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

                                   FORM 10 - K

(Mark One)

[X]      Annual Report Pursuant to Section 13 or 15(d) of Securities Exchange
         Act of 1934 for the fiscal year ended December 31, 1998

[ ]      Transaction Report Pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934
         For the Transaction Period:
                                     -----------------------
         Commission File Number:
                                 ---------------------------


                             Response Oncology, Inc.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

               Tennessee                                      62-1212264
       ------------------------                        ------------------------
       (State of incorporation)                        (I.R.S. Employer ID No.)

 1805 Moriah Woods Blvd., Memphis, TN                            38117 
----------------------------------------                       ----------
(Address of principal executive offices)                       (Zip Code)


       Registrant's telephone number, including area code: (901) 761-7000
           Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
                                                          Name of each exchange
Title of each class                                       on which registered
-------------------                                       -------------------        
<S>                                                       <C>                                            
Common Stock, par value $.01 per share...................NASDAQ National Market
</TABLE>

           Securities registered pursuant to Section 12(g) of the Act:

                                      NONE

Indicate by check mark whether the registrant (1) has filed all reports required
by section 13 of 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days. Yes  X     No
                 ----      ----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated in Part III of this Form 10-K or any Amendment to this 
form 10-K  X
         ----

As of March 18, 1999, 12,049,331 shares of Common Stock of Response Oncology,
Inc. were outstanding and the aggregate market value of such Common Stock held
by non affiliates was $27,852,000 based on the closing sale price of $2.50 as of
that date.

Portions of Registrant's Proxy Statement for use in connection with the Annual
Meeting of Shareholders to be held on June 10, 1999 are incorporated by
reference into Part III of this report, to the extent set forth therein, if such
Proxy Statement is filed with the Securities and Exchange Commission on or
before April 29, 1999. If such Proxy Statement is not filed by such date, the
information required to be presented in Part III will be filed as an amendment
to this report under cover of a Form 8. The exhibits for this Form 10-K are
listed on Page 18.


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PART I

ITEM 1.   BUSINESS

THE COMPANY

Response Oncology, Inc. ("The Company") is a comprehensive cancer management
company. The Company provides advanced cancer treatment services through
outpatient facilities known as IMPACT(R) Centers under the direction of
practicing oncologists; owns the assets of and manages the nonmedical aspects of
oncology practices; and conducts outcomes research on behalf of pharmaceutical
manufacturers. Approximately 400 medical oncologists are associated with the
Company through these programs.

IMPACT(R) Services  The Company presently operates 54 IMPACT(R) Centers in 26
states and the District of Columbia which provide high dose chemotherapy with
stem cell support to cancer patients on an outpatient basis. Through its
IMPACT(R) Centers, the Company has developed extensive medical information
systems and databases containing clinical and patient information, analysis of
treatment results and side effects and clinical care pathways. These systems and
databases support the Company's clinical trials program, which involves
carefully planned, uniform treatment regimens administered to a significant
group of patients together with the monitoring of outcomes and side effects of
these treatments. The clinical trials program allows the Company to develop a
rational means of improving future treatment regimens by predicting which
patients are most likely to benefit from different treatments.

Each IMPACT(R) Center is staffed by, and makes extensive use of, experienced
oncology nurses, pharmacists, laboratory technologists, and other support
personnel to deliver outpatient services under the direction of independent
medical oncologists. IMPACT(R) Center services include preparation and
collection of stem cells, administration of high dose chemotherapy, reinfusion
of stem cells and delivery of broad-based supportive care. IMPACT(R) Center
personnel extend the support mechanism into the patient's home, further reducing
the dependence on hospitalization. The advantages of this system to the
physician and patient include (i) convenience of the local treatment facility;
(ii) specialized on-site laboratory and pharmacy services, including home
pharmacy support; (iii) access to the Company's clinical trials program to
provide ongoing evaluation of current cancer treatment; (iv) specially trained
medical and technical staff; (v) patient education and support materials through
computer, video and staff consultation; and (vi) reimbursement assistance.

High dose chemotherapy is most appropriate for patients with lymphoma, acute
leukemia, multiple myeloma and breast and ovarian cancer. Patients referred to
the Company by the treating oncologist are placed on a treatment protocol
developed from the cumulative analysis of the Company's approximately 3,000
high-dose cases. Protocols conducted at the IMPACT(R) Center begin with a drug
regimen which allows for the collection and cryopreservation of stem cells. A
stem cell is a cell which originates in the bone marrow and is a precursor to
white blood cells. At the appropriate time, stem cells capable of restoring
immune system and bone marrow functions are harvested over a two to three day
period. The harvested stem cells are then frozen and stored at the IMPACT(R)
Center, and following confirmation of response to treatment and a satisfactory
stem cell harvest, patients receive high dose chemotherapy followed by
reinfusion of stem cells. Most patients are then admitted to an affiliated
hospital for approximately 10-14 days. After discharge, the patient is monitored
in the oncologist's office. The Company believes that the proprietary databases
and the information gathering techniques developed from the foregoing programs
enable practicing oncologists to cost effectively manage cancer cases while
ensuring quality. Clinical research conducted by the Company focuses on (i)
improving cancer survival rates; (ii) enhancing the cancer patient's quality of
life; (iii) reducing the costs of cancer care; and (iv) developing new
approaches to cancer diagnosis, treatment and post-treatment monitoring.

Since 1989, the Company has conducted a clinical trials program pursuant to
which carefully planned, uniform treatments administered to a substantial number
of patients have been monitored and studied, with the results being collected in
a database and utilized to predict outcomes and determine utilization of high
dose chemotherapy as a treatment. In addition, the Company has recorded outcomes
from over 3,000 cases in which high dose chemotherapy was utilized as a
treatment and has developed and continues to refine treatment 





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pathways, which forecast the best outcome with the lowest possible cost.
Pursuant to agreements between the Company and the oncologists who supervise
their patients' treatment in IMPACT(R) Centers, such oncologists are obligated
to record and monitor outcomes, collect information and report such information
to the Company.

The Company also provides pharmacy management services for certain medical
oncology practices. These services include compounding and dispensing
pharmaceuticals for a fee, typically cost plus a percentage.

Oncology Practice Management Services  During 1996, the Company adopted a
strategy of diversification into physician practice management and since then
has consummated affiliations with 12 medical oncology practices, including 43
medical oncologists in Florida and Tennessee. Through these affiliations, the
Company believes that it has successfully achieved deep geographic penetration
in those markets, believing that significant market share is crucial to
achieving efficiencies, revenue enhancements, and marketing of complete cancer
services to diverse payors including managed care. Pursuant to management
service agreements ("Service Agreements"), the Company provides management
services that extend to all nonmedical aspects of the operations of the
affiliated practices.

Pursuant to the Service Agreements, the Company is the sole and exclusive
manager and administrator of all day-to-day business functions connected with
the medical practice of an affiliated physician group. The Company is
responsible for providing facilities, equipment, supplies, support personnel,
and management and financial advisory services. Under the terms of the Service
Agreements, the Company (among other things): (i) prepares annual capital and
operating budgets; (ii) prepares financial statements; (iii) orders and
purchases medical and office inventory and supplies; (iv) bills patients and
third party payors as agent for the affiliated practices; (v) maintains
accounting, billing, medical, and collection records; (vi) negotiates and
administers managed care contracts as an agent for affiliated physicians; (vii)
arranges for legal and accounting services related to practice operations;
(viii) recruits, hires and appoints an executive director to manage and
administer all of the day-to-day business functions of each practice; and (ix)
manages all non-physician professional support and administrative personnel,
clerical, secretarial, bookkeeping and collection personnel. The Company seeks
to combine the purchasing power of numerous physicians to obtain favorable
pricing and terms for equipment, pharmaceuticals and supplies and to obtain
favorable contracts with suppliers.

In return for its management services, the Company receives a service fee based
on net revenue or net operating income of the practice. Pursuant to each Service
Agreement, the physicians and the practice agree not to compete with the Company
and the practice. Each Service Agreement has an initial term of 40 years and,
after the initial term, will be automatically extended for additional five year
terms unless either party delivers written notice to the other party 180 days
prior to the expiration of the preceding term. The Service Agreement only
provides for terminationmay "for cause". If the Company terminates the Service
Agreement for cause, the practice is typically obligated to purchase assets
(which typically include intangible assets) and pay liquidated damages, which
obligations are guaranteed by individual physician owners of the practice for a
period of time. Each Service Agreement provides for the creation of an oversight
committee, a majority of the members of which are designated by the practice.
The oversight committee is responsible for developing management and
administrative policies for the overall operation of each clinic.

In February 1999 the Company announced that it had terminated its Service
Agreement with one of the Company's three underperforming net revenue model
relationships. Concurrently, the Company established a reserve against the three
Service Agreements in accordance with Financial Accounting Standards Board
Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of." The structure of these contracts has
failed over time to align the physician and Company incentives, producing
deteriorating returns and/or negative cash flows to the Company. Since this was
not a "for cause" termination initiated by the Company the affiliated practice
was not responsible for liquidated damages. A separate negotiated settlement was
agreed on by the Company and the affiliated practice and the 






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Company anticipates that the affiliated practice will continue to participate in
the Company's IMPACT Center network.

The Company is currently discussing a termination with the second of the three
underperforming relationships. The termination will not be deemed "for cause"
and a negotiated settlement is expected to be reached in the second quarter of
1999.

Cancer Research Services  The Company also utilizes its outcomes database to
provide various types of data to pharmaceutical companies regarding the use of
their products. The IMPACT(R) Center network and the Company's medical
information systems make the Company ideally suited to this process. The Company
is currently participating in several projects with leading pharmaceutical
manufacturers to furnish data in connection with FDA applications and post-FDA
approval marketing studies. Revenue from these contracts helps to underwrite the
Company's clinical trials expenses. Such relationships with pharmaceutical
companies allow patients and physicians earlier access to drugs and therapies,
which guarantee the Company's role as a leader in oncological developments.

COMPETITION

As a result of growing interest among oncologists and the more widely recognized
efficacy of high-dose chemotherapy treatments, the competitive environment in
the field is starting to heighten. Most community hospitals with a commitment to
cancer treatment are evaluating their need to provide high dose treatments, and
other entities are competing with the Company in providing high-dose services
similar to those offered by the Company. Such competition has long been
contemplated by the Company, and is indicative of the evolution of this field.
While the Company believes that the demand for high dose chemotherapy services
is sufficiently large to support several significant providers of these
services, the Company is subject to increasing competitive risks from these
entities.

In addition, the Company is aware of at least three competitors specializing in
the management of oncology practices and two other physician management
companies that manage at least one oncology practice. Several health care
companies with established operating histories and significantly greater
resources than the Company are also providing at least some management services
to oncologists. There are certain other companies, including hospitals, large
group practices, and outpatient care centers, that are expanding their presence
in the oncology market and may have access to greater resources than the
Company. Furthermore, organizations specializing in home and ambulatory infusion
care, radiation therapy, and group practice management compete in the oncology
market.

The Company's profitability depends in part on the continued success of its
affiliated physician groups. These physician groups face competition from
several sources, including sole practitioners, single and multi-specialty
groups, hospitals and managed care organizations.

GOVERNMENT REGULATION

The delivery of healthcare items and services has become one of the most highly
regulated of professional and business endeavors in the United States. Both the
federal government and the individual state governments are responsible for
overseeing the activities of individuals and businesses engaged in the delivery
of healthcare services. Federal law and regulations are based primarily upon the
Medicare program and the Medicaid program, each of which is financed, at least
in part, with federal money. State jurisdiction is based upon the state's
authority to license certain categories of healthcare professionals and
providers, and the state's interest in regulating the quality of healthcare in
the state, regardless of the source of payment and the state's relevant
participation in and funding of its Medicaid program.

The Company believes it is in material compliance with applicable laws. The
Company has engaged health law counsel to evaluate compliance with applicable
laws, but has not received the results of such review. However, 




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the laws applicable to the Company are subject to evolving interpretations and
therefore, there can be no assurance that a review of the Company's or the
affiliated physicians' practices by a court or law enforcement or regulatory
authority will not result in a determination that could adversely affect the
operations of the Company or the affiliated physicians. Furthermore, there can
be no assurance that the laws applicable to the Company will not be amended in a
manner that could adversely affect the Company.

FEDERAL LAW

The federal healthcare laws apply in any case in which the Company is providing
an item or service that is reimbursable under Medicare, Medicaid or other
federally-funded programs ("Federal Reimbursement Programs") or is claiming
reimbursement from Federal Reimbursement Programs on behalf of physicians with
whom the Company has a Service Agreement. The principal federal laws include
those that prohibit the filing of false or improper claims with the Federal
Reimbursement Programs, those that prohibit unlawful inducements for the
referral of business reimbursable under Federal Reimbursement Programs and those
that prohibit the provision of certain services by a provider to a patient if
the patient was referred by a physician with which the provider has certain
types of financial relationships.

False and Other Improper Claims  The federal government is authorized to impose
criminal, civil and administrative penalties on any person or entity that files
a false claim for reimbursement from Federal Reimbursement Programs. Criminal
penalties are also available in the case of claims filed with private insurers
if the government can show that the claims constitute mail fraud or wire fraud
or violate state false claims prohibitions. While the criminal statutes are
generally reserved for instances involving fraudulent intent, the civil and
administrative penalty statutes are being applied by the government in an
increasingly broader range of circumstances. For example, the government takes
the position that a pattern of claiming reimbursement for unnecessary services
violates these statutes if the claimant should have known that the services were
unnecessary. The government also takes the position that claiming reimbursement
for services that are substandard is a violation of these statutes if the
claimant should have known that the care was substandard. Severe sanctions under
these statutes, including exclusion from Federal Reimbursement programs, have
been levied even in situations not resulting in criminal convictions. The
Company believes that its billing activities on behalf of affiliated practices
through Service Agreements are in material compliance with such laws, but there
can be no assurance that the Company's activities will not be challenged or
scrutinized by governmental authorities. A determination that the Company or any
affiliated practice has violated such laws could have a material adverse effect
on the Company.

Anti-Kickback Law  Federal law commonly known as the "Anti-kickback Amendments"
prohibits the knowing or willful offer, solicitation, payment or receipt of
anything of value (direct or indirect, overt or covert, in cash or in kind)
which is intended to induce the referral of patients covered by Federal
Reimbursement Programs, or the ordering of items or services reimbursable under
those programs. The law also prohibits remuneration that is intended to induce
the recommendation of, or furnishing, or the arranging for, the provision of
items or services reimbursable under Federal Reimbursement Programs. The law has
been broadly interpreted by a number of courts to prohibit remuneration which is
offered or paid for otherwise legitimate purposes if the circumstances show that
one purpose of the arrangement is to induce referrals. Even bona fide investment
interests in a healthcare provider may be questioned under the Anti-kickback
Amendments if the government concludes that the opportunity to invest was
offered as an inducement for referrals. The penalties for violations of this law
include criminal sanctions and exclusion from the federal healthcare program.

In part to address concerns regarding the implementation of the Anti-kickback
Amendments, the federal government in 1991 published regulations that provide
exceptions, or "safe harbors," for certain transactions that will not be deemed
to violate the Anti-kickback Amendments. Among the safe harbors included in the
regulations were provisions relating to the sale of physician practices,
management and personal services agreements and employee relationships.
Subsequently, regulations were published offering safe harbor protection to
additional activities, including referrals within group practices consisting of
active investors. Proposed amendments to the Anti-kickback Amendments were
published in 1994 which, if ultimately adopted, would result in substantive
changes to existing regulations. The failure to qualify under a safe harbor
provision, while potentially subjecting the activity to greater regulatory
scrutiny, does not render the activity illegal per se.





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There are several aspects of the Company's relationships with physicians to
which the anti-kickback law may be relevant. In some instances, the Company
itself may become a provider of services for which it will claim reimbursement
from Federal Reimbursement Programs, and physicians who are investors in the
Company may refer patients to the Company for those services. Furthermore, the
government may construe some of the marketing and managed care contracting
activities of the Company as arranging for the referral of patients to the
physicians with whom the Company has a Service Agreement. Finally, at the
request of a physician or medical practice with which the Company has a Service
Agreement, the Company will manage in the physician's office the provision of
ancillary services which the physician desires to make available to his
patients. At the present time, the services provided by the Company in its
IMPACT(R) Centers are generally not reimbursable by Federal Reimbursement
Programs.

Although neither the investments in the Company by physicians nor the Service
Agreements between the Company and physicians qualify for protection under the
safe harbor regulations, the Company does not believe that these activities fall
within the type of activities the Anti-kickback Amendments were intended to
prohibit. A determination that the Company had violated the Anti-kickback
Amendments would have a material adverse effect on the Company's business.

The Stark Self-Referral Law  The Stark Self-Referral Law ("Stark Law") prohibits
a physician from referring a patient to a healthcare provider for certain
designated health services reimbursable by Medicare or Medicaid if the physician
has a financial relationship with that provider, including an investment
interest, a loan or debt relationship or a compensation relationship. The
designated services covered by the law include radiology services, infusion
therapy, radiation therapy, outpatient prescription drugs and hospital services,
among others. In addition to the conduct directly prohibited by the law, the
statute also prohibits "circumvention schemes," that are designed to obtain
referrals indirectly that cannot be made directly. The penalties for violating
the law include (i) a refund of any Medicare or Medicaid payments for services
that resulted from an unlawful referral; (ii) civil fines; and (iii) exclusion
from the Medicare and Medicaid programs. The Stark Law contains a number of
exceptions potentially applicable to the Company's operations. These include
exceptions for a physician's ownership of certain publicly traded securities for
certain in-office ancillary services and for certain personal services
arrangements.

On January 9, 1998, the Health Care Financing Administration (the "HCFA") issued
proposed rules (the "Proposed Regulations") regarding the Stark Law as it
relates to designated health services other than clinical laboratory services.
The Proposed Regulations contemplate that designated health services may be
provided by a physician's practice or by any other corporation, including an
entity that owns the operation. A corporation that merely owns the components of
a health services operation, such as the building that houses the facility or
the medical equipment used at the facility, would not be deemed to own the
operation. It is not clear, however, whether and to what extent the additional
provision of services by the Company to affiliated practices and the receipt of
a service fee based on net revenue or net operating income would cause the
Company to be deemed to own such operation. In addition, the Proposed
Regulations would apply to an entity that does not bill under its own Medicare
number but receives payment for services from the billing entity as part of a
so-called "under arrangements" agreement (the term of art under the Proposed
Regulations relating to certain hospital arrangements) or similar agreements. It
is not clear whether the term "similar agreements" would apply to the Service
Agreements. If the Company is deemed to "own the operation" or to be engaged in
an arrangement similar to an "under arrangements" agreement, it would be deemed
a provider of the services addressed by the Proposed Regulations.

The Company believes that it is not currently a provider of any designated
health service under the Stark Law for which the Company claims reimbursement
from Medicare or Medicaid. The Company intends to assure that any designated
health services provided by physicians with whom the Company has a Service
Agreement will qualify under the applicable exception in the Stark Law for
in-office services. However, because the Company will provide management
services related to those designated health services, there can be no certainty
that the Company will not be considered as the provider for those services. In
that event, the referrals from the physicians will be permissible only if (i)
the Company qualifies for the exception for publicly-traded corporations and
(ii) the Service Agreement meets the exception in the Stark Law for payments by
physicians to 





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a health care entity. To qualify for such exception, such payments must be set
at a fair market value. The Company intends to structure its arrangements so as
to qualify for applicable exceptions under the Stark Law, however, there can be
no assurance that a review by courts or regulatory authorities would not result
in a contrary determination.

The Stark Law contains an exception for investment interests by physicians in a
health care provider where the health care provider is a company whose
securities are traded on a national securities market and which, as of the end
of the most recently completed fiscal year, had stockholders' equity exceeding
$75 million. The Company's stockholders' equity currently is less than $75
million, thus such exception is not available to physicians who own the
Company's securities.

STATE LAW

State Anti-Kickback Laws  Many states have laws that prohibit the payment of
kickbacks in return for the referral of patients. Some of these laws apply only
to services reimbursable under the state Medicaid program. However, a number of
these laws apply to all healthcare services in the state, regardless of the
source of payment for the service. The Company pays oncologists who supervise
their patients' treatment at the IMPACT(R) Centers fees for collecting and
monitoring treatment and outcomes data and reporting such data to the Company.
The Company believes such fees reflect the fair market value of the services
rendered by such physicians to the Company. However, the laws in most states
regarding kickbacks have been subjected to limited judicial and regulatory
interpretation and, therefore, no assurances can be given that the Company's
activities will be found to be in compliance. Noncompliance with such laws could
have an adverse effect upon the Company and subject it and such physicians to
penalties and sanctions.

State Self-Referral Laws  A number of states have enacted self-referral laws
that are similar in purpose to the Stark Self-Referral Law. However, each state
law is unique. For example, some states only prohibit referrals where the
physician's financial relationship with a healthcare provider is based upon an
investment interest. Other state laws apply only to a limited number of
designated health services. Finally, some states do not prohibit referrals, but
merely require that a patient be informed of the financial relationship before
the referral is made. The Company believes that it is in compliance with the
self-referral law of any state in which the Company has a financial relationship
with a physician. The Company has engaged health law counsel to evaluate
compliance with applicable laws, but has not received the results of such
review.

Fee-Splitting Laws  Many states prohibit a physician from splitting with a
referral source the fees generated from physician services. Other states have a
broader prohibition against any splitting of a physician's fees, regardless of
whether the other party is a referral source. In most cases, it is not
considered to be fee-splitting when the payment made by the physician is
reasonable reimbursement for services rendered on the physician's behalf.

The Company will be reimbursed by physicians on whose behalf the Company
provides management services. The Company intends to structure the reimbursement
provisions of its management contracts with physicians in order to comply with
applicable state laws relating to fee-splitting. However, there can be no
certainty that, if challenged, the Company and its affiliated physicians will be
found to be in compliance with each state's fee-splitting laws.

The Florida Board of Medicine recently ruled in a declaratory statement that
payments of 30% of a physician group's net income to a practice management
company in return for a number of services, including expansion of the practice
by increasing patient referrals through the creation of provider networks,
affiliation with other networks, and the negotiation of managed care contracts,
constituted fee-splitting arrangements in violation of the Florida law
prohibiting fee-splitting and could subject the physicians engaged in such
arrangements to disciplinary action. This order only applies to the physician
practice management company and the individual physicians whose fact situation
was presented to the Florida Board of Medicine for a declaratory statement. The
Florida Board of Medicine has agreed to stay implementation of the order pending
appeal of the decision to the Florida court by the affected physician practice
management company. While the Company believes that its Service Agreements are
substantially different from the management services agreement that the Florida
Board 





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of Medicine ruled on, there is a risk that an adverse decision by the Florida
courts on the case presented could have an adverse precedential impact on the
Company's Service Agreements with Florida affiliated practices. The Company's
Service Agreements contain provisions requiring modification of the Service
Agreements in such event in a manner that preserves the economic value of the
Service Agreement, but there can be no assurance that Florida courts would
specifically enforce such contractual provisions. Such adverse determinations
could have a material adverse effect on the Company.

Corporate Practice of Medicine  Most states prohibit corporations from engaging
in the practice of medicine. Many of these state doctrines prohibit a business
corporation from employing a physician. However, states differ with respect to
the extent to which a licensed physician can affiliate with corporate entities
for the delivery of medical services. Some states interpret the "practice of
medicine" broadly to include decisions that have an impact on the practice of
medicine, even where the physician is not an employee of the corporation and the
corporation exercises no discretion with respect to the diagnosis or treatment
of a particular patient.

The Company's standard practice under its Service Agreements is to avoid the
exercise of any responsibility on behalf of its physicians that could be
construed as affecting the practice of medicine. Accordingly, the Company
believes that it is not in violation of applicable state laws relating to the
corporate practice of medicine. However, because such laws and legal doctrines
have been subjected to only limited judicial and regulatory interpretation,
there can be no assurance that, if challenged, the Company will be adjudicated
to be in compliance with all such laws and doctrines.

Insurance Laws  Laws in all states regulate the business of insurance and the
operation of HMOs. Many states also regulate the establishment and operation of
networks of health care providers. While these laws do not generally apply to
companies that provide management services to networks of physicians, there can
be no assurance that regulatory authorities of the states in which the Company
operates would not apply these laws to require licensure of the Company's
operations as an insurer, as an HMO or as a provider network. The Company
believes that it is in compliance with these laws in the states in which it does
business, but there can be no assurance that future interpretations of insurance
and health care network laws by regulatory authorities in these states or in the
states into which the Company may expand will not require licensure or a
restructuring of some or all of the Company's operations.

State Licensing  The Company's laboratories operated in conjunction with certain
IMPACT(R) Centers are registered with the U.S. Food & Drug Administration and
are certified pursuant to the Clinical Laboratory Improvement Amendments of
1988. In addition, the Company maintains pharmacy licenses for all IMPACT(R)
Centers having self-contained pharmacies, and state health care facility
licenses, where required.

REIMBURSEMENT AND COST CONTAINMENT

Approximately 40% of the net revenue of the Company's practice management
division and less than 5% percent of the revenue of the Company's IMPACT(R)
division are derived from payments made by government sponsored health care
programs (principally, Medicare and Medicaid). As a result, any change in
reimbursement regulations, policies, practices, interpretations or statutes
could adversely affect the operations of the Company. In recent years, the
federal government has sought to constrain the growth of spending in the
Medicare and Medicaid programs. Through the Medicare program, the federal
government has implemented a resource-based relative value scale ("RBRVS")
payment methodology for physician services. RBRVS is a fee schedule that, except
for certain geographical and other adjustments, pays similarly situated
physicians the same amount for the same services. The RBRVS is adjusted each
year and is subject to increases or decreases at the discretion of Congress. To
date, the implementation of RBRVS has reduced payment rates for certain of the
procedures historically provided by physicians who have Service Agreements with
the Company. RBRVS-type payment systems have also been adopted by certain
private third party payors and may become a predominant payment methodology. A
broader implementation of such programs would reduce payments by private third
party payors and could indirectly reduce the Company's operating margins to the
extent that the cost of providing management services related to such procedures
could not be proportionately reduced. To the extent the Company's costs
increase, the Company may not be able to recover such cost increases from
government reimbursement programs. In addition, because of cost containment
measures and market changes in non  





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governmental insurance plans, the Company may not be able to shift cost
increases to non governmental payors. The Company expects a reduction from
historical levels in per patient Medicare revenue received by certain of the
physician groups with which the Company contracts; however, the Company does not
believe such reductions would, if implemented, result in a material adverse
effect on the Company.

Rates paid by private third party payors, including those that provide Medicare
supplemental insurance, are based on established physician, clinic and hospital
charges and are generally higher than Medicare payment rates. Changes in the mix
of the Company's patients among the non-governmental payors and government
sponsored health care programs, and among different types of non-government
payor sources, could have a material adverse effect on the Company.

EMPLOYEES

As of March 1, 1998, the Company employed approximately 700 persons,
approximately 500 of whom were full-time employees. Under the terms of the
Service Agreements with the affiliated physician groups, the Company is
responsible for the practice compensation and benefits of the groups' non
physician medical personnel. No employee of the Company or of any affiliated
physician group is a member of a labor union or subject to a collective
bargaining agreement. The Company believes that its labor relations are good.

ITEM 2.  PROPERTIES

As of March 1, 1999 the Company leased 35,000 square feet of space at 1805
Moriah Woods Boulevard, in Memphis, Tennessee, where the Company's headquarters
are located. The lease expires in 2002. The Company also leases all facilities
housing the Company's operating facilities. Management believes that the
Company's properties are well maintained and suitable for its business
operations. The Company may lease additional space in connection with the
development of future treatment facilities or practice affiliations.

ITEM 3.  LEGAL PROCEEDINGS

No material litigation is currently pending against the Company, and the Company
is not aware of any outstanding claims against any affiliated physician group
that would have a material adverse effect on the Company's financial condition
or results of operations. The Company expects its affiliated physician groups to
be involved in legal proceedings incident to their business, most of which are
expected to involve claims related to the alleged medical malpractice of its
affiliated oncologists.

ITEM 4.  MATTERS SUBMITTED TO STOCKHOLDERS' VOTE

Not applicable.



                                       8
<PAGE>   10


                                     PART II

ITEM 5.  MARKET INFORMATION AND RELATED STOCKHOLDER MATTERS

The Company's common stock trades on The Nasdaq Stock Market under the symbol
"ROIX." As of February 16, 1999 the Company's common stock was held by
approximately 1,850 shareholders of record.

The Company has not paid any cash dividends on the common stock since its
inception. The Board of Directors does not intend to pay cash dividends on the
common stock in the foreseeable future, but intends to retain all earnings, if
any, for use in the Company's business.

<TABLE>
<CAPTION>
     Year Ended December 31, 1997                           Year Ended December 31, 1998                
---------------------------------------              -----------------------------------------

                           High     Low                                        High        Low
                           ----     ---                                        ----        ---

<S>                        <C>       <C>             <C>                          <C>     <C>
First Quarter             $10 1/4   $6 3/4           First Quarter            $9 3/4     $6 1/2
Second Quarter            $ 7 1/2   $5 1/2           Second Quarter           $8 15/16   $6 1/8
Third Quarter             $10 9/16  $5 1/4           Third Quarter            $7 5/8     $3 1/4
Fourth Quarter            $11       $7 1/4           Fourth Quarter           $5 1/4     $3 1/2
</TABLE>

RECENT SALES OF UNREGISTERED SECURITIES

Securities Issued in Connection with Physician Practice Affiliations

During the Company's 1996 fiscal year, the Company issued shares of its Common
Stock, warrants to purchase the Company's Common Stock, and unsecured and
subordinated promissory notes ("PIK Notes") payable at the option of holders in
shares of Common Stock (collectively, the "Unregistered Securities") in ten
separate acquisition transactions pursuant to which the Company acquired the
operating assets or stock of ten medical oncology practices from the physician
owners ("Physician Owners") thereof or the professional association owned by
such Physician Owners ("P.A."). In each case, the Unregistered Securities were
issued in exchange for either 100% of the outstanding stock or other equity
interests owned by the Physician Owners of the practices or, in one case,
certain of the assets of the P.A. The Unregistered Securities were offered and
issued to the Physician Owners or, in one instance, the P.A., in reliance upon
the exemption from registration under Section 4(2) of the Securities Act of
1933. Each of the Physician Owners was an accredited investor, as that term is
defined in Rule 501 under Regulation D, and each of the Physician Owners was
represented by competent transactional counsel. The affiliation transactions and
Unregistered Securities issued in connection with the affiliations are as
follows:

         In January 1996, the Company issued to Physician Owners a single 9% PIK
Note in the principal amount of $5,959,972 that matures in 2011, with principal
and interest payable on an amortized basis. Any payment of principal and
interest may be paid, at the option of the holder of the PIK Note, in shares of
Common Stock at a conversion price of $14.00 per share.

         In April 1996, the Company issued to Physician Owners 80,000 warrants
to purchase Common Stock at a price of $11.75. These warrants expired in
connection with the termination of this Service Agreement in February 1999. In
addition, the Company issued a 5% PIK Note to a Physician Owner in the principal
amount of $150,000 maturing in 1997, payment of which may be made, at the option
of the holder, in shares of Common Stock at a conversion price of $11.75 per
share. This note was repaid in cash by the Company in 1997.





                                       9
<PAGE>   11

         In June 1996, the Company issued to a Physician Owner 196,154 shares of
Common Stock. In addition, the Company issued to the Physician Owner a $5.1
million 4% PIK Note maturing in December 1998, payment of which may be made, at
the option of the holder, in shares of Common Stock at a conversion price of
$15.60 per share.

         In July 1996, the Company issued to Physician Owners an aggregate of
117,600 shares of Common Stock.

         In August 1996, the Company issued to Physician Owners 5% PIK Notes in
the aggregate principal amount of $1,900,000 maturing August 1, 2001, payment of
which may be made, at the option of the holders, in shares of Common Stock at a
conversion price of $13.75.

         In October 1996, the Company issued to Physician Owners an aggregate of
326,170 shares of Common Stock. In addition, the Company issued 4% and 5% PIK
Notes in the aggregate principal amount of $5,636,625 maturing through 2001,
payment of which may be made, at the option of the holders, in shares of Common
Stock at conversion prices ranging from $12.73 to $18.00 (approximately $4
million of which has a conversion price of $12.73).

         In November 1996, the Company issued 47,836 shares of Common Stock. In
addition, the Company issued to Physician Owners 5.6% PIK Notes in the aggregate
principal amount of $772,500, payment of which may be made, at the option of the
holders, in shares of Common Stock at a conversion price of $14.20.

Securities Issued to Controlling Shareholder

         In April 1996, the Company issued an unsecured, $10 million convertible
note to Seafield Capital Corporation ("Seafield"), who at the time was the
Company's controlling shareholder, bearing interest at a rate of prime plus 1%,
which after August 1, 1996, became convertible at the election of Seafield into
shares of the Company's Common Stock. Proceeds of the loan were used to finance
a practice management affiliation. The note was exchanged for 909,090 shares of
Common Stock during August 1996.

         In October 1996, the Company obtained a $23.5 million credit facility
from Seafield to be used to finance practice affiliations and for working
capital. The facility was evidenced by a convertible note payable upon the
earlier of the closing of an equity offering, or August 1, 1998. The note
provided for interest at a rate of 8% escalating at certain points during the
term of the note, was unsecured, and was convertible at the election of Seafield
Capital Corporation into shares of the Company's Common Stock at a conversion
price equal to the market price of the Common Stock at the date of conversion;
provided, however, that after December 31, 1996, the conversion price would be
the lower of market or $11.00 per share. In February 1997, the $23.5 million
credit facility and accrued interest thereon was converted into 3,020,536 shares
of the Company's Common Stock at a rate of $8 per share.



                                       10
<PAGE>   12


ITEM 6.  SELECTED FINANCIAL DATA
         (in thousands except per share data)

<TABLE>
<CAPTION>
                                                                         Years Ended December 31,
                                                   ---------------------------------------------------------------------
                                                      1998            1997           1996          1995           1994
                                                   ---------        --------       --------       -------       --------
<S>                                                <C>              <C>            <C>            <C>           <C>     
Net revenue                                        $ 128,246        $101,920       $ 67,353       $44,298       $ 38,471

Net earnings (loss)                                  (17,448)          4,202            910         2,314         (2,346)

Net earning (loss) to common stockholders            (17,451)          4,199            907         2,310         (2,349)

Total assets                                         126,753         149,075        142,950        24,765         21,037

Long-term debt and capital lease obligations          33,252          35,443         62,230            15             29

Earnings (loss) per common share:

    Basic                                          $   (1.45)       $   0.36       $   0.11       $  0.33       $  (0.34)
                                                   =========        ========       ========       =======       ========
    Diluted                                        $   (1.45)       $   0.36       $   0.11       $  0.32       $  (0.34)
                                                   =========        ========       ========       =======       ========
</TABLE>




                                       11
<PAGE>   13


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS 

OVERVIEW

The Company is a comprehensive cancer management company. The Company provides
advanced cancer treatment services through outpatient facilities known as
IMPACT(R) Centers under the direction of practicing oncologists; owns the assets
of and manages the nonmedical aspects of oncology practices; and conducts
outcomes research on behalf of pharmaceutical manufacturers. Approximately 400
medical oncologists are associated with the Company through these programs.

In 1990 the Company began development of a network of specialized IMPACT(R)
Centers to provide complex outpatient chemotherapy services under the direction
of practicing oncologists. The majority of the therapies provided at the
IMPACT(R) Centers entail the administration of high dose chemotherapy coupled
with peripheral blood stem cell support of the patient's immune system. At
December 31, 1998, the Company's network consisted of 54 IMPACT(R) Centers,
including 33 wholly-owned, 15 managed programs, and 6 owned and operated in
joint venture with a host hospital. Prior to January 1997, the Company derived
substantially all of its revenues from outpatient cancer treatment services
through reimbursements from third party payors on a fee-for-service or
discounted fee-for-service basis. During 1997, the Company began concentrating
its efforts on contracting on a "global case rate" basis where the Company
contracts with the appropriate third-party payor to receive a single payment
that covers the patient's entire course of treatment at the center and any
necessary in-patient care.

The Company also provides pharmacy management services for certain medical
oncology practices. These services include compounding and dispensing
pharmaceuticals for a fee, typically cost plus a percentage.

During 1996 the Company executed a strategy of diversification into physician
practice management and subsequently affiliated with 43 physicians in 12 medical
oncology practices in Florida and Tennessee as of December 31, 1998. Through
these affiliations, the Company believes that it has successfully achieved deep
geographic penetration in those markets, believing that significant market share
is crucial to achieving efficiencies, revenue enhancements, and marketing of
complete cancer services to diverse payors including managed care. Pursuant to
Service Agreements, the Company provides management services that extend to all
nonmedical aspects of the operations of the affiliated practices. The Company is
responsible for providing facilities, equipment, supplies, support personnel,
and management and financial advisory services.

In its practice management relationships, the Company has predominantly used two
models of Service Agreements: (i) an "adjusted net revenue" model; and (ii) a
"net operating income" model. Service Agreements utilizing the adjusted net
revenue model provide for the payment by the physician group out of practice net
revenue, in the following order of payment (A) physician retainage (i.e.
physician compensation, benefits, and prerequisites, including malpractice
insurance) of between 24% and 34.7% of net revenue ("Physician Expense"); (B) a
clinic expense portion of the management fee (the "Clinic Expense Portion")
equal to the aggregate actual practice operating expenses exclusive of Physician
Expense; and (C) a base service fee portion (the "Base Fee") of between 8.7% and
24% of net revenue. In the event that net revenue is insufficient to pay all of
the foregoing in full, then the Base Fee is first reduced, followed by the
Clinic Expense Portion of the management fee, and finally, physician retainage,
therefore effectively shifting all operating risk to the Company. In each
Service Agreement utilizing the adjusted net revenue model, the Company is
entitled to a Performance Fee generally equal to 50% of Annual Surplus, defined
as the excess of practice revenue over the sum of Physician Retainage, the
clinic Expense Portion, and the Base Fee.

Service Agreements utilizing the net operating income model provide for a
management fee equal to the sum of a Clinic Expense Portion (see preceding
paragraph) plus a percentage (the "Percentage Portion"), ranging from 15% to
40%, of the net operating income of the practice (defined as net revenue minus
practice operating expenses). Practice operating expenses do not include
Physician Expense. In those practice management relationships utilizing the net
operating income model Service Agreement, the Company and the physician 





                                       12
<PAGE>   14

group share the risk of expense increases and revenue declines, but likewise
share the benefits of expense savings, economies of scale and practice
enhancements.

Each Service Agreement contains a liquidated damages provision binding the
physician practice and the principals thereof in the event the Service Agreement
is terminated "for cause" by the Company. The liquidated damages are a declining
amount, equal in the first year to the purchase price paid by the Company for
practice assets and declining over a period of between 5 and 17.5 years.
Principals are relieved of their individual obligations for liquidated damages
only in the event of death, disability, or retirement at a predetermined age.
Each Service Agreement provides for the creation of an oversight committee, a
majority of whom are designated by the practice. The oversight committee is
responsible for developing management and administrative policies for the
overall operation of each clinic. However, under each Service Agreement, the
affiliated practice remains obligated to repurchase practice assets, including
intangible assets, in the event the Company terminates the Service Agreement for
cause.

In February 1999 the Company announced that it had terminated its service
agreement with one of the Company's three underperforming adjusted net revenue
model relationships. Concurrently, the Company established a reserve against the
three service agreements in accordance with Financial Accounting Standards Board
Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of." The structure of these contracts has
failed over time to align the physician and Company incentives, producing
deteriorating returns and/or negative cash flows to the Company. Since this was
not a "for cause" termination initiated by the Company the affiliated practice
was not responsible for liquidated damages. A separate negotiated settlement was
agreed on by the Company and the affiliated practice and the Company anticipates
that the affiliated practice will continue to participate in the Company's
IMPACT Center network.

The Company is currently discussing a termination with the second of the three
underperforming relationships. The termination will not be deemed "for cause"
and a negotiated settlement is expected to be reached in the second quarter of
1999.

RESULTS OF OPERATIONS

1998 Compared to 1997

Net revenue increased 26% to $128.2 million for the year ended December 31,
1998, compared to $101.9 million for the year ended December 31, 1997. Practice
management service fees from affiliations were $59.5 million in 1998 compared to
$46.5 million in 1997 for a 28% increase. Additionally, pharmaceutical sales to
physicians increased $8.5 million or 46% from $18.3 million in 1997 to $26.8
million in 1998.

EBITDA (earnings before interest, taxes, depreciation and amortization)
decreased $28.6 million or 195% to ($14.0) million for the year ended December
31, 1998 in comparison to $14.6 million for the year ended December 31, 1997.
The decrease is primarily due to the reserve for impairment of management
service agreements and associated assets of $24.9 million recognized in the
fourth quarter of 1998.

Salaries and benefits costs increased $4.4 million, or 21%, from $20.8 million
in 1997 to $25.2 million in 1998. The increase is primarily due to the addition
of employed physicians and their support personnel in the practice management
division and general increases in salaries and benefits. Salaries and benefits
expense as a percentage of net revenue was 20% in the years 1998 and 1997.

Supplies and pharmaceuticals expense increased $18.2 million, or 37%, from 1997
to 1998. The increase is primarily related to greater utilization of new
chemotherapy agents with higher costs in the practice management division and
increased volume in pharmaceutical sales to physicians. Supplies and
pharmaceuticals expense as a percentage of net revenue was 52% and 48% for the
years ended 1998 and 1997, respectively. The 




                                       13
<PAGE>   15

increase as a percentage of net revenue is due to the lower margin associated
with the increased pharmaceutical sales to physicians as well as general price
increases in pharmaceuticals used in the practice management division.

Other operating expenses increased $2.9 million, or 26%, from $11.0 million in
1997 to $13.9 million in 1998. Other operating expenses consist primarily of
medical director fees, purchased services related to global case rate contracts
rent expense, and other operational costs. The increase is primarily due to
increased volume in the practice management division in 1998.

General and administrative expense increased $3.0 million, or 70%, from $4.3
million in 1997 to $7.3 million in 1998. The increase is primarily due to a
consolidation of certain of the Company's business office functions at the
Company's headquarters during the year expenses recognized for various aborted
mergers and acquisitions during 1998, as well as general corporate expense
increases. 

Depreciation and amortization increased $.9 million from $4.7 million in 1997 to
$5.6 million in 1998. Based on recent guidance from the Securities and Exchange
Commission, the Company announced a change in the amortization period of Service
Agreements acquired in practice management affiliations to 25 years from 40
years beginning July 1, 1998.

1997 Compared to 1996

Net revenue increased 51% to $101.9 million for the year ended December 31,
1997, compared to $67.4 million for the year ended December 31, 1996. Practice
management service fees from affiliations were $46.5 million compared to $19.3
million for a 141% increase. Additionally, pharmaceutical sales to physicians
increased $4.8 million or 36% from $13.5 million in 1996 to $18.3 million in
1997.

EBITDA (earnings before interest, taxes, depreciation and amortization)
increased $7.6 million or 109% to $14.6 million for the year ended December 31,
1997 in comparison to $7.0 million for the year ended December 31, 1996. The
increase is primarily due to the increase in revenues related to the Service
Agreements with affiliated physicians. The Company's net earnings, however,
reflect significant non-cash expenses related to the amortization of the costs
of the Service Agreements.

Salaries and benefits costs increased $4.5 million, or 28%, from $16.3 million
in 1996 to $20.8 million in 1997. The increase is primarily due to the addition
of operational management personnel for the practice management division and
general increases in salaries and benefits. Salaries and benefits expense as a
percentage of net revenue were 20% and 24% in 1997 and 1996, respectively. The
decrease as a percentage of net revenue is due to the significant increase in
the revenue base from practice management service fees.

Supplies and pharmaceuticals expense increased $19.2 million, or 64%, from 1996
to 1997. The increase is primarily related to pharmacy expenses at the
affiliated physician practices that were not included in the Company's operating
results for the full year of 1996. Supplies and pharmaceuticals expense as a
percentage of net revenue was 48% and 44% for the years ended 1997 and 1996,
respectively. The increase as a percentage of net revenue is due to the higher
pharmaceutical costs associated with the increased practice management service
fees and pharmaceutical sales to physicians.

Other operating expenses increased $3.2 million, or 41%, from $7.8 million in
1996 to $11.0 million in 1997. Other operating expenses consist primarily of
medical director fees, rent expense, and other operational costs. The increase
is primarily due to 1997 being the first full year of operations of the
Company's practice management division.




                                       14
<PAGE>   16

Depreciation and amortization increased $1.2 million from $3.5 million in 1996
to $4.7 million in 1997. The increase is primarily attributable to the first
full year of amortization of the Service Agreements purchased in practice
management affiliations consummated during 1996.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1998, the Company's working capital was $16.4 million with
current assets of $52.2 million and current liabilities of $35.8 million. Cash
and cash equivalents represented $1.1 million of the Company's current assets.

Cash provided by operating activities was $2.8 million in 1998 as compared to
cash provided by operating activities of $6.6 million in 1997. The decrease in
operating cash flow is primarily the result of a lengthening in IMPACT Center
receivables collections process due to the Company's strategic increase in the
number of global case rate contracts. The Company believes that the delay in
collections is a temporary one and has implemented procedures that are expected
to expedite the billing and collections process for global case rate
contracting.

Cash used in investing activities was $2.7 million and $1.2 million in 1998 and
1997, respectively. Cash used in financing activities was $1.4 million in 1998
and $3.3 million in 1997.

The Company has a $45.0 million Credit Facility, expiring March 31, 1999, to
fund the Company's acquisition and working capital needs. The Credit Facility,
comprised of a $35.0 million Acquisition Facility and a $10.0 million Working
Capital Facility, is collateralized by the common stock of the Company's
subsidiaries. The Credit Facility bears interest at a variable rate equal to
LIBOR plus a spread between 1.5% and 2.125%, depending upon borrowing levels. At
December 31, 1998, $37.8 million aggregate principal was outstanding under the
Credit Facility with a current interest rate of approximately 8.04%. The Credit
Facility contains affirmative and negative covenants which, among other things,
require the Company to maintain certain financial ratios, including minimum
fixed charges coverage, funded debt to EBITDA, net worth and current ratio. The
Company was not in compliance with certain of these covenants at December 31,
1998. The Company has received an extension on the maturity of the Credit 
Facility until June 30, 1999 and has received a waiver of the 
covenant violations as of December 31, 1998.

In May 1997, the Company entered into a LIBOR based interest rate swap agreement
("Swap Agreement") with an affiliate of the Company's primary lender as required
by the terms of the Credit Facility. Amounts hedged under the Swap Agreement
accrue interest at the difference between 6.42% and the thirty day LIBOR rate
and are settled monthly. As of December 31, 1998, approximately 40% of the
Company's outstanding principal balance under the Credit Facility was hedged
under the Swap Agreement. The Swap Agreement matures in March 1999 and is
cancelable at the lender's option after July 1998.

In March 1999 the Company received a commitment for a $30.0 million Line of
Credit which will mature on March 31, 2002 to replace the existing Credit
Facility. The Line of Credit will be collateralized by the common stock and
assets of the Company and its subsidiaries. The Line of Credit will bear
interest at a variable rate equal to LIBOR plus a spread between 1.375% and
2.5%, depending upon borrowing levels. The Company is also obligated to a
commitment fee of .25% to .5% of the unused portion of the Line of Credit. The
Company will be subject to certain affirmative and negative covenants which,
among other things, require the Company to maintain certain financial ratios,
including minimum fixed charges coverage, funded debt to EBITDA, net worth and
current ratio. The Company is currently in negotiations with respect to the
uncommitted portion of the line of credit.

Long-term unsecured amortizing promissory notes bearing interest at rates from
4% to 9% were issued as partial consideration for the practice management
affiliations consumated in 1996. Principal and 




                                       15
<PAGE>   17

interest under the long-term notes may, at the election of the holders, be paid
in shares of common stock of the Company based upon conversion rates ranging
from $13.75 to $17.50. The unpaid principal amount of the long-term notes was
$5.5 million at December 31, 1998.

Capital expenditures of $1.7 million for the year ended December 31, 1998 were
primarily associated with the expansion of the Company's network of IMPACT(R)
Centers and practice management affiliations.

The Company is committed to future minimum lease payments under operating leases
of $24.8 million for administrative and operational facilities.

The Company has commitments to lease machinery under 54 month operating leases
through 2003. The estimated fair value of the equipment is $1.2 million.

IMPACT OF YEAR 2000

The Year 2000 Issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
occurs, computer programs, computers and embedded microprocessors controlling
equipment with date-sensitive systems may recognize Year 2000 as 1900 or not at
all. This inability to recognize or properly treat Year 2000 may result in
computer system failures or miscalculations of critical financial and
operational information as well as failures of equipment controlling
date-sensitive microprocessors. In addition, there are two other related issues,
which could also lead to miscalculations or failures: (i) some older systems'
programming assigns special meaning to certain dates, such as 9/9/99 and (ii)
the Year 2000 is a leap year.

The Company started to formulate a plan to address the Year 2000 Issue in the
second quarter of 1998. To date the Company's primary focus has been on its own
internal information technology systems, including all types of systems in use
by the Company in its operations, finance and human resources departments, and
to deal with the most critical systems first. The Company has developed a Year
2000 Plan to address all of its Year 2000 issues. The Year 2000 plan involves
the following phases: awareness, assessment, renovation, testing and
implementation. The Company has completed an assessment of its internal
information technology systems and has established a timetable for the
renovation phase of the systems. The Company has already completed the
renovation of approximately 75% of its information technology systems, including
modifying and upgrading software and purchasing new software, and continues to
renovate the remaining portions of the systems. The Company's goal is to
complete the testing and implementation phases by June 30, 1999, although
complications arising from unanticipated acquisitions might cause some delay.

The Company has also begun to assess the potential for Year 2000 problems with
the information systems of its payors and vendors. The Company expects to
complete the assessment with respect to such parties by April 30, 1999. The
Company has been provided an estimated timetable for completion of renovation
and testing that such vendors with which the Company has a material relationship
will undertake. The Company has estimated the costs that it may incur to remedy
the Year 2000 issues relating to such parties at $85,000. The Company's
diagnostic imaging equipment used to provide imaging services have computer
systems and applications, and in some cases embedded microprocessors, that could
be affected by Year 2000 issues. The Company has assessed the impact on its
diagnostic imaging equipment by contacting the vendors of such equipment. The
vendors with 





                                       16
<PAGE>   18

respect to the majority of the equipment used by the Company have informed the
Company that such equipment is Year 2000 compliant.

The Company has made an assessment of the potential for Year 2000 problems with
the embedded microprocessors in its other equipment, facilities and corporate
and regional offices, including telecommunications systems, utilities and
security systems. The Company estimates, on a preliminary basis, that the cost
of assessment, renovation, testing and implementation of its internal systems
will range from approximately $15,000 to $30,000. The major components of these
costs are: consultants, programming new software and hardware, software upgrades
and travel expenses. The company expects that such costs will be funded through
operating cash flows. This estimate, based on currently available information,
will be updated as the Company proceeds with renovation, testing and
implementation, and may be adjusted upon receipt of more information from the
Company's vendors and other third parties and upon the design and implementation
of the Company's contingency plan. In addition, the availability and cost of
consultants and other personnel trained in this area and unanticipated
acquisitions might materially affect the estimated costs. The effects of the
aforementioned costs have had no material impact on the Company's progress as it
relates to other information system projects and implementation.

The Company's Year 2000 issue involves significant risks. There can be no
assurance that the Company will succeed in implementing the Year 2000 Plan it is
developing. The following describes the Company's most reasonably likely
worst-case scenario, given current uncertainties. If the Company's renovated or
replaced internal information technology systems fail the testing phase, or any
software application or embedded microprocessors central to the Company's
operations are overlooked in the assessment or implementation phases,
significant problems, including delays, may be incurred in billing the Company's
major customers (Medicare, HMO's or private insurance carriers) for services
performed. If its major customers' systems do not become Year 2000 compliant on
a timely basis, the company will have problems and incur delays in receiving and
processing correct reimbursements. If the computer systems of third parties
(including hospitals) with which the Company's systems exchange data do not
become Year 2000 compliant both on a timely basis and in a manner compatible
with continued data exchange with the Company's systems, significant problems
may be incurred in billing and reimbursement. If the systems on the diagnostic
imaging equipment utilized by the Company are not Year 2000 compliant, the
Company may not be able to provide imaging services to patients. If the
Company's vendors or suppliers of the Company's necessary supplies and power,
telecommunications and financial services fail to provide the Company with
services, the Company will be unable to provide services to its customers. If
any of these uncertainties were to occur, the Company's business, financial
condition and results of operations would be adversely affected. The Company is
unable to assess the likelihood of such events occurring or the extent of the
effect on the Company.

The Company is establishing a contingency plan to address unavoidable Year 2000
risks with internal information technology systems and with customers, vendors
and other third parties; and expects to create such a plan by June 30, 1999.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's primary market risk exposure is to changes in interest rates 
obtainable on its Credit Facility. The Company's interest rate risk objective is
to limit the impact of interest rate fluctuations on earnings and cash flows and
to lower its overall borrowing costs. To achieve this objective, the Company
manages its exposure to fluctuations in market interest rates for its borrowings
by selecting interest periods for traunches of the Credit Facility that are more
favorable to the Company based on the current market interest rates. The Company
has the option of fixing current interest rates for interest periods of 1, 2, 3,
6 or 12 months.

The Company is also a party to a LIBOR based interest rate swap agreement ("Swap
Agreement") with an affiliate of the Company's primary lender as required by the
terms of the Credit Facility. Amounts hedged under the Swap Agreement accrue
interest at the difference between 6.42% and the thirty day LIBOR rate and are
settled monthly. As of December 31, 1998, approximately 40% of the Company's
outstanding principal balance under the Credit Facility was hedged under the
Swap Agreement. The Swap Agreement matures in March 1999 and is cancelable at
the lender's option after July 1998. The Company does not enter into derivative
or interest rate transactions for speculative purposes.

At December 31, 1998, $37.8 million aggregate principal was outstanding under
the Credit Facility with a current interest rate of approximately 8.04%. The
Company does not have any other material market-sensitive financial instruments.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

This item is submitted in a separate section of this report (see pages 22
through 39).

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

Not applicable.



                                       17
<PAGE>   19


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

The information required by this item with respect to the executive officers and
directors of the Company is incorporated herein by reference to the sections
entitled "Executive Officers" and "Nominees for Election as Directors" in the
Company's definitive proxy statement for its Annual Meeting of Shareholders to
be held June 10, 1999.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item with respect to executive compensation is
incorporated herein by reference to the section entitled "Executive
Compensation" in the Company's definitive proxy statement for its Annual Meeting
of Shareholders to be held June 10, 1999.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item with respect to executive compensation is
incorporated herein by reference to the section entitled "Security Ownership of
Certain Beneficial Owners, Directors and Management" in the Company's definitive
proxy statement for its Annual Meeting of Shareholders to be held June 10, 1999.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated herein by reference to the
section entitled "Certain Transactions" in the Company's definitive proxy
statement for its Annual Meeting of Shareholders to be held June 10, 1999.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A)(1) and (2) -- The response to this portion of Item 14 is submitted as a
separate section of this report 

(A)(3) LISTING OF EXHIBITS

2(a)     Stock Purchase Agreement between the Registrant and stockholders of
         Oncology Hematology Group of South Florida (filed as Exhibit 10(m) to
         Registrant's Form 8-K filed January 17, 1996 (File No. 0-15416) and
         incorporated herein by reference)
2(b)     Purchase and Sale Agreement between the Registrant, Knoxville
         Hematology Oncology Associates and Partners of Knoxville Hematology
         Oncology Associates (filed as Exhibit 10(q) to Registrant's Form 8-K
         filed April 15, 1996 (File No. 0-15416) and incorporated herein by
         reference)
2(c)     Stock Purchase Agreement between the Registrant and stockholders of
         Jeffrey L. Paonessa, M.D., P.A. (filed as Exhibit 10(s) to Registrant's
         Form 8-K filed July 5, 1996 (File No. 0-15416) and incorporated herein
         by reference)
2(d)     Stock Purchase Agreement between the Registrant and stockholders of
         Southeast Florida Hematology Oncology Group, P.A. (filed as Exhibit
         2(d) to Registrant's Form 8-K filed July 15, 1996 (File No. 0-15416)
         and incorporated herein by reference)
2(e)     Asset Purchase Agreement by and among the Registrant, stockholders of
         The Center for Hematology-Oncology, P.A. and the Registrant's Form 8-K
         filed October 21, 1996 (File No. 1-09922) and incorporated herein by
         reference






                                       18
<PAGE>   20

2(f)     Stock Purchase Agreement by and among the Registrant, stockholders of
         Hematology Oncology Associates of the Treasure Coast, P.A., and
         Hematology Oncology Associates of the Treasure Coast, P.A. (filed as
         Exhibit 10(z) to the Registrant's Form 8-K filed November 5, 1996 (File
         No 1-09922) and incorporated herein by reference)
3(a)     Charter (1)
3(b)     Bylaws (2)
4        Trust Indenture, Deed of Trust and Security Agreement dated April 3,
         1990 (3)
10(a)    Registrant's 1985 Stock Option Plan, as amended (4)
10(b)*   Registrant's 1990 Non-Qualified Stock Option Plan, as amended** (6)(8)
10(c)*   Employment agreement between the Registrant and William H. West, M.D.
         dated January 1, 1995*
10(d)*   Employment agreement between the Registrant and Joseph T. Clark dated
         July 1, 1995**(7)
10(e)    Service Agreement between the Registrant and stockholders of Oncology
         Hematology Group of South Florida (filed as Exhibit 10(n) to
         Registrant's Form 8-K filed January 17, 1996 (File No. 0-15416) and
         incorporated herein by reference)
10(f)**  Amendment to 1990 Registrant's Non-Qualified Stock Option Plan adopted
         April 20, 1995 (7)
10(g)    Service Agreement between the Registrant and stockholders of Jeffrey L.
         Paonessa, M.D., P.A. (filed as Exhibit 10(t) to Registrant's Form 8-K
         filed July 5, 1996 (File No. 0-15416) and incorporated herein by
         reference)
10(h)    Service Agreement between the Registrant and stockholders of Southeast
         Florida Hematology Oncology Group, P.A. (filed as Exhibit 10(u) to
         Registrant's Form 8-K filed July 15, 1996 (File No 0-15416) and
         incorporated herein by reference)
10(i)**  Amendment No. 3 to 1990 Registrant's Non-qualified Stock Option Plan
         adopted December 16, 1995 (8)
10(j)    Service Agreement between the Registrant, Rosenberg & Kalman, M.D.,
         P.A., and stockholders of R&K, M.D., P.A. (filed as Exhibit 10(x) to
         Registrant's Form 8-K filed September 18, 1996 (File No. 1-09922) and
         incorporated herein by reference)
10(k)    Loan Agreement dated April 21, 1997 between Registrant, NationsBank of
         Tennessee, N.A., AmSouth Bank of Tennessee and Union Planters National
         Bank (10)
10(l)    Registrant's 1996 Stock Incentive Plan(9)
10(m)    Second amendment to First Amended and Restated Loan Agreement dated
         March 31, 1999 between Registrant, NationsBank of Tennessee, N.A.,
         Amsouth Bank of Tennessee and Union Planters National Bank
10(n)    First Amendment to Revolving Credit Note dated March 31, 1999 between
         Registrant, NationsBank of Tennessee, N.A., AmSouth Bank of Tennessee
         and Union Planters National Bank
11       Statement regarding Computation of Per Share Earnings
13       Annual Report to Shareholders for the year ended December 31, 1997 --
         to be filed
23       Consent of Independent Auditors
27       Financial Data Schedule
99(a)    Definitive Proxy Statement for Annual Meeting of Shareholders to be
         held June 11, 1998 -- to be filed

----------

*        These documents may be obtained by stockholders of Registrant upon
         written request to: Response Oncology, Inc., 1775 Moriah Woods Blvd.,
         Memphis, Tennessee 38117
**       Management Compensatory Plan
(1)      Incorporated by reference to the Registrant's 1989 10-K, dated July 31,
         1989
(2)      Incorporated by reference to the Registrant's Registration Statement on
         Form S-1 under the Securities Act of 1933 (File No. 33-5016) effective
         April 21, 1986





                                       19
<PAGE>   21

 (3)     Incorporated by reference in the initial filing of the Registrants'
         1990 10-K, dated July 18, 1990, filed July 20, 1990 and amended on
         September 19, 1990
 (4)     Incorporated by reference to the Registrant's Registration Statement on
         Form S-8 under the Securities Act of 1933 (File No. 33-21333) effective
         April 26, 1988
 (5)     Incorporated by reference to the Registrant's 1991 10-K, dated July 26,
         1991
 (6)     Incorporated by reference to the Registrant's Registration Statement on
         Form S-8 under the Securities Act of 1933 (File No. 33-45616) effective
         February 11, 1992
 (7)     Incorporated by reference to the Registrant's 1995 10-K, dated March
         29, 1996
 (8)     Incorporated by reference to the Registrant's Registration Statement on
         Form S-8 under the Securities Act of 1933 (File No. 333-14371)
         effective October 11, 1996
 (9)     Incorporated by reference to the Registrant's Statement on Form S-8 
         under the Securities Act of 1933 (File No. 333-28973) effective June 
         11, 1997
(10)     Incorporated by reference to the Registrant's 1997 10-K dated March 
         31, 1997

(B)      Reports on Form 8-K filed in the fourth quarter of 1996
(C)      Exhibits - The response to this portion of Item 14 is submitted as a
         separate section of this report
(D)      Financial Statement Schedules - The response to this portion of Item 14
         is submitted as a separate section of this report



                                       20
<PAGE>   22


                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Response Oncology, Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

RESPONSE ONCOLOGY, INC.

                                           By: /s/ Joseph T. Clark
                                               ---------------------------------
                                               Joseph T. Clark
                                               President, Chief Executive
                                               Officer, and  Director

                                               Date: March 31, 1999

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.

   By:  /s/ Frank M. Bumstead               By: /s/ Dena L. Mullen   
       --------------------------------         --------------------------------
       Frank M. Bumstead                        Dena L. Mullen
       Vice-Chairman of the Board               Director of Finance

       Date: March 31, 1999                     Date: March 31, 1999

   By: /s/ Joseph T. Clark                  By: /s/ James R. Seward  
       --------------------------------         --------------------------------
       Joseph T. Clark                          James R. Seward
       President, Chief Executive               Director
       Officer, and Director

       Date: March 31, 1999                     Date: March 31, 1999

   By: /s/ Mary E. Clements                 By: /s/  Peter A. Stark  
       --------------------------------         --------------------------------
       Mary E. Clements                         Peter A. Stark
       Chief Financial Officer                  Controller

       Date: March 31, 1999                     Date: March 31, 1999

   By: /s/  P. Anthony Jacobs               By: /s/ William H. West, M.D.    
       --------------------------------         --------------------------------
       P. Anthony Jacobs                        William H. West, M.D.
       Director                                 Chairman of the Board

       Date: March 31, 1999                     Date: March 31, 1999






                                       21
<PAGE>   23


Independent Auditors' Report
The Board of Directors
Response Oncology, Inc.:

We have audited the accompanying consolidated balance sheets of Response
Oncology, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1998. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in the accompanying
index at Item 14(a). These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule 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 financial position of Response Oncology,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.

                                                                        KPMG LLP

Memphis, Tennessee
March 23, 1999



                                       22
<PAGE>   24


PART I - FINANCIAL INFORMATION

ITEM 1:  FINANCIAL STATEMENTS
         RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
         CONSOLIDATED BALANCE SHEETS
         (Dollar amounts in thousands except for share data)

<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                      --------------------------
ASSETS                                                                                  1998             1997
                                                                                      ---------        ---------
<S>                                                                                   <C>              <C>      
CURRENT ASSETS
    Cash and cash equivalents                                                         $   1,083        $   2,425
    Accounts receivable, less allowance for doubtful accounts
         of $2,772 and $3,130                                                            22,844           16,910
    Supplies and pharmaceuticals                                                          3,406            2,772
    Prepaid expenses and other current assets                                             6,276            4,219
    Due from affiliated physician groups                                                 18,630           14,823
                                                                                      ---------        ---------
         TOTAL CURRENT  ASSETS                                                           52,239           41,149

    Property and equipment, net                                                           5,273            3,555

    Deferred charges, less accumulated amortization of $496 and $513                         50              386
    Management service agreements, less accumulated amortization of $5,160
           and $4,016                                                                    68,087          103,054
    Other assets                                                                          1,104              931
                                                                                      ---------        ---------
         TOTAL ASSETS                                                                 $ 126,753        $ 149,075
                                                                                      =========        =========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
    Accounts payable                                                                  $  16,528        $   9,751
    Accrued expenses and other liabilities                                                7,350            4,370
    Current portion of notes payable                                                     11,107            8,537
    Current portion of capital lease obligations                                            357               45
      Deferred income taxes                                                                 473               --
                                                                                      ---------        ---------
         TOTAL CURRENT LIABILITIES                                                       35,815           22,703

    Capital lease obligations, less current portion                                         962               44
    Notes payable, less current portion                                                  32,290           35,399
    Deferred income taxes                                                                 7,295           23,544
    Minority interest                                                                       981            1,037

STOCKHOLDERS' EQUITY
    Series A convertible preferred stock, $1.00 par value (aggregate involuntary 
         liquidation preference $266), authorized 3,000,000
         shares; issued and outstanding 26,631 and 27,233 shares, respectively               27               27
    Common stock, $.01 par value, authorized 30,000,000 shares; issued and
          outstanding  12,049,331 and 11,972,358 shares, respectively                       120              120
    Paid-in capital                                                                     101,912          101,402
    Accumulated deficit                                                                 (52,649)         (35,201)
                                                                                      ---------        ---------
                                                                                         49,410           66,348
                                                                                      ---------        ---------
         TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                   $ 126,753        $ 149,075
                                                                                      =========        =========
</TABLE>

See accompanying notes to consolidated financial statements.



                                       23
<PAGE>   25


RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands except for share data)

<TABLE>
<CAPTION>
                                                                      Years Ended December 31,
                                                       ---------------------------------------------------
                                                            1998               1997               1996
                                                       ------------        ------------        -----------
<S>                                                    <C>                 <C>                 <C>        
NET REVENUE                                            $    128,246        $    101,920        $    67,353

COSTS AND EXPENSES
     Salaries and benefits                                   25,227              20,828             16,288
     Pharmaceuticals and supplies                            67,290              49,132             29,929
     Other operating costs                                   13,887              10,955              7,806
     General and administrative                               7,315               4,278              4,394
     Depreciation and amortization                            5,579               4,704              3,485
     Interest                                                 2,946               3,125              2,574
     Provision for doubtful accounts                          2,947               1,529              1,594
     Impairment of management service agreements
       and associated assets                                 24,877               - - -              - - -
                                                       ------------        ------------        -----------
                                                            150,068              94,551             66,070
                                                       ------------        ------------        -----------

EARNINGS (LOSS) BEFORE INCOME TAXES AND MINORITY            (21,822)              7,369              1,283
INTEREST
     Minority owners' share of net earnings                    (749)               (591)              (373)
                                                       ------------        ------------        -----------
EARNINGS (LOSS) BEFORE INCOME TAXES                         (22,571)              6,778                910
     Income tax provision (benefit)                          (5,123)              2,576              - - -
                                                       ------------        ------------        -----------
NET EARNINGS (LOSS)                                         (17,448)              4,202                910
Common stock dividend to preferred stockholders                  (3)                 (3)                (3)
                                                       ------------        ------------        -----------
NET EARNINGS (LOSS) TO COMMON STOCKHOLDERS             $    (17,451)       $      4,199        $       907
                                                       ============        ============        ===========
EARNINGS (LOSS) PER COMMON SHARE:
     Basic                                             $      (1.45)       $       0.36        $      0.11
                                                       ============        ============        ===========
     Diluted                                           $      (1.45)       $       0.36        $      0.11
                                                       ============        ============        ===========
Weighted average number of common shares:
     Basic                                               12,039,480          11,505,775          7,941,888
                                                       ============        ============        ===========
     Diluted                                             12,039,480          11,662,157          8,245,782
                                                       ============        ============        ===========
</TABLE>


See accompanying notes to consolidated financial statements.



                                       24
<PAGE>   26



RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollar amounts in thousands except for share data)

<TABLE>
<CAPTION>
                                              Series A Convertible
                                                 Preferred Stock        Common Stock
                                               ------------------   ----------------------
                                                        Par Value                Par Value                               Total
                                                        $1.00 Per                 $.01 Per   Paid-In    Accumulated   Stockholders'
                                               Shares     Share       Shares        Share    Capital      Deficit        Equity
                                               ------     -----     ----------     -----     --------     --------      --------
<S>                                            <C>      <C>          <C>         <C>         <C>        <C>            <C>   
Balances at December 31, 1995                  27,833        28      7,371,589        74       60,054      (40,313)       19,843
    Net earnings                                                                                               910           910
    Exercise of common stock options                                    26,000                    275                        275
    Conversion of preferred stock                (600)       (1)           109                      1                           
    Common stock issued in connection
      with practice affiliations                                       639,924         6        6,583                      6,589
    Conversion of note payable to parent                               909,090         9        9,991                     10,000
    Dividend on preferred stock                                            306                                                  
    Warrants issued in connection
      with practice affiliations                                                                  550                        550
                                               ------     -----     ----------     -----     --------     --------      --------
Balances at December 31, 1996                  27,233        27      8,947,018        89       77,454      (39,403)       38,167
    Net earnings                                                                                             4,202         4,202
    Exercise of common stock options                                     4,498         1           26                         27
    Conversion of note payable to parent                             3,020,536        30       23,922                     23,952
    Dividend on preferred stock                                            306                                                  
                                               ------     -----     ----------     -----     --------     --------      --------
Balances at December 31, 1997                  27,233     $  27     11,972,358     $ 120     $101,402     $(35,201)     $ 66,348
    Net loss                                                                                               (17,448)      (17,448)
    Exercise of common stock options                                    54,164                    320                        320
    Common stock issued in connection with
      practice affiliations                                             22,406                    190                        190
    Conversion of preferred stock                (602)                     110                                                  
    Dividend on preferred stock                                            293                                                  
                                               ------     -----     ----------     -----     --------     --------      --------
Balances at December 31, 1998                  26,631     $  27     12,049,331     $ 120     $101,912     $(52,649)     $ 49,410
                                               ======     =====     ==========     =====     ========     ========      ========
</TABLE>

See accompanying notes to consolidated financial statements.



                                       25
<PAGE>   27



RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                                                                            Years Ended December 31,
                                                                                     -------------------------------------
                                                                                       1998          1997          1996
                                                                                     --------      --------      ---------
<S>                                                                                  <C>           <C>           <C>      
OPERATING ACTIVITIES
    Net earnings (loss)                                                              $(17,448)     $  4,202      $     910
    Adjustments to reconcile net earnings (loss) to net cash
          provided by (used in) operating activities:
      Depreciation and amortization                                                     5,579         4,704          3,485
      Impairment of management service agreements and associated                       24,877         - - -          - - -
         assets
      Deferred income taxes                                                            (5,800)        - - -          - - -
      Provision for doubtful accounts                                                   2,947         1,529          1,594
      Minority owners' share of net earnings                                              749           591            373
      Changes in operating assets and liabilities net of effect of acquisitions:
         Accounts receivable                                                           (8,881)       (4,141)        (1,956)
         Supplies and  pharmaceuticals,  prepaid expenses and other
             current assets                                                            (2,624)       (2,408)        (1,332)
         Deferred charges and other assets                                               (175)         (970)          (176)
         Due from affiliated physician groups                                          (4,955)       (3,783)        (6,846)
         Accounts payable and accrued expenses                                          8,512         6,849            225
                                                                                     --------      --------      ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                                     2,781         6,573         (3,723)
                                                                                     --------      --------      ---------
INVESTING ACTIVITIES
    Purchase of equipment                                                              (1,702)         (978)        (1,034)
    Sale of short-term investments                                                      - - -         - - -            362
    Investment in joint venture                                                         - - -            73          - - -
    Acquisition of non-medical assets of affiliated physician groups                   (1,011)         (332)       (52,683)
                                                                                     --------      --------      ---------
NET CASH USED IN INVESTING ACTIVITIES                                                  (2,713)       (1,237)       (53,355)
                                                                                     --------      --------      ---------
FINANCING ACTIVITIES
    Bank overdraft                                                                      - - -         - - -            491
    Financing costs incurred                                                            - - -          (388)          (324)
    Proceeds from exercise of stock options and warrants                                  320            27            275
    Distributions to joint venture partners                                              (805)        - - -          - - -
    Proceeds from notes payable                                                         - - -        12,724         27,312
    Principal payments on notes payable                                                (8,907)      (16,623)        (6,895)
    Net proceeds from credit facility                                                   8,191         - - -          - - -
    Proceeds from note payable to parent                                                - - -         1,006         32,494
    Principal payments on capital lease obligations                                      (209)          (72)           (65)
                                                                                     --------      --------      ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                    (1,410)       (3,326)        53,288
                                                                                     --------      --------      ---------

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                       (1,342)        2,010         (3,790)
    Cash and cash equivalents at beginning of period                                    2,425           415          4,205
                                                                                     --------      --------      ---------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                           $  1,083      $  2,425      $     415
                                                                                     ========      ========      =========
</TABLE>
                                                                      Continued:




                                       26
<PAGE>   28



<TABLE>
<CAPTION>
                                                                                            Years Ended December 31,
                                                                                     -------------------------------------
                                                                                       1998          1997          1996
                                                                                     --------      --------      ---------
<S>                                                                                  <C>           <C>           <C>      
Supplemental schedule of noncash investing and financing
activities
    Effect of practice affiliations:
      Intangible assets                                                              $  1,040      $    281      $ 103,308
      Property and equipment                                                               20            42          2,474
      Acquired accounts receivable, net                                                   139            29          6,430
      Other assets                                                                         --            22          4,643
                                                                                     --------      --------      ---------
      Total assets acquired, net of cash                                                1,199           374        116,855
                                                                                     --------      --------      ---------
      Liabilities assumed                                                                  --           (42)       (29,926)
      Issuance of notes payable                                                            --            --        (27,107)
      Issuance of common stock                                                           (188)           --         (7,139)
                                                                                     --------      --------      ---------
      Payments for practice affiliations operating assets                            $  1,011      $    332      $  52,683
                                                                                     ========      ========      =========
Cash paid for interest                                                               $  3,010      $  3,408      $   1,642
                                                                                     ========      ========      =========
Cash paid for income taxes                                                           $  2,202      $  1,821             --
                                                                                     ========      ========      =========
</TABLE>

See accompanying notes to consolidated financial statements.



                                       27
<PAGE>   29


RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998

NOTE A--ORGANIZATION AND DESCRIPTION OF BUSINESS

Response Oncology, Inc. ("the Company") is a comprehensive cancer management
company which owns and/or operates a network of outpatient treatment centers
("IMPACT Centers"), which provide stem cell supported high-dose chemotherapy and
other advanced cancer treatment services under the direction of practicing
oncologists; owns the assets of and manages oncology practices; and conducts
clinical cancer research on behalf of pharmaceutical manufacturers.

Prior to July 25, 1997, the Company was a subsidiary of Seafield Capital
Corporation ("Seafield"). On July 1, 1997, Seafield's Board of Directors
declared a dividend to its shareholders of record on July 11, 1997 of all shares
of common stock of the Company owned by Seafield. On July 25, 1997, 1.2447625
shares of the Company's common stock were distributed for each share of Seafield
common stock outstanding. The Seafield shareholders paid no consideration for
any shares of the Company's stock received in the distribution.

NOTE B--SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation: The consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries and majority-owned or controlled joint ventures. All significant
intercompany accounts and transactions have been eliminated in consolidation.

Cash Equivalents: All highly liquid investments with an original maturity of
three months or less when purchased are considered to be cash equivalents.

Accounts Receivable: Accounts receivable primarily consists of receivables from
patients, insurers, government programs and other third-party payors for medical
services provided. Such amounts are reduced by an allowance for contractual
adjustments and other uncollectible amounts. Contractual adjustments result from
the differences between the amounts charged for services performed and the
amounts allowed by the Medicare and Medicaid programs and other public and
private insurers.

Due From Affiliated Physicians: Due from affiliated physicians consists of
management fees earned and payable pursuant to related service agreements. In
addition, the Company may also fund certain working capital needs of affiliated
physicians from time to time.

Due to the demographics of oncology patients, a significant portion of the
affiliated physicians' medical service revenues are related to third-party
reimbursement agreements, primarily Medicare and other governmental programs.
Medicare and other governmental programs reimburse physicians based on fee
schedules which are determined by the related governmental agency. In the
ordinary course of business, affiliated physicians receiving reimbursement from
Medicare and other governmental programs are potentially subject to a review by
regulatory agencies concerning the accuracy of billings and sufficiency of
supporting documentation of procedures performed. Provisions for estimated
third-party payor settlements and adjustments are estimated in the period the
related services are rendered and adjusted in future periods as final
settlements are determined.

Supplies and pharmaceuticals: Supplies and pharmaceuticals are recorded at lower
of cost (first-in, first-out) or market.





                                       28
<PAGE>   30

Property and Equipment: Property and equipment are stated at cost. Depreciation
and amortization are provided using the straight-line method over the estimated
useful lives which range from three to ten years.

Equipment under capital lease obligations is amortized using the straight-line
method over the shorter of the lease term or the estimated useful life of the
equipment. Such amortization is included in depreciation and amortization in the
consolidated financial statements.

Management Service Agreements: Costs of obtaining Service Agreements were
created by the excess of the purchase price over the fair value of net assets of
acquired practices. The Service Agreements are noncancelable except for
performance defaults, as defined. In the event a practice breaches the
agreement, or if the Company terminates with cause, the practice is required to
purchase all tangible assets at fair market value and pay substantial
liquidating damages.

At each reporting period, the Company reviews the carrying value of Service
Agreements on a practice-by-practice basis to determine if facts and
circumstances exist which would suggest that the value of the Service Agreements
may be impaired or that the amortization period needs to be modified. Among the
factors considered by the Company in making the evaluation are changes in the
practices' market position, reputation, profitability and geographical
penetration. Using these factors, if circumstances are present which may
indicate impairment is probable, the Company will prepare a projection of the
undiscounted cash flows before interest charges of the specific practice and
determine if the Service Agreements are recoverable based on these undiscounted
cash flows. If impairment is indicated, then an adjustment will be made to
reduce the carrying value of intangible assets to fair value. Certain Service
Agreements were determined to be impaired during 1998, as more fully discussed
in note C.

Based on recent guidance from the Securities and Exchange Commission, the
Company announced a change in the amortization period of Service Agreements
acquired in practice management affiliations to 25 years from 40 years beginning
July 1, 1998. The Company estimates that the change in the amortization period
will result in additional annual amortization expense of approximately
$1,200,000 in subsequent years exclusive of the amortization expense associated
with the three impaired Service Agreements discussed in Note C.

Deferred Charges: Deferred charges includes costs capitalized in connection with
obtaining long-term financing and are being amortized using the interest method
over the terms of the related debt.

Net Revenue: The following table is a summary of net revenue by source for the
respective years ended December 31. Net patient service revenue is recorded net
of contractual allowances and discounts of $6,043,000, $6,253,000 and $4,898,000
for the years ended December 31, 1998, 1997 and 1996, respectively. The
Company's revenue from practice management affiliations includes reimbursement
of practice operating expenses (other than amounts retained by physicians) and a
management fee either fixed in amount or equal to a percentage of each
affiliated oncology group's adjusted net revenue or net operating income. In
certain affiliations, the Company may also be entitled to a performance fee if
certain financial criteria are satisfied.

Pharmaceutical sales to physician revenue is recorded based upon the Company's
contract with physician groups to manage the pharmacy component of the groups'
practice. Revenue recorded for these contracts represents the cost of
pharmaceuticals plus a percentage fee.

<TABLE>
<CAPTION>
                                                 Years Ended December 31,
                                                      (In thousands)
                                            ---------------------------------
                                              1998         1997        1996
                                            --------     --------     -------
<S>                                         <C>          <C>          <C>    
     Net patient service revenue            $ 37,957     $ 34,249     $33,423
     Practice management service fees         59,527       46,476      19,292
     Pharmaceutical sales to physicians       26,849       18,302      13,531
     Clinical research revenue                 3,913        2,893       1,107
                                            --------     --------     -------
                                            $128,246     $101,920     $67,353
                                            ========     ========     =======
</TABLE>



                                       29
<PAGE>   31

Income Taxes: The asset and liability method is used whereby deferred tax assets
and liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.

Earnings (Loss) Per Common Share: Earnings (loss) per common share has been
computed based upon the weighted average number of shares of common stock
outstanding during the period, plus (in periods in which they have a dilutive
effect) common stock equivalents, primarily stock options and warrants.

Fair Value of Financial Instruments: The carrying amounts of all asset and
liability financial instruments approximate their estimated fair values at
December 31, 1998 and 1997. Fair value of a financial instrument is defined as
the amount at which the instrument could be exchanged in a current transaction
between willing parties.

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 amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

RECLASSIFICATIONS -

Certain Reclassifications have been made in the 1997 and 1996 financial
statements to conform with the 1998 presentation.

NOTE C - IMPAIRMENT OF MANAGEMENT SERVICE AGREEMENTS AND ASSOCIATED ASSETS

The Company recognized a pretax impairment charge during the fourth quarter of
1998, based on the criteria described in Note B, totaling $24,877,000. This
charge was principally related to the poor performance of three specific
Physician Practice Management Service Agreements as further described below. Of
the total charge, $22,482,000 related to the impairment of Service Agreement
assets and $2,395,000 related to the write-off of certain net tangible assets
associated with the individual physician practices.

Certain significant economic issues, especially the introduction of new and more
costly cancer drugs and the Company's related inability to convert the subject
physician practices to a more equitable revenue sharing model, began to
materially and negatively impact these practices during 1998. The subject
practices have continued to evidence these adverse operating conditions
subsequent to year-end. Practice operating losses and other factors led the
Company to evaluate the recoverability of related Service Agreement and other
assets. This evaluation and the factors described in the following paragraph led
to the recognition of impairment charges in the accompanying 1998 financial
statements, which included the complete write-off of the subject Service
Agreement assets.

Given the results of the evaluation described above, the Company has been
actively negotiating with the subject physician practices, principally regarding
potential exit strategies and/or Service Agreement modifications. On February 1,
1999, the Company executed a termination agreement with one of the three
physician practices. The terms of the agreement provide for the termination of
the Service Agreement and for the Company to return certain net tangible assets
to the physician practice. The Company believes that the ultimate terms of any
potential termination agreements related to other impaired Service Agreements
will parallel, in all material respects, the terms of the executed termination
agreement.





                                       30
<PAGE>   32

NOTE D--PROPERTY AND EQUIPMENT

Balances of major classes of property and equipment at December 31, 1998 and
1997 are as follows: (In thousands)

<TABLE>
<CAPTION>
                                                            1998               1997
                                                          -------            -------
<S>                                                       <C>                <C>    
Lab and pharmacy equipment                                $ 5,329            $ 4,984
Furniture and office equipment                              5,318              4,482
Equipment under capital leases                              2,827              1,342
Leasehold improvements                                      2,949              2,474
                                                          -------            -------
                                                           16,423             13,282
Less accumulated depreciation and amortization             11,150              9,727
                                                          =======            =======
                                                          $ 5,273            $ 3,555
                                                          =======            =======
</TABLE>

NOTE E--NOTES PAYABLE

Notes payable at December 31, 1998 and 1997, consist of the following:
(In thousands)

<TABLE>
<CAPTION>
                                                                                   1998               1997
                                                                                 -------            -------
<S>                                                                              <C>                <C>    
Credit Facility                                                                  $37,777            $29,586
Various subordinated notes payable to affiliated physicians and
    physician practices, bearing interest ranging from 4% to 9%,
    with maturity dates through 2003                                               5,478             14,180
Other notes payable collateralized by furniture and equipment with
    interest rates between 8% and 10% payable in monthly installments
    of principal and interest through 2005                                           142                170
                                                                                 -------            -------
Total notes payable                                                               43,397             43,936
Less current portion                                                              11,107              8,537
                                                                                 =======            =======
                                                                                 $32,290            $35,399
                                                                                 =======            =======
</TABLE>

The Company has a $45.0 million Credit Facility, expiring March 31, 1999, to
fund the Company's acquisition and working capital needs. The Credit Facility,
comprised of a $35.0 million Acquisition Facility and a $10.0 million Working
Capital Facility, is collateralized by the common stock of the Company's
subsidiaries. The Credit Facility bears interest at a variable rate equal to
LIBOR plus a spread between 1.5% and 2.125%, depending upon borrowing levels. At
December 31, 1998, $37.8 million aggregate principal was outstanding under the
Credit Facility with a current interest rate of approximately 8.04%. The Credit
Facility contains affirmative and negative covenants which, among other things,
require the Company to maintain certain financial ratios, including minimum
fixed charges coverage, funded debt to EBITDA, net worth and current ratio. The
Company was not in compliance with certain of these covenants at December 31,
1998. The Company has received an extension on the maturity of the Credit
Facility until June 30, 1999  and has received a waiver of the covenant
violations as of December 31, 1998.

In May 1997, the Company entered into a LIBOR based interest rate swap agreement
("Swap Agreement") with an affiliate of the Company's primary lender as required
by the terms of the Credit Facility. Amounts hedged under the Swap Agreement
accrue interest at the difference between 6.42% and the thirty day LIBOR rate
and are settled monthly. As of December 31, 1998, approximately 40% of the
Company's outstanding principal balance under the Credit Facility was hedged
under the Swap Agreement. The Swap Agreement matures in March 1999 and is
cancelable at the lender's option after July 1998.

In March 1999 the Company received a commitment for a $30.0 million Line of
Credit which will mature on March 31, 2002 to replace the existing Credit
Facility. The Line of Credit will be collateralized by the common stock and
assets of the Company and its subsidiaries. The Line of Credit will bear
interest at a variable rate equal to LIBOR plus a spread between 1.375% and
2.5%, depending upon borrowing levels. The Company is also obligated to a
commitment fee of .25% to .5% of the unused portion of the Line of Credit. The
Company 




                                       31
<PAGE>   33
will be subject to certain affirmative and negative covenants which, among
other things, require the Company to maintain certain financial ratios,
including minimum fixed charges coverage, funded debt to EBITDA, net worth and
current ratio. The Company is currently in negotiations with respect to the
uncommitted portion of the line of credit.

The installment notes payable to affiliated physicians and physician practices
were issued as partial consideration for the practice management affiliations.
Principal and interest under the long-term notes may, at the election of the
holders, be paid in shares of common stock of the Company based on conversion
prices ranging from $11.50 to $17.00.

The aggregate maturities of long-term debt at December 31, 1998 are as follows:
(In thousands)

<TABLE>
                  <S>                               <C>     
                  1999                               $11,107
                  2000                                   976
                  2001                                   898
                  2002                                30,179
                  2003                                   203
                  Thereafter                              34
                                                     -------
                                                     $43,397
                                                    =========
</TABLE>

NOTE F -- LEASES

The Company leases certain office facilities and equipment under lease
agreements with original terms ranging from one to forty years that generally
provide for one or more renewal options.

Interest has been imputed on capital leases at rates of 6% to 12%. Accumulated
amortization of assets recorded under capital leases totaled $1,595,000 and
$1,440,000 at December 31, 1998 and 1997, respectively. Amortization of leased
assets is included in depreciation and amortization expense.

Total rental expense under operating leases amounted to $3,527,000, $2,619,000
and $2,361,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. The Company is generally obligated to the lessors for its
proportionate share of operating expenses of the leased premises. At December
31, 1998, future minimum lease payments under capital and operating leases with
initial terms of one year or more are as follows:

<TABLE>
<CAPTION>
                                                           Capital Leases         Operating Leases
                                                           --------------         ----------------
<S>                                                        <C>                    <C>    
Year ending December 31:

                                  1999                        $  444                  $ 3,042
                                  2000                           361                    2,321
                                  2001                           342                    1,978
                                  2002                           313                    1,594
                                  2003                            62                    1,330
                                  Thereafter                      --                   14,507
                                                              ------                  -------
Total minimum payments                                         1,522                  $24,772
                                                              ------                  -------
        Less imputed interest                                    203
                                                              ------
Present value of minimum rental payments                       1,319
Less current portion                                             357
                                                              ------
Capital lease obligations
        Less current portion                                  $  962
                                                              ======
</TABLE>



                                       32
<PAGE>   34


NOTE G --- INCOME TAXES

The actual tax expense for the years ended December 31, 1998, 1997, and 1996,
respectively, differs from the expected tax expense or benefit for those years
(computed by applying the federal corporate tax rate of 34% to earnings or loss
before income taxes as follows (in thousands):

<TABLE>
<CAPTION>
                                                       1998           1997        1996
                                                      -------        ------       -----
<S>                                                   <C>            <C>          <C>  
Computed expected tax expense (benefit)               $(7,674)       $2,304       $ 309
Non-deductible expenses                                 1,206            23          14
Utilization of net operating loss carryforwards            --            12        (323)
State tax expense                                        (893)          237          --
Valuation allowance                                     2,238            --          --
                                                      -------        ------       -----
Actual income tax expense (benefit)                   $(5,123)       $2,576       $   0
                                                      =======        ======       =====
</TABLE>

The components of the actual expense for the years ended 1998, 1997 and 1996 are
as follows (in thousands):

<TABLE>
<CAPTION>
                                                       1998           1997        1996
                                                      -------        ------       -----
<S>                                                   <C>            <C>          <C>  
Federal current tax expense                           $   545        $1,334          --
State current tax expense                                 132           245          --
Deferred federal tax expense (benefit)                 (4,885)          883          --
Deferred state tax expense (benefit)                     (915)          105          --
                                                      -------        ------       -----
                                                      $(5,123)       $2,576       $   0
                                                      =======        ======       =====
</TABLE>

The approximate tax effects of each type of temporary difference and
carryforward that gives rise to a significant portion of deferred tax assets and
deferred tax liabilities are as follows (in thousands):

<TABLE>
                                                       1998           1997        1996
                                                      -------        ------       -----
<S>                                                   <C>            <C>          <C>   
    Deferred tax assets:
       Net operating loss carryforwards               $ 1,317        $1,497     $ 1,678
       Reserve for bad debts                             (473)           --         674
       Excess book depreciation/amortization            1,093         1,035         665
       Partnership basis differences                       --            --         204
       Excess book expense accruals                        --            46          46
       Other                                               --            40          --
          Impairment of management                  
            service agreements and associated assets    7,401            --          --
                                                      -------       -------     -------
    Total deferred assets                               9,338         2,618       3,267
    Valuation allowance                                (2,238)           --          --
                                                      -------       -------     -------
    Net deferred tax assets                           $ 7,100       $ 2,618     $ 3,267
      Deferred tax liability:
       Management service agreements                  $14,868       $26,172     $25,127
                                                      -------       -------     -------
    Net deferred tax liability                        $ 7,768       $23,544     $21,860
                                                      =======       =======     =======
</TABLE>

The deferred tax liability of ($7,768,000) is calculated by applying the
applicable expected tax rate of 38% to the future taxable amounts resulting from
the taxable temporary differences between the assigned value of identifiable net
assets (Service Agreements) and their tax basis. A portion of the increase in
the deferred tax liability ($696,000) is the result of purchase price
adjustments in Service Agreements purchased in 1996.

The valuation allowance for the deferred tax assets as of December 31, 1998 is
$2,238,000. Management believes that a valuation allowance is necessary with
respect to the impairment of physician practices. This is due to the nature
(capital) of a loss currently attributed to one of the three practices. There
was no valuation 




                                       33
<PAGE>   35

allowance for December 31, 1997 and 1996. Thus, the net change in the total
valuation allowance for the year ended December 31, 1998, was an increase of
$2,238,000. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, income
taxes paid in prior years eligible to be offset by net operating loss
carrybacks, and tax planning strategies in making this assessment. Taxable
income for the years ended December 31, 1998, 1997, and 1996, was $1,604,000,
$3,962,000, and $0, respectively. In order to fully realize the deferred tax
asset, the Company will need to generate future ordinary taxable income of
$13,118,000 (after considering taxable income in previous years available for
carryback) and future capital gain income of $5,889,000. Based upon the level of
historical ordinary taxable income, management believes it is more likely than
not the Company will realize the benefits of ordinary deductible differences.
However, based upon the historical level of capital gain taxable income,
management believes that it is not more likely than not the Company will realize
the entire deferred tax asset related to the impaired physician practices.

The amount of income that the Company may offset in future years by the net
operating loss carryforwards incurred prior to an ownership change in 1990 will
be limited, by the application of the Internal Revenue Code Section 382, to
$473,000 annually through the year 2005. The unused portion of the net operating
losses may be carried forward and realized in future years subject to this
limitation.

As of December 31, 1998, the Company had available tax net operating loss
carryforwards totaling $3,471,000, all of which is subject to certain annual
limitations discussed above. The use of net operating loss carryforwards, for
income tax purposes, is also dependent upon future taxable income.

NOTE H -- COMMON STOCK, CONVERTIBLE PREFERRED STOCK, WARRANTS, AND OPTIONS

Common Stock: The $10 million note payable to Seafield was exchanged for 909,090
shares of common stock during August 1996. At December 31, 1996, Seafield's
ownership interest in the Company was approximately 56%. On February 26, 1997,
the $23.5 million note payable to Seafield and accrued interest thereon was
converted into 3,020,536 shares of the Company's common stock at a rate of $8
per share. The conversion increased Seafield's ownership as of February 26, 1997
to 67%.

The Company also has reserved 2,572,400 shares of its common stock for issuance
upon the exercise of options (2,235,000), the conversion of Convertible
Preferred Stock (4,900), and the exercise of warrants or conversion of debt
issued in the practice affiliations consummated during 1996 (332,500).

Convertible Preferred Stock: The shares of Series A Convertible Preferred Stock
have the following rights and restrictions: (a) a preference in the event of
liquidation equal to $11.00 per share; (b) the right to convert into the number
of shares of common stock equal to the stated value of shares surrendered
($11.00) divided by the conversion price of $60.00 -- subject to certain
adjustments; (c) the right to receive dividends in the form of common stock at
the rate of .011 share of common stock per annum per share payable annually each
year commencing January 15, 1988; (d) the shares are redeemable at the Company's
option at $11.00 per share; and (e) holders of the preferred stock will not be
entitled to vote.

During the years ended December 31, 1998 and 1996, 602 and 600 shares of Series
A Convertible Preferred Stock were converted into 110 and 109 shares of common
stock, respectively. As of December 31, 1998, 26,631 Convertible Preferred Stock
shares remain outstanding.

In December 1998, 1997, and 1996, the Board of Directors approved a common stock
dividend of 293, 306 and 306 shares to the holders of the Series A Convertible
Preferred Stock of record as of December 15, 1998, 1997, and 1996, respectively,
that was paid January 1999, 1998, and 1997, respectively. The market value of
the 



                                       34
<PAGE>   36

common stock distributed was $3,000 at each period. The dividends have been
reflected in the "Statement of Operations," and the weighted average number of
common shares in the determination of net earnings (loss) to common stockholders
and the earnings (loss) per common share calculations. The par value of the
common stock distributed was charged to paid-in capital.

Options: The 1985 Stock Option Plan (the "1985 Plan"), as amended in fiscal year
1988, allows for granting of incentive stock options, non qualified stock
options, and stock appreciation rights for up to 122,000 shares of common stock
to eligible officers and key employees of the Company at an exercise price of
not less than the fair market value of the common stock on the date of grant for
an incentive stock option and not less than 85% of the fair market value of the
common stock on the date of grant for a non qualified stock option. The 1985
Plan expired in 1995; no additional shares are available for grant.

The 1990 Non Qualified Stock Option Plan (the "1990 Plan"), as amended in 1995,
allows for the granting of non qualified stock options, up to 1,125,000 options
to eligible officers, directors, key employees, and consultants of the Company
at an exercise price of not less than the market price of the common stock on
the date of grant with an option period up to 10 years.

The 1996 Incentive and Non Qualified Stock Option Plan (the "1996 Plan"), as
amended in 1997, allows for the granting of up to 1,130,000 options to eligible
officers, directors, advisors, medical directors, consultants, and key employees
of the Company at an exercise price of not less than the market price of the
common stock on the date of grant with an option period up to 10 years.

A summary status of the 1985 Plan as of December 31, 1998, 1997, and 1996 and
changes during the years then ended is presented below:

<TABLE>
<CAPTION>
                                              1998                     1997                     1996
                                     ---------------------    ----------------------    ---------------------
                                                  Weighted                  Weighted                 Weighted
                                                   Average                   Average                  Average
                                       Number     Exercise      Number      Exercise     Number      Exercise
        Fixed Options                of shares      Price     of shares       Price     of shares      Price
        -------------                ---------      -----     ---------       -----     ---------      -----
<S>                                   <C>         <C>           <C>         <C>           <C>         <C>     
Outstanding at beginning of year      61,203      $   3.81      71,100      $   5.76      74,200      $   5.79
Exercised                             (1,000)         1.88        (300)         3.12      (2,700)         5.76
Forfeited                                 --            --      (9,597)        17.12        (400)        11.88
                                     -------                   -------                   -------              
Outstanding at end of year            60,203          3.85      61,203          3.81      71,100          5.76
                                     =======                   =======                   =======              
Options exercisable end of year       60,006                    60,485                    66,060              
                                     =======                   =======                   =======              
</TABLE>

A summary status of the 1990 Plan as of December 31, 1998, 1997, and 1996 and
changes during the years then ended is presented below:

<TABLE>
<CAPTION>
                                              1998                     1997                     1996
                                     ---------------------    ----------------------    ---------------------
                                                  Weighted                  Weighted                 Weighted
                                                   Average                   Average                  Average
                                       Number     Exercise      Number      Exercise     Number      Exercise
        Fixed Options                of shares      Price     of shares       Price     of shares      Price
        -------------                ---------      -----     ---------       -----     ---------      -----
<S>                                   <C>         <C>        <C>          <C>          <C>           <C>     
Outstanding at beginning of year     810,034      $   6.75   1,053,150    $   11.24      933,440      $  11.02
Granted                               54,500          6.75     658,779         6.44      172,000         12.50
Exercised                            (47,103)         6.00        (721)        6.00      (22,300)        11.09
Forfeited                            (38,323)         6.00    (901,174)       11.66      (29,990)        11.69
                                     -------                 ---------                 ---------           
Outstanding at end of year           779,108          6.34     810,034         6.75    1,053,150      $  11.24
                                     =======                 =========                 =========              
Options exercisable end of year      754,420                   741,054                   694,020              
                                     =======                 =========                 =========              
</TABLE>






                                       35
<PAGE>   37

A summary status of the 1996 Plan for the years ended December 31, 1998, 1997
and 1996, and changes during the years then ended is presented below:

<TABLE>
<CAPTION>
                                              1998                     1997                     1996
                                     ---------------------    ----------------------    ---------------------
                                                  Weighted                  Weighted                 Weighted
                                                   Average                   Average                  Average
                                       Number     Exercise      Number      Exercise     Number      Exercise
        Fixed Options                of shares      Price     of shares       Price     of shares      Price
        -------------                ---------      -----     ---------       -----     ---------      -----
<S>                                   <C>         <C>           <C>         <C>           <C>         <C>     
Outstanding at beginning of year   1,086,989      $   6.55     570,400      $  11.81          --            --
Granted                               61,000          6.62   1,025,467          6.06     621,400      $  11.87
Exercised                             (8,061)         6.00      (3,478)         6.00      (1,000)        12.50
Forfeited                            (38,238)         6.97    (505,400)        10.30     (50,000)        12.50
                                     -------                   -------                   -------           
Outstanding at end of year         1,101,690          6.54   1,086,989          6.55     570,400         11.81
                                   =========                 =========                   =======              
Options exercisable end of year    1,017,146                   535,846                   130,080
                                   =========                 =========                   =======              
</TABLE>


The following table summarizes information about fixed stock options outstanding
at December 31, 1998:

<TABLE>
<CAPTION>
                                       Options Outstanding                          Options Exercisable
                           --------------------------------------------        ----------------------------
                                              Weighted 
                                               Average        Weighted                            Weighted
                                              Remaining        Average                             Average
        Range of             Number          Contractual       Exercise           Number           Exercise
    Exercise Prices        Outstanding       Life (Years)       Price          Exercisable           Price
    ---------------        -----------       ------------       -----          -----------           -----

<S>                         <C>              <C>             <C>               <C>                 <C>  
    $1.56  -   5.63           130,900           3.09            $3.04            116,734             $2.86
     6.00  -   6.00         1,345,201           8.36             6.00          1,314,603              6.00
     6.25  -  10.63           333,200           8.23             7.68            286,535              7.79
    11.56  -  15.50           115,700           6.78            12.74            103,700             12.68
    16.50  -  16.50            15,000           7.50            16.50              9,000             16.50
    16.88  -  15.88             1,000           6.75            16.88              1,000             16.88
</TABLE>


The Company accounts for stock options in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations (APB 25). As such, compensation expense
is recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. On December 31, 1995, the Company
adopted Statement of Financial Accounting Standards No. 123, "Accounting for
Stock Based Compensation" (FAS 123), which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards on the
date of grant. Alternately, FAS 123 allows entities to continue to apply the
provisions of APB 25 and provide pro forma net earnings and pro forma earnings
per share disclosures for employee stock option grants made in 1995 and future
years as if the fair-value-based method defined in FAS 123 had been applied. The
Company has elected to continue to apply the provisions of APB 25 and provide
the pro forma disclosures required by FAS 123.

The per share weighted average fair value of stock options granted during 1998,
1997 and 1996 was $4.47, $6.21 and $12.00 on the date of grant. The fair values
were calculated by using the "Black Scholes" option-pricing model with the
following average assumptions: 1998 - expected dividend yield of 0%, risk-free
interest rate of 5.5%, expected volatility factor of 80% and an expected life of
five years; 1997 - expected dividend yield of 0%, risk-free interest rate of
5.5%, expected volatility factor of 80% and an expected life of five years; 1996
- expected dividend yield of 0%, risk-free interest rate of 6%, expected
volatility factor of 77% and an expected life of five years.




                                       36
<PAGE>   38

Since the Company applies APB 25 in accounting for its plans, no compensation
cost has been recognized for its stock options in the financial statements. Had
the Company recorded compensation cost based on the fair value at the grant date
for its stock options under FAS 123, the Company's net earnings (loss) and
earnings (loss) per common share would have been reduced by the proforma amounts
indicated below (in thousands except for per share data):

<TABLE>
<CAPTION>
                                                         1998            1997          1996
                                                         ----            ----          ----
<S>                                                      <C>            <C>            <C>   
    Net earnings (loss)                                  $1,767         $5,338         $2,366
    Basic earnings (loss) per common share               $ 0.15         $ 0.46         $ 0.30
    Diluted earnings (loss) per common share             $ 0.15         $ 0.46         $ 0.29
</TABLE>

Pro forma net earnings (loss) reflect only options granted in 1998, 1997 and
1996. Therefore, the full impact of calculating compensation cost for stock
options under FAS 123 is not reflected in the pro forma net earnings (loss)
amounts presented above because compensation costs are reflected over the
option's vesting period of five years for the 1998, 1997 and 1996 options.
Compensation cost for options granted prior to January 1, 1995 is not
considered.

NOTE I -- BENEFIT PLAN

The Company established a 401(k) Profit Sharing Plan (the "Plan") which allows
qualifying employees electing participation to defer a portion of their income
on a pretax basis through contributions to the Plan. For each dollar of employee
contributions, the Company makes a discretionary percentage matching
contribution to the Plan. In addition, eligible employees share in any
additional discretionary contributions which are based upon the profitability of
the Company. All contributions made by the Company are determined by the
Company's Board of Directors. For the Plan year ended December 31, 1998, the
approved matching percentage is twenty-five percent (25%) up to a maximum of
$1,250 per employee. The expense recognized for the years ended December 31,
1998, 1997, and 1996 for Company contributions to the Plan totaled $130,000,
$120,000 and $113,000, respectively.

NOTE J - PROFESSIONAL AND LIABILITY INSURANCE

With respect to professional and general liability risks, the Company currently
maintains an insurance policy that provides coverage during the policy period
ending August 1, 1998, on a claims-made basis, for $1,000,000 per claim in
excess of the Company retaining $25,000 per claim, and $3,000,000 in the
aggregate. Costs of defending claims are in addition to the limit of liability.
In addition, the Company maintains a $10,000,000 umbrella policy with respect to
potential general liability claims. Since inception, the Company has incurred no
professional or general liability losses. As of December 31, 1998 the Company
was not aware of any pending professional or general liability claims that would
have a material adverse effect on the Company's financial condition or results
of operations.

NOTE K - SEGMENT INFORMATION

The Company's reportable segments are strategic business units that offer
different services. The Company has three reportable segments: IMPACT Services,
Physician Practice Management and Cancer Research Services. The IMPACT Services
segment provides stem cell supported high-dose chemotherapy and other advanced
cancer treatment services under the direction of practicing oncologists. The
Physician Practice Management segment owns the assets of and manages oncology
practices. The Cancer Research Services segment conducts clinical cancer
research on behalf of pharmaceutical manufacturers.

The accounting policies of the segments are the same as those described in the
summary of significant accounting policies except that the Company does not
allocate interest expense, taxes or corporate overhead to 



                                       37
<PAGE>   39

the individual segments. The Company evaluates performance based on profit or
loss from operations before income taxes and unallocated amounts. The totals per
the schedules below will not and should not agree to the consolidated totals.
The difference should be due to corporate overhead and other unallocated amounts
which are reflected in the reconciliation to consolidated earnings (loss) before
income taxes.

(In thousands)

<TABLE>
<CAPTION>
                                                                    Physician        Cancer 
                                                      IMPACT        Practice         Research
                                                     Services      Management        Services      Total
                                                     --------      ----------        --------     ---------
<S>                                                   <C>           <C>              <C>          <C>      
For the year ended December 31, 1998:
Net revenue                                           $64,806       $  59,527        $3,913       $ 128,246
Total operating expenses                               53,806          53,570         2,059         109,435
Impairment of management service agreements and
associated assets                                          --          24,877            --          24,877
                                                      -------       ---------        ------       ---------
Segment contribution                                   11,000         (18,920)        1,854          (6,066)
Depreciation and amortization                             921           4,208            --           5,129
                                                      -------       ---------        ------       ---------
Segment profit (loss)                                 $10,079         (23,128)        1,854         (11,195)
                                                      =======       =========        ======       =========
Segment assets                                        $26,448       $  91,291        $2,279       $ 120,018
                                                      =======       =========        ======       =========
Capital expenditures                                  $   340       $   2,711        $   18       $   3,069
                                                      =======       =========        ======       =========
</TABLE>

<TABLE>
<CAPTION>
                                                                    Physician        Cancer 
                                                      IMPACT        Practice         Research
                                                     Services      Management        Services      Total
                                                     --------      ----------        --------     ---------
<S>                                                   <C>           <C>              <C>          <C>      
For the year ended December 31, 1997:
Net revenue                                           $52,551       $  46,476        $2,893       $ 101,920
Total operating expenses                               42,596          37,918         1,217          81,731
                                                      -------       ---------        ------       ---------
Segment contribution                                    9,955           8,558         1,676          20,189
Depreciation and amortization                           1,610           2,950            --           4,560
                                                      -------       ---------        ------       ---------
Segment profit (loss)                                 $ 8,345       $   5,608        $1,676       $  15,629
                                                      =======       =========        ======       =========
Segment assets                                        $19,850       $ 120,719        $1,493       $ 142,062
                                                      =======       =========        ======       =========
Capital expenditures                                  $   221       $     676        $   11       $     908
                                                      ========      =========        ======       =========
</TABLE>


<TABLE>
<CAPTION>
                                                                    Physician        Cancer 
                                                      IMPACT        Practice         Research
                                                     Services      Management        Services      Total
                                                     --------      ----------        --------     ---------
<S>                                                   <C>           <C>              <C>          <C>      
For the year ended December 31, 1996:
Net revenue                                           $46,954       $  19,292        $1,107       $  67,353
Total operating expenses                               38,028          15,438           450          53,916
                                                      -------       ---------        ------       ---------
Segment contribution                                    8,926           3,854           657          13,437
Depreciation and amortization                           1,764           1,624            --           3,388
                                                      -------       ---------        ------       ---------
Segment profit (loss)                                 $ 7,162       $   2,230        $  657       $  10,049
                                                      =======       =========        ======       =========
Segment assets                                        $17,467       $ 118,059        $  749       $ 136,275
                                                      =======       =========        ======       =========
Capital expenditures                                  $   232       $     717        $    7       $     956
                                                      =======       =========        ======       =========
</TABLE>


Reconciliation of profit (loss):

<TABLE>
<CAPTION>
                                                                      Years Ended
                                                     -----------------------------------------------
                                                       1998                1997               1996
                                                     --------             -------            -------
<S>                                                  <C>                  <C>                <C>    
Segment profit (loss)                                $(11,195)            $15,629            $10,049
Unallocated amounts:
  Corporate general and administrative                  7,980               5,582              6,468
  Corporate depreciation and amortization                 450                 144                 97
  Corporate interest expense                            2,946               3,125              2,574
                                                     --------             -------            -------
Earnings (loss) before income taxes                  $(22,571)            $ 6,778            $   910
                                                     ========             =======            =======
</TABLE>





                                       38
<PAGE>   40


SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
RESPONSE ONCOLOGY, INC. AND SUBSIDIARIES
(Dollar amounts in thousands)
 
<TABLE>
<CAPTION>
              Col A                        Col B                 Col C - Additions              Col D           Col E
                                                                            Charged to
                                        Balance at        Charged to          Other          Deductions        Balance at
                                       Beginning of        Costs and        Accounts -       - Describe          End of 
         Classification                   Period           Expenses          Describe            (1)             Period

<S>                                    <C>                <C>               <C>               <C>               <C>   
Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful
accounts - accounts receivable            $3,130            $2,947                              $3,305            $2,772
                                          ======            ======                              ======            ======
Year ended December 31, 1997:                                                           
Deducted from asset accounts:                                                           
Allowance for doubtful                                                                  
accounts - accounts receivable            $1,774            $1,529                              $  173            $3,130
                                          ======            ======                              ======            ======
Year ended December 31, 1996:                                                           
Deducted from asset accounts:                                                           
Allowance for doubtful                                                                  
accounts - accounts receivable            $2,080            $1,594                              $1,900            $1,774
                                          ======            ======                              ======            ======
</TABLE>
                                                                     

(1)      Accounts written off, net of recoveries.





                                       39