<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                 ____________

                                   FORM 10-K

                       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 (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.
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                                     PART I

     The Business section and other parts of this Annual Report on Form 10-K
contain forward-looking statements that involve risks or uncertainties.  The
Company's actual results may differ significantly from the results discussed in
the forward-looking statements.  Factors that might cause such a difference
include, but are not limited to, those discussed in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors Affecting Future Operating Results."

ITEM 1. BUSINESS.

     Physicians Quality Care, Inc., a Delaware corporation ("PQC" or the
"Company"), was incorporated in March 1995, and provides practice management
services for multi-specialty medical practice groups. 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 has four central elements:  (i) developing economies of
scale in support services for physician practices (i.e., administrative, billing
and clerical staff) and managed care contracts and geographic penetration by
affiliating with large numbers of qualified physicians in targeted geographic
areas; (ii) assisting the affiliated practices in providing cost-effective
healthcare to special populations; (iii) building comprehensive local healthcare
networks by developing contractual or strategic relationships with providers of
ancillary services such as home healthcare and weight and health management; and
(iv) improving the financial performance of affiliated physician's practices by
seeking to maximize the value of each physician encounter. To date, the Company
has focused upon developing its presence in western Massachusetts, northern
Connecticut, Maryland and Atlanta. The Company believes that once the Company
has developed a large base of affiliated physicians its strategy will enable the
Company 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 and the development of contractual or strategic relationships with
providers of ancillary services.

     The core of PQC's proposed integrated healthcare delivery system 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 seeking
to increase revenues and improve 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 increased opportunity to access 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.
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Industry Overview
-----------------

     Traditionally, health insurance plans reimbursed providers on a fee-for-
service basis, a system that offered very little incentive for efficiency. In
recent years, the healthcare industry has undergone significant changes as both
the private and public sectors seek to slow spending growth. Since the early
1980s, much of the healthcare coverage in the U.S. has shifted to managed care
systems which offer cost savings in exchange for limiting the utilization of
services. Moreover, there has been a shift to prepaid insurance plans that offer
comprehensive healthcare services to enrollees and pay providers a fixed,
prepaid monthly premium. The most prevalent of these prepaid health insurance
alternatives is the health maintenance organization ("HMO"). To remain
competitive, HMOs and other similar payors seek to align themselves with the
most cost- and service-effective providers, generally channeling patient volume
to such providers.

     In the managed care environment, doctors must contract or affiliate with
leading insurers or healthcare networks in their practice area. The third-party
payors rely on primary care physicians to play a "gatekeeping" role and to make
important medical decisions for the patient. Many payors look to share the risk
of providing services through capitation arrangements which provide for fixed
payments for patient care over a specified period of time. In general, capitated
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 inpatient care) to the enrollee. A significant
difference between a 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 being referred to as
"high risk patients"). Although 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. If over-
utilization occurs with respect to a given physician's enrollees (or if the
physician's panel of enrollees includes a disproportionate share of high risk
patients not covered by reinsurance), the physician typically is 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, inpatient hospital and
other services when the physician has agreed contractually to manage the use of
those services. Under this payment system, primary care physicians have
important economic incentives to reduce costs by ensuring the efficient
utilization of other providers of care, shifting care to outpatient settings
where feasible, monitoring the progress of patients throughout the course of
treatment and encouraging preventive healthcare.

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     In this environment, physicians are facing reimbursement pressures, greater
administrative burdens, increasing financial responsibility for the risk of
patient care, and a shift in demand from specialty to primary care. In addition,
legislative changes have substantially limited a physician's ability to maintain
an ownership interest in entities that provide ancillary services such as
outpatient laboratories, infusion centers and diagnostic and rehabilitation
facilities. These factors have all contributed to a moderation, if not
reduction, in the growth of many physicians' incomes. With greater oversight by
third-party payors, physicians are also facing a decrease in control over
medical decisions and the administration of their practices.

     In response to these changes in the marketplace, many physicians are
joining together to maintain clinical autonomy, create greater negotiating
leverage vis-a-vis HMOs and other third party payors and reduce escalating
administrative costs. Physicians also are increasingly abandoning traditional
private practice which typically has higher operating costs and little
purchasing power with suppliers and must spread overhead over a relatively small
revenue base in favor of affiliations with larger organizations. Three basic
groups have emerged as managers of physician practices each of which encompasses
several variations in format: hospitals, which may employ physicians directly or
provide support through a management services organization ("MSO"); insurance
companies, which may employ physicians directly through HMOs or may provide
management services through an affiliated MSO; and independent, investor-owned
physician practice management companies.

Company Strategy
----------------

     The Company believes that physician practice management companies ("PPMs"),
such as PQC, offer physicians significant advantages over other alternatives in
the industry consolidation. PPMs provide physicians with improved practice
management and an opportunity to participate in the growth of the PPM through
stock ownership while maintaining control over medical decisions. The physician
market is currently highly fragmented, and PPMs and other organizations
providing physicians with management alternatives have thus far captured only a
small portion of this potential market.

     In addition, the Company believes that because physicians can serve as
gatekeepers for patient care, they can exercise direct control over healthcare
spending and should be in a position to share in the savings generated by the
cost containment practices they adopt. For a fee or a percentage of the group's
earnings, a PPM provides physician groups with administrative and practice
management services that are needed for a physician group to realize these cost
savings and to seek to optimize contractual relationships with managed care
organizations, thus retaining some or most of the cost savings so generated.

     The central elements of the Company's strategy are to develop long-term
affiliations with physicians, focus on cost effective healthcare delivery to
special populations, and build comprehensive local healthcare networks. To date,
the Company has focused upon developing a network of affiliated physicians. The
Company believes that its strategy will enable the

                                      -3-
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Company 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.

     Develop long-term affiliations with physicians. PQC seeks to affiliate with
physicians in solo or group practices by entering into contractual arrangements
pursuant to which PQC, or a professional corporation or professional association
affiliated with PQC, assumes management of non-medical aspects of the practices
(an "Affiliated Group"). Upon affiliation, PQC seeks to provide the physicians
with, among other things, increased opportunity to access capital, management
experience, improved information systems and increased opportunity to
participate in favorable managed care contracts. The Company intends to assist
affiliated physicians in improving clinical outcomes and seeks to keep medical
costs down by merging physicians into Affiliated Groups. The Company's structure
allows physicians to continue to practice in their existing locations with no
disruption to patient flow patterns while providing access to coordinated
ancillary services. By affiliating with PQC, physicians, through the revenue
sharing provisions of their employment agreements and the Services Agreements
between the Affiliated Group and PQC, 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. Physicians
constitute a majority of the Board of the Directors of PQC and all local
advisory boards, which control such decisions as clinical protocols and
utilization review, payor relations and the addition of ancillary services.

     Balance of primary care physicians and specialists. PQC believes that a
successful system should be balanced between primary care physicians and
specialists to provide efficient coordination and utilization of the appropriate
levels of care, and PQC intends to seek to develop this balance in the physician
groups with which it affiliates. Of the 185 physicians affiliated with the
Company at December 31, 1997, 128 are engaged in primary care practices and 57
are engaged in specialist practices. The Company believes the industry trend
toward integrated delivery systems will result in an increasing demand for
primary care physicians because a higher degree of coordination of care and
risk-sharing will be required than that which can be achieved in a system
controlled by specialists. The Company's strategy is to have the primary care
physician serve as the central manager in the patient system and to develop
effective coordination between specialists and the primary care physicians
within its network.

     Focus on special populations. PQC believes that the management of
healthcare costs for certain populations provides significant opportunities that
are not being addressed in the marketplace. The Company believes that special
populations, including the elderly, the disabled and those with debilitating
chronic or high-cost, complex diseases represent a minority of the population
but account for a disproportionately high percentage of the healthcare costs in
the United States due to the significantly greater need of such patients for
medical care compared to the population as a whole. The Company believes that a
significant portion of these costs can be avoided with effective case
management, use of information systems, and coordinated use of the full
continuum of healthcare. At present, a relatively

                                      -4-
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small percentage of these patients are enrolled under capitated contracts.
However, the Company believes that the cost pressures that fostered the
development of managed care for other segments of the population should have an
even more significant impact on the rapid development of managed care for such
patients. Through affiliation with physicians and academic experts who
specialize in geriatrics and medical conditions that disproportionately affect
these population segments, effective use of case management techniques designed
specifically for such populations, and management information systems, the
Company believes that its affiliated physicians should be able to manage cost
effectively the risks of providing care to these populations on a capitated
basis.

     Improved medical quality and performance. Over time, the Company intends
that its affiliated physicians will devise medical protocols and the Company
will perform outcome analyses, such that the most effective medical practices in
each network can be shared across physician groups. The Company is in the
process of establishing a quality assurance program that will incorporate peer
review, self-critiquing mechanisms, patient satisfaction surveys, continuing
medical staff development and regular continuing medical education seminars.
Once a large base of affiliated physicians at Affiliated Groups is established,
medical directors of each local care network will participate in the Company's
National Medical Advisory Board that will meet regularly to establish and review
medical standards, policies and procedures for all physicians affiliated with
the Company.

Affiliation Structure
---------------------

     General affiliation model. Although the details of each affiliation
transaction may differ, the Company has developed a general affiliation model
designed to capture the benefits of integration while preserving significant
physician autonomy (the "General Affiliation Model"). In the General Affiliation
Model, physicians initially affiliating with the Company in each geographic area
who will become stockholders of the Company transfer their practices by mergers
or asset sales to an Affiliated Group, a professional corporation ("PC") or
professional association ("PA") permitted to practice medicine under applicable
law. These physicians, along with other physicians in that geographic area who
subsequently become part of an Affiliated Group and become stockholders of the
Company (the "Stockholder Physicians"), execute an Employment Agreement with the
Affiliated Group at the time that they transfer their practice assets. The
Affiliated Group, in turn, enters into a Services Agreement, generally for
periods up to 40 years, with the Company pursuant to which the Company agrees to
provide the physicians in the Affiliated Group with comprehensive management
services in exchange for a fee. As consideration for transferring their
practices to and becoming employed by the Affiliated Group, Stockholder
Physicians receive shares of the Company's Class A Common Stock, $.01 par value
per share (the "Class A Common Stock"), and in some cases cash, the amount of
which is negotiated on an individual basis between each Stockholder Physician
and the Company. Physicians who are not stockholders of the Company may also be
employed by the Affiliated Group.

                                      -5-
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     The factors that the Company considers in selecting a physician or a
physician group for affiliation include the location of the practice, whether
the practice can be successfully integrated into an Affiliated Group, the
ability of the Company to assist the physician to increase billings and control
costs, the size of the practices, the compensation sought by the physician or
physician group, the nature of the physician's practice and the reputation of
the physician in the medical community.

     All of the outstanding capital stock of each Affiliated Group is held by a
Stockholder Physician designated by the Company (the "Affiliated Group
Stockholder"). At the time of the affiliation, the Affiliated Group Stockholder
enters into an agreement (the "Designation Agreement") with the Company and the
Affiliated Group pursuant to which he or she agrees to consult with the Company
in voting the stock of the Affiliated Group, agrees to transfer the stock of the
Affiliated Group without consideration to another licensed physician at the
direction of the Company and agrees to pay over to the Company any dividend or
distribution on the stock received from the Affiliated Group. The Designation
Agreement also provides that the stock of the Affiliated Group is automatically
transferred at the direction of the Company in the event that the Affiliated
Group Stockholder attempts to transfer it to a third party. The Designation
Agreement provides, however, that the Affiliated Group Stockholder is not
required to consult with the Company as to matters requiring the exercise of
professional medical judgment.

     The Employment Agreements contain certain restrictive covenants, including
covenants relating to noncompetition, confidentiality and nonsolicitation of
employees. Pursuant to these restrictive covenants, the Stockholder Physicians
agree, during the term of the employment agreement and for a one year period
thereafter, not to establish, operate or provide medical services in a specified
geographic region, subject to certain limited exceptions. In addition, the
Stockholder Physicians agree during the employment agreement and for a two year
period thereafter not to provide certain other services related to the practice
of medicine in the geographic region and not to solicit any employee or patients
of the Affiliated Group. Under current state laws and judicial decisions that
restrict the enforcement of non-competition agreements against physicians on
public policy grounds, the Company has no or limited ability to enforce the
covenants not to compete. Each Employment Agreement generally is terminable by
the Affiliated Group with respect to any individual Stockholder Physician upon
the death or disability of such Stockholder Physician or upon the occurrence of
certain events that either interfere with the ability of such Stockholder
Physician to practice medicine or significantly diminish the value of such
Stockholder Physician's affiliation to the Affiliated Group. Each Stockholder
Physician may terminate his or her Employment Agreement under certain
circumstances, including without cause upon six months notice to the Affiliated
Group.  The Employment Agreements also contain terms permitting or requiring a
Stockholder Physician upon termination after certain material breaches of the
Affiliated Group's or the Company's obligations under the employment agreement
or the Services Agreement between PQC and the Affiliated Group, to repurchase
from the Affiliated Group the restrictive covenants and his or her practice
assets (i.e., office and examination equipment, in certain cases the lease for
premises at which the physician practices, patient lists and

                                      -6-
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records, and third party payor contracts) upon termination of employment. The
terms of such repurchase provision may not permit the Company to fully recover
its affiliation payments to the physician or reflect the cost of affiliation
transactions at the time of termination. To date, no Stockholder Physician has
terminated an employment agreement or repurchased any practice assets.

     Pursuant to the Services Agreement, the Company provides (or arranges for
the provision of) a comprehensive package of services to the Affiliated Group
and its physicians, including offices and facilities, equipment, nursing and
other non-physician professional support, administrative personnel, information
systems, comprehensive professional liability insurance and general management
and financial advisory services. The Company, on behalf of the physicians in the
Affiliated Group, supervises the billing of all patients, insurance companies
and third-party payors and negotiates all contracts and relationships with
payors. The physicians remain responsible for, among other things, the medical,
professional and ethical aspects of their practices.

     Generally under a Services Agreement, revenue from patient care is used to
pay practice expenses and a fee to PQC for its services and to fund one or more
pools from which physician compensation is paid (each a "Compensation Pool").
The basis for such allocation is negotiated separately with each group of
affiliating physicians.  Because compensation of Stockholder Physicians is a
function of many factors including the financial performance of such physicians,
neither the Company nor an Affiliated Group can guarantee that a Stockholder
Physician will receive any minimum level of compensation, and the Stockholder
Physicians are not entitled to any compensation other than their allocated share
of the Compensation Pool. The Compensation Pool is initially allocated to the
Stockholder Physicians until each physician has received a pre-agreed draw. Any
amount remaining in the Compensation Pool is allocated among the Stockholder
Physicians as determined by a Compensation Committee appointed by the
Physicians.

     The Company believes that its General Affiliation Model offers a number of
advantages.  For example, physicians remain in their pre-affiliation locations,
offering their patients the continuity and convenience of decentralized offices.
At the same time, laboratory and administrative services generally are provided
on a centralized basis, allowing the Affiliated Groups to achieve economies of
scale in purchasing and other administrative efficiencies.  Moreover, the
Company believes that as it completes its initial affiliation transactions in
particular geographic markets, Affiliated Groups will provide it with both a
visible business presence and a corporate framework for securing additional
affiliations with physicians in those markets.

     The Company also believes that the decision making structure that it
establishes in connection with each Affiliated Group facilitates information
sharing and cooperation between the affiliated physicians and the Company. Each
Affiliated Group maintains its own policy making structure, including a Joint
Policy Board and a Medical Advisory Board. The Joint Policy Board is charged
with, among other things, developing certain management and

                                      -7-
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administrative policies for the Affiliated Group, approving operating and
capital expenditure budgets, establishing fee schedules for services provided by
the Affiliated Group, approving the establishment of managed care contracts and
determining of the number and type of physicians required for the operation of
the Affiliated Group. Certain decisions that may have a material impact upon the
business, results of operation or financial condition of the Affiliated Group
must also be approved by the Affiliated Group Stockholder. The current Joint
Policy Boards are comprised of: the President of the Affiliated Group (selected
by the Affiliated Group Stockholder from physicians nominated by the Stockholder
Physicians), and an equal number of members selected by the Company and the
physician stockholders. The Medical Advisory Board, which is responsible for
providing medical input on managed care contracting by the Affiliated Group and
leading the development and dissemination of medical protocols among the
physicians, consists of the Medical Director of the Affiliated Group (selected
by the Affiliated Group Stockholder from physicians nominated by the Stockholder
Physicians) and other physicians elected by the Stockholder Physicians.

     Although the Affiliated Groups in the Springfield, Massachusetts area and
the greater Baltimore-Annapolis, Maryland generally track the General
Affiliation Model, the Company may depart to some extent or significantly from
it or pursue an altogether different approach in completing future physician
affiliations.

     The Springfield Affiliated Group.  The Company has entered into affiliation
transactions with nine medical practices located in western Massachusetts,
consisting at December 31, 1997 of a total of 42 physicians, 35 of whom are
stockholders in the Company (the "Springfield Stockholder Physicians") and 7 of
whom are employed by the Springfield Affiliated Group as employees (the
"Springfield Affiliated Group").  Twenty-nine of the physicians are engaged in
primary care practices, including two physicians with pediatric practices.
Thirteen of the physicians are engaged in specialist practices, including
pulmonology, cardiology, oncology/hematology, infectious disease, rheumatology
and gastroenterology.

     Consistent with the General Affiliation Model, the Springfield Stockholder
Physicians, or the professional corporations and other entities with whom they
were affiliated, merged or sold their practice assets to the Springfield
Affiliated Group in exchange for an aggregate of approximately 3,164,738 shares
of Class A Common Stock of the Company and approximately $4.1 million in cash.
The 29 initial Stockholder Physicians entered into a three-year employment
agreement with the Springfield Affiliated Group, pursuant to which each
physician also received options to purchase 2,500 shares of Class A Common Stock
of PQC at an exercise price of $2.50 per share. The options expire on the
earlier of termination of employment or three years from commencement of
employment. The Physicians who subsequently affiliated with the Springfield
Affiliated Group entered into ten-year employment agreements with the
Springfield Affiliated Group. Four of these Springfield Physician Stockholders
each received options to purchase 37,500 shares of Class A Common Stock at an
exercise price of $1.00 per share which options are subject to certain vesting
conditions. Up to an additional $2.15 million, payable in Class A Common Stock
at $2.50 per share, was

                                      -8-
<PAGE>

available to be paid to certain physicians if certain revenue goals were met.
During 1997, $2.1 million of additional consideration was accrued based upon the
achievements of these goals and will be paid during 1998. The Springfield
Affiliated Group in turn entered into a 40-year services agreement with the
Company pursuant to which the Company (on behalf of the Springfield Affiliated
Group) agreed to provide management services to the Springfield Affiliated Group
physicians.

     Under the Employment Agreements with the twenty-nine initial Springfield
Stockholder Physicians, revenues from patient care remaining after payment of
operating expenses, including expenses of the Springfield Affiliated Group
("Gross Margin") are allocated first between the Springfield Affiliated Group's
Compensation Pool (the "Springfield Compensation Pool") and the Springfield
Affiliated Group in a 95%/5% proportion until 95% of the base compensation of
the Springfield Stockholder Physicians is achieved, then to payment of certain
non-operating expenses, and then 80% to the Springfield Affiliated Group and 20%
to the Springfield Compensation Pool until the Springfield Affiliated Group has
been allocated $1.5 million, with any remaining Gross Margin being divided
evenly between the Springfield Affiliated Group and the Springfield Compensation
Pool. Under the Employment Agreements with the Springfield Stockholder
Physicians who subsequently affiliated with the Springfield Affiliate Group any
Gross Margin attributable to these physicians are allocated between the
Springfield Compensation Pool and the Springfield Affiliated Group in a 80%/20%
proportion until the physicians receive 80% of their base compensation, and then
to payment of certain non-operating expenses attributable to the Springfield
Affiliated Group, with any remaining Gross Margin being divided evenly between
the Springfield Compensation Pool and the Springfield Affiliated Group. The
allocation of Gross Margin to the Springfield Compensation Pool is calculated
separately for each fiscal period. If the Gross Margin for any such period is
negative, such negative amount constitutes an operating expense in the next
fiscal period. Pursuant to the Springfield Services Agreement, all amounts
allocated to the Springfield Affiliated Group in any fiscal period are remitted
to the Company.

     On March 1, 1999, the Springfield Affiliated Group (on behalf of the
Company) or a majority of the Springfield Shareholder Physicians may amend the
financial arrangements, effective as of August 30, 1999, such that the economic
terms of the Springfield Stockholder Physicians' employment agreements, taken as
a whole (and giving effect to any payments or other compensation received by the
Springfield Stockholder Physicians in connection with their affiliation), are
adjusted to reflect the terms being entered into by independent third parties
for similar affiliation and employment relationships at that time.

     The Flagship Affiliated Group. On December 11, 1996, pursuant to
affiliation transactions with the Company, 15 existing professional practices
located in the greater Baltimore-Annapolis, Maryland area, consisting of a total
of 55 physicians, transferred their practice assets to and became employed by
Flagship Health P.A., a Maryland professional association (the "Flagship
Affiliated Group"). In exchange for such affiliation, the physicians received a
combination of approximately $2.7 million in cash and 6,842,675 shares of

                                      -9-
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Class A Common Stock (the "Initial Flagship Affiliation"). On December 1, 1997,
Clinical Associates, P.A., a Maryland professional association ("Clinical
Associates"), which also had practices in the Baltimore area, was combined with
the Flagship Affiliated Group. The stockholders of Clinical Associates received
approximately $3.0 million in cash and 4,800,000 shares of Class A Common Stock.

     As of December 31, 1997, the Flagship Affiliated Group employed 143
physicians and 16 non-physician medical professional, of which 113 are
stockholders of the Company and employees of the Flagship Affiliated Group (the
"Flagship Stockholder Physicians") and 30 are employees of the Flagship
Affiliated Group. Of the physicians employed by the Flagship Affiliated Group,
99 are primary care or pediatric physicians and 44 are specialists.  The
specialist practices include pulmonology, cardiology, oncology/hematology,
infectious disease, rheumatology, gastroenterology, neurology, dermatology,
endocrinology, immunology, neurology, psychiatry, obstetrics/gynecology,
ophthalmology, orthopedics, otolaryngology, plastic surgery, urology, general
surgery and vascular surgery. The Flagship Affiliated Group leases 28 practice
locations in Maryland, some of which are leased from the Flagship Stockholder
Physicians.

     In order to effectuate the Flagship Affiliation, the Flagship Stockholder
Physicians, or the professional associations, business corporations and limited
liability partnerships with whom they were affiliated, transferred their
practice assets to the Flagship Affiliated Group by merger or by sale of assets.
The Company entered into a 40-year management services agreement with the
Flagship Affiliated Group (the "Flagship Services Agreement"), which entered
into Employment Agreements with each Flagship Stockholder Physician. In
addition, the Company entered into an agreement with the Flagship Affiliated
Group pursuant to which the Company agreed to grant options to purchase, subject
to certain conditions, up to 400,000 shares of Class A Common Stock to the
Flagship Stockholder Physicians.

     Pursuant to the Flagship Services Agreement and the Employment Agreements
with the Flagship Stockholder Physicians who initially affiliated with the
Flagship Affiliated Group (the "Initial Flagship Affiliated Physicians"),
revenues from patient services remaining after payment of third- party operating
expenses ("Net Margin") is allocated between the Flagship Stockholder
Physicians' Compensation Pool (the "Initial Flagship Compensation Pool") and
reimbursement of the Company's direct expenses relating to the Flagship
Affiliated Group, based on a ratio of such budgeted compensation to such
budgeted expenses. Once both the Company's direct expenses and the aggregate
base physician compensation have been fully satisfied, any remaining Net Margin
will be divided evenly between the Company and the Initial Flagship Compensation
Pool.

     The method for determining PQC's management fee and the compensation of the
Clinical Associates physicians differs from the model used in the Springfield
Affiliated Group and with the original Flagship physicians. Instead of a sharing
of gross margin after practice expenses, PQC is entitled to a percentage of
billings, net of uncollectible amounts and discounts ("Net Adjusted Billings").
The revenue splitting arrangements for the Clinical

                                      -10-
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Associates physicians differ based upon whether the revenue is derived from an
existing specialist practice, a primary care practice, future specialist
practices and the practices of physicians without established practices. Except
as provided below, Net Adjusted Billings in excess of baseline Net Adjusted
Billings reflecting the historical level billings for such physician subject to
reductions for changes in practice patterns ("Specialist Net Adjusted Billings")
from specialist (a specialist being a physician at least 80% of whose billings
are derived from a specialist practice) practices with respect to any fiscal
year will be allocated 35% to PQC and 65% to an account established with respect
to the Clinical Associates physicians and any future physicians included in the
same compensation arrangements (the "Account") until $3 million has been
allocated between the Account and PQC; and any remaining Specialist Billings
will be allocated 20% to PQC and 80% to the Account.

     Net Adjusted Billings by primary care, OB/GYN physicians and physicians
(whether primary care or specialist) added to the compensation arrangements in
the future in excess of the agreed upon baseline Net Adjusted Billings will be
allocated 20% to PQC and 80% to the Account. With respect to any physician
recruited to join Flagship who does not have a practice that is merged into
Flagship (and to certain physicians currently affiliated with Clinical
Associates ), 20% of the Incremented Amount shall be allocated to PQC.
"Incremented Amount" means the excess, if any, of Net Adjusted Billings
attributable to such physician over an amount equal to twice the average
compensation of physicians with a similar practice in the Baltimore metropolitan
area as reported by a standardized reporting source. Any Net Adjusted Billings
attributable to such physician less (A) the amounts allocated to PQC and (B) the
compensation payable to the physician under the physician's employment agreement
shall be allocated to the Account. Any revenue not included in Net Adjusted
Billings will be allocated to the Compensation Pool to offset practice expenses,
provided that if the ratio of practice expenses to practice revenue declines
below historical levels, revenues not included in Net Adjusted Billings will be
allocated equally to PQC and the Account. Net Margin from centralized laboratory
services (which for this purpose shall mean revenue from laboratory ancillary
services less (i) direct expenses of such laboratory ancillary services and (ii)
an allocation of Flagship overhead) attributable to the Clinical Associate
physicians will be allocated 80% to PQC and 20% to the Account. Net Margin from
incremental non-laboratory ancillary services will be allocated 50% to PQC and
50% to the Account together with the current Flagship Compensation Pool.

     The amount allocated to the Account is first used to pay the practice
expenses of the physicians whose compensation is paid through the Account. Any
remaining amount in the Account with respect to any fiscal year will be
distributed to the Clinical Associates physicians as their sole source of
compensation. The allocation of such compensation among the physicians is
determined by a committee elected by, or pursuant to a formula approved by, the
Clinical Associates physicians.

     PQC expects to consider restructuring the compensation arrangements with
respect to the initial Flagship Affiliated Physicians to determine whether to
merge the two compensation arrangements. In the event that PQC elects to modify
the compensation arrangements of the

                                      -11-
<PAGE>

Initial Flagship Physicians in this manner, PQC will guarantee for a two year
period (commencing on the date of such merger) that the compensation of the
Clinical Associates physicians under the combined compensation distribution
system is not less than the baseline compensation that such physicians would
have received if the compensation distribution systems are not merged.

     Until June 1, 1998, the Clinical Associate physicians have the right to
elect to receive up to an additional 2,000,000 shares of Common Stock as
consideration for their affiliation with the Flagship Affiliated Group. If the
Clinical Associate physicians elect in their sole discretion to receive such
additional Common Stock, the compensation arrangements set forth above will be
amended, so that an aggregate of $760,000 of Net Adjusted Billings (or such
proportionately reduced amount if less than 2,000,000 shares of Common Stock
shares are elected) that would otherwise be allocated to the Account with
respect to each fiscal year shall instead be allocated to PQC.

     The Agreements between PQC and the Clinical Associated Physicians include a
provision that penalizes PQC if certain revenue targets described below are not
met. Until there is no Shortfall (as defined below) or PQC completes a public
offering of the Company Common Stock at a price to the public of $9.00 or more
per share, the amount that would have been allocated to PQC pursuant to the
Services Agreement will be reduced by the Adjustment Amount and the amount that
is allocated to the Account will be increased by the Adjustment Amount.
"Shortfall" means the difference between $3.0 million and the aggregate increase
in Net Adjusted Billings over baseline Net Adjusted Billing by the specialist
physicians in Clinical Associates or who are subsequently added to the practice.
The "Adjustment Amount" is 45% of any Shortfall. Consequently, unless Net
Adjusted Billing increases by $3.0 million over historical levels, and
Adjustment Amount will be due.

     PQC has agreed with the stockholders of Clinical Associates that neither
PQC nor Flagship will merge with or into, become a subsidiary of, or sell
Flagship or all or substantially all of PQC's assets to, or grants governance
participation to, a Baltimore Health Care Entity without the approval of a
majority of the members of the Management Committee. A Baltimore Health Care
Entity means any hospital, medical group or other organization that principally
conducts its business in and derives its revenues from the delivery of
healthcare services in Maryland.

     In the event that PQC or any of its affiliates propose the establishment of
an independent provider association ("IPA") network in the Maryland Area, PQC is
required to obtain the approval of the Joint Policy Board with respect to the
structure, governance and financial arrangements of the IPA network, including
whether the Physicians in the Flagship Affiliated Group will participate in such
IPA network. PQC will be entitled to a fee of up to 10% of the aggregate revenue
of the IPA network, which fee PQC shall not be required to share with the
physicians employed by the Flagship Affiliated Group. Any residual profits of
the IPA network (in excess of the 10% fee) that are retained by PQC shall be
allocated 50% to PQC and 50% to the physicians in the Flagship Affiliated Group.

                                      -12-
<PAGE>

     In the event that prior to December 1, 2001, PQC has not completed an
underwritten initial public offering, the Clinical Associates physicians shall
have the right, within 45 days thereafter, to require PQC to repurchase the
Common Stock issued in the affiliation transaction with Clinical Associates at a
purchase price of $3.00 per share. PQC shall have the right to pay the purchase
price by a five (5) year non-interest bearing note. The principal payable with
respect to such note shall be reduced by the amount, if any, that the Clinical
Associates physicians' compensation between the issue date of the note and its
maturity exceeds the base compensation with respect to the Clinical Associates
physicians during that period.

     Atlanta IPA Affiliates.  The Company has acquired a 50% interest in two
related physician network management companies in Atlanta, Georgia. The two
entities, TLC Management Company, Inc. ("TLC") and Total Quality Practice
Management, Inc. ("Total Quality"), manage payor contracting for a 350-physician
network in Georgia. The network currently serves approximately 4,500 covered
lives. PQC's investment totals $5 million.  The Company believes that the
Atlanta market is attractive for the Company as it is a relatively
unconsolidated physician practice market and global capitation arrangements are
expected to become a more significant market factor.

     Future Affiliation Transactions. The Company's current primary focus is on
expanding the Springfield Affiliated Group and the Flagship Affiliated Group,
and developing additional Affiliated Groups in the eastern United States.

     The Company will determine which geographic markets to enter in the future
based upon consideration of the following factors (among others): (i) population
and economic profile, (ii) level of managed care penetration and effectiveness
of providers in coping with the managed care environment, (iii) physician
practice density, specialty composition, and average group size, (iv)
receptivity of the medical community to the Company's management philosophy,
(v) local competition in the physician practice management business and (vi)
commercial and Medicare reimbursement rates. The Company also regularly
considers the addition of physicians on an employee, rather than a Stockholder
Physician, basis.

Governmental Regulation
-----------------------

     As a participant in the healthcare industry, the Company's operations and
relationships, and the business and activities of its affiliated physicians,
will be subject to extensive and increasing regulation by a number of
governmental entities at the federal, state and local levels and by fiscal
intermediates appointed by various payors and other private brokers. The Company
will also be subject to laws and regulations relating to business corporations
in general. Because of the uniqueness of the structure of the relationship with
the physician groups, many aspects of the Company's business operations have not
been the subject of state or federal regulatory interpretation, and there can be
no assurance that a review of the business of the Company or its affiliated
physicians by courts or regulatory authorities will not result in a
determination that could adversely affect the operations of the Company or the

                                      -13-
<PAGE>

affiliated physicians. In addition, there can be no assurance that the
healthcare regulatory environment will not change so as to restrict the
Company's or the affiliated physicians' existing operations or their expansion.

     Prohibition on Corporate Practice of Medicine. The laws of most states,
including Massachusetts and Maryland, prohibit business corporations such as the
Company from practicing medicine or employing physicians to do so. The
contractual relationships the Company has entered into with the Affiliated
Groups attempt to comply with these laws. Because there is very limited judicial
or regulatory interpretation of the scope of the corporate practice of medicine
prohibition in most states, however, there can be no assurance that the
Company's contractual arrangements will be found to comply with such laws. Any
determination that the contractual relationships violate such laws could have a
material adverse effect on the Company, and there can be no assurance that the
Company would be able to restructure its arrangements on favorable terms or at
all.

     The Massachusetts Board of Registration in Medicine (the "BRM") has
proposed regulations that, if promulgated as proposed, might prohibit physicians
licensed within the Commonwealth of Massachusetts from entering into management
contracts with proprietary business entities unless a majority of the governing
board of those business entities are licensed physicians and certain other
conditions are met. The BRM also indicated that it may seek to limit
significantly the extent to which proprietary business entities may have control
or consultation rights with respect to medical decisions or business decisions
that may affect patient care, such as the amount of time each physician spends
with a patient. Extensive commentary has been filed in opposition to the
proposed regulations, and it is not known when or in what form final regulations
will be promulgated. The final regulations may have a material adverse effect on
the Company's relationship with the Springfield Affiliated Group and its ability
to operate in Massachusetts as currently contemplated. Comparable regulations
have not been proposed in Maryland, but there can be no assurance that such
regulations will not be proposed or adopted.

     Restrictions on Referrals and Fee-Splitting. In addition to prohibiting the
practice of medicine, numerous states prohibit entities such as the Company from
engaging in certain healthcare-related activities such as fee-splitting with
physicians or from making referrals to entities in which the referring physician
has an ownership interest. For example, Maryland has enacted legislation that
significantly restricts patient referrals for certain services, and requires
disclosure of ownership in businesses to which patients are referred and places
other regulations on healthcare providers. The Company has structured its
arrangements with the practices in the Flagship Affiliation to fit within the
group practice exemption contained in the Maryland act; however, investments or
contractual relationships with businesses not specifically operated by the
Flagship Affiliated Group would, in some cases, be prohibited. The Company
believes it is likely that other states will adopt similar legislation.
Accordingly, expansion of the operations of the Company to certain jurisdictions
may require it to comply with such jurisdictions' regulations which could lead
to structural and organizational

                                      -14-
<PAGE>

modifications of the Company's anticipated form of relationships with physician
groups. Such changes, if any, could have an adverse effect on the Company.

     Certain provisions of the Social Security Act, commonly referred to as the
"Anti-kickback Statute," prohibit the offer or receipt of any form of
remuneration in return for the referral of Medicare or state health program
(such as Medicaid) patients, or in return for the recommendation, arrangement,
purchase, lease, or order of items or services that are covered by Medicare or
state health programs. The Anti-kickback Statute is broad in scope and has been
broadly interpreted by courts in many jurisdictions. Read literally, the statute
places at risk many customary business arrangements, potentially subjecting such
arrangements to lengthy, expensive investigations and prosecutions initiated by
federal and state governmental officials. Many states have adopted similar
prohibitions against payments intended to induce referrals of state health
program and other third-party payor patients. While the Company has attempted to
structure its contractual relationships so as to comply with the Anti-kickback
Statute, there can be no assurance that such relationships do in fact comply
with the Anti-kickback Statute given the broad wording of the statute. While the
federal government has promulgated or proposed various "safe harbor" exceptions
to the Anti-kickback Statute, the Company does not expect its operations to fit
within any of the safe harbors. Violation of the Anti-kickback Statute is a
felony, punishable by fines up to $25,000 per violation and imprisonment for up
to five years. In addition, the Department of Health and Human Services may
impose civil penalties excluding violators from participation in Medicare or
state health programs.

     Significant prohibitions against physician referrals were enacted by
Congress in the Omnibus Budget Reconciliation Act of 1993. These prohibitions,
commonly known as "Stark II," amended prior physician self-referral legislation
known as "Stark I" by dramatically enlarging the field of physician-owned or
physician-interested entities to which the referral prohibitions apply. Stark II
prohibits, subject to certain exemptions, a physician or a member of his or her
immediate family from referring Medicare or state health program patients for
"designated health services" to an entity in which the physician has an
ownership or investment interest or with which the physician has entered into a
compensation arrangement including the physician's own group practice. The
designated health services include radiology and other diagnostic services,
radiation therapy services, physical and occupational therapy services, durable
medical equipment, parenteral and enteral nutrients, equipment, and supplies,
prosthetics, orthotics, outpatient prescription drugs, home health services, and
inpatient and outpatient hospital services. The penalties for violating Stark II
include a prohibition on payment by these government programs for services
rendered pursuant to such references and civil penalties of as much as $15,000
for each violative referral and $100,000 for participation in a "circumvention
scheme." In addition, the provider may be disqualified from participating in the
Medicare and state health care programs based on the submission of a false claim
or participation in a circumventive scheme. The Company has attempted to
structure its activities in compliance with Stark I and Stark II. However, the
Stark legislation is broad and the Stark I regulations are complex and do not
provide clear guidance on how Stark II will be interpreted. A finding that the
Company or its Affiliated Groups has violated Stark could have

                                      -15-
<PAGE>

a material adverse effect on the Company. In addition, future regulations or
clarification of the existing regulations could require the Company to modify
the form of its relationships with physician groups and may limit the Company's
ability to implement fully its plan for integrated care.

     Prohibition on False Claims. There are also state and federal civil and
criminal statutes imposing substantial penalties, including civil and criminal
fines and imprisonment, on healthcare providers who fraudulently or wrongfully
bill governmental or other third-party payors for healthcare services. The
federal law prohibiting false billings allows a private person to bring a civil
action in the name of the United States government for violations of its
provisions. There can be no assurance that the Company's activities will not be
challenged or scrutinized by governmental authorities. Moreover, technical
Medicare and other reimbursement rules affect the structure of physician billing
arrangements. Regulatory authorities might challenge the billing arrangements
with the Affiliated Groups and, in such event, the Company may have to modify
its relationship with physician groups. Noncompliance with such regulations may
adversely affect the operation of the Company and subject the Company and
Affiliated Groups to lost reimbursement, penalties and additional costs.

     Direct Provision of Healthcare Services. The Company plans to develop a
network of integrated healthcare services (other than acute care) in the future,
depending on market conditions. If the Company determines that it is
advantageous to provide such services through a wholly-owned subsidiary or other
controlled relationship, it is possible that one or more subsidiaries or
affiliates of the Company could become licensed providers of healthcare
services. Any such provider would have to comply with applicable regulatory
requirements. In addition, the direct provision of healthcare services by a
subsidiary or affiliate might increase the risk to the Company of regulatory or
other investigation or litigation.

     Healthcare Reform. A portion of the revenues of the Company's Affiliated
Groups is derived from payments made by governmental sponsored healthcare
programs (principally, Medicare and Medicaid). Government revenue sources are
subject to statutory and regulatory changes, administrative rulings,
interpretations of policy, determinations by fiscal intermediaries, and
government funding restrictions, all of which may materially decrease the rates
of payment and cash flow to physicians and other healthcare providers. The
federal Medicare program adopted a system of reimbursement of physician
services, known as the resource based relative value scale schedule ("RBRVS"),
which took effect in 1992 and is expected to be fully implemented by December
31, 1996. The Company expects that the RBRVS fee schedule and other future
changes in Medicare reimbursement will, in some cases, result in a reduction
from historical levels in the per patient Medicare revenue received by certain
of the Affiliated Groups with which the Company may contract, which in turn may
result in a decrease in revenues to the Company.

     In addition to current regulation, the United States Congress has
considered various types of healthcare reform, including comprehensive revisions
to the current healthcare

                                      -16-
<PAGE>

system. It is uncertain what legislative proposals will be adopted in the
future, if any, or what actions federal or state legislatures or third party
payors may take in anticipation of or in response to any healthcare reform
proposals or legislation. Healthcare reform legislation adopted by Congress
could result in lower payment levels for the services of physicians managed by
the Company and lower profitability of the Affiliated Groups, which could have a
material adverse effect on the operations of the Company.

     Insurance Laws. Laws in all states regulate the business of insurance and
the operation of HMOs. Many states also regulate the establishment and operation
of networks of healthcare providers. While these laws do not generally apply to
the hiring and contracting of physicians by other healthcare providers, there
can be no assurance that regulatory authorities of the states in which the
Company operates would not apply these laws to require licensure of the
Company's operations as an insurer, as an HMO or as a provider network.

     Antitrust Laws. Because the affiliated practice groups are not subsidiaries
of the Company and thus remain separate legal entities for antitrust purposes,
they may be deemed competitors subject to a range of antitrust laws which
prohibit anti-competitive conduct, including price fixing, concerted refusals to
deal and division of market. The Company intends to comply with such state and
federal laws as they may affect its development of integrated healthcare
delivery networks, but there is no assurance that the review of the Company's
business by courts or regulatory authorities will not result in a determination
that could adversely affect the operation of the Company and its affiliated
physician groups.

Competition
-----------

     The Company faces competition for both the recruitment and retention of
affiliated physicians. 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 whom have
substantially greater resources, greater name recognition and a longer operating
history than the Company and some of whom offer alternative affiliation
strategies which the Company may not be able to offer.

     The provision of physician practice management services is a highly
competitive business in which the Company will compete for contracts with
several national and many regional and local providers of such services. Certain
of the Company's competitors will have access to substantially greater resources
than the Company. Although the nature of the competition may vary, competition
is generally based on cost and quality of care.

     There can be no assurance that PQC will be able to compete effectively,
that additional competitors will not enter the market, or that such competition
will not make it more difficult to acquire the assets of multi-speciality
clinics on terms beneficial to PQC.

                                      -17-
<PAGE>

Employees
---------

     As of December 31, 1997, the Company had 43 employees and the Affiliated
Groups had 1,037 employees, including 198 physicians.

ITEM 2. PROPERTIES.

     The Company leases a 6,358 square foot facility in Waltham, Massachusetts
for its headquarters and also leases office space in Springfield, Massachusetts
and Baltimore, Maryland. The Springfield Affiliated Group leases approximately
46,000 square feet at 13 practice locations and the Flagship Affiliated Group
leases approximately 197,000 square feet at 41 practice locations. The
facilities leased by the Company and its Affiliated Groups are sufficient for
its current operations.

ITEM 3. 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 complaint involves a dispute over
whether an amendment in December 1996 to Mr. Greenberg's Employment Agreement is
valid and whether Mr. Greenberg resigned or was terminated in January 1997. The
Company maintains that the amendment was fraudulently induced based upon a
commitment by Mr. Greenberg for long-term employment with the Company and that
Mr. Greenberg resigned in January 1997. Under such facts Mr. Greenberg is
entitled to have no more than 450,000 shares of Class A Common Stock vest (and,
depending upon counterclaims that may be brought by the Company, possibly fewer)
and is entitled to no severance payment. Mr. Greenberg claims that 843,750
shares of Class A Common Stock have vested and that his employment was
terminated in January 1997 by the Company entitling him to severance payments of
$440,000. The Company is not able to predict the outcome of this litigation. No
other claims are pending against the Company.

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

     No matters were submitted to a vote of security holders of the Company,
through solicitation of proxies or otherwise, during the last quarter of the
year ended December 31, 1997.

                                      -18-
<PAGE>

                                    PART II

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

     The Company did not issue or sell any equity securities during the quarter
ended December 31, 1997 that were not registered under the Securities Act of
1933, as amended.

ITEM 6. SELECTED FINANCIAL DATA.

     The following selected financial data for the Company should be read in
conjunction with the financial statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Annual Report on Form 10K. The selected financial
data of the Company for the period from March 20, 1995 (inception) through
December 31, 1995 and for the years ended December 31, 1996 and December 31,
1997, have been derived from financial statements of the Company which have been
audited by Ernst & Young LLP, independent auditors.

                                      -19-
<PAGE>

<TABLE>
<CAPTION>
                                                                   PQC
                                         ------------------------------------------------------
                                                PERIOD FROM
                                              MARCH 20, 1995       YEAR ENDED     YEAR ENDED
                                              (INCEPTION) TO     DECEMBER 31,    DECEMBER 31,
                                            DECEMBER 31, 1995        1996            1997
                                         ------------------------------------------------------
                                                  (in thousands, except per share data)
<S>                                        <C>                  <C>             <C>
STATEMENT OF OPERATING DATA:

Net patient service revenue                    $     -            $  6,027        $ 46,037
Retained by physicians                               -               2,195          15,596
                                               -------            --------        --------
Management fee revenue                               -               3,832          30,441
Nonphysician salaries and benefits                   -               1,816          13,865
Other practice expenses                              -               1,822          12,721
General corporate expenses                       2,062               4,666           7,329
Depreciation and amortization                        6                 280           2,164
Provision for bad debt                               -                 214           1,106
                                               -------            --------        --------
Operating income (loss)                         (2,068)             (4,968)         (6,743)
Other, net                                          18                 (13)            238
                                               -------            --------        --------
Income (loss) before taxes                      (2,050)             (4,981)         (6,506)
Income taxes (benefit)                              32                  78            (795)
                                               -------            --------        --------
Net income (loss)                               (2,082)             (5,059)         (5,710)
                                               =======            ========        ========
Net loss available to common stock              (2,082)            (19,496)        (12,389)
Net income (loss) per common share-basic       $ (0.27)           $  (1.81)       $  (0.41)
Weighted average common shares and
 common share equivalents outstanding            7,706              10,786          30,336
</TABLE>

<TABLE>
<CAPTION>
                                                      PQC
                                           -------------------------
                                                 DECEMBER 31,
                                            1995     1996     1997
                                           -------------------------
                                               (in thousands)
<S>                                        <C>     <C>       <C>
BALANCE SHEET DATA:

Cash and cash equivalents                  $3,480  $   136   $ 8,782
Net current assets                          2,651     (860)   12,493
Total assets                                4,363   34,790    73,411
Total current liabilities                     850    2,776     2,113
Long-term obligations                       1,410      521       746
Class A Common Stock, subject to put            -   31,851    54,474
Total stockholders' equity (deficiency)     2,104     (358)   16,077
</TABLE>

     During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" ("SFAS 128") which requires the
restatement of earnings per share calculations for all years presented. The
adoption of SFAS 128 did not impact the Company's earnings per share calculation
for 1995 and 1996.

                                      -20-
<PAGE>

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

Overview
--------

     The Company affiliates with and operates multi-specialty medical practice
groups. The first physician affiliation took place on August 30, 1996, with 32
physicians in the Springfield, Massachusetts and Enfield, Connecticut area. On
December 11, 1996, PQC consummated the affiliation with the Flagship Affiliated
Group, which consisted of 59 physicians in Baltimore and Annapolis, Maryland.
In connection with the affiliation transactions, the assets and liabilities of
the physician practices were transferred to newly formed PCs or PAs affiliated
with the Company.  Additional physicians have been subsequently added to the
Affiliated Groups.  PQC is working with these groups of physicians to improve
operating practices and to obtain managed care contracts. On October 24, 1997,
the Company also acquired a 50% interest in TLC and a 50% interest in Total
Quality.  Both companies are located in Atlanta, Georgia.  As of December 31,
1997, the Company had affiliations or IPA arrangements with the following
physicians:
<TABLE>
<CAPTION>

                             Affiliated Physicians
                         ----------------------------
<S>                 <C>        <C>             <C>
                     Maryland   Massachusetts   Georgia
                    ----------  -------------   -------
Primary Care:          99                 29        0
Specialist:            44                 13        0
Total:                143(1)              42        0
</TABLE>

<TABLE>
<CAPTION>
                              IPA Physicians
                              --------------
<S>                 <C>        <C>             <C>
                     Maryland   Massachusetts   Georgia(2)
                    ----------  -------------   -------

Total:                  0               0         350
-----------------
</TABLE>
(1)  Includes 16 non-physician medical professionals.
(2)  Reflects number of physicians in IPA network in which the Company has a 50%
     interest.

     The Company's Fee under Service Agreements. For a discussion of the fee and
expense allocation arrangement between the Company and each Affiliated Group,
see "Item 1. Business - Affiliation Structure."

     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, whether through improved billing and
operating efficiency, additional patient encounters or increased capitated
revenues, and controlling the expenses of Affiliated Groups. To the extent that
patient revenue increases at a greater rate than practice expenses,

                                      -21-
<PAGE>

PQC'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, PQC will earn no or only a limited management fee. Under the
arrangements with the physicians formerly associated with Clinical Associates
(which became effective on December 1, 1997) PQC 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
expenses. While this structure causes PQC's management fee not to be as
dependent upon controlling practice expenses, PQC believes that both increased
revenues and controlling costs will continue to be important factors to its
management fee growth as increased billings 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
December 31, 1997 during the year ended December 31, 1997:

<TABLE>
<S>                                <C>
Fee for Service Contracts           48.0%
Medicare                            35.0%
Capitated Managed Care Contracts    12.0%
Medicaid                             5.0%
                                   ------
                                     100%
</TABLE>

Results of Operations
---------------------

Year Ended December 31, 1996 Compared to Period From March 20, 1995 (Inception)
to Year Ended December 31, 1995

     From inception (March 20, 1995) through August 30, 1996, the Company was
primarily in a development and start up phase.  The first affiliation with 32
Springfield, Massachusetts physicians was completed on August 30, 1996.  Prior
to this date the Company had no revenues.  On December 11, 1996, the Company
affiliated with 59 physicians in the greater Baltimore-Annapolis, Maryland area.

     In connection with the affiliation transactions, the assets and liabilities
of the physician practices were transferred to newly formed PCs and PAs
affiliated with the Company.  The assets and liabilities of the Springfield,
Massachusetts physicians were transferred to Medical Care Partners, P.C. ("MCP")
and the physicians became employees of MCP.  The assets and liabilities of the
December 11, 1996 affiliation were transferred to Flagship Health I, P.A.
("Flagship I") and the physicians became employees of Flagship I.

     The increase in revenues of $6.0 million was more than offset by increases
in operating expenses.  The affiliation transactions resulted in the addition of
physician salaries and benefits, non-physician salaries and benefits, other
practice expenses, provision for bad

                                      -22-
<PAGE>

debt and depreciation and amortization. Prior to the completion of the first
affiliation transaction the Company incurred general corporate home office
expense only.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

     During January and February 1997, the Company affiliated with 6 physicians
in the Springfield, Massachusetts area. The assets and liabilities of the
Springfield physicians were transferred to MCP and the physicians became
employees of MCP. On December 1, 1997, the Company entered into an affiliation
agreement with a physician practice consisting of 58 physicians located in the
Baltimore/Annapolis, Maryland area. The assets and liabilities of the
Baltimore/Annapolis physicians were transferred to Flagship Health II, P.A.
("Flagship II") and the physicians became employees of Flagship II.

     The completion of the Springfield and Baltimore area affiliations resulted
in the Company having net revenues of approximately $46.0 million for the year
ended December 31, 1997 compared to approximately $6.0 million for the year
ended December 31, 1996.  The increase in revenues was primarily due to both the
number and dates of affiliation of the Springfield and Baltimore physicians.
The revenues for 1996 were generated from 32 physicians from August 30, 1996
through December 31, 1996 and one month of revenues from Flagship I physicians.
The revenues for 1997 consisted of a full year of revenues from both MCP and
Flagship I physicians as well as one month's revenues generated by the 58
Flagship II physicians.  The source of revenue in 1997 remained largely
unchanged from 1996, with fee for service payments and Medicare accounting for
approximately 83% of revenue.  Although the Company is seeking to increase its
participation in capitated managed care contracts, such agreements only amounted
for approximately 12.0% of revenue in 1997.

     During the year ended December 31, 1997 as compared to the year ended
December 31, 1996, the amounts retained by physician groups, which represents
physician salaries and benefits increased approximately $13.4 million.  The
increase is primarily due to the same factors which caused the increase in
revenues, namely that 1997 consisted of a fully year of operations for MCP and
Flagship I as compared to four months of operations and one month of operations
during 1996 for MCP and Flagship I, respectively.  In addition, the affiliation
of Flagship II on December 1, 1997 resulted in an increase of approximately
$900,000 as compared with 1996.  As a percentage of net patient service revenues
amounts retained by physician groups decreased from 36.4% in 1996 to 33.8% in
1997.  This decrease was primarily due to variances in the fee and expenses
allocation arrangements between the Company and each Affiliated Group.  See
"Item 1. Business-Affiliation Structure."

     During the year ended December 31, 1997 as compared to the year ended
December 31, 1996, nonphysician salaries and benefits, which represents salaries
and benefits for staff engaged in the physicians' practice increased
approximately $12.0 million.  Other practice expenses in 1997, which represent
primarily all non-salary and benefits expenses of physicians' practices,
increased approximately $10.9 million and provision for bad debt increased
approximately $891,000.  These increases in physician affiliation expenses
resulted

                                      -23-
<PAGE>

primarily from the same reasons stated above for the increase in net patient
service revenues and amounts retained by physician groups; namely that 1997
consisting of a full year of operations for MCP and Flagship I as compared with
a partial year operations in 1996 and the addition of Flagship II during 1997.

     General corporate expenses consist of all costs except depreciation and
amortization of the Company's corporate home office and regional operations.
The increase in general corporate expenses of approximately $2.7 million for the
year ended December 31, 1997 as compared to the year ended December 31, 1996 was
primarily due to the increase in home office and corporate regional operations
staff and related expenses to support the Company's growth.  However, corporate
expenses increased at a slower rate than overall revenue, declining from 77.4%
of net patient service revenue in 1996 to 15.9% in 1997.

     Depreciation and amortization expense consists primarily of amortization of
intangibles associated with affiliated practices.  The increases of
approximately $1.9 million from the year ended December 31, 1997 as compared to
the year ended December 31, 1996 was due to the increase in intangible assets
acquired as practice affiliations were completed, as well as 1997 consisting of
a full years depreciation and amortization for MCP and Flagship I as compared to
a partial year of depreciation and amortization during 1996.

     On October 24, 1997, the Company acquired a 50% interest in TLC and a 50%
interest in Total Quality.  The Company has accounted for the transaction using
the equity method of accounting for investments in common stock.  For the year
ended December 31, 1997, the net loss in investment was approximately $98,000.
The Company made no such investments in 1996.

     The increase in interest income of approximately $407,000 for the year
ended December 31, 1997 as compared to the year ended December 31, 1996 was
primarily due to a significant increase in the purchase of the Company's Class B
and Class C Common Stock by institutional investors during the year ended
December 31, 1997 as compared to the year ended December 31, 1996.  Proceeds
from the issuance of common stock to institutional investors, net of issuance
costs were approximately $25.8 million for the year ended December 31, 1997 as
compared to approximately $8.0 million for the year ended December 31, 1996.

Liquidity and Capital Resources
-------------------------------

     The Company's principal requirements for capital are payments to physicians
in connection with affiliation transactions with the Company and its Affiliated
Groups, transaction costs associated with such affiliation transactions, working
capital requirements for its Affiliated Groups and the funding of operating
losses. The Company anticipates that its liquidity and capital resource
requirements will be similar on a long-term and short-term basis. Due to its
start-up status, the Company has incurred significant operating losses to date
and does not have operating cash flow to fund growth or further losses. The
Company's

                                      -24-
<PAGE>

principal sources of capital to date have been the issuance of Class B and Class
C Common Stock to contain institutional investors, issuances of Class A Common
Stock to Physician Stockholders, other issuances of Class A Common Stock to
private investors, borrowing under a Credit Agreement with Bankers Trust Company
(which terminated on January 31, 1998) and cash generated by the operations of
the Affiliated Groups.

     During 1997 and 1996, the Company paid aggregate consideration of
approximately $23.6 and $29.5 million, respectively, in connection with
affiliation transactions. Of such amount, approximately $7.8 million in 1997 and
$5.9 in 1996 was paid in cash and approximately $15.8 million in 1997 and $23.6
in 1996 was paid in Class A Common Stock. The majority of such payments were
accounted for as an addition to intangible assets, which represented $26.1
million of the Company's total assets of $73.4 million at December 31, 1997. As
of December 31, 1997, intangible assets net of amortization costs, represent
approximately $57.3 million of the Company's total assets of approximately $73.4
million. The Company is amortizing the intangible assets over 25 years.

     Of the Company Common Stock outstanding at December 31, 1997, 18,157,982
shares of Class A Common Stock are subject to a put option which provides for
the put of the shares back to the Company at fair value upon the death or
disability of the holder. In addition, 1,029,749 of such shares are also subject
to a fair value put option back to the Company at the later of the shareholder's
retirement from the Company or June 1998. Consequently, these 18,157,982 shares
of Class A Common Stock have been recorded at fair value outside of permanent
equity in the accompanying balance sheet. Under the Company's stockholder
agreements, the holders of an aggregate of 15,471,063 shares of Class A Common
Stock, the Company may repurchase such shares for fair value if the
shareholder's termination of employment with the Company 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 provision may not permit the Company to
fully recover its affiliation payments to the physician or reflect the cost of
affiliation transactions at the time of termination. To date, no Stockholder
Physician has terminated an employment agreement or repurchased any practice
assets. All of the above put and call provisions expire on the closing of a
public offering of the Company's common stock which results in net proceeds to
the Company of at least $50.0 million and which meets certain other criteria.
In addition to the previously discussed put options, the Flagship II physicians
have the right to require the Company to repurchase (in the form of a five year
non-interest bearing note) 4.8 million shares of Class A Common Stock issued in
the Flagship II affiliation at a purchase price of $3.00 per share if the
Company has not completed an underwritten initial public offering prior to
December 1, 2001.  Because the Company's shares are subject to a number of
restrictions in the stockholders' agreements and will not trade until the
occurrence of such an offering, the Company believes it is a nonpublic entity
for compensation accounting purposes and, accordingly, has not recorded any
compensation expense for these puts and calls.

     Working capital existing at the date of affiliation has generally been
retained in the practices. Therefore, additional working capital investment is
generally only required to the

                                      -25-
<PAGE>

extent billing processing is slowed during payor administrative changes after an
affiliation and also to fund growth of revenues. The Company and its affiliated
entities had total net accounts receivable of $5.4 million and $11.9 million at
December 31, 1996 and 1997, respectively.

     The Company currently anticipates that its and the Affiliated Group's
capital expenditures during 1998 will be approximately $2.5 million.

     The Company has executed a contract with HMO and Company that obligates the
Company to purchase $1.1 million worth of equipment and licenses pertaining to
practice management systems. The term of the contract is five years.

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 enormous 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 is 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 newer version of the software which is 100% compliant
as part of it's 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,

                                      -26-
<PAGE>

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.

     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 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 then
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. 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

                                      -27-
<PAGE>

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.

     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 or 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
affects 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 Affiliations 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

                                      -28-
<PAGE>

may not be realized. Any delays or unexpected costs 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 some respects. PQC's management
faces a significant challenge in its efforts to integrate and expand the
business of the Affiliated Groups. 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 assurances 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
a decrease in the patient base associated with such affiliated physicians. There
can be no assurance that PQC will be able to

                                     -29-
<PAGE>

attract and retain a sufficient number of qualified physicians. If the Company
were unable to affiliate with and 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.

     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. 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 capitated 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

                                      -30-
<PAGE>

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").

     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. 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 became 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 RBRVS 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

                                      -31-
<PAGE>

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
costs, pricing of services and agreements with payors. Because PQC derives its
revenues from the 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 (the "Code"), 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
from 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

                                      -32-
<PAGE>

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.

     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 Jerilyn P. Asher,
the Chief Executive Officer, and on PQC's ability to continue to attract,
motivate and retain highly qualified senior management and employees. The
Company has an employment agreement with Ms. Asher. The Company does not
maintain key person life insurance with respect to Ms. Asher. As a development
stage company, PQC has experienced some turnover in staff, including two of the
founding officers. The Company and one of the departed founders are currently in
a dispute concerning the vesting of approximately 400,000 shares of Class A
Common Stock granted to the founder and the founder's right to severance
payments of approximately $440,000. 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 inventors ("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
also restricts 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 are exercisable at $2.50 or $3.25 per share, which exercise price may
be substantially below the fair market value of the Class A Common Stock at the
time of exercise. 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.

                                      -33-
<PAGE>

     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 an arms-length private sale. In determining the fair market
value, the Board is to consider recent arms-length sales by the Company and the
stockholders, as well as other factors considered relevant. While the
Stockholders Agreement does not limit the Board's discretion, such other factors
may include changes, since the last arms-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 physician
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 within four years. 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. During the year ended December 31, 1997, amortization of
intangible assets contributed approximately $1,292,000 to the Company's net loss
of $5.7 million.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

     Not applicable.

                                      -34-
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     All financial statements required to be filed hereunder are filed as
Appendix A, are listed under Item 14(a) and are incorporated herein by
reference.

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

     There have been no disagreements on accounting and financial disclosure
matters.


                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The executive officers and directors of the Company and their ages as of
December 31, 1997 are as follows:

<TABLE>
<CAPTION>
NAME                          AGE                  POSITION
----------------------------  ---  -----------------------------------------
<S>                           <C>  <C>
Jerilyn P. Asher               55  Chief Executive Officer and Chairman
                                      of the Board
Alphonse Calvanese, M.D.       46  Director
Leslie Fang, M.D.(1)           52  Director
Ira Fine, M.D.                 49  Director
Dana Frank, M.D.               47  President and Director
Arlan F. Fuller, Jr., M.D.     52  Executive Vice President, Medical
                                      Affairs and Director
Stephen G. Pagliuca            42  Director
Marc Wolpow                    39  Director
Timothy T. Weglicki            46  Director
Samantha J. Trotman            30  Chief Financial Officer
</TABLE>
----------------
(1)  Member of the Compensation Committee.

There are currently three vacancies on the Board.

     Directors, Executive Officers and Other Key Employees
     -----------------------------------------------------

     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

                                      -35-
<PAGE>

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 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.

     Alphonse 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.

     Leslie 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.

     Ira 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.

     Dana 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.

                                      -36-
<PAGE>

from Brown University and his M.D. from George Washington University. He
completed his internship and residency at Johns Hopkins Hospital.

     Arlan F. Fuller, Jr., M.D. has served as Executive Vice President of
Medical Affairs and a member of the Board of Directors of the Company since its
inception. He also co-chairs the Company's National Medical Advisory Board, and
is responsible for organizing and directing the company's clinical systems. 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. Previously,
Dr. Fuller was 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.

     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 Lampert, 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., where he established and
headed its Capital Markets Group and prior thereto

                                      -37-
<PAGE>

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.

     Samantha J. Trotman has served as Chief Financial Officer since December
1996. She is responsible for all financial functions and physician affiliation
activities. She is also a member of the senior management team. Ms. Trotman
joined PQC from Bain Capital, where she was a senior associate. While at Bain
Capital, she managed and completed over a dozen transactions with combined value
of approximately $500 million, including the $30 million capital commitment to
the Company. Prior to joining Bain Capital, Ms. Trotman was an analyst with
Wasserstein Perella, a leading mergers and acquisitions advisory firm. Ms.
Trotman holds a BA in Engineering from Cambridge University, England, an MA and
Meng also from Cambridge and an MBA from Harvard Business School.

     Ann M. Keehn served as Vice President of Finance from February 1997 to
February 1998. Prior to joining PQC, Ms. Keehn was Director, Health Services
Management Consulting for John Snow, Inc. ("JSI"), an international health care
consulting firm. During her eight years with JSI, Ms. Keehn provided management
consulting services to a wide array of health care provider organizations
including integrated delivery systems, physician practices, community health
centers, and hospitals. Consulting engagement areas included strategic planning,
affiliation strategies, financial management under capitation arrangements, and
operational effectiveness. From 1988 to 1995, Ms. Keehn served as the chief
financial officer and interim chief executive officer for Acton Medical
Associates, a primary group practice affiliated with Harvard Pilgrim (formerly
Harvard Community Health Plan). Ms. Keehn has also held financial positions with
Children's Hospital and Brigham and Women's Hospital in Boston. Ms. Keehn worked
for Price Waterhouse from 1978 to 1981. She is a certified public accountant and
a member of the Massachusetts Society of CPAs. Ms. Keehn received her BA in
Accounting from Kansas State University and her Masters in Business
Administration from the University of Texas.

ITEM 11. EXECUTIVE COMPENSATION.

     The following table sets forth compensation earned by (i) the Company's
Chief Executive Officer and (ii) the other executive officer of the Company
whose compensation was greater than $100,000 in the year ended December 31, 1997
(collectively, the "Named Executive Officers"):

                                      -38-
<PAGE>

                          SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                                                       Long-Term
                                                                      Compensation
                                     Annual Compensation               Awards (1)
                                    ---------------------             --------------
                                                                 Securities   All Other
                                                                 Underlying  Compensation
  Name and Principal Position  Year    Salary ($)   Bonus ($)    Options (#)     ($)
-----------------------------  ----   ------------  ----------   ----------- ------------
<S>                            <C>    <C>           <C>          <C>         <C>
Jerilyn P. Asher.............  1997    250,000         --            --         7,996 (2)
 Chief Executive Officer       1996    250,000         --            --         9,647 (3)
Dana Frank...................  1997    220,325 (4)     --         300,000         --
 President                     1996    118,075         --            --           --
Samantha J. Trotman..........  1997    125,000         --         400,000         --
 Chief Financial Officer       1996      4,808 (5)     --            --           --
</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)  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.


                             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 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

                                      -39-
<PAGE>

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 vesting if Ms. Asher maintains her employment with the Company
until June 1998, which vesting will be 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 cause and upon 60 days' notice without cause. Dr.
Fuller may terminate his employment for any reason upon 60 days' written notice.

                                      -40-
<PAGE>

     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.

Options Grants Table
--------------------

     The following sets forth, as to the Named Executive Officers, information
concerning stock options granted in the year ended December 31, 1997.

                       OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
                                                                                        POTENTIAL REALIZABLE
                                                                                          VALUE AT ASSUMED
                                                                                           ANNUAL RATES OF
                                                                                            STOCK PRICE
                                                                                          APPRECIATION FOR
                                       INDIVIDUAL GRANTS                                   OPTION TERM(1)
                   -----------------------------------------------------------------    ---------------------
<S>                 <C>             <C>            <C>           <C>                    <C>           <C>
                     NUMBER OF       % OF TOTAL
                    SECURITIES        OPTIONS
                    UNDERLYING       GRANTED TO    EXERCISE
                      OPTION        EMPLOYEES IN    PRICE        EXPIRATION
NAME                GRANTED (#)     FISCAL YEAR    ($/SH)(2)       DATE(3)                5%            10%
----------------  -------------    -------------   ----------    -----------            -------       ---------
Jerilyn Asher...         --               --            --           --                   --             --
Dana Frank......    300,000(4)          13.8%        $2.50         4/23/07              471,671       1,195,307
Samantha Trotman    400,000(5)          18.3%         2.50          1/1/07              628,895       1,593,742
</TABLE>
----------------
(1)  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.

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

(3)  The expiration date of an option is the tenth anniversary of the date on
     which the option was originally granted.

(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 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.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The following table sets 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.

                                      -41-
<PAGE>

<TABLE>
<CAPTION>
                                              Class A Common Stock(2)       Class B Common Stock(2)
                                             -------------------------     --------------------------
                                              Number        Percentage     Number         Percentage
Name and Address                               of            of Class       of            of Class
of Beneficial Owner                           Shares       Outstanding     Shares         Outstanding
--------------------------------------       ----------    -----------     ----------     -----------
<S>                                          <C>           <C>             <C>            <C>
Bain Capital Funds....................             --             --       11,015,000(3)     100.0%
 c/o Bain Capital, Inc.
 Two Copley Plaza
 Boston, Massachusetts 02116

Goldman Sachs Funds...................             --             --              --            --
 c/o Goldman Sachs & Co.
 85 Broad Street
 New York, NY 10004

ABS Capital Partners, 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 02116

Jerilyn P. Asher......................       4,318,748(8)       16.8%             --            --
Arlan F. Fuller, Jr., M.D. ...........         618,750           2.4%             --            --
Samantha J. Trotman...................         150,000(9)        *          1,729,016(10)     15.7%
Alphonse F. Calvanese, M.D............         313,007(11)       *                --            --
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%
Marc Wolpow(13).......................             --             --       11,015,000(3)     100.0%
Timothy T. Weglicki...................             --             --              --            --
All directors and executive officers
 as a group (10 persons) (32,115,577
 (15) shares of 83.9% assuming
 conversion of Class B Common Stock
 into Class A Common Stock)                  5,786,725          22.2%
---------------------
</TABLE>
*Less than 1%


<TABLE>
<CAPTION>
                                                       Class C Common                             Total
                                                          Stock(2)                          Common Stock(1)(2)
                                                  ---------------------------          -------------------------
                                                                                        Number of     Percentage of
Name and Address                                    Number          Percentage          Common         Common
of Beneficial Owner                                of Shares         of Class           Stock          Stock
--------------------------------------            -----------       -----------         ----------     -----------
<S>                                               <C>               <C>                 <C>            <C>

Bain Capital Funds....................            3,076,924(4)(5)      33.3%            14,091,924        30.7%
 c/o Bain Capital, Inc.
 Two Copley Plaza
 Boston, Massachusetts 02116

Goldman Sachs Funds...................             3,076,924(4)(5)     33.3%             3,076,924          7.8%
 c/o Goldman Sachs & Co.
 85 Broad Street
 New York, NY 10004

ABS Capital Partners, II,.............             9,160,004(6)        74.6%             9,160,004        21.5%
 L.P. Funds
 One South Street
 Baltimore, MD 21201

Offshore Health                                         --              --               1,582,500         4.1%
 Industries, Inc.
 Two Park Plaza
 Boston, MA 02116

Jerilyn P. Asher......................                  --              --               4,318,748        11.4%
Arlan F. Fuller, Jr., M.D. ...........                  --              --                 618,750         1.6%
Samantha J. Trotman...................                  --              --               1,879,016         4.8%
Alphonse F. Calvanese, M.D. ..........                  --              --                 313,007         *
Leslie Fang, M.D. ....................                  --              --                      --         *
Ira Fine, M.D. .......................                  --              --                 113,316         *
Dana Frank, M.D. .....................                  --              --                 272,904         *
Stephen G. Pagliuca...................             3,076,924(4)(5)     33.3%             14,091,924        30.7%
Marc Wolpow...........................             3,076,924(4)(5)     33.3%             14,091,924        30.7%
Timothy T. Weglicki...................             9,160,004(14)       74.6%              9,160,004        21.5%
All directors and executive officers
 as a group (10 persons) (32,115,577
 (15) shares of 83.9% assuming
 conversion of Class B Common Stock
 into Class A Common Stock)
 </TABLE>
---------------------
*Less than 1%

                                      -42-
<PAGE>

(1)  Reflects the percentage of shares of Class A, Class B and Class C Common
     Stock. The Class B and Class C 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 March 1, 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) and 1,538,426 shares
     of Class C Common Stock (3,076,924 on a fully diluted basis). 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 (9,160,004 shares of
     Class C Common Stock on a fully diluted basis) 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. As such Mr.
     Weglicki 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)-(14) above.

                                      -43-
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     Through June 20, 1997, pursuant to 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 for an aggregate consideration of $25 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.
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 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 $11.8 million total consideration paid to the physicians who
transferred their practices to the Springfield Affiliated Group.

     Ira Fine, M.D. and Dana Frank, M.D., each a Director of the Company, are
members of medical practice groups which transferred their practice assets to
the Flagship Affiliated Group in the Flagship Affiliation. Upon consummation of
the Flagship Affiliation, Dr. Fine received his allocable share of the total
consideration of $566,580 payable to his existing practice group, and Dr. Frank
received his allocable share of the total consideration of $3,647,064 payable to
his existing practice group.


                                    PART IV

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

     (a) The following documents are included:

1.   The following financial statements (and related notes) of the Company are
     included:



                                      -44-
<PAGE>

<TABLE>

                                                                                              Page
<S>                                                                                          <C>
      Report of Independent Accountants..................................................      1

      Balance Sheets at December 31, 1997 and 1996.......................................      2

      Statements of Operations for the Years Ended December 31,
      1997 and 1996......................................................................      3

      Statements of Stockholders' Equity for the Years Ended
      December 31, 1997 and 1996.........................................................      4

      Statements of Cash Flows for the Years Ended December 31,
      1997 and 1996......................................................................      5

      Notes to the Financial Statements..................................................      6
</TABLE>

2.   The schedule listed below and the Report of Independent Accountants on
     financial statement schedule are filed as part of this Annual Report on
     Form 10-K:

          All schedules are omitted as the information required is inapplicable
          or the information is presented in the financial statements or the
          related notes.

3.   The Exhibits listed in the Exhibit Index immediately preceding the Exhibits
     filed as a part of this Annual Report on Form 10-K.

     (b)  The following current report on Form 8-K was filed by the Company
during the last quarter of the year ended December 31, 1997.

     1.   Current Report on Form 8-K dated December 2, 1997, filed with the
          Securities and Exchange Commission on December 16, 1997, relating to
          the closing of the merger between Clinical and Flagship pursuant to
          which Clinical became affiliated with PQC.

     There are no trademarks mentioned in this Annual Report on Form 10-K.

                                      -45-
<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.


                                  By:  /s/ Samantha J. Trotman
                                     ------------------------------------------
                                     Samantha J. Trotman
                                     Chief Financial Officer and Vice President

Date: March 31, 1998

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

<TABLE>
<CAPTION>
Signature                                           Title                       Date
-----------------------------------  -----------------------------------   --------------
<S>                                  <C>                                   <C>

/s/ Jerilyn P. Asher                 Chief Executive Officer, Secretary    March 31, 1998
-----------------------------------  and Chairman of the Board
Jerilyn P. Asher                     (Principal Executive Officer)



/s/ Samantha J. Trotman              Chief Financial Officer and Vice      March 31, 1998
-----------------------------------  President (Principal Financial and
Samantha J. Trotman                  Accounting Officer)


/s/ Dana Frank, M.D.                 President and Director                March 31, 1998
-----------------------------------
 Dana Frank, M.D.


/s/ Arlan F. Fuller, Jr., M.D.       Executive Vice President, Medical     March 31, 1998
-----------------------------------  Affairs and Director
 Arlan F. Fuller, Jr., M.D.


/s/ Alphonse Calvanese, M.D.         Director                              March 31, 1998
-----------------------------------
Alphonse Calvanese, M.D.

</TABLE>
                                      -46-
<PAGE>

<TABLE>

<S>                                 <C>                     <C>
/s/ Leslie Fang, M.D.                Director                March 31, 1998
-----------------------------------
Leslie Fang, M.D.

                                     Director                March __, 1998
-----------------------------------
 Stephen G. Pagliuca

/s/ Mark Wolpow                      Director                March 31, 1998
-----------------------------------
Mark Wolpow


/s/ Ira Fine, M.D.                   Director                March 31, 1998
-----------------------------------
 Ira Fine, M.D.


/s/ Timothy T. Weglicki              Director                March 31, 1998
-----------------------------------
Timothy T. Weglicki
</TABLE>

     SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.

     Subsequent to the filing of this Annual Report on Form 10-K a proxy
statement will be sent to security holders.

                                      -47-
<PAGE>

                                                                      APPENDIX A
                                                                      ----------
                         Physicians Quality Care, Inc.

                         AUDITED FINANCIAL STATEMENTS

                    Years ended December 31, 1997 and 1996


                                    CONTENTS


Report of Independent Auditors....................................  1

Audited  Financial Statements

Balance Sheets....................................................  2

Statements of Operations..........................................  3

Statements of Stockholders' Equity and Common
 Stock Subject to Put.............................................  4

Statements of Cash Flows..........................................  5

Notes to Financial Statements.....................................  6

<PAGE>

                        Report of Independent Auditors


The Board of Directors
Physicians Quality Care, Inc.

We have audited the accompanying balance sheets of Physicians Quality Care, Inc.
(the Company) as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity and common stock subject to put, and cash flows
for the period from March 20, 1995 (inception) to December 31, 1995 and the
years ended December 31, 1996 and 1997.  These financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Physicians Quality Care, Inc.
as of December 31, 1997 and 1996 and the results of its operations and its cash
flows for the period from March 20, 1995 (inception) to December 31, 1995, and
the years ended December 31, 1996 and 1997, in conformity with generally
accepted accounting principles.



Boston, Massachusetts
March 13, 1998

                                                                               1
<PAGE>

                         Physicians Quality Care, Inc.

                                Balance Sheets

<TABLE>
<CAPTION>
                                                                              December 31
                                                                          1997          1996
                                                                  ---------------------------------
<S>                                                                  <C>               <C>
ASSETS
Current assets:
 Cash and cash equivalents                                           $  8,782,019      $    136,926
 Prepaid expenses                                                          35,175            58,776
 Due from affiliated physician practices                                5,719,421         1,694,687
 Other current assets                                                      69,868            25,380
                                                                 --------------------------------------
Total current assets                                                   14,606,483         1,915,769

Investment in long-term affiliation agreements, less accumulated
 amortization of $1,394,987 and $198,634 in 1997 and 1996,
 respectively                                                          57,340,059        32,401,305


Property and equipment, net                                             1,327,860           214,008
Other assets                                                              136,181           258,491
                                                                 --------------------------------------
Total assets                                                         $ 73,410,583      $ 34,789,573
                                                                 ======================================

<CAPTION>
                                                                                December 31
                                                                         1997               1996
                                                                 --------------------------------------
<S>                                                                 <C>                <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
 Accounts payable                                                   $  1,218,766       $  1,217,630
 Accrued compensation                                                    266,138            218,893
 Accrued expenses                                                        628,433          1,053,892
 Income taxes payable                                                                        69,708
 Note payable                                                                               200,000
 Current portion of capital lease obligations                                                15,685
                                                                 --------------------------------------
Total current liabilities                                              2,113,337          2,775,808

Capital lease obligations, less current maturities                                           55,867
Deferred taxes                                                           746,062            464,877

Commitments and contingencies

Common stock, subject to put, 18,157,982 and 12,740,589 shares
 authorized, issued and outstanding at December 31, 1997 and
 1996, respectively                                                   54,473,947         31,851,473

Stockholders' equity (deficit):
 Preferred stock, $.01 par value, 10,000,000 shares authorized,
  none issued
 Class A common stock, $.01 par value, 75,000,000 shares
 authorized, 8,505,208 and 7,236,033 shares issued and 7,492,708
  and 6,223,533 outstanding at December 31, 1997 and 1996,
  respectively                                                            85,052             72,360
 Class B-1 common stock, $.01 par value, 15,267,915 shares
  authorized, 2,809,296 and 2,442,866 shares issued and
  outstanding at December 31, 1997 and 1996, respectively                 28,093             24,429
 Class B-2 common stock, $.01 par value, 9,732,085 shares
  authorized, 1,790,704 and 1,557,134 shares issued and
  outstanding at December 31, 1997 and 1996, respectively                 17,907             15,571
 Class C common stock, $.01 par value, 13,846,155 shares
  authorized, 7,692,309 shares issued and outstanding at
  December 31, 1997                                                       76,923
 Additional paid-in capital                                           49,846,913         21,117,622
 Accumulated deficit                                                 (33,967,526)       (21,578,309)
 Less treasury stock, at cost, 1,012,500 shares                          (10,125)           (10,125)
                                                                 --------------------------------------
Total stockholders' equity (deficit)                                  16,077,237           (358,452)
                                                                 --------------------------------------

Total liabilities and stockholders' equity                          $ 73,410,583       $ 34,789,573
                                                                 ======================================

See accompanying notes.
</TABLE>

                                                                               2
<PAGE>

                            Statements of Operations

<TABLE>
<CAPTION>

                                                                                  PERIOD FROM
                                                                                   MARCH 20
                                           YEAR ENDED          YEAR ENDED      1995 (INCEPTION)
                                          DECEMBER 31         DECEMBER 31       TO DECEMBER 31
                                              1997                1996               1995
                                     ----------------------------------------------------------
<S>                                    <C>                 <C>                 <C>
Net patient service revenue                 $ 46,037,234        $  6,026,452
Less: amounts retained by
physician groups                             (15,596,162)         (2,194,571)
                                     ----------------------------------------------------------
Management fee revenue                        30,441,072           3,831,881

Operating expenses:
 Nonphysician salaries and benefits           13,864,792           1,816,309
 Other practice expenses                      12,721,065           1,822,262
 Corporate and regional expenses               7,329,132           4,666,334        $ 2,061,737
 Depreciation and amortization                 2,163,866             280,490              6,704
 Provision for bad debts                       1,105,616             214,404
Total expenses                                37,184,471           8,799,799          2,068,441
                                     ----------------------------------------------------------

Operating loss                                (6,743,399)         (4,967,918)        (2,068,441)

Other income (expense):
 Interest income                                 498,095              91,104            108,177
 Interest expense                               (161,938)           (104,255)           (90,000)
 Loss of investment in subsidiary                (98,269)
                                     ----------------------------------------------------------
                                                 237,888             (13,151)            18,177

Loss before income taxes                      (6,505,511)         (4,981,069)        (2,050,264)
Income tax (benefit)/provision                  (795,281)             78,128             32,000
                                     ----------------------------------------------------------

Net loss                                    $ (5,710,230)       $ (5,059,197)       $(2,082,264)
                                     ==========================================================

Net loss available to common stock          $(12,389,217)       $(19,496,045)       $(2,082,264)
                                     ==========================================================

Net loss per common share  basic                  $(0.41)             $(1.81)            $(0.27)
                                     ==========================================================
</TABLE>

See accompanying notes.

                                                                               3
<PAGE>

                         Physicians Quality Care, Inc.

                      Statements of Stockholders' Equity
                        and Common Stock Subject to Put

         Period from March 20, 1995 (inception) to December 31, 1995,
            and year ended December 31, 1996 and December 31, 1997


<TABLE>
<CAPTION>


                                                        Common Stock                Class A Common Stock
                                                -------------------------------------------------------------------
                                                      Shares        Amount           Shares            Amount
                                                -------------------------------------------------------------------
<S>                                                <C>              <C>             <C>               <C>
Issuance of common stock                            7,706,250       $ 77,063
Issuance of convertible preferred stock, net
  of issuance cost of $98,153
Issuance of warrants
Loan to stockholders
Net loss
                                                -------------------------------------------------------------------
Balance at December 31, 1995                        7,706,250         77,063
Purchase of treasury shares
Recapitalization in connection with
    restatement of Charter                         (7,706,250)       (77,063)        7,706,250          $ 77,063
Reclassification of common stock in
    connection with recapitalization                                                (5,897,914)          (58,980)
Accretion of common stock subject to
    put to fair value
Issuance of Class A common stock upon
   conversion of Series A convertible
   preferred stock                                                                   1,666,151            16,662
Issuance of Class A common stock                                                    10,604,221           106,041
Reclassification of common stock
     subject to put                                                                 (6,842,675)          (68,426)
Issuance of Class B-1 and B-2 common
    stock for cash, net of issuance costs
    of $2,051,095
Payment received from stockholder
Net loss
                                                -------------------------------------------------------------------
Balance at December 31, 1996                                -              -         7,236,033            72,360
Issuance of Class A common stock, net
   of issuance cost $108,475                                                         6,686,568            66,866
Reclassification of common stock
   subject to put to fair value                                                     (5,417,393)          (54,174)
Issuance of Class B-1 and B-2 common
   stock for cash
Accretion of common stock subject to
  put to fair value
Issuance of Class C common stock for cash
  net of issuance cost of $742,088
Options issued at below fair value in
    connection with affiliation
Net loss
                                                -------------------------------------------------------------------

Balance at December 31, 1997                                -              -         8,505,208          $ 85,052
                                                ===================================================================


<CAPTION>

                                                 Class B-1 Common Stock               Class B-2 Common Stock
                                             ---------------------------------------------------------------------
                                                Shares             Amount             Shares            Amount
                                             ---------------------------------------------------------------------
<S>                                            <C>                 <C>                <C>               <C>
Issuance of common stock
Issuance of convertible preferred stock, net
  of issuance cost of $98,153
Issuance of warrants
Loan to stockholders
Net loss
                                             ---------------------------------------------------------------------
Balance at December 31, 1995
Purchase of treasury shares
Recapitalization in connection with
    restatement of Charter
Reclassification of common stock in
    connection with recapitalization
Accretion of common stock subject to
    put to fair value
Issuance of Class A common stock upon
   conversion of Series A convertible
   preferred stock
Issuance of Class A common stock
Reclassification of common stock
     subject to put
Issuance of Class B-1 and B-2 common
    stock for cash, net of issuance costs
    of $2,051,095                               2,442,866            $24,429          1,557,134          $15,571
Payment received from stockholder
Net loss
                                             ---------------------------------------------------------------------
Balance at December 31, 1996                    2,442,866             24,429          1,557,134           15,571
Issuance of Class A common stock, net
   of issuance cost $108,475
Reclassification of common stock
   subject to put to fair value
Issuance of Class B-1 and B-2 common
   stock for cash                                 366,430              3,664            233,570            2,336
Accretion of common stock subject to
  put to fair value
Issuance of Class C common stock for cash
  net of issuance cost of $742,088
Options issued at below fair value in
    connection with affiliation
Net loss
                                             ---------------------------------------------------------------------

Balance at December 31, 1997                    2,809,296            $28,093          1,790,704          $17,907
                                             =====================================================================


<CAPTION>

                                                Class C         Series A Convertible
                                              Common Stock         Preferred Stock             Treasury Stock            Additional
                                             ----------------------------------------------------------------------        Pain-in
                                             Shares     Amount      Shares       Amount        Shares        Amount        Capital
                                             ---------------------------------------------------------------------------------------
<S>                                          <C>        <C>     <C>          <C>            <C>            <C>          <C>
Issuance of common stock
Issuance of convertible preferred stock,
  net of issuance cost of $98,153                               1,666,151    $ 3,750,609
Issuance of warrants                                                                                                     $  420,000
Loan to stockholders
Net loss
                                             ---------------------------------------------------------------------------------------
Balance at December 31, 1995                                    1,666,151      3,750,609                                    420,000
Purchase of treasury shares                                                                 (1,012,500)     $(10,125)
Recapitalization in connection with
    restatement of Charter
Reclassification of common stock in
    connection with recapitalization                                                                                       (248,958)
Accretion of common stock subject to
    put to fair value
Issuance of Class A common stock upon
   conversion of Series A convertible
   preferred stock                                             (1,666,151)    (3,750,609)                                 3,733,947
Issuance of Class A common stock                                                                                         26,341,989
Reclassification of common stock
     subject to put                                                                                                     (17,038,261)
Issuance of Class B-1 and B-2 common
    stock for cash, net of issuance costs
    of $2,051,095                                                                                                         7,908,905
Payment received from stockholder
Net loss
                                           ----------------------------------------------------------------------------------------
Balance at December 31, 1996                                            -              -    (1,012,500)      (10,125)   21,117,622
Issuance of Class A common stock, net
   of issuance cost $108,475                                                                                            18,718,611
Reclassification of common stock
   subject to put to fair value                                                                                        (15,889,309)
Issuance of Class B-1 and B-2 common
   stock for cash                                                                                                        1,494,000
Accretion of common stock subject to
  put to fair value
Issuance of Class C common stock for cash
  net of issuance cost of $742,088           7,692,309  $76,923                                                         24,180,989
Options issued at below fair value in
    connection with affiliation                                                                                            225,000
Net loss
                                           ----------------------------------------------------------------------------------------

Balance at December 31, 1997                 7,692,309   76,923         -            $ -    (1,012,500)     $(10,125) $ 49,846,913
                                           =========================================================================================


<CAPTION>
                                                                                                                          Common
                                                Additional                                               Total             Stock
                                                 Paid-in       Accumulated         Due from          Stockholders'        Subject
                                                 Capital         Deficit         Stockholders            Equity            to Put
                                             --------------------------------------------------------------------------------------
<S>                                          <C>               <C>              <C>                  <C>              <C>
Issuance of common stock                                                                              $     77,063
Issuance of convertible preferred stock, net
  of issuance cost of $98,153                                                                            3,750,609
Issuance of warrants                          $      420,000                                               420,000
Loan to stockholders                                                                    $(61,875)          (61,875)
Net loss                                                        $  (2,082,264)                          (2,082,264)
                                             --------------------------------------------------------------------------------------
Balance at December 31, 1995                         420,000       (2,082,264)           (61,875)        2,103,533
Purchase of treasury shares                                                               10,125
Recapitalization in connection with
    restatement of Charter
Reclassification of common stock in
    connection with recapitalization                (248,958)                                             (307,938) $      307,938
Accretion of common stock subject to
    put to fair value                                             (14,436,848)                         (14,436,848)     14,436,848
Issuance of Class A common stock upon
   conversion of Series A convertible
   preferred stock                                 3,733,947
Issuance of Class A common stock                  26,341,989                                            26,448,030
Reclassification of common stock
     subject to put                              (17,038,261)                                          (17,106,687)     17,106,687
Issuance of Class B-1 and B-2 common
    stock for cash, net of issuance costs
    of $2,051,095                                  7,908,905                                             7,948,905
Payment received from stockholder                                                         51,750            51,750
Net loss                                                           (5,059,197)                          (5,059,197)
                                             --------------------------------------------------------------------------------------
Balance at December 31, 1996                      21,117,622         (21,578,309)                         (358,452)     31,851,473
Issuance of Class A common stock, net
   of issuance cost $108,475                      18,718,611                                            18,785,477
Reclassification of common stock
   subject to put to fair value                  (15,889,309)                                          (15,943,483)     15,943,483
Issuance of Class B-1 and B-2 common
   stock for cash                                  1,494,000                                             1,500,000
Accretion of common stock subject to
  put to fair value                                                (6,678,987)                          (6,678,987)      6,678,991
Issuance of Class C common stock for cash
  net of issuance cost of $742,088                24,180,989                                            24,257,912
Options issued at below fair value in
    connection with affiliation                      225,000                                               225,000
Net loss                                                           (5,710,230)                          (5,710,230)
                                             --------------------------------------------------------------------------------------

Balance at December 31, 1997                    $ 49,846,913    $ (33,967,526)               $ -      $ 16,077,237     $54,473,947
                                             ======================================================================================

See accompanying notes.
</TABLE>

                                                                               4

<PAGE>

                         Physicians Quality Care, Inc.

                           Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                                                          PERIOD FROM
                                                                                                           MARCH 20
                                                                                                       1995 (INCEPTION)
                                                                                                              TO
                                                                             DECEMBER 31                  DECEMBER 31
                                                                        1997               1996               1995
                                                               --------------------------------------------------------
<S>                                                              <C>                <C>                <C>
OPERATING ACTIVITIES
Net loss                                                              $(5,710,230)       $(5,059,197)       $(2,082,264)
Adjustments to reconcile net loss to net cash used
in operating activities:
  Depreciation and amortization                                         2,163,866            280,490              6,704
  Interest accretion on convertible promissory note                                           90,000             90,000
  Changes in operating assets and liabilities, net of effects
   of business acquisitions:
     Increase in due from affiliated physician practices               (6,121,758)        (2,522,221)
     (Increase) decrease in prepaid expenses and other assets            (614,070)            11,402           (335,853)
     Increase (decrease) in accounts payable, accrued
      compensation and accrued expenses                                   540,064          1,672,530            817,885

     Increase (decrease) in income taxes payable                          (69,708)            37,708             32,000
                                                               -----------------------------------------------------------
Net cash used in operating activities                                  (9,811,836)        (5,489,288)        (1,471,528)

INVESTING ACTIVITIES
Purchase of property and equipment                                     (1,657,453)          (120,218)           (97,350)
Cash paid for affiliation related costs                                (1,016,096)        (1,839,274)
Cash paid for affiliations                                             (7,277,412)        (5,880,974)
                                                               -----------------------------------------------------------
Net cash used in investing activities                                  (9,950,961)        (7,840,466)           (97,350)

FINANCING ACTIVITIES
Proceeds from issuance of common stock, net of issuance costs          28,599,906          8,309,655             15,188
Net proceeds from issuance of convertible preferred stock                                                     3,750,609
Proceeds from issuance of warrants                                                                              420,000
Proceeds from bridge financing                                                             1,000,000
(Payment to) proceeds from note payable                                  (200,000)           200,000
Proceeds from convertible promissory note                                                                     1,320,000
Proceeds from repayment of shareholder loan                                                   51,750
(Increase) decrease  in deferred financing costs                           79,536            438,942           (457,138)
Payments on capital lease obligations                                     (71,552)           (13,448)
Net cash provided by financing activities                              28,407,890          9,986,899          5,048,659
                                                               -----------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                    8,645,093         (3,342,855)         3,479,781
Cash and cash equivalents at beginning of period                          136,926          3,479,781
                                                               -----------------------------------------------------------

Cash and cash equivalents at end of period                            $ 8,782,019        $   136,926        $ 3,479,781
                                                               ===========================================================
</TABLE>

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid for  interest was $119,000, $14,000 and $0 for the years ended
December 31, 1997, 1996 and 1995, respectively.

Cash paid for income taxes was $230,000, $32,000 and $0 for the years ended
December 31, 1997, 1996 and 1995, respectively.

During 1997 and 1996 $15,943,000 and $23,587,000, respectively was paid in
connection with affiliations in the form of Class A common stock.

During 1996, the Company converted a bridge loan and a promissory note payable
totalling $2,500,000 into shares of Class A common stock.

See accompanying notes.

                                                                               5
<PAGE>

                         Physicians Quality Care, Inc.

                         Notes to Financial Statements

                               December 31, 1997



1.  BUSINESS AND ORGANIZATION

Formed in March 1995, Physicians Quality Care, Inc. (PQC or the Company)
provides complete practice management for multi-specialty medical practice
groups.  The Company's objective is to establish and manage networks of
specialty and primary care physicians and related diagnostic and therapeutic
support services which can provide comprehensive health care services in
targeted geographic areas.

During 1996 and 1997, the Company completed affiliations with physician
practices in Springfield, Massachusetts, and in the Baltimore/Annapolis,
Maryland area.  Prior to August 30, 1996, the Company's operations consisted
primarily of seeking affiliations with physician practices and negotiating the
terms of the affiliations and management agreements with such physician
practices.


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The Company enters into long-term affiliation arrangements with physician
practices, and through mergers and asset purchases, the assets and liabilities
of the physician practices are transferred to a professional corporation
affiliated with the Company. Each affiliated group has a nine member joint
Policy Board that is responsible for final decisions related to management and
administrative policies for the overall operations of the affiliated group
including decisions regarding; scope of services, patient acceptance policies
and procedures, pricing of services, negotiation and execution of contracts and
approval of operating and capital budgets. Four members of the Joint Policy
Board are appointed by the Company and four members are appointed by the
affiliated group. The President, who is the ninth member of the Joint Policy
Board, is appointed by the Company; however, the Company may only select the
President from three physicians nominated by physicians employed by the
affiliated group. Therefore, the Company cannot exercise exclusive authority
over the decision making process of the Joint Policy Board. Accordingly, for
financial reporting purposes, the Company does not consolidate the operating
results and accounts of the physician practices. For display purposes, the
Company has presented the physician practice revenues and amounts retained by
the physician practices in the accompanying statements of operations to arrive
at the Company's management fee revenue. See further discussion below.

NET PATIENT SERVICE REVENUE

Net patient service revenue represents the revenue of the physician practices
reported at the estimated realizable amounts from patients, third-party payors
and others for services rendered, net of contractual and other adjustments.

During 1996 and 1997, respectively, the Company estimates that approximately 40%
and 35% of net patient service revenue was received under government-sponsored
healthcare programs (principally, the Medicare and Medicaid programs).

                                                                               6
<PAGE>

                        Physicians Quality Care, Inc.

                   Notes to Financial Statements (continued)


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company has agreements with various Health Maintenance Organizations (HMOs)
to provide medical services to subscribing participants.  Under these
agreements, the Company receives monthly capitation payments based on the number
of each HMO's participants.

MANAGEMENT FEE REVENUE

Management fee revenue represents net patient service revenue less amounts
retained by physician practices.  The amounts retained by physician practices
represents amounts paid to the physicians pursuant to the service agreements
between the Company and the physician practices.  Physician baseline
compensation is determined based on an agreed-upon percentage (80% to 95%) of
the physicians' historic compensation levels, but is subject to reduction if
physician practice net revenues are insufficient to cover the baseline
compensation for two of the physician groups.  The amounts allocated to the
Company and to the physician groups are determined based on a percentage of
physician group revenue in excess of physician baseline compensation and
reimbursement of practice expenses (hereafter referred to as net profits).  The
net profits for one of the Company's Affiliated Groups are first allocated to
the Company up to 5% of the net profits.  Net profits remaining after the first
allocation are then allocated 80% to the Company and 20% to the physician groups
up to $1.5 million.  Net profits remaining after the second allocation are then
allocated equally between the Company and the physician groups.  The net profits
for the Other Affiliated Group are allocated equally between the Company and the
physician groups.

The following details the amounts retained by physician groups and the
management fee revenue for the year ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                         1997                1996
                                                ----------------------------------------
<S>                                               <C>                 <C>
Amounts Retained by Physician Groups:
      Excess net profits subject to allocation           $   759,041          $  241,143
      Less amount allocated to the Company                  (568,302)           (136,957)
                                                ----------------------------------------
      Amount allocated to physician groups                   190,739             104,186
      Physician baseline compensation                     15,405,423           2,090,385
                                                -----------------------------------------

                                                         $15,596,162          $2,194,571
                                                ========================================
Management Fee Revenue:
      Amount allocated to Company                           $568,302            $136,957
      Reimbursement of practices expenses                 29,872,770           3,694,924
                                                -----------------------------------------
                                                         $30,441,072          $3,831,881
                                                ========================================
</TABLE>

                                                                               7
<PAGE>

                        Physicians Quality Care, Inc.

                   Notes to Financial Statements (continued)


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Under the service agreements, the Company provides each physician practice with
a comprehensive package of services, including office and facilities, equipment,
nursing and other non-physician professional support, administrative support,
information systems, comprehensive professional liability insurance, and general
management and financial advisory services.  The Company also bills all
patients, insurance companies and third-party payors and negotiates all
contracts and relationships with payors.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents.  The carrying
amount reported in the balance sheet for cash and cash equivalents approximates
its fair value.

PROPERTY AND EQUIPMENT

Property and equipment is carried at cost.  Depreciation is calculated using the
straight-line method over the useful lives of the assets.

PROFESSIONAL LIABILITY INSURANCE

The Company has obtained professional liability coverage for the Physician
Practices through commercial insurance carriers on either a claims-made or
occurrence basis.  The Company has purchased additional insurance to cover the
tail portion of the claims made policies.  Management believes that there are no
claims that may result in a loss in excess of amounts covered by its existing
insurance.

INVESTMENT IN LONG TERM AFFILIATION AGREEMENTS

The cost of the long-term affiliation agreements in excess of the underlying
equity of the affiliated groups is being amortized on a straight-line basis over
25 years.

STOCK COMPENSATION ARRANGEMENTS

As permitted under SFAS 123 the Company accounts for its stock compensation
arrangements under the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25).  Because the exercise price of options granted
during 1997, 1996 and 1995 equals the fair value of the underlying stock at date
of grant, no compensation expense is required under APB 25.

                                                                               8
<PAGE>

                        Physicians Quality Care, Inc.

                   Notes to Financial Statements (continued)


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company has adopted disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123).  These provisions require the Company to disclose pro forma net income and
earnings per share amounts as if compensation expense related to grants of stock
options were recognized based on new fair value accounting rules.

NET LOSS PER COMMON SHARE

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings per Share" (SFAS 128), which
establishes standards for computing and presenting earnings per share (EPS) and
applies to entities with publicly held common stock or potential common stock.
This Statement is effective for financial statements issued for both interim and
annual periods ending after December 15, 1997 and requires restatement of all
prior period EPS data.  The Company has applied this standard in 1997 and has
restated EPS for 1995 and 1996.

Basic net loss per share of common stock is computed by dividing the net loss
available to common stock by the weighted-average number of common shares
outstanding during each period presented.  Diluted loss per share is not
presented because the effect would be antidilutive.

RISKS AND UNCERTAINTIES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period.  Actual results could differ from those estimates.

                                                                               9
<PAGE>

                        Physicians Quality Care, Inc.

                   Notes to Financial Statements (continued)


2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

PENDING ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board 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 an 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.

RECLASSIFICATION

Certain amounts in the financial statements have been reclassed for the basis of
presenting corresponding items in the comparative financial statements.

3.  AFFILIATIONS

Springfield

On January 1, 1997, the Company entered into long-term affiliation arrangements
with 2 physician practices (5 physicians) located in Western Massachusetts (the
Springfield Affiliation).  On August 30, 1996, the Company entered into long-
term affiliation arrangements with 7 physician practices (32 physicians) located
in Western Massachusetts (the Springfield Affiliation).  In connection with
these transactions, the assets and liabilities of the physician practices were
transferred to a professional corporation affiliated with the Company, Medical
Care Partners, P.C. (MCP) and the physicians became employees of MCP.  The
aggregate consideration paid to the physicians for the 1997 affiliation was
approximately $2.5 million, of which  $831,000

                                                                              10
<PAGE>

                        Physicians Quality Care, Inc.

                   Notes to Financial Statements (continued)


3.  AFFILIATIONS (CONTINUED)

was paid in cash, $1.4 million was paid by the issuance of 572,493 shares of
Class A common stock, and $225,000 was paid by the issuance of options to
purchase shares of common stock at below fair value. The aggregate consideration
paid to the physicians for the 1996 affiliation was approximately $9.7 million,
of which $3.2 million was paid in cash and $6.5 million was paid by the issuance
of 2,592,245 shares of Class A common stock. Up to an additional $2.15 million,
payable in Class A common stock, was available to be paid to certain physicians
if revenue goals were met. During 1997, $2.1 million of additional consideration
was accrued based on the achievement of these goals and will be paid during
1998. In addition, 29 physicians each received 2,500 options to purchase common
stock at an exercise price equal to fair value.

Baltimore

On December 1, 1997, the Company entered into a long-term affiliation
arrangement with a physician practice (58 physicians) located in the
Baltimore/Annapolis, Maryland area (the Flagship II Affiliation).  In connection
with this transaction, the assets and liabilities of the physician practices
were transferred to a newly formed professional corporation affiliated with the
Company, Flagship Health II, P.A. (Flagship II) and the physicians became
employees of Flagship II.  The aggregate consideration paid to the physicians
for the affiliation was approximately $17.4 million, of which $3 million was
paid in cash and $14.4 million was paid by the issuance of 4,800,000 shares of
Class A common stock.

On December 11, 1996, the Company entered into long-term affiliation
arrangements with 15 physician practices (59 physicians) located in the
Baltimore/Annapolis, Maryland area. In connection with this transaction, the
assets and liabilities of the physician practices were transferred to a newly
formed professional corporation affiliated with the Company, Flagship Health I,
P.A. (Flagship I) and the physicians became employees of Flagship I. The
aggregate consideration paid to the physicians for the affiliation was
approximately $19.8 million, of which $2.7 million was paid in cash and $17.1
million was paid by the issuance of 6,842,675 shares of Class A common stock.
During 1997, the Company issued 44,900 shares of Class A common stock to the
Flagship I physicians totalling $112,000 for the settlement of working capital
adjustments.

As described in Note 2, the Company does not consolidate the operating results
or accounts of the affiliated physician practices for financial reporting
purposes.  Accordingly, its investments in these long-term affiliation
agreements are accounted for in a manner similar to that used in the application
of the equity method of accounting.  Therefore, the costs of the long-term
affiliation agreements in excess of the underlying equity of affiliated groups
is accounted for as an intangible asset and amortized on a straight-line basis
over 25 years.

                                                                              11
<PAGE>

                        Physicians Quality Care, Inc.

                   Notes to Financial Statements (continued)


3.  AFFILIATIONS (CONTINUED)


The allocation of the costs of the 1997 and 1996 affiliations were as follows:

<TABLE>
<CAPTION>
                                                          1997 AFFILIATIONS
                                              ------------------------------------------
                                                    SPRINGFIELD          FLAGSHIP II
                                              ------------------------------------------
<S>                                             <C>                    <C>
Cash                                                 $30,000
Fixed assets                                          21,000             $1,171,000
Other current assets                                 150,000              4,100,000
Intangibles                                        2,327,000             15,795,000
Accounts payable                                     (12,000)              (905,000)
Other liabilities                                    (29,000)            (2,762,000)
                                              ------------------------------------------
                                                   2,487,000             17,399,000
Other affiliation costs                              115,000                461,000
                                              ------------------------------------------
Investment in long-term affiliation
           agreements                             $2,602,000            $17,860,000
                                              ==========================================
<CAPTION>
                                                           1996 AFFILIATIONS
                                              -------------------------------------------
                                                    SPRINGFIELD          FLAGSHIP I
                                              ------------------------------------------
<S>                                             <C>                    <C>
Cash                                                $336,000               $443,000
Fixed assets                                         317,000                955,000
Other current assets                               1,346,000              4,260,000
Intangibles                                        9,037,000             16,371,000
Accounts payable                                    (190,000)              (677,000)
Other liabilities                                 (1,138,000)            (1,592,000)
                                              ------------------------------------------
                                                   9,708,000             19,760,000
Other affiliation costs                            1,238,000              1,711,000
                                              ------------------------------------------
Investment in long-term affiliation
        agreements                               $10,946,000            $21,471,000
                                              ==========================================
</TABLE>



4.  ACQUISITIONS

On October 24, 1997, the Company acquired a 50% interest in TLC Management
Company, a medical management company and a 50 % interest in Total Quality
Practice Management, Inc., a practice management company providing Medicare risk
management services.  Both companies are based in Atlanta, GA.  Total aggregate
consideration was $4 million paid in cash and an obligation to issue a $1
million letter of credit.  As of December 31, 1997, the letter of credit has not
been issued.  The Company has accounted for the transaction using the equity
method of accounting for investments in common stock.  For the year ended
December 31, 1997, the net loss in investment was $98,269.

                                                                              12
<PAGE>

                       Physicians Quality Care, Inc.

                  Notes to Financial Statements (continued)

5.  PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                            DECEMBER 31
                                      1997                1996
                                 ---------------------------------
<S>                                 <C>                   <C>
Equipment                            $1,504,452           $132,163
Furniture and fixtures                   10,863             34,110
Office equipment                         32,753             20,509
Leasehold improvements                        -             85,000
                                 ---------------------------------
                                      1,548,068            271,782
Less accumulated depreciation          (220,208)           (57,774)
                                 ---------------------------------

                                     $1,327,860           $214,008
                                 =================================
</TABLE>


Depreciation expense was $543,591, $81,853 and $6,704 for years ended December
31, 1997, 1996 and for the period from inception to December 31, 1995,
respectively.

6.  TRANSACTIONS WITH RELATED PARTIES

The amounts due under the service agreements with the affiliated practices
represent management fee revenue due the Company net of nonphysician salaries
and benefits and other practice related expenses paid by the Company on behalf
of the affiliated practices.



The amounts due as a result of working capital and other adjustments at date of
affiliation, represent post closing adjustments provided for as part of the
affiliation agreements.  The corresponding credits were reflected as a reduction
in the cost of the long-term affiliation agreements.

Because of the nature of the Company's arrangements with the affiliated
physician groups, substantially all transactions included in net patient service
revenues and amounts retained by physician groups in the accompanying financial
statements are viewed as related-party transactions.

                                                                              13
<PAGE>

                       Physicians Quality Care, Inc.

                  Notes to Financial Statements (continued)


6.  TRANSACTIONS WITH RELATED PARTIES (CONTINUED)

The following summarizes the amounts due from related parties:


<TABLE>
<CAPTION>

                                                             DECEMBER 31
                                                       1997               1996
                                               -------------------------------------
<S>                                                <C>                 <C>
Due under Service agreements:
Flagship I & II                                     $3,164,696          $69,774
MCP                                                  2,219,318          520,596

Working capital and other adjustments at date
of affiliation:
Flagship I & II                                         72,000           506,702
MCP                                                    263,407           597,615
                                               --------------------------------------
                                                    $5,719,421        $1,694,687
                                               ======================================
</TABLE>



During the year ended December 31, 1996, the Company entered into affiliation
transactions with three of its directors who are physicians.  The physicians
received 498,602 shares of Class A common stock, 2,500 options to acquire Class
A common stock, with an exercise price of $2.50 per share and cash in the amount
of $315,000 as consideration for the affiliations.

On August 30, 1996, the Company entered into a Management Agreement with Bain
Capital Partners V, L.P. (Bain), an affiliate of the Company's Institutional
Investors (see Note 6).  Pursuant to the Management Agreement, the Company has
agreed to pay Bain a management fee of $750,000, plus 1% of any financings from
parties other than affiliates of Bain, for services including advice in
connection with financings and financial, managerial and operational advice in
connection with day-to-day operations.  The Company is also obligated to pay
certain expenses, not to exceed $100,000 per year without the Company's consent,
of Bain and its affiliates in connection with the Management Agreement.

7.  LEASES

The Company and its affiliates maintain operating leases for property and
certain office equipment. The property leases contain renewal options and
escalation clauses and require payments of certain utilities and taxes over
established base amounts.

Operating lease expense amounted to $3,136,822, $535,479 and $14,679 for the
years ended December 31, 1997 and 1996 and the period from inception to December
31, 1995, respectively.

Future minimum lease payments under noncancelable capital and operating leases
follow. All amounts, excluding approximately $162,000 in 1998, are the
obligations of the Company's affiliated groups.

<TABLE>
<CAPTION>
                              OPERATING LEASES
                              ----------------

             <S>                 <C>

             1998                $ 4,349,000
             1999                  3,932,000
             2000                  3,721,000
             2001                  3,081,000
             2002                  2,417,000
             Thereafter            2,673,000
                                 ___________
                                 $20,173,000
                                 ===========
</TABLE>
                                                                              14






<PAGE>

                       Physicians Quality Care, Inc.

                  Notes to Financial Statements (continued)


8.  STOCKHOLDERS' EQUITY

Preferred Stock
---------------

During June 1995, the Company issued 1,666,151 shares of Series A Convertible
Preferred Stock (Preferred Stock), par value $.01, that was converted to Class A
common stock on a one-for-one basis in connection with the recapitalization
discussed below. Warrants to purchase 416,538 shares of Common Stock at $2.40
per share were issued upon the closing of the sale of the Preferred Stock.
Warrants to purchase an additional 416,538 shares of common stock were required
to be issued to the holders of the Preferred Stock in the event that the Company
did not complete an initial public offering on or before June 30, 1996.
Accordingly, on August 30, 1996, the Company issued an additional 416,538
warrants at $2.40 per share. A total value of $300,000 were assigned to these
warrants.

In connection with the recapitalization, the Company authorized 10 million
shares of $.01 par value preferred stock.

Common Stock
------------

The Company has four classes of common stock; Class A, Class B-1, Class B-2 and
Class C. The primary difference between these four classes is voting rights.
Holders of Class A, Class B-1, Class B-2 and Class C common shares are entitled
to elect two, one, two and one members of the Company's Board of Directors,
respectively. The remaining seven directors are elected collectively by the
holders of Class A, Class B-1, Class B-2 and Class C common shares, with each
share having a single vote.


During the period from March 20, 1995 (inception) to December 31, 1995, the
Company issued 7,706,250 shares of $.01 par value common stock to its founders
in exchange for cash of $15,188 and notes of $61,875.  During the year ended
December 31, 1996, 1,012,500 shares of common stock were reacquired by the
Company at a cost of $10,125 in the form of cancellation of a like amount of a
note due from the shareholder.  These shares are subject to certain restrictions
which lapse in August 1998. Effective August 30, 1996, the Company
recapitalized. All shares of then-existing common stock were canceled and
replaced with Class A common shares.

On August 30, 1996, 402,301 of Class A common shares were issued in connection
with the conversion of a bridge loan.  The bridge loan, in the amount of $1.0
million, (1) was outstanding during July and August 1996;  (2) bore interest at
10.25% and (3) was convertible into Class A common shares at a conversion rate
of $2.50 per share.  Warrants to purchase 201,150 shares of common stock at
$5.00 per share were issued in connection with the bridge loan.


                                                                             15
<PAGE>

                       Physicians Quality Care, Inc.

                  Notes to Financial Statements (continued)


8.  STOCKHOLDERS' EQUITY (CONTINUED)

During August 1996, 625,000 shares of Class A common stock were issued in
connection with the conversion of a promissory note.

In connection with the Springfield Affiliation described in Note 3, on August
30, 1996, the Company issued 1,587,863 Class B-1 common shares, 1,012,137 Class
B-2 common shares and warrants to purchase 3,750,500 shares of Class B common
stock at $2.50 per share to the Institutional Investors in exchange for cash
proceeds of $6.5 million, which after issuance costs of approximately $1.4
million, netted to approximately $5.1 million.  In connection with the Baltimore
Affiliation described in Note 3, on December 11, 1996, the Company issued
855,003 Class B-1 common shares, 544,997 Class B-2 common shares and warrants to
purchase 1,799,000 shares of Class B common stock at $2.50 per share to the
Institutional Investors in exchange for cash proceeds of $3.5 million, which
after issuance costs of approximately $640,000, netted to approximately $2.9
million.

In April 1997, the Company issued 366,430 Class B-1 common shares, 233,570 Class
B-2 common shares and warrants to purchase 865,500 shares of Class B common
stock at $2.50 per share to the Institutional Investors in exchange for cash
proceeds of $1.5 million.

Subject to certain conditions, the Institutional Investors are required to
purchase up to 8,000,000 additional shares of Class B common stock, together
with warrants to purchase up to 7,450,500 shares of Class B common stock, for
aggregate consideration of $20,000,000.  These shares may be sold no later than
December 31, 1999.

In connection with the Flagship II Affiliation described in Note 3, on June 30,
1997, the Company issued 7,692,309 Class C common shares, at $3.25 per share to
the Institutional Investors in exchange for cash proceeds of $25 million, which
after issuance costs of approximately $700k, netted to approximately $24.3
million.


                                                                              16
<PAGE>

                       Physicians Quality Care, Inc.

                  Notes to Financial Statements (continued)

8.  STOCKHOLDERS' EQUITY (CONTINUED)

Puts and Calls
--------------

Of the Company's outstanding common stock, 18,157,982 shares as of December 31,
1997 are subject to a put option which provides for the put of the shares back
to the Company at fair value upon the death of the holder. In addition,
1,029,749 of such shares are also subject to a fair value put option back to the
Company at the later of the shareholder's retirement from the Company or June,
1998. Consequently, common shares have been recorded at fair value outside of
permanent equity in the accompanying balance sheet.

Under shareholder agreements as of December 31, 1997, the Company has the right
to purchase 15,471,063 shares of common stock for fair value if the
shareholder's termination from the Company is without cause or is by
resignation, and for the lower of cost or fair value if termination is with
cause.

All of the above put and call provisions expire on the date of a Qualified
Public Offering (QPO), defined as a public offering of the Company's common
stock with proceeds to the Company of at least $50 million.

In addition to the previously discussed put options, the Flagship II physicians
have the right to require the Company to repurchase (in the form of a five year
non-interest bearing note) 4.8 million shares of Class A common stock issued in
the Flagship II affiliation (note 3) at a purchase price of $3.00 per share if
the Company has not completed an underwritten initial public offering prior to
December 1, 2001.

Because the Company's shares are subject to a number of restrictions in the
shareholders' agreements and will not trade until the occurrence of a QPO, the
Company believes it is a nonpublic entity for compensation accounting purposes
and, accordingly, has not recorded any compensation expense for these puts and
calls.  As noted above, at the date of the QPO, the put and call provisions of
the shareholder agreements will expire.

                                                                              17
<PAGE>

                       Physicians Quality Care, Inc.

                  Notes to Financial Statements (continued)


8.  STOCKHOLDERS' EQUITY (CONTINUED)

Warrants
--------

At December 31, 1997, warrants to purchase shares of Class A, Class B and
Class C common stock were outstanding as follows:
<TABLE>
<CAPTION>

    NUMBER OF SHARES   PRICE PER SHARE     EXPIRATION DATE
-------------------------------------------------------------------
 <S>                   <C>                 <C>
         20,000            $2.40                2000
         201,150            5.00                2003
         416,538            2.40                2000
         416,538            2.40                2001
         6,415,000          2.50                2003
         50,000             3.00                2003
         7,692,309          3.25                2004
</TABLE>

Shares Reserved for Future Issuance
-----------------------------------

At December 31, 1997, the Company has reserved 24,865,381 shares of  Common
Stock for future issuance for the following purposes:

                Equity incentive plan            2,710,795
                Warrants                        15,211,535
                                               -----------

                                                17,922,330
                                               ===========

                                                                              18
<PAGE>

                       Physicians Quality Care, Inc.

                  Notes to Financial Statements (continued)


9.  Earnings Per Share

The following table sets forth the computation of basic earnings per share:

<TABLE>
<CAPTION>
                                                1997               1996               1995
                                       ---------------------------------------------------------
<S>                                         <C>                 <C>                 <C>
Numerator:
Net loss                                      $ (5,710,230)      $ (5,059,197)       $(2,082,264)
Accretion of common stock subject to
 put to fair value                              (6,678,987)       (14,436,848)
                                       ---------------------------------------------------------
Numerator for basic earnings per
 share-income available to common
 stockholders                                  (12,389,217)       (19,496,045)        (2,082,264)

Denominator for basic earnings per
 share - weighted-average shares                30,335,607         10,785,605          7,706,250
                                       ---------------------------------------------------------

Basic earnings per share                       $     (0.41)      $      (1.81)       $     (0.27)
                                       =========================================================
</TABLE>

The effect of options (Note 9) and warrants (Note 7) are not considered, as it
would be anti-dilutive for the years presented.  At December 31, 1997, these
securities, if converted, could potentially dilute basic earnings per common
share in the future.

10.  Employee Compensation Plans

Equity Incentive Plan
---------------------

The Company's 1995 Equity Incentive Plan provides the opportunity for employees,
consultants, officers and directors to be granted options to purchase, receive
awards or make direct purchases of up to 3.5 million shares of the Company's
common stock.  Options granted under the Plan may be "Incentive Stock Options"
or "Nonqualified Options" under the applicable provisions of the Internal
Revenue Code.

Incentive Stock Options are granted at the fair market value of the Company's
common stock at the date of the grant as determined by the Board of Directors.
Incentive Stock Options granted to employees who own more than 10% of the voting
power of all classes of stock will be granted at 110% of the fair market value
of the Company's common stock at the date of the grant.  Nonqualified options
may be granted at amounts up to the fair market value of the Company's common
stock on the date of the grant, as determined by the Board of Directors.

                                                                              19
<PAGE>

                       Physicians Quality Care, Inc.

                  Notes to Financial Statements (continued)


10.  EMPLOYEE COMPENSATION PLANS (CONTINUED)

Pro forma information regarding net income and earnings per share, as if the
Company had used the fair value method of SFAS 123 to account for stock options
issued under its equity incentive plan is presented below.  The fair value for
these options was estimated at the date of grant using the "minimum value
method" prescribed by SFAS 123.  The following weighted-average assumptions were
used to determine the fair value for 1997, 1996 and 1995, respectively: a risk-
free interest rate of 6.08%, 6.2% and 6.0%, an expected dividend yield of 0%
each year, and a weighted-average expected life of the options of six years.

<TABLE>
<CAPTION>
                                        1997                1996               1995
                               ----------------------------------------------------------
<S>                              <C>                 <C>                 <C>
Pro forma net income                  $(13,379,027)       $(19,541,921)       $(2,084,340)
Pro forma basic earnings
 per share                            $      (0.44)       $      (1.81)       $     (0.27)

</TABLE>

A summary of the Company's stock option activity and related information is as
follows:

<TABLE>
<CAPTION>
                                                                                                         PERIOD FROM MARCH 20 1995
                                          YEAR ENDED                           YEAR ENDED               (INCEPTION) TO DECEMBER 31,
                                       DECEMBER 31, 1997                    DECEMBER 31, 1996                       1995
                             ------------------------------------------------------------------------------------------------------
                                                                                                                          WEIGHTED
                                                                                                                          AVERAGE
                                                   WEIGHTED AVERAGE                      WEIGHTED AVERAGE                 EXERCISE
                                      SHARES         EXERCISE PRICE         SHARES        EXERCISE PRICE      SHARES       PRICE
                             ------------------------------------------------------------------------------------------------------
<S>                           <C>                <C>                 <C>                 <C>              <C>            <C>
Outstanding at beginning of
 period                                811,012            $ 0.95           476,086             $ 0.10

Granted                              2,181,033              2.69           346,676               2.12         476,086       $0.10

Exercised                              (90,375)            (0.04)
Forfeited                             (190,875)            (1.97)          (11,750)             (0.08)
                               ------------------------------------                         --------------------------------------

Outstanding at end of period         2,710,795            $ 2.25           811,012             $ 0.95         476,086       $0.10

                               ===================                    =================                  ===============

Exercisable at period end              600,099                             140,487                                 --
Weighted-average fair value    ===================                    ==================                 ===============
 of options granted during
 period                                  $0.85                            $   0.69                           $   0.02


</TABLE>

                                                                              20
<PAGE>

                       Physicians Quality Care, Inc.

                  Notes to Financial Statements (continued)


10.  EMPLOYEE COMPENSATION PLANS (CONTINUED)

The following table summarizes information about stock options outstanding at
December 31, 1997:

<TABLE>
<CAPTION>
                                                                       Weighted-Average
                                                                        Remaining Life
  EXERCISE PRICE      OPTIONS OUTSTANDING      Options Exercisable         (Years)
------------------------------------------------------------------------------------------
<S>                 <C>                      <C>                     <C>
     $ 0.01                241,586                 152,557                    7.4
       0.25                 91,000                  40,500                    7.0
       0.85                109,676                  27,669                    8.1
       1.00                150,000                 150,000                    9.0
       2.50              1,311,000                 229,373                    9.2
       3.00                316,533                       0                    9.8
       3.25                491,000                       0                    8.5
</TABLE>

All options granted vest ratable over a range of three to four years.

Profit Sharing Plan
-------------------

The Board of Directors of the Company approved the adoption of a qualified
401(k) profit sharing plan (the Plan) for all employees meeting certain
eligibility requirements.  Under the Plan, the participants may make
contributions to the Plan of up to 15% of their compensation, up to the Internal
Revenue Service limitation.  Effective December 1, 1996, the Company may make
discretionary contributions to the Plan as  determined by the Board of
Directors.  Contributions for the year ended December 31, 1997 and 1996,
respectively, were approximately $528,000 and $86,000.

Money Purchase Pension Plan
---------------------------

The Board of Directors of the Company approved the adoption of a qualified money
purchase pension plan for the employees of MCP.  Effective August 30, 1996,
the Company may provide a contribution on wages up to the Social Security
limitation and up to 9.27% on wages in excess of the Social Security limitation.
The Company contributed approximately $518,000 and $187,000 to the money
purchase pension plan in 1997 and 1996, respectively.

                                                                              21
<PAGE>

                       Physicians Quality Care, Inc.

                  Notes to Financial Statements (continued)


11.  Income Taxes

The Company consolidates the affiliated physician practices for Federal and
State income tax purposes.


Significant components of the provision for income taxes are as follows:


<TABLE>
<CAPTION>
                                    YEAR ENDED DECEMBER 31
                                  1997                 1996
                            -----------------------------------
<S>                            <C>                <C>
Current:
  Federal                                            $22,057
  State                         $ 111,123             56,071
                            -----------------------------------
                                  111,123             78,128
Deferred:
  Federal                        (770,443)
  State                          (135,961)
                            -----------------------------------
                                 (906,404)
                            -----------------------------------

Total (benefit) expense         $(795,281)           $78,128
                            ===================================

</TABLE>

The components of the Company's deferred income taxes are as follows:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31
                                                              1997             1996

<S>                                                 <C>                 <C>
Deferred tax liabilities:
 Adjustment of cash basis practices to accrual basis      $(1,475,782)     $(1,073,048)
 Fixed assets differences                                    (514,408)          85,360
                                                     ---------------------------------
Total deferred tax liabilities                             (1,990,190)        (987,688)

Deferred tax assets:
 Net operating loss carryover                               3,660,488        1,783,956
 Other accrued liabilities                                    194,225           98,529
 Other (charitable contribution carryover)                      9,617
 Capitalized start-up costs                                   498,410          664,547
 Allowance for doubtful accounts                              282,122           85,763
                                                     ---------------------------------
                                                            4,644,862        2,632,795
 Less valuation allowance                                  (3,400,734)      (2,109,984)
                                                     ---------------------------------
Net deferred tax assets                                     1,244,128          522,811
                                                     ---------------------------------

Net deferred tax assets (liabilities)                     $  (746,062)     $  (464,877)
                                                     =================================
</TABLE>

                                                                              22
<PAGE>

                       Physicians Quality Care, Inc.

                  Notes to Financial Statements (continued)


11.  INCOME TAXES (CONTINUED)


The difference between the provision for income taxes and the amount computed by
applying the statutory federal income tax rate is as follows:


<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31
                                                     1997                            1996
                                       ----------------------------------------------------------------
<S>                                      <C>               <C>          <C>              <C>
Federal taxes at statutory rates             $(2,211,874)        34%       $(1,721,439)            35%

Add (deduct):
 State income taxes, net of federal
  benefit                                       (300,555)         4.6         (209,474)           4.3

 Change in valuation allowance
  attributable to operations                   1,290,750        (19.8)       1,999,182          (40.6)

 Goodwill                                        402,404          6.2
 Other                                            23,994         (0.4)           9,859           (0.2)
                                       ----------------------------------------------------------------

                                             $  (795,281)        12.2%     $    78,128          (1.5)%
                                       =================================================================
</TABLE>

At December 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $9,151,000 which expire through the
year 2012.  The utilization of net operating losses may be subject to limitation
under the change in stock ownership rules of the Internal Revenue Code.  For
financial reporting purposes, a valuation allowance of approximately $3,400,734
has been recognized to offset the deferred tax assets, including these
carryforwards, since uncertainty exist with respect to future realization of
such carryforwards.  The 1997 increase in the valuation allowance of $1,290,750
is comprised of an increase in the allowance of $2,197,154 relating to the
creation of deferred tax assets in the current period that may not be realized
in future periods, and a decrease of $906,404 relating to the utilization of a
portion of these deferred tax assets to offset acquired deferred tax liabilities
unable to be offset by preacquisition deferred tax assets.

                                                                              23
<PAGE>

                       Physicians Quality Care, Inc.

                  Notes to Financial Statements (continued)


12.  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 judgement 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 complaint involves a dispute over
whether an amendment in December 1996 to Mr. Greenberg's employment agreement is
valid and whether Mr. Greenberg resigned or was terminated in January 1997.  The
Company maintains that the amendment was fraudulently induced based upon a
commitment by Mr. Greenberg for long-term employment with the Company and that
Mr. Greenberg resigned in January 1997.  Under such facts, Mr. Greenberg is
entitled to have no more than 450,000 shares of Class A Common Stock (and,
depending upon counterclaims that may be brought by the Company, possibly fewer)
and is entitled to no severance payment.  Mr. Greenberg claims that 843,750
shares of Class A Common Stock have vested and that his employment was
terminated in January 1997 by the Company entitling him to severance payments of
$440,000.  While the Company is not able to predict the outcome of this
litigation, it does not believe its ultimate resolution will materially affect
either the Company's financial position or its results of operations.

13.  SUBSEQUENT EVENT

In February 1998 the Company entered into affiliation arrangements with 2
physicians located in the Baltimore/Annapolis, Maryland area. The aggregate
total consideration paid to the physicians in connection with the affiliation
was approximately $1.5 million, payable in a combination of cash and common
stock.

                                                                              24
<PAGE>

                                 EXHIBIT INDEX
                                 -------------

<TABLE>
<CAPTION>
Exhibit No.                                Description                           Page
-----------        ------------------------------------------------------------  ----
<C>          <C>   <S>                                                           <C>
    3.1(1)    --    Restated Certificate of Incorporation of the Registrant (as
                    amended on June 23, 1997)

    3.2(1)    --    Amended and Restated By-Laws of the Registrant (as
                    amended on June 19, 1997)

    4.1(1)    --    Specimen certificate for shares of Class A Common Stock

    4.2(1)    --    Amended and Restated Class B Common Stock and
                    Warrant Purchase Agreement dated June 20, 1997, between
                    the Registrant and each of the Institutional Investors

    4.3(1)    --    Stockholders Agreement, dated August 30, 1996 (the
                    "Stockholders Agreement"), among the Registrant, the
                    Institutional Investors, each Management Stockholder from
                    time to time party thereto, each Physician Stockholder from
                    time to time party thereto and other existing stockholders
                    from time to time party thereto

    4.4       --    Waiver of Rights and Amendment Under Stockholders Agreement

    4.5       --    Amendment No. 2 to the Stockholders Agreement

    4.6(1)    --    Stockholders Agreement dated August 9, 1996 between the
                    Registrant and certain Springfield Stockholder Physicians

    4.7(1)    --    Registration Rights Agreement dated August 9, 1996, by
                    and among the Registrant and certain Springfield
                    Stockholder Physicians

   10.1(1)    --    1995 Equity Incentive Plan

   10.2(1)    --    Management Agreement dated August 30, 1996, between
                    the Registrant and Bain Capital Partners V, L.P., a
                    Delaware limited partnership (the "Management
                    Agreement")

   10.3(1)    --    Lease dated November 1995 between Shorenstein
                    Management, Inc. as trustee for SRI Two Realty Trust and
                    the Registrant

   10.4(1)    --    Lease dated December 9, 1996 between Steven M. Roberts,
                    trustee of Northernedge/Plant One Realty Trust and the
                    Registrant
</TABLE>

                                       1
<PAGE>

   10.5(1)    --    Maryland Full-Service Office Lease of Camden Yards
                    North Warehouse dated October 12, 1995, by and between
                    the Maryland Stadium Authority and the Registrant

   10.6(1)    --    Form of Merger Agreement dated December 11, 1996,
                    among the Registrant, the Flagship Affiliated Group and
                    certain of the Flagship Stockholder Physicians and their
                    practices

   10.7(1)    --    Form of Asset Purchase Agreement dated December 11,
                    1996, among the Registrant, the Flagship Affiliated Group
                    and certain of the Flagship Stockholder Physicians and
                    their practices

   10.8(1)    --    Form of Affiliated Agreement dated December 11, 1996,
                    among the Registrant, the Flagship Affiliated Group and
                    certain of the Flagship Stockholder Physicians

   10.9(1)    --    Services Agreement dated December 11, 1996, between the
                    Registrant and the Flagship Affiliated Group (the "Flagship
                    Service Agreement")

   10.10(1)   --    Form of Employment Agreement dated December 11,
                    1996, between the Flagship Affiliated Group and each
                    Flagship Stockholder Physician

   10.11(1)   --    Form of Shareholder Designation and Stock Transfer
                    Agreement dated December 11, 1996, among the
                    Registrant, the Flagship Affiliated Group and the Flagship
                    Affiliated Group Stockholder, Laura M. Mumford, M.D.

   10.12(1)   --    Form of Merger Agreement among the Registrant, the
                    Springfield Affiliated Group and the Springfield
                    Stockholder Physicians and their practices

   10.13(1)   --    Form of Asset Purchase Agreement among the Registrant,
                    the Springfield Affiliated Group and certain Springfield
                    Stockholder Physicians

   10.14(1)   --    Form of Employment Agreement between the Springfield
                    Affiliated Group and certain Springfield Stockholder
                    Physicians, including General Terms and Conditions of
                    Employment for the Springfield Affiliated Group and Form
                    of Addendum thereto relating to the Springfield
                    Stockholder Physicians


                                       2
<PAGE>

   10.15(1)   --    Form of Affiliation Agreement dated August 30, 1996,
                    among the Registrant, the Springfield Affiliated Group and
                    the Springfield Stockholder Physicians

   10.16      --    Services Agreement dated August 30, 1996, among the
                    Registrant and the Springfield Affiliated Group

   10.17(1)   --    Shareholder Designation and Stock Transfer Agreement
                    dated August 9, 1996, among the Registrant, the
                    Springfield Affiliated Group and the Springfield Affiliated
                    Group Stockholder, Jay Ungar, M.D.

   10.18(1)   --    Credit Agreement dated January 16, 1997 among the
                    Registrant, Banker's Trust Company, as Agent, and various
                    lending institutions

  *10.19(1)   --    Employment Agreement dated June 21, 1995 between the
                    Registrant and Jerilyn P. Asher, as amended in January
                    1996 and on August 30, 1996

  *10.20(1)   --    Employment Agreement dated June 21, 1995 between the
                    Registrant and Arlan F. Fuller, M.D., as amended in
                    January 1996

   10.21(1)   --    Office Building Lease dated March 18, 1997, by and
                    between Harbor Court Associates and the Registrant

   10.22      --    Amended and Restated Services Agreement dated July
                    1997, among Flagship Health II, P.A. ("Flagship II") and
                    the Registrant

   10.23      --    Agreement dated July 31, 1997 by and among the
                    Registrant, Flagship, Flagship II and the Stockholders and
                    Optionholders of Clinical Associates, P.A.

   10.24      --    Merger Agreement dated July 31, 1997, between the
                    Registrant, Flagship II, Clinical Associates and the
                    Stockholders and Optionholders of Clinical Associates

   10.25      --    Amendment to the Management Agreement, dated
                    April 18, 1997

   21.1       --    Subsidiaries of the Registrant

   27         --    Financial Data Schedule
___________
(*)  Management contract or compensatory plan or arrangement filed as an exhibit
     to this Form pursuant to Item 14(c) of Form 10-K.
(1)  Incorporated herein by reference from the Company's Registration Statement
     on Form S-1 (File No. 333-26137).

                                       3