<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                  FORM 10-QSB


(Mark One)

 X  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
----                                                                           
   ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998.
                                              ------------- 

     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: 0-21145


                              COVALENT GROUP, INC.
                 (Name of small business issuer in its charter)


             NEVADA                                      56-1668867

(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)

              ONE GLENHARDIE CORPORATE CENTER, 1275 DRUMMERS LANE
                           Wayne, Pennsylvania 19087
                   (address of principal executive offices)


Issuer's telephone number: 610-975-9533

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

State the number of shares outstanding of each of the issuer's classes of common
equity as of June 30, 1998.

Common Stock, Par Value $.001                            11,743,209
-----------------------------                            ----------
     (Class)                                             Outstanding

Transitional Small Business Disclosure Format (check one): Yes    No  X
                                                               --     --
<PAGE>
 
FORM 10-QSB


                             COVALENT GROUP, INC.
                                        
                                        
                                     INDEX



<TABLE>
<CAPTION>
                                                                     Page
                                                                     ----

<S>                                                           <C>     
PART I.    Financial Information                                    
                                                                    
  Item 1.  Consolidated Financial Statements                        
                                                                    
     Balance Sheet - June 30, 1998 (Unaudited)                          3
                                                                    
     Statements of Operations - Six and Three Months Ended          
     June 30, 1998 and 1997 (Unaudited)                                 5
                                                                    
     Statements of Cash Flows - Six Months                          
     Ended June 30, 1998 and 1997 (Unaudited)                           6
                                                                    
     Notes to Consolidated Financial Statements                     
     (Unaudited)                                                        7
                                                                    
  Item 2.  Management's Discussion and Analysis of                  
           Financial Condition and Results of Operations                9
                                                                    
PART II.   Other Information                                           12
                                                                    
Signature Page                                                         13
</TABLE>
<PAGE>
 
PART I.  FINANCIAL INFORMATION
  Item 1.  Consolidated Financial Statements


                                                COVALENT GROUP, INC.
                                                   AND SUBSIDIARY
                                             CONSOLIDATED BALANCE SHEET
                                                    JUNE 30, 1998
                                                     (Unaudited)
 
<TABLE>
<CAPTION>
<S>                                                             <C>
ASSETS                                                  
                                                        
                                                        
CURRENT ASSETS                                          
   Cash and cash equivalents                                         $1,200,561
   Accounts receivable                                                1,425,428
   Prepaid expenses and other                                           236,444
   Costs and estimated earnings in excess of            
     related billings on uncompleted contracts                        1,846,101
                                                              -----------------
            TOTAL CURRENT ASSETS                                      4,708,534
                                                              -----------------
                                                        
PROPERTY AND EQUIPMENT                                  
   Equipment                                                            826,164
   Furniture and fixtures                                               201,535
   Leasehold improvements                                                59,441
                                                              -----------------
                                                                      1,087,140
     Less - Accumulated depreciation                                  ( 483,051)
                                                              -----------------
            NET PROPERTY AND EQUIPMENT                                  604,089
                                                              -----------------
DEFERRED INCOME TAXES                                                   228,462
                                                              -----------------
OTHER ASSETS                                                            110,919
                                                              -----------------
TOTAL ASSETS                                                         $5,652,004
                                                              =================
 
</TABLE>
 
 
                See accompanying notes to financial statements

                                       3
<PAGE>
 
                             COVALENT GROUP, INC.
                                AND SUBSIDIARY
                          CONSOLIDATED BALANCE SHEET
                                 JUNE 30, 1998
                                  (Unaudited)
 
 
<TABLE>
<CAPTION>
<S>                                                              <C>
LIABILITIES AND STOCKHOLDERS' EQUITY                          
                                                              
                                                              
CURRENT LIABILITIES                                           
Accounts payable                                                                 $ 1,671,218
Accrued expenses                                                                      91,254
Billings in excess of related costs and                       
    estimated earnings on uncompleted contracts                                      413,015
                                                                          ------------------
              TOTAL CURRENT LIABILITIES                                            2,175,487
                                                                          ------------------
                                                              
                                                              
STOCKHOLDERS' EQUITY                                          
Common stock, $.001 par value                                 
    25,000,000 shares, authorized                             
    11,755,709 shares issued                                                          11,756
Additional paid-in-capital                                                         9,265,508
Accumulated deficit                                                               (5,399,213)
Unrealized loss on investment                                                       (351,218)
                                                                          ------------------
                                                                                   3,526,833
LESS:                                                         
    Treasury stock at cost, 12,500 shares                                            (50,316)
                                                                          ------------------
              TOTAL STOCKHOLDERS' EQUITY                                           3,476,517
                                                                          ------------------
                                                              
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                       $ 5,652,004
                                                                          ==================
 
</TABLE>
 
 
 
                See accompanying notes to financial statements

                                       4
<PAGE>
 
                             COVALENT GROUP, INC.
                                AND SUBSIDIARY
                     Consolidated Statements Of Operations
                                  (Unaudited)
 
<TABLE> 
<CAPTION>  
                                                               Three Months Ended                  Six Months Ended
                                                                   June 30,                            June 30,
                                                       -------------------------------    ---------------------------------
                                                            1998              1997              1998               1997
                                                       ---------------    ------------    -----------------    ------------
 
<S>                                                    <C>                <C>             <C>                  <C>
REVENUES                                                  $ 2,543,213     $ 3,267,726          $ 4,782,820     $ 6,313,444
 
OPERATING EXPENSES
  Direct                                                    1,637,901       2,549,422            3,492,127       4,862,194
  Selling, general and administrative                         931,928         851,849            1,749,650       1,602,966
                                                       --------------     -----------          -----------     -----------
 
Total Operating Expenses                                    2,569,829       3,401,271            5,241,777       6,465,160
                                                       --------------     -----------          -----------     -----------
 
LOSS FROM OPERATIONS                                          (26,616)       (133,545)            (458,957)       (151,716)
 
INTEREST INCOME                                                27,504          36,853               57,465          50,298
 
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE                   888         (96,692)            (401,492)       (101,418)
 INCOME TAX BENEFIT
 
INCOME TAX BENEFIT                                              1,471               -              135,223         103,508
                                                       --------------     -----------          -----------     -----------
 
NET INCOME (LOSS)                                         $     2,359     $   (96,692)         $  (266,269)    $     2,090
                                                       ==============     ===========          ===========     ===========
 
 
NET INCOME (LOSS) PER COMMON SHARE
  Net Income (Loss) - Basic                               $         -     $      (.01)               $(.02)    $         -
  Net Income (Loss) - Diluted                             $         -     $      (.01)               $(.02)    $         -
 
WEIGHTED AVERAGE COMMON AND COMMON
  EQUIVALENT SHARES OUTSTANDING
   Basic                                                   11,743,209      11,605,121           11,743,209      11,603,925
   Diluted                                                 12,069,036      11,605,121           11,743,209      12,430,057
 
</TABLE>
 
 
                See accompanying notes to financial statements.

                                       5
<PAGE>
 
                             COVALENT GROUP, INC.
                                AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                           Six Months Ended
                                                                                               June 30,
                                                                                -------------------------------------
                                                                                    1998                       1997
                                                                                ----------                  ----------
<S>                                                                      <C>                          <C>
Cash Flows From Operating Activities:
 
Net income (loss)                                                               $ (266,269)                      2,090
Adjustments to reconcile net income (loss) to
   net cash provided by (Used In) operating activities
     Amortization and depreciation                                                 110,610                      76,032
     (Increase) Decrease deferred income taxes                                    (136,522)                   (103,508)
     Changes In assets and liabilities
     (Increase) decrease in -
     Accounts receivable                                                           709,795                    (851,141)
     Prepaid expenses and other                                                    (65,510)                   (134,889)
     Costs and estimated earnings in excess
     of related billings on uncompleted contracts                                 (438,168)                   (930,154)
     Other assets                                                                  (16,239)                          -
     Increase (decrease) in -
     Accounts payable                                                             (131,839)                  2,338,272
     Accrued expenses                                                               (7,165)                        224
     Billings in excess of related costs and
      estimated earnings on uncompleted contracts                                 (326,098)                    881,895
                                                                       -------------------          ------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                               (567,405)                  1,278,821
                                                                       -------------------          ------------------
 
INVESTING ACTIVITIES:
 
Purchases of property and equipment                                                (26,564)                   (242,922)
                                                                       -------------------          ------------------
 
NET CASH USED IN INVESTING ACTIVITIES                                              (26,564)                   (242,922)
                                                                       -------------------          ------------------
 
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
 
Proceeds from issuance of stock, net                                                     -                      63,870
                                                                       -------------------          ------------------
 
NET CASH PROVIDED BY FINANCING ACTIVITIES:                                               -                      63,870
                                                                       -------------------          ------------------
 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                              (593,969)                  1,099,769
 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                   1,794,530                     922,010
                                                                       -------------------          ------------------
 
CASH AND CASH EQUIVALENTS, END OF PERIOD                                        $1,200,561                  $2,021,779
                                                                       ===================          ==================
</TABLE>

                See accompanying notes to financial statements

                                       6
<PAGE>
 
FORM 10-QSB

                             Covalent Group, Inc.
                                And Subsidiary
                  Notes To Consolidated Financial Statements
                                  (Unaudited)


1.  DESCRIPTION OF BUSINESS
    -----------------------

    Covalent Group, Inc. (the "Company"), is a contractual research
    organization, providing clinical research and development services to
    pharmaceutical, biotechnology, medical services and managed care
    organizations. The Company initiates, designs and monitors clinical trials,
    manages and analyzes clinical data and offers other related services and
    products.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
    ------------------------------------------

    Use of Estimates
    ----------------

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

    Principles of Consolidation
    ---------------------------

    The consolidated financial statements include the accounts of the Company
    and its wholly owned subsidiary. Intercompany transactions and balances have
    been eliminated in consolidation.

    Basis of Presentation
    ---------------------

    The financial statements for the six and three months ended June 30, 1998
    and 1997 have been prepared without audit and, in the opinion of management,
    reflect all adjustments necessary (consisting only of normal recurring
    adjustments) to present fairly the Company's financial position at June 30,
    1998 and the results of its operations and its cash flows for the interim
    periods presented. Such financial statements do not include all of the
    information and footnotes required by generally accepted accounting
    principles for complete financial statements. For further information, refer
    to the financial statements and footnotes thereto included in the Company's
    annual report on Form 10-KSB, as amended for the year ended December 31,
    1997.

    Operating results for the six months ended June 30, 1998 may not necessarily
    be indicative of the results for the year ending December 31, 1998.

                                       7
<PAGE>
 
    Revenue Recognition
    -------------------

    Fixed price contract revenue is recognized based on the status of the work
    completed under the contract as of a given time using the percentage of
    completion method. Revenue from other contracts is recognized as services
    are provided. Revenue related to contract modifications is recognized when
    realization is assured and the amounts are reasonably determinable.
    Adjustments to contract cost estimates are made in the periods in which the
    facts which require the revisions become known. When the revised estimate
    indicates a loss, such loss is provided for currently in its entirety. Costs
    and estimated earnings in excess of related billings on uncompleted
    contracts represent revenue recognized in excess of amounts billed. Billings
    in excess of related costs and estimated earnings on uncompleted contracts
    represent amounts billed in excess of revenue recognized.

    Reclassifications
    -----------------

    Certain prior year balances have been reclassified to conform to the current
    year presentation.

    Net Income (Loss) Per Common and Common Equivalent Share
    --------------------------------------------------------

    The Company adopted Statement of Financial Accounting Standards No. 128
    "Earnings Per Share" (SFAS No. 128) as of December 31, 1997. In accordance
    with SFAS No. 128, prior period earnings per share amount have been restated
    to conform with SFAS No. 128. SFAS No. 128 requires basic earnings per share
    which is computed by dividing reported earnings available to common
    shareholders by the weighted average shares outstanding and diluted earnings
    per share which reflects the dilutive effect of common stock equivalents
    such as stock options and warrants, unless the inclusion of these items
    would be anti dilutive.

    The weighted average common and common equivalent shares outstanding for
    purposes of calculating net income (loss) per common share are computed as
    follows:

<TABLE>
<CAPTION>
                                                 Three Months Ended             Six Months Ended
                                                      June 30,                      June 30,
                                            -----------------------------     --------------------------
                                                 1998            1997             1998           1997
                                            ------------     ------------     ------------    -----------
<S>                                    <C>              <C>             <C>             <C>
Weighted average common shares
 outstanding used for basic net income
 (loss) per common share                      11,743,209       11,605,121       11,743,209     11,603,925
                                            
Dilutive effect of common stock
 options and warrants outstanding                 325,827          -                 -            826,132
                                            -------------    ------------     ------------    -----------      
Weighted average common and
 common equivalent shares outstanding
 used for  diluted net income (loss)
 per common share                              12,069,036      11,605,121       11,743,209     12,430,057
                                             ============    ============     ============    ===========
</TABLE>



    New Accounting Pronouncements
    -----------------------------

    In June 1997, the Financial Accounting Standards Board issued Statement of
    Financial Accounting Standards No. 130 " Reporting Comprehensive Income"
    (SFAS No. 130). SFAS No. 130 is effective for fiscal years beginning after
    December 15, 1997. SFAS No. 130 establishes standards for the reporting and
    display of comprehensive income in a set of financial statements.
    Comprehensive income is defined as the change in net assets of a 

                                       8
<PAGE>
 
    business enterprise during a period from transactions generated from non-
    owner sources. It includes all changes in equity during a period except
    those resulting from investments by owners and distributions to owners. The
    Company adopted SFAS No. 130 as of March 31, 1998 and a reconciliation of
    comprehensive income follows:

<TABLE> 
<CAPTION>
                                                Three Months Ended            Six Months Ended
                                                     June 30,                     June 30,
                                           ----------------------------  -------------------------
                                                1998           1997          1998          1997
                                           --------------  -----------   ------------   ----------
<S>                                   <C>                 <C>          <C>            <C>
Net Income (Loss)                               $   2,359     $(96,692)     $(266,269)      $2,090
Unrealized Loss on Investment                    (242,547)        -          (351,218)         -
Comprehensive Income (Loss)                     $(240,188)    $(96,692)     $(617,487)      $2,090
</TABLE> 


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

When used in this Report on Form 10-QSB and in other public statements, both
oral and written, by Covalent Group, Inc. (the "Company") and Company officers,
the words "estimate," "project," "intend," "believe," "anticipate" and similar
expressions are intended to identify forward-looking statements regarding events
and financial trends that may affect the Company's future operating results and
financial position.  Such statements are subject to risks and uncertainties that
could cause the Company's actual results and financial position to differ
materially.  Such factors include, among others: (i) the Company's success in
attracting new business; (ii) the size, duration and timing of clinical trials;
(iii) the termination, delay or cancellation of clinical trials; (iv) the
intense competition in the industry in which the Company competes; (v) the
Company's ability to obtain financing on satisfactory terms; (vi) the
sensitivity of the Company's business to general economic conditions; and (vii)
other economic, competitive, governmental and technological factors affecting
the Company's operations, markets, products, services and prices.  The Company
undertakes no obligation to publicly release the result of any revision of these
forward-looking statements to reflect events or circumstances after the date
they are made or to reflect the occurrence of unanticipated events.

The information set forth and discussed below for the six and three months ended
June 30, 1998 and 1997 is derived from the Consolidated Financial Statements
included elsewhere herein.  The financial information set forth and discussed
below is unaudited but, in the opinion of management, reflects all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
such information.  The results of operations of the Company for a particular
quarter may not be indicative of results expected during the other quarters or
for the entire year.


GENERAL
-------

The Company, through its wholly owned subsidiary Covalent Research Alliance
Corp., is a research management organization that designs, coordinates and
monitors clinical trials in drug development for some of the world's leading
pharmaceutical firms.  In addition, using advanced technologies, the Company
works extensively in managed care, medical outcomes research and health
management programs that focus on compliance and provider/patient behavior
modification.  Revenue is derived 

                                       9
<PAGE>
 
principally from the identification, placement, monitoring and management of
clinical development studies in the traditional pharmaceutical, as well as
managed care environment.

The Company's quarterly results can fluctuate as a result of a number of
factors, including the Company's success in attracting new business, the size
and duration of the clinical trials, the timing of client decisions to conduct
new clinical trials or possible cancellation or delays of ongoing trials, and
other factors, many of which are beyond the Company's control. Clinical research
service contracts generally have terms ranging from several months to several
years. A portion of the contract fee is generally payable upon execution of the
contract, with the balance payable in installments over the life of the
contract. Revenue and related cost of revenue are recognized as specific
contract terms are fulfilled under the percentage of completion method.

Contracts generally may be terminated by clients with or without cause.
Clinical trials may be terminated or delayed for several reasons, including
unexpected results or adverse patient reactions to the drug, inadequate patient
enrollment or investigator recruitment, manufacturing problems resulting in
shortages of the drug or decisions by the client to de-emphasize or terminate a
particular trial or development efforts on a particular drug.  Depending on the
size of the trial in question, a client's decision to terminate or delay a trial
in which the Company participates could have a materially adverse effect on the
Company's backlog, future revenue and profitability.

The Company's backlog, which consists of anticipated revenues from signed
contracts, is in excess of $7 million at June 30, 1998.  The Company believes
that its backlog as of any date is not necessarily a meaningful predictor of
future results.


THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
-----------------------------------------------------------------------------

Revenues for the three months ended June 30, 1998 decreased 22% to $2,543,000 as
compared to $3,268,000 for the three month period ended June 30, 1997.  The
decrease of $725,000 relates to the smaller value of the individual clinical
studies being conducted in the most recent quarter as compared to the same
quarter last year.

Direct expenses include compensation and other expenses directly related to
conducting clinical studies.  These costs decreased by $911,000 from $2,549,000
to $1,638,000 for the three months ended June 30, 1997 and 1998, respectively.
The decrease in expenses results primarily from less fees being paid to
investigator sites due to size of clinical studies being conducted.  Direct
expenses as a percentage of total revenues were 64% for the three months ended
June 30, 1998 as compared to 78% for the same period last year.  The decrease in
relative percent is due to different cost structures of the studies which are
based on work requested by the Company's clients.

Selling, general and administrative expenses include all administrative and
business development personnel, and all other support expenses not directly
related to specific contracts.  Also included are expenses associated with the
development of an interactive voice recognition system ("IVR") the platform
development of which was essentially completed in January 1998.  Selling,
general and administrative expenses for the three months ended June 30, 1998
amounted to $932,000 as compared to $852,000 for the same period last year.
Included in selling, general and administrative expenses for the three months
ended June 30, 1997 and 1998 are IVR development and system maintenance expenses
of $255,000 and $103,000, respectively.  The increase in the level of expenses,
excluding IVR related expenses for both periods, is due to costs associated with
building 

                                      10
<PAGE>
 
the necessary support infrastructure for the overall business.  As a
percentage of revenues, selling, general and administrative expenses increased
from 26% to 37% for the three months ended June 30, 1997 and 1998, respectively.
The increase in expenses as a percentage of revenues results from the decrease
in clinical study revenues.

Interest income decreased $9,000 from $37,000 for the three months ended June
30, 1997 to $28,000 for the three months ended June 30, 1998.

Income tax benefit for the three months ended June 30, 1998 was immaterial.


SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
-------------------------------------------------------------------------

Revenues for the six months ended June 30, 1998 decreased 24% to $4,783,000 as
compared to $6,313,000 for the six month period ended June 30, 1997.  The
decrease of $1,530,000 relates to the smaller value of the individual clinical
studies being conducted in the most recent period as compared to the same period
last year.

Direct expenses include compensation and other expenses directly related to
conducting clinical studies.  These costs decreased by $1,370,000 from
$4,862,000 to $3,492,000 for the six months ended June 30, 1997 and 1998,
respectively.  The decrease in expenses results primarily from less fees being
paid to investigator sites due to the size of clinical studies being conducted.
Direct expenses as a percentage of total revenues were 73% for the six months
ended June 30, 1998 as compared to 77% for the same period last year.  The
decrease in relative percent is due to different cost structures of the studies
which are based on work requested by the Company's clients.

Selling, general and administrative expenses include all administrative and
business development personnel, and all other support expenses not directly
related to specific contracts.  Also included are expenses associated with the
development of an interactive voice recognition system ("IVR") the platform
development of which was essentially completed in January 1998.  Selling,
general and administrative expenses for the six months ended June 30, 1998
amounted to $1,750,000 as compared to $1,603,000 for the same period last year.
Included in selling, general and administrative expenses for the six months
ended June 30, 1997 and 1998 are IVR development and systems maintenance
expenses of $421,000 and $218,000, respectively.  The increase in the level of
expenses, excluding IVR related expenses for both periods, is due to costs
associated with building the necessary support infrastructure for the overall
business.  As a percentage of revenues, selling, general and administrative
expenses increased from 25% to 37% for the six months ended June 30, 1997 and
1998, respectively.  The increase in expenses as a percentage of revenues
results from the decrease in clinical study revenues.

Interest income increased $7,000 from $50,000 for the six months ended June 30,
1997 to $57,000 for the six months ended June 30, 1998.

Income tax benefit for the six months ended June 30, 1998 amounted to $136,000
or 34% of the pretax loss for the period.  Management expects the tax benefit to
be fully utilized.

In 1996 the Company sold all of the stock of a subsidiary, Future Medical
Technologies, Inc. ("FMT").  In the six months ended June 30, 1997 the Company
reached agreement with the purchaser to treat the sale of FMT as an asset sale
under Internal Revenue Code Section 338 (h) 

                                      11
<PAGE>
 
(10). Accordingly, the loss on the sale is deductible for tax purposes against
future income, and, as a result, the company recorded a deferred tax asset of
$94,000. Management anticipates the loss on disposal to be fully utilized.


LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

The Company's contracts usually require a portion of the contract amount to be
paid at the time the contract is initiated.  Additional payments are generally
made upon completion of negotiated performance requirements throughout the life
of the contract.  Cash receipts do not necessarily correspond to costs incurred
and revenue recognized (revenue recognition is based on the percentage of
completion accounting method).  The Company typically receives a low volume of
large-dollar receipts.  As a result, the number of days outstanding in accounts
receivable will fluctuate due to the timing and size of cash receipts.  Accounts
receivable decreased $710,000  to $1,425,000 at June 30, 1998 primarily due to
the timing of progress payments for clinical trials.  This was partially offset
by costs and estimated earnings in excess of related billings on uncompleted
contracts which increased $438,000 to $1,846,000 at June 30, 1998.  This
increase was attributable to four clinical trials, for which revenues have been
recognized in excess of progress payments made to date on those contracts.
Accounts payable decreased $132,000 to $1,671,000 at June 30, 1998 primarily due
to a decrease in payments due to investigator sites.  These contractual payments
are based on completing certain milestones during the clinical trial.
Investigator fees are therefore accrued based on the work completed and paid at
a later date

The Company's cash and cash equivalents balance at June 30, 1998 was $1,201,000
as compared to $1,795,000 at December 31, 1997.  The decrease in cash was
primarily due to operating results for the six months ended June 30, 1998
including the above mentioned increase in costs and estimated earnings in excess
of related billings and the decrease in accounts payable.

The Company purchased $27,000 of equipment in 1997.  The Company does not
anticipate the need for significant capital expenditures in 1998.

The Company has a line of credit with a commercial bank providing a maximum
credit facility of $1 million which bears interest at a rate not to exceed 1%
point above the bank's prime rate.  Borrowings outstanding under the credit line
are secured by substantially all of the assets of the Company.  No borrowings
were outstanding under the credit line at June 30, 1998.

The Company's principal cash needs on both a short and long-term basis are for
the funding of its operations, and capital expenditure requirements.  The
Company expects to continue expanding its operations through internal growth,
expansion of its existing services, and the development of new service products
for clinical research and the healthcare industry.  The Company expects such
activities to be funded from existing cash and cash equivalents and cash flow
from operations.

Management believes that the Company's operations and financial results are not
materially affected by inflation.

                                      12
<PAGE>
 
FORM 10-QSB
                              COVALENT GROUP, INC.
                                        
PART II. OTHER INFORMATION

     ITEM 1.  Legal Proceedings

               None.

     ITEM 2.  Changes in Securities

               None.

     ITEM 3.  Defaults Upon Senior Securities

               None.

     ITEM 4.  Submission of Matters to a Vote of Security Holders
 
              On May 21, 1998, the Company held its Annual Meeting of
              Stockholders during which the stockholders: 
              (1) Elected four nominees to serve as directors with terms
              continuing until the next Annual Meeting of Stockholders in 1999.
              The votes cast were as follows:
<TABLE>
<CAPTION>
 
                                    For              Withheld
                                   ------------    ------------
<S>                                <C>           <C>
               Bruce LaMont        10,932,489            52,496
               William Robinson    10,932,708            52,277
               Ivan Rubin          10,932,708            52,227
               John Whittle        10,932,708            52,227
 
</TABLE> 
              (2) Amended the 1996 Stock Incentive Plan to increase the number
              of Common Stock shares reserved for issuance from 2,000,000 to
              2,500,000. The votes cast were as follows:
 
                             For          Against         Abstain    
                        -------------- --------------  ------------  
                         10,340,867       639,487          4,631      

              (3) Ratified the repricing of options under the Company's 1996
              Stock Incentive Plan.  The votes cast were as follows:
 
                             For           Against        Abstain   
                        -------------- --------------  -------------  
                           4,023,581      647,060        6,314,344

              (4) Ratified the appointment of the firm of Arthur Andersen LLP as
              independent auditors to examine the accounts of the Company for
              the year ending December 31, 1998. The votes cast were as follows:

                             For           Against        Abstain
                        -------------- --------------  -------------  
                          10,940,270      44,442            273

     ITEM 5.  Other Information

              Discretionary Proxy Voting Authority/Shareholder Proposals

              On May 21, 1998 the Securities and Exchange Commission adopted an 
amendment to Rule 14a-4, as promulgated under the Securities and Exchange Act of
1934. The amendment to Rule 14a-4(c)(1) governs the Company's use of its 
discretionary proxy voting authority with respect to a shareholder proposal 
which the shareholder has not sought to include in the Company's proxy
statement. The new amendment provides that if a proponent of a proposal fails to
notify the company at least 45 days prior to the month and day of mailing of the
prior year's proxy statement, then the management proxies will be allowed to use
their discretionary voting authority when the proposal is raised at the meeting,
without any discussion of the matter in the proxy statement.

              With respect to the Company's 1999 Annual meeting of Shareholders,
if the Company is not provided notice of a shareholder proposal, which the 
shareholders has not previously sought to include in the Company's proxy 
statement by March 6, 1999, the management proxies will be allowed to use their 
discretionary authority as outlined above.
 
                                      13
<PAGE>
 
     ITEM 6.  Exhibits and Reports on Form 8-K

               (a) Exhibits

                  27 Financial Data Schedule (in electronic format only)

               (b) Reports on Form 8-K


                  None.

                                      14
<PAGE>
 
                                  SIGNATURES
                                        


     In accordance with the requirements of the Exchange Act, The Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.


                                                   COVALENT GROUP, INC.


Dated: August 14, 1998          By: /S/ Bruce LaMont
       ---------------              ---------------
                                    Bruce LaMont, President
                                    and Chief Executive Officer


Dated: August 14, 1998          BY: /S/ William K. Robinson
       ---------------              ----------------------
                                    William K. Robinson, Chief
                                    Financial Officer

                                      15