net revenues increased from 32.6% for the year ended December 31,
1993, to 34.5% for the year ended December 31, 1994, primarily as a result of
increases in professional fees.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased from
$333,000 for the year ended December 31, 1993, to $293,000 for the year ended
December 31, 1994, a decrease of $40,000 or 12%. This decrease was the result of
several units becoming fully depreciated during 1994, which was partially offset
by the addition of $744,000 in new medical equipment which is depreciated over
three years with no residual value, utilizing the straight line method, during
the year ended December 31, 1994.

PROVISIONS FOR UNCOLLECTIBLE ACCOUNTS. Provision for uncollectible accounts
increased from $551,000 for the year ended December 31, 1993, to $781,000 for
the year ended December 31, 1994, an increase of $230,000 or 42%. This increase
was primarily due to the increase in revenues. As a percentage of net revenue,
provision for uncollectible accounts was 14.8% for the years ended December 31,
1993 and 1994, respectively.

OPERATING INCOME (LOSS). Operating income improved from an operating loss
of $21,000 for the year ended December 31, 1993, to operating income of $365,000
for the year ended December 31, 1994, an increase of $386,000. As a percentage
of net revenue, operating income (loss) increased from (0.6%) for the year ended
December 31, 1993, to 6.9% for the year ended December 31, 1994. This increase
was primarily the result of the Company's ability to increase net revenue per
employee during 1994.

INTEREST EXPENSE. Interest expense increased from $158,000 for the year
ended December 31, 1993, to $179,000 for the year ended December 31, 1994, an
increase of $21,000 or 13%. This increase was primarily due to the addition of
$600,000 of capital leases for medical equipment.

NET INCOME (LOSS). As a result of the items discussed above, the Company's
net income improved from a net loss of $150,000 for the year ended December 31,
1993, to net income of $192,000 for the year ended December 31, 1994.

LIQUIDITY AND CAPITAL RESOURCES

From its inception through 1993, the Company's operating expenses
significantly exceeded its net revenues, resulting in an accumulated retained
deficit of approximately $1.3 million as of December 31, 1993. Since 1993, the
Company has recorded positive earnings, which have reduced the accumulated
retained deficit to $526,383 as of December 31, 1995 and to $157,238 as of June
30, 1996. The Company has funded its operations primarily through the private
placement of equity securities, bank borrowings and cash provided by operations.
The majority of the equity capital raised by the Company has been raised from
the private placement of $2.2 million of equity securities. In July 1992, the
Company raised $750,000 through the sale of Series A Convertible Preferred
Stock. The sale of the Series A Convertible Preferred Stock was pursuant to the
terms of the Series A Preferred Stock Purchase Agreement, dated July 10, 1992
between the Company and Mapleleaf Capital Ltd. (the "Series A Agreement"). The
Company, at various times, has not been in compliance with certain covenants of
the Series A Agreement, including the timely issuance of its year-end audited
consolidated financial statements, the timely issuance of a budgeted operating
forecast and a loan to an employee which exceeds the designated limit. The
Company has obtained appropriate waivers from the Series A Preferred Stock
shareholder with respect to these matters. The Company obtained a $2.0 million

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<PAGE> 23

credit facility from NationsBank in June, 1995. Such facility is composed of
several tranches which bear interest rates ranging from prime plus 0.5% to prime
plus 1.5%. The net proceeds from such facility were used to retire outstanding
debt and to purchase medical equipment. The Company's facility with NationsBank
of Texas, N.A. ("NationsBank") was increased to $4.3 million in March, 1996. See
"Certain Transactions." As of June 30, 1996, there was approximately $3.4
million outstanding under such facility. Under the terms of the credit agreement
regarding this facility, the Company is to provide NationsBank with annual
audited financial statements by May 31 for the prior fiscal year. The Company
has not complied with this covenant and has obtained a waiver from NationsBank
which is in effect until January 1, 1997.

The Company generated cash from its operations of $13,000, $274,000 and
$917,000 for the years ended December 31, 1993, 1994 and 1995, respectively, and
$469,000 and $595,000 for the six months ended June 30, 1995 and 1996,
respectively. The Company's accounts receivable balance increased $141,000,
$634,000, and $1,182,000 for the years ended December 31, 1993, 1994 and 1995,
respectively, and $630,000 and $830,000 for the six months ended June 30, 1995
and 1996, respectively. These increases were due primarily to increases in net
revenues during such periods. The Company's days of accounts receivable
outstanding remained fairly consistent for the periods presented. The increase
in accounts receivable has reduced operating cash flow available to the Company
during the reported periods. For its investing activities, the Company consumed
$56,000, $126,000 and $1.9 million for the years ended December 31, 1993, 1994
and 1995, respectively, and $884,000 and $2.0 million for the six months ended
June 30, 1995 and 1996, respectively, primarily for the acquisition of medical
equipment. Capital expenditures were $36,000, $130,000 and $1.9 million for the
years ended December 31, 1993, 1994 and 1995, respectively, and $891,000 and
$1.5 million for the six months ended June 30, 1995 and 1996, respectively. Net
cash provided by (used in) financing activities were $90,000, ($136,000) and
$2.3 million for the years ended December 31, 1993, 1994 and 1995, respectively,
and $378,000 and $1.4 million for the six months ended June 30, 1995 and 1996,
respectively. The cash provided from financing activities in 1995 was primarily
provided by the proceeds from bank borrowings and the sale of 362,500 shares of
Series B Convertible Preferred Stock pursuant to the Series B Stock Purchase
Agreement dated November 17, 1995 between the Company and various investors (the
"Series B Agreement"). The Company, at various times, has not been in compliance
with certain covenants of the Series B Agreement, including the timely issuance
of its year-end audited consolidated financial statements, the timely issuance
of a budgeted operating forecast, and a loan to an employee which exceeds the
designated limit. The Company has obtained appropriate waivers from all Series B
Preferred Stock shareholders with respect to these matters.

The Company estimates that its total capital expenditures will be
approximately $3.7 million in 1996 and approximately $4.7 million in 1997. The
Company believes that the net proceeds from the Offering and cash provided by
operating activities will be sufficient to fund its operations through 1998.
However, there can be no assurance that the Company will not require additional
financing in the near future, and that if needed, it will be available on terms
satisfactory to the Company, or at all.

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<PAGE> 24

BUSINESS

INTRODUCTION

Medical Alliance provides a complete range of services used to create
temporary surgical sites in physician offices in 40 states and Canada and
believes it is a leading national provider of such services. The Company's
services allow physicians to transfer an increasing number of established
surgical procedures from a hospital or outpatient setting to the physician's
office. These services include:

- Providing on-site technical personnel and medical equipment on a
scheduled basis;

- Monitoring and documenting preoperative, intraoperative and postoperative
procedures;

- Returning the physician's office to its pre-procedure condition;

- Establishing procedural safety and quality assurance protocols for
office-based procedures;

- Facilitating physician training and qualification; and

- Physician credentialing pursuant to contracts with managed care
organizations.

The Company's services benefit payors, physicians and patients by lowering costs
for surgical procedures, increasing physician productivity, broadening access to
advanced medical technologies and improving patient satisfaction.

The Company is a leader in facilitating the migration of established
surgical procedures and the latest advanced medical technologies from hospitals
and outpatient surgery centers to a lower-cost setting, the physician's office.
An increasing number of minimally invasive procedures are being performed with
local anesthesia in physicians' offices using technologically advanced medical
equipment. The Company has over 100 managed care contracts that in the aggregate
cover approximately 16 million lives. Managed care contracts are made directly
between the Company and managed care organizations, and typically have
automatically renewable one-year terms. The Company has served approximately
2,500 physicians during the six months ended June 30, 1996, and currently,
physicians perform approximately 6,000 procedures monthly using the Company's
services.

The Company provides its services along two primary business lines: medical
surgical and aesthetic elective services. The Company's medical surgical
services allow physicians to perform approximately 25 different office-based
surgical procedures across numerous specialties, including gynecology, podiatry,
urology and otolaryngology. The Company's aesthetic elective services are
utilized primarily by plastic surgeons and dermatologists for laser procedures
such as skin resurfacing, vascular and pigmented lesion treatment, and tattoo
removal. The Company is generally reimbursed for providing its medical surgical
services by third-party payors, including through contracts with managed care
organizations, and is paid directly by patients for any required copayments and
deductibles. For providing its aesthetic elective services, the Company is paid
directly by patients, generally at the time of service. The Company derived
approximately 64% and 33% of its net revenues in 1995 from the provision of
medical surgical and aesthetic elective services, respectively. None of the
Company's net revenues is derived from Medicare or Medicaid reimbursement.

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<PAGE> 25

The physician will charge a professional fee to the patient for aesthetic
elective procedures or bill the patient's third-party payor for medical surgical
procedures. Primarily, the Company will collect its fee from the patient at the
time of service for aesthetic elective procedures and bill the patient's
third-party payor for medical surgical procedure, less any co-pay or deductible.

MARKET OVERVIEW

Medical Surgical

The continued increase in health care costs at a rate significantly higher
than that of overall inflation has caused managed care companies, indemnity
insurers, government agencies and other payors to employ a variety of strategies
designed to reduce the cost and control the utilization of health care services.
In particular, payors have created incentives for health care providers to
deliver high-quality health care services in lower cost settings. Initially,
numerous surgical, diagnostic and other medical procedures that were
traditionally performed in a hospital were transferred to an outpatient setting,
predominantly the outpatient section of a hospital or an ambulatory surgery
center. In continuation of this trend, many established procedures that are
performed in an outpatient setting can now be transferred to the physician's
office because such procedures can be performed at a lower cost and without the
risk of general anesthesia while maintaining the quality of care. The transfer
of such procedures to the physician's office has continued to accelerate as a
result of: (i) the introduction of advanced medical technology that allows
physicians to perform a broader array of office-based procedures, (ii) the
development of training programs and clinical protocols for office-based
procedures, and (iii) the patient's desire to undergo procedures in a more
comfortable setting, with reduced risk, pain and recovery time. The migration of
such procedures to the physician's office benefits payors, providers and
patients through lower procedure costs (as compared to similar procedures
performed in a hospital or outpatient surgery center), increased provider
productivity, broader access by physicians and patients to advanced technologies
and treatments, and an increased level of patient satisfaction.

According to MDI, total surgical procedures in the United States have
increased by 12.4% from 25.8 million procedures in 1990 to 29.0 million
procedures in 1994. Over this period, the number of surgeries performed in an
outpatient setting as a percentage of total surgeries performed annually in the
United States has increased. The volume of outpatient surgical procedures has
grown by 71.8% over this period, from 11.0 million procedures, or approximately
43% of total surgeries in 1990, to 18.9 million procedures, or approximately 65%
of total surgeries in 1994. Furthermore, the prevalence of surgical procedures
occurring in a physician's office has increased, representing approximately 12%
of total outpatient procedures performed in 1994 as compared to approximately 6%
in 1990. The Company believes that a broader array of procedures, including more
complex surgeries, is currently being performed in an outpatient setting than
was performed in a similar setting in 1990 and believes that the migration of
outpatient procedures to a physician's office will continue.

Aesthetic Elective

The Company believes that the number of aesthetic elective procedures
performed annually in the United States will continue to grow, primarily due to
the development of new technologies for cosmetic procedures, increased public
awareness, shorter recovery times and the aging of the "baby boom" generation.
According to the AACS Survey, approximately 2.7 million cosmetic procedures were
performed in the United States in 1994. The Company believes that a majority of
such procedures are or can be performed in a physician's office. According to
the ASPRS Survey, patients between the ages of 35 and 50 represented 41% of the
cosmetic procedures performed in the United States in 1994, and the number of
people who say they approve

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<PAGE> 26

of cosmetic surgery, either for themselves or others, has increased 50% in the
last decade. According to the ASPRS Survey, approximately 36% of the cosmetic
procedures performed in 1994 were performed in a physician's office. The Company
believes that the vast majority of the aesthetic procedures are performed in an
outpatient setting and that such procedures will increasingly be transferred to
physician's office. The benefits derived from performing aesthetic procedures in
an office-based setting are similar to those associated with medical surgical
procedures, and include lower procedure costs, increased provider productivity,
broader access by physicians and patients to advanced technologies and
treatments, and an increased level of patient satisfaction.

BUSINESS STRATEGY

The Company's goal is to enhance its position as a provider of services to
the emerging market for physician office-based procedures. The Company intends
to achieve its goal by employing four primary strategies:

Increasing Utilization of the Company's Services in Existing Markets

The Company plans to expand by facilitating the transfer of an increasing
percentage of outpatient procedures to a physician's office where the Company's
services may be utilized. The Company intends to achieve such expansion through:
(i) marketing efforts designed to cause physicians who currently use the
Company's services to transfer more outpatient procedures performed by them to
their offices, (ii) the increase in the number of physicians who utilize the
Company's services, either through ongoing marketing efforts or the acquisition
of mobile medical equipment providers that maintain relationships with
physicians, (iii) the provision of a full range of applicable services to all
physicians served by the Company, and (iv) the introduction of new services and
technologies which will enable additional procedures to be performed in a
physician's office. In addition, the Company plans to increase the services
which are eligible for reimbursement under its existing managed care contracts
and to assist in the establishment of incentives and/or mandates by payors for
their network physicians to perform office-based procedures using the Company's
services.

Expanding the Company's Operations into New Markets

The Company employs a two-phase strategy to enter new markets. In the
initial phase, the Company offers aesthetic elective services (which are paid
for by patients generally at the time of service) to physicians who utilize such
services and seeks to develop relationships with local managed care
organizations for the provision of medical surgical services. This initial phase
may include acquisitions. In the second phase, the Company negotiates managed
care contracts and introduces its medical surgical services to such managed care
payors' system of physicians and seeks to increase the number of physicians
using its medical surgical services. In some cases, the Company will also seek
to capitalize on its managed care relationships in existing markets by gaining
access to such payors' covered lives in markets not currently served by the
Company. This two-phase expansion strategy allows the Company to utilize a
single infrastructure to support both business lines and use cash flow generated
from aesthetic elective services to offset the relatively higher costs
associated with establishing reimbursement of medical surgical services under
third-party payor contracts.

Continuing the Development of Managed Care Contracts

The Company is designated as a preferred provider for medical surgical
services in over 100 payor contracts, including contracts with health plans
owned by United HealthCare Corporation, Prudential Healthcare, CIGNA Healthcare
and Blue Cross Blue Shield entities in six states, which contracts cover in
aggregate approximately 16 million lives. The Company plans to establish
additional contractual relationships with managed care organizations and other
third-party payors as a preferred or mandated provider to physicians of
office-based surgical services. As a preferred provider, the Company negotiates
a pre-determined fee schedule for its services and obtains enhanced access to
the payor's physician network in order to market its services directly to such
physicians. The Company believes that payors contract with the Company because

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<PAGE> 27

the Company's services provide a turn-key solution that assists payors in
transferring established surgical procedures to a lower cost setting while
maintaining the quality of care.

Establishing Strategic Alliances with Medical Equipment Manufacturers

The Company believes manufacturers often encounter significant challenges
in selling sophisticated medical equipment to physicians. Physicians are
generally reluctant to purchase such medical equipment because: (i) physicians
generally are not able to ensure sufficient procedure volume to recover the cost
of acquiring, using and maintaining the equipment, (ii) physicians generally do
not want to assume the risk of technological obsolescence, and (iii) such
equipment is generally available to them through hospitals, outpatient surgery
centers and mobile medical equipment providers. As a result, manufacturers are
considering new opportunities for distribution of their medical equipment along
non-traditional lines, such as through services offered by the Company.

The Company seeks to establish strategic alliances with manufacturers of
medical equipment. From the Company's perspective, such strategic alliances are
beneficial as they generally provide the Company with preferential access to new
technology and products at limited costs and risks as the research and
development cost thereof are typically borne by the manufacturers. These
strategic relationships also benefit the manufacturers as it provides the
manufacturers a distribution channel through which they can market their
products directly to physicians and third party payors, thereby shortening the
period of market acceptance (by third party payors, physicians and patients),
and provide the manufacturers the opportunity to recover their costs of
development and participate in the revenues generated by the use of such
products through revenue sharing arrangements with the Company.

The Company currently has three strategic alliance agreements with
manufacturers of medical equipment, the terms of which range from fixed fee per
month agreements with thirty day cancellation policies and no further liability,
to revenue sharing with a certain percentage of the revenues going to the
manufacturer and subsequently paying down a predetermined purchase price until
such price is satisfied. Certain agreements provide for the manufacturer to
provide all repairs and maintenance on the equipment during the alliance period.
All such agreements provide the Company with cancellation options. The loss of
any of these agreements would not have a material adverse effect upon the
Company's operating results or financial conditions.

SERVICES PROVIDED BY THE COMPANY

The Company offers a complete range of services used to create temporary
surgical sites in physicians' offices. The Company facilitates the migration of
established outpatient procedures and advanced medical technologies to
physicians' offices by providing a broad array of services which enables
physicians to provide high quality, cost-effective medical care in their
offices. The Company's services include the following:

On-Site Technical Personnel

The Company provides on-site technical personnel who create the temporary
surgical setting in a physician's office, assist the physician in the set-up and
operation of medical equipment, and are present during, and document relevant
aspects of, the office-based procedure. The Company provides training to its
field technicians, including intensive classroom instruction and hands-on
training covering various technical and clinical aspects of office-based
procedures as well as the Company's surgical services. In addition, the Company
provides continuing education to its technical personnel in the form of training
programs covering advanced medical technology and current and new procedures.

Provision of On-Site Medical Technology

The Company provides medical technology using mobile field units that
include all of the medical equipment and related instruments, accessories and
disposable supplies utilized by the Company's network physicians to perform
certain office-based procedures. Mobile field units are composed of such
equipment and are delivered to the physician's office by a field technician on a
scheduled basis. The Company has organized

26
<PAGE> 28

its mobile field units into the three configurations listed below, the first two
of which are used to provide medical surgical services and the third of which is
used to provide aesthetic elective services:

Mobile Surgical Unit ("MSU"). The MSU may be configured utilizing the
following technologies: CO(2) laser, flashlamp pulsed dye laser,
electrosurgical generator, hospital grade smoke evacuator and related
instrumentation and accessories. The equipment delivered in the MSU is used
to perform procedures in gynecology, podiatry, urology and otolaryngology.
As of June 30, 1996, the Company had 49 MSUs in service.

Mobile Endoscopy Unit ("MEU"). The MEU may be configured utilizing the
following technologies: medical digital camera system, video monitor,
printer and recorder, CO(2) and fluid sufflation, related instrumentation
and accessories, and one of the following endoscopes: hysteroscope,
laparoscope or arthroscope. The equipment delivered in the MEU is used to
perform procedures in gynecology and podiatry. As of June 30, 1996, the
Company had 13 MEUs in service.

Mobile Aesthetic Laser Unit ("MALU"). The MALU may be configured utilizing
the following technologies: Q-switched Nd: YAG laser, flashlamp pulsed dye
laser, ultrapulse CO(2) laser and related instrumentation and accessories.
The equipment delivered in the MALU is used to perform procedures in
plastic surgery and dermatology. As of June 30, 1996, the Company had 64
MALUs in service.

In utilizing the Company's services, a physician will schedule an
office-based procedure for a specified date and time. If appropriate, the
Company will verify a patient's insurance coverage and obtain any necessary
precertification from the third-party payor. Prior to arrival of the patient, a
field technician will create a temporary surgical setting in the physician's
office that meets the Company's preoperative protocol and will configure the
transportable medical equipment in accordance with the Company's procedure
guidelines. Prior to performing the procedure, the physician and/or his or her
staff is required to inspect the temporary surgical setting, test and accept all
medical equipment, and record such acceptance in the field technician's delivery
log. Following the patient recovery period in the physician's office, the field
technician returns the physician's office to its pre-procedure condition.

Procedure Monitoring and Documentation

The Company's on-site technical personnel are present during, and document
relevant aspects of, the office-based procedures, including patient billing
data, and information regarding disposables consumed, sterilization procedures
performed and adherence to the Company's established guidelines and standards,
including preoperative, intraoperative and postoperative instructions.

Establishment of Procedural Safety and Quality Assurance Protocols

The Company has established procedural safety and quality assurance
protocols and standards for the use of its surgical services in physicians'
offices that are set forth in its Alternate Site Quality Protocol, Standards and
Guidelines. The Company utilizes this manual to assist managed care
organizations in documenting the Company's operations to satisfy requirements
for receiving accreditation under the National Committee for Quality Assurance
(NCQA) and other accrediting organizations. The Company's standard field
operating procedures include Occupational Safety and Health Administration
safety procedures incorporating the use of personal protective equipment and
sterilization of equipment, and provide step-by-step preoperative,
intraoperative and postoperative instructions. The Company recognized that there
was an absence of documented office-based procedures and clinical protocols in
the physician marketplace, as well as methods for measuring and documenting
compliance therewith. Accordingly, the Company created its Optimal In-Office
Surgical Suite Guidelines manual for its physicians who utilize the Company's
services, which includes guidelines, standards and regulations and a
comprehensive self-assessment checklist for surgeries performed in the
physician's office without general anesthesia. The standards established by the
Company serve as guidelines to assist physicians in satisfying quality
requirements set by managed care organizations and accrediting authorities, as
well as in complying with applicable government regulations and manufacturers'
specifications.

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<PAGE> 29

Physician Training Seminars

The Company conducts seminars to train physicians and their staff in the
use of medical equipment and related technology provided by the Company through
its services and receives a fee from physicians for attending such seminars.
Since 1993, approximately 2,200 physicians have participated in over 100 of the
Company's seminars. The Company developed and introduced its physician training
seminars in response to the high demand for physician training created by the
introduction of new medical technology. The Company retains highly qualified
physician faculty to conduct these seminars, which present such topics as
medical laser physics and safety, light and tissue interaction, clinical
applications and treatment parameters, procedure demonstrations, as well as to
conduct hands-on laboratory sessions. Physician participants in the Company's
seminars generally receive a peer reference manual, video tapes, patient
awareness and market information, and a certificate that documents that the
participant has completed the Company's training seminar.

Physician Credentialing

The Company performs physician credentialing, including on behalf of
managed-care payors, utilizing standards established by its Medical Director
which are based upon standards generally recognized by the medical profession.
The Company's services are offered only to those practitioners who have provided
documentation of certified training and/or competence relevant to the procedures
to be performed, including use of the technology provided in conjunction with
such services. For certain procedures, the Company requires physicians to
maintain hospital or surgery privileges relative to such procedures, including
the use of any technology for performance thereof. Physician credentialing
information is maintained by the Company and reviewed periodically by the
Medical Director and other key personnel.

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<PAGE> 30

PROCEDURES

The following tables set forth certain information regarding medical
surgical and aesthetic elective procedures which are or may be performed in the
physician's office utilizing the Company's services.

Medical Surgical Procedures

The Company facilitated a total of 19,509 and 12,690 medical surgical
procedures for the year ended December 31, 1995, and for the six months ended
June 30, 1996, respectively. The Company's services are used by physicians to
perform approximately 25 different office-based medical surgical procedures,
including the procedures listed in the table below:

<TABLE>
<CAPTION>
DESCRIPTION/APPLICATION OF
PROCEDURES PERFORMED
PROCEDURE BY SPECIALTY UTILIZING COMPANY SERVICES
- ------------------------------------------------- ------------------------------------------------------------
<S> <C>
GASTROENTEROLOGY:

Flexible Sigmoidoscopy Endoscopic colon rectal screening.

GYNECOLOGY:
Colposcopy with loop electrode excision of )
cervix ) Laser or electrosurgical assisted cervical procedures to
) remove abnormal cells and/or to collect pathology.
Conization of cervix: loop electrode excision )
)
Laser ablation of cervix )

Cystourethroscopy Diagnostic endoscopy of bladder.

Hysteroscopy, diagnostic ) Endoscopy of uterus to diagnose and
) treat causes of abnormal uterine bleeding.
Hysteroscopy, surgical )

Laparoscopy, diagnostic Endoscopy of abdomen to diagnose causes of pelvic pain and
infertility.

Treatment of vaginal lesions )
) Laser destruction of genital lesions and warts.
Treatment of vulva lesions )

PODIATRY:
Endoscopic decompression for intermetarsal
nerve entrapment Endoscopic treatment for mortons neuroma.

Endoscopic plantar fasciotomy Surgical release of the plantar fascia (tendon) to relieve
chronic heel pain.
PODIATRY/DERMATOLOGY:
Treatment of warts and skin lesions Laser destruction of warts, including the non-invasive
removal of planters warts.
DERMATOLOGY/PLASTIC SURGERY:
Treatment of cutaneous vascular lesions Laser destruction of surface lesions created or fed by blood
vessels such as port wine birthmarks.
UROLOGY:
Treatment of condyloma lesions Laser destruction of genital lesions and warts.

OTOLARYNGOLOGY:
Laser assisted uvulapalatoplasty, uvulectomy
and palatopharyngoplasty Laser assisted procedure to reshape and reduce uvula to
reduce snoring and treat sleep apnea.
</TABLE>

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<PAGE> 31

Aesthetic Elective Procedures

The Company facilitated a total of 20,131 and 20,219 aesthetic elective
procedures for the year ended December 31, 1995, and for the six months ended
June 30, 1996, respectively. The Company's services are used by physicians to
perform approximately seven different office-based aesthetic elective
procedures, including the procedures listed in the table below:

<TABLE>
<CAPTION>
DESCRIPTION/APPLICATION OF PROCEDURES
PROCEDURE PERFORMED UTILIZING COMPANY SERVICES
- --------------------------------------------------- -------------------------------------------------------------
<S> <C>
Laser Treatment of Tattoos Utilization of a laser to remove or fade tattoos.
Laser Treatment of Pigmented Lesions (brown spots Utilization of a laser to remove or fade brown spots of the
of the skin) skin.
Laser Treatment of Facial Telangiectasia (spider
veins of the face) Utilization of a laser to treat spider veins of the face.
Laser Treatment of Vascular Birthmarks (hemangiomas Utilization of a laser to treat hemangiomas and port wine
and port wine birthmarks) birthmarks.
Laser Treatment of Stretch Marks Utilization of a laser to treat stretch marks.
Laser Skin Resurfacing of Facial Wrinkles and Acne Utilization of a laser to remove facial wrinkles and acne
Scarring scars.
Laser Blepharoplasty (eyelid surgery) Utilization of a laser for eyelid surgery.
</TABLE>

Future Services

The Company maintains an ongoing program to develop and introduce new
medical surgical and aesthetic elective services to its network of physicians
and managed care payors. The Company actively coordinates the development of new
medical surgical services with its managed care payors in order to facilitate
the transfer of an increasing number of procedures from a hospital or outpatient
setting to the physician's office. The Company anticipates that by the end of
1998 it will expand its medical surgical services to include treatment of
abnormal uterine bleeding and enlarged prostate (benign prostatic hyperplasia).
Within aesthetic elective services, the Company anticipates that it will
commence offering services for laser-based hair removal in 1997 and anticipates
introducing services for the treatment of leg spider veins by the end of 1997.

REIMBURSEMENT AND PAYMENT

For its services, the Company charges fees that are payable by either the
patient, a managed care organization or an indemnity insurance company. For
medical surgical services rendered by the Company pursuant to a contract with a
managed care organization, the Company bills the managed care payor based upon a
pre-determined fee schedule. For medical surgical services that are reimbursed
under an indemnity plan, the Company generally bills and collects 20% of the
Company's charges from the patient at the time services are rendered and bills
the patient's insurance indemnity carrier for the remaining balance. For
aesthetic elective services, generally the Company charges on a per-case basis
and its fees are payable by the patient, generally at the time the services are
rendered. The Company believes that its per-case billing practices for such
services are preferred by physicians over the flat rate rental fee that many of
its competitors charge. None of the Company's net revenues is derived from
Medicare or Medicaid reimbursement.

SALES AND MARKETING

The Company currently operates in 40 states and Canada. The Company has
divided its service area into four regions ("Regions") encompassing an aggregate
of 19 districts ("Districts"). The Company maintains an office in each District.
Each Region is managed by a Regional Vice President who is responsible for
meeting the Company's sales and operational objectives within his or her
Region(s). The Company anticipates that as

30
<PAGE> 32

it enters new markets, additional Regions will be created and additional
Regional Vice Presidents will be hired.

Within each District, the Company employs a District Manager, a District
Representative and one or more field technicians. The District Manager is
responsible for physician recruitment, managed care contract development,
operations management, customer service and personnel development. District
Representatives are designated to oversee the marketing and development of a
particular product line or specialty focus within their respective designated
geographic area. Field technicians specialize in a particular clinical and/or
technical area within their respective designated geographic area and are
assigned mobile field units for use in their assigned specialties.

The Company actively seeks to increase the number of physicians who use the
Company's services through its marketing efforts. The Company employs a variety
of marketing methods to identify qualified physicians in a community who are
performing procedures utilizing services and/or technology similar to those
offered by the Company. The Company also exhibits at local and national medical
conferences to gain exposure to target markets. In addition, through its
physician training seminars, the Company is able to educate physicians on the
services provided by the Company.

The Company also pursues the development of relationships with managed care
organizations. The Company seeks to enter into agreements which enable the
Company to be reimbursed for medical surgical services performed on plan
members. In addition, the Company seeks the support of medical directors and
utilization departments within contracted managed care organizations in order to
establish policies which provide incentives and/or mandate physician use of the
Company's surgical services. The Company's efforts to gain such support include
the demonstration of quality, cost effectiveness and clinical appropriateness of
the Company's medical surgical services for selected procedures.

SUPPLIERS OF MEDICAL TECHNOLOGY

In conjunction with its other services, the Company offers a wide range of
medical technology for use in performing office-based procedures. Such medical
technology is obtained directly from manufacturers and distributors of medical
equipment. Prior to obtaining any medical equipment, the Company performs
extensive research on existing and developing medical technology in order to
determine the optimal equipment to acquire. In order to enhance its access to
medical technology, the Company seeks to establish strategic alliances with
manufacturers and distributors of medical equipment generally during the
development stage of a selected product. Such strategic alliances may include
agreements based upon per-procedure or other revenue sharing arrangements. In
certain circumstances, the Company may seek to become the exclusive mobile
provider for a certain technology.

INFORMATION SYSTEMS

In 1995 the Company began implementation of an information system that
includes a wide area network to link its Districts to its corporate office and
information databases. The system is decentralized and allows for data
acquisition by field personnel within each District and maintenance of all data
captured at a central corporate database that is accessible on a real-time
basis. The Company has completed the first three of six implementation phases
which included the installation of a network driven by multiple file servers, an
in-house voice mail system and software to link the Districts to the corporate
billing and collection system. The last three phases of implementation include
the integration of the Company's general ledger and financial reporting systems,
the implementation of voice activated software and the installation of cellular
equipped portable computers to all field personnel. The Company anticipates
completion of the implementation of this system by the end of 1997.

GOVERNMENT REGULATION

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<PAGE> 33

Company's services and products and therefore may indirectly affect the
Company's business. In addition, promulgation of new laws and regulations, or
changes in or reinterpretations of existing laws or regulations, may directly or
indirectly affect the Company's business, operating results or financial
condition. Further, the Company's services involve the handling of chemical and
biological substances, thereby subjecting the Company to certain labor and
environmental regulations. There can be no assurance that a review of the
Company's operations by courts or regulatory authorities will not result in a
determination that could adversely affect the operations of the Company.

Subject to certain statutory exceptions, physicians who have a financial
relationship with an entity providing health care services are prohibited by
federal law (the "Stark II Legislation") from referring or admitting patients to
that entity for the furnishing of certain designated services reimbursable under
Medicare or Medicaid, as well as certain other federally assisted state health
care programs. Possible sanctions for violations of the Stark II Legislation
include civil monetary penalties, exclusion from the Medicare and Medicaid
programs, and forfeiture of all amounts collected in violation of such
prohibition. Federal law generally prohibits activities and arrangements which
are designed to provide kickbacks or to induce the referral of business under
Medicare and Medicaid programs (the "Fraud and Abuse Statutes"). Violations of
anti-kickback legislation are felonies punishable by monetary fines, civil and
criminal penalties and exclusion from participation in Medicare or Medicaid
programs. Several states in which the Company operates prohibit the corporate
practice of medicine except by professional medical corporations or
associations. Several states in which the Company operates also prohibit
physicians from splitting fees with non-physicians. Although the Company has
attempted to structure its business relations with physician groups to comply
with the Stark II Legislation, the Fraud and Abuse Statutes, and the state
corporate-practice-of-medicine and fee-splitting laws, there can be no assurance
that such laws will ultimately be interpreted in a manner consistent with the
Company's practices or that other laws or regulations will not be enacted in the
future which could have a material adverse effect on the Company's operating
results or financial condition.

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<PAGE> 34

release of pollutants and contaminants into the air and water, and the
protection of employees who may be exposed to blood or other potentially
infectious material. In particular, the Company is subject to Occupational
Safety and Health Administration regulations governing bloodborne and airborne
pathogens and hazard communications. Further, the use and operation of lasers is
subject to state regulation. The Company believes it is in substantial
compliance with all applicable material labor and environmental laws. However,
there can be no assurance that there will be no environmental matters for which
the Company might be liable in the future. In addition, future regulatory
action, as well as compliance with future laws governing the handling and
disposition of hazardous materials may require the Company to incur costs that
could have a material adverse effect on the Company's financial condition and
results of operations.

COMPETITION

The Company competes with companies that offer medical equipment to
physicians' offices on either a rental or a fee-for-service basis and with
hospitals and surgery centers that provide comparable surgical services. The
Company also competes with other providers in the health care industry for
access to technology, relationships with third-party payors and relationships
with physicians. The Company believes the trend toward managed care could
increase the competition to obtain contracts with third-party payors. The health
care industry is highly competitive and is subject to continuing changes in the
manner in which such services are provided and the manner in which providers are
selected and paid. Some of the Company's competitors have substantially greater
financial and other resources than the Company. In addition, competitors of the
Company could obtain exclusive rights to provide mobile surgical services for
products that the Company currently offers or expects to offer.

The market for aesthetic elective services is highly competitive. The
Company believes that the heightened interest in aesthetic procedures among
physicians and patients, the development of advanced medical technologies to
perform aesthetic procedures and the industry practice of requiring immediate
cash payment for such services will create increased competition in this
segment. Competition in the provision of medical surgical services may also
increase because these services are becoming more accepted by physicians,
patients and third-party payors and the medical equipment used in providing such
services is readily available from various sources.

The Company believes that competition in the provision of services to
create temporary office-based surgical settings is based on the price, quality,
breadth and availability of services. The Company considers its comprehensive
high quality services, trained on-site technical personnel, "per case" billing
for certain services and strategic relationships with payors and medical device
manufacturers to be important factors in enabling it to compete effectively. The
Company believes that it is the only national provider of medical surgical
services for use in performing office-based procedures that has developed
contracts with managed care organizations.

INSURANCE

The Company maintains professional, general and product liability insurance
in amounts deemed appropriate by management. The Company carries an aggregate of
$10 million of general and public liability insurance coverage, which covers
premises, operations and product liability, and a $1 million professional
liability insurance policy.

PROPERTIES

The Company leases 15 offices within its service area that range in size
from approximately 100 to 400 square feet under agreements with varying terms
and renewal options, and annual rent ranging from $2,220 to $5,400. The Company
currently leases approximately 10,000 square feet for its corporate executive
offices located in Irving, Texas. The lease agreement for its corporate
headquarters stipulates annual rental payments that increase from $124,525 to
$134,487, during the term of the lease, and expires in 2002.

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<PAGE> 35

EMPLOYEES

As of June 30, 1996, the Company had 113 employees, including 78 employees
in field operations. The Company anticipates hiring additional employees
following consummation of the Offering, primarily in field operations. None of
the Company's employees is represented by a union and the Company believes that
it maintains good relations with its employees.

LEGAL PROCEEDINGS

To date, the Company has not been involved in any material claim or legal
proceeding relating to the use of its surgical services or otherwise. In the
future, the Company may become involved from time to time in various legal
proceedings and claims incident to the normal conduct of its business. See "Risk
Factors."

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<PAGE> 36

MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The following table sets forth certain information with respect to the
directors, executive officers and key employees of the Company.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Paul R. Herchman(1)(2)..................... 40 Chairman of the Board, Chief Executive
Officer and President
David A. Kallenberger, M.D. ............... 47 Medical Director and Director
Kevin D. O'Brien........................... 39 Senior Vice President, Sales, Marketing and
Operations
Michael G. Wallace......................... 31 Senior Vice President, Chief Financial
Officer and Treasurer
Leo Lopez.................................. 51 Director
Thomas A. Montgomery....................... 39 Director
Morris G. Moreland(1)(2)................... 64 Director
Leon Pritzker.............................. 73 Director
Jim Silcock(1)(2).......................... 46 Director
Mark Novy.................................. 30 Controller and Secretary
Clyde Hutchinson........................... 31 Regional Vice President of Sales and
Operations
Jay Farris................................. 36 Vice President, Business Development
Mark Rubino................................ 30 Regional Vice President of Sales and
Operations
Rona P. McGarvey........................... 47 Director of Patient Accounts
</TABLE>

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

(1) Member of the Compensation Committee

(2) Member of the Audit Committee

EXECUTIVE OFFICERS

The executive officers of the Company are elected annually by the Board of
Directors of the Company (the "Board") and serve at the discretion of the Board.

PAUL R. HERCHMAN is a co-founder of the Company and has served as Chairman
of the Board, Chief Executive Officer and President since its inception in 1989.
In addition, Mr. Herchman is a member of the Audit and Compensation Committees.
From 1986 to 1989, Mr. Herchman was a sales representative for Sun Medical,
Inc., a distributor of medical equipment. Prior thereto, Mr. Herchman served in
sales positions with Chesebrough-Ponds USA Co. in its Hospital Products
Division, from 1984 to 1986, and with Johnson & Johnson in its Ortho
Pharmaceutical Division, from 1982 to 1984. Mr. Herchman received a Bachelor of
Science degree from Texas Tech University.

KEVIN D. O'BRIEN has served as Senior Vice President, Sales, Marketing and
Operations of the Company since September 1992. From the Company's inception in
1989 to December 1990, Mr. O'Brien served as a District Manager of the Company,
and from January 1991 to September 1992 as a Regional Vice President of Sales
and Operations. Mr. O'Brien co-founded Dental Plan of America, Inc., a prepaid
dental health plan based in Oklahoma, and served as its marketing director from
1983 to 1984. From 1982 to 1983, Mr. O'Brien was a sales representative in the
patient care division of Procter & Gamble Co. Mr. O'Brien received a Bachelor of
Science degree from the University of Texas at Dallas.

MICHAEL G. WALLACE has served as the Treasurer of the Company since April
1993, as Senior Vice President since November 1995 and as the Chief Financial
Officer since June 1996. From April 1993 to November 1995, Mr. Wallace also
served as Vice President of Finance. From June 1991 to April 1993, Mr. Wallace
served as Senior Accountant for Medical Care America, Inc., an owner-operator of
outpatient surgery centers, and as a Regional Accountant for Medical Care
America, Inc., from January 1990 to June 1991. From 1988 to 1990, Mr. Wallace
served as an accountant for Woodland Investment Company. Mr. Wallace has also
served as a director of Global Healthnet, Inc., a software service company in
the health

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<PAGE> 37

care industry, since March 1996. Mr. Wallace is a Certified Public Accountant
and received a Bachelor of Business Administration degree from Southwest Texas
State University.

BOARD OF DIRECTORS

In addition to Paul R. Herchman the Board includes:

DAVID A. KALLENBERGER, M.D. is a co-founder of the Company and has served
as a director and as the Medical Director since its inception in 1989. Dr.
Kallenberger is a practicing physician specializing in obstetrics and
gynecology, and has been practicing at Integris Baptist Medical Center in
Oklahoma City, Oklahoma since 1981. Dr. Kallenberger serves as a Clinical
Professor in the Department of Obstetrics/Gynecology at the University of the
Oklahoma Health Science Center and as the Program Director of the Henry G.
Bennett Fertility Institute at Integris Baptist Medical Center. Dr. Kallenberger
received his Medical Doctorate degree from The University of Oklahoma.

LEO LOPEZ, a director of the Company since 1994, has served as the
President and Chief Executive Officer of Eligibility Services, Inc., a company
that provides business management and information management services to the
health care industry, since 1989. Prior thereto, Mr. Lopez served as Vice
President of Donaldson, Lufkin & Jenrette Securities Corporation from 1988 to
1990 in the Public Finance Group in Dallas, Texas and from 1986 to 1988 in the
Healthcare Finance Group in New York, New York. Mr. Lopez received a Bachelor of
Science Degree in Business Administration from Washington University and a
Masters of Health Administration degree from the Washington University School of
Medicine.

THOMAS A. MONTGOMERY, is a co-founder of the Company and has served as a
director of the Company since 1989. Mr. Montgomery is a partner of Montgomery,
Jessup & Co., L.L.P., an accounting firm. From December 1982 to December 1990,
Mr. Montgomery served in various capacities with Arthur Andersen & Co., and as
the Senior Tax Manager of the Enterprise Group since 1985. Mr. Montgomery
received a Bachelor of Business Administration degree from Texas Tech University
and a Master of Science degree from Texas Tech University.

MORRIS G. MORELAND, a director of the Company since 1991 and a member of
the Audit and Compensation Committees, has served as Vice President and Chief
Financial Officer of Satana Corporation ("Satana"), an investment company. Mr.
Moreland is a Certified Public Accountant and received a Bachelor of Business
Administration degree from West Texas A & M University.

LEON PRITZKER, a director of the Company since 1989, has been self-employed
as a management consultant since 1990. From 1985 to 1990, Mr. Pritzker served as
the Executive Vice President of Campbell Taggart, Inc. From 1967 to 1984, Mr.
Pritzker served in various capacities with Anheuser-Busch Companies, Inc., most
recently as Director, Management Systems Group. Mr. Pritzker is a fellow of the
American Statistical Association. Mr. Pritzker received a Bachelor of Science
degree from College of the City of New York and a Master of Arts degree from the
University of Pennsylvania.

JIM SILCOCK, a director of the Company since February 1996 and a member of
the Audit and Compensation Committees, has served as a general partner of
Mapleleaf Capital Ltd., and as a general partner of Sunwestern Associates III, a
general partner of Sunwestern Investment Fund III, a venture capital fund, since
1988 and as a general partner of T.V.P. Associates Limited the general partner
of Texas Venture Partners, a venture capital fund, since 1984. Mr. Silcock
received a Bachelor of Arts from Dartmouth College and a Master of Business
Administration from the Amos Tuck School of Business Administration at Dartmouth
College.

KEY EMPLOYEES

MARK NOVY has served as Controller and Secretary of the Company since May
1995. Prior to joining the Company, from July 1988 to April 1995, Mr. Novy
served as a Senior Accountant, and most recently as the Financial Analyst and
Market Chief Financial Officer of the Northeast Market for Columbia/HCA
HealthCare Corporation, Ambulatory Surgery Division. Mr. Novy is a Certified
Public Accountant and received a Bachelor of Business Administration degree from
the University of Texas at Arlington.

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<PAGE> 38

CLYDE HUTCHINSON has served as a Regional Vice President of Sales and
Operations of the Company since January 1993. Prior thereto, Mr. Hutchinson
served as a District Manager of the Company from August 1990 to December 1992.
Mr. Hutchinson received a Bachelor of Science degree from Mississippi State
University.

JAY FARRIS has served as Vice President, Business Development since July
1996. Prior thereto, Mr. Farris served as a Regional Vice President of Sales and
Operations since January 1991. Prior thereto, Mr. Farris served as District
Manager of the Company from March 1990 to January 1991. Mr. Farris received a
Bachelor of Science degree from the University of Oklahoma.

MARK RUBINO has served as a Regional Vice President of Sales and Operations
of the Company since November 1995. Prior thereto, Mr. Rubino served as District
Manager of the Company from April 1991 to November 1995. Mr. Rubino received a
Bachelor of Science degree from Elizabeth Town College.

RONA P. MCGARVEY has served as Director of Patient Accounts of the Company
since June 1996. Prior to joining the Company in June 1996, Ms. McGarvey served
as Business System Analyst with Columbia/HCA HealthCare Corporation, Ambulatory
Surgery Division, in Dallas, Texas from October 1994 to May 1996. Ms. McGarvey
served as Information System Analyst for Medical Care International in Dallas,
Texas from March 1990 to October 1994, as Regional Office Coordinator for
Medivision, Inc., Houston, Texas from 1986 to 1990, and as Business Office
Manager at National Medical Care in The Woodlands, Texas from 1984 to 1986. Ms.
McGarvey received a Bachelor of Business in Education degree from Youngstown
State University.

TERM OF OFFICE FOR DIRECTORS; CLASSIFIED BOARD

Directors are elected by the Company's shareholders and serve until their
successors are elected and qualified. Upon consummation of the Offering, the
Board will be divided into three classes: Class A, Class B and Class C.
Directors will serve for staggered three-year terms, except with respect to the
initial terms of Class A and Class B directors which will expire at the annual
meetings of shareholders in 1997 and 1998, respectively. Directors for each
class will be elected at the annual meeting of shareholders held in the year in
which the term for such class expires and will serve thereafter for three years,
or until their earlier death, resignation or removal, or until their successors
are elected and qualified. Upon consummation of the Offering, the Class A
Directors will be Leon Pritzker and Morris G. Moreland; the Class B Directors
will be Jim Silcock and Thomas A. Montgomery; and the Class C Directors will be
Paul R. Herchman, David A. Kallenberger, M.D. and Leo Lopez.

BOARD COMMITTEES

The Company has established an Audit Committee and a Compensation
Committee. The Audit Committee makes recommendations to the Board regarding the
appointment of independent auditors, reviews the plan and scope of any audit of
the Company's financial statements and reviews the Company's significant
accounting policies and related matters. The Compensation Committee makes
recommendations to the Board regarding the compensation of executive officers
and the administration of the Incentive Plan.

COMPENSATION OF DIRECTORS

Upon consummation of the Offering, it will be the policy of the Company
that directors who are not employees of the Company ("Independent Directors")
will receive $500 for each Board meeting attended. All directors of the Company
will be reimbursed for travel, lodging and other out-of-pocket expenses in
connection with their attendance at Board and committee meetings. Under the
terms of the Incentive Plan, so long as the Company is a reporting company
subject to the terms of the Securities Exchange Act of 1934, as amended,
Independent Directors will receive an option to purchase 2,500 shares of Common
Stock upon his or her initial election to the Board and an option to purchase
1,500 shares of Common Stock at each annual meeting of the shareholders
thereafter while he or she continues to serve as a director of the Company. Such
options will be non-qualified stock options, will have an exercise price equal
to the fair market value of the Common Stock at the date of grant, will become
exercisable one-third on the date of grant and one-third each on the second and
third anniversaries thereof, and will expire ten years from the date of grant.
As of June 30, 1996, the current Independent Directors and their affiliated
entities have been granted options to purchase a total of 29,659 shares of
Common Stock at exercise prices ranging from $1.28 to $2.56 per share pursuant
to the Incentive Plan. See "-- Incentive Plan."

37
<PAGE> 39

COMPENSATION COMMITTEE, INTERLOCKS AND INSIDER PARTICIPATION

During 1995, the Compensation Committee made recommendations to the Board
regarding compensation of the Company's executive officers and the Board
approved all of such recommendations. The Compensation Committee was comprised
of Paul R. Herchman and Morris G. Moreland during 1995. Other than Mr. Herchman,
no officer, former officer or employee served on the Compensation Committee. No
executive officer of the Company served as a member of the compensation
committee or similar committee or board of directors of any other entity which
an executive officer thereof served on the Compensation Committee or Board.

On November 17, 1995, the Company entered into a Preferred Stock Purchase
Agreement (the "Series B Purchase Agreement") with various investors, pursuant
to which the Company issued an aggregate of 362,500 shares of Series B
Convertible Preferred Stock (the "Series B Preferred") to such investors at a
purchase price of $4.00 per share ($1.45 million in the aggregate). In such
offering, Morris G. Moreland and Satana, of which Mr. Moreland is a director,
acquired an aggregate of 163,662 shares of Series B Preferred, and Mapleleaf
Capital, Ltd., Sunwestern Investment Fund III and Sunwestern Cayman 1988
Partners, affiliated entities of Jim Silcock, acquired an aggregate of 171,067
shares of Series B Preferred. For a description of the Series B Preferred, see
Note 6 of the Notes to Consolidated Financial Statements.

On July 27, 1995, the Company granted Paul R. Herchman a warrant to
purchase up to 15,610 shares of Common Stock at an exercise price of $2.56 per
share, which warrant vested upon the date of grant and expires in September
1999. This warrant was granted to Mr. Herchman in consideration for his personal
guaranty of the obligations of the Company under its revolving credit facility
and term loans with NationsBank of Texas, N.A. (the "NationsBank Loans"). A
portion of the net proceeds from the Offering will be used to repay such
indebtedness in full. See "Use of Proceeds."

In connection with the issuance and amendment of a promissory note by the
Company to Satana, the Company issued to Satana in January 1991 and July 1992, a
warrant to purchase up to an aggregate of 468,300 shares of Common Stock
exercisable as follows: 93,660 shares at $0.64 per share on or before July 10,
1995, and 374,640 shares at $1.28 per share on or before December 31, 1997.
During 1994, Satana exercised a portion of the warrant to acquire 93,660 shares
of Common Stock at a discounted price of $0.53 per share. The Company recorded
interest expense of approximately $10,000 as a result of this transaction.
During the year ended December 31, 1995, the holder exercised the warrant to
acquire 374,640 shares of common stock in exchange for the outstanding debt owed
to Satana Corporation and the put feature. The difference between the carrying
value of the debt instrument, which approximated fair value, and the exercise
price of the warrants has been accounted for as a reduction of capital in excess
of par value and has been deducted from net income for purposes of computing net
income applicable to common stock. See Notes 4 and 7 to Consolidated Financial
Statements.

INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY

Upon consummation of the Offering, the Company's Articles of Incorporation
will provide that, to the fullest extent permitted by Texas law, no director
shall be liable to the Company or its shareholders for monetary damages for
breach of fiduciary duty as a director and each director will be indemnified to
the maximum extent permitted by such law. By virtue of these provisions, a
director of the Company will not be personally liable for monetary damages for a
breach of such director's fiduciary duty except for liability for (i) breach of
the duty of loyalty to the Company or to its shareholders, (ii) acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (iii) dividends or stock repurchases or redemptions that are
unlawful under the Texas Business Corporation Act (the "TBCA") and (iv) any
transaction from which such director receives an improper personal benefit. In
addition, the Company's Articles of Incorporation will provide that if the TBCA
is amended to authorize the further elimination or limitation of the liability
of a director, then the liability of the directors will be eliminated or limited
to the fullest extent permitted by the TBCA, as amended.

The Company intends to enter into indemnification agreements with each of
the Company's directors and executive officers. The indemnification agreements
will require, among other things, that the Company indemnify its directors and
executive officers to the fullest extent permitted by law and advance to the

38
<PAGE> 40

directors and executive officers all related expenses, subject to reimbursement
if it is subsequently determined that indemnification is not permitted. The
Company will also be required to indemnify and advance all expenses incurred by
directors and executive officers seeking to enforce their rights under the
indemnification agreements. Although the form of indemnification agreement
offers substantially the same scope of coverage afforded by provisions in the
Company's Articles of Incorporation and Bylaws, it provides greater assurance to
directors and executive officers that indemnification will be available,
because, as a contract, it cannot be modified unilaterally in the future by the
Board or by the shareholders to eliminate the rights it provides.

EXECUTIVE COMPENSATION

The Summary Compensation Table below sets forth certain information
regarding compensation paid or accrued for services rendered to the Company for
the year ended December 31, 1995 to the Company's Chief Executive Officer and
each of the Company's other executive officers whose total annual salary and
bonuses earned during the year ended December 31, 1995, exceeded $100,000
(collectively referred to herein as the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
1995 ANNUAL COMPENSATION -------------------------
--------------------------------- SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS(1) COMPENSATION
- ---------------------------------------- -------- ------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Paul R. Herchman........................ $132,000 $77,000 -- 48,391 $5,700(2)
Chairman of the Board, Chief Executive
Officer and President
Kevin D. O'Brien........................ 105,000 51,000 -- 46,830 --
Senior Vice President, Sales,
Marketing and Operations
</TABLE>

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

(1) Represents shares of Common Stock underlying stock options granted to the
Named Executive Officers during 1995 pursuant to the Incentive Plan.

(2) Represents a $350 per month automobile allowance paid to Mr. Herchman, and
$1,500 of annual premiums on a life insurance policy, of which Mr.
Herchman's spouse is the beneficiary, paid by the Company on Mr. Herchman's
behalf.

The following table sets forth certain information with respect to options
granted to the Named Executive Officers during the year ended December 31, 1995.
The Company has not granted any stock appreciation rights.

OPTION GRANTS IN 1995

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUES AT ASSUMED
NUMBER OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3)
OPTIONS EMPLOYEES PRICE PER EXPIRATION ---------------------
NAME GRANTED IN 1995 SHARE(1) DATE(2) 5% 10%
- ----------------------------- ---------- ---------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Paul R. Herchman............. 46,830 15% $2.56 09/16/99 $476,261 $565,706
1,561 1 2.56 08/15/97 14,033 14,892
Kevin D. O'Brien............. 46,830 16 2.56 09/16/99 476,261 565,706
</TABLE>

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

(1) Options were granted at an exercise price equal to the fair market value of
the Common Stock on the date of grant, as determined by the Board.

(2) Most of the options granted to the Named Executive Officers are subject to
vesting and, accordingly, may expire before the dates indicated.

(3) The 5% and 10% assumed annual compound rates of stock price appreciation
are mandated by the rules of the Securities and Exchange Commission and do
not represent the Company's estimate or projection of future Common Stock
prices.

39
<PAGE> 41

The following table sets forth certain information with respect to
unexercised options held by the Named Executive Officers as of December 31,
1995. No stock options were exercised by the Named Executive Officers during
1995.
AGGREGATE OPTION VALUES AT DECEMBER 31, 1995

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE-
UNDERLYING UNEXERCISED MONEY OPTIONS AT
OPTIONS AT DECEMBER 31, 1995 DECEMBER 31, 1995(1)
------------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Paul R. Herchman........................ 18,732 46,830 $ 160,052 $ 395,130
Kevin D. O'Brien........................ 87,416 46,830 849,576 395,130
</TABLE>

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

(1) These values assume a valuation of $11.00 per share at December 31, 1995.
Value is calculated based on the difference between the option exercise
price and $11.00 multiplied by the number of shares of Common Stock
underlying the option.

INCENTIVE PLAN

The Incentive Plan, which amended and restated the Company's previous stock
compensation plan, became effective on December 31, 1994. The Incentive Plan
authorizes the issuance of incentive and non-qualified stock options and
restricted stock awards to directors, key employees and advisors of the Company.
The Incentive Plan is administered by the Compensation Committee or such other
committee comprised of at least two nonemployee directors as may be appointed by
the Board. The committee generally has the authority to fix the terms and number
of options and restricted stock awards to be granted and to determine the
employees or other persons who will receive awards; provided that Independent
Directors receive non-qualified stock options under the Incentive Plan
automatically upon election as a director and upon each annual meeting of the
Shareholders thereafter while he or she continues to serve as a director of the
Company. The aggregate number of shares of Common Stock for which options may be
granted or for which restricted stock grants may be made under the Incentive
Plan is 1,324,290, subject to adjustment for stock splits and other capital
adjustments. See "-- Compensation of Directors."

Each option granted pursuant to the Incentive Plan is exercisable at any
time upon or after vesting and expires on the date determined by the committee,
but in no event will any option expire later than ten years from the date of
grant. With respect to a participant who is an employee or advisor, each option
expires within three months after the date the participant ceases to be an
employee or advisor, unless the participant is terminated for "cause," dies or
becomes permanently disabled, or unless the option is a non-qualified stock
option and the committee determines to extend the term of the option. If a
participant ceases to be an employee or advisor due to death or permanent
disability, or a nonemployee director ceases to serve as a director due to
death, the participant or his legal representative may exercise all vested
options during the following 12-month period (or if the option is a
non-qualified stock option, such longer period as the committee may determine),
provided that no options may be exercised after the expiration of the initial
term. If the employee, advisor or nonemployee director is terminated for
"cause," the option will automatically expire. The exercise price of each
incentive stock option granted will be determined by the committee, but shall
not be less than 100% of the fair market value of the Common Stock at the time
such incentive stock option is granted. The maximum aggregate fair market value
of Common Stock, determined at the time an incentive stock option is granted,
with respect to which incentive stock options are exercisable for the first time
by any participant during any calendar year, may not exceed $100,000. The price
at which shares of Common Stock may be acquired pursuant to the exercise of a
non-qualified stock option will be determined by the committee. Options are not
transferable other than by will or the laws of descent or distribution, pursuant
to a qualified domestic relations order, or if permitted by the committee,
non-qualified stock options may be transferred to a member of a participant's
immediate family, and may be exercised during the lifetime of the optionee only
by the optionee or the optionee's authorized representative. A vesting schedule
for the options is indicated in each option agreement as determined by the
committee. The committee has agreed that if Messrs. Herchman, O'Brien or Wallace
are terminated without cause, that all non-vested options held by such
terminated executive officer shall be immediately exercisable.

Shares of Common Stock awarded under restricted stock grants are subject to
restrictions prohibiting their sale, assignment, transfer or encumbrance for a
period of time specified by the committee and will revert

40
<PAGE> 42

to the Company if the participant's relationship with the Company terminates
during such period of restriction, unless such termination is due to the death,
disability or retirement of the participant. Upon the death or disability of a
participant, the restrictions pertaining to the shares of Common Stock terminate
and the stock is no longer subject to forfeiture. Upon the retirement of a
participant, the restrictions pertaining to the shares of Common Stock shall
continue for the original period, unless shortened by the committee, and the
stock is no longer subject to forfeiture. A vesting schedule in the restricted
stock agreement indicates the restriction period and the rate at which the
restrictions lapse.

The Company has outstanding options to purchase in the aggregate 902,315
shares of Common Stock under the Incentive Plan, 348,103 of which are vested and
exercisable. The Company expects that options will continue to be granted to
eligible persons as part of the Company's incentive-based compensation program.

EMPLOYMENT AGREEMENTS

The Company has entered into an Employment Agreement with Paul Herchman,
dated as of January 1, 1994, as amended (the "Herchman Agreement"). The Herchman
Agreement may be terminated by the Company upon 12 months prior notice and may
be terminated by Mr. Herchman upon three months prior notice. The Herchman
Agreement provides that Mr. Herchman receive a base salary of $145,200 per year
and is eligible to receive bonuses based upon the Company's financial
performance. The Herchman Agreement requires Mr. Herchman to maintain the
confidentiality of the Company's proprietary information during his employment
and thereafter and prohibits Mr. Herchman from competing with the Company during
his employment and for a period of one year thereafter.

The Company has entered into an Employment Agreement with Kevin O'Brien,
dated as of January 1, 1995, as amended (the "O'Brien Agreement"). The O'Brien
Agreement provides that Mr. O'Brien will receive a base salary of $115,500 per
year and is eligible to receive bonuses based upon the Company's performance.
The O'Brien Agreement is terminable by the Company with 6 months prior notice
and may be terminated by Mr. O'Brien upon 3 months prior notice. The O'Brien
Agreement requires Mr. O'Brien to maintain the confidentiality of the Company's
proprietary information during his employment and for a period of four years
thereafter and prohibits Mr. O'Brien from competing with the Company during his
employment and for a period of one year thereafter.

The Company has entered into an Employment Agreement with Michael G.
Wallace, dated as of January 1, 1995, as amended (the "Wallace Agreement"). The
Wallace Agreement provides that Mr. Wallace will receive a base salary of
$84,000 per year and is eligible to receive bonuses based upon the Company's
performance. The Wallace Agreement is terminable by the Company with 6 months
prior notice and may be terminated by Mr. Wallace upon 3 months prior notice.
The Wallace Agreement requires Mr. Wallace to maintain the confidentiality of
the Company's proprietary information during his employment and for a period of
four years thereafter and prohibits Mr. Wallace from competing with the Company
during his employment and for a period of one year thereafter.

CERTAIN TRANSACTIONS

On November 17, 1995, the Company entered into a Preferred Stock Purchase
Agreement with various investors, pursuant to which the Company issued an
aggregate of 362,500 shares of Series B Convertible Preferred Stock to such
investors at a purchase price of $4.00 per share ($1.45 million in the
aggregate). In such offering, Morris G. Moreland and Satana, of which Mr.
Moreland is a director, acquired an aggregate of 163,662 shares of Series B
Preferred, and Mapleleaf Capital, Ltd., Sunwestern Investment Fund III and
Sunwestern Cayman 1988 Partners, affiliated entities of Jim Silcock, acquired an
aggregate of 171,067 shares of Series B Preferred. For a description of the
Series B Preferred, see Note 6 of the Notes to Consolidated Financial
Statements.

On July 27, 1995, the Company granted Paul R. Herchman a warrant to
purchase up to 15,610 shares of Common Stock at an exercise price of $2.56 per
share, which warrant vested upon the date of grant and expires in September
1999. This warrant was granted to Mr. Herchman in consideration for his personal
guaranty of the obligations of the Company under its revolving credit facility
and term loans with NationsBank of Texas, N.A. A portion of the net proceeds
from the Offering will be used to repay such indebtedness in full. See "Use of
Proceeds."

41
<PAGE> 43

A warrant to purchase up to 374,640 shares of common stock at $1.28 per
share was granted to Satana on January 17, 1991 as part of the note agreement
(see Note 4). This warrant includes a put feature, whereby the holder of the
shares acquired via the exercise of the warrant could require the Company to
redeem the shares based on a formula price. The Satana note was modified in July
1992, at which time Satana was granted a warrant to purchase an additional
93,660 shares of the Company's common stock at $.64 per share. During the year
ended December 31, 1994, the holder exercised the $.64 per share warrant to
purchase 93,660 shares of common stock at a price of $0.53 per share. The
Company recorded interest expense of approximately $10,000 as a result of this
transaction. During the year ended December 31, 1995, the holder exercised the
warrant to acquire 374,640 shares of common stock in exchange for the
outstanding debt owed to Satana Corporation and the put feature. The difference
between the carrying value of the debt instrument, which approximated fair
value, and the exercise price of the warrants has been accounted for as a
reduction of capital in excess of par value and has been deducted from net
income for purposes of computing net income applicable to common stock. See
Notes 4 and 7 to Consolidated Financial Statements.

On November 26, 1991, MJ Capital Corporation ("MJ Corporation") loaned the
Company $35,000 (the "MJ Corporation Loan") bearing interest at a rate of 16%
per annum. In February of 1992, an additional $10,000 was advanced to the
Company and on December 31, 1992 the balance, including $8,392 of accrued
interest, was consolidated into the MJ Corporation Loan. On May 12, 1993,
Montgomery, Jessup and Company L.L.P. ("MJC") loaned the Company $13,000 bearing
an interest rate of 16% per annum with an additional loan of $2,500 in May of
1993 (the "MJC Loan"). On September 30, 1993, MJ Corporation and MJ Partners
became partners of MJ Capital Partners, L.P. ("MJ Partners"). In connection
therewith, MJ Corporation contributed the MJ Corporation Loan to MJ Partners and
MJC contributed the MJC Loan, together with $8,961 of fees due to MJC for
accounting services rendered, to MJ Partners, all of which amounts were
consolidated into the MJ Partners Note described below.

On September 5, 1991, MJ Partners loaned the Company $95,000 evidenced by a
promissory note (the "MJ Partners Note") bearing interest at a rate of 16% per
annum. In addition to the consolidation of the MJ Corporation Loan and MJC Loan,
during 1991, 1992, 1993 and 1994, MJ Partners loaned the Company additional
amounts under the MJ Partners Note of $78,000, $50,000, $190,000 and $57,500,
respectively, and rolled an aggregate of $46,148 of accrued interest back into
the MJ Partners Note during such period. The MJ Partners Note was paid on June
29, 1995 with proceeds from the NationsBank Loans.

The Company issued the following warrants to certain partners of MJ
Partners in connection with additional advances under the MJ Partners Note, all
of which warrants expire on March 31, 1997: (i) On August 15, 1993, the Company
granted to Columbia General Corporation warrants to purchase up to 23,416 shares
of Common Stock exercisable as follows: 11,708 shares immediately with the
remaining 11,708 shares on or after August 16, 1994 at an exercise price of
$1.28 per share; (ii) On October 17, 1993, the Company granted to Robert
Matthews warrants to purchase up to 2,810 shares of Common Stock exercisable as
follows: 1,405 shares immediately with the remaining 1,405 shares on or after
October 18, 1994 at an exercise price of $1.28 per share; (iii) On May 31, 1994,
the Company granted Thomas H. Montgomery warrants to purchase up to 4,214 shares
of Common Stock exercisable as follows: 2,107 shares immediately and the
remaining 2,107 shares on or after May 31, 1995, at an exercise price of $1.28
per share; (iv) On August 1, 1994, the Company granted to Mr. Montgomery
warrants to purchase up to 1,404 shares of Common Stock exercisable as follows:
702 shares immediately and the remaining 702 shares on or after August 1, 1995,
at an exercise price of $1.28 per share, which remaining portion was canceled in
connection with the repayment of the MJ Partners Note; (v) On August 15, 1994,
the Company granted to Mr. Montgomery warrants to purchase up to 2,810 shares of
Common Stock exercisable as follows: 1,405 shares immediately and the remaining
1,405 shares on or after August 15, 1995, at an exercise price of $1.28 per
share, which remaining portion was canceled in connection with the repayment of
the MJ Partners Note; and (vi) On August 31, 1994, the Company granted to Shelly
Burks warrants to purchase up to 2,342 shares of Common Stock exercisable as
follows: 1,171 shares immediately and the remaining 1,171 shares on or after
August 31, 1995, at an exercise price of $1.28 per share, which remaining
portion was canceled in connection with the repayment of the MJ Partners Note.

Mr. Montgomery, a Director of the Company, is the President of MJ
Corporation and the general partner of MJC and MJ Partners.

42
<PAGE> 44

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of June 30, 1996, and as adjusted to reflect
the sale of the shares of Common Stock offered hereby, by (i) all persons who
are beneficial owners of 5% or more of the Common Stock, (ii) each director of
the Company, (iii) each Named Executive Officer and (iv) all executive officers
and directors of the Company as a group.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES -------------------------------------
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) BEFORE OFFERING AFTER OFFERING(2)
- -------------------------------------------- --------------------- --------------- -----------------
<S> <C> <C> <C>
NAMED EXECUTIVE OFFICERS
Paul R. Herchman(3)......................... 501,827 13.7% 8.9%
Kevin D. O'Brien(4)......................... 104,119 2.8 1.8
DIRECTORS
David A. Kallenberger, M.D.(5).............. 192,003 5.3 3.4
Leo Lopez(6)................................ 1,561 * *
Thomas A. Montgomery(7)..................... 211,125 5.8 3.7
Morris G. Moreland(8)....................... 583,957 16.1 10.4
Leon Pritzker(9)............................ 80,454 2.2 1.4
Jim Silcock(10)............................. 949,193 26.2 16.9
All executive officers and directors as a
group (9 persons)(11)..................... 2,660,100 69.6 45.7
OTHER 5% SHAREHOLDERS
Mapleleaf Capital, Ltd.(12)................. 738,330 20.4 13.1
Satana Corporation(13)...................... 492,645 13.6 8.8
</TABLE>

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

* Less than 1%.

(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
Shares of Common Stock subject to options or warrants that are currently
exercisable or exercisable within 60 days are deemed to be outstanding and
to be beneficially owned by the person or entity holding such options. Data
in this table gives effect to the conversion of the outstanding shares of
Convertible Preferred Stock into Common Stock upon consummation of the
Offering.

(2) Assumes that the Underwriters' over-allotment option to purchase up to
300,000 shares from the Company is not exercised.

(3) Includes 18,732 shares underlying currently exercisable options to purchase
Common Stock and 15,610 shares underlying currently exercisable warrants to
purchase Common Stock. The business address of Mr. Herchman is 2445 Gateway
Drive, Suite 150, Irving, Texas 75063.

(4) Includes 87,416 shares underlying currently exercisable options to purchase
Common Stock.

(5) Includes 24,976 shares underlying currently exercisable options to purchase
Common Stock. The business address of Dr. Kallenberger is 3433 N.W. 56th
Street, Suite 310, Oklahoma City, Oklahoma 73112.

(6) Includes 1,561 shares underlying a currently exercisable option to purchase
Common Stock.

(7) Includes 23,415 shares underlying currently exercisable options to purchase
Common Stock, 5,151 shares underlying currently exercisable warrants to
purchase Common Stock, 7,805 shares of Common Stock held by Mr.
Montgomery's spouse's profit sharing plan and 15,610 shares of Common Stock
held by MJC's profit sharing plan, of which Mr. Montgomery is a partner. As
a partner of MJC, Mr. Montgomery may be deemed to be the indirect
beneficial owner of the shares beneficially owned by MJC by virtue of his
authority to make investment decisions regarding the voting and disposition
of such shares. The business address of Mr. Montgomery is 5220 Spring
Valley, Suite 600, Dallas, Texas 75240.

43
<PAGE> 45

(8) Includes the shares of Common Stock beneficially owned by Satana, of which
Mr. Moreland is an executive officer. As an executive officer of Satana,
Mr. Moreland may be deemed to the indirect beneficial owner of the shares
beneficially owned by Satana by virtue of his authority to make investment
decisions regarding the voting and disposition of such shares. Mr. Moreland
disclaims beneficial ownership of the shares beneficially owned by Satana.
The business address of Mr. Moreland is National Plaza 2, Suite 102,
Amarillo, Texas 79101.

(9) Includes 1,561 shares underlying a currently exercisable option to purchase
Common Stock.

(10) Includes the shares beneficially owned by Mapleleaf Capital, Ltd., 109,649
shares beneficially owned by Sunwestern Cayman 1988 Partners, 101,214
shares beneficially owned by Sunwestern Investment Fund III, all of which
are affiliates of Mr. Silcock. Mr. Silcock may be deemed to the indirect
beneficial owner the shares beneficially owned by such entities by virtue
of his authority to make investment decisions regarding the voting and
disposition of such shares. Mr. Silcock disclaims beneficial ownership of
the shares owned by Mapleleaf Capital, Ltd., Sunwestern Cayman 1988
Partners and Sunwestern Investment Fund III. The business address of Mr.
Silcock is 12221 Merit Drive, Suite 935, Dallas, Texas 75251.

(11) Includes the shares referenced in footnotes (3) - (10), 18,690 additional
shares and 17,171 additional shares underlying currently exercisable
options to purchase Common Stock.

(12) Includes 1,561 shares underlying a currently exercisable option to purchase
Common Stock. The business address of Mapleleaf Capital, Ltd. is 12221
Merit Drive, Suite 935, Dallas, Texas 75251.

(13) Includes 1,561 shares underlying a currently exercisable option to purchase
Common Stock. The business address of Satana Corporation is National Plaza
2, Suite 102, Amarillo, Texas 79101.

44
<PAGE> 46

DESCRIPTION OF CAPITAL STOCK

GENERAL

As of the date of this Prospectus, the authorized capital stock of the
Company consists of 10,000,000 shares of Common Stock, par value $0.002 per
share, and 2,000,000 shares of Preferred Stock, par value $0.002 per share,
issuable in Series. Simultaneously upon consummation of the Offering, the
Articles of Incorporation of the Company will be amended to authorize 30,000,000
shares of Common Stock, par value $0.002 per share, and 5,000,000 shares of
Preferred Stock, par value $0.002 per share. Upon the consummation of the
Offering, there will be 5,623,596 shares of Common Stock outstanding (5,923,596
shares if the Underwriters over-allotment option is exercised in full) and no
shares of Preferred Stock outstanding. On September 9, 1996, the Pricing
Committee of the Board of Directors approved a 1.561 to 1 stock split, effected
through a stock dividend. The description of capital stock has been
retroactively adjusted to give effect for this dividend.

COMMON STOCK

As of the date of this Prospectus, there are 2,378,699 shares of Common
Stock outstanding held by 58 record holders. Each holder of Common Stock is
entitled to one vote per share held of record in the election of Directors and
for all other matters submitted to a vote of the shareholders. Except as
otherwise required by Texas law, a majority vote is sufficient for any act of
the shareholders. Upon consummation of the Offering, there will be no cumulative
voting rights applicable to any shares of Common Stock. All shares of Common
Stock are entitled to participate pro rata in distributions and in such
dividends as may be declared by the Board out of funds legally available
therefor, subject to any preferential dividend and the setting aside of sinking
funds or redemption accounts of outstanding shares of Preferred Stock, if any.
Subject to the prior rights of creditors, all shares of Common Stock are
entitled in the event of liquidation, dissolution or winding up of the Company
to participate ratably in the distribution of all the remaining assets of the
Company after distribution in full of preferential amounts, if any, to be
distributed to holders of Preferred Stock. Holders of Common Stock have no
preemptive rights or right to convert their shares into other securities. The
outstanding shares of Common Stock are and the shares of Common Stock to be
outstanding upon the completion of the Offering will be fully paid and
non-assessable. The rights, preferences and privileges of holders of Common
Stock are subject to, and may be adversely affected by, the rights of any series
of Preferred Stock which the Company may issue in the future.

PREFERRED STOCK

Upon consummation of the Offering, the Board may, without further action by
the Company's shareholders, authorize, from time to time, issuance of up to
5,000,000 shares of Preferred Stock in series and may, at the time of issuance,
determine the powers, rights, preferences and limitations of any such series.
Satisfaction of any dividend preferences on outstanding shares of Preferred
Stock would reduce the amount of funds available for the payment of dividends on
Common Stock. Holders of Preferred Stock would be entitled to receive a
preference payment in the event of any liquidation, dissolution or winding up of
the Company before any payment is made to the holders of Common Stock. Although
there is no current intention to do so, the Board may, without shareholder
approval, issue shares of a class or series of Preferred Stock with voting and
conversion rights which could adversely affect the voting power or dividend
rights of the holders of Common Stock and may have the effect of delaying,
deferring or preventing a change in control of the Company.

The Company has authorized the issuance of 435,000 shares of Series A
Convertible Preferred Stock and 362,500 shares of Series B Convertible Preferred
Stock. Immediately prior to the consummation of the Offering, there were 435,000
shares of Series A Convertible Preferred Stock outstanding held by one holder of
record and 362,500 shares of Series B Convertible Preferred Stock outstanding
held by 16 holders of record. See Notes 5 and 6 of the Notes to Consolidated
Financial Statements for a description of the Series A Convertible Preferred
Stock and Series B Convertible Preferred Stock, respectively. Concurrently with
the consummation of the Offering, all of the outstanding shares of Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock will be
converted into shares of Common Stock on a 1.561 to 1 basis. Upon consummation
of the Offering, no shares of Preferred Stock will be outstanding.

45
<PAGE> 47

WARRANTS

As of June 30, 1996, there were warrants outstanding to purchase 49,328
shares of Common Stock at a weighted average exercise price of $1.69 per share.
The warrants were issued in connection with the issuance of debt instruments by
the Company. All of the warrants are currently exercisable. Warrants covering
33,718 shares will expire by their terms in March 1997, and warrants covering
15,610 shares will expire by their terms in September 1999.

REGISTRATION RIGHTS

The Company has entered into the Series A Convertible Preferred Stock
Purchase Agreement (the "Series A Preferred Stock Agreement") and a Series B
Convertible Stock Purchase Agreement (the "Series B Preferred Stock Agreement")
which give certain rights to the holders of the equivalent of 1,244,898 shares
of Common Stock to demand that the Company register shares of Common Stock under
the Securities Act, subject to certain conditions. In order for the holders
("Series A Rights Holders") of Series A Preferred Stock or of Common Stock
converted from Series A Preferred Stock to effect a demand for registration, the
Series A Preferred Stock Agreement requires that the holders of at least 50% of
all such shares request the registration of at least 45% of the total shares of
Common Stock that are issued or issuable upon conversion of the Series A
Preferred Stock. In order for the holders ("Series B Rights Holders") of Series
B Preferred Stock or of Common Stock converted from Series B Preferred Stock to
effect a demand for registration, the Series B Preferred Stock Agreement
requires that the holders of at least 40% of all such shares request the
registration of at least 45% of the total shares of Common Stock that are issued
or issuable upon conversion of the Series B Preferred Stock. An unlimited number
of demands may be made; however, the Company has an obligation to complete only
two registrations at the demand of the Series A Rights Holders and only two
registrations at the demand of the Series B Rights Holders. The expenses of the
first such registration on behalf of each of the Series A Rights Holders and
Series B Rights Holders will be borne by the Company; the expenses of subsequent
registrations will be borne by the respective selling shareholders. In addition,
once the Company is eligible to effect a registration of its securities under
Form S-3, each group of Series A Rights Holders and Series B Rights Holders may
effect a demand for registration on Form S-3 if the holders of 25% of such
rights holders' shares request such registration. An unlimited number of demands
for registration on Form S-3 may be made; however, the Company has an obligation
to complete only one such registration during any one fiscal year. All rights
holders have waived such rights with respect to the Offering and have agreed not
to demand registration of any of their shares for a period of one year following
the Effective Date pursuant to the Lock-up Agreements.

In addition to demand registration rights, each group of rights holders has
unlimited "piggyback" registration rights pursuant to which the rights holders
will have the right to request that the Company register their respective shares
under the Securities Act at the expense of the Company (excluding all
underwriting discounts, selling commissions and applicable stock transfer
taxes), unless in connection with an underwritten public offering, the principal
underwriter reasonably and in good faith recommends that the respective rights
holders' shares be excluded from the offering. All rights holders have waived
such rights with respect to the Offering and have agreed not to demand
registration of any of their shares for a period of one year following the
Effective Date pursuant to the Lock-up Agreements.

Satana and Morris G. Moreland have registration rights equivalent to those
of the Series A Rights Holders with respect to 421,470 shares and 46,830 shares
of Common Stock held by Satana and Morris G. Moreland, respectively. Satana and
Morris G. Moreland have waived their registration rights in connection with the
Offering and has agreed not to demand registration of any of its shares for a
period of one year following the Effective Date pursuant to the Lock-up
Agreements.

CERTAIN ANTI-TAKEOVER PROVISIONS

Certain provisions of the Company's Articles of Incorporation and Bylaws
may be deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a shareholder may consider to be in the
best interests of the Company or its shareholders, including those attempts that
may

46
<PAGE> 48

result in a premium over the then current market price for the Common Stock.
Concurrent with the completion of the Offering, the Company's Restated and
Amended Articles of Incorporation and Restated and Amended Bylaws will provide
for the Board of Directors to be divided into three classes of as equal size as
possible, with the term of each class expiring in consecutive years with
approximately one-third of the Board of Directors being elected each year.
Holders of Common Stock will not be entitled to vote cumulatively for directors,
but directors will be permitted to be removed with or without cause by the
affirmative vote of at least two-thirds of the outstanding shares of stock of
the Company entitled to vote thereon. The Company's Restated and Amended
Articles of Incorporation and Restated and Amended Bylaws will also provide that
the Company's Bylaws may be adopted, amended, or repealed only by the Board of
Directors and that the number of directors shall be fixed from time to time by
resolution of the Board of Directors. In addition, a calling of a special
meeting by the shareholders of the Company will require the written request of
holders of at least 50% of all the outstanding shares of the Company entitled to
vote. Shareholders of the Company entitled to take action at annual or special
meetings of the shareholders may take action by written consent only with the
unanimous written consent of all the shareholders entitled to vote thereon.
Concurrent with the completion of the Offering, the Company's Restated and
Amended Articles of Incorporation and Restated and Amended Bylaws will also
authorize shares of Preferred Stock with respect to which the Board of Directors
will have the power to fix the rights, preferences, privileges, and restrictions
without any further vote or action by the stockholder. The provisions of the
Company's Restated and Amended Articles of Incorporation and Restated and
Amended Bylaws may have the effect of delaying, deferring or preventing a change
in control of the Company, which could deprive the Company's shareholders of the
opportunity to sell their shares of Common Stock at prices higher than
prevailing market prices. Such provisions could also limit the price that
certain investors might be willing to pay in the future for shares of Common
Stock. These provisions, in addition to the existence of authorized but unissued
capital stock, may have the effect, either alone or in combination with each
other, of making more difficult or discouraging an acquisition of the Company or
other change in control deemed undesirable by the Board. See "Description of
Capital Stock -- Preferred Stock."

TRANSFER AGENT AND REGISTRAR

Upon consummation of the Offering, the transfer agent and registrar for the
Common Stock will be ChaseMellon Shareholder Services, L.L.C.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that a significant public market for the Common
Stock will develop or be sustained after the Offering. Future sales of
substantial amounts of Common Stock in the public market could adversely affect
market prices prevailing from time to time and could impair the Company's
ability to raise capital through sale of its equity securities. Sales of
substantial amounts of Common Stock of the Company in the public market after
the restrictions lapse could adversely affect the prevailing market price and
the ability of the Company to raise equity capital in the future.

Upon completion of the Offering, the Company will have outstanding
5,623,596 shares of Common Stock. Of these shares, the 2,000,000 shares of
Common Stock offered hereby will be tradeable without restriction under the
Securities Act, except for any shares acquired by an "affiliate" of the Company
(as that term is defined in the Securities Act and regulations promulgated
thereunder). The remaining 3,623,596 shares are "restricted securities" within
the meaning of Rule 144 and may be publicly sold only if registered under the
Securities Act or sold in accordance with an applicable exemption from
registration, such as Rule 144. The beneficial owners of more than 98% of the
Restricted Shares have entered into Lock-up Agreements which provide that, with
certain limited exceptions, the shareholder will not offer, sell, contract to
sell, grant an option to purchase, make a short sale or otherwise dispose of or
engage in any hedging or other transaction that is designed or reasonably
expected to lead to a disposition of any shares of Common Stock or any option or
warrant to purchase shares of Common Stock or any securities exchangeable for or
convertible into shares of Common Stock for a period of 180 days after the
Effective Date without the prior written consent of Bear, Stearns & Co. Inc. The
remainder, less than 2% of the Restricted Shares, will be available for

47
<PAGE> 49

sale upon the Effective Date. Beginning 180 days after the Effective Date, the
remainder of the Restricted Shares will become eligible for sale under Rule 144
or Rule 701 upon the expiration of the Lock-up Agreements. In addition, 348,103
shares subject to currently vested stock options and warrants will become
eligible for sale in the public market upon the expiration of the Lock-up
Agreements.

In general, under Rule 144 as currently in effect, beginning 90 days after
the Effective Date, a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least two years, including an
affiliate of the Company, is entitled to sell, within any three month period, a
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock (approximately 56,321 shares immediately
after the Offering) or (ii) an amount equal to the average weekly reported
volume of trading in the Common Stock during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain manner of sale
limitations, notice requirements and the availability of current public
information about the Company. A person (or persons whose shares are aggregated)
who is not deemed an affiliate of the Company and who has beneficially owned
Restricted Shares for at least three years is entitled to sell such shares under
Rule 144 without regard to these volume or other limitations. Restricted Shares
properly sold in reliance on Rule 144 are thereafter freely tradeable without
restrictions or registration under the Securities Act, unless thereafter held by
an affiliate of the Company. In addition, Rule 701 permits any employee, officer
or director of or consultant to the Company who purchased his or her shares
pursuant to a written compensatory plan or contract to sell such shares without
having to comply with the holding period requirements of Rule 144 and, in the
case of non-affiliates, without having to comply with the public information,
volume limitation or notice provisions of Rule 144.

The Company anticipates that it will file a registration statement on Form
S-8 under the Securities Act to register all of the shares of Common Stock
issued or reserved for future issuance under the Incentive Plan. Subject to the
Lockup Agreements, upon filing of such registration statement, shares purchased
upon the exercise of options covered thereby would generally be available for
resale in the public market, subject to Rule 144 volume limitations applicable
to affiliates of the Company.

Pursuant to the Registration Rights Agreements, the holders of the
Convertible Preferred Stock have been accorded the right to require the Company,
at the Company's expense, to register up to all of their 1,244,898 shares of
Common Stock under the Securities Act. Satana and Morris G. Moreland have
registration rights equivalent to those of the Series A Rights Holders with
respect to 421,470 shares and 46,830 shares of Common Stock held by Satana and
Morris G. Moreland, respectively. See "Description of Capital
Stock -- Registration Rights." Pursuant to the Lock-up Agreements, such persons
have agreed not to exercise such registration rights for a period of one year
following the Effective Date, without the prior written consent of Bear, Stearns
& Co. Inc.

48
<PAGE> 50

UNDERWRITING

Subject to certain terms and conditions contained in the Underwriting
Agreement (the "Underwriting Agreement"), the underwriters named below (the
"Underwriters"), for whom Bear, Stearns & Co. Inc. and Equitable Securities
Corporation are acting as representatives (the "Representatives"), have
severally agreed to purchase from the Company an aggregate of 2,000,000 shares
of Common Stock. The number of shares of Common Stock that each Underwriter has
agreed to purchase is set forth opposite its name below:

SCHEDULE I

<TABLE>
<CAPTION>
NUMBER OF FIRM SHARES
NAME OF UNDERWRITER TO BE PURCHASED
------------------------------------------------------------------------------------ ---------------------
<S> <C>
Bear, Stearns & Co. Inc. ........................................................... 858,000
Equitable Securities Corporation.................................................... 462,000
Alex. Brown & Sons Incorporated..................................................... 40,000
Cowen & Company..................................................................... 40,000
Donaldson, Lufkin & Jenrette Securities Corporation................................. 40,000
Hambrecht & Quist LLC............................................................... 40,000
Lehman Brothers Inc. ............................................................... 40,000
Montgomery Securities............................................................... 40,000
Morgan Stanley & Co. Incorporated................................................... 40,000
Prudential Securities Incorporated.................................................. 40,000
Wasserstein Perella Securities, Inc. ............................................... 40,000
Arnhold and S. Bleichroeder, Inc. .................................................. 20,000
Blaylock & Partners, L.P. .......................................................... 20,000
J.C. Bradford & Co. ................................................................ 20,000
Dain Bosworth Incorporated.......................................................... 20,000
First Southwest Company............................................................. 20,000
Gerard Klauer Mattison & Co., LLC................................................... 20,000
Josephthal Lyon & Ross Incorporated................................................. 20,000
McDonald & Company Securities, Inc. ................................................ 20,000
Morgan Keegan & Company, Inc. ...................................................... 20,000
Needham & Company, Inc. ............................................................ 20,000
Piper Jaffray Inc. ................................................................. 20,000
Principal Financial Securities, Inc. ............................................... 20,000
Rauscher Pierce Refsnes, Inc. ...................................................... 20,000
Scott & Stringfellow, Inc. ......................................................... 20,000
Volpe, Welty & Company.............................................................. 20,000
Wheat, First Securities, Inc. ...................................................... 20,000
----------
Total....................................................................... 2,000,000
==========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of Common Stock are subject to approval of
certain legal matters by counsel and to certain other conditions precedent. If
any of the shares of Common Stock are purchased by the Underwriters pursuant to
the Underwriting Agreement, all such shares of Common Stock (other than shares
of Common Stock covered by the over-allotment option described below) must be so
purchased.

Prior to the Offering, there has been no established public trading market
for the Common Stock. The initial price to the public for the Common Stock
offered hereby has been determined in negotiations between the Company and the
Representatives. Among the factors considered in such negotiations have been the
history of and the prospects for the industry in which the Company competes, an
assessment of the Company's management, the past and present operations of the
Company, the historical results of operations of the Company, the prospects for
future earnings of the Company, the general condition of the securities markets
at the time of the Offering, and the recent market prices of securities of
generally comparable companies. There can be no assurance that an active trading
market will develop for the Common Stock or that the Common Stock will trade in
the public market subsequent to the Offering at or above the initial offering
price.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Act, or to contribute to payments
that the Underwriters may be required to make in respect thereof.

The Company has been advised by the Representatives that the Underwriters
propose to offer the Common Stock to the public initially at the price set forth
on the cover page of this Prospectus and to certain dealers (who may include the
Underwriters) at such price less a concession not to exceed $0.46 per share. The
Underwriters may allow, and such dealers may allow, discounts not in excess of
$0.15 per share to any Underwriter and certain other dealers.

The Company has granted to the Underwriters an option to purchase up to an
aggregate of 300,000 solely additional shares of Common Stock at the initial
public offering price, less underwriting discounts and

49
<PAGE> 51

commissions to cover overallotments. Such option may be exercised at any time
until 30 days after the date of the final Prospectus relating to the Offering.
To the extent that the Underwriters exercise such option, each of the
Underwriters will be committed, subject to certain conditions, to purchase a
number of option shares proportionate to such Underwriters' initial commitment
as indicated in the preceding table.

The holders of over 98% of the outstanding capital stock of the Company,
including all of the Company's directors and executive officers, have agreed not
to offer, pledge, issue, sell, contract to sell, grant any option to purchase or
otherwise dispose (or announce any offer, sale, grant of any option to purchase
or other disposition) of any shares of Common Stock, or any securities
convertible into, or exercisable or exchangeable for, shares of Common Stock for
a period of 180 days after the date of the final Prospectus relating to the
Offering, without the prior written consent of Bear, Stearns & Co. Inc. In
addition, holders of the Company's Convertible Preferred Stock have agreed not
to exercise certain rights to have their shares of Company Common Stock
registered under the Securities Act for a period of the year following the
Effective Date, without the prior written consent of Bear, Stearns & Co. Inc.
See "Shares Eligible for Future Sale."

The Underwriters do not intend to sell shares of Common Stock to any
account over which they exercise discretionary authority.

Julie E. Silcock, a Senior Managing Director of Bear, Stearns & Co. Inc.,
is the wife of Jim Silcock, a general partner of Mapleleaf Capital, Ltd. and a
director of the Company. Mapleleaf Capital, Ltd., together with its affiliates,
is the largest holder of the Company's Common Stock. Ms. Silcock may be deemed
to beneficially own certain shares of the Company's Common Stock held by
Mapleleaf Capital, Ltd. and its affiliates due to her marital relationship with
Mr. Silcock. See "Principal Shareholders."

LEGAL MATTERS

The validity of the issuance of the shares of Common Stock offered hereby
and certain other legal matters will be passed upon for the Company by Jackson &
Walker, L.L.P., Dallas, Texas. A partner of Jackson & Walker, L.L.P.
beneficially owns 10,927 shares of Common Stock of the Company. Certain legal
matters in connection with the issuance of the shares of Common Stock offered
hereby will be passed upon for the Underwriters by Winstead Sechrest & Minick
P.C., Dallas, Texas.

EXPERTS

The consolidated financial statements and financial statement schedule of
Medical Alliance, Inc. and its subsidiaries at December 31, 1994 and 1995, and
for each of the years in the three-year period ended December 31, 1995,
appearing in this Prospectus and Registration Statement have been audited by
Coopers & Lybrand L.L.P., independent accountants and are included herein and
elsewhere in the Registration Statement in reliance upon such reports and
schedule given upon the authority of said firm as experts in accounting and
auditing.

ADDITIONAL INFORMATION

The Company has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus constitutes a part of the Registration Statement
and does not contain all of the information set forth in the Registration
Statement or the exhibits and schedules thereto, certain parts of which have
been omitted in accordance with the rules and regulations of the Commission. For
further information pertaining to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement, including the exhibits
and schedules thereto. Statements made in this Prospectus concerning the
provisions of any documents to which reference is made are not necessarily
complete and, in the case of documents filed as exhibits to the Registration
Statement, reference is made to the copy of the documents so filed for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference. The Registration Statement
and the exhibits and schedules thereto filed with the Commission may be
inspected and copied at the public reference facility maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the Commission located at 75 Park
Place, Room 1228, New York, New York 10007 and Suite 1400, Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 60621-2511. The Commission
maintains a web site that contains reports, proxy statements and other
information filed with the Commission; the address of this site is
http://www.sec.gov. Copies of such material may also be obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549.

50
<PAGE> 52

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S> <C>
MEDICAL ALLIANCE, INC. AND SUBSIDIARIES
Report of Independent Accountants.................................................... F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996....... F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and
1995 and the six months ended June 30, 1995 and 1996.............................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1993, 1994 and 1995 and the six months ended June 30, 1996........... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995 and for the six months ended June 30, 1995 and 1996.......................... F-6
Consolidated Notes to Financial Statements........................................... F-7
</TABLE>

F-1
<PAGE> 53

REPORT OF INDEPENDENT ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheets of Medical
Alliance, Inc. and Subsidiaries (the "Company"), as of December 31, 1994 and
1995 and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1995. 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. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Medical Alliance, Inc. and Subsidiaries as of December 31, 1994 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles.

/s/ Coopers & Lybrand L.L.P.

COOPERS & LYBRAND L.L.P.

Dallas, Texas
July 17, 1996, except for Note 17 as to
which the date is September 9, 1996

F-2
<PAGE> 54

MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND JUNE 30, 1996

ASSETS

PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
----------------------- JUNE 30, JUNE 30,
1994 1995 1996 1996
---------- ---------- ----------- -------------
(UNAUDITED) (UNAUDITED)

<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 93,656 $1,385,654 $ 1,404,985
Restricted cash......................................... 15,035 22,854 26,900
Accounts receivable, less allowance for doubtful
accounts of $449,881, $1,113,314 and $1,514,926,
respectively.......................................... 1,386,714 2,568,686 3,399,029
Prepaid expenses and other current assets............... 124,665 230,322 440,512
----------- ----------- -----------
Total current assets............................. 1,620,070 4,207,516 5,271,426
----------- ----------- -----------
Property and equipment, net............................... 809,354 2,192,791 3,474,655
----------- ----------- -----------
Other assets:
Deferred income taxes................................... 256,972 -- --
Intangible assets, net of amortization of approximately
$44,000, $3,000 and $23,000, respectively............. 11,526 43,056 184,536
----------- ----------- -----------
Total other assets............................... 268,498 43,056 184,536
----------- ----------- -----------
Total assets..................................... $2,697,922 $6,443,363 $ 8,930,617
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 241,951 $ 316,367 $ 562,026
Accrued expenses........................................ 343,766 801,555 1,147,328
Current maturities of:
Long-term debt........................................ 275,875 366,667 700,452
Capital lease obligations............................. 209,826 284,633 317,894
Deferred income taxes................................... 256,972 365,616 41,780
Deferred revenue........................................ 165,907 159,337 156,842
----------- ----------- -----------
Total current liabilities........................ 1,494,297 2,294,175 2,926,322
Long-term debt, net of current maturities................. 688,912 1,443,819 2,655,335
Capital lease obligations, net of current maturities...... 391,280 258,296 138,922
Deferred income taxes..................................... -- 16,547 451,825
----------- ----------- -----------
Total liabilities................................ 2,574,489 4,012,837 6,172,404
----------- ----------- -----------
Stockholders' equity:
Series A convertible preferred stock, $0.002 par value,
2,000,000 shares authorized; 435,000 shares issued and
outstanding; aggregate liquidation preferences of
$928,500, $893,500 and $893,500, respectively, no
shares pro forma...................................... 870 870 870 --
Series B convertible preferred stock, $0.002 par value,
362,500 shares authorized, issued and outstanding;
aggregate liquidation preferences of $0, $1,450,000
and $1,450,000, respectively, no shares pro forma..... -- 725 725 --
Common stock, $0.002 par value, 10,000,000 shares
authorized and 1,894,024, 2,339,421 and 2,387,172
shares issued and outstanding, respectively, 3,632,069
shares pro forma...................................... 3,788 4,678 4,774 7,264
Capital in excess of par value.......................... 1,232,257 2,959,586 2,918,032 2,917,137
Accumulated deficit..................................... (1,104,532) (526,383) (157,238) (157,238)
Treasury stock at cost, 17,230 shares................... (8,950) (8,950) (8,950) (8,950)
----------- ----------- ----------- -----------
Total stockholders' equity....................... 123,433 2,430,526 2,758,213 2,758,213
----------- ----------- ----------- -----------
Total liabilities and stockholders' equity....... $2,697,922 $6,443,363 $ 8,930,617
=========== =========== ===========
</TABLE>

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

F-3
<PAGE> 55

MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- ------------------------
1993 1994 1995 1995 1996
---------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>

Net revenue...................... $3,720,268 $5,261,763 $11,177,138 $4,854,109 $8,395,480
---------- ---------- ----------- ---------- ----------
Costs and expenses:
Salaries and benefits.......... 1,643,306 2,005,262 3,721,169 1,686,252 2,748,810
Selling, general and
administrative.............. 1,214,320 1,816,859 3,620,394 1,539,224 2,800,838
Depreciation and
amortization................ 333,090 293,093 718,767 264,573 652,710
Provision for uncollectible
accounts.................... 550,521 781,176 1,884,709 743,196 1,422,737
---------- ---------- ----------- ---------- ----------
Total costs and
expenses............. 3,741,237 4,896,390 9,945,039 4,233,245 7,625,095
---------- ---------- ----------- ---------- ----------
Operating income
(loss)............... (20,969) 365,373 1,232,099 620,864 770,385
---------- ---------- ----------- ---------- ----------
Other (income) expense:
Interest income and other,
net......................... (1,860) (5,528) 11,953 9,644 (12,110)
Interest expense............... 157,846 178,722 246,655 130,735 150,658
---------- ---------- ----------- ---------- ----------
Total other expense.... 155,986 173,194 258,608 140,379 138,548
---------- ---------- ----------- ---------- ----------
Income (loss) before income
taxes.......................... (176,955) 192,179 973,491 480,485 631,837
Provision (benefit) for income
taxes.......................... (26,474) -- 395,342 195,129 262,692
---------- ---------- ----------- ---------- ----------
Net income (loss)................ (150,481) 192,179 578,149 285,356 369,145
---------- ---------- ----------- ---------- ----------
Less preferred stock dividend.... (75,000) (75,000) (87,000) (87,000) (87,000)
Less charge for cancelation of
put feature described in Note
7.............................. -- -- (180,000) (180,000) --
---------- ---------- ----------- ---------- ----------
Net income (loss) applicable to
common stock................... $ (225,481) $ 117,179 $ 311,149 $ 18,356 $ 282,145
========== ========== =========== ========== ==========
Net income (loss) per share...... $ (.09) $ .04 $ .10 $ .01 $ .08
========== ========== =========== ========== ==========
Weighted average number of common
shares and common share
equivalents (in thousands)..... 2,529 2,611 3,011 2,728 3,553
---------- ---------- ----------- ---------- ----------
</TABLE>

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

F-4
<PAGE> 56

MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK CAPITAL IN
---------------- ---------------- ------------------ EXCESS OF ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT PAR VALUE DEFICIT
------- ------ ------- ------ --------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993.................. 375,000 $750 1,776,949 $3,554 $1,221,111 $(1,146,230)
Issuance of common stock for note
receivable.............................. 23,415 47 1,453
Series A preferred stock dividend......... (75,000)
Net loss.................................. (150,481)
------- ---- ------- ---- --------- ------ ---------- -----------
Balance at December 31, 1993................ 375,000 750 1,800,364 3,601 1,147,564 (1,296,711)
Issuance of common stock (Satana warrants
exercised).............................. 93,660 187 59,813
Issuance of preferred stock for cash
(Mapleleaf Capital warrants
exercised).............................. 60,000 120 99,880
Series A preferred stock dividend......... (75,000)
Net income................................ 192,179
------- ---- ------- ---- --------- ------ ---------- -----------
Balance at December 31, 1994................ 435,000 870 1,894,024 3,788 1,232,257 (1,104,532)
Issuance of preferred stock................. 362,500 $725 1,439,207
Exercise of warrant in exchange for debt
payable to Satana Corporation........... 374,640 749 479,251
Charge for cancelation of put feature
described in Note 7..................... (180,000)
Options exercised......................... 60,723 121 50,179
Issuance of common stock related to
acquisition............................. 10,034 20 25,692
Series A preferred stock dividend......... (87,000)
Net income................................ 578,149
------- ---- ------- ---- --------- ------ ---------- -----------
Balance at December 31, 1995................ 435,000 870 362,500 725 2,339,421 4,678 2,959,586 (526,383)
Issuance of common stock (unaudited)...... 4,293 9 10,991
Options exercised (unaudited)............. 43,458 87 34,455
Series A preferred stock dividend
(unaudited)............................. (87,000)
Net income (unaudited).................... 369,145
------- ---- ------- ---- --------- ------ ---------- -----------
Balance at June 30, 1996
(unaudited)............................... 435,000 $870 362,500 $725 2,387,172 $4,774 $2,918,032 $ (157,238)
======= ==== ======= ==== ========= ====== ========== ===========

<CAPTION>
TOTAL
STOCKHOLDERS'
TREASURY EQUITY
STOCK (DEFICIT)
-------- -------------
<S> <C> <C>
Balance at January 1, 1993.................. $(8,950) $ 70,235
Issuance of common stock for note
receivable.............................. 1,500
Series A preferred stock dividend......... (75,000)
Net loss.................................. (150,481)
------- ----------
Balance at December 31, 1993................ (8,950) (153,746)
Issuance of common stock (Satana warrants
exercised).............................. 60,000
Issuance of preferred stock for cash
(Mapleleaf Capital warrants
exercised).............................. 100,000
Series A preferred stock dividend......... (75,000)
Net income................................ 192,179
------- ----------
Balance at December 31, 1994................ (8,950) 123,433
Issuance of preferred stock................. 1,439,932
Exercise of warrant in exchange for debt
payable to Satana Corporation........... 480,000
Charge for cancelation of put feature
described in Note 7..................... (180,000)
Options exercised......................... 50,300
Issuance of common stock related to
acquisition............................. 25,712
Series A preferred stock dividend......... (87,000)
Net income................................ 578,149
------- ----------
Balance at December 31, 1995................ (8,950) 2,430,526
Issuance of common stock (unaudited)...... 11,000
Options exercised (unaudited)............. 34,542
Series A preferred stock dividend
(unaudited)............................. (87,000)
Net income (unaudited).................... 369,145
------- ----------
Balance at June 30, 1996
(unaudited)............................... $(8,950) $2,758,213
======= ==========
</TABLE>

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

F-5
<PAGE> 57

MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996

YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------- -------------------------
1993 1994 1995 1995 1996
--------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $(150,481) $ 192,179 $ 578,149 $ 285,356 $ 369,145
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Provision for uncollectible accounts................. 550,521 781,176 1,884,709 743,196 1,422,737
Depreciation and amortization........................ 350,090 293,093 718,767 264,573 652,710
Deferred income taxes................................ (26,474) -- 382,163 192,435 111,442
Changes in assets and liabilities net of effects from
acquisitions:
Accounts receivable................................ (691,573) (1,414,948) (3,066,681) (1,343,072) (2,253,080)
Prepaid expenses and other current assets.......... (66,431) 10,515 (105,657) (66,354) (210,190)
Accounts payable and accrued expenses.............. 24,330 269,872 577,794 428,789 504,432
Deferred revenue................................... 23,395 142,512 (6,570) (35,455) (2,495)
Other.............................................. -- -- (45,589) -- --
--------- ----------- ----------- ----------- -----------
Net cash provided by operating activities........ 13,377 274,399 917,085 469,468 594,701
--------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures................................... (36,142) (130,231) (1,850,112) (891,172) (1,499,190)
Payment for acquisitions............................... -- -- (35,000) -- (493,840)
Change in restricted cash.............................. (19,630) 4,595 (7,819) 7,301 (4,046)
--------- ----------- ----------- ----------- -----------
Net cash used in investing activities............ (55,772) (125,636) (1,892,931) (883,871) (1,997,076)
--------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Payment of dividends on preferred stock................ -- (115,000) (122,000) (35,000) --
Repayment of capital lease obligations................. (16,134) (80,025) (244,543) (108,602) (151,113)
Repayment of long-term debt............................ (88,260) (148,833) (1,161,190) (1,023,713) (183,336)
Proceeds from issuance of preferred stock.............. -- 100,000 1,439,932 -- --
Proceeds from issuance of common stock................. -- 50,000 50,300 -- 34,542
Proceeds from issuance of long-term debt............... 205,500 57,500 2,293,819 1,575,260 1,728,635
Other.................................................. (11,303) -- 11,526 (30,000) (7,022)
--------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities..................................... 89,803 (136,358) 2,267,844 377,945 1,421,706
--------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................................ 47,408 12,405 1,291,998 (36,458) 19,331
Cash and cash equivalents at beginning of year........... 33,843 81,251 93,656 93,656 1,385,654
--------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of year................. $ 81,251 $ 93,656 $ 1,385,654 $ 57,198 $ 1,404,985
========= =========== =========== =========== ===========
Supplemental disclosures of cash flow information:
Interest paid.......................................... $ 82,467 $ 172,222 $ 247,990 $ 130,735 $ 146,374
Income taxes paid...................................... -- -- 5,000 -- 93,956
Supplemental schedule of noncash investing and financing
activities:
Issuance of note payable in payment for accounts
payable, advances and interest....................... 56,294 -- -- -- --
Issuance of common stock for note receivable........... 1,500 -- -- -- --
Preferred stock dividend declared...................... 75,000 35,000 -- 87,000 87,000
Capital lease obligations incurred..................... 85,400 613,925 186,366 186,366 65,000
Exercise of warrant in exchange for outstanding debt
and cancelation of put feature described in Note 7:
Common stock and capital in excess of par value...... -- -- 480,000 -- --
Debt................................................. -- -- 300,000 -- --
The Company has acquired businesses, as follows:
Fair value of assets acquired........................ $ 242,765 $ 351,198
Goodwill recorded.................................... 45,589 142,642
Less:
Fair value of common stock......................... (25,712) --
Cash paid.......................................... (35,000) (493,840)
----------- -----------
Liabilities assumed.................................. $ 227,642 $ --
=========== ===========
</TABLE>

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

F-6
<PAGE> 58

MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
(INFORMATION OF AND FOR THE SIX MONTH PERIODS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)

1. ORGANIZATION:

Medical Alliance, Inc. ("Medical Alliance") provides mobile surgical
services which allow certain minimally invasive operative procedures to be
performed in the physician's office. Medical Alliance was incorporated in Texas
in 1989 and is headquartered in Irving, Texas. Medical Alliance provides its
services throughout the United States and Canada. Medical Alliance entered into
two new lines of business in 1993 through wholly-owned subsidiaries. MAI Safety
Compliance Services, Inc. provides assistance to physician offices and other
alternate site health-care facilities to comply with O.S.H.A. standards.
Physicians Marketing Services, Inc. provides group advertising services to
physicians who utilize Medical Alliance's mobile medical services.

The accompanying consolidated financial statements include the accounts of
Medical Alliance and its wholly-owned subsidiaries (the "Company"). All
significant intercompany transactions have been eliminated.

Interim Financial Information

The consolidated balance sheet as of June 30, 1996, the consolidated
statements of stockholders' equity for the six months then ended, and the
consolidated statements of operations and cash flows for the six months ended
June 30, 1995 and 1996, have been prepared by the Company without audit. In the
opinion of management, all adjustments (which include only normal, recurring
adjustments) necessary to present fairly the financial position at June 30,
1996, and the results of operations and cash flows for all periods presented
have been made. The results of operations for the interim periods are not
necessarily indicative of the operating results for the full year.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets, particularly accounts
receivable, and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results may, in some instances,
differ from previously estimated amounts.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Cash and Cash Equivalents -- The Company considers all investments with
initial maturities of 90 days or less at the time of purchase to be cash
equivalents. The Company maintains a significant portion of its cash balances
with one financial institution. These deposit accounts are insured by the
Federal Deposit Insurance Corporation ("FDIC") up to a limit of $100,000 per
account. At December 31, 1995 and June 30, 1996, the Company had approximately
$1,115,000 and $1,008,000 invested in short-term U.S. government treasury
securities. As a result of the foregoing, the Company believes that credit and
market risk in such instruments is minimal.

Property and Equipment -- Property and equipment are recorded at cost.
Depreciation is provided by the straight-line method over existing useful lives
ranging from three to five years. Repairs and maintenance are charged directly
to expense as incurred. Maintenance contracts are amortized over their
respective contracted period.

Intangibles -- Debt issuance costs were amortized on a straight-line basis
over the periods of the respective debt and organization costs were amortized on
a straight-line basis over a five-year period. Goodwill is the excess of the
purchase price over the fair value of net assets acquired and is being amortized
on a straight-line basis over three years. The carrying value of goodwill is
continually reviewed for recoverability. If

F-7
<PAGE> 59

MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

the review indicates that goodwill will not be recoverable, as determined based
on undiscounted cash flows, the carrying value of the goodwill is reduced by the
estimated short-fall of discounted cash flows.

Income Taxes -- The Company recognizes deferred tax liabilities and assets
for the expected future tax consequences of events that have been recognized in
the Company's consolidated financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax bases of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. Valuation allowances, if any, are
established when necessary to reduce deferred tax assets to the amount that is
more likely than not to be realized. Income tax expense is the tax payable for
the period and the change during the period in deferred tax assets and
liabilities.

Revenue Recognition -- The Company recognizes revenue in most instances
upon completion of the surgical procedures performed with the Company's
equipment. Revenue for procedures that require two or more treatments and is
collected as a global fee, is recognized in equal amounts over the course of the
treatments. Revenue is presented net of contractual allowances and field
discounts.

Deferred Revenue -- The Company organizes certain advertising campaigns and
training seminars for physician utilizers. Revenues are recognized when the
advertising is run or seminars are held. Additionally, certain procedures
require multiple treatments and revenues received in advance are deferred until
subsequent procedures are performed.

Long Lived Assets -- Effective January 1, 1996 the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. There was no material effect from the adoption of this
Statement.

Stock-Based Compensation -- The Company has elected to account for employee
stock-based compensation as prescribed in Accounting Principles Board (APB) No.
25 as opposed to the fair value method prescribed by the Financial Accounting
Standards Board (SFAS) No. 123, "Accounting for Stock-Based Compensation."
However, pro forma disclosure as prescribed by SFAS No. 123 for all such equity
awards will be included in the annual financial statements.

Earnings Per Share -- Net income (loss) per common share is based on
reported net income (loss) less the Series A Preferred Stock dividend and the
charge for cancellation of the put feature (See Note 7). The resulting amount is
presented as income (loss) applicable to common stock. Such income (loss)
applicable to common stock in each period presented is divided by the weighted
average number of outstanding common and common equivalent shares using the
treasury stock method adjusted for the stock split described in Note 16.
Earnings per share for all common stock and common stock warrants, options and
other potentially dilutive instruments issued one year before the initial public
offering have been computed in accordance with Securities and Exchange
Commission Staff Accounting Bulletin ("SAB") Topic 4-D. The SAB requires that
such shares issued at a price less than the per share Offering price be included
in the calculation of common stock and common stock equivalents as if such
shares were outstanding for all periods presented, even when anti-dilutive. With
respect to these shares, the Company has also used the treasury stock method
based on the Offering price as the purchase price.

F-8
<PAGE> 60

MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

3. PROPERTY AND EQUIPMENT:

Property and equipment consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Medical equipment............................. $ 1,048,470 $ 2,764,090 $ 4,484,444
Furniture and fixtures........................ 123,731 223,356 332,259
Transportation................................ -- 7,000 67,956
Leasehold improvements........................ 3,702 11,877 11,877
Equipment under capital leases................ 700,032 886,398 910,479
----------- ----------- -----------
1,875,935 3,892,721 5,807,015
Less accumulated depreciation and
amortization................................ (1,066,581) (1,699,930) (2,332,360)
----------- ----------- -----------
Net property and equipment.................... $ 809,354 $ 2,192,791 $ 3,474,655
=========== =========== ===========
</TABLE>

Accumulated amortization related to equipment under capital leases was
approximately $91,000, $363,000 and $502,000 at December 31, 1994, 1995 and June
30, 1996, respectively.

4. LONG-TERM DEBT:

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
--------- ---------- -----------
<S> <C> <C> <C>
Revolving bank credit agreement at prime plus
1/2%; interest payments due monthly; principal
due 1997....................................... $ -- $ 250,000 $ 250,000
Bank term loan at prime plus 1 1/2% with varying
monthly principal and interest payments; final
payment due 2000............................... -- 643,819 643,819
Bank term loan at prime plus 1 1/2%; monthly
principal and interest payments; final payment
due 1998....................................... -- 916,667 733,333
Bank term loan at prime plus 3/4%; monthly
principal and interest payments beginning in
1997; final payment due 2000................... -- -- 1,728,635
Note to MJ Capital Partners, L.P. at 16%; varying
principal and interest payments; final payment
due 1997....................................... 607,974 -- --
Subordinated note to Satana Corporation at 10%;
varying monthly principal and interest
payments; final payment due 1996............... 356,813 -- --
--------- ---------- ----------
964,787 1,810,486 3,355,787
Less current maturities.......................... (275,875) (366,667) (700,452)
--------- ---------- ----------
$ 688,912 $1,443,819 $ 2,655,335
========= ========== ==========
</TABLE>

F-9
<PAGE> 61

MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Prime rate was 8 1/2% and 8 1/4% at December 31, 1995 and June 30, 1996,
respectively.

The annual principal requirements for the five years subsequent to June 30,
1996 are as follows:

<TABLE>
<S> <C> <C>
YEARS ENDING DECEMBER 31
Remaining 1996....................................................... $ 183,333
1997................................................................. 1,095,861
1998................................................................. 974,151
1999................................................................. 790,818
2000................................................................. 311,624
----------
$3,355,787
==========
</TABLE>

The bank term loans and revolving credit agreement originated in 1995, with
varying principal and interest payments through 2000. Effective March 20, 1996,
the Company and the bank modified the term loans and revolving credit agreement
which increased the term loan agreement from $1,750,000 to $3,750,000 and
increased the revolving credit agreement from $250,000 to $500,000. The loans
and revolving credit are collateralized by Company assets and a personal
guarantee of a major shareholder.

Under the terms of the bank debt, the Company is subject to certain
covenants, including restrictions on dividend payments, the redemption or
repurchase of stock and stock equivalents and limitations on indebtedness. In
addition, the loan agreement contains restrictive covenants which, among other
things, require the Company to obtain directors' and officers' liability
insurance.

As noted above the Company and the bank modified the term loan and
revolving credit agreement. The amended and restated term and revolving credit
agreement requires annual audited financial statements by May 31 for the prior
fiscal year. The Company has not complied with this covenant and has obtained a
waiver from the bank which is effective until January 1, 1997.

The note with Satana Corporation ("Satana"), which originated in 1991, was
collateralized by Company assets, and was modified in July 1992 to extend the
maturity date to December 1996. On June 28, 1995, Satana exercised a warrant to
acquire 374,640 shares of common stock in exchange for the outstanding debt owed
to Satana Corporation (Note 7).

The note with MJ Capital Partners, L.P. and MJ Capital Corporation
originated in 1991 and was collateralized by equipment and certain accounts
receivable. Additional loans have been obtained from these companies
periodically since the origination date. During 1993, MJ Capital Corporation
became a partner in MJ Capital Partners, L.P., at which time the loans from
those parties were combined into a single note. The note was paid in full in
1995.

5. SERIES A PREFERRED STOCK AND PREFERRED STOCK WARRANTS:

On July 10, 1992 the Company entered into a Preferred Stock Purchase
Agreement (the "Series A Agreement") with Mapleleaf Capital, Ltd. The Company
issued an aggregate of 375,000 shares of Series A Convertible Preferred Stock
("Series A Preferred Stock") in exchange for cash of $2.00 per share. In
connection with this transaction, the Company converted subordinated debt of
certain shareholders into shares of common stock at a conversion rate of one
share of common stock for every $2.00 of subordinated debt as described above.

The shares of Series A Preferred Stock were issued with warrants attached
to purchase up to 60,000 shares of Series A Preferred Stock. The warrants were
exercisable at $2.00 per share and expired in 1995. The warrants were exercised
on July 1, 1994 at $1.67 per share which approximated the fair value for other
trades in the Company's common stock. The Series A Preferred Stock was
convertible into common stock at a ratio

F-10
<PAGE> 62

MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

of 1 to 1 initially. However, upon issuance of common stock or common stock
equivalents, the conversion ratio is subject to an anti-dilution adjustment
pursuant to the Series A Agreement for all convertible preferred stock.
Effective with the stock dividend discussed in Note 16, the conversion ratio for
the Series A Preferred Stock will be 1.561 to 1 as approved by the Board of
Directors. The Series A Preferred Stock is convertible at the election of the
holder at any time, or automatically with the closing of an underwritten
qualified public offering (as defined in the Series A Agreement). If the Company
has not completed a qualified public offering on or prior to December 31, 1997,
the Company has the right, but not the obligation to repurchase all remaining
shares of Series A Preferred Stock.

The Series A Preferred Stock requires a $.20 per share annual dividend
commencing on June 30, 1993 which is cumulative if unpaid. Dividends paid for
the years ended December 31, 1993, 1994 and 1995 were $0, $115,000 and $122,000,
respectively. The Company was not in compliance with certain covenants of the
Series A Agreement including the timely issuance of its year-end audited
consolidated financial statements, the timely issuance of a budgeted operating
forecast and a loan to an employee which exceeds the designated limit. The
Company has obtained appropriate waivers from the Series A Preferred Stock
shareholder effective until January 1, 1997.

The Company has reserved 679,035 shares of common stock for the conversion
of all outstanding Series A Preferred Stock.

6. SERIES B PREFERRED STOCK:

On November 17, 1995 the Company entered into a Preferred Stock Purchase
Agreement (the "Series B Agreement") with various investors. The Company issued
an aggregate of 362,500 shares of Series B Convertible Preferred Stock ("Series
B Preferred Stock") in exchange for cash of $4.00 per share.

The Series B Preferred Stock was convertible into common stock at a ratio
of 1 to 1 initially. However, upon issuance of common stock or common stock
equivalents, the conversion ratio is subject to an anti-dilution adjustment
pursuant to the Series B Agreement for all convertible preferred stock.
Effective with the stock dividend discussed in Note 16, the conversion ratio for
the Series B Preferred Stock will be 1.561 to 1 as approved by the Board of
Directors. The Series B Preferred Stock is convertible at the election of the
holders at any time, or automatically with the closing of an underwritten
qualified public offering (as defined in the Series B Agreement). There is no
annual dividend requirement in the Series B Agreement. However, the Company was
not in compliance with certain covenants of the Series B Agreement including the
timely issuance of its year-end audited consolidated financial statements, the
timely issuance of a budgeted operating forecast, and a loan to an employee
which exceeds the designated limit. The Company has obtained appropriate waivers
from all Series B Preferred Stock shareholders effective until January 1, 1997.

The Company has reserved 565,863 shares of common stock for the conversion
of all outstanding Series B Preferred Stock.

7. COMMON STOCK AND COMMON STOCK WARRANTS:

F-11
<PAGE> 63

MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

cancelation of the put feature. The difference between the carrying value of the
debt instrument, which approximated fair value, and the exercise price of the
warrants has been accounted for as a reduction of capital in excess of par value
and has been deducted from net income for purposes of computing net income
applicable to common stock in the accompanying statement of operations.

A warrant to purchase up to 23,415 shares of common stock at $1.28 per
share was granted to Columbia General Corporation on August 15, 1993 as part of
the restructured MJ Capital Partners note. The warrant expires on March 31,
1997.

A warrant to purchase 2,810 shares of common stock was granted in 1993 as
part of the restructured MJ Capital Partners note. The warrant expires on March
31, 1997. Warrants to purchase up to 10,771 shares of common stock at $1.28 per
share were granted in 1994 in connection with advances under the MJ Capital
Partners note. Warrants to purchase 3,278 shares of common stock at $1.28 per
share were canceled in 1995 as part of the early retirement of the MJ Capital
Partners note. The remaining warrants expire on March 31, 1997.

A warrant to purchase up to 15,610 shares of common stock at $2.56 per
share was granted in 1995 to a major stockholder in return for a personal
guarantee of the bank debt. This warrant vested immediately and expires in 1999.

The Company has reserved 49,328 shares of common stock for the conversion
of all outstanding common stock warrants as of December 31, 1995 and June 30,
1996.

The Company's debt and Series A and Series B Preferred Stock agreements
restrict the Company from making dividend payments other than the Series A
Preferred Stock dividend.

8. STOCK OPTIONS:

The Company implemented an Incentive Stock Option Plan (the "Plan") in
January of 1990. In 1994, the Company amended and restated the Plan, which
increased the number of options available for issuance to 1,168,190 shares of
the Company's common stock. In December of 1995, the Company revised the Plan
covering up to 1,324,290 shares of the Company's common stock. The options have
varying expiration dates through September 16, 1999. At December 31, 1995 and
June 30, 1996, options for 441,170 and 294,436 shares remain available for
issuance under the Plan. Options to purchase an equivalent number of shares of
the Company's common stock are as follows:

<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------- -----------
<S> <C> <C>
Total outstanding at January 1, 1993.................................. 293,999 122,289
======== =======
Granted during 1993 at $1.28 per share................................ 220,882 21,074
Exercised at $.06 per share........................................... (23,415) (23,415)
Canceled during 1993 at $1.28 per share............................... (78,050) (31,220)
Outstanding at December 31, 1993
$1.28 per share..................................................... 357,470 159,222
$ .58 per share..................................................... 39,025 39,025
$ .32 per share..................................................... 16,921 16,921
-------- -------
Total outstanding at December 31, 1993................................ 413,416 215,168
======== =======
</TABLE>

F-12
<PAGE> 64

MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
-------- -------
<S> <C> <C>
Granted during 1994 at $1.28 per share................................ 116,295 30,440
Canceled during 1994 at $1.28 per share............................... (40,586) (7,025)
Outstanding at December 31, 1994
$1.28 per share..................................................... 433,179 298,151
$ .58 per share..................................................... 39,025 39,025
$ .32 per share..................................................... 16,921 16,921
-------- -------
Total outstanding at December 31, 1994................................ 489,125 354,097
======== =======
Granted during 1995 at $2.56 per share................................ 679,035 30,440
Exercised at $1.28 per share.......................................... (21,698) (21,698)
Exercised at $.58 per share........................................... (39,025) (39,025)
Canceled during 1995 at $2.56 per share............................... (285,663) --
Canceled during 1995 at $1.28 per share............................... (22,791) (9,522)
Outstanding at December 31, 1995
$2.56 per share..................................................... 393,373 30,440
$1.28 per share..................................................... 388,689 266,931
$ .32 per share..................................................... 16,921 16,921
-------- -------
Total outstanding at December 31, 1995................................ 798,983 314,292
======== =======
Granted during 1996 at $2.56 per share................................ 159,222 --
Granted during 1996 at an assumed public offering price of $12.00 per
share............................................................... 60,099 --
Exercised at $1.28 per share.......................................... (26,537) (26,537)
Exercised at $.32 per share........................................... (16,921) (16,921)
Canceled during 1996 at $2.56 per share............................... (67,123) (31,220)
Canceled during 1996 at $1.28 per share............................... (5,464) --
Outstanding at June 30, 1996
$2.56 per share..................................................... 485,520 30,440
$1.28 per share..................................................... 356,689 317,664
Assumed public offering price of $12.00 per share................... 60,106 --
-------- -------
Total outstanding at June 30, 1996.................................... 902,315 348,103
======== =======
</TABLE>

During 1993, the Company granted 9,366 nonqualifying stock options at $1.28
each vesting immediately of which 7,805 were exercised in 1995 and the remaining
1,561 were exercised in 1996. During 1995, the Company granted 10,927
nonqualifying stock options at $2.56 each vesting immediately and expiring on
August 15, 1997.

During 1995, the Company granted 472,203 performance based stock options
under the Plan at an exercise price of $2.56 each contingent upon the Company
exceeding certain pretax earnings levels which are determined by the Board of
Directors. Although the Company achieved the earnings levels as determined by
the Board, the market value of the Company's common stock did not exceed the
exercise price of $2.56 per share. Therefore, no charge to earnings was recorded
by the Company. Approximately 195,000 of the performance based stock options
were earned in 1995, however, these options do not vest until December 31, 1997.
The remaining options were canceled during 1995.

F-13
<PAGE> 65

MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

9. INCOME TAXES:

The income tax provision consisted of the following:

<TABLE>
<CAPTION>
SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Current provisions:
Federal..................... $ -- $ -- $ -- $ -- $124,010
State....................... -- -- 13,179 6,505 27,240
--------- -------- -------- --------- --------
Total current....... -- -- 13,179 6,505 151,250
--------- -------- -------- --------- --------
Deferred provisions:
Federal..................... (26,474) -- 310,925 153,463 91,371
State....................... -- -- 71,238 35,161 20,071
--------- -------- -------- --------- --------
Total deferred...... (26,474) -- 382,163 188,624 111,442
--------- -------- -------- --------- --------
Total provisions
(benefit)......... $ (26,474) $ -- $395,342 $ 195,129 $262,692
========= ======== ======== ========= ========
</TABLE>

For the years ended December 31, 1993, 1994 and 1995 the Company generated
tax net operating losses. At December 31, 1995, the Company had tax net
operating loss carryforwards of approximately $799,000 which will begin to
expire in the year 2007. For the years ended December 31, 1993, 1994 and 1995
and for the six months ended June 30, 1996, the Company recognized the benefits
of tax operating carryforwards of approximately $0, $0, $39,000 and $619,000,
respectively.

The components of the net deferred tax asset (liability) as of December 31,
1994 and 1995 and June 30, 1996 were as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Net operating loss carryforward............... $ -- $ 238,757 $ --
Accrual to cash conversion.................... (256,972) (642,963) --
Change from cash to accrual for tax
purposes................................... -- -- (80,370)
Other......................................... -- 38,590 38,590
--------- --------- ---------
Net current asset (liability) before valuation
allowance.................................. (256,972) (365,616) (41,780)
Less valuation allowance...................... -- -- --
--------- --------- ---------
Net current asset (liability)................. $(256,972) $(365,616) $ (41,780)
========= ========= =========
Noncurrent:
Book vs. tax depreciation differences......... $ 28,793 $ (16,547) $ 36,014
Net operating loss carryforwards.............. 254,771 -- --
Change from cash to accrual for tax
purposes................................... -- -- (482,223)
Other......................................... -- -- (5,616)
--------- --------- ---------
Net noncurrent asset (liability) before
valuation allowance........................ 283,564 (16,547) (451,825)
Less valuation allowance...................... (26,592) -- --
--------- --------- ---------
Net noncurrent asset (liability).............. $ 256,972 $ (16,547) $(451,825)
========= ========= =========
</TABLE>

F-14
<PAGE> 66

MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The effective income tax rate varies from the federal statutory rate for
the years ended December 31, 1993, 1994, 1995 and six months ended June 30, 1995
and 1996 as follows:

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31, JUNE 30,
------------------------ -------------
1993 1994 1995 1995 1996
----- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Federal statutory rate........................ (34.0)% 34.0% 34.0% 34.0% 34.0%
Disallowance of meals and entertainment....... 4.6 4.6 1.8 1.5 1.8
(Reduction) addition to valuation allowance... 19.4 (37.4) -- -- --
State taxes (net of federal benefit).......... -- -- 5.7 5.7 4.9
Other......................................... (5.0) (1.2) (0.9) (0.6) 0.8
------ ------ ----- ----- -----
Effective income tax rate..................... (15.0)% 0.0% 40.6% 40.6% 41.5%
====== ====== ===== ===== =====
</TABLE>

10. LEASE COMMITMENTS:

The Company leases office space and vans under operating leases and certain
medical equipment under both capital and operating leases. The Company currently
leases office space under noncancelable operating leases which expire on various
dates through July 2002.

The Company has strategic alliances with manufacturers wherein the
manufacturer is paid a portion of the revenues generated by the Company's
equipment for certain benefits including access to the technology and periodic
equipment upgrades. These arrangements can be canceled with a 90 day notice and
are not included in the future minimum rental payments.

Future minimum rental payments under these capital and operating leases
subsequent to June 30, 1996 are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ----------
<S> <C> <C>
YEAR ENDING DECEMBER 31
Remaining 1996.............................................. $ 180,806 $ 486,335
1997........................................................ 285,031 818,725
1998........................................................ 36,656 568,325
1999........................................................ -- 145,288
2000........................................................ -- 131,997
Thereafter.................................................. -- 201,731
--------- ----------
Total future minimum lease payments......................... 502,493 $2,352,401
==========
Less amounts representing interest.......................... (45,677)
---------
Present value of future minimum lease payments.............. 456,816
Less current maturities..................................... (317,894)
---------
Long-term capital lease obligations......................... $ 138,922
=========
</TABLE>

Rent expense for the years ended December 31, 1993, 1994, 1995 and six
months ended June 30, 1995 and 1996 under operating leases was approximately
$103,000, $310,000, $946,000 and $302,000 and $1,257,000, respectively.

F-15
<PAGE> 67

MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

11. CONCENTRATION OF SUPPLIERS:

The Company currently buys its laser equipment, the main component of its
services, from three suppliers. Although there are a limited number of
manufacturers of this equipment, management believes that other suppliers could
provide similar laser equipment on comparable terms.

12. RELATED PARTIES:

The Company paid Montgomery, Jessup and Co., L.L.P. ("MJ"), certified
public accountants, and affiliates of MJ Capital Partners, L.P. and MJ Capital
Corporation, approximately $62,000 in 1993, $13,000 in 1994, and $20,000 in
1995, for professional fees. The Company owed MJ and its affiliates
approximately $616,000 at December 31, 1994, for professional fees and loans. MJ
and its affiliates own 295,216 shares of the Company's common stock and 15,571
shares of Series B Preferred Stock.

Satana's Vice President owns 60,145 shares of common stock and 19,966
shares of Series B Convertible Preferred Stock. The Company had a note payable
to Satana of approximately $357,000 at December 31, 1994.

Approximately $13,000, $32,000 and $27,000 in medical supplies were
purchased from a company owned by the relative of an officer and stockholder of
the Company during 1993, 1994 and 1995, respectively.

13. EMPLOYEE BENEFITS:

Effective January 1, 1993, a tax deferred savings plan under Section 401(k)
of the Internal Revenue Code was established. The plan covers all full-time
employees who are twenty-one years of age with one year of service. Employees
may contribute to the plan up to a maximum of 20% of their salary with a maximum
contribution of $9,240 in 1995. Employees are immediately vested in their
contributions. The Company may contribute an amount as determined by the Board
of Directors. Effective January 1, 1996, the Company began matching 15% of
employee contributions.

14. ACQUISITIONS:

On October 30, 1995, the Company completed the acquisition of substantially
all of the assets of Mobile Surgical Services, Inc., a Florida laser rental
company. For cash paid of $35,000 and 10,034 shares of common stock valued at
$2.56 per share, the Company recorded assets and assumed liabilities as follows:

<TABLE>
<S> <C>
Property and equipment........................................... $ 242,765
Goodwill......................................................... 45,589
Accounts payable................................................. (227,642)
---------
$ 60,712
=========
</TABLE>

The purchase agreement contains a contingent consideration clause whereby
the Company will pay an additional $25,000 by July 31, 1996 if specific gross
revenues are generated in Florida. The acquisition has been accounted for under
the purchase method of accounting and, accordingly, the operating results of
Mobile Surgical Services, Inc. have been included in the consolidated operating
results since the date of acquisition. The pro forma effect of the acquisition
was not material to the results of operations or financial position of the
Company.

Subsequent to year end, the Company completed two acquisitions for a total
purchase price of approximately $494,000. These asset purchases were accounted
for under the purchase method of accounting resulting in the recording of
approximately $143,000 in goodwill and approximately $351,000 in property and

F-16
<PAGE> 68

MEDICAL ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

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

15. FAIR VALUE OF FINANCIAL INSTRUMENTS:

The following methods and assumptions were used in estimating fair values:

Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Accrued
Expenses

The carrying value in the balance sheet approximates fair value.

Long-Term Debt

The fair value of the Company's long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. The carrying
value in the balance sheet approximates fair value.

16. PRO FORMA FINANCIAL STATEMENT INFORMATION (UNAUDITED):

Upon the closing of the Company's initial public offering, each outstanding
share of the Company's Series A and B Preferred Stock will be converted
automatically to common stock and will be given effect for the stock split
discussed in Note 17. The pro forma effect of the conversion has been presented
as a separate column in the Company's consolidated balance sheet assuming the
conversion had occurred as of June 30, 1996. In addition, pro forma financial
information regarding the pro forma sale of common stock necessary to retire
indebtedness (e.g., approximately $3.4 million divided by the assumed IPO price
of $12 per share) as if the retirement had taken place at the beginning of 1995
is as follows:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDING ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
Historical net income applicable to common stock........ $ 311,149 $ 282,145
add: Interest Adjustment assuming repayment of debt as
of January 1, 1995.................................... 182,214 129,558
---------- ----------
Pro forma net income applicable to common stock......... $ 493,363 $ 411,703
========== ==========
Incremental common shares required to repay
indebtedness.......................................... 280,000 280,000
---------- ----------
Pro forma primary shares outstanding.................... 3,293,046 3,833,301
========== ==========
Pro forma fully diluted shares outstanding.............. 3,972,081 4,512,336
========== ==========
Pro forma primary earnings per share.......... $ 0.15 $ 0.11
========== ==========
Pro forma fully diluted earnings per share.... $ 0.15 $ 0.11
========== ==========
</TABLE>

17. SUBSEQUENT EVENT:

On September 9, 1996, the Board of Directors approved and paid a 1.561 to 1
stock split, effected through a stock dividend, whereby each common stock
shareholder received an additional .561 shares for each share owned. In
connection with the split, effected through a stock dividend, common stock was
credited and capital in excess of par value was charged for the aggregate par
value of the shares that were issued. In accordance with SAB Topic 4-C, the
accompanying financial statements and related footnotes have been retroactively
adjusted to give effect for this stock split effected through a stock dividend.

F-17
<PAGE> 69

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN
WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL, OR IN WHICH THE PERSON MAKING SUCH
OFFER IS NOT AUTHORIZED TO DO SO, OR TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO
MAKE SUCH AN OFFER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 6
The Company......................... 12
Use of Proceeds..................... 12
Dividend Policy..................... 12
Dilution............................ 13
Capitalization...................... 14
Selected Consolidated Financial
Data.............................. 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 16
Business............................ 23
Management.......................... 35
Certain Transactions................ 41
Principal Shareholders.............. 43
Description of Capital Stock........ 45
Shares Eligible for Future Sale..... 47
Underwriting........................ 49
Legal Matters....................... 50
Experts............................. 50
Additional Information.............. 50
Index to Consolidated Financial
Statements........................ F-1
</TABLE>

UNTIL NOVEMBER 5, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------
------------------------------------------------------

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

2,000,000 SHARES

LOGO

COMMON STOCK
-------------------------

PROSPECTUS
-------------------------

BEAR, STEARNS & CO. INC.

EQUITABLE SECURITIES CORPORATION

OCTOBER 11, 1996

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