<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                 ____________

                                  FORM 10-K/A
                                AMENDMENT NO. 1

                       FOR ANNUAL AND TRANSITION REPORTS
                    PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                                        
(Mark One)
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

For the fiscal year ended   December 31, 1997
                         ------------------------------------

                                      OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

                        Commission file number 333-26137
                                               ---------

                         Physicians Quality Care, Inc.
                        -------------------------------
            (Exact Name of Registrant as Specified in its Charter)

                    Delaware                      04-3267297
                   ----------                    ------------
       (State or Other Jurisdiction of         (I.R.S. Employer
       Incorporation or Organization)         Identification No.)

      950 Winter Street, Suite 2410, Waltham, MA        02154
     --------------------------------------------      -------
     (Address of Principal Executive Offices)         (Zip Code)

Registrant's telephone number, including area code: (781) 890-5560
                                                   ----------------

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months 
<PAGE>
 
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X   No
         ----   ----

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

The aggregate value of voting common stock held by nonaffiliates of the
registrant was approximately $76,224,048, based on the Company's most recent
arms-length sale of the Common Stock of the Company on February 13, 1998.  There
is no public market for the Registrant's voting Common Stock.

Number of shares outstanding of the registrant's common stock as of March 23,
1998: 26,146,844 shares of Class A Common Stock, $.01 par value, 2,809,296
shares of Class B-1 Common Stock, $.01 par value, 1,790,704 shares of Class B-2
Common Stock, $.01 par value, and 7,692,309 shares of Class C Common Stock, $.01
par value.
<PAGE>
 
The Company's Annual Report on Form 10-K was filed with the Commission on March
31, 1998.  This Amendment No. 1 to the Annual Report on Form 10-K/A is being
filed to supplementally provide the Company's proxy materials which were
furnished to the security holders on September 12, 1998.

                                        
<PAGE>
 
                                  SIGNATURES
                                        

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

                                          PHYSICIANS QUALITY CARE, INC.


 
                                          /s/ Eugene M. Bullis      
                                          ----------------------------      
                                          Chief Financial Officer and Senior
                                           Vice President
<PAGE>
 
                         PHYSICIANS QUALITY CARE, INC.


                                         September 12, 1998



     RE:  NOTICE OF ANNUAL MEETING OF PHYSICIANS QUALITY CARE, INC.

Dear Stockholder:

     You are cordially invited to attend the 1998 Annual Meeting of Stockholders
(the "Meeting") of Physicians Quality Care, Inc. (the "Company") to be held on
September 23, 1998, 10:00 a.m., at 1100 Winter Street, Waltham, MA 02159 (use
center entrance).

     This year, thirteen directors are nominated for election to the Board,
including one new director.  Of these thirteen directors, two are to be elected
by the holders of the shares of Class A Common Stock of the Company.  In
addition, seven directors, each of whom must be a physician, are to be elected
by the holders of the Class A, Class B-1, Class B-2, Class C and Class L Common
Stock, voting together as a single class.  One of the remaining four directors
shall be elected by the holders of the Class B-1 Common Stock, one by the
holders of the Class B-2 Common Stock, and two by the holders of the Class C
Common Stock.

     At the meeting, you will be asked to elect the directors for whom you are
eligible to vote to serve until the next annual meeting.  Signatories to the
Stockholders Agreement (the "Stockholders Agreement") of the Company, dated as
                            -----------------------                           
of August 30, 1996, as amended, who hold shares of Class A Common Stock are
contractually obligated to vote their shares for the election of individuals
nominated to serve on the Board by the Chief Executive Officer of the Company.
All of the stockholders of the Company (other than the 32 physicians who
affiliated with Medical Care Partners in August 1996) are signatories to the
Stockholders Agreement.  The nominees of the Chief Executive Officer are
described in the accompanying proxy statement.

     The accompanying Proxy Statement provides a detailed description of these
proposals.  We recommend that you read the accompanying materials so that you
may be informed about the business to come before the meeting.

     Enclosed please find the following materials:

          1. Notice of Annual Meeting of Shareholders;

          2. Proxy Statement for the Company ("Proxy Statement");

          3. Quarterly Report on Form 10-Q for the period ended June 30, 1998;

          4. Proxy Card to be returned to the Company; and

          5. Stamped envelope addressed to the Company for return of proxy card.
<PAGE>
 
     Copies of the Company's Annual Report on Form 10-K for the year ended
December 31, 1997 have previously been distributed to shareholders.  Additional
copies are available upon request.

     We look forward to seeing you at the meeting.


                                    Sincerely,


                                    /s/ Jerilyn P. Asher

                                    Jerilyn P. Asher,
                                    Chair and Chief Executive Office


Enclosures
<PAGE>
 
                         PHYSICIANS QUALITY CARE, INC.
                         -----------------------------
                         950 WINTER STREET, SUITE 2410
                               WALTHAM, MA 02154

                   NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

                         To Be Held September 23, 1998

     The 1998 annual meeting of the stockholders of Physicians Quality Care,
Inc. (the "Company") will be held at 1100 Winter Street, Waltham, MA 02159 (use
center entrance), on September 23, 1998, at 10:00 a.m., local time, for the
transaction of the following business:

 .   To present the annual reports of the officers of the Company;

 .   For the holders of Class A Common Stock to elect the following persons
     designated by the Chief Executive Officer of the Company to serve on the
     Board of Directors until the next annual meeting and until their successors
     have been duly elected and qualified:

          Jerilyn P. Asher
          Eugene M. Bullis

 .   For the holders of Class B-1 Common Stock to elect the following person to
     the Board of Directors, to serve until the next annual meeting and until
     their successors have been duly elected and qualified:

          Stephen G. Pagliuca

 .   For the holders of Class B-2 Common Stock to elect the following person to
     the Board of Directors, to serve until the next annual meeting and until
     their successors have been duly elected and qualified:

          Marc Wolpow

 .   For the holders of Class C Common Stock to elect the following persons to
     the Board of Directors, to serve until the next annual meeting and until
     their successors have been duly elected and qualified:

          Timothy T. Weglicki
          John Stobo

 .   For the holders of all the classes of the Common Stock voting as a single
     class to elect the following persons designated by the Chief Executive
     Officer to serve on the Board of Directors until the next annual meeting
     and until their successors have been duly elected and qualified:
<PAGE>
 
          Ira T. Fine, M.D.
          Arlan F. Fuller, Jr., M.D.
          Leslie S.T. Fang, M.D.
          Alphonse F. Calvanese, M.D.
          Paul Z. Bodnar, M.D.
          Richard Maffezzoli, M.D.
          Dana H. Frank, M.D.

 .   To transact such other business as may properly come before the meeting, or
     any adjournment or postponement thereof.

     The Board of Directors has fixed September 4, 1998, at the close of
business, for the determination of shareholders entitled to notice of and to
vote at the meeting, or any adjournment or postponement thereof.  Transferees
after such date shall not be entitled to vote at such meeting.

     YOUR VOTE IS IMPORTANT.  IF YOU CANNOT BE PRESENT IN PERSON, PLEASE SIGN
AND DATE THE ENCLOSED SHAREHOLDER'S PROXY CARD AND FORWARD SAME AT ONCE IN THE
ENCLOSED ENVELOPE TO PHYSICIANS QUALITY CARE, INC., 950 WINTER STREET, SUITE
2410, WALTHAM, MA 02154.  NO POSTAGE IS REQUIRED IF MAILED WITHIN THE UNITED
STATES.

BY ORDER OF THE BOARD OF DIRECTORS


 
/s/ Jerilyn P. Asher

Jerilyn P. Asher
Secretary
<PAGE>

 
         PROXY FOR SHAREHOLDERS' MEETING PHYSICIANS QUALITY CARE, INC.

        ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON SEPTEMBER 23, 1998

THE ENCLOSED PROXY IS BEING SOLICITED ON BEHALF OF THE MANAGEMENT OF THE COMPANY

     The undersigned shareholder of Class A Common Stock, $0.01 par value per
share, of PHYSICIANS QUALITY CARE, INC. (the "Company") acknowledges receipt of
                                              -------               
the Notice of Annual Meeting of the Company to be held on September 23, 1998,
and attached proxy statement, and does hereby constitute and appoint Jerilyn P.
Asher and Eugene M. Bullis, or either one of them, the true and lawful
substitute, attorney and proxy, with full power of substitution and revocation,
of the undersigned, for, and in the name, place and stead of the undersigned, to
vote, according to the number of votes which the undersigned would then be
entitled to cast, and with all the powers which the undersigned would be
entitled to exercise, if personally present, at the meeting of the shareholders
of the Company, to be held on September 23, 1998, or at any adjournment or
postponement of such meeting, upon any matter coming before such meeting or
adjournment or postponement, and does hereby revoke all proxies heretofore given
by the undersigned as a shareholder in said Company.

                                         Please check one box
                                         --------------------

<TABLE>
<CAPTION>
----------------------------------------------------------------------------
NAME OF NOMINATED          VOTE MY          VOTE MY          I WITHHOLD
 DIRECTOR                  SHARES FOR:      SHARES AGAINST:  AUTHORITY TO
                                                             VOTE MY SHARES:
----------------------------------------------------------------------------
<S>                       <C>               <C>              <C>
Jerilyn P. Asher                                *            *
----------------------------------------------------------------------------
Eugene M. Bullis                                *            *
----------------------------------------------------------------------------
Ira T. Fine, M.D.                               *            *
----------------------------------------------------------------------------
Arlan F. Fuller, M.D.                           *            *
----------------------------------------------------------------------------
Leslie S.T. Fang,                               *            *
 M.D.
----------------------------------------------------------------------------
Alphonse F.                                     *            *
 Calvanese, M.D.
----------------------------------------------------------------------------
Paul Z. Bodnar,                                 *            *
 M.D.
----------------------------------------------------------------------------
Richard Maffezzoli,                             *            *
 M.D.
----------------------------------------------------------------------------
Dana H. Frank,                                  *            *
 M.D.
----------------------------------------------------------------------------
</TABLE>

*   IF YOU ARE A SIGNATORY TO THE STOCKHOLDERS AGREEMENT DATED AS OF 
AUGUST 30, 1996, AS AMENDED, AMONG THE COMPANY AND THE SHAREHOLDERS WHO ARE A
PARTY THERETO, YOU ARE CONTRACTUALLY OBLIGATED TO VOTE IN FAVOR OF THE NOMINEES
AND MAY NOT MARK A BOX WITH AN ASTERISK.

<PAGE>

                                OTHER PROPOSALS

     Your above-named proxies shall vote in respect of any other business
properly to come before the meeting (the Board of Directors knowing of no such
other business) as such proxies may in their discretion determine appropriate,
it being the intention of such proxies to vote in such a manner as will be in
harmony with the policies of the management of the Company.

     THE MANAGEMENT RECOMMENDS A VOTE FOR EACH DIRECTOR NOMINATED.
 
     UNLESS OTHERWISE INDICATED, YOUR ABOVE-NAMED PROXIES SHALL VOTE FOR THE
ELECTION OF THE INDIVIDUALS NOMINATED AS DIRECTORS NAMED IN THE ATTACHED PROXY
STATEMENT.  PLEASE SIGN, DATE AND RETURN IN THE ENCLOSED STAMPED ENVELOPE
ADDRESSED TO THE COMPANY.


 
                                                  ------------------------------
Dated:
      ------------------     -----
                                  Please sign proxy exactly as your name appears
                                  on the share certificate. When signing as
                                  attorney, executor, administrator, trustee or
                                  guardian, give full title as such. If signer
                                  is a corporation, sign full corporate name by
                                  duly authorized officer. If shares are held in
                                  the name of two or more persons, all should
                                  sign. 
 


<PAGE>

 
         PROXY FOR SHAREHOLDERS' MEETING PHYSICIANS QUALITY CARE, INC.

        ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON SEPTEMBER 23, 1998

THE ENCLOSED PROXY IS BEING SOLICITED ON BEHALF OF THE MANAGEMENT OF THE COMPANY

     The undersigned shareholder of Class B, C or L Common Stock, $0.01 par
value per share, of PHYSICIANS QUALITY CARE, INC. (the "Company") acknowledges
                                                        -------               
receipt of the Notice of Annual Meeting of the Company to be held on September
23, 1998, and attached proxy statement, and does hereby constitute and appoint
Jerilyn P. Asher and Eugene M. Bullis, or either one of them, the true and
lawful substitute, attorney and proxy, with full power of substitution and
revocation, of the undersigned, for, and in the name, place and stead of the
undersigned, to vote, according to the number of votes which the undersigned
would then be entitled to cast, and with all the powers which the undersigned
would be entitled to exercise, if personally present, at the meeting of the
shareholders of the Company, to be held on September 23, 1998, or at any
adjournment or postponement of such meeting, upon any matter coming before such
meeting or adjournment or postponement, and does hereby revoke all proxies
heretofore given by the undersigned as a shareholder in said Company.

                                         Please check one box
                                         --------------------

<TABLE>
<CAPTION>
Name of                      Classes of      VOTE     VOTE MY    I WITHHOLD
 Nominated                  Common Stock     MY       SHARES     AUTHORITY
 Director                   Eligible to Vote SHARES   AGAINST:   TO VOTE MY
                            for Director     FOR:                SHARES:
----------------------------------------------------------------------------
<S>                       <C>                <C>      <C>        <C>
Stephen G. Pagliuca       Class B-1 Common
                          Stock
----------------------------------------------------------------------------
Marc Wolpow               Class B-2 Common
                          Stock
----------------------------------------------------------------------------
Timothy T. Weglicki       Class C Common              *          *
                          Stock
----------------------------------------------------------------------------
John Stobo                Class C Common              *          *
                          Stock
----------------------------------------------------------------------------
Ira T. Fine, M.D.         All classes                 *          *
----------------------------------------------------------------------------
Arlan F. Fuller, M.D.     All classes                 *          *
----------------------------------------------------------------------------
Leslie S.T. Fang, M.D.    All classes                 *          *
----------------------------------------------------------------------------
Alphonse F.               All classes                 *          *
 Calvanese, M.D.
----------------------------------------------------------------------------
Paul Z. Bodnar,  M.D.     All classes                 *          *
----------------------------------------------------------------------------
Richard Maffezzoli,       All classes                 *          *
 M.D.
----------------------------------------------------------------------------
Dana H. Frank,  M.D.      All classes                 *          *
----------------------------------------------------------------------------
</TABLE>
*    IF YOU ARE A SIGNATORY TO THE STOCKHOLDERS AGREEMENT DATED AS OF AUGUST 30,
     1996, AS AMENDED, AMONG THE COMPANY AND THE SHAREHOLDERS WHO ARE A PARTY
     THERETO, YOU ARE CONTRACTUALLY OBLIGATED TO VOTE IN FAVOR OF THE NOMINEES
     AND MAY NOT MARK A BOX WITH AN ASTERISK.


<PAGE>

                                OTHER PROPOSALS

     Your above-named proxies shall vote in respect of any other business
properly to come before the meeting (the Board of Directors knowing of no such
other business) as such proxies may in their discretion determine appropriate,
it being the intention of such proxies to vote in such a manner as will be in
harmony with the policies of the management of the Company.

         THE MANAGEMENT RECOMMENDS A VOTE FOR EACH DIRECTOR NOMINATED.
 
     UNLESS OTHERWISE INDICATED, YOUR ABOVE-NAMED PROXIES SHALL VOTE FOR THE
ELECTION OF THE INDIVIDUALS NOMINATED AS DIRECTORS NAMED IN THE ATTACHED PROXY
STATEMENT.  PLEASE SIGN, DATE AND RETURN IN THE ENCLOSED STAMPED ENVELOPE
ADDRESSED TO THE COMPANY.


 
                                                  ------------------------------
Dated:
      ------------------     -----
                                  Please sign proxy exactly as your name appears
                                  on the share certificate. When signing as
                                  attorney, executor, administrator, trustee or
                                  guardian, give full title as such. If signer
                                  is a corporation, sign full corporate name by
                                  duly authorized officer. If shares are held in
                                  the name of two or more persons, all should
                                  sign.

<PAGE>
 
                        ANNUAL MEETING OF SHAREHOLDERS
                       TO BE HELD ON SEPTEMBER 23, 1998

                                PROXY STATEMENT
                         PHYSICIANS QUALITY CARE, INC.

                                 INTRODUCTION
                                 ------------

     THE ENCLOSED PROXY IS BEING SOLICITED BY THE MANAGEMENT OF PHYSICIANS
QUALITY CARE, INC., A DELAWARE CORPORATION (THE "COMPANY").  Any shareholder
                                                 -------                    
giving a proxy has the power to revoke it by giving notice to the Company in
writing, or in open meeting before the vote is taken.  The shares represented by
the enclosed proxy shall be voted if it is properly signed and received by the
Company prior to the time of meeting.  The expense of making the solicitation
will consist of preparing and mailing the proxies and the proxy statements and
the charges and expenses of forwarding documents to security owners.  These are
the only contemplated expenses of solicitation and will be paid by the Company.

     This Proxy Statement is being furnished to stockholders of the Company, in
connection with the solicitation of proxies by the Board of Directors of the
Company for use at the Annual Meeting of Stockholders to be held on September
23, 1998, at 10:00 a.m., local time, at 1100 Winter Street, Waltham, MA 02154
(use center entrance), and any adjournment or postponement thereof (the
"Meeting").
 -------   

     At the Meeting, stockholders will be asked to consider and vote upon the
election of directors to serve as Class A, Class B, Class C and Common Directors
of the Company until the 1999 Annual Meeting.

     This Proxy Statement is dated September 11, 1998 and is first being mailed
to stockholders along with the related form of proxy on or about September 11,
1998.

     If a proxy in the accompanying form is properly executed and returned to
the Company in time for the Meeting and is not revoked prior to the time it is
exercised, the shares represented by the proxy will be voted in accordance with
the directions specified therein for the matters listed on the proxy card
(unless, in the case of the election of Directors, such vote is contrary to the
terms of the Stockholders Agreement of the Company (the "Stockholders
                                                         ------------
Agreement") dated as of August 30, 1996, as amended, among the Company and the
---------
stockholders who are a party thereto). Unless the proxy specifies that it is to
be voted against or is an abstention on a listed matter, proxies will be voted
FOR each of the nominated directors, and otherwise in the discretion of the
proxy holders as to any other matter that may come before the Meeting.

     Revocability of Proxy.  Any stockholder of the Company who has given a
     ---------------------                                                 
proxy has the power to revoke such proxy at any time before it is voted either
(i) by filing a written revocation or a duly executed proxy bearing a later date
with Jerilyn P. Asher, Chief Executive Officer of the Company, at 950 Winter
Street, Suite 2410, Waltham, MA 02154, or (ii) by appearing at the Meeting and
voting in person. Attendance at the Meeting will not in and of itself constitute
the revocation of a proxy. Voting by those present during the conduct of the
Meeting will be by ballot.

     Record Date and Outstanding Securities and Votes Required.  The Board of
     ---------------------------------------------------------               
Directors of the Company has fixed the close of business on September 4, 1998 as
the record date (the "Record Date") for determining holders of outstanding
                      -----------                                         
shares who are entitled to notice of and to vote at the Meeting. As of the
Record Date, there were 176 registered holders of shares of Class A Common Stock
and 26,146,844 issued and outstanding shares of Class A Common Stock.  In
addition, there were 4 registered holders of Class B-1 Common Stock and
2,809,296 issued and outstanding shares of such stock; 4 registered holders of
shares of Class B-2 Common Stock and 1,790,704 issued and outstanding shares of
such stock; 21 registered holder of Class C Common Stock and 7,692,309 issued
and outstanding shares of such stock; and 21 registered holder of Class L Common
Stock and 2,461,538 issued and outstanding shares of such stock.  There were no
issued and outstanding shares of Preferred Stock.  As provided in the Amended
and Restated Certificate of Incorporation ("Certificate"), each common share is
                                            -----------                        
entitled to one vote, except that certain directors must be elected by class
voting, and certain actions require the approval of certain classes of common
shares.

     The elections of the Class A Directors requires the affirmative vote of a
majority of the shares of Class A Common Stock which are entitled to vote for
the election of Class A Directors.  The election of the of the Class B-1
Director requires the affirmative vote of a majority of shares of Class B-1
Common Stock which are entitled to vote for the election of Class B-1 Director.
The election of the of the Class B-2 Director requires the affirmative vote of a
majority of shares of Class B-2 Common Stock which are entitled to vote for the
election of the Class B-2 Director.  The election of the of the Class C
Directors requires the affirmative vote of a majority of shares of Class C
Common Stock which are entitled to vote for the election of the Class Directors.
The election of the Common Director requires the affirmative vote of a majority
of the shares of Class A, B, C and L Common Stock which are which are entitled
to vote for the election of the Common Director.

     Certain risk factors in connection with an investment in the Company, as
well as the Company's financial statements and a description of its business are
included in the Company's Annual Report on Form 10-K, which has previously been
distributed to shareholders, and quarterly report on Form 10-Q which accompanies
this Proxy Statement.  Shareholders should carefully review such Reports.

                                      -1-
<PAGE>
 
                                 ELECTION OF DIRECTORS
                                 ---------------------

     The Company's Certificate provides for a Board of Directors of thirteen
members divided into four classes, including two directors elected by the
holders of the Class A Common Stock, one Director elected by the holders of the
Class B-1 Common Stock, two Directors elected by the holders of the Class C
Common Stock and seven directors who are physicians elected by the holders of
all of the classes of common stock of the Company voting together as a single
class.  Each Director is elected for a term of one year except in the case of
elections to fill vacancies or newly created directorships.

     Jerilyn P. Asher and Eugene M. Bullis are the nominees for Class A
Directors.  Ira T. Fine, M.D., Arlan Fuller, M.D., Leslie S. T. Fang, M.D.,
Alphonse F. Calvanese, M.D., Paul Z. Bodnar, M.D., Richard Maffezzoli, M.D. and
Dana H. Frank, M.D. are the nominees for Common Directors.  Stephen G. Pagliuca
is the nominee for Class B-1 Director.  Marc Wolpow is the nominee for Class B-2
Director.  Timothy T. Weglicki and John D. Stobo, Jr. are the nominees for the
Class C Director.  If elected, each will hold authority until the election and
qualification of his or her successor.

     Unless a stockholder votes AGAINST a nominated director or WITHHOLDS
AUTHORITY from the proxy to vote for a nominated director (i) the holders of
proxies representing shares of Class A Common Stock will vote FOR the election
of Jerilyn P. Asher and Eugene M. Bullis as Class A Directors; (ii) the holders
of proxies representing shares of Class B-1 Common Stock will vote FOR the
election of Stephen G. Pagliuca as the Class B-1 Director; (iii)  the holders of
proxies representing shares of Class B-2 Common Stock will vote FOR the election
of Marc Wolpow as the Class B-2 Director; (iii) the holders of proxies
representing shares of Class C Common Stock will vote FOR the election of
Timothy T. Weglicki and John D. Stobo, Jr. as the Class C Directors; and the
holders of proxies representing shares of the Class A, Class B-1, Class B-2,
Class C or Class L Common Stock will vote FOR the election of Ira T. Fine, M.D.,
Arlan Fuller, M.D., Leslie S. T. Fang, M.D., Alphonse F. Calvanese, M.D., Paul
Z. Bodnar, M.D., Richard Maffezzoli, M.D. and Dana H. Frank, M.D. as the Common
Directors.

     THE CLASS A STOCKHOLDERS OF THE COMPANY WHO ARE PARTIES TO THE STOCKHOLDERS
AGREEMENT ARE CONTRACTUALLY OBLIGATED TO VOTE IN FAVOR OF THE NOMINEES FOR
DIRECTOR.

     The Board of Directors has no reason to believe that any nominee will
decline or be unable to serve as a Director of the Company. However, if a
nominee shall be unavailable for any reason, then the proxies may be voted for
the election of such person as may be recommended by the Board of Directors.

     Table of Directors and Executives.  The following table sets forth the age
     ---------------------------------                                         
and title of each nominee director followed by descriptions of such person's
additional business experience during the past five years.

                                      -2-
<PAGE>
 
                                 DIRECTORS AND OFFICERS


<TABLE>
<CAPTION>
 
NOMINEE NAME                   AGE      POSITION
-------------------------------------------------------------------------------------------------
<S>                           <C>      <C>   
Jerilyn P. Asher               55       Chief Executive Officer and Chairman of the Board
-------------------------------------------------------------------------------------------------
Eugene M. Bullis               53       Senior Vice President and Chief Financial Officer
-------------------------------------------------------------------------------------------------
Stephen G. Pagliuca            42       Director
-------------------------------------------------------------------------------------------------
Marc Wolpow                    39       Director
-------------------------------------------------------------------------------------------------
Timothy T. Weglicki            46       Director
-------------------------------------------------------------------------------------------------
John D. Stobo, Jr.             32       Director
-------------------------------------------------------------------------------------------------
Ira T. Fine, M.D.              49       Director
-------------------------------------------------------------------------------------------------
Arlan F. Fuller, M.D.          52       Director
-------------------------------------------------------------------------------------------------
Leslie S.T. Fang, M.D.         49       Director
-------------------------------------------------------------------------------------------------
Alphonse F. Calvanese, M.D.    46       Director
-------------------------------------------------------------------------------------------------
Paul Z. Bodnar, M.D.           48       Director
-------------------------------------------------------------------------------------------------
Richard Maffezzoli, M.D.       56       Director
-------------------------------------------------------------------------------------------------
Dana H. Frank, M.D.            47       Director and President
-------------------------------------------------------------------------------------------------
</TABLE>


     Jerilyn P. Asher is a founder of the Company and has served as Chief
Executive Officer and as Chairman of the Board since its inception. She has over
eighteen years of experience as a healthcare executive in both the public and
private sectors, with broad-based responsibilities for all aspects of
constituency building with physicians and payors, business development, finance,
operations, sales, marketing and federal and state healthcare regulation. From
1994 to 1995, Ms. Asher served as President and a member of the Board of
Directors of Abbey Healthcare Group Incorporated ("Abbey"), a home healthcare
provider. Ms. Asher was a founder and served as President, Chief Executive
Officer and Chairman of the Board of Directors from 1988 to 1995 and Executive
Vice President from 1985 to 1988 of Protocare, Inc., a leading regional provider
of home healthcare products and services. From 1978 to 1984, Ms. Asher

                                      -3-
<PAGE>
 
served as Executive Director of United Cerebral Palsy of Western Massachusetts,
Inc., a multi-service agency providing direct care services to persons of all
ages with multiple disabilities.

     Eugene M. Bullis has served as Executive Vice President and Chief Financial
Officer since March, 1998.  He is responsible for all financial and information
system functions for the Company.  Mr. Bullis joined the Company after serving
as an independent business consultant and interim executive with a number of
technology companies, including Computervision, NYNEX and Eastman Kodak.  From
1979 through 1989, he served as a senior executive at Wang Laboratories, the
final two years as Chief Financial Officer and Treasurer.  Prior to joining Wang
Laboratories, Mr. Bullis was a partner in the public accounting firm, Ernst and
Young.  He holds a Bachelor of Arts Degree in Business Administration from Colby
College and is a Certified Public Accountant.

     Stephen G. Pagliuca has been a member of the Board of Directors of the
Company since August 1996. He has been with Bain Capital, Inc., where he is a
Managing Director, since 1989, and has actively invested in the medical and
information industries. Prior to joining Bain Capital, Inc., he was a partner at
Bain & Company, where he managed client relationships in the healthcare and
information services industries, including assisting clients in developing
acquisition strategies. He is chairman of the board of PhysioControl Corporation
and Dade International, Inc. and a director of Vivra, Inc., Coram Healthcare,
Gartner Group, Executone, Medical Specialities Group and Wesley-Jessen.

     Marc Wolpow has been a member of the Board of Directors of the Company
since August 1996. He joined Bain Capital, Inc. in 1990 and has been a Managing
Director since 1993. Previously he was a member of the corporate finance
department of Drexel Burnham Lambert, Inc. He is a director of American Pad &
Paper Corp., Miltex Instruments, Inc., Professional Services Industries, Inc.,
Paper Acquisition Corp. and Waters Corp.

     Timothy T. Weglicki has been a member of the Board of Directors of the
Company since June 1997. Mr. Weglicki has been a principal with ABS Partners II,
L.L.C., the general partner of ABS Capital Partners II, L.P., a private equity
fund, and related entities since December 1993. Prior to joining ABS Partners,
he was a Managing Director of Alex. Brown & Sons, Inc. ("Alex. Brown"), where he
established and headed its Capital Markets Group and prior thereto headed the
Firm's Equity Division, Corporate Finance Department, and Health Care Investment
Banking Group. Mr. Weglicki holds an M.B.A. from the Wharton Graduate School of
Business and a B.A. from the John Hopkins University. He is a director of
Eldertrust, VitalCom, Inc. and several privately held companies.

     John D. Stobo, Jr. is a nominee director of the Company.  Since July 1996,
Mr. Stobo has been a principal of ABS Partners II, L.L.C., the general partner
of ABS Capital Partners II, L.P.  Mr. Stobo has also been a principal of the
general partner of ABS Capital Partners, L.P. since 1993.  From 1991 to 1993,
Mr. Stobo was a member of Alex. Browns's health care corporate finance group.
Mr. Stobo is a graduate of the University of California, San Diego and Johnson
School of Management at Cornell University.

                                      -4-
<PAGE>
 
     Ira T. Fine, M.D. has been a member of the Board of Directors of the
Company since November 1996. He has been in the private practice of medicine for
16 years and has been the Chief, Division of Rheumatology at Sinai Hospital
since 1988 and St. Joseph Medical Center in Baltimore since 1992. He is the
Chairman of the Board of The Physician Group. He is also an Assistant Professor
of Medicine at the University of Maryland School of Medicine and an Assistant
Professor of Medicine at the Johns Hopkins University School of Medicine. He
received his B.S. from the Virginia Polytechnic Institute and his M.D. from
University of Maryland School of Medicine. He completed his internship at
University of Maryland Hospital/Baltimore Veterans Administration Hospital, his
residency at University of Maryland Hospital and a fellowship in rheumatology at
the Johns Hopkins University School of Medicine.

     Arlan F. Fuller, Jr., M.D. has served as a member of the Board of Directors
of the Company since its inception. Dr. Fuller has been an Associate Professor
of Obstetrics and Gynecology at Harvard University Medical School since 1987 and
has been the Director of the Gynecologic Oncology Service of Massachusetts
General Hospital since 1985. Dr. Fuller maintains a practice in gynecologic
surgery and gynecologic oncology at the Massachusetts General Hospital and is
affiliated with the North Shore Cancer and Medical Centers in Peabody and Salem,
Massachusetts. In 1988, Dr. Fuller was a founder and served as President of
Massachusetts General Physicians Corporation, the first organized physician
group at the Massachusetts General Hospital and a forerunner to the
Massachusetts General Physicians Organization, which manages group practices at
the Massachusetts General Hospital.  Dr. Fuller has been a member of the Board
of Trustees of Partners Community Healthcare, Inc., the primary care network and
integrated health system which includes the Massachusetts General Hospital and
Brigham and Women's Hospital. Dr. Fuller received his undergraduate degree from
Bowdoin College and his M.D. from Harvard University Medical School. He
completed his internship at Massachusetts General Hospital, his residencies at
the former Boston Hospital for Women (now the Brigham and Women's Hospital) and
a fellowship in gynecological oncology at Sloan-Kettering Memorial Cancer
Center.

     Leslie S. T. Fang, M.D. has served as a member of the Board of Directors of
the Company and a member of the Board's compensation committee since its
inception. Dr. Fang has been Associate Director of the Hemodialysis Unit,
Massachusetts General Hospital since 1980 and an Assistant Professor of Medicine
at Harvard University Medical School since 1983. He is also Director of the
Charles River Plaza Dialysis Unit and a nationally recognized expert in the
field of nephrology. Dr. Fang received his B.S., M.S. and Ph.D. in physiology
and biophysics from the University of Illinois and his M.D. from Harvard
University Medical School. He completed his internship and residency at
Massachusetts General Hospital.

     Alphonse F. Calvanese, M.D. has been a member of the Board of Directors of
the Company since November 1996 and President of the Springfield Affiliated
Group since August 1996. He has been in the private practice of medicine since
1981. He received his B.S. from the University of Massachusetts and his M.D.
from Tufts Medical School. He completed his internship and residency at Baystate
Medical Center.

     Paul Bodnar, M.D., serves as Senior Vice President for Managed Care and
Medical Director.  He also serves as Medical Director of the Mid-Atlantic
Region.  Prior to joining PQC, Dr. Bodnar served for ten years as the Medical
Director of Clinical Associates, a 90-member

                                      -5-
<PAGE>
 
multi-specialty group practice, of which he has been a practicing pediatrician
since 1980. Dr. Bodnar received his Bachelor of Arts Degree from Johns Hopkins
University and his M.D. from Columbia University. He completed his internship
and residency at Johns Hopkins Hospital and Sinai Hospital in Baltimore.

     Richard Maffezzoli, M.D. is the Senior Vice President for Development and
Analysis for PQC and Chief Operating Officer of the Company's affiliates
Flagship Health, P.A. and Flagship Health II, P.A.  He was founder and President
of Clinical Associates, which at the time of the merger with PQC was a
successful 90-member health-professional group servicing approximately 60,000
pre-paid lives and 200,000 fee-for-service lives from 16 locations, and operated
the company profitably for 25 years with high patient satisfaction and low
overhead.  He is a graduate of the Johns Hopkins School of Medicine and received
his A.B. from Johns Hopkins University.  He remains active in the practice of
internal medicine and endocrinology.

     Dana H. Frank, M.D. has been President of the Company since March 1997 and
the Flagship Affiliated Group since December 1996 and has served as a member of
the Board of Directors of the Company since November 1996. He has been in the
private practice of medicine since 1981 and is President of Park Medical
Associates, P.A. He is an Assistant Professor at the Johns Hopkins University
School of Medicine and has been a Consulting Internist and Headache Specialist
at the Johns Hopkins University School of Medicine since 1981. He has also
served on the Johns Hopkins Hospital Medical Board. He received his A.B. from
Brown University and his M.D. from George Washington University. He completed
his internship and residency at Johns Hopkins Hospital.

     Committees of the Board of Directors. The Board of Directors have
     ------------------------------------                             
established a Compensation Committee which generally consists of two non-
employee directors.  Dr. Fang and Mr. Weglicki are currently the only members.
The Compensation Committee makes recommendations to the Board of Directors
concerning salaries and incentive compensation for employees of and consultants
to the Company.  No interlocking relationships exist between any member of the
Compensation Committee and any member of any other company's Board of Directors
or compensation committee.

     Directors' Compensation.  Historically, members of the Board of Directors
     -----------------------                                                  
of the Company have not been received any cash compensation for their services
as members of the Board, although they are reimbursed for reasonable travel
expenses while attending Board and Committee meetings.  The Board of Directors
has the authority to establish the compensation of its members.

     Executive Compensation - Summary Compensation Table.  The following table
     ---------------------------------------------------                      
sets forth the cash compensation of Jerilyn P. Asher, the Chief Executive
Officer and Chairman of the Board of the Company, and the two most highly
compensated executives of the Company in 1997 (who earned more than $100,000
during 1997) (the "Named Executive Officers").
                   ------------------------   

                                      -6-
<PAGE>
 
                                 SALARY COMPENSATION TABLE


<TABLE>
<CAPTION>
 
NAME AND                   YEAR            SALARY           BONUSES       OTHER           OPTIONS AND 
POSITION                                                                  REMUNERATION    WARRANTS/1/
-------------------------------------------------------------------------------------------------------
<S>                      <C>            <C>                <C>         <C>              <C>   
Jerilyn P.
 Asher, CEO                 1997         $250,000               --            7,996/2/            --
 and Chair                  1996         $250,000               --            9,647/3/            --
----------------------------------------------------------------------------------------------------
Dana H. Frank,
 M.D.,                      1997         $220,235/4/            --               --          300,000
 President                  1996         $118.057               --               --               --
----------------------------------------------------------------------------------------------------
Samantha
 Trotman,                   1997         $125,000               --               --          400,000
 Chief                      1996         $  4,808/5/            --               --               --
 Financial
 Officer/6/
----------------------------------------------------------------------------------------------------
</TABLE> 

     1.   The Company did not grant any restricted stock or stock appreciation
          rights during the year ended December 31, 1997.

     2.   Represents $7,200 paid in connection with an automobile allowance and
          $796 of compensatory group life insurance premiums paid by the
          Company.

     3.   Represents $7,200 paid in connection with an automobile allowance and
          $2,447 of compensatory group life insurance premiums paid by the
          Company.

     4.   Amount includes $120,325 paid as salary for Dr. Frank's patient care
          practice.

     5.   Amount based on annual salary of $125,000 from December 16, 1996.

     6.   Ms. Trotman's employment with the Company terminated on June 30, 1998.

     Employment Agreements.  The Company is a party to an employment agreement
     ---------------------                                                    
with Jerilyn P. Asher pursuant to which Ms. Asher serves as Chief Executive
Officer of the Company for the three-year period ending June 21, 1998. The term
of the agreement will be automatically extended for successive one-year terms,
unless the Company notifies Ms. Asher to the contrary at least 90 days prior to
the expiration of the then current term. For her services, Ms. Asher is entitled
to an initial base salary of $250,000 per year (subject to periodic increases as
determined by the Board) and is eligible to receive bonuses under the Company's
management incentive program, if such a program is adopted, in an amount up to
100% of her base pay based upon

                                      -7-
<PAGE>
 
individual and Company performance. Pursuant to an amendment to the employment
agreement dated August 30, 1996, Ms. Asher waived the right to receive any
unpaid amounts of base salary and bonus to which she was entitled and had not
received as of August 1, 1996.

     Ms. Asher is also entitled to receive other benefits available to the
Company's senior management generally. Pursuant to a stock restriction agreement
executed as of the date of the employment agreement, the Company issued
4,162,500 shares of Series A Common Stock to Ms. Asher at a purchase price of
$.01 per share, 346,875 of which remain subject to forfeiture if Ms. Asher does
not maintain her employment with the Company until June 1998, unless accelerated
in the event of a Change in Control. A Change in Control is defined to include a
person or group becoming the beneficial owner of 50% or more of the outstanding
voting securities of the Company, certain changes to the composition of the
Board of Directors, certain mergers and a liquidation of the Company. A
percentage of the vested shares (50% in the case of termination for cause and
35% in the case of voluntary termination) are subject to the Company's
repurchase rights in certain circumstances, including termination of Ms. Asher
for "cause" or Ms. Asher's voluntary resignation, at the fair market value at
the time of repurchase.

     The Company may terminate Ms. Asher's employment at any time without cause
and upon 10 days' written notice with cause. Ms. Asher may terminate her
employment for any reason upon 90 days' written notice. If Ms. Asher's
employment is terminated by the Company without cause, or if Ms. Asher
terminates her employment for good reason, the Company must pay Ms. Asher an
amount equal to two times her annual salary. Cause, for purposes of the
termination provisions, means willful and continued failure to perform her
duties, willful engagement in misconduct materially injurious to the Company or
her conviction for a felony, fraud or embezzlement of the Company's property. In
addition, the Company must also make such payment if Ms. Asher's employment is
terminated at any time within 24 months after a "Change in Control" for any
reason other than (i) death or disability, (ii) by the Company for Cause or
(iii) by Ms. Asher other than for Good Reason.

     During the term of the agreement, the Company must nominate Ms. Asher to
and Ms. Asher will be eligible to serve on the Board of Directors. Ms. Asher
also agreed to standard non-competition and non-disclosure terms with the
Company.

     The Company is also party to an employment agreement with Arlan F. Fuller,
pursuant to which Dr. Fuller serves as Executive Vice President, Medical
Information Systems and Academic Development of the Company for the three-year
period ending June 20, 1998. The term of the agreement will be automatically
extended for successive one-year terms, unless the Company notifies Dr. Fuller
to the contrary at least 90 days prior to the expiration of the then current
term. Dr. Fuller was required to devote 40% of his time to the Company and, for
such services, was entitled to an initial base salary of $175,000 per year
(subject to periodic increases as determined by the Board). Dr. Fuller reduced
his base annual salary to $50,000 beginning in December 1996. Pursuant to a
stock restriction agreement executed as of the date of the employment agreement,
the Company issued 618,750 shares of Common Stock to Dr. Fuller at a purchase
price of $.01 per share. These shares are subject to vesting based on individual
performance and duration of employment, which vesting will be accelerated in the
event of a "Change in Control." The Company may terminate Dr. Fuller's
employment at any time with

                                      -8-
<PAGE>
 
cause and upon 60 days' notice without cause. Dr. Fuller may terminate his
employment for any reason upon 60 days' written notice.

     During the term of the agreement, the Company must nominate Dr. Fuller to
and Dr. Fuller will be eligible to serve on the Board of Directors.  Dr. Fuller
also agreed to standard non-competition and non-disclosure terms with the
Company.

     The Company has entered into employment agreements with Dr. Calvanese and
Dr. Frank.  These agreements have initial terms, commencing in 1998, of four
years, and are renewable thereafter by agreement between the parties.  In the
event that the agreements are not extended for at least a one year period, the
company is obligated to make a severance payment of up to $175,000, in the case
of Dr. Frank, up to $200,000 in the case of Dr. Calvanese.  The Agreement with
Dr. Frank provides for a base salary of $100,000 per annum, provided that his
minimum compensation from the Company or its affiliates must not be less than
$220,000 per year.  The Agreement with Dr. Calvanese provides for a base salary
of $50,000 per annum, provided that his minimum compensation from the Company or
its affiliates must not be less than $430,000 per year.  The employment
agreements provide for the following grant of options:


<TABLE>
<CAPTION>
 
 -------------------------------------------------------------------------------------------------
                       TOTAL GRANT            VESTED        VESTING EACH YEAR     EXERCISE PRICE
                                                                THEREAFTER
--------------------------------------------------------------------------------------------------
<S>                <C>                     <C>               <C>                    <C>  
Dr. Frank           500,000 Class A*          300,000             100,000               $2.25
--------------------------------------------------------------------------------------------------
Dr. Calvanese       500,000 Class A*          300,000             100,000               $2.25
--------------------------------------------------------------------------------------------------
</TABLE>

     *Dr. Frank and Dr. Calvanese each also hold options to purchase 300,000
shares at $2.50, of which 100,000 shares are vested, 100,000 shares vest
September 1998 and 100,000 shares vest on January 1, 1999.

                                      -9-
<PAGE>
 
     In the event that the employment agreements are terminated by the Company
without cause or by the employee for good reason, the employee is entitled to
severance payments for a period of at least two years.  The Company may
terminate the employment agreements for cause, which means (i) material failure
to perform duties to the Company, (ii) intentional misconduct or (iii)
conviction of a felony or for fraud, provided that in the event of a termination
pursuant to clause (i) the employee is entitled to severance payment equal to
one years salary or two years if the termination is following a change in
control.

     The Company also has entered into an employment agreement with Eugene M.
Bullis pursuant to which he acts as senior vice president and chief financial
officer of the Company.  The agreement has an initial term of 24 months
commencing in March 1998, which is automatically extended for one year in the
event of a change of control of the Company occurring during the last 12 months
of the term of the agreement.  The agreement provides for a base salary payable
in equal monthly installments of $24,740.00 beginning September 1, 1998 and
through December 31, 1998 and a base salary of $225,000 per year thereafter.  On
the first anniversary date of the agreement, if Mr. Bullis has remained in the
continuous employment of the Company, he shall receive a bonus in the amount of
$100,000.  From and after December 31, 1999, Mr. Bullis will be eligible to
receive annual bonus payments of up to 100% of base salary based upon the
achievement of certain performance targets.  The Company has issued Mr. Bullis
options for 750,000 shares of Class A Common Stock at an exercise price of
$3.00) which shall vest in equal annual installments of 187,500 shares
commencing on April 1, 1999.  In addition, Mr. Bullis is entitled to receive an
additional grant of options for 150,000 shares of Class A Common Stock at an
exercise price of $3.00 per share on April 1, 1999 if certain performance
targets are met.  In the event that Mr. Bullis is terminated without cause, he
is entitled to severance payments equal to one years salary.  "Cause" means (i)
the material failure to perform his duties with the Company or (ii) misconduct
materially injurious to the Company.  In the event that Mr. Bullis is terminated
within one year after a change in control, he is entitled to receive one years
salary and the $100,000 bonus referred to above (unless already paid by the
Company, and all options granted shall be vested.

                                      -10-
<PAGE>
 
     Options Granted in 1997- Table.  The following sets forth, as to each of
     ------------------------------                                          
the Named Executive Officers, information  concerning stock options granted in
the year ended December 31, 1997.

<TABLE> 
<CAPTION> 
                                 OPTION GRANTS FOR LAST FISCAL YEAR
-----------------------------------------------------------------------------------------------------------
                        NUMBER OF      % OF TOTAL                              POTENTIAL REALIZABLE VALUE
                       SECURITIES        OPTIONS                                AT ASSUMED  ANNUAL RATES
NAME AND POSITION      UNDERLYING      GRANTED TO    EXPIRATION    EXERCISE          OF STOCK PRICE  
                     OPTION GRANTED   EMPLOYEES IN      DATE/1/     PRICE/2/        APPRECIATION FOR                            
                                       FISCAL YEAR                                   OPTION TERM/3/
                                                                                    5%             10%
-----------------------------------------------------------------------------------------------------------
<S>                  <C>              <C>             <C>          <C>         <C>            <C>
                                                                                       5
Jerilyn P. Asher             --             --                        --             --
-----------------------------------------------------------------------------------------------------------
Dana H. Frank, M.D.    300,000/4/         13.8%      4/23/07       $2.50       $471,671     $1,195,307
-----------------------------------------------------------------------------------------------------------
Samantha Trotman,
 Chief Financial       400,000/5/         18.3%      1/1/07        $2.50       $628,895     $1,593,742
 Officer
-----------------------------------------------------------------------------------------------------------
</TABLE> 
     1.   The expiration date of an option is the tenth anniversary of the date
          on which the option is granted.

     2.   The exercise price is equal to the fair market value of the Company's
          Class A Common Stock on the date of the grant.

     3.   Amounts represent hypothetical gains that could be achieved for
          respective options if exercised at the end of the option term.  These
          gains are based on assumed rates of stock price appreciation of 5% and
          10%, compounded annually from the date the respective options were
          granted to their expiration date.  The gains shown are net of the
          option exercise price, but do not include deductions for taxes or
          other expenses associated with the exercise. Actual gains, if any, on
          stock option exercises will depend on the future performance of the
          Common Stock, the option holder's continued employment through the
          option period and the date on which the options are exercised.

     4.   Of these stock options, 100,000 stock options vest immediately and the
          remaining stock options vest in two equal annual installments
          commencing on the first anniversary of the date on which the option
          was originally granted. Of these options 120,000 are intended to
          qualify as incentive stock options and the remainder are non-statutory
          stock options. The vesting of these stock options is accelerated in
          the event of a change in control of the Company.

     5.   These stock options vest in three annual installments of 150,000,
          125,000 and 125,000 shares commencing on the first anniversary of the
          date on which the option was originally granted. Of these options
          120,000 are intended to qualify as 

                                      -11-
<PAGE>
 
          incentive stock options and the remainder are non-statutory stock
          options. The vesting of these stock options is accelerated in the
          event of a change in control of the Company.

     Security Ownership of Certain Beneficial Owners and Managers.  The
     ------------------------------------------------------------      
following tables set forth the number of shares of capital stock of the Company
beneficially owned as of January 1, 1998 by (i) each owner who is known by the
Company to beneficially own 5% or more of any class of voting stock, (ii) each
of the Company's directors, (iii) each of the Company's Named Executive Officers
and (iv) all directors and executive officers as a group.  Except as otherwise
indicated, the named owner has sole voting and investment power with respect to
all shares beneficially owned.

                                      -12-
<PAGE>
 
<TABLE> 
<CAPTION> 
                                     POC TABLE OF COMMON STOCK -- CLASS  A AND CLASS B SHARES
                                     --------------------------------------------------------

                         Class A Common Stock/1/     Class B Common Stock/2/   Class C Common Stock/2/   Class L Common Stock/2/  
----------------------------------------------------------------------------------------------------------------------------------
                                       Percentage                  Percentage                 Percentage               Percentage
Name and Address of       Number of     of Class     Number of      of Class    Number of      of Class    Number of    of  Class
 Beneficial Owner           Shares    Outstanding      Shares     Outstanding     Shares      Outstanding    Shares    Outstanding
----------------------------------------------------------------------------------------------------------------------------------
<S>                     <C>            <C>          <C>           <C>         <C>             <C>         <C>         <C> 
Bain Capital Funds c/o           -              -     11,015,000/3/   100.0%   3.076,924/4,5/     33.3%      615,385     25.0% 
 Bain Capital, Inc.    
Two Copley Plaza                                                                        
Boston, MA 02116
----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Funds              -              -               -         -    3,076,924/4,5/     33.3%      461,538    18.75%
c/o Goldman Sachs & Co.   
85 Broad Street                                                             
New York, MA 10004
----------------------------------------------------------------------------------------------------------------------------------
ABS Capital Partners,            -              -               -         -    9,160,004/6/       74.6%    1,374,487    55.83% 
 II, L.P. Funds
One South Street                                                            
Baltimore, MD 21201
----------------------------------------------------------------------------------------------------------------------------------
Offshore Health
 Industries, Inc.        1,582,500/7/         6.1%              -         -            -             -             -        -
Two Park Plaza
Boston, MA 02110
----------------------------------------------------------------------------------------------------------------------------------
Jerilyn P. Asher         3,849,832/8/        14.6%              -         -            -             -             -        - 
----------------------------------------------------------------------------------------------------------------------------------
Arlan F. Fuller, Jr.,      618,750            2.4%              -         -            -             -             -        -
 M.D.
----------------------------------------------------------------------------------------------------------------------------------
Samantha J. Trotman        150,000/9/           "       1,729,016/10/  15.7%           -             -             -        -
----------------------------------------------------------------------------------------------------------------------------------
Alphonese F. Calvanese,    313,007/11/          "               -         -            -             -             -        -  
 M.D. 
----------------------------------------------------------------------------------------------------------------------------------
Leslie Fang, M.D.                -              -               -         -            -             -             -        - 
----------------------------------------------------------------------------------------------------------------------------------
Ira Fine, M.D.             113,316              "               -         -            -             -             -        -
----------------------------------------------------------------------------------------------------------------------------------
Dana Frank, M.D.           272,904/12/          "               -         -            -             -             -        - 
----------------------------------------------------------------------------------------------------------------------------------
Stephen G. Pagliuca/13/          -              -      11,015,000/3/  100.0%   3.076,924/4,5/     33.3%            -        -
----------------------------------------------------------------------------------------------------------------------------------
Marc Wolpow/13/                  -              -      11,015,000/3/  100.0%   3,076,924/4,5/     33.3%            -        -
----------------------------------------------------------------------------------------------------------------------------------
Timothy T. Weglicki              -              -               -         -    9,160,004/14/      74.6%    1,374,487    55.83%
----------------------------------------------------------------------------------------------------------------------------------
John D. Stobo, Jr.               -              -               -         -    9,160,004/14/      74.6%    1,374,487    55.83% 
----------------------------------------------------------------------------------------------------------------------------------
Richard Maffezzoli, M.D.    94,585              -               -         -            -             -             -        -
----------------------------------------------------------------------------------------------------------------------------------
Paul Bodnar, M.D.           94,585              -               -         -            -             -             -        -
----------------------------------------------------------------------------------------------------------------------------------
All directors and        5,317,809           19.8%               -        -            -             -             -        - 
 executive officers as
 a group (10 persons)
 (31,594,579/15/ shares
 or 83.9% assuming
 conversion of Class B,    
 Class C and Class L
 Common Stock into
 Class A Common Stock)
 
"Less than 1%
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE> 
<CAPTION> 

                             Total Common Stock
                             Assuming Conversion
                             to Class A/1,2,16/       
---------------------------------------------------
                           Number of   Percentage  
Name and Address of         Common     of Common
 Beneficial Owner           Stock        Stock  
---------------------------------------------------
<S>                     <C>            <C>         
Bain Capital Funds c/o     15,322,694       30.0%
 Bain Capital, Inc.                                
Two Copley Plaza                                   
Boston, MA 02116                                   
---------------------------------------------------
Goldman Sachs Funds         4,000,000        8.3%
c/o Goldman Sachs & Co.                            
85 Broad Street                                    
New York, MA 10004                                 
---------------------------------------------------
ABS Capital Partners,      11,908,978       23.1%
 II, L.P. Funds                                    
One South Street                                   
Baltimore, MD 21201                                
---------------------------------------------------
Offshore Health                                    
 Industries, Inc.           1,582,500        3.8%
Two Park Plaza                                     
Boston, MA 02110                                   
---------------------------------------------------
Jerilyn P. Asher            3,849,832        9.4% 
---------------------------------------------------
Arlan F. Fuller, Jr.,         618,750        1.6% 
 M.D.                                              
---------------------------------------------------
Samantha J. Trotman         1,879,016        4.8%  
---------------------------------------------------
Alphonese F. Calvanese,       313,007          "  
 M.D.                                              
---------------------------------------------------
Leslie Fang, M.D.                   -          "
---------------------------------------------------
Ira Fine, M.D.                113,316          "  
---------------------------------------------------
Dana Frank, M.D.              272,904          "  
---------------------------------------------------
Stephen G. Pagliuca/13/    15,322,694       30.0%
---------------------------------------------------
Marc Wolpow/13/            15,322,694       30.0%
---------------------------------------------------
Timothy T. Weglicki        11,908,978       23.1%
---------------------------------------------------
John D. Stobo, Jr.         11,908,978       23.1%
---------------------------------------------------
Richard Maffezzoli, M.D.       94,585          "
---------------------------------------------------
Paul Bodnar, M.D.              94,585          "
---------------------------------------------------
All directors and           
 executive officers as                             
 a group (10 persons)                              
 (31,594,57915 shares                              
 or 83.9% assuming                                 
 conversion of Class B,                            
 Class C and Class L                               
 Common Stock into                                 
 Class A Common Stock)                             
                                                   
"Less than 1%                     
---------------------------------------------------
</TABLE>

                                      -13-
<PAGE>
 
1.   Reflects the percentage of shares of Class A, Class B, Class C and Class L
     Common Stock.  The Class B, Class C and Class L Common Stock of the Company
     are convertible at the option of the holder into Class A Common Stock.
2.   Beneficial ownership is determined in accordance with the rules of the
     Securities and Exchange Commission.  In computing the number of shares
     beneficially owned by a person and the percentage ownership of that person,
     shares of the Company's capital stock subject to options or warrants held
     by that person that are exercisable on or before December 31, 1998 are
     deemed outstanding.  Such shares, however, are not deemed outstanding for
     purposes of computing the ownership of each other person.
3.   Includes warrants to purchase 6,415,000 shares of Class B Common Stock.
4.   Does not include 6,153,846 shares of Class C Common Stock or warrants to
     purchase 6,153,846 shares of Class C Common Stock which other Institutional
     Investors are entitled to purchase pursuant to the Equity Facility.
5.   Includes warrants to purchase 1,538,462 shares of Class C Common Stock.
6.   Includes warrants to purchase 4,580,002 shares of Class C Common Stock.
7.   Includes warrants to purchase 332,500 shares of Class A Common Stock.
8.   Includes warrants to purchase 52,082 shares of Class A Common Stock.
9.   Consists of options to purchase shares of Class A Common Stock.
10.  Includes an aggregate of 722,059 shares of Class B Common Stock and
     1,006,957 shares of Class B Common Stock issuable upon outstanding warrants
     held by BCIP Associates and BCIP Trust Associates.  Ms. Trotman is a
     general partner of BCIP Associates and BCIP Trust Associates.  As such, Ms.
     Trotman may be deemed to own beneficially shares owned by BCIP Associates
     and BCIP Trust Associates, although Ms. Trotman disclaims beneficial
     ownership of any such shares.
11.  Includes options to purchase 100,625 shares of Class A Common Stock.
12.  Includes options to purchase 100,000 shares of Class A Common Stock.
13.  Includes an aggregate of 4,600,000 shares of Class B Common Stock
     beneficially owned by the institutional investors affiliated with Bain
     Capital (11,015,000 shares on a fully diluted basis), 1,538,426 shares of
     Class C Common Stock and 615,385 shares of Class L Common Stock (1,230,777
     on a fully diluted basis (assuming a 2-to-1 conversion rate on the Class L
     Common Stock)).  Each of Mr. Pagliuca and Mr. Wolpow is a Managing Director
     of Bain Capital, which manages each of the institutional investors.  Bain
     Capital is a limited partner in the partnership which is the general
     partner of Bain Capital Fund V, L.P. and Bain Capital Fund V-B, L.P., and a
     general partner of BCIP Associates and BCIP Trust Associates.  As such,
     Messrs. Pagliuca and Wolpow may be deemed to own beneficially shares owned
     by such institutional investors, although each of Mr. Pagliuca and Mr.
     Wolpow disclaims beneficial ownership of any such shares.
14.  Includes 4,580,002 shares of Class C Common Stock, and 1,374,487 shares of
     Class L Common Stock (2,748,974 shares of Class C Common Stock on a fully
     diluted basis (assuming a 2-to-1 conversion rate on the Class L Common
     Stock)) beneficially owned by ABS Capital Partners II, L.P.  Mr. Weglicki
     is a managing member of ABS Partners II, L.L.C., which manages ABS Capital
     Partners II, L.P.  Mr. Stobo is a vice president of ABS Capital Partners
     II, L.L.C.  As such Mr. Weglicki and Mr. Stobo may be deemed to own
     beneficially shares owned by ABS Capital Partners II, L.P., although Mr.
     Weglicki disclaims beneficial ownership of such shares.
15.  See Notes 1, 3, 4, 5 and 8 through 14 above.
16.  The conversion rate is determined pursuant to a formula and amounts
     reflected in the table assume all accrued dividends have been paid and that
     no Class L adjustment is necessary.  If the full Class L adjustment is
     required, the conversion rate would be 5.12 rather than the 2 to 1 as
     reflected in the table.

                                      -14-
<PAGE>
 
     Certain Relationships and Related Transactions.  Through June 20, 1997,
     ----------------------------------------------                         
pursuant to an agreement between the Company and its institutional investors
(the "Equity Facility"), the institutional investors affiliated with Bain
      ---------------                                                    
Capital purchased an aggregate of 4,600,000 shares of Class B Common Stock and
warrants exercisable for 6,415,000 shares of Class B Common Stock for an
aggregate purchase price of $11,500,000. On June 23, 1997, the Company issued
7,692,309 shares of Class C Common Stock and Warrants to purchase 7,692,309
shares of Class C Common Stock to the institutional investors affiliated with
Bain Capital, Goldman Sachs & Co., ABS Capital Partners (the "Institutional
Investors") for an aggregate consideration of $25 million.  On July 14, 1998,
the Institutional Investors acquired 2,461,538 shares of Class L Common Stock
for aggregate consideration of $8 million.  In connection with the Equity
Financing, the Company entered into a Management Agreement dated as of August
30, 1996 with BCPV, pursuant to which the Company will pay BCPV (or an affiliate
designated by BCPV) a management fee of $750,000 per year, plus 1% of any
financings from parties other than affiliates of Bain Capital, for services
including advice in connection with financings and financial, managerial and
operational advice in connection with day-to-day operations (the "Management
Agreement"). The Company is also obligated to pay certain expenses, not to
exceed $250,000 per year without the Company's consent, of BCPV, Bain Capital
and the Institutional Investors in connection with the Management Agreement.
Effective June 30, 1998, the Company's obligation to pay a fee under the
Management Contract was terminated, provided that, in the event of a merger or
public offering, the Company is obligated to pay from the proceeds of such sale
accrued but unpaid management fees.  Each of Stephen G. Pagliuca and Marc Wolpow
is a Director of the Company, a limited partner of BCPV, which is the general
partner of Bain Capital Fund V, L.P. and Bain Capital Fund V-B, L.P., and a
general partner of BCIP Associates, L.P. and BCIP Trust Associates, L.P., and a
Managing Director of Bain Capital, which manages each of the institutional
investors.

     Alphonse F. Calvanese, M.D., is a director of the Company and transferred
his practice to the Springfield Affiliated Group for which he received his
allocable portion of the total consideration paid to the physicians who
transferred their practices to the Springfield Affiliated Group.  Ira T. Fine,
M.D., Dana H. Frank, M.D., Paul Z. Bodnar, M.D. and Richard Maffezzoli, M.D.,
each a Director of the Company, are members of medical practice groups which
transferred their practice assets to the Flagship Affiliated Group for which
they received the allocated part of the total consideration paid to physicians
who transferred their practices to the Flagship Affiliated Group.  Each of Drs.
Calvanese, Fine, Frank, Maffezzoli and Bodnar are also officers of the Company
and receives compensation for the Company and its affiliates.  Each of Drs.
Calvanese, Fine, Frank, Maffezzoli and Bodnar have also been granted options to
purchase shares of the Company's Class A Common Stock.

 

                                      -15-
<PAGE>
 
                                 OTHER BUSINESS
                                 --------------
                                        
     Independent Accountants.  Ernst & Young, LLP is the Company's independent
     -----------------------                                                  
public accounting firm and has been since 1985. Representatives of Ernst &
Young, LLP are not expected to be present at the Meeting.

     Solicitation.  The Company does not intend to solicit proxies.  If the
     ------------                                                          
Company undertakes any solicitation, all costs and expenses associated with its
soliciting proxies will be borne by the Company. In addition to the use of the
mails, proxies may be solicited by the directors, officers and employees of the
Company by personal interview, telephone or telegram. Such directors, officers
and employees will not be additionally compensated for such solicitation but may
be reimbursed for out-of-pocket expenses incurred in connection therewith.
Arrangements will also be made with custodians, nominees and fiduciaries for the
forwarding of solicitation material to the beneficial owners of Common Stock
held of record by such persons, and the Company will reimburse such custodians,
nominees and fiduciaries for their reasonable out-of-pocket expenses incurred in
connection therewith.

     Other Matters.  As of the date of this Proxy Statement, the Board of
     -------------                                                       
Directors is not aware of any other business or matters to be presented for
consideration at the Meeting other than as set forth in the Notice of Meeting
attached to this Proxy Statement. However, if any other business shall come
before the Meeting or any adjournment or postponement thereof and be voted upon,
the enclosed proxy shall be deemed to confer discretionary authority on the
individuals named to vote the shares represented by such proxy as to any such
matters.

                                      -16-
<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-Q


(Mark One)
[ ]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934.

For the quarterly period ended     June 30, 1998
                              -----------------------

                                      OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934.

For the transition period from _________________ to _________________


Commission file number   333-26137
                      ---------------------------


                         Physicians Quality Care, Inc.
--------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)


          Delaware                                       04-3267297
--------------------------------------------------------------------------------
(State or Other Jurisdiction of             (I.R.S. Employer Identification No.)
Incorporation or Organization)    
 

950 Winter Street, Suite 2410, Waltham, Massachusetts               02154
------------------------------------------------------------------------------- 
(Address of Principal Executive Offices)                          (Zip Code)

 
Registrant's Telephone Number, Including Area Code (617) 890-5560
                                                  --------------------------

     Not Applicable
--------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)

     Indicate by check X whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days   Yes  X      No
                                              -----      -----

                     APPLICABLE ONLY TO CORPORATE ISSUERS:

     The number of shares outstanding of issuer's common stock, as of August 12,
1998 was: 26,106,780 shares of Class A Common Stock, $.01 par value, 2,809,296
shares of Class B-1, $.01 par value, 1,790,704 shares of Class B-2 Common Stock,
$.01 par value, 7,692,309 shares of Class C Common Stock, $.01 par value, and
2,461,538 shares of Class L Common Stock, $.01 par value.
<PAGE>
 
                         PHYSICIANS QUALITY CARE, INC.

                                   FORM 10-Q

                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                   PAGE
                                                                   ----
<S>                                                                <C> 
PART I   FINANCIAL INFORMATION

Item 1.  Balance Sheets as of June 30, 1998 and
         December 31, 1997 .......................................    1
 
         Statements of Operations for the three and six
         months ended June 30, 1998 and 1997 .....................    3
 
         Statements of Cash Flows for the six months
         ended June 30, 1998 and 1997 ............................    4
 
Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations .....................    7
 
 
PART II  OTHER INFORMATION
 
Item 1.  Legal Proceedings .......................................   23
 
Item 5.  Other Information .......................................   24
 
Item 6.  Exhibits and Reports on Form 8-K ........................   26
 
Signatures .......................................................   27
</TABLE>
<PAGE>
 
                                    PART I
                             FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS.

                         PHYSICIANS QUALITY CARE, INC.
                                BALANCE SHEETS
<TABLE> 
<CAPTION> 
                                                                     (UNAUDITED)
                                                                    JUNE 30, 1998   DECEMBER 31, 1997
                                                                    -------------   ----------------
<S>                                                                 <C>             <C> 
ASSETS
Current Assets:
  Cash and cash equivalents                                         $   (257,817)    $  8,782,019
  Restricted cash                                                      1,106,290                -
  Prepaid expenses                                                        46,811           35,175
  Due from affiliated physician practices                             14,011,793        5,719,421
  Other current assets                                                    17,656           69,868
                                                                    ------------     ------------
Total current assets                                                  14,924,733       14,606,483
  Investment in long term affiliation agreements, less
    accumulated amortization of $1,879,778 and $1,394,987 in
    1998 (unaudited) and 1997, respectively                           54,044,322       57,340,059
  Property and equipment, net                                            398,054        1,327,860
  Other asset                                                            386,300          136,181
                                                                    ------------     ------------
  Total assets                                                      $ 69,753,409     $ 73,410,583
                                                                    ============     ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable                                                  $    639,299     $  1,218,766
  Accrued compensation                                                   204,583          266,138
  Accrued expenses                                                       607,937          628,433
                                                                    ------------     ------------
Total current liabilities                                              1,451,819        2,113,337
Deferred taxes                                                           746,061          746,062
Commitments and contingencies
Common stock, subject to put, 18,604,136 and 18,157,982 shares
 authorized, issued and outstanding at June 30, 1998 (unaudited)
 and December 31, 1997, respectively                                  60,463,943       54,473,947
Stockholders' equity:
  Class A common stock, $.01 par value, 75,000,000
    shares authorized, 8,515,144 and 8,505,208 shares issued and
    7,502,644 and 7,492,708 outstanding at June 30, 1998
    (unaudited) and December 31, 1997, respectively                       85,151           85,052
  Class B-1 common stock, $.01 par value, 15,367,915
    shares authorized,  2,809,296 shares issued and outstanding at
    June 30, 1998 (unaudited) and December 31, 1997                      28,093           28,093
  Class B-2 common stock, $.01 par value 9,732,085
    shares authorized, 1,790,704 shares issued and outstanding at
    June 30, 1998 (unaudited) and December 31, 1997                      17,907           17,907
  Class C common stock, $.01 par value, 13,846,155
    shares authorized, 7,692,309 shares issued and outstanding at
    June 30, 1998 (unaudited) and December 31, 1997                      76,923           76,923
  Additional paid-in capital                                          50,033,254       49,846,913
  Accumulated deficit                                                (43,139,617)     (33,967,526)
  Less treasury stock, at cost, 1,012,500 shares                         (10,125)         (10,125)
                                                                    ------------     ------------
  Total stockholders' equity                                           7,091,586       16,077,237
                                                                    ------------     ------------
  Total liabilities and stockholders' equity                        $ 69,753,409     $ 73,410,583
                                                                    ============     ============
</TABLE> 

See accompanying notes to unaudited financial statements and management's
discussion and analysis of financial condition and results of operations.
<PAGE>
 
                         PHYSICIANS QUALITY CARE, INC.
                           STATEMENTS OF OPERATIONS
                                  (Unaudited)

<TABLE> 
<CAPTION> 
                                                     For the Three Months           For the Six Months
                                                        Ended June 30,                Ended June 30,
                                                  ---------------------------   -------------------------
                                                     1998          1997           1998          1997   
                                                  --------------------------------------------------------
<S>                                               <C>           <C>           <C>           <C> 
Net patient service revenue                       $20,636,578   $10,669,608     41,802,375     21,223,647
Less:  amounts retained by physician groups        (5,381,593)   (3,757,811)   (11,930,442)    (7,467,445)
                                                  -----------   -----------   ------------    -----------
Management fee revenue                             15,254,985     6,911,797     29,871,933     13,756,202

Operating expenses:
  Nonphysician salaries and benefits                6,827,848     3,146,813     13,647,629      6,214,101
  Other practice expenses                           7,189,690     2,882,446     13,358,894      5,633,688
  Corporate and regional expenses                   2,136,833     1,310,224      4,296,657      2,781,347
  Deprecation and amortization                        842,632       616,831      1,505,377        958,363
  Provision for bad debts                             778,786       282,318      1,467,114        555,581
                                                  -----------   -----------   ------------    -----------
Total expenses                                     17,775,789     8,238,632     34,275,671     16,143,080
Operating Loss                                     (2,520,804)   (1,326,835)    (4,403,738)    (2,386,878)
Other Income (expense):
  Interest income                                      47,344        32,838        151,558         36,793
  Interest expense                                    (18,813)      (75,102)       (57,127)      (105,826)
  Loss of investment in subsidiary                   (190,445)                    (323,287)
                                                  -----------   -----------   ------------    -----------
Net loss                                          $(2,682,718)  $(1,369,099)  $ (4,632,594)   $(2,455,911)
                                                  ===========   ===========   ============    =========== 
Net loss available to common stock                $(7,222,214)  $(8,025,640)  $ (9,172,090)   $(9,112,452)
                                                  ===========   ===========   ============    =========== 
Net loss per common share-basic                   $     (0.18)  $     (0.30)  $      (0.23)   $     (0.35)
                                                  ===========   ===========   ============    =========== 
Weighted average common 
 shares outstanding                                39,461,589    26,724,848     39,352,829     25,746,314
                                                  ===========   ===========   ============    ===========
</TABLE> 
 
See accompanying notes to unaudited financial statements and management's
discussion and analysis of financial condition and results of operations.

                                       2
<PAGE>
 
                         PHYSICIANS QUALITY CARE, INC.
                            STATEMENTS OF CASH FLOW
                                  (UNAUDITED)
<TABLE> 
<CAPTION> 
                                                                              For the Six Months
                                                                                 Ended June 30,
                                                                          ----------------------------
                                                                               1998          1997
                                                                          -------------  -------------
<S>                                                                       <C>            <C> 
OPERATING ACTIVITIES
Net Loss                                                                  $ (4,632,594)  $ (2,455,896)
Adjustments to reconcile net loss to net cash used
 in operating activities:
   Depreciation and amortization                                             1,505,377        958,363
   Changes in operating assets and liabilities, net of effects of
     business acquisitions:
     Increase in due from affiliated physician practices                    (4,169,908)    (3,605,340)
     Increase (Decrease) in prepaid expenses and other assets                 (159,543)      (330,062)
     Decrease in accounts payable, accrued compensation and 
       accrued expenses                                                       (497,597)      (366,228)
     Decreases in income taxes payable                                         (22,319)       (92,000)
                                                                          -------------  -------------
Net cash used in operating activities                                       (7,976,584)    (5,891,163)
 
INVESTING ACTIVITIES
Purchase of property and equipment                                             (93,402)      (949,199)
Cash paid for affiliations                                                     (50,000)      (831,231)
Cash paid for affiliation costs                                                              (406,097)
Increase in restricted cash                                                 (1,106,290)
Increase in deferred acquisition costs                                                       (657,632)
                                                                          -------------  -------------
Net cash used in investing activities                                       (1,249,692)    (2,844,159)
 
FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of issuance costs                  186,440     28,864,362
Proceeds from note payable                                                                  3,500,000
Decrease in deferred financing costs                                                           18,196
Payments on note payable                                                                   (3,500,000)
Payments on capital lease obligations                                                        (207,705)
Cash paid for debt issuance cost                                                             (331,148)
                                                                          -------------  -------------
Net cash provided by financing activities                                      186,440     28,343,705
 
Net decrease in cash and cash equivalents                                   (9,039,835)   (19,608,383)
Cash and cash equivalents at beginning of period                             8,782,019        136,926
                                                                          -------------  -------------
Cash and cash equivalents at end of period                                $   (257,817)  $ 19,745,309
                                                                          =============  =============
</TABLE> 

See accompanying notes to unaudited financial statements and management's
discussion and analysis of financial condition and results of operations.

                                       3
<PAGE>
 
                         Physicians Quality Care, Inc.

                    Notes to Unaudited Financial Statements
                    Six Months Ended June 30, 1998 and 1997

(1)  Basis of Presentation
     ---------------------

     The accompanying unaudited financial statements of Physicians Quality Care,
Inc., a Delaware corporation (the "Company"), have been prepared in accordance
with generally accepted accounting principles and in accordance with Rule 10-01
of Regulation S-X.

     In the opinion of management, the unaudited interim financial statements
contained in this report reflect all adjustments, consisting of only normal
recurring accruals which are necessary for a fair presentation of the financial
position as of June 30, 1998 and the results of operations for the three and six
months ended June 30, 1998. The results of operations for the three and six
month periods ended June 30, 1998 are not necessarily indicative of results for
the full year.

     These unaudited financial statements, footnote disclosures and other
information should be read in conjunction with the financial statements and
notes thereto included in the Company's Registration Statement on Form S-1, as
amended (No. 333-26137), and the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
 
     The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the amounts reported in the accompanying financial
statements and notes.  Actual results could differ from those estimates.

(2)  Net Loss Per Common Share
     -------------------------

     Net loss per share of common stock is computed by dividing the net loss
available to common stock by the weighted-average number of shares of common and
common equivalent shares outstanding during each period presented. The net loss
available to common stock for the three and six months ended June 30, 1998 and
June 30, 1997 reflect the accretion of common stock subject to put to fair value
at those respective balance sheet dates. The effect of options and warrants is
not considered as it would be antidilutive. Fully diluted loss per share is not
presented because the effect would be antidilutive.

     In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings
Per Share", which established standards for computing and presenting earnings
per share ("EPS") and applies to entities with publicly held common stock or
potential common stock.  SFAS 128 is effective for financial statements issued
for both interim and annual periods ending after December 31, 1997 and requires
restatement of all prior period EPS data.  Under the new requirements for
calculating primary 

                                       4
<PAGE>
 
 
earnings per share, the dilutive effect of stock options will be excluded. The
Company has applied this standard in 1997 and 1998.

(3)  Pending Accounting Standards
     ----------------------------
 
     In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income," and SFAS No. 131 "Disclosures About Segments of an Enterprise and
Related Information."  SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components.  SFAS No. 131 establishes
standards for public companies to report information about operating segments in
financial statements and supersedes SFAS No. 14 "Financial Reporting for
Segments of a Business Enterprise," but retains the requirements to report
information about major customers.  SFAS No. 130 and SFAS No. 131 are effective
for the Company in 1998.  The Company does not believe the adoption of these
Statements will have a significant effect on its financial statements.     

     In November 1997, the Financial Accounting Standards Board's Emerging 
Issues Task Force reached a consensus on its Issue 97-2, Consolidation of 
Physician Practice Entities which is effective for the Company for its 1998 
annual financial statements. The Company is currently evaluating the guidance 
contained in the consensus as it affects its current model for its affiliation 
structures. However, management does not believe implementation of the consensus
guidance will materially affect the financial position or its net results of 
operations.

(4)  Contingency
     -----------

     On June 12, 1997, Jay N. Greenberg, a founder and former executive vice
president of the Company, filed a complaint against the Company in Massachusetts
state court seeking damages of $1.4 million and a declaratory judgment that
843,750 of the shares registered in Mr. Greenberg's name (out of 1,012,500
shares of Class A Common Stock originally granted to Mr. Greenberg) have
"vested" under his Employment Agreement. The Company and Mr. Greenberg entered
into a Settlement Agreement in April 1998 pursuant to which the Company
confirmed Mr. Greenberg's ownership of 1,012,500 shares of Class A Common Stock
and Mr. Greenberg granted the Company an option to purchase all of such shares.
The purchase price is $1.3 million and increases (commencing October 1997) by
$25,000 for each three month period thereafter. The Company's purchase option 
expires on the earlier of (i) October 14, 1999, (ii) upon a public offering of
the capital stock of the Company, or (iii) a change in control. No damages were
awarded and mutual releases were granted.

(5)  LETTER OF CREDIT
     ----------------
     In connection with the October 1997 acquisition of a 50% interest in TLC 
Management Company, a medical management company ("TLC"), and a 50% interest in 
Total Quality Practice Management, Inc., a practice management company providing
Medicare risk management services ("Total Quality"), the Company issued a $1.0 
million letter of credit in April 1998. In connection with this letter of 
credit, the Company is required to maintain a cash balance of $1 million which 
is included under the caption "restricted cash" on the balance sheet.

(6)  Subsequent Event
     -----------------
     On July 15, 1998, the Company issued  2,461,538  shares of Class L Common
Stock to certain  institutional investors pursuant to a Class L Common Stock
Purchase Agreement.  The purchase price was $3.25 for each share of Class L
Common Stock for an aggregate purchase price of approximately $8,000,000. In
connection with such transaction the rights of the Class B Common Stock in a
liquidation were amended to rank prior to the Class A Common Stock and on an
equal basis with the Class C Common Stock.  The exercise price of the
outstanding Class B and Class C Common Stock warrants were reduced by $2.00 per
share to $0.50 and $1.25 per share respectively.  No distribution, whether as a
dividend, upon liquidation or otherwise, may be made on any other class of
Common Stock until the holders of the Class L Common Stock have received
dividends or distributions equal to the purchase price of the Class L Common
Stock plus an additional 12% per annum. In connection with the Class L Common
Stock financing, the Company's Shareholders approved a Restated Certificate of
Incorporation. The Restated Certificate limits any distribution on capital stock
that constitutes a taxable distribution.


                                       5
                             
<PAGE>
 
     The Class L Common Stock automatically converts into Class A Common Stock
upon the occurrence of a public offering that satisfy certain criteria, upon a
merger, consolidation, liquidation or winding up of the Company or a sale or
other transfer of all or substantially all of the Company's assets, or certain
other conditions brought about by partial redemption of Class L Common Stock.
The Class L Common Stock is also convertible at any time at the option of the
holder.

     The number of shares of Class A Common Stock into which the Class L
Common Stock is convertible is determined according to a formula and is based on
the value of Class A Common Stock issued pursuant to a realization event. The 
number of shares of Class A Common Stock issuable upon conversion (assuming no 
accrued and unpaid dividends) ranges between 4,923,007 and 12,603,077.

     The proceeds of the sale of Class L Common Stock will be used for working
capital and other corporate purposes.

                                       6
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

     This Quarterly Report on Form 10-Q contains forward-looking statements that
involve a number of risks and uncertainties.  There are a number of important
factors that could cause the Company's actual results to differ materially from
those indicated by such forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed under
"Factors Affecting Future Operating Results."  The following discussion should
be read in conjunction with the Company's Unaudited Financial Statements and
Notes thereto included elsewhere in this documents.

OVERVIEW

     The Company is affiliated with and operates multi-specialty medical
practice groups.  The first physician affiliation was completed on August 30,
1996 with 32 physicians in the Springfield, Massachusetts area (the "Springfield
Affiliated Group").  On December 11, 1996 the Company consummated the
affiliation with Flagship Health, P.A., a Maryland professional association
("Flagship," and together with Flagship II, the "Flagship Affiliated Group"),
which consisted of 59 physicians in the Baltimore, Maryland area.  On December
1, 1997, the Company entered into a long term affiliation agreement with a
physician practice consisting of 58 physicians in the Baltimore, Maryland area.
Additional physicians have been subsequently added to the Springfield Affiliated
Group and the Flagship Affiliated Group (the "Affiliated Groups") during 1997
and 1998.  In connection with the affiliation transactions, the assets and
liabilities of the physician practices were transferred to newly formed
professional corporations ("PCs") or professional associations ("PAs")
affiliated with the Company.  The Company is working with these groups of
physicians to improve operating practices and to obtain managed care contracts.
On October 24, 1997, the Company acquired a 50% interest in Total Life 
Care, a medical management company based in Atlanta, Georgia.

     As of June 30, 1998, the Company had affiliations or independent provider
association ("IPA") arrangements with the following physicians:

<TABLE>
<CAPTION>
                                                 
                                      Maryland   Massachusetts  Georgia
                                      ---------  -------------- --------
<S>                                   <C>        <C>            <C>
Affiliated Physicians:
  Primary Care                           102          27             0
  Specialist                              50          13             0
                                         ---         ---           --- 
Total:                                   152          40             0
  
IPA Physicians:                            0           0           334*

</TABLE>

* Reflects number of physicians in the IPA network in which the Company has a
  50% interest.

                                       7
<PAGE>
 
     Under the Company's contractual arrangements with its Affiliated Groups,
the Company can improve its management fee revenues by increasing the patient
care revenue of its Affiliated Groups, through improved billing and operating
efficiency, additional patient encounters, increased capitated revenues and
controlling the expenses of Affiliated Groups. To the extent that patient
revenue increases at a greater rate than practice expenses, the Company's
management fee will increase. Conversely, if PQC is not able to control practice
expenses or assist the Affiliated Groups in increasing patient care revenue, the
Company will earn no or only a limited management fee. Under the arrangements
with the physicians formally associated with Clinical Associates, P.A. (which
became effective on December 1, 1997) the Company earns a fee based, in part,
upon increases in billings, net of bad debts and discounts, above historical
levels, and a reduction in the percentage of revenue needed to pay practice
expense. While this structure causes the Company's management fee not to be as
dependent upon controlling practice expenses, the Company believes that both
increased revenues depend upon affiliated physicians being motivated by
competitive levels of compensation.

     The Company's and its Affiliated Groups revenues are derived from
governmental programs, managed care payors and traditional fee-for service
arrangements.  The following table sets forth the approximate percentage of the
revenues received by the practices that were affiliated with the Company at and
during the three month period ended June 30, 1998:

<TABLE>
<S>                                        <C>
       Fee for Service Contracts            49%
       Medicare                             22%
       Capitated Managed Care Contracts     27%
       Medicaid and Other                    2%
                                           --- 
                                           100%
                                           ===
</TABLE>

RESULTS OF OPERATIONS:

Three Months ended June 30, 1998 and June 30, 1997

     Net patient revenues of affiliated practices were $20.6 million for the
three months ended June 30, 1998 compared to $10.7 million for the same period a
year ago.  The increase of  $9.9 million in net revenues was primarily due to
the Flagship II affiliation in December, 1997. Capitated managed care contracts
were 27% of revenues for the three months ended June 30, 1998 compared to 9% for
the three months ended June 30, 1997.  Capitated contracts have increased as a
source of revenue in 1998 due to the Flagship II affiliation.

                                       8
<PAGE>
 
     Amounts retained by physician groups, which represents physician salaries
and benefits, increased  $1.6 million for the three months ended June 30, 1998
compared to the three months ended June 30, 1997.  This is primarily due to the
increase in affiliated physicians from 1997 to 1998.  As a percentage of net
patient service revenues, amounts retained by physician groups was 26% for the
three months ended June 30, 1998 compared to 35% for the three months ended June
30, 1997.  This was primarily due to the Flagship II affiliation which has a
lower physician compensation ratio to net revenues than the prior affiliations.

     Nonphysician salaries and benefits, which represents salaries and benefits
for physician practice staff increased by $3.7 million to $6.8 million for the
three months ended June 30, 1998 from $3.1 for the three months ended June 30,
1997. As a percentage of net patient service revenues, Nonphysician salaries and
benefits was 33% for the three months ended June 30, 1998 compared to 29% for
the three months ended June 30, 1997. Other practice expenses, which represent
all other physician practice expenses, increased $4.3 million and as a
percentage of net revenue to 35% for the three months ended June 30, 1998
compared to 27% for the three months ended June 30, 1997. The increase in
Nonphysician salaries and benefits and other practice expenses is primarily a
result of the Flagship II affiliation which has higher infrastructure expenses.
The infrastructure expenses include outside services and administrative costs
associated with capitated managed care contracts.

     Corporate and regional expenses increased $827,000 for the three months
ended June 30, 1998 compared to the three months ended June 30, 1997. This
increase was due to the hiring of corporate and regional staff and related
expenses to support the affiliated practices. Corporate and regional expenses
were 10% of revenues for the three months ended June 30, 1998 compared to 12%
for the three months ended June 30, 1997.

     Depreciation and amortization expense was $843,000 for the three months
ended June 30, 1998 compared to $617,000 for the three months ended June 30,
1997. The increase was due to the Flagship II affiliation completed in December
1997 and is primarily related to the amortization of intangible assets from the
affiliation transactions.

     Provisions for bad debt expense increased by $496,000 for the three months
ended June 30, 1998 compared to the three months ended June 30, 1997 and
increased as a percentage of net revenue to 4% from 3% for the same periods. The
increases in provisions for bad debts is due to the provisions for Flagship II
affiliation and patient mix compared to prior affiliations.

     Interest income increased for the three months ended June 30, 1998 compared
to the three months ended June 30, 1997 due to a higher level of invested cash
over the entire period.

                                       9
<PAGE>
 
     Loss in investment for the three months ended June 30, 1998 was $190,000.
The Company acquired a 50% interest in Total Life Care on October 24, 1997 and
has accounted for the transaction using the equity method.

 Six Months ended June 30, 1998 and June 30, 1997

     Net patient revenues of affiliated practices for the six months ended June
30, 1998 were $41.8 million compared to $21.2 million for the same period a year
ago. The increase of $20.6 million in net revenues was primarily due to the
Flagship II affiliation. Capitated managed care contracts were 27% of revenues
for the six months ended June 30, 1998 compared to 9% for the six months ended
June 30, 1997. Capitated contracts have increased as a source of revenue in 1998
due to the Flagship II affiliation.

     Amounts retained by physician groups, which represents physician salaries
and benefits, increased $4.5 million for the six months ended June 30, 1998
compared to the six months ended June 30, 1997. This is primarily due to the
increase in affiliated physicians from 1997 to 1998. As a percentage of net
patient service revenues, amounts retained by physician groups was 29% for the
six months ended June 30, 1998 compared to 35% for the six months ended June 30,
1997. This was primarily due to the Flagship II affiliation which has a lower
physician compensation ratio to net revenues than the prior affiliations.

     Nonphysician salaries and benefits, which represent salaries and benefits
for physician practice staff increased by $7.4 million to $13.6 million for the
six months ended June 30, 1998 from $6.2 million for the six months ended June
30, 1997. As a percentage of net patient service revenues, Nonphysician salaries
and benefits was 33% for the six months ended June 30, 1998 compared to 29% for
the six months ended June 30, 1997. Other practice expenses, which represent all
other physician practice expenses, increased $7.7 million and as a percentage of
net revenue to 32% for the six months ended June 30, 1998 compared to 27% for
the six months ended June 30, 1997. The increase in Nonphysician salaries and
benefits and other practice expenses is primarily a result of the Flagship II
affiliation which has higher infrastructure expenses. The infrastructure
expenses include outside services and administrative costs associated with
capitated managed care contracts.

     Corporate and regional expenses increased $1.5 million for the six months
ended June 30, 1998 compared to the six months ended June 30, 1997. This
increase was due to the hiring of corporate and regional staff and related
expenses to support the affiliated practices. Corporate and regional expenses
were 10% of revenues for the six months ended June 30, 1998 compared to 13% for
the six months ended June 30, 1997.

     Depreciation and amortization expense was $1.5 million for the six months
ended June 30, 1998 compared to $958,000 for the six months ended June 30, 1997.
The increase was due to the Flagship II affiliation completed in December 1997
and is primarily related to the amortization of intangible assets from the
affiliation transactions.

                                       10
<PAGE>
 
     Provisions for bad debts increased by $911,000 for the six months ended
June 30, 1998 compared to the six months ended June 30, 1997 and increased as a
percentage of net revenue to 3.5% from 2.6% for the same periods. The increases
in provisions for bad debts is due to the Flagship II affiliation and patient
mix compared to prior affiliations.

     Interest income increased for the six months ended June 30, 1998 compared
to the six months ended June 30, 1997 due to a higher level of invested cash
over the entire period.

     Loss in investment for the six months ended June 30, 1998 was $323,000. The
Company acquired a 50% interest in Total Life Care on October 24, 1997 and has 
accounted for the transaction using the equity method.

 LIQUIDITY AND CAPITAL RESOURCES:

     Principal capital requirements include payments for affiliation
transactions, related transaction costs, working capital requirements, and the
funding of operating losses.  The Company anticipates that its liquidity and
capital requirements will be the same for the short-term and long-term.  The
Company has incurred significant operating losses to date and does not have
operating cash flow to fund further losses.  The principal sources of capital
have been the issuance of Class B, Class C, and Class L Common Stock to
institutional investors, and the issuance of Class A Common Stock to private
investors.  Capital expenditures are expected to be $2 million for 1998.  There
can be no assurance that the institutional investors, who have previously been a
source of capital, will continue to fund the operations through the purchase of
additional equity.

     Working capital existing at the date of the affiliation transactions has
been retained in the affiliated groups.  Additional working capital is required
to fund growth and manage accounts receivable fluctuations.  The affiliated
groups had net accounts receivable of $14.4 million at June 30, 1998 compared to
$11.9 million at December 31, 1997.  The $2.5 million increase in accounts
receivable is due to billing delays caused by system conversions.  Management
believes that the increases are temporary and anticipates that the system
conversions will be completed by December 31, 1998.

     During 1998 and 1997 the Company paid an aggregate consideration of $1.5
and $23.6 million, respectively, in connection with affiliation transactions. Of
that amount $50,000 in 1998 and $7.8 million in 1997 was paid in cash and $1.5
million in 1998 and $15.8 million in 1997 was paid in Class A Common Stock. The
majority of the consideration has been ascribed to intangible assets.

     As of June 30, 1998, intangible assets net of amortization costs,
represented  $54 million of the total assets of  $70 million.  The Company is
amortizing the intangible assets over 25 years.

     Continuing operating losses, working capital requirements and other
expenditures caused the company to experience a net reduction in cash and cash
equivalents of $9 million during the six 

                                       11
<PAGE>
 
months ended June 30, 1998. As a result of such reduction in working capital,
the Company had a negative balance of unrestricted cash of ($258,000) at June
30, 1998 and its current assets at such date were principally composed of
amounts due from affiliated physician practices. Delays in billings and
collections at the affiliated practices due principally to systems conversions
contributed to the decrease in cash and the increase in amounts due from
affiliates. While the Company is addressing the billing and collection problems
at the affiliated practice, the Company faced a serious shortfall in working
capital. To address this problem and to fund its operations and growth, the
Company issued 2,461,538 shares of Class L Common Stock to certain institutional
investors pursuant to a Class L Common Stock Purchase Agreement. The purchase
price was $3.25 for each share of Class L Common Stock for an aggregate purchase
price of approximately $8 million. In connection with such transaction the
rights of the Class B Common Stock in a liquidation were amended to rank prior
to the Class A Common Stock and on an equal basis with the Class C Common Stock.
The exercise price of the outstanding Class B and Class C Common Stock warrants
were reduced by $2.00 per share to $0.50 and $1.25 per share respectively. While
the Company believes that the proceeds from the Class L Common Stock financing
will be sufficient to fund the Company's operations for the current year, the
Company will continue periodically to experience shortfalls in working capital
unless it is able to generate a positive cash follow from its operations. There
can be no assurance that additional equity financing will be available in the
future from the institutional investors in the Company or other sources.
 
     Of the common stock outstanding at June 30, 1998, 18,604,136 shares of
Class A Common are subject to a put option which provided for the purchase of
the shares at fair value upon the death of the holder.  In addition, 1,029,749
shares are subject to a fair value put option back to the Company at the later
of the physician shareholder's retirement or June 1998.  These Class A Common
Shares have been recorded at fair value on the accompanying balance sheet. Under
the stockholder agreements as of December 31, 1997, the Company has the right to
repurchase 15,471,063 shares of Class A Common Stock for fair value if the
physician shareholder's termination of employment is without cause or is by
resignation, and for the lower of cost or fair value if termination is with
cause.  The terms of such repurchase provisions may not permit the Company to
fully recover its physician affiliation payments or reflect the cost of
affiliation transactions at the time of termination.  To date, no physician
shareholder has terminated an employment agreement or repurchased any practice
assets.  All of the put and call provisions expire on the completion of an
initial public offering with net proceeds of $50 million and which meets certain
other criteria.  In addition, the Flagship II physicians have the right to
require the Company to repurchase through a five year non-interest bearing note
4.8 million shares of Class A Common Stock at $3.00 per share if the Company has
not completed an  initial public offering prior to December 1, 2001.  The Class
A Common Stock is subject to a number of restrictions in the stockholder
agreements and will not trade until the occurrence of an offering.  The Company
has not recorded a compensation expense for these puts and calls and believes it
is a nonpublic entity for compensation accounting purposes.

                                       12
<PAGE>
 
IMPACT OF YEAR 2000

     The Company is aware of issues associated with the programming code in
existing computer systems as the year 2000 approaches.  The "Year 2000" problem
is pervasive and complex, as virtually every computer operation will be affected
in the same way by the rollover of the two digit year value to 00.  The issue is
whether computer systems will properly recognize date sensitive information when
the year changes to 2000.  Systems that do not properly recognize such
information could generate erroneous data or cause a system to fall.

     The Company is utilizing both internal and external resources to identify,
correct or reprogram, and test its systems for Year 2000 compliance.  It is
currently anticipated that all reprogramming efforts will be completed by July
31, 1999, allowing adequate time for testing. A preliminary assessment has
indicted that some of the Company's older personal computers and ancillary
software programs may not be Year 2000 compatible.  The Company intends to
either replace or modify these computers and programs.  The cost of this
replacement in not expected to be material as the shelf life of the Company's
personal computers is three to five years.  The present financial systems are
all Year 2000 compliant.  The practice management system is 80% compliant and
the Company plans to move to a new version of the software which is 100%
compliant as part of its reprogramming efforts which will be completed by July
31, 1999.  This upgrade is provided under the Company's current software
maintenance agreement with its software vendor.  All new software purchased will
be 100% compliant.

     The Company is also obtaining confirmations from the Company's primary
vendors that plans are already in place to address processing of transactions in
the Year 2000.  However, there can be no assurance that the systems of other
companies on which the Company's systems rely also will be converted in a timely
fashion or that any such failure to convert by another company would not have an
adverse effect on the Company's systems.  Management is in the process of
completing the assessment of the Year 2000 compliance costs.  However, based on
currently available information (excluding the possible impact of vendor systems
which management currently is not in a position to evaluate) as noted above,
management does not believe that these costs will have a material effect on the
Company's earnings.

FACTORS AFFECTING FUTURE OPERATING RESULTS

     Lack of Operating History; History of Operating Losses

     The Company's historical financial condition and results of operations may
not be indicative of the Company's results of operations and financial condition
for future periods.  The Company has incurred losses of each of its fiscal years
through 1997.  The Company expects to incur operating losses for at least the
immediate future and to fund such operating losses through the issuance of
additional equity and debt securities.  See "-- Need for Substantial Additional
Capital."  There can be no assurance that the Company will achieve or maintain
profitability.

                                       13
<PAGE>
 
     Need for Substantial Additional Capital

     The Company will require substantial capital resources to obtain the
necessary scale to become profitable and to fulfill its business plan.
Additional funds will be required to fund the acquisition, integration,
operation and expansion of affiliated practices, capital expenditures including
the development of the information systems to manage such practices, operating
losses and general corporate purposes.

     The Company has no committed external sources of capital.  Without the
consent of the director elected by the stockholders of the Class B-1 Common
Stock (the "Class B-1 Director"), the director elected by the stockholders of
the Class B-2 Common Stock (the "Class B-2 Director," and together with the
Class B-1 Director of the "Class B Directors") and the directors elected by the
holders of Class C Common Stock (the "Class C Directors"), the Company may not
obtain additional financing through external borrowings or the issuance of
additional securities.  The issuance of additional capital stock could have an
adverse effect on the value of the shares of common stock held by the existing
stockholders.  There can be no assurance that the Class B Directors and Class C
Directors will approve such capital raising activities or that the Company will
be able to raise additional capital when needed on satisfactory terms or at all.
In July 1998, the Company issued 2,461,538 shares of Class L Common Stock for an
aggregate consideration of $8 million to finance the Company's working capital
shortfall and its ongoing operations.  Because of the Company's working capital
requirements and operating losses, as well as a general change in the market
valuation of physician management companies, the terms of the Class L Common
Stock financing were less favorable to the Company than its prior institutional
offerings. If the Company is not able to eliminate its operating losses, the
Company will need additional working capital in the future.  Additional capital
may also be needed to finance the expansion of the Company's operations.  The
Company may not be able to obtain such additional financing when needed or may
not be able to do so on favorable terms.  The failure to obtain additional
financing when needed and on appropriate terms could have a material adverse
effect on the Company.

     Risk that Future Affiliation Transactions Will Not be Consummated; Costs of
Affiliation Transactions

     There can be no assurance that any future affiliation transactions will be
consummated. In consummating future affiliation transactions, the Company will
rely upon certain representations, warranties and indemnities made by sellers
with respect to the affiliation transaction, as well as its own due diligence
investigation.  There can be no assurance that such representations and
warranties will be true and correct, that the Company's due diligence will
uncover all material adverse facts relating to the operations and financial
condition of the affiliated medical practices or that all of the conditions to
the Company's obligations to consummate these future affiliations will be
satisfied.  Any material misrepresentations could have a material adverse effect
on the Company's financial condition and results of operations.

                                       14
<PAGE>
 
     The Company has incurred approximately $2.9 million and $567,000 during
1996 and 1997, respectively, in accounting, legal and other costs in developing
its affiliation structure and completing its initial affiliation transactions.
The Company's ability to enter into affiliation transactions with a significant
number of physicians and to achieve positive cash flow will be adversely
affected unless it is able to reduce the expenses associated with future
transactions. There can be no assurance that the Company will be able to reduce
transaction costs on a per affiliated physician basis in the future.

     Dependence upon Affiliated Medical Practices

     Although the Company does not and will not employ physicians or control the
medical aspects of the practices of the physicians employed by the Springfield
Affiliated Group, the Flagship Affiliated Group or similar Affiliated Groups,
the Company's revenue and profitability are directly dependent on the revenue
generated by the operation and performance of and referrals among the affiliated
medical practices.  The compensation to the Company under its Services
Agreements with the Affiliated Groups is based upon a percentage of the profits
of revenues generated by the Affiliated Groups' practices with a substantial
portion of the profits or revenues being allocated to the physicians until
threshold levels of income or revenues, based upon the physicians' historical
compensation or billings, are achieved.  Accordingly, the performance of
affiliated physicians affected the Company's profitability and the success of
the Company depends, in part, upon an increase in net revenues from the practice
of affiliated physicians compared to historical levels.  The inability of the
Company's Affiliated Groups to attract and retain patients, to manage patient
care effectively and to generate sufficient revenue or a material decrease in
the revenues of the Affiliated Groups would have a material adverse effect on
the financial performance of the Company.  To the extent that the physicians
affiliated with the Company are concentrated in a limited number of target
markets, as is currently the case in western Massachusetts and Maryland,
deterioration in the economies of such markets could have a material adverse
effect upon the Company.

     Risks Related to Expansion of Operations

     Integration Risks.  The Company has completed affiliation transactions with
the Springfield Affiliated Group and the Flagship Affiliated Group, and is
seeking to enter into Affiliates with additional physicians.  In the Springfield
and Greater Baltimore-Annapolis areas and in other potential affiliation
markets, the Company is integrating physician practice groups that have
previously operated independently.  The Company is still in the process of
integrating its affiliated practices.  The Company may encounter difficulties in
integrating the operations of such physician practice groups and the benefits
expected from such affiliations may not be realized.  Any delays or unexpected
cots incurred in connection with integrating such operations could have an
adverse effect on the Company's business, operating results or financial
condition.

     While each Affiliation conforms to PQC's overall business plan, the
profitability, location and culture of the physician practices that have been
combined into Affiliated Groups are different in come respects.  PQC's
management faces a significant challenge in its efforts to integrate and 

                                       15
<PAGE>
 
expand the business of the Affiliated Groups. Because of limited working capital
and operating losses, the Company has recently reduced the size of its corporate
staff. While intended to improve the efficiency and cost of its operations, such
reduction may also make it more difficult for the Company to manage it
operations and growth. The need for management to focus upon such integration
and future Affiliations may limit resources available for the day-to-day
management of the Company's business. While management of the Company believes
that the combination of these practices will serve to strengthen the Company,
there can be no assurance that management's efforts to integrate the operations
of the Company will be successful. The profitability of the Company is largely
dependent on its ability to develop and integrate networks of physicians from
the affiliated practices, to manage and control costs and to realize economies
of scale. There can be no assurance that there will not be substantial costs
associated with such activities or that there will not be other material adverse
effects on the financial results of the Company as a result of these integration
and affiliation activities.

     The Company intends to continue to pursue an aggressive growth strategy
through affiliations and internal development for the foreseeable future.  The
Company's ability to pursue new growth opportunities successfully will depend on
many factors, including, among others, the Company's ability to identify
suitable growth opportunities and successfully integrate affiliated or acquired
businesses and practices.  There can be no assurance that the Company will
anticipate all of the changing demands that expanding operations will impose on
its management, management information systems and physician network.  Any
failure by the Company to adapt its systems and procedures to those changing
demands could have a material adverse effect on the operating results and
financial condition of the Company.

     Need to Hire and Retain Additional Physicians

     The success of the Company is dependent upon its ability to affiliate with
a significant number of qualified physicians and the willingness of such
affiliated physicians to maintain and enhance the productivity of their
practices following affiliation with PQC.  The market for affiliation with
physicians is highly competitive, and the Company expects this competition to
increase.  The Company competes for physician affiliations with many other
entities, some of which have substantially greater resources, greater name
recognition and a longer operating history than the Company and some of which
offer alternative affiliation strategies which the Company may not be able to
offer.  In addition, under current law the Company has no or only limited
ability to enforce restrictive covenants in the employment agreements with the
physicians with whom the Company affiliates.  The Company is subject to the risk
that physicians who receive affiliation payments may discontinue such
affiliation with the Company, resulting in a significant loss to the Company and
decrease in the patient base associated with the such affiliated physicians.
There can be no assurance that PQC will be able to attract and retain a
sufficient number of qualified physicians.  If the Company were unable to
affiliate with an retain a sufficient number of physicians, the Company's
operating results and financial condition would be materially adversely
affected.  A material increase in costs of affiliations could also adversely
affect PQC and its stockholders.

                                       16
<PAGE>
 
     Risk of Inability to Manage Expanding Operations

     The Company is seeking to expand its operations rapidly, which, if
successful, will create significant demands on the Company's administrative,
operational and financial personnel and systems.  There can be no assurance that
the Company's systems, procedures, controls and staffing will be adequate to
support the proposed expansion of the Company's operations. Because of limited
working capital and operating losses, the Company has recently reduced the size
of its corporate staff.  While intended to improve the efficiency and cost of
its operations, such reduction may also make it more difficult for the Company
to manage it operations and growth. The Company's future operating results will
substantially depend on the ability of its officers and key employees to
integrate the management of the Affiliated Groups, to implement and improve
operational, financial control and reporting systems and to manage changing
business conditions.

     Dependence Upon the Growth of Numbers of Covered Lives

     The Company is also largely dependent on the continued increase in the
number of covered lives under managed care and capitate contracts.  This growth
may come from affiliation with additional physicians, increased enrollment with
managed care payors currently contracting with the Affiliated Groups and
additional agreements with managed care payors.  A decline in covered lives or
an inability to increase the number of covered lives under contractual
arrangement with managed care or capitated payors could have a material adverse
effect on the operating results and financial condition of the Company.

     Potential Regulatory Restraints Upon the Company's Operations

     The healthcare industry is subject to extensive federal and state
regulation.  Changes in the regulations or interpretations of existing
regulations could have a material adverse effect on the Company's business,
financial condition and results of operations.

     Risks of Capitated Contracts

     The physician groups with which the Company is affiliated and proposes to
affiliate are parties to certain capitated contracts with third party payors,
such as insurance companies.  The Company intends to seek to expand the
capitated patient base of its Affiliated Groups, particularly for Medicare
enrollees.  In general, risk contracts pay a flat dollar amount per enrollee in
exchange for the physician's obligation to provide or arrange for the provision
of a broad range of healthcare services (including in-patient care) to the
enrollee.  A significant difference between a full risk capitated contract and
traditional managed care contracts is that the physician is sometimes
responsible for both professional physician services and many other healthcare
services, e.g., hospital, laboratory, nursing home and home health.  The
physician is not only the "gatekeeper" for enrollees, but is also financially at
risk for over-utilization and for the actuarial risk that certain patients may
consume significantly more healthcare resources than average for patients of
similar age and sex (such patients are referred to herein as "high risk
patients").

                                       17
<PAGE>
 
     While physicians often purchase reinsurance to cover some of the actuarial
risk associated with high risk patients, such insurance typically does not apply
with respect to the risk of over-utilization until a relatively high level of
aggregate claims has been experienced and therefore does not completely protect
against any capitation risk assumed.  If over-utilization occurs with respect to
a given physician's enrollees (or the physician's panel of enrollees includes a
disproportionate share of high risk patients not covered by reinsurance), the
physician is typically penalized by failing to receive some or all of the
physician's compensation under the contract that is contingent upon the
attainment of negotiated financial targets, or the physician may be required to
reimburse the payor for excess costs.  In addition, a physician may be liable
for over-utilization by other physicians in the same "risk pool" and for
utilization of ancillary, in-patient hospital and other services when the
physician has agreed contractually to manage the use of those services.  Except
for a small amount of coverage maintained by Flagship, neither the Company nor
the Affiliated Groups currently maintain any reinsurance arrangement and, to
date, the Affiliated Groups have not experienced losses from participation in
risk pools or incurred any material penalties or obligations with respect to
excess costs under capitated contracts.  The Company is pursuing a strategy of
seeking increased participation in capitated contracts for all of its affiliated
physicians.  As the percentage of the Company's revenues derived from capitated
contracts increases, the risk of the Company experiencing losses under capitated
contracts increases.  As the revenues from capitated contracts become of
increasing importance to PQC and its Affiliated Groups, the Company will review
the financial attractiveness of reinsurance arrangements.

     Medical providers, such as the Affiliated Groups, are experiencing
increasing pricing pressure in negotiating capitated contracts while facing
increased demands on the quality of their services.  If these trends continue,
the costs of providing physician services could increase while the level of
reimbursement could grow at a lower rate or decrease.  Because the Company's
financial results are dependent upon the profitability of such capitated
contracts, the Company's results will reflect the financial risk associated with
such capitated contracts.  Liabilities or insufficient revenues under capitated
and other risk-sharing arrangements could have a material adverse effect on the
Company.

     Risks of Changes in Payment for Medical Services

     The profitability of the Company may be adversely affected by Medicare and
Medicaid regulations, cost containment decisions of third party payors and other
payment factors over which PQC and its Affiliated Groups have no control.  The
federal Medicare program has undergone significant legislative and regulatory
changes in the reimbursement and fraud and abuse areas, including the adoption
of the resource-based relative value scale schedule for physician compensation
under Medicare, which may have a negative impact on PQC's revenue. Efforts to
control the cost of healthcare services are increasing.  PQC's Affiliated Groups
contract with provider networks, managed care organization and other organized
healthcare systems, which often provided fixed fee schedules or capitation
payment arrangements which are lower than standard charges.  Future
profitability in the changing healthcare environment, with differing methods of
payment for medical services, is likely to be affected significantly by
management of healthcare 

                                       18
<PAGE>
 
costs, pricing of services and agreements with payors. Because PQC derives its
revenues generated by its affiliated physician groups, further reductions in
payment to physicians generally or other changes in payment for healthcare
services could have an adverse effect on the Company.

     Exposure to Professional Liability; Liability Insurance

     In recent years, physicians, hospitals and other participants in the
healthcare industry have become subject to an increasing number of lawsuits
alleging medical malpractice, negligent credentialing of physicians, and related
legal theories.  Many of these lawsuits involve large claims and substantial
defense costs.  There can be no assurance that the Company will not become
involved in such litigation in the future.  Through its management of practice
locations and provision of non-physician healthcare personnel, the Company could
be named in actions involving care rendered to patients by physicians or other
practitioners employed by Affiliated Groups.  In addition, to the extent that
affiliated physicians are subject to such claims, the physicians may need to
devote time to defending such claims, adversely affecting their financial
performance for the Company, and potentially having an adverse effect upon their
reputations and client base.  The Company and the Affiliated Groups maintain
professional and general liability insurance, which is currently maintained at
$1 million per occurrence and $3 million annually for each affiliated physician.
Nevertheless, certain types of risks and liabilities are not covered by
insurance, and there can be no assurance that the limits of coverage will be
adequate to cover losses in all instances.

     Certain Federal Income Tax Considerations

     Physician groups which operated as PCs in Springfield prior to affiliating
with the Company were merged into the Springfield Affiliated Group, with
stockholders of each PC receiving shares of Class A Common Stock of the Company
and cash in exchange for their capital stock in the PC.  Physician groups which
operated as PAs in the greater Baltimore-Annapolis area prior to affiliating
with the Company were similarly merged into the Flagship Affiliated Group, with
stockholders of each PA receiving shares of Class A Common Stock of the Company
and cash in exchange for their capital stock in the PA.  Each such merger is
intended to qualify as a "reorganization" under Section 368(a) of the Internal
Revenue Code of 1986, as amended, in which case no gain or loss would generally
be recognized by the PC or PA or the stockholders (other than as cash received)
of the PC or PA.  The Company has not sought or obtained a ruling form the
Internal Revenue Service or an opinion of counsel with respect to the tax
treatment of the mergers of PCs or PAs into the Springfield or Flagship
Affiliated Groups.  The Company does not believe that the Internal Revenue
Service is issuing rulings at this time on transactions using the Company's
affiliation structure.  If a merger were not to so qualify, the exchange of
shares would be taxable to the stockholders of the PC or PA, and the
consideration (net of asset basis) issued in connection with the merger would be
taxable to the Affiliated Group into which such PC or PA was merged.  Because of
such tax liability, failure of a merger or mergers to qualify as tax-free
reorganizations could have a material adverse effect on the applicable
Affiliated Group and the Company.  Also, the inability to structure future
Affiliations on a tax-deferred basis may adversely affect the Company's ability
to attract additional physicians.

                                       19
<PAGE>
 
     New Management; Dependence on Key Personnel

     The current management structure and the senior management team of the
Company have been in place for a relatively short time. The Company's future
success depends, in large part, on the continued service of its senior
management team, including Jerilyn P. Asher, the Chief Executive Officer, and
Eugene M. Bullis, Senior Vice President and Chief Financial Officer, and the
PQC's ability to continue to attract, motivate and retain highly qualified
senior management and employees. The Company has employment agreements with Ms.
Asher and Mr. Bullis. The Company does not maintain key person life insurance
with respect to Ms. Asher or Mr. Bullis. As a development stage company, PQC has
experienced some turnover in staff, including two of the founding officers.
Although the Company has entered into employment agreements with certain of its
other executives that contain covenants not to compete with the Company, there
can be no assurance that the Company will be able to retain such key executives
or its senior managers and employees. The inability to hire and retain qualified
personnel or the loss of the services of personnel could have a material adverse
effect upon the Company's business and future business prospects.

     Risk of the Unavailability of the Equity Facility

     The remaining amount under the Class B and Class C Stock Purchase Agreement
(the "Equity Facility") with certain institutional investors ("Institutional
Investors") is only available with the consent of the Institutional Investors
and there can be no assurance that the Institutional Investors will be willing
to provide additional capital when needed by the Company.  The Equity Facility
and the Class L Common Stock Purchase Agreement also restrict the sources of
capital available to the Company without the consent of the Institutional
Investors.  Except for the Equity Facility, the Company has no committed
external sources of capital.  Except with the consent of the director elected by
the Institutional Investors, the Company may not obtain additional financing
through external borrowings or the issuance of additional securities.  The
Institutional Investors also have received warrants to purchase a substantial
number of shares of Class A Common Stock.  These warrants, as amended in
connection with the Class L Common Stock financing, are exercisable at $.50 or
$1.25 per share, which exercise price may be substantially below the fair market
value of the Class A Common Stock at the time of exercise. In addition, the
Class L Common Stock is convertible into Class A Common Stock on the basis of a
formula, which would, as of July 15, 1998, result in conversion at least equal
to two shares of Class A Common Stock for each share of Class L Common Stock.
Any additional equity issuance could have an adverse effect on the value of the
shares of Class A Common Stock held by the then existing stockholders.

     Risks from Put and Other Rights Held by Certain Stockholders

     Each physician and management stockholder who is a party to the
Stockholders Agreement, dated as of August 30, 1996 (the "Stockholder's
Agreement"), has the right to require PQC to purchase the Common Stock owned by
such stockholder at fair market value upon their death or disability.  Pursuant
to the Stockholders Agreement, fair market value, as determined by the Board of
Directors, reflects and arm's length private sale.  In determining the fair
market value, the Board is to consider recent arm's length sales by the Company
and the stockholders, as well as other factors 

                                       20
<PAGE>
 
considered relevant. While the Stockholders Agreement does not limit the Board's
discretion, such other factors may include changes, since the last arm's length
sale, in the Company's financial conditions or prospects and any valuation
studies conducted by management of the Company or independent valuation experts.
Under the Stockholder Agreement, the Board is not permitted to discount the fair
market value of the Common Stock to reflect the fact that the Common Stock being
sold constitutes less than a majority of the outstanding shares. The put option
is only triggered by death or disability (and in a few instances retirement) and
will terminate upon the completion of a public offering which results in at
least $50.0 million in gross revenues to the Company and which meets certain
other criteria. The physicians affiliated with Clinical Associates have the
right to require the Company to repurchase their Common Stock at $3.00 per share
(in the form of a five-year, non-interest bearing note) in the event that the
Company has not completed an underwritten initial public offering before
December 1, 2001. The exercise of such right could have a material adverse
effect upon the Company. To the extent that the "put options" are likely to be
exercised, the Company expects to fund such repurchases from working capital,
the Equity Facility or other sources.

     Amortization of Intangible Assets

     In connection with its affiliations, the Company has recorded, and is
expected to continue to record, a significant amount of intangible assets as the
consideration paid to physicians exceeds the value of the practice assets. At
December 31, 1997, the Company had intangible assets of approximately $57.3
million reflected on its balance sheet as long-term affiliation agreements. The
Company amortizes such intangible assets over a 25-year period. See the Notes to
the Company's Financial Statements. The amortization of these intangible assets,
while not affecting the Company's cash flow, has an ongoing negative impact upon
the Company's earnings. Amortization of intangible assets contributed
approximately $1,292,000 to the Company's net loss of $5.7 million during the
year ended December 31, 1997 and $957,000 to the Company's loss of $4.6 million
during the six months ended June 30, 1998.

                                       21
<PAGE>
 
                                    PART II
                               OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

     On June 12, 1997, Jay N. Greenberg, a founder and former executive vice
president of the Company, filed a complaint against the Company in Massachusetts
state court seeking damages of $1.4 million and a declaratory judgment that
843,750 of the shares registered in Mr. Greenberg's name (out of 1,012,500
shares of Class A Common Stock originally granted to Mr. Greenberg) have
"vested" under this Employment Agreement.  The Company and Mr. Greenberg entered
into a Settlement Agreement in April 1998 pursuant to which the Company
confirmed Mr. Greenberg granted the Company an option to purchase all of such
shares.  The purchase price is $1.3 million and increases (commencing effective
October 1997) by $25,000 each three-month period.  The option expires on the
earlier of (i) October 14, 1999, (ii) upon a public offering of the capital
stock of the Company, or (iii) a change in control.  No damages were awarded and
mutual releases were granted.

                                       22
<PAGE>
 
ITEM 5.  OTHER INFORMATION

     To address its liquidity needs, the Company issued  2,461,538  shares of
Class L Common Stock to the investors in Class C Common Stock.  The purchase
price was $3.25 for each share of Class L Common Stock for an aggregate purchase
price of approximately $8,000,000. The terms of this round of financing are less
favorable to the Company than the Class C Common Stock financing in June 1997
reflecting the Company's current operating deficits and a general downward
valuation of physician practice management companies ("PPMs") in the
marketplace.

     No distribution, whether as a dividend, upon liquidation or otherwise, may
be made on any other class of Common Stock until the holders of the Class L
Common Stock have received dividends or distributions equal to the purchase
price of the Class L Common Stock plus an amount sufficient to generate an
internal rate of return thereon equal to 12% per annum (compounded).  The
Restated Certificate also limits any distributions on capital stock that
constituted a taxable distribution.

     The Class L Common Stock is a new class of Common Stock. The Class L Common
Stock automatically converts into Class A Common Stock upon the occurrence of
(i) a Qualified Public Offering (as defined in the Restated Certificate), (ii)
upon a merger, consolidation, liquidation or winding up of the Company or a sale
or other transfer of all or substantially all of the Company's assets, or (iii)
if less than 30% of the shares of Class L Common Stock issued in the transaction
remain outstanding, subject, in each case, to approval of two thirds of the
Class B and C Directors, voting as a single class. The Class L Common Stock is
also convertible a any time at the option of the holder.

     The number of shares of Class A Common Stock into which the Class L Common
Stock is convertible is determined pursuant to the formula set forth below.
Based on that formula and assuming no Class L Adjustment, each share of Class L
Common Stock is initially convertible into two shares of Class A Common Stock.
If the full Class L Adjustment is assumed, the Class L Common Stock is initially
convertible into approximately 5 shares of Class A Common Stock. The Class L
Adjustment is made if the Company's Common Stock does not achieve certain
valuations upon a Public Offering or Realization Event. 

     The Class L Conversion Factor (see the Restated Certificate for the meaning
of capitalized terms) is determined as follows:

[Class L Conversion Constant] + [the quotient obtained by dividing the Remaining
Class L Minimum Payment Amount by the Applicable Price per share] + [the Class L
Adjustment].

The Class L Conversion Constant is initially 1 and is adjusted in the event of a
stock split or similar event.

                                       23
<PAGE>
 
     The Remaining Class L Minimum Amount is equal to the Investors' initial
investment in the Class L Common Stock plus an amount sufficient to generate an
internal rate of return equal to 12% per annum (Compounded).

     Applicable Price per Share means, (a) upon the Public Offering, the Public
Offering Price, (b) at the time of any Realization Event, a fraction, the
numerator of which is the excess, if any, of (i) the aggregate value of all
Common Stock of the Company over (ii) the aggregate Remaining Class L
Minimum Payment Amount with respect to all shares of Class L Common Stock
outstanding and the denominator of which is the aggregate number of shares of
Common Stock, (c) at any other time after the Public Offering Time, the Public
Trading Price, and (d) in connection with any optional conversion of Class L
Common Stock, the Public Trading Price, if at such time the Class A Common Stock
is listed on a national securities exchange or traded in the Nasdaq Stock
Market, and, if the Class A Common Stock is not so listed or traded, the greater
of $3.25 per share and the fair market value of each share of Class A Common
Stock as determined in good faith by the Board of Directors.

     The Class L Adjustment is an adjustment to the Class L Conversion Factor
upon the earlier to occur (but only upon the occurrence) of (x) a Realization
Event (i.e., a merger, liquidation or winding up of the Company or a sale of all
or substantially all of its assets) and (y) a public offering. In either such
event, the Class L Conversion Factor is increased by a number equal to, (i) if
the Public Offering Price or the amount distributed to the holders of Class L
Common Stock in such liquidation (together with all prior distributions with
respect to such Class L Common Stock) (the "Class L Value") is equal to or more
than $6.75 per share, 0, (ii) if the Class L Value is equal to or less than
$3.50 per share, 3.12, and (iii) if the Class L Value is less than $6.75 per
share and equal to or greater than $3.50 per share, 0.0096 for each $0.01 that
the Class L Value is less than $6.75.

     Certain provisions of the outstanding Class B Common Stock and Class B and
C Common Stock Warrants  were amended in connection with the Class L financing.
The rights of the Class B Common Stock were amended so that the Class B Common
Stock ranks in parity with the Class C Common Stock in the event of liquidation.
Consequently, in the event of a liquidation, the assets of the Company would
first be used to pay the holders of Class L Common Stock $3.25 per share plus a
cumulative 12% return per annum; the remaining assets, if any, would be used to
pay the holders of Class C Common Stock and Class B Common Stock the greater of
$3.25 and $2.50, respectively, per share and the amount that those shares would
receive if converted to Class A Common Stock.  If any assets remain after those
distributions, they would be available for distribution to the holders of Class
A Common Stock and Class L Common Stock.

     The outstanding warrants to purchase Class C and B Common Stock were also
repriced. The exercise price on the Class B Common Stock Warrants was reduced
from $2.50 to $0.50. The exercise price on the Class C Common Stock Warrants was
reduced from $3.25 to $1.25.

                                       24
<PAGE>
 
     The By-laws of the Company provide that the Board of Directors consists of
13 members. Currently there is one vacancy on the Board and twelve Board
members.  Of those members, affiliates of Bain Capital have the right to appoint
two members and ABS Capital Partners II had the right to appoint one member.
The composition of the Board was amended to provide that ABS Capital Partners II
has the right to appoint two members to the Board of Directors.  The members of
the Board appointed by affiliates of Bain Capital and ABS Capital Partners II
have certain superior voting rights.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

  (A) EXHIBITS

      Exhibit Index
     3.1  Amended and Restated Articles of Incorporation
     3.2  Amended and Restated By-Laws
     10.1 Class L Common Stock Purchase Agreement
     10.2 Employment Agreement between the Company and Dana Frank, M.D.
     10.3 Employment Agreement between the Company and Alphonse Calvanese , M.D.
     10.4 Employment Agreement between the Company and Eugene M. Bullis
     10.5 Amendment No. 3 to Stockholders Agreement 
     27   Financial Data Schedule

  (B)    REPORTS ON FORM 8-K:  None

                                       25
<PAGE>
 
                                   SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.


Date: August 14, 1998           PHYSICIANS QUALITY CARE, INC.
 


                                          By: /s/ Eugene M. Bullis
                                             ---------------------------------
                                             Eugene M. Bullis
                                             Chief Financial Officer
                                             and Senior Vice President

                                       26
<PAGE>
 
                                 EXHIBIT INDEX

Exhibits
--------

3.1       Amended and Restated Articles of Incorporation
3.2       Amended and Restated By-Laws
10.1      Class L Common Stock Purchase Agreement
10.2      Employment Agreement between the Company and Dana Frank, M.D.
10.3      Employment Agreement between the Company and Alphonse Calvanese, M.D.
10.4      Employment Agreement between the Company and Eugene M. Bullis
10.5      Amendment No. 3 to Stockholders Agreement
27        Financial Data Schedule
<PAGE>
 
                                                   Physicians Quality Care, Inc.
                                                   950 Winter Street
                                                   Waltham, MA 02154
                                                   Phone:  781-890-5560
                                                   Fax: 781-890-1796

       PHYSICIANS QUALITY CARE, INC.




       CORPORATE OVERVIEW



 .     .     .     .     .     .     .     .     .     .     .     .     .     .




                            Prepared September, 1998
<PAGE>
 
       Physicians Quality Care, Inc.

       Building Sustainable Partnerships with Physicians

       I.  INTRODUCTION

       Physicians Quality Care, Inc. is a second-generation physician practice
       management company with a uniquely constructed organization and structure
       that blends the talents of its business and physician leaders.   Since
       its formation in 1995, PQC has followed a focused business development
       strategy that has resulted in relationships with more than 500 physicians
       in three markets.  The Company anticipates achieving profitable
       operations by the end of 1999. The current annualized revenue level is
       approximately $90M.  The Company's objective is to establish networks of
       primary and specialty care physicians and related diagnostic and
       therapeutic support services which can provide comprehensive healthcare
       services in targeted geographic areas.

       PQC's strategy includes the following central elements:

          .  create a truly PHYSICIAN-DRIVEN ORGANIZATION in which practicing 
             physicians are active participants in a highly collaborative 
             operating environment

          .  develop CRITICAL MASS AND MARKET DOMINANT GEOGRAPHIC PENETRATION 
             in selected markets, by affiliating with large numbers of 
             qualified physicians, who will in turn attract their colleagues 
             due to strong professional AFFINITY RELATIONSHIPS

          .  establish a sustainable business model which FULLY ALIGNS THE 
             INCENTIVES of the Company and its affiliated physicians in terms of
             improved practice productivity and profitability, as well as the
             potential long term equity appreciation of PQC stock

          .  build MULTI-SPECIALTY PHYSICIAN GROUPS that recognize primary care 
             physicians as the coordinator of care for most patients and
             specialists as key resources for the treatment of complex medical
             problems and who frequently serve in a primary care capacity for
             patients with certain chronic conditions

          .  emphasize SAME-STORE GROWTH ON A PHYSICIAN-BY-PHYSICIAN BASIS by 
             maximizing the value of each patient encounter through improvement
             in practice productivity, appropriate utilization of ancillary
             services and intragroup referrals

          .  develop and manage NEW PRODUCTS AND SERVICES, such as clinical 
             research site management, that leverage the geographic density,
             multispecialty 

                                       1
<PAGE>
 
             composition, and fully aligned incentive compensation program
             present within PQC affiliated physician groups

          .  extend care management competencies in order to accept and succeed 
             in the administration of CAPITATED RISK contracts for AFFILIATED
             PHYSICIAN GROUPS AND BROADER PHYSICIAN NETWORKS

       The Company believes that this strategy will enable it to generate
       increased demand for the services and capabilities of its affiliated
       physicians, treat patients in lower cost settings and negotiate favorable
       managed care contracts.  The Company intends to achieve growth through
       the recruitment of additional physicians, the expansion of managed care
       relationships, the development of ancillary services, and the
       optimization of physician-to-physician referrals.  These efforts will
       result in the formation of a truly integrated healthcare delivery system.

       The core of PQC's integrated healthcare delivery system strategy is its
       affiliation with groups of physicians who enter into long-term management
       agreements with the Company.  The Company assumes responsibility for non-
       medical aspects of an affiliated physician's practice and focuses its
       efforts on increasing revenues and improving operating margins,
       implementing management information systems and negotiating managed care
       contracts.  The physicians remain responsible for, among other things,
       the medical, professional and ethical aspects of their practices.  By
       affiliating with the Company, physicians have expanded access to capital,
       continue to participate in the profitability of their individual
       practices and, through stock ownership, share a financial interest in the
       overall performance of the Company.

       PQC has demonstrated the ability to grow both through the acquisition of
       physician practices and the successful implementation of regional profit
       initiatives, which leverage the power of its affiliated physicians in
       each local market.

       PQC HAS STRONG EQUITY PARTNERS, all of whom possess significant
       healthcare experience.  Bain Capital made its initial investment of $15M
       in August of 1996.  In June, 1997 Bain Capital was joined by ABS Capital
       Partners (an affiliate of BT Alex. Brown) and GS Capital (an affiliate of
       Goldman Sachs).  Terms for an additional $8M were recently finalized.
       The total capital invested by these three organizations is $43M.  In
       addition, the company has raised an additional $10M  from other
       investors.  Debt financing is also currently being evaluated as the
       Company matures and receivables increase in size.

       The DEVELOPMENT PIPELINE is large and active and is also consistent with
       the Company's focused strategy, in that the development activities are
       directed exclusively at growth in existing or contiguous markets.
       Recognizing that approximately 78% of practicing physicians are members
       of groups of fewer than 10, PQC has established unique expertise in the
       aggregation of small independent practices into cohesive, integrated
       medical groups.  This capability gives the Company a competitive
       advantage in promoting rapid add-on affiliation transactions.

       This year, PQC is TRANSITIONING FROM A START-UP ORGANIZATION TO AN
       ESTABLISHED COMPANY able to provide sustainable operating performance for
       its shareholders and its physician partners.

                                       2
<PAGE>
 
       II.  INDUSTRY DYNAMICS

       BUSINESS PROPOSITION

       The rapid changes within the health care industry are bringing greater
       emphasis to the central role played by physicians in the delivery of
       healthcare services.  Traditional clinical and financial relationships
       are changing rapidly.  Physicians are presented with incentives to
       utilize healthcare services more efficiently.  At the same time, patients
       and payors are setting higher standards for the quality of care provided.
       Because physicians, through their clinical decision-making, control or
       influence more than 80% of all health care expenditures, PQC believes
       that physicians are in the best position to create and sustain the
       changes demanded by the health care marketplace and thus create real and
       sustainable value.

       The healthcare industry continues to evolve rapidly.  Hospitals, payors
       and physician organizations are working separately and collaboratively to
       improve the quality of healthcare, while lowering overall costs.  The
       relationships take on the particular character of each specific market.
       "All Healthcare is Local" is an accurate way to describe the observed
       variations, driven by regulatory, professional and demographic trends.
       PQC believes it  is critical to build broadly and deeply in a few
       attractive markets, to achieve market leverage.

       Physician Practice Management Companies (PPMC's) come in many forms and
       are evolving to adapt to the dynamic environment.  PQC believes that,
       notwithstanding the diversity within the PPMC sector, success will come
       only to those organizations with the following characteristics:

          .  Truly Physician-Driven

          .  High Quality Physicians

          .  Medical Cost Management Skills

          .  Strong Regional Management (e.g. Operations and Contracting)

          .  Flexible Portfolio of Relationships (e.g. Owned, Multi-Specialty, 
             Single-Specialty, and Network)

       MAJOR TRENDS DEFINING RELATIONSHIPS WITH PHYSICIANS

       The growing significance of PPMC's in the consolidation of physicians
       parallels the inability of hospitals and payors to effectively control
       the physician - patient relationship.

       Hospitals have chosen two major strategies.  Through the formation of
       Physician-Hospital Organizations (PHO's), hospitals have attempted to
       create regionally focused contracting networks.  The performance of PHO's
       has been mixed, both in terms of their ability to secure contracts and in
       their management.  Indeed, for many physicians PHO = pHO, an organization
       in which the physicians play secondary roles in governance and
       operations.  Hospital-affiliated group practices have been formed as
       vehicles for the acquisition and management of physician practices.  The
       premise is that ownership will secure long term referral sources for the
       sponsoring organization.  However, the financial and operational
       performance of these organizations has been disappointing.  Nationally,
       only one in six of such group practices are reported to breakeven.  The
       average annual operating loss has been reported to be between $70 and
       $80K per physician.  Many physicians are unhappy with the 

                                       3
<PAGE>
 
       institutional character of the management support. Physician compensation
       arrangements frequently remove the incentives present in traditional,
       private practice productivity-based compensation.

       Many large national and regional payors manage "captive" physician
       organizations.  These staff model groups have frequently experienced
       operational and productivity performance deficits similar to hospital-
       affiliated groups.  This can be attributed to the institutional nature of
       the relationship between the physicians and the sponsoring organization.
       Moreover, the reliance on a single source for all revenue has resulted in
       a high turnover of enrollees, when a subscriber's health plan coverage
       changes to another payor.  This disruption of the physician-patient
       relationship is frustrating to clinicians and patients alike.  Finally,
       the public is increasingly demanding expanded choice.  Such market forces
       are contrary to tightly controlled, mandated provider networks that the
       payors have operated.  As a result, a large number of payor-owned groups
       have been sold or restructured.

       The failure of physician groups owned by hospitals and payors creates
       substantial opportunities for well-managed physician organizations.  This
       is true in two significant ways.  First, there is a business opportunity
       to improve the financial and clinical performance of these owned
       practices.  Second, the business opportunity can be accomplished in a
       manner, which promotes long term collaboration with the hospital and/or
       payor.  When properly implemented, partnerships involving well-managed
       physician groups with hospitals and/or payors will support each party's
       strategic objectives.

       A number of initially well-respected PPMC's have lost credibility due to
       earnings disappointments.  This has been attributable to the PPMC's
       reliance on the ability to arbitrage the revenues generated from practice
       acquisitions.  Such emphasis has often resulted in a lack of attention to
       building real value on behalf of the affiliated physician groups.  The
       decline in shareholder value of publicly traded PPMC's has been well
       documented by the financial media.  In addition, the dissatisfaction of
       some physician groups with their PPMC business partners has been widely
       described.

       III.  PQC BUSINESS MODEL

       PQC affiliates with physicians:

          .  who are committed to improving the healthcare delivery process 
             while ensuring cost-effective care;

          .  whose reputation with their patients, peers and payors is that of 
             a thought leader and excellent clinician;

          .  who are intent on enhancing and expanding their practices;

          .  who are primary and specialty care physicians with demonstrated 
             success at meeting the needs of patients and payors according to
             the dynamics of their particular environments; and

          .  who are committed to sharing / creating best-demonstrated 
             practices with their colleagues.

                                       4
<PAGE>
 
       Also, PQC affiliated physicians are high achievers and independent-
       minded.  They are seeking to maintain significant autonomy, but are
       willing to exchange some of that autonomy in order to successfully
       affiliate with colleagues to create greater market leverage.

       PQC makes the following value proposition to its affiliates:

          .  Physician-Driven

          .  Aggregation / Market Power

             [ ] Multi-specialty Group Equity Affiliation Model

             [ ] Network Management

          .  Contracting

          .  Controlling Practice Overhead Costs

          .  Ancillaries

          .  Systems / Operations

          .  Protocol Development

       Upon affiliation, PQC enters into a long-term administrative services
       agreement with group practices.  Under the agreement, PQC assumes
       management of all business aspects of the practice and provides
       physicians with management expertise, sophisticated information systems
       and negotiation and comprehensive management of managed care contracts.
       As a true partner, PQC relies on the medical knowledge, expertise and
       skills of its physician partners to improve outcomes, utilization of
       resources and apply best practice protocols to the patient base they
       serve.

       Over the longer term, PQC intends to expand its relationships and
       services to cover a broad portion of the continuum of care required to
       treat patients, all centered around this physician base.  Acquisitions,
       joint ventures, strategic partnerships and affiliations with traditional
       healthcare providers such as hospitals, skilled nursing and long-term
       care facilities will be employed to build an integrated system.  The
       creation of local care networks will enable PQC to maintain high-quality
       care, promote efficient utilization of medical services and control
       costs, thereby positioning it to contract favorably with payors on a
       capitated basis.

       Under the PQC model, physicians are business partners, not salaried
       employees.  The mechanism by which this relationship is formalized
       includes the execution, by each physician, of a contractual agreement
       between the physician and the medical group.  The agreement describes the
       basis for physician compensation.  Unlike fixed salary arrangements,
       physician compensation for PQC-affiliated physicians is dependent upon
       productivity.  The compensation plan includes a profit-sharing mechanism,
       which recognizes financial gains generated by individual physicians and
       by the group as a whole.  The objective is to diversify and grow total
       physician compensation.  For many physicians, the alternative to a
       relationship with PQC will likely be a net reduction in their total
       compensation.  The diagram on the following page graphically describes
       the basic elements of the equity affiliation model from the perspective
       of a participating physician.

                                       5
<PAGE>
 
       From the Company's perspective, successful partnerships with physicians -
       that provide genuine value and return - will be achieved by execution of
       PQC's business model.  PQC is confident that focused attention to the
       elements of its model will yield substantial returns to its shareholders.
       This includes a commitment to closing subsequent acquisitions within the
       defined deal parameters.  Also, it includes a commitment to grow the
       company in existing and contiguous markets.  Finally - and most
       importantly, it includes a resolute commitment to creating growth for
       each affiliated physician.  The following table provides additional
       detail about the characteristics of PQC's business model.

                              PQC Ecomomic Model
                 Practice Affiliation:  The Economic Equation

<TABLE>
<CAPTION>
                                                   Physician        Additional Physician      
                                                   Compensation     Compensation
-------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>                <C>              <C>                       <C>
                                Total Comp:            200*
                                Previous Year
-------------------------------------------------------------------------------------------------------------------------------
Reduction of Administrative     Baseline Comp:         160*                [PQC]               .  PQC Stock
Burden/Access to Capital        Year 1                                      230*               .  One Time Cash
                                                                                                  Payment to Physicians
-------------------------------------------------------------------------------------------------------------------------------
Reduction of Administrative     Total Comp:            160*                 230*               .  Risk  Pool
Burden/Access to Capital        Year 1                                                         .  Referrals
                                                                                               .  New M.D.'s
                                                                                               .  Ancillaries
                                                                                               .  Efficiencies
-------------------------------------------------------------------------------------------------------------------------------
Reduction of                    Total Comp:            160*                 250*               .  Appreciation Potential
Administrative                  Year 2                                                         .  Particularly Attractive
Burden/Access to Capital                                                                          For Pre-Public Holders.
-------------------------------------------------------------------------------------------------------------------------------
Reduction of Administrative     Total Comp:            160*                 270*
Burden/Access to Capital        Year 3
-------------------------------------------------------------------------------------------------------------------------------
                                Year 3                  ?                    ?
                                Alternative
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

  *Number is an approximation based on the bar graph characterization in the PQC
   Economic Model.


                   CHARACTERISTICS OF THE PQC BUSINESS MODEL
--------------------------------------------------------------------------------
Geography:                  [ ]  Sustained Regional Focus for Optimal Market
                                 Leverage

                            [ ]  Currently in Three Markets:

                                 [ ] Western Massachusetts

                                 [ ] Mid-Atlantic

                                 [ ] Atlanta

                            [ ]  Same and Contiguous Market Growth

                            [ ]  Maintain East Coast Orientation
--------------------------------------------------------------------------------
Physician Types:            [ ]  Multi-Specialty (60% Primary Care)

                            [ ]  Broad Clinical Capabilities

                            [ ]  High Quality

                            [ ]  Affinity Relationships Support Additional
                                 Affiliations
--------------------------------------------------------------------------------
Types of Affiliations:      [ ]  Owned (80% Stock / 20% Cash On Average)

                            [ ]  Network Management (Lower Capital Requirement)

                            [ ]  Need Multiple Products to Offer Physicians at
                                 Different Stages of Career and Thinking
--------------------------------------------------------------------------------
Valuation Methodology:      [ ]  6 - 8X EBITDA

                            [ ]  30% IRR Investment Target

                            [ ]  Anticipated Reduction with Scale in Market
--------------------------------------------------------------------------------
PQC Revenue Structure:      [ ]  Owned: 15% of Historic Compensation + Profit
                                 Sharing

                            [ ]  Network: 10% Management Fee + Profit Sharing

                                       6
<PAGE>
 
       IV.  PPMC COMPETITOR ANALYSIS

       In its three markets, PQC sees competition from four PPMC's.  Frequently,
       local hospital systems are also perceived to be competitors.  The degree
       of competition varies significantly.  Indeed, in some cases, the
       alternative to a PQC relationship is for the physicians to remain
       independent.  The following table profiles PQC's key competitors:

<TABLE>
<CAPTION>
         TYPE                       HISTORICAL                                     FUTURE
----------------------------------------------------------------------------------------------------------------
<S>                      <C>                                <C>
 .  PPMC (PhyCor)          .  Own Large Clinics                   .  Equity Model Where Available
                          .  Some Networks                       .  Reduced Acquisition Cost
                          .  Intra-referrals, Ancillaries        .  Networks
                                                                 .  Hospital Joint Ventures (Equity and Network)
                                                                 .  More Capitation
                                                                 .  Baltimore, Atlanta & CT Competitor to PQC
----------------------------------------------------------------------------------------------------------------
 .  PPMC (MedPartners)     .  Own Staff Model                     .  More of the same
                          .  Large Networks                      .  Focus on Same Practice Value / Profitability
                          .  Capitation                          .  Massachusetts Competitor to PQC
----------------------------------------------------------------------------------------------------------------
 .  PPMC (ProMedco)        .  Large clinics in secondary          .  Massachusetts and Maryland competitor to PQC
                             markets                             .  Develop in immature managed care markets
                          .  Acquired network management
                             capability
----------------------------------------------------------------------------------------------------------------
 .  HOSPITAL               .  Virtually every hospital has        .  Competitor to PQC in all markets
                             some ownership interest in a        .  Selling practices in all markets...potential
                             physician group                        partner with PQC for both equity and network
                          .  Unprofitable and unproductive          relationships
                             relationships
----------------------------------------------------------------------------------------------------------------
 .  PAYOR                  .  Owned practices exclusively         .  Typically, practices will be sold or
                             serve needs of covered population      restructured to accept other payors
                                                                 .  Business partner with PQC in all markets
----------------------------------------------------------------------------------------------------------------
 .  INDEPENDENT            .  Determined physicians strive        .  Competitor to and partner with PQC in all 
   PHYSICIAN GROUP           to aggregate in manner which           markets
                             protects independence and           .  PQC's unique business expertise at combining     
                             autonomy                               small, independent practice presents sizable     
                          .  Shortage of capital,                   potential for creating add-on equity and 
                             management expertise and               network relationships, as well as entree 
                             physician time limit                   into new markets 
                             potential of most groups
----------------------------------------------------------------------------------------------------------------
 .  DO NOTHING             .  Physicians fail to see value        .  Potential participant in network 
                             in aggregation, prefer to              relationships, perhaps as a precursor to an 
                             remain independent                     equity relationship in the future
----------------------------------------------------------------------------------------------------------------
</TABLE>

                                       7
<PAGE>
 
       V.  PQC'S CURRENT PHYSICIAN PARTNERSHIPS

       WESTERN MASSACHUSETTS

       Medical Care Partners, PC is the name of the multi-specialty group
       practice affiliated with Physicians Quality Care in Western
       Massachusetts.  This group, the first to affiliate with PQC, consists of
       45 physicians practicing at 11 different locations in the Springfield, MA
       and Northern Connecticut area who serve approximately 50,000 patients.
       The group has successfully managed a full-risk Medicare contract for two
       years (2,500 lives).  PQC developed a group-owned laboratory, which is
       expected to generate more than $2M in revenue in 1998. Radiology,
       ultrasound and mammography services have been introduced.

       MID-ATLANTIC

       PQC's Mid-Atlantic relationship is with Flagship Health, PA.  This multi-
       specialty group practice is comprised of approximately 160 physicians and
       other practitioners from the Baltimore and Annapolis, MD area who serve
       their patients from more than 35 different clinical sites.  Flagship
       Health was formed by the combination of 17 separate practices.  The
       group currently manages the care of about 180,000 patients, with over
       50,000 on a capitated basis.  As is the case with Medical Care Partners,
       PQC has introduced clinical laboratory and diagnostic imaging services to
       the group.  Currently, Flagship Health physicians are participating in 11
       different clinical research trials, which are expected to generate
       approximately $.5M in additional revenue in 1998.

       ATLANTA
       Physicians Quality Care is a 50% shareholder of TLC Management Company,
       Inc. (TLC).  This network management company has an exclusive management
       contract with Total Life Care, PC, a 325-physician Independent Practice
       Association, whose members serve approximately 325,000 people. TLC
       currently manages approximately 9,000 covered lives.  This number is
       expected to rise to 22,000 by year-end 1998.  Effective July 1, 1998, TLC
       will participate in capitated relationships for commercial and Medicare
       populations with CIGNA, Kaiser and a number of smaller regional payors.
       Due to the structure of this relationship, PQC reports TLC's performance
       as investment income.

       VI.  DEVELOPMENT STATUS

       Consistent with the its focused, regional  strategy, PQC has a very
       active pipeline of development opportunities.  Both equity and network
       management relationships are well represented. Some of the key
       development opportunities are:

                                       8
<PAGE>
 
          .  An established, 62-physician primary care group in a contiguous 
             market;

          .  An established 45-physician multi-specialty group in a contiguous 
             market;

          .  A network management relationship with a 250-member physician 
             organization in a contiguous market and related equity affiliations
             with 25 physicians

          .  A 20-physician hospital-affiliated group practice in an existing 
             market

       These opportunities are at various stages of negotiation.  There is no
       assurance than these or any other prospective transaction will be
       successfully completed.


       In July, PQC announced the signing of a major agreement with Johns
       Hopkins Medicine that provides for collaboration on contracting and
       physician development issues within the Mid-Atlantic Region. The parties
       have also agreed to explore the feasibility of creating  a joint venture
       entity that will exclusively support medical management efforts for the
       two organizations.  The Company believes  that the relationship with
       Johns Hopkins validates the tenets of the PQC model.

       VII.  SENIOR MANAGEMENT AND KEY EMPLOYEES

       PQC's management team includes professionals who have successfully
       organized, operated and financed private and publicly held healthcare
       growth companies during a period of broad market changes in the
       healthcare industry.

       JERILYN P. ASHER is a founder of the Company and serves as both Chief
       ----------------                                                     
       Executive Officer and Chairman of the Board of Directors. She has over
       fifteen years of experience as a healthcare executive in both the public
       and private sectors, with broad-based responsibilities for all aspects of
       constituency building with physicians and payors, business development,
       finance, operations, sales, marketing and federal and state healthcare
       regulation.  Ms. Asher served as President and a member of the Board of
       Directors of Abbey Healthcare Group Incorporated, which, since its merger
       with Homedco (now Apria Healthcare), is the nation's largest home
       healthcare provider with in excess of $1 billion in net revenues.

       Ms. Asher was a founder and served as President and Chief Executive
       Officer and Chairwoman of the Board of Directors from 1988 to 1995 and
       Executive Vice-President from 1985 to 1988 of Protocare, Inc., a leading
       regional provider of home healthcare products and services.  Protocare,
       Inc. provided a broad range of infusion and respiratory therapies,
       nursing care and home medical equipment through seven branches and
       fourteen satellite facilities located in twelve states along the East
       Coast through a network of 4,000 physicians.  Protocare had revenues of
       $50 million and operating income of $2.7 million and its significant
       industry indicators, such as days sales outstanding and inventory
       turnover were among the most favorable in the industry.

       From 1978 to 1984, Ms. Asher served as Executive Director of United
       Cerebral Palsy of Western Massachusetts, Inc., a multi-service agency
       providing direct care services to persons of all ages with multiple
       disabilities.  While at United Cerebral Palsy, she pioneered
       comprehensive methods of delivering healthcare services to people with
       disabilities under the Medicare/Medicaid programs, which became a
       delivery system model replicated 

                                       9
<PAGE>
 
       throughout the country. Ms. Asher received numerous awards for this
       pioneering work in capitated care for dual-eligible populations. Ms.
       Asher also designed and implemented the first community-based, de-
       institutional model of medical care management for high-risk, non-verbal,
       ventilator-dependent quadriplegics in the country. Ms. Asher attended
       Smith College and received a Master of Education Degree from the Graduate
       School of Education at Harvard University.

       EUGENE M. BULLIS has served as Chief Financial Officer since March 1998.
       ----------------                                                         
       He is responsible for all financial and information system functions for
       the Company.   Mr. Bullis joined PQC after serving as an independent
       business consultant and interim business executive with a number of
       technology companies, including Computervision, NYNEX and Eastman Kodak.
       From 1979 through 1989, he served as a senior executive at Wang
       Laboratories, the final two years as Chief Financial Officer and
       Treasurer. Prior to joining Wang Laboratories, Mr. Bullis was a partner
       in the public accounting firm, Ernst and Young.  He holds a Bachelor of
       Arts Degree in Business Administration from Colby College and is a
       Certified Public Accountant.

       DANA FRANK, M.D. is President and a member of the Board of Directors of
       ----------------                                                       
       the Company.  He also serves as President of the Mid-Atlantic Region.  He
       has been in the private practice of medicine since 1981.  Formerly, Dr.
       Frank was Chairman of the Board of The Physicians Group, Johns Hopkins at
       Green Spring Station in Lutherville, Maryland. He has also been an
       Assistant Professor, Consulting Internist and Headache Specialist at The
       Johns Hopkins School of Medicine since 1987, and is on the Medical Board
       of Johns Hopkins Hospital.  He received his Bachelor of Arts Degree from
       Brown University and his M.D. from George Washington University.  He
       completed his internship and residency at Johns Hopkins Hospital.

       DEBORAH I. REDD is Chief Operating Officer for the Mid-Atlantic Region.
       ---------------                                                         
       She joined the Company in March 1998.  Previously, Ms. Redd served as
       President for three Health Maintenance Organizations owned by Coastal
       Physicians Group.  From 1991 to 1995, she was Vice-President for Network
       Management for Blue Cross/Blue Shield of Maryland, as well as President
       of Potomac Physicians, a primary care physician group which serves BCBSMD
       patients.  From 1977 to 1990, Ms. Redd served in a number of executive
       capacities for Chesapeake Physicians, a multi-specialty physician
       professional association affiliated with the Johns Hopkins School of
       Medicine, including Associate Executive Director.  Ms. Redd holds a
       Bachelor of Science Degree from the University of Cincinnati.

       AL CALVANESE, MD is Chief Medical Officer and a member of the Board of
       ----------------                                                      
       Directors of the Company.  He also serves as President of the New England
       Region.  He has been in the private practice of medicine since 1981.
       Formerly, Dr. Calvanese was President of Associated Community Physicians,
       a primary care physicians network in Springfield, MA.  He received his
       Bachelor of Science Degree from the University of Massachusetts and his
       MD from Tufts University.  He completed his internship and his residency
       at BayState Medical Center.

       MARK GOLBERG is Chief Operating Officer for the New England Region where
       ------------                                                            
       he is responsible for practice growth, operations, and quality.  Prior to
       joining PQC, he was COO of TravCorps Corporation, a healthcare temporary
       staffing company.  Prior to this Mr. Golberg was the Director of APM,
       Inc.'s Clinic Operations Practice where he led complete business and
       clinical operations restructurings of many nationally recognized academic
       medical centers, for-profit hospitals, and multi-specialty clinics.  From
       1985 to 1990, Mr. Golberg was a consultant at two major consulting firms,
       Bain and Company and Arthur D. Little, on engagements encompassing cost
       and competitive strategy, marketing, and 

                                       10
<PAGE>
 
       customer retention strategy for Fortune 100 companies, as well as major
       hospital, long-term care, and pharmaceutical/medical product companies.
       Prior to 1985, he was the co-founder and vice-president of the hospital
       chain HRCA/Republic Health Corporation. Mr. Golberg holds Master of
       Business Administration and a Bachelor of Arts Degree from the University
       of Chicago, where he received the Hearst Prize for excellence in studies.

       PAUL BODNAR, MD serves as Senior Vice-President for Managed Care and
       ---------------                                                     
       Medical Director and is also a member of the Board of Directors of the
       Company.  He also serves as Medical Director of the Mid-Atlantic Region.
       Prior to joining PQC, Dr. Bodnar served for ten years as the Medical
       Director of Clinical Associates, a 90-member multi-specialty group
       practice, of which he has been a practicing pediatrician since 1980.  Dr.
       Bodnar received his Bachelor of Arts Degree from Johns Hopkins University
       and his M.D. from Columbia University.  He completed his internship and
       residency at Johns Hopkins Hospital and Sinai Hospital in Baltimore.

       RICHARD MAFFEZZOLI, MD serves as Senior Vice-President for Development
       ----------------------                                                
       and Business Analysis and is also a member of the Board of Directors of
       the Company.  He also serves as Director of Development for the Mid-
       Atlantic Region.  Dr. Maffezzoli was founder and President of Clinical
       Associates, a 90-member multi-specialty group practice, which serves
       60,000 capitated and 200,000 fee-for-service patients.  Dr. Maffezzoli
       received his Bachelor of Arts and his M.D. from Degree from Johns Hopkins
       University.  He completed his internship and residency at Johns Hopkins
       Hospital

       HARRY DODYK serves as Vice-President for Managed Care for the New England
       -----------                                                              
       Region.  He is responsible for the development and implementation of the
       company's regional managed care strategy.   From 1988 to 1997, he worked
       for the Fallon Community Health Plan, a 190,000 member HMO in Central
       Massachusetts, with more than $400,000,000 in annual revenue.  He served
       as its Director of Regional Development and Director of Operations. From
       1987 to 1988, Mr. Dodyk served as the Chief Financial Officer of the
       Matthew Thornton Health Plan, an HMO in New Hampshire.  From 1975 to
       1987, Mr. Dodyk held a number of positions at Blue Cross Blue Shield of
       Massachusetts, including the position of Associate Executive Director at
       one of Blue Cross's IPA model HMOs.  Mr. Dodyk holds a Bachelor of Arts
       Degree in Economics and English from Brandeis University and a Master of
       Business Administration Degree, with a concentration in Health Care
       Management, from Boston University.

       MARK E. MAZAK serves as Vice-President for Strategy and Development.  He
       -------------                                                           
       is responsible for the development and implementation of corporate and
       subsidiary strategic, business and marketing planning. From 1981 to 1995
       he served as a senior executive at the Melrose-Wakefield Hospital
       Association, a $120M community healthcare system, in the capacities of
       Vice-President of Planning, Vice-President of Planning and Ancillary
       Services and finally as Vice-President of Administrative Services. From
       1978-1981, he worked for the Commonwealth of Massachusetts Department of
       Public Health Determination of Need Program as both Chief Planner and
       then Assistant Director.  During his tenure, Mr. Mazak performed
       feasibility analyses for $250M in healthcare projects and led policy-
       making efforts in the areas of managed care and mental health.  From 1976
       to 1978 he served as Assistant Director of the Medical Care Group, a
       Washington University affiliated health maintenance organization, in St.
       Louis, Missouri.  He holds a Bachelor of Science Degree in Biology from
       the Massachusetts Institute of Technology, and a Master of Science Degree
       in Health Policy and Management from Harvard University School of Public
       Health.

       CHARLES L. POPKIN serves as Vice-President for Development.  He is
       -----------------                                                 
       responsible for the assessment and development of business opportunities
       in new or existing markets and 

                                       11
<PAGE>
 
       integrating these initiatives into the Company's existing operations. He
       was formerly the President of Medical Claims Management, a company he
       founded in 1993, which provides business management of medical practices
       for physicians by joining the best management technologies with superior
       business systems and procedures. From 1990 to 1993, Mr. Popkin served as
       a Senior Consultant in the Management Consulting Service Group of Price
       Waterhouse where he conducted financial and strategic analysis for
       companies in a variety of industries. From 1986 to 1988, Mr. Popkin
       served as a Senior Accountant in the Audit Department of Deloitte &
       Touche. He is a Certified Public Accountant and holds a Bachelor of
       Science Degree from Bentley College in Accountancy and Management and a
       Master of Business Administration Degree from the Kellogg School,
       Northwestern University.






       VIII.  GOVERNANCE STRUCTURE OF AFFILIATION

       The PQC governance model is firmly built upon the importance of physician
       participation in the governance of the company. The relationship between
       the physician groups and PQC is illustrated in the accompanying diagram:


                                 SHAREHOLDERS
                              (Physicians Largest
                               Ownership Group)


                              BOARD OF DIRECTORS
                             (Physician Majority)

     OPERATING                        PQC                   NATIONAL MEDICAL
     COMMITTEE               (Physician President)           ADVISORY BOARD

          NEW ENGLAND            MID-ATLANTIC           ATLANTA
        (Physician-Led)        (Physician-Led)      (Physician-Led)





       PQC is a truly physician driven company:

        .  Physicians are the largest shareholder group

        .  Physicians hold the majority of Board seats

                                       12
<PAGE>
 
        .  Physicians hold key leadership positions
           (President, Chief Medical Officer, Senior Vice-Presidents)

        .  Physicians serve as President and CEO in each region



       IX.  PQC'S GOALS AND  OBJECTIVES FOR 1998

       PQC views 1998 as a critical year in the transition of the Company from a
       start-up organization into a fully functioning and profitable enterprise.
       The Company has implemented operating and development plans that it
       believes will result in achieving profitable operations by the end of
       1999. Critical to the attainment of these goals is PQC's ability to
       deliver on the "value proposition" to its physician partners.
       Development will continue to be focused on expanding relationships in
       existing or contiguous markets.  New equity transactions will only be
       conducted if they can be done within the Company's investment parameters.
       PQC will also continue to work on the development of its network
       management product.  The Company anticipates introducing this product
       into existing and contiguous markets.  During this year, PQC will
       continue to harness the aggregate power of the physicians by the
       continued development of group-operated ancillary services.  Also,
       increased intragroup referrals are anticipated as physicians become more
       educated regarding the clinical capabilities of their new physician
       partners.  Finally, the Company will continue to seek opportunities to
       assume risk under capitated managed care contracts, always recognizing
       the continued importance of bringing optimal value to all other payor
       contracting relationships.  Successful execution along these dimensions
       is realistic.  The Company is confident that a truly physician-driven
       organization can provide genuine and sustainable shareholder value and
       will enjoy market distinction from others in the PPM sector.

                                       13