<PAGE>   1

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

                                    FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 [FEE REQUIRED] 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 [NO FEE REQUIRED]

For the transition period from _______________ to _________________.

                         Commission file number: 1-10963

                            RX MEDICAL SERVICES CORP.
             ------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

                  NEVADA                                 NO. 87-0436782
      ----------------------------                      ----------------
      (State or other jurisdiction                      (I.R.S. Employer
           of incorporation)                           Identification No.)

888 EAST LAS OLAS BOULEVARD - SUITE 210,
FORT LAUDERDALE, FLORIDA   33301                            (954) 462-1711
---------------------------------------------------   -----------------------
(Address of principal executive offices) (Zip Code)   (Registrant's telephone
                                                    number, including area code)

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

     COMMON STOCK, $.002 PAR VALUE                              NONE
     -----------------------------                   ----------------------
        (Title of each class)                        (Name of each exchange
                                                       on which registered)

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. [X] Yes [ ] 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 this
Form 10-K [X].

The aggregate market value of the voting common stock held by non-affiliates of
the Registrant (determined on the basis of the closing price of Registrant's
Common Stock on the OTC Electronic Bulletin Board on March 16, 1998) was
$1,424,178.

As of March 16, 1998, Registrant had outstanding 9,164,117 shares of Common
Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE:

                                      None.


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                                     PART I

ITEM 1.           BUSINESS

INTRODUCTION

Rx Medical Services Corp. ("RXM" or the "Company") is a holding company which,
through its subsidiaries, is a provider of healthcare services in the United
States. At December 31, 1997, the Company was engaged in two healthcare
businesses: the operation and management of hospitals and clinics located
predominantly in rural markets in the southeast, and the wholesale distribution
of pharmaceutical products. The hospital management operation is conducted
through the Company's wholly-owned subsidiary, Consolidated Health Corporation
of Mississippi, Inc. ("CHC"), a Mississippi corporation which the Company
acquired in July 1995 through a merger transaction. CHC operates and/or manages
two hospitals and one medical clinic in Mississippi, one hospital and three
medical clinics in Virginia and a hospital in Pittsburgh, Pennsylvania, with a
total of 122 licensed hospital beds. The pharmaceutical distribution operation,
known as BioLogic Health Care ("BHC"), is conducted through Rx Medical Imaging
Corp. ("RxMIC") and Rx Medical Management, Inc., ("RxM Management"), two Florida
corporations wholly-owned by the Company. BHC engages in the business of
distributing, on a wholesale basis, biological and biotech products for chronic
care outpatients through a network of retail pharmacy providers.

The Company was incorporated in Nevada in 1985. The Company's principal
executive offices are located at 888 East Las Olas Boulevard, Suite 210, Fort
Lauderdale, Florida 33301 and its telephone number is (954) 462-1711.

BUSINESS STRATEGY

The Company, through asset sales and a bankruptcy proceeding, has divested
itself of substantially all of the assets that were acquired and used initially
in its business. Since July 1995, the Company has acquired all of the assets
that are used in its current operations.

HISTORICAL PERSPECTIVE: The Company acquired its first operating assets in May
1990, and entered the health care industry in 1991 when it acquired a group of
clinical laboratories in several separate transactions. In 1992 and 1993
additional clinical laboratories were purchased, as well as three magnetic
resonance imaging ("MRI") centers. The medical diagnostic facilities were
acquired by the Company's wholly-owned subsidiary, Manatee Medical Laboratories,
Inc. ("Manatee"). Operations were concentrated primarily on the east and west
coasts of Florida and southern and central California.

From inception, the Company was unable to achieve profitability in its medical
diagnostic business. The losses stemmed mainly from reductions in Medicare and
Medicaid reimbursement levels, the rise of managed health care plans and
resulting cost containment pressures, and the inability to effectively
consolidate the various clinical laboratory operations that were acquired by the
Company. The Company unsuccessfully attempted many strategies to increase
revenues, effect consolidations of business lines and reduce operating costs.



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Commencing in 1995, and continuing in 1996, management embarked on a plan to
reorganize the Company. In March 1995, the Company closed an MRI center in Fort
Lauderdale, Florida that had been acquired in July 1993. An MRI center, in
Victorville, California, had previously been closed by the Company in June 1994.
In August 1995, the Company sold its California clinical laboratory operation.
In January 1996, the Company sold its Louisiana laboratory operation. Finally,
in April 1996, Manatee filed a voluntary petition under Chapter 7 of the U.S.
Bankruptcy Code resulting in the closing of the Company's remaining medical
diagnostic facilities primarily located on the west coast of Florida (see
"Discontinued Operations" below).

RECENT DEVELOPMENTS: In July 1995, the Company acquired all of the issued and
outstanding shares of capital stock of CHC. At the time of acquisition, CHC
operated and managed three hospitals and three medical clinics in rural
Mississippi. In the same month, the Company entered into a joint venture with
Biologic Health Resources, a Nevada corporation, to form BHC, a business
specializing in the delivery of biotech products and home infusion services to
chronically ill patients.

The Company's strategy is to continue to develop its hospital management and
wholesale pharmaceutical distribution businesses, while seeking, at the same
time, to acquire other ancillary businesses in the medical services industry
that would complement its existing businesses. With respect to its hospital
management business, the Company will focus on increasing revenues and market
share by acquiring and integrating existing rural hospitals and clinics and
other related health care businesses into the Company's operations. In addition
to outright acquisitions of hospitals, the Company will seek to expand its
third-party management business by negotiating management contracts and
operating leases for medical facilities located in rural markets. This emphasis
on non-urban communities affords the Company the opportunity to grow in a less
competitive environment that heretofore has been poorly serviced.
Notwithstanding the emphasis in seeking acquisition candidates located in rural
markets, the Company also intends to acquire or obtain management of specialty
care hospitals in urban locations.

With respect to its pharmaceutical products distribution and home infusion
services business, the Company originally entered the business in July 1995 as a
minority partner (25%) of a California partnership with the same name, Biologic
Health Care, which operates in the Northern California market. During 1996, the
Company expanded the BHC operation into Southern California and the State of
Florida. The Company has structured BHC as a cost effective, alternate site care
model for the distribution of biological and biotech products and services
through a vertically integrated pharmacy benefits management network. However,
progress in growing this business segment has been slow (see Item 3. "Legal
Proceedings", below) and revenues for the 1997 fiscal year were minimal.

The Company is also seeking to expand its presence into new markets in related
health care businesses with perceived growth potential. The Company anticipates
limiting its acquisitions to those which meet these criteria and with expected
positive cash flow. There can be no assurance, however, that suitable
acquisition candidates can be found, that acquisitions can be negotiated on






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acceptable terms, that adequate financing can be obtained or that the operations
of acquired businesses can be effectively or profitably integrated into the
Company's existing operations.

FINANCING: In April 1994, the Company received a commitment from National
Century Financial Enterprises, Inc., the Company's primary financing source (the
"Financing Source") to provide the Company with a $20 million acquisition line
of credit which is intended to finance the medical accounts receivable of the
businesses that may be acquired by the Company. See Item 13. "Certain
Relationships and Related Transactions". As of December 31, 1997, the $20
million line of credit remained available under this commitment. Competition in
the health care industry for acquisition candidates is intense, and there can be
no assurance that candidates will be available to the Company on favorable terms
or at all.

BUSINESS SEGMENTS

HOSPITAL MANAGEMENT DIVISION - CHC

In furtherance of its growth strategy, the Company, in July 1995, acquired,
through a merger transaction, all of the stock of CHC, then based in Nashville,
Tennessee. CHC, a hospital company, at the time it was acquired, operated three
acute care hospitals, with a total of 98 licensed beds, and three medical
clinics, all located in rural communities in Mississippi. Under the acquisition
agreement, in exchange for all of the issued and outstanding common and
preferred stock of CHC, the Company paid $1.0 million in cash, agreed to issue
330,000 shares of RXM Common Stock and 1.09 million shares of preferred stock
(designated series F convertible preferred stock) convertible into RXM Common
Stock at $5.00 per share. The cash portion of this acquisition was provided by a
loan from an affiliate of the Financing Source. In consideration for the
financing and as security for repayment, the Company pledged to the Financing
Source the stock of CHC it received in the merger transaction. See Item 12.
"Security Ownership of Certain Beneficial Owners and Management", and Item 13.
"Certain Relationships and Related Transactions". This financing is not part of
the overall $20 million in acquisition financing that the Financing Source has
committed to the Company for its use based on the qualifying receivables of the
companies to be acquired (see "Business Strategy" above).

Effective as of March 30, 1996, newly formed subsidiaries of CHC entered into
operating lease agreements on two rural hospitals owned by an affiliate of the
Financing Source. The hospitals are the Whitwell Medical Center located in
Whitwell, Tennessee, which has 17 medical/surgical and 35 alcohol and drug abuse
beds, and the Dickenson County Medical Center, a 50 bed acute care facility
located in Clintwood, Virginia. Included in the operations of Dickenson County
Medical Center are three medical clinics. These facilities were acquired by the
affiliate of the Financing Source on March 29, 1996, from Volunteer Healthcare
Systems, Inc., a debtor in bankruptcy pursuant to a petition for reorganization
under Chapter 11 of the Bankruptcy Code. The operating leases, each for 20
years, provide that CHC will operate and manage the facilities and pay the
lessor approximately $95,500 per month for the Dickenson facility and equipment
and approximately $27,300 per month for the Whitwell facility and equipment. In
connection with the operating leases, the owner granted CHC an option to
purchase both hospitals, during the one






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year period commencing May 1, 1996, for a purchase price equal to the assumption
of all liabilities and indebtedness attributable to or secured by the facilities
and equipment.

In May 1996, the Company had repurchased (a) the rights to the 330,000 shares of
RXM Common Stock and (b) a total of 400,000 shares of series F convertible
preferred stock issued to the minority shareholders of CHC at the time CHC was
acquired by the Company in July 1995. In consideration therefore, the Company
transferred to such minority shareholders the right to exercise CHC's option to
purchase the Whitwell Medical Center, and entered into various agreements
pursuant to which the minority shareholders, through their company Star Health
Services, Inc., now Ameris Health Systems, ("Ameris"), would manage or
sub-manage, as the case may be, four hospital facilities in CHC's portfolio
(excluding Dickenson County Medical Center) and the one medical clinic in
Mississippi, and be paid a portion of the management fees payable to CHC. On
August 13, 1996, Ameris notified the Company and the owner of Whitwell Medical
Center, of its decision to exercise the option to purchase the land, building
and equipment comprising the Whitwell Medical Center. Closing on this purchase
occurred on October 31, 1996, at which date CHC ceased operating the Whitwell
Medical Center.

CHC's option to purchase Dickenson County Medical Center has been extended by
the owner of that facility from May 1, 1997 to December 31, 1998.

On April 30, 1996, one month following the acquisition of Dickenson County
Medical Center by the affiliate of the Financing Source, the bankruptcy court
entered an order rejecting all executory contracts, including Dickenson County
Medical Center's Medicare provider contract. This occurred without the knowledge
or consent of CHC or the purchaser of the facility, and has resulted in the
denial of Medicare claims from that facility for the period from March 30, 1996
through June 2, 1996, amounting to $ 793,856. CHC has requested the Health Care
Financing Administration ("HCFA") to reconsider its decision to issue a new
provider agreement effective June 3, 1996 and to revise the effective date of
the agreement to March 30, 1996, or, alternatively, May 1, 1996. Since HCFA has
yet to reconsider its decision (a proceeding seeking such reconsideration is
still pending), and CHC and the owner of the facility may have no further viable
legal recourse to contest that decision, the Company has recorded a loss of
revenue equal to 100% of the denied Medicare claims.

Two of the three medical clinics operated by CHC at the time of the Company's
acquisition of CHC, the Dedeaux and Owen clinics, located in Morton,
Mississippi, were closed in March 1996 due to poor performance. Effective
October 1, 1996, CHC agreed to a lease arrangement for the remaining clinic, the
Family Medical Group clinic in Forest, Mississippi, pursuant to which CHC
transferred operational control of the clinic to a Meridien, Mississippi medical
services company for a monthly lease fee. The term of the lease was for one
year, with the lessee having the option during the year to purchase the clinic
from CHC at a price of $750,000. The lessee exercised its right under the lease
agreement to purchase the clinic and the closing of this sale occurred on July
21, 1997.



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The following table sets forth the name of each of CHC's hospitals, its
location, the number of licensed beds and whether the hospital is owned, leased
or managed:

<TABLE>
<CAPTION>
                                                                                 OWNED, LEASED
NAME                                LOCATION            LICENSED BEDS              OR MANAGED
----                                --------            -------------              ----------
<S>                                 <C>                  <C>                       <C>
Smith County General Hospital       Raleigh, MS               29                    Leased
Scott Regional Hospital             Morton, MS                30                   Managed *
Newton Regional Hospital            Newton, MS                39                   Managed **
Dickenson County Med. Center        Clintwood, VA             50                    Leased
Podiatry Hospital of Pittsburgh     Pittsburgh, PA            13                    Owned

</TABLE>

------------------
* The management agreement for this facility will terminate in April 1998 and
will not be renewed. However, in February, 1998, CHC exercised its option to
purchase the hospital which is currently the subject of pending litigation (see
Item 3. "Legal Proceedings").

** On February 4, 1998, CHC agreed to settle certain claims it had against
Newton Hospital located in Newton, Mississippi. The hospital agreed to pay CHC
the sum of $500,000, payable $200,000 in cash and $300,000 in a two year note at
8% interest per annum, in settlement of outstanding notes and management fees.
As part of the settlement, CHC agreed to terminate its management
responsibilities to manage Newton Hospital retroactive to December 31, 1997.
Effective January 1, 1998, Ameris assumed CHC's role as manager of this
facility.

Leased hospitals are operated by CHC under operating lease agreements pursuant
to which CHC pays the owner a stipulated rental and assumes the risk of the
hospital not generating sufficient revenues to pay all operating expenses. Any
net revenues belong to CHC under these operating agreements. Managed hospitals
are operated by CHC under management agreements pursuant to which the owners of
the hospitals pay a stipulated management fee to CHC for the services performed
by CHC in managing the hospitals. The risk of loss remains with the hospital
owners in such instances.

The Company intends to expand CHC's operations in the future through the
acquisition of additional management contracts, operating leases and the
purchase of acute care hospitals.

The Company believes that rural acute care hospitals generally face less direct
competition than similar urban facilities from specialty healthcare providers
such as outpatient surgery and diagnostic treatment centers, and rehabilitation,
psychiatric and chemical dependency hospitals. The Company seeks to develop its
acute care hospitals as the providers of primary care services in their
respective markets and to reduce the migration of the local population to larger
urban hospitals and other rural hospitals. This is based on the Company's belief
that the delivery of healthcare services is local in nature and, as such, its
strategic plan for each hospital is designed to meet the healthcare needs of the
local population and employers. These plans generally respond to the healthcare
service needs identified by the referral patterns within the community and the
general demographic characteristics of the market.

CHC employs experienced administrators and controllers at each of the hospitals
operated or managed by CHC who have responsibility for carrying out the
strategic plan established for their





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respective hospital. CHC's management works closely with its local
administrators to review hospital performance and provide operating and
financial guidance.

The significant components of the Company's hospital operating strategy are
outlined below:

         NETWORKS. At each of its hospitals, CHC seeks to develop an integrated
healthcare delivery network which includes local physicians, with the hospital
as the nucleus of the healthcare services offered. Through these networks, CHC
is able to provide to local employers and insurers a collaborative offering of
both physician and hospital services. These integrated networks, the Company
believes, will reduce migration of the local population to other hospitals and
will discourage the entry into such markets of specialty healthcare providers.

         PHYSICIAN RECRUITING. At each of its hospitals, CHC seeks to attract
physicians who are trained in the latest clinical methodologies and who expand
the range of services offered.

         OUTPATIENT SERVICES. CHC offers a variety of outpatient services at
each of its hospitals, including outpatient surgery, emergency room treatment,
physical rehabilitation, diagnostic services and home health care. This is
consistent with the Company's strategy of offering a broad range of primary care
services to the community.

         COST CONTROLS. A critical element in the Company's strategic plan is to
establish a series of controls for each of the hospitals CHC may acquire or
contracts to operate or manage. The primary control is one of cost. Cost
controls include staffing efficiency, the consolidation of purchasing contracts,
and improved information systems. In addition, as CHC acquires ownership and/or
management of additional hospitals, it will increase its corporate staff support
to handle insurance/risk management, business systems management, Medicare
reimbursement and administration, and other significant accounting and support
functions.

ACQUISITION STRATEGY

CHC seeks to acquire acute care hospitals in rural communities that have a
diversified economic and business base. CHC targets hospitals that are either
the dominant providers in their markets or have the potential to dominate their
markets. Acquisition targets are generally operated by tax-exempt entities or
municipal governments which may lack adequate resources to operate at maximum
efficiency or profitability or, in certain cases, by large hospital management
companies focusing on urban hospital systems. CHC assesses potential
acquisitions based on expected improvement in operating efficiencies, potential
to increase market penetration, future capital requirements and historical cash
flow.

Upon acquisition of the hospital, CHC will take immediate steps to implement its
financial and operating policies which are designed to improve the operating
performance of the hospital and achieve the Company's financial goals. CHC
endeavors to improve the hospital's efficiency through more effective staff
management and the renegotiation or elimination of agreements for the purchase
of hospital services. As CHC's portfolio of hospitals under management
increases,





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CHC will initiate volume purchasing arrangements with suppliers and thereafter
convert each hospital's purchasing activities into such volume purchasing
agreements.

In furtherance of its strategic plan, a CHC subsidiary acquired, effective as of
January 1, 1997, the operating assets of the Podiatry Hospital of Pittsburgh, a
13 licensed bed specialty hospital, with current operations consisting entirely
of podiatry surgical procedures. The purchase price for the hospital assets,
which consist of land, buildings, inventory and equipment, was $1,542,000, of
which $1,166,000 was cash, $250,000 was in the form of a purchase money second
mortgage taken by the seller, and $126,366 represented the assumption of certain
liabilities. The cash portion of the purchase price was funded by an affiliate
of the Financing Source through an accounts receivable credit facility designed
for the hospital and the issuance by the purchaser (a subsidiary of CHC) of two
promissory notes originally totaling $635,000, secured by a first mortgage on
the acquired assets. One of the notes, in the amount of $335,000, bears interest
at the rate of 17% per annum, with the principal amount and all accrued interest
currently due on July 15, 1997. The other note, in the amount of $300,000, bears
interest at a rate equal to three percentage points over the prime rate, with
the principal amount and all accrued interest due also on July 15, 1997. In
October 1997, the maturity dates of both notes were extended to July 15, 1998
and the accrued interest on both notes through October 15, 1997 was added to the
original principal balances of the notes. The new unpaid principal balances of
both notes as of October 15, 1997 were $378,375.62 and $318,974.99,
respectively. This financing is not part of the overall $20 million in
acquisition financing that the Financing Source has committed to the Company for
its use based on the qualifying receivables of the companies to be acquired (see
"Business Strategy" above). The Company is seeking long-term financing to
replace the $635,000 in short term financing due July 15, 1998. However, no
assurance can be given that such replacement financing is currently available.
In the alternative, the Financing Source has indicated its intent to extend the
maturity date of its notes until such time as long-term financing is secured by
CHC.

Since its acquisition of the Podiatry Hospital of Pittsburgh, CHC has
experienced a reduction in revenues from the hospital due primarily to the loss
of a group of the hospital's admitting physicians who, following the
acquisition, affiliated with another hospital in the area. In order to reverse
this trend, CHC recently decided to change the hospital's name to the
"Pittsburgh Specialty Hospital" and is seeking approval from the Department of
Health of Pennsylvania to add, in addition to podiatry, plastic surgery and
ophthalmology, and other specialties.

SOURCES OF REVENUES

Hospital revenues are received primarily from three categories of payors:
private payors (primarily private insurance), the federal government under the
Medicare program and state governments under their respective Medicaid programs.
The following table sets forth the percentages of net operating revenues
received by CHC's hospitals from each category of payor for the year ended
December 31, 1997:

       Medicare and Medicaid........................................ 50%
       Private and other sources.................................... 50%



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The Medicare and Medicaid reimbursement programs have been changed by
legislative and regulatory actions many times since their inception. The changes
have usually reduced the rate of growth in reimbursement payments and placed a
greater administrative burden on hospitals and other providers of healthcare
services. Although the Company will attempt to offset the reduction in
reimbursement rates under Medicare and Medicaid and the additional
administrative burdens imposed by applicable laws and regulations by expanding
services within its market area and by implementing more efficient operating and
cost control systems, there can be no assurance that the Company's profitability
will not be adversely affected. (see "Business Segments - Hospital Management
Division-CHC" above for a description of a Medicare denial of claims at one of
CHC's hospitals).

EMPLOYEES AND MEDICAL STAFFS

CHC has approximately 341 full-time and part-time employees at its hospitals, of
which approximately 49% are nursing personnel (i.e. registered nurses, licensed
vocational nurses and licensed practical nurses). Other than for the Dickenson
County Medical Center in Clintwood, Virginia, which has 199 employees, CHC's
employees are not represented by any labor union. The union agreement pertaining
to Dickenson County Medical Center has an initial expiration date of July 1,
1998, and is renewable on a year-to-year basis thereafter unless either party,
after due notice, desires to modify or terminate the agreement.

Physicians on the medical staffs of CHC's hospitals are generally not employees
of CHC or its hospitals; however, they utilize the hospitals to serve and treat
their patients. Physician staff members may also serve on the medical staffs of
other hospitals and each may terminate his or her affiliation with CHC's
hospital at any time.

DEPENDENCE ON HEALTHCARE PROFESSIONALS

CHC's hospitals are dependent upon the physicians practicing in the communities
served by CHC's hospitals. A small number of physicians account for a
significant portion of patient admissions at some of CHC's hospitals. Changes in
the healthcare industry may increase the competition for physicians specializing
in primary care. There can be no assurance that, despite their vigorous
physician recruitment efforts, CHC's hospitals will be able to recruit
physicians successfully or to retain the loyalty of the physicians whose patient
admissions are important to the hospitals. Many of the markets where CHC's
hospitals are located are also facing shortages of nursing personnel, and it is
expected that such shortage will continue.

COMPETITION

Competition for patients among hospitals and other healthcare providers has
intensified in recent years. During this period, hospital occupancy rates in the
United States have declined as a result of cost containment pressures, changing
technology, changes in regulations and reimbursement, the advent of managed
care, changes in practice patterns from inpatient to outpatient treatment and
other factors. In certain areas in which CHC operates, there are other hospitals
or facilities





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that provide inpatient and outpatient services comparable to those
offered by CHC's hospitals. Certain of these facilities may have greater
financial resources and may offer a wider range of services than CHC's
hospitals. Even in communities in which CHC's hospitals are the sole or dominant
providers of acute care hospital services, CHC may face competition from
hospitals and other healthcare providers in nearby communities. The competitive
position of CHC's hospitals will, in all likelihood, be affected by cost
containment strategies imposed by the federal and state governments and other
major purchasers of healthcare services.

HOSPITAL ACCREDITATION AND LICENSING

Of the four hospitals owned, leased or managed by CHC, one is accredited by the
Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"). With
regard to accreditation by JCAHO, or the American Osteopathis Association,
another accrediting body, it is CHC's intention to meet the requirements of the
managed care contract providers for each of its hospitals. All hospitals, and
the healthcare industry generally, are subject to extensive federal, state and
local regulation relating to licensure, conduct of operations, billing and
reimbursement, relationships with physicians, construction of new facilities,
expansion or acquisition of existing facilities and the offering of new
services. Each of CHC's hospitals is licensed by the department of health or an
equivalent agency in the state in which the hospital is located. These federal
and state agencies conduct periodic inspections to ensure that a hospital
maintains adequate standards of medical care, equipment and cleanliness. Failure
to comply with applicable laws and regulations could result in, among other
things, the imposition of fines, temporary suspension of the ability to admit
new patients to the facility or, in extreme circumstances, exclusion from
participation in government healthcare reimbursement programs such as Medicare
and Medicaid (from which the Company derives substantial revenues) or the
revocation of facility licenses. The Company believes that it is in substantial
compliance with all material regulations, although there is no assurance that
CHC's hospitals will be able to comply in the future and there can be no
assurance that future regulatory changes will not have an adverse impact on the
Company.

         CERTIFICATE OF NEED. Certificate of need regulations continue to
control the development and expansion of healthcare services and facilities in
many of the states in which CHC's leased or managed hospitals operate. Those
regulations generally require proper government approval for the expansion or
acquisition of existing facilities, the construction of new facilities, the
addition of new beds, the acquisition of major items of equipment and the
introduction of new healthcare services. Failure to obtain necessary approval
can result in the inability to complete a project, the imposition of civil and,
in some cases, criminal sanctions, the inability to receive Medicare and
Medicaid reimbursement and/or revocation of a facility's license.

BIOLOGICAL PRODUCTS DISTRIBUTION DIVISION - BHC

In July 1995, the Company entered into a joint venture with Biologic Health
Resources, a Nevada corporation ("BHR"), to establish a pharmacy benefits
management company specializing in the delivery of biotech products and patient
services known as BioLogic Health Care ("BHC"). Initially, BHC was formed as a
general partnership in California to service the northern California







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market ("BHC-Northern California"). The Company owns a 25% interest in
BHC-Northern California, through its wholly-owned subsidiary, RxMIC. BHC's
managed care structure provides health care payors and providers a cost
efficient alternative to the traditional home infusion companies for the
delivery of biotech products and services. BHC will seek to lower the cost of
care associated with home infusion services through a vertically integrated
pharmacy benefits management organization for biological and biotech
therapeutics used to treat many rare chronic diseases. BHC is concentrating its
efforts in northern California on providing services and biological products to
hemophilia patients. As an alternative to hemophilia treatment centers and home
infusion companies, BHC contracts with pharmaceutical manufacturers to purchase
biological and biotech products and through arrangements with non-chain retail
pharmacies, BHC facilitates the dispensing of these products to the patients.
The BHC delivery model is patient focused and can be custom-tailored to function
effectively within any integrated delivery system for their rare chronically-ill
patients. The BHC model enables a more efficient management of all the cost
points relative to alternate-site chronic care and will enhance the health care
provider's ability to better manage risk.

BHC-Northern California has been operating since July 1995 with the first
revenues generated in September 1995. The Company expanded the BHC operation
into Southern California and Florida during the second half of 1996. In October
1996, BioLogic Health Care-Florida, Inc. ("BHC-FL") was incorporated in Florida
to operate the BHC Florida operation. BHC-FL is owned 87.5% by Rx Medical
Management Inc. ("RXM Management"), a wholly-owned subsidiary of the Company.
The remaining 12.5% of BHC-FL is owned by one of the principals of BHR. In
November 1996, BioLogic Health Care-Southern California, Inc. ("BHC-SC") was
incorporated in California. BHC-SC is owned 75% by RxM Management. The remaining
25% of BHC-SC is owned by one of the principals of BHR. At December 31, 1996,
the Company, due to a partnership dispute described below, provided a reserve
equal to 100% of its investment in BHC-Northern California of $180,000.

In March 1997, the Company learned that the principals of BHR had conspired to
violate the BHC agreements by entering into direct competition with the BHC
operations in Florida and California. In April 1997 Company commenced an action
in Florida Circuit Court (Dade County) against BHR's new Florida operation
seeking to enjoin BHR from stealing BHC-FL's patients and for damages in an
unspecified amount for breach of contract and tortious interference with
BHC-FL's business. That action is presently pending. In addition, in June 1997,
the Company commenced an action in Superior Court of California (Santa Clara
County) seeking a dissolution of the BHC-Northern California general
partnership, an accounting of monies alleged to have been diverted by BHR from
BHC- Northern California for BHR's own use, and for damages for breach of
contract. See Item 3. "Legal Proceedings". The actions of BHR that are the
subject of the lawsuit in Florida significantly weakened the BHC operation in
Florida. Only recently has sales activity been recorded for this unit. The
BHC-Northern California unit ceased operations in the last quarter of 1997 as a
result of the dispute between the BHC partners. Notwithstanding these setbacks,
the Company is proceeding with its business plan of building the BHC business in
the Florida and California markets.



                                       11
<PAGE>   12

FINANCIAL INFORMATION

The Company's net revenues from continuing operations, by business segment
during the past three fiscal years, were as follows (in thousands):

                                            YEARS ENDED DECEMBER 31,
                                       ----------------------------------
                                         1997         1996         1995
                                       -------      -------       -------

Hospitals and Medical Clinics          19,627       16,926         1,844
Pharmaceutical Products                   345           54            --

Revenue from hospitals and medical clinics is recognized upon completion of
patient services and is recorded at amounts estimated to be received under
reimbursement arrangements with third party payors.

GOVERNMENTAL REGULATION

GENERAL. The health care industry is subject to extensive federal, state and
local regulation relating to licensure, conduct of operations, ownership of
facilities, addition of facilities and services and prices for services, as
described below. The Company is unable to predict the future course of federal,
state and local regulation or legislation, including Medicare and Medicaid
statutes and regulations. Further changes in the regulatory framework could have
a material adverse effect on the financial results of the Company's operations.

FEDERAL AND STATE ANTI-FRAUD AND ANTI-REFERRAL LEGISLATION.

         MEDICARE ANTI-KICKBACK STATUTE. Section 1128B(b) of the Social Security
Act (the "Antikickback Statute") prohibits offering, paying, soliciting, or
receiving remuneration to induce, or in exchange for, the referral of business
that is reimbursable under the Medicare or Medicaid program. A person who
violates the Antikickback Statute may be subject to fines of up to $25,000,
imprisonment for up to five years, civil monetary penalties, and exclusion from
participation in the Medicare and Medicaid programs. The Antikickback Statute
has been interpreted broadly by federal courts and enforcement agencies. Many
common kinds of business arrangements, including joint ventures, investment
interests, leases, and service or supply contracts, can violate the Antikickback
Statute if they involve the payment of any remuneration that is intended to
induce the referral of Medicare or Medicaid business. The federal government
encourages the public to report persons believed to be in violation of the
Antikickback Statute.

         "STARK" SELF-REFERRAL STATUTE. If a physician has a financial
relationship with an entity (including any ownership or investment interest in,
or any compensation arrangement with, an entity), Section 1877 of the Social
Security Act (the "Stark Law") prohibits the physician from referring patients
to the entity for the provision of any "designated health service" for which
reimbursement is available under Medicare or Medicaid. The Stark Law also
prohibits the entity from billing Medicare, Medicaid, or any other payer for
services provided pursuant to a prohibited referral. "Designated health
services" include (among others) clinical laboratory services, physical





                                       12
<PAGE>   13

and occupational therapy services, radiology services, durable medical
equipment, home health services, and inpatient and outpatient hospital services.
Sanctions for violating the Stark Law include civil money penalties of up to
$15,000 per prohibited service provided, assessments equal to 200% of the dollar
value of each such service provided, and exclusion from the Medicare and
Medicaid programs. The Stark Law contains certain exceptions to the
self-referral prohibition.

         FALSE CLAIMS. The Social Security Act also imposes criminal and civil
penalties for making false claims to Medicare and Medicaid for services not
rendered or for misrepresenting actual services rendered in order to obtain
higher reimbursement. Like the Antikickback Statute, the false claims statute is
very broad. The false claims statute requires careful and accurate coding of
claims for reimbursement.

         STATE ANTIKICKBACK LAWS. Many states in which the Company operates also
have laws that prohibit payments to physicians for patient referrals. Although
some of these statutes are similar to the federal Antikickback Statute, they are
broader in the sense that they apply regardless of the source of the payment for
the care. These statutes typically provide for criminal and civil penalties as
well as loss of licensure. Many states also have passed legislation similar to
the Stark Law, but also with broader effect because the legislation applies
regardless of the source of the payment for the care.

         CERTAIN COMPANY TRANSACTIONS. Certain of the Company's prior or current
arrangements with physicians, including joint ventures, may be subject to
enforcement action under the Antikickback Statute, Stark Law, or state laws. The
Company's future development of joint ventures and other financial arrangements
with physicians also could be adversely affected by the failure of such
arrangements to comply with those laws or similar laws adopted in the future.
The Company has not been the subject of, and is not currently the subject of,
any legal proceedings concerning violations of federal or state anti-kickback or
self-referral laws.

As of January 1, 1995, the Company was unable to comply with certain provisions
of the Stark Law, as well as certain similar state self-referral statutes, as
they applied to the medical diagnostic business of the Company's Manatee
subsidiary. The Company took steps during 1995, before the Company's medical
diagnostic business ceased operations, to notify its physician shareholders of
its intent not to accept referrals that would be prohibited under the Stark Law.
The Company has determined that, based on prohibited referrals to the Company's
medical diagnostic business (before it ceased operations), the Company could be
subject to penalties and the return of monies collected on certain services
provided in an aggregate amount of up to approximately $50 million. The Company
believes, however, that enforcement action is unlikely, because of the filing of
the Chapter 7 bankruptcy petition by Manatee and the cessation of the Company's
medical diagnostic operations. Nevertheless, the Company cannot be certain
concerning the probability of an enforcement action.

In June 1996, the Company was served with a subpoena duces tecum issued by the
Office of Inspector General ("OIG") of the Department of Health and Human
Services in connection with an investigation then being conducted by the OIG.
The investigation related to possible false claims or otherwise improper billing
practices at the Company's Quail Diagnostic Laboratories in






                                       13
<PAGE>   14

Fresno, California. The Company sold Quail Diagnostic Laboratories in August
1995 (see Item 1. "Business - Business Strategy - Historical Perspective"). The
Company complied with the document production requested in the OIG subpoena. In
September 1996, the OIG informed the Company that it had terminated the
investigation and that there would be no further proceedings in connection with
the subject matter of the investigation.

         MEDICARE AND MEDICAID REIMBURSEMENT. The Company is dependent upon
reimbursement from the Medicare and Medicaid programs. Recent legislation
adopted or proposed in Congress in connection with efforts to reduce the federal
budget deficit likely will have the effect of reducing, or limiting increases
in, federal expenditures on the Medicare and Medicaid programs. Such legislation
could have a material adverse effect on the Company.

DISCONTINUED OPERATIONS

Following the sale of its California clinical laboratory operations in August
1995, the Company, through its Manatee subsidiary, owned and operated eight
clinical laboratories which analyzed human tissue, blood and other bodily fluids
for the medical community. The Company's clinical laboratories serviced clients
in the metropolitan areas surrounding Tampa, Miami, Orlando and Jacksonville,
Florida and New Orleans, Louisiana. In addition, Manatee owned and operated an
imaging center in Pinole, California which performs MRI's. In early March 1995,
the Company had closed an MRI center in Fort Lauderdale, Florida that had been
acquired in July 1993. Due to continuing unprofitability of Manatee, and intense
pressure from certain of Manatee's creditors who were in the process of
executing on previously obtained judgments, on April 4, 1996 Manatee filed a
voluntary petition under Section 301 of Chapter 7 of Title 11 of the United
States Code, 11 U.S.C. Sections 101 et. seq. in the Bankruptcy Court for the
Southern District of Florida (Case No. 96-21552 BKC-RBR). On April 10, 1996,
John P. Barbee of Fort Lauderdale, Florida was appointed Trustee of the bankrupt
estate. The bankruptcy filing forced the closing of all the Company's remaining
clinical laboratory facilities in Florida (the assets of the New Orleans lab had
been sold in January 1996 to another laboratory company in an arms-length
transaction). The trustee in bankruptcy has assumed Manatee's position as
general partner of the partnership that owns and operates the Pinole, California
MRI center. The bankruptcy proceeding is presently pending.

EMPLOYEES.

The Company has a total of approximately 350 employees, of whom approximately
344 are engaged in the operation of the Company's hospital management and
pharmaceutical products distribution divisions, and the remainder are engaged in
administrative functions at the Company's Fort Lauderdale, Florida corporate
headquarters.





                                       14
<PAGE>   15

ITEM 2.           PROPERTIES

The Company's corporate headquarters are located in Fort Lauderdale, Florida,
where it leases approximately 3,000 square feet at a monthly rental of $4,700
through September 1998. In addition, BHC operates four locations in leased
premises in Pinole, California (1,000 square feet), Santa Clara, California
(1,000 square feet), Pasadena, California (1,100 square feet) and Clearwater,
Florida (1,000 square feet) at an aggregate monthly rental of $4,205, with lease
terms ending at various dates through August 31, 1999. Other than the Podiatry
Hospital of Pittsburgh, CHC has no owned or leased properties. The Podiatry
Hospital consists of two buildings (the hospital and an administrative building)
and adjacent parking lots, and is situated on approximately 2.8 acres.







                                       15
<PAGE>   16



ITEM 3.           LEGAL PROCEEDINGS

On July 22, 1994, two individuals who hold an aggregate of 1,125 shares of RXM
Common Stock filed a stockholders' lawsuit against the Company and the Company's
Chief Executive Officer (who is also a director of the Company), in the United
States District Court for the Southern District of Florida under the title
ABRAHAM KRELOFF AND SHEILA RICH V. RX MEDICAL SERVICES CORP. AND MICHAEL L.
GOLDBERG (Case No. 94-6671-Civ-Zloch). The Company was served with the summons
and complaint on August 3, 1994. The two plaintiffs in this action sought to
represent a class composed of all persons who purchased or otherwise acquired
shares of RXM Common Stock in the period from June 3, 1992 through April 22,
1994. The complaint alleged the dissemination of materially false and misleading
statements in connection with certain press releases and filings by the Company
with the Securities and Exchange Commission between 1991 and 1994 allegedly
causing an artificial inflation of the market price of RXM Common Stock. The
complaint sought damages in an unspecified amount. The Company retained
securities litigation counsel to represent it and Michael L. Goldberg in this
matter. The Company and Mr. Goldberg filed an answer denying the allegations
contained in the complaint and raising several affirmative defenses. In February
1996, the parties entered into a stipulation in which settlement of the class
action lawsuit was reached. The Stipulation of Class Settlement was filed but
never acted upon by the Court. On January 29, 1998, the lawsuit was voluntarily
dismissed. An order Approving Stipulation of Dismissal and Dismissing Action
Without Prejudice was entered by the presiding Judge and filed with the Clerk of
the Court. In consideration for the voluntary dismissal without prejudice, the
Company agreed to pay plaintiffs' counsel their out-of-pocket costs incurred in
the lawsuit, amounting to approximately $16,000. No release of any claims was
given to the defendants by virtue of this stipulation of dismissal.

The Company, in March 1995, received from the U.S. Securities and Exchange
Commission (the "Commission") a Formal Order Directing Private Investigation And
Designating Officers To Take Testimony In The Matter of Rx Medical Services
Corp., dated March 8, 1995. The Company has been advised by the Commission that
the investigation is confidential and should not be construed as an indication
by the Commission or its staff that any violation of law has occurred.

On July 21, 1995, an action was commenced against the Company and three of its
directors in the United States District Court, Eastern District of California
(Fresno), under the title SHARI RAINWATER AND GREG RAINWATER V. RX MEDICAL
SERVICE CORP., ET. AL. (Case No. CV-F-95-5596 REC/DIR). The complaint alleges
fraud and misrepresentation and breach of a written employment agreement and
seeks damages of not less than $600,000, declaratory relief and injunctive
relief. The suit relates to the acquisition by the Company, through a merger
transaction, of Quail Diagnostic Laboratories, Inc. in October 1992 and the
subsequent employment of Shari Rainwater as the officer in charge of the
Company's California clinical laboratory operations. Due to the filing of the
Chapter 7 petition in bankruptcy by Manatee, most of the claims made by the
plaintiffs can no longer be prosecuted. The only cause of action remaining to be
litigated is one in fraud and rescission against the Company as a result of the
merger. In March 1998, a tentative settlement was reached between the parties,
pursuant to which the plaintiffs have agreed to accept the sum of $200,000 in
complete satisfaction of their claims against the defendants. Upon receipt of
payment, the plaintiffs will file a dismissal of the






                                       16
<PAGE>   17

action with prejudice and general releases will be exchanged. It is anticipated
that the settlement will be finalized on or before May 1, 1998.

In February 1996, an action was commenced against the Company and Manatee by
Eduardo R. Latour, as Trustee for Physicians Reference Lab Short Term Trust (the
"Trust") in the Circuit Court for Pinellas County, Florida (Case No.
96-00683-CI-15). The beneficiary of the Trust is Deborah H. Behar, the wife of
Morris Behar. Mr. Behar was a director of the Company until November 1997 and
was formerly an executive vice president and a director of Manatee, and was
previously the trustee of the Trust. The complaint filed in this action alleged
a default under a promissory note from Manatee, which note had been guaranteed
by the Company, and seeks damages in the amount of $3,060,000 against Manatee
and the Company. In addition, the complaint sought to foreclose a security
interest in certain assets of Manatee that had been pledged to the Trust by
Manatee. The promissory note and pledge had been delivered to the Trust in
connection with the Trust's sale, in December 1991, to Manatee of the
Physician's Reference Laboratory Services group of clinical laboratories located
in Florida. Due to the Manatee bankruptcy, the Company remained as the sole
defendant in the action. In March 1998, an agreement was reached, prior to the
date set for trial, to settle this lawsuit for a total of $577,500 payable in
one lump sum on or before April 30, 1998. The Financing Source guaranteed
payment of the settlement amount. Upon receipt of payment, the parties will file
a voluntary dismissal of the action with prejudice.

On April 4, 1996, Manatee filed a voluntary petition under Section 301 of
Chapter 7 of Title 11 of the United States Code, 11 U.S.C. Sections 101 et. seq.
in the Bankruptcy Court for the Southern District of Florida (Case No. 96-21552
BKC-RBR). On April 10, 1996, John P. Barbee of Fort Lauderdale, Florida was
appointed trustee of the bankrupt estate. The bankruptcy proceeding is pending.

On April 8, 1997, the Company commenced an action against Biologic Health
Resources (Florida) LLC ("BHR LLC") and five individuals, in the Circuit Court
for Dade County, Florida, under the title BIOLOGIC HEALTH CARE - FLORIDA, INC.
V. BIOLOGIC HEALTH RESOURCES (FLORIDA) LLC, ET. AL. (Case No. 97-07747 CA 25).
The complaint alleges that the principals of BHR conspired to violate the BHC
agreements by entering into direct competition with the BHC-FL operation, and
seeks injunctive relief and damages against two former BHC employees for
violations of restrictive covenants contained in their employment agreements,
and damages against BHR LLC and its principals for tortious interference with
the business of BHC-FL. A motion by the Company for a temporary injunction
against one of the former BHC-FL employees was granted in August 1997. The
action is presently in discovery and no trial date has been set.

On June 10, 1997, the Company commenced an action against BHR in the Superior
Court of California, County of Santa Clara, under the title RX MEDICAL IMAGING
CORP V. BIOLOGIC HEALTH RESOURCES, ET. AL. (Case No. CV-766768). The complaint
alleges that the defendants violated the partnership agreement of BHC in a
number of respects, including misappropriation of partnership assets and
diverting partnership customers, and seeks a dissolution of BHC, an accounting
of BHC's affairs, and damages. On August 7, 1997, the defendants filed a
cross-complaint in the pending action against the Company, RxMIC, the Financing
Source, the Company's president and





                                       17
<PAGE>   18

general counsel, and Bay Cities Pharmaceutical Services and its two principals,
seeking a dissolution of the partnership and an accounting, and damages for
breach of contract, breach of fiduciary duty, fraud, recission, conversion,
constructive trust, and conspiracy to defraud. The Company asserts that the
allegations contained in the cross-complaint are totally without merit, and on
behalf of itself and its two employees the Company intends to vigorously defend
against such allegations and pursue the causes of action contained in the
complaint. The action is presently in discovery and no trial date has been set.

On January 29, 1998, an action was commenced by Morton Medical Center, Inc.
("MMC") in the Chancery Court of Scott County, Mississippi against CHC, Ameris
and Scott County (Civil Action Case Number 98-085). The suit relates to an
option originally held by MMC to purchase Scott Regional Hospital (the
"Hospital") from Scott County. In 1993, Scott County had leased the Hospital to
MMC and the lease contained the option to purchase, which MMC thereafter
assigned to CHC as partial consideration for CHC's agreement to manage the
Hospital for MMC. In 1996, CHC assigned the option to Ameris. The complaint
seeks a declaratory judgment that the option to purchase the Hospital is void on
public policy grounds and that CHC's assignment to Ameris lacked the required
approval of MMC and was, therefore, invalid. After the action was commenced, CHC
formally exercised the option to purchase, for itself or on behalf of Ameris,
should Ameris decide to purchase the Hospital. Pursuant to the grant of option,
the purchase price for the Hospital is $500,000, payable $100,000 at closing and
the balance over four years in equal annual installments. No date has been set
for closing, although the Company anticipates that MMC will seek to obtain a
temporary restraining order staying the closing of the purchase pending the
outcome of its lawsuit. The Company intends to vigorously oppose the lawsuit,
which is presently in discovery. No trial date has been set.

In addition to the foregoing, the Company is involved in routine litigation
arising in the ordinary course of its business which the Company believes would
not have a material adverse effect on its financial position.

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

On November 20, 1997, the Company held its annual meeting of stockholders. One
proposal, the election of directors, was submitted to a vote of the security
holders of the Company. Set forth below is a list of the directors elected at
the meeting, each of whom continued his term of office as director after the
meeting, and the number of votes cast for or withheld, as well as the number of
abstentions and broker non-votes, with respect to each nominee for office:

<TABLE>
<CAPTION>
            NAME                  VOTES FOR        VOTES WITHHELD        ABSTENTIONS           BROKER NON-VOTES
            ----                  ---------        --------------        -----------           ----------------
<S>                               <C>                  <C>                    <C>                      <C>
Michael L. Goldberg               6,518,522            64,258                 0                        0
Phillip E. Pearce                 6,534,628            48,152                 0                        0
Michael J. Pickering              6,534,628            48,152                 0                        0
Randolph H. Speer                 6,529,003            53,777                 0                        0

</TABLE>




                                       18
<PAGE>   19

EXECUTIVE OFFICERS

 The executive officers of the Company as of December 31, 1997, are as follows:

<TABLE>
<CAPTION>
                        NAME                       AGE                       POSITION
                        ----                       ---                       --------
<S>                                                <C>         <C>
          Michael L. Goldberg                      48          Chairman of the Board and
                                                                Chief Executive Officer

          Randolph H. Speer                        47          Director, President and
                                                                Chief Operating Officer


</TABLE>

MICHAEL L. GOLDBERG, 48 (a director since 1990). Mr. Goldberg was an Assistant
District Attorney in the Philadelphia District Attorney's office from 1974 to
1977 before entering private practice with a specialty in complex commercial
litigation. Mr. Goldberg joined the Company in May 1990. He was Chairman,
President and Chief Executive Officer of the Company from November 1991 to June
1994 at which time he relinquished the position of President.

RANDOLPH H. SPEER, 47 (a director since 1994). Mr. Speer was named President and
Chief Operating Officer of the Company in July 1994. On August 2, 1994, Mr.
Speer was appointed to the Board of Directors. Previously, he was Senior Vice
President, Treasurer and Chief Financial Officer of Summit Health Ltd. from
April 1989 through April 1994. In April 1994, Summit Health Ltd. was merged into
OrNda HealthCorp. Previous to Summit Health Ltd., from January 1981 until April
1989, Mr. Speer was Vice President and Chief Financial Officer of Sierra Land
Group, Inc. which, prior to the merger with OrNda HealthCorp., was the largest
shareholder of Summit Health Ltd. Mr. Speer is a CPA, licensed in the State of
California.

The executive officers hold office at the pleasure of the Board of Directors.





                                       19
<PAGE>   20

                                     PART II

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

Effective December 3, 1996, shares of RXM Common Stock were formally delisted
from the American Stock Exchange (the "Exchange"). Prior to that date, there had
been no trading of the RXM Common Stock since April 1, 1996. RXM Common Stock is
qualified for trading on the OTC Electronic Bulletin Board (the "OTC Bulletin
Board"). Trading of the RXM Common Stock on the OTC Bulletin Board commenced in
mid-December, 1996; however, such trading has been limited due to the Company's
inability to comply with the filing requirements of the Securities Exchange Act
of 1934 since April 1, 1996. The following table sets forth the high and low
closing prices on the Exchange for 1995 and 1996 and on the OTC Bulletin Board
for 1997:

                                                    HIGH          LOW
                                                    ----          ---

         1995     First Quarter                     2.25          1.44
         ----     Second Quarter                     1.88          .88
                  Third Quarter                      1.63          .94
                  Fourth Quarter                     1.19          .69

         1996     First Quarter                      1.50          .50
         ----     Second Quarter                      N/A          N/A
                  Third Quarter                       N/A          N/A
                  Fourth Quarter                      N/A          N/A

         1997     First Quarter                       .56          .06
         ----     Second Quarter                      .38          .13
                  Third Quarter                       .22          .09
                  Fourth Quarter                      .44          .10

On March 16, 1998, the closing price of RXM Common Stock on the OTC Bulletin
Board was $.21 per share. In December 1993, RXM Common Stock was combined in a 1
for 4 reverse stock split. The prices in the preceding table have been adjusted
to reflect this combination. As of March 16, 1998, based on the records of the
Company's transfer agent, there were 773 holders of record of RXM Common Stock,
excluding the number of beneficial owners whose shares are held in street name.

Although RXM Common Stock is qualified for trading on the OTC Bulletin Board,
there can be no assurance that an active trading market will develop for such
common stock.

Effective November 1, 1996, the 1,250,000 shares of the Company's Series E
Preferred Stock were automatically fully converted into 625,000 shares of RXM
Common Stock, as specified in the preferences and rights of the Series E
Preferred Stock. Pursuant to the terms of the Series E Preferred Stock, the
Company was required to make monthly dividend payments at the rate of




                                       20


<PAGE>   21

12% per annum payable in arrears, calculated on the average of the total dollar
value of the Series E Preferred Stock remaining unconverted for the preceding
month (see Note 6 to the Notes to Consolidated Financial Statements). At
December 31, 1997 the Company had dividends in arrears in the amount of
$304,589.

On January 1, 1996 and on a quarterly basis thereafter (April 1, July 1, and
October 1) until the shares of the Company's Series F Preferred Stock are fully
converted (on or before July 1, 1998), as specified in the preferences and
rights of the Series F Preferred Stock, the Company is required to make
quarterly dividend payments, in cash at the rate of $.40 per annum per share or,
at the election of the holder, in RXM Common Stock, payable in arrears (see Note
6 to the Notes to Consolidated Financial Statements). At December 31, 1997, the
Company had dividends in arrears in the amount of 1,560,702 shares of RXM Common
Stock.















                                       21

<PAGE>   22



ITEM 6.           SELECTED FINANCIAL DATA

                            Rx Medical Services Corp.
                        Summary of Financial Information
             (Dollar amounts in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                        YEARS ENDED DECEMBER 31,
                                          ---------------------------------------------------
                                          1997      1996        1995        1994        1993
                                          ----      ----         ----       ----         ----
<S>                                    <C>         <C>         <C>         <C>         <C>
Revenues                               $ 19,972    $ 16,980    $  1,844    $     --    $     --
Loss from continuing operations        $ (9,147)   $ (9,988)   $ (4,731)   $ (3,637)   $ (4,051)
Net loss                               $ (8,993)   $ (7,669)   $(20,421)   $(12,904)   $(14,025)
Loss per common share:
   Loss from continuing operations     $  (1.03)   $  (1.20)   $  (0.58)   $  (0.58)   $  (1.18)
   Net loss                            $  (1.01)   $  (0.93)   $  (2.42)   $  (2.05)   $  (4.09)
Distributions                          $     --    $     --    $     --    $     --    $     --
Total assets                           $  6,473    $  6,390    $  2,547    $  9,379    $ 12,666
Working capital deficit                $(44,912)   $(34,711)   $(25,503)   $(15,381)   $ (8,492)
Long-term debt                         $    202    $    592    $    736    $     --    $  1,210
Total shareholders' equity (deficit)   $(43,629)   $(34,396)   $(26,361)   $ (6,059)   $  2,181
</TABLE>






                                       22
<PAGE>   23



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

OVERVIEW

From inception, the Company was unable to achieve profitability in its medical
diagnostic business. Commencing in 1995, and continuing in 1996, management
embarked on a plan to reorganize the Company. In March 1995, the Company closed
an MRI center in Fort Lauderdale, Florida. An MRI center, in Victorville,
California, was closed in June 1994. In August 1995, the Company sold its entire
clinical laboratory operation in California and in January 1996 it sold its
Louisiana clinical laboratory operation.

In April 1996, due to continuing losses and intense pressure from creditors,
Manatee, which operated the Company's medical diagnostic services business
segment, filed a voluntary petition under Chapter 7 of the U.S. Bankruptcy Code.
This resulted in the closing of the Company's remaining medical diagnostic
facilities. Management decided that it was in the best interests of the Company
and its shareholders to discontinue the operations of this division, and to
focus its future efforts on the expansion of its hospital management and
pharmaceutical products distribution businesses.

As a result of this decision, for all years presented, the medical diagnostic
services business segment has been accounted for as discontinued operations in
accordance with Accounting Principles Board Opinion No. 30, which provides for
the reporting of operating results of discontinued operations separately from
the continuing operations. Gains and (losses) from discontinued operations
amounted to $181,000, $229,000 and $(15,183,000) for the years ended December
31, 1997, 1996 and 1995, respectively.

Also, gains and losses on the settlement of liabilities and on the purchase of
accounts receivable have been accounted for as extraordinary items in accordance
with APB 30, which provides for the reporting of such material, non-recurring
events separately from the continuing operations. Gains and (losses) from
extraordinary items amounted to $(27,000), $2,090,000 and $(507,000) for the
years ended December 31, 1997, 1996 and 1995, respectively.

Including losses from continuing operations, net losses of the Company were
$(8,993,000), $(7,669,000) and $(20,421,000) for the fiscal years 1997, 1996 and
1995, respectively.

RESULTS OF OPERATIONS

1997 VS. 1996

Revenues from hospitals and medical clinics for the year ended December 31, 1997
were $19.9 million compared to $16.9 million for the year ended December 31,
1996. The increase in revenues from hospitals and medical clinics is primarily
the result of (a) the year ended December 31, 1997 includes twelve months of
operations from the Dickenson County Medical Center located in Clintwood,
Virginia ("DCMC") while the year ended December 31, 1996 only includes nine
months of operations from DCMC resulting in an increase of revenues of
approximately $5.6









                                       23
<PAGE>   24

million; (b) the Company ceased operating the Whitwell Medical Center located in
Whitwell, Tennessee ("WMC") on October 31, 1996, therefore no revenues were
generated during the year ended December 31, 1997, which resulted in a decrease
of approximately $4.1 million; (c) the acquisition of the Podiatry Hospital of
Pittsburgh, Pennsylvania ("PHP") effective January 1, 1997 which generated
revenues of approximately $2.3 million for the year ended December 31, 1997; and
(d) a cumulative decrease at other Company hospital and medical clinics of
approximately $1.1 million.

Revenues from the pharmaceutical products distribution division for the year
ended December 31, 1997 were $0.3 million compared to $0.1 million for the year
ended December 31, 1997. The increase in revenues from the pharmaceutical
products distribution division is primarily the result of the Company beginning
this division in July 1996 and therefore the year end December 31, 1997 includes
twelve months of operations while the year ended December 31, 1996 includes only
six months of operations.

Costs and expenses increased 3% to $22.8 million for the year ended December 31,
1997 from $22.1 million for the year ended December 31, 1996. Of these 1997
expenses, hospital management operations accounted for $20.9 million,
pharmaceutical distribution accounted for $0.6 million, and the corporate
expenses of the Company were $1.3 million. The increase in costs and expenses is
primarily the result of (a) the year ended December 31, 1997 includes twelve
months of operations from DCMC while the year ended December 31, 1996 only
includes nine months of operations from DCMC which resulted in an increase of
costs and expenses of approximately $4.8 million; (b) the Company ceased
operating WMC on October 31, 1996, therefore no costs and expense were incurred
during the year ended December 31, 1997, which resulted in a decrease of
approximately $5.7 million; (c) the acquisition of PHP effective January 1, 1997
which generated costs and expenses of approximately $3.6 million for the year
ended December 31, 1997; (d) costs and expenses associated with the
pharmaceutical products distribution division, which first incurred costs in the
fourth quarter of 1996, of approximately $0.4 million; and (e) a cumulative
decrease at other Company hospital and medical clinics and the Company's
corporate headquarters of approximately $2.4 million.

Interest expense increased 37% to $6.4 million for the year ended December 31,
1997 from $4.7 million for the year ended December 31, 1996. This increase is
due primarily to a higher level of borrowings from the Financing Source. (See
"Financial Condition, Liquidity, and Capital Resources").

No provision for income taxes has been provided on the gain from discontinued
operations since existing net operating loss carryforwards from continuing
operations may be substantially limited.

RESULTS OF OPERATIONS

1996 VS. 1995

Revenues from hospitals and medical clinics for 1996 were $16.9 million compared
to $1.8 million in 1995. The Company began operating its hospital management
division in 1995 and revenues include the results of operations from August 1,
1995. In 1996, the Company began







                                       24
<PAGE>   25

operating two additional hospitals - DCMC and WMC. Revenues include the results
of operations of DCMC for the nine month period from April 1, 1996 to December
31, 1996 and WMC for the seven month period from April 1, 1996 to October 31,
1996.

Revenues from pharmaceutical products for 1996 were $0.1 million compared to $0
revenues in 1995. The Company began operating this business in 1996 and revenues
include the results of operations from July 1, 1996.

Costs and expenses increased 320% from $5.3 million in 1995 to $22.2 million in
1996. Of these 1996 expenses, hospital management operations accounted for $20.4
million, pharmaceutical distribution accounted for $0.3 million, and the
corporate expenses of the Company were $1.5 million. This decrease of 40% in
corporate expenses is the result of management's efforts to aggressively control
costs.

Interest expense increased 230% from $1.4 million in 1995 to $4.7 million in
1996. This increase was due primarily to a higher level of borrowings from the
Financing Source. (See "Financial Condition, Liquidity, and Capital Resources").

No provision for income taxes has been provided on the losses from discontinued
operations since existing net operating loss carryforwards from continuing
operations may be substantially limited.

1995 VS. 1994

Revenues from hospitals and medical clinics for 1995 were $1.8 million compared
to $0 revenues in 1994. The Company began operating this business in 1995 and
revenues include the results of operations from August 1, 1995.

Costs and expenses increased 84% from $2.9 million in 1994 to $5.3 million in
1995. Of these 1995 expenses, hospital management operations accounted for $2.7
million and the corporate expenses of the Company were $2.6 million. This
decrease of 10% in corporate expenses is the result of management's efforts to
aggressively control costs.

Interest expense increased 90% from $0.7 million in 1994 to $1.4 million in
1995. This increase was due primarily to a higher level of funding from the
Financing Source. (See "Financial Condition, Liquidity, and Capital Resources").

No provision for income taxes has been provided on the losses from discontinued
operations since existing net operating loss carryforwards from continuing
operations may be substantially limited.

FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES

At December 31, 1997 and 1996, the Company's working capital deficit was $44.9
million and $34.7 million, respectively. This increase in the working capital
deficit was primarily due to a $8.2 million increase in the level of funding
from the Financing Source as well as operating losses. In addition, the Company
is a defendant in various lawsuits. Through December 31, 1997, the Company's
ability to continue as a going concern is dependent on successful resolution of
the








                                       25
<PAGE>   26

lawsuits and the continued funding of its operations by the Financing Source.
Without this funding, the Company's ability to operate its business would be
adversely impacted. As a result of the elimination by the Company of a portion
of its unprofitable operations, the continued dependence on the Financing Source
has been lessened. However, until the Company's revenues increase so as to
exceed the Company's operating expenses, the Company will continue to utilize
funding from the Financing Source, or other alternative sources of funding, to
the extent available. To the extent fundings from the Financing Source are
insufficient to pay the Company's operating expenses, the Company will require
alternative sources of funding. There can be no assurance that any alternative
sources of financing will be available to the Company at such point in time, or
if obtainable, on terms that are commercially feasible.

The Company's continuing operations (i.e. hospital management ("CHC") and
pharmaceutical products distribution ("BHC")) are presently being funded through
financing agreements with the Financing Source and the various operating
facilities. Agreements to purchase the eligible accounts receivable exist with
Smith County Hospital, Dickenson County Medical Center, the Podiatry Hospital of
Pittsburgh and the retail pharmacy used by BHC in Florida to facilitate the
delivery of the biological products to patients. At December 31, 1997
approximately $17.0 million had been funded (net) by the Financing Source and
its related affiliates under these current agreements. Of this amount,
approximately $4.9 million had been funded under agreement with WMC, which was
sold on October 31, 1996.

In April 1994, the Company entered into an agreement-in-principle with the
Financing Source, pursuant to which the Financing Source, through one or more of
its subsidiaries or affiliates, would provide up to $20.0 million to be used to
purchase the medical accounts receivable of businesses which may be acquired in
the future by the Company. As a stipulation of this arrangement, the Company
employed a new President and Chief Operating Officer in August 1994. See Item
13. "Certain Relationships and Related Transactions".

In October 1993, the Company entered into an agreement with the Financing
Source, providing the Company with accounts receivable based financing which
initially produced cash to the Company of approximately $2.6 million (the "1993
Commitment"). That agreement, which expired in April 1997, provided that the
Financing Source would periodically purchase certain eligible accounts
receivable, up to an aggregate of $25 million. However, due to the bankruptcy of
Manatee, the Company is not generating accounts receivable that could be
purchased under the 1993 Commitment. The Financing Source and its related
affiliates, through April 4, 1996, had funded and invested approximately $21.0
million in debt and equity in the Company. Of that amount, $2.3 million was paid
for equity and $18.7 million was advanced pursuant to the 1993 Commitment and
additional advances. The Financing Source had, and continues to have, no
contractual obligation to fund additional advances pursuant to the 1993
Commitment.

While the Company has not yet reached profitability operationally, it has
several plans of action in progress designed to improve profitability as well as
cash flow. The Company has divested its loss operations and will continue to
pursue additional sources of revenues by expanding its hospital operations and
other specialty medical services.



                                       26
<PAGE>   27

GOING CONCERN

The report of the independent auditors of the Company on its 1997, 1996 and 1995
consolidated financial statements express substantial doubt about the Company's
ability to continue as a going concern. Factors contributing to this substantial
doubt include recurring operating losses, a working capital deficiency,
delinquencies and defaults on its accounts payable and other outstanding
liabilities, litigation, as well as to the uncertainty of the Company's
compliance with certain Medicare and state statutes and regulations. As of
January 1, 1995, the Company was unable to comply with certain provisions of the
OBRA 1993 amendments to the Stark Act, as well as, certain similar state
statutes. Although the Company has not been the subject of, and is not currently
the subject of, any administrative proceedings concerning violations of federal
or state self-referral statutes or regulations, in the event that the Company is
found to have violated such statutes and regulations, it could be subject to
cumulative fines and penalties and could also be required to make refunds, which
may aggregate up to approximately $50.0 million. The Company believes, however,
that due to the filing of the Chapter 7 bankruptcy petition for Manatee, the
likelihood of such enforcement actions occurring is remote.

As mentioned in the Financial Condition section, the Company is dependent on the
continued funding currently being received from the Financing Source to continue
operations. The discontinuance of such funding, and the unavailability of
financing to replace such funding, could result in the Company ceasing its
operations.

OUTLOOK

The Company views its decision to discontinue the operation of its medical
diagnostic services business segment and to invest its current and future
resources on the expansion of its hospital and pharmaceutical products
distribution businesses as positive from a strategic standpoint. In the hospital
division, the Company will continue to pursue new opportunities in all areas of
hospital operations to include management, operational leases, joint ventures
and the acquisition of assets. In the pharmaceutical products distribution
division, the Company has scaled back its emphasis in the retail area but will
continue as a wholesale distributor. The Company will, however, continue to seek
retail patients in certain geographic markets where business objectives can be
met. (See Part I Item 1. "Business"). There can be no assurance, however, that
the Company will achieve its strategic objectives.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
         RISK

None.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Refer to the index of financial statements and schedules as presented on page
37. Information on selected quarterly financial data is not required for the
Registrant pursuant to the rules of the Commission.

                                       27
<PAGE>   28

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

         ACCOUNTING AND FINANCIAL DISCLOSURE

None.



                                       28
<PAGE>   29


                                    PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
         PERSONS OF THE REGISTRANT

DIRECTORS

The Company's by-laws provide that the number of directors shall be not less
than three nor more than ten. The actual number of directors is determined by
resolution of the Board from time to time. The Company's by-laws also provide
that directors are elected at the annual meeting of shareholders for a term of
office of one year or until their successors are elected and qualify. The last
annual meeting of shareholders was held on November 20, 1997. All of the current
directors were elected at that meeting. The Company anticipates that the next
annual meeting of shareholders will be held in the summer of 1998. The number of
directors is currently set at nine. Only four persons, however, are currently
serving as directors. Following is information concerning each of the current
directors of the Company:

MICHAEL L. GOLDBERG, 48 (a director since 1990). Mr. Goldberg was an Assistant
District Attorney in the Philadelphia District Attorney's office from 1974 to
1977 before entering private practice with a specialty in complex commercial
litigation. Mr. Goldberg joined the Company in May 1990. He was Chairman,
President and Chief Executive Officer of the Company from November 1991 to June
1994 at which time he relinquished the position of President.

RANDOLPH H. SPEER, 47 (a director since 1994). Mr. Speer was named President and
Chief Operating Officer of the Company in July 1994 and in August 1994, he was
appointed to the Board of Directors. Previously, Mr. Speer was Senior Vice
President, Treasurer and Chief Financial Officer of Summit Health Ltd. from
April 1989 through April 1994. In December 1993, Summit Health Ltd. was merged
into OrNda HealthCorp. Previous to Summit Health Ltd., from January 1981 until
April 1989, Mr. Speer was Vice President and Chief Financial Officer of Sierra
Land Group, Inc. which, prior to the merger with OrNda HealthCorp., was the
largest shareholder of Summit Health Ltd. Mr. Speer is a CPA licensed in the
State of California.

PHILLIP E. PEARCE, 69 (a director since 1992). Mr. Pearce has been in the
investment banking and securities business since receiving his Graduate Degree
from the Wharton School in 1954. From 1969 to 1983, he served as Senior Vice
President and a Director of E.F. Hutton of New York City, served on the Board of
Governors of the New York Stock Exchange and was Chairman of the Board of
Governors of the National Association of Securities Dealers, Inc. From 1983 to
1988, Mr. Pearce served as President of Phillip E. Pearce & Co., and since 1988
has been a partner in Pearce-Henry Capital Corp. of Charlotte, North Carolina,
an investment banking firm. Mr. Pearce was also a contributing author and editor
of the Dow Jones publication of the Stock Market Handbook, and sat on the
advisory council to the Securities and Exchange Commission on THE INSTITUTIONAL
STUDY OF THE STOCK MARKETS.

MICHAEL J. PICKERING, M.D., 67 (a director since 1990). Dr. Pickering has
practiced as a medical doctor specializing in nephrology since receiving his
medical degree from the University of Florida in 1961. He has certifications
from the American









                                       29
<PAGE>   30

Board of Internal Medicine and the American Board of Internal Medicine in the
Subspecialty of Nephrology and is a member of the American and Florida Medical
Associations, is a Fellow, American College of Physicians, and is a member of
the American Society of Artificial Internal Organs, American Society of Internal
Medicine, the American Society of Nephrology, the Florida Society of Internal
Medicine, the Florida Society of Nephrology, the Hillsborough County Medical
Association, the International Society of Nephrology, the National Kidney
Foundation, the Southeastern Dialysis and Transplantation Association, the
South-Eastern Organ Procurement Foundation, the Royal Society of Health and the
American Board of Quality Assurance & Utilization Review Physicians. Dr.
Pickering currently practices medicine, serves as an Associate Professor of
Medicine at the University of Florida and is a frequent speaker and lecturer on
his area of specialty throughout the country. He also has had articles and
abstracts published in more than one hundred medical journals and medical
conferences.

EXECUTIVE OFFICERS

Information concerning the executive officers of the Company is contained in
Part I, on page 19 of this annual report.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Ownership of and transactions in the Company's securities by executive officers
and directors of the Company and owners of ten percent or more of the Company's
Common Stock are required to be reported to the Securities and Exchange
Commission pursuant to Section 16(a) of the Securities Exchange Act of 1934 (the
"Exchange Act").

The Company does not have knowledge of any failure to file a required form to
report such ownership and transactions.


                                       30
<PAGE>   31


ITEM 11. EXECUTIVE COMPENSATION

                           SUMMARY COMPENSATION TABLE

The following table provides a summary of cash and non-cash compensation for
each of the fiscal years ended December 31, 1997, 1996 and 1995 with respect to
the Company's Chief Executive Officer and the only other executive officers
whose compensation exceeded $100,000 in the fiscal year ended December 31, 1997
(the "Named Officers").

<TABLE>
<CAPTION>
                                                                                                     Long Term
                                                                                                   Compensation
                                                            Annual Compensation                       Awards
                                              ----------------------------------------------------------------------
                                                                                                    Securities
                                                                              Other Annual          Underlying
Name And Principal Position            Year      Salary ($)     Bonus ($)   Compensation ($)     Option/SARs (#)
---------------------------            ----      ----------     ---------   ----------------     ---------------
<S>                                    <C>        <C>               <C>           <C>                   <C>
Michael L. Goldberg                    1997       165,000          -0-            8,000                -0-
  Chief Executive Officer              1996       165,000          -0-            8,000                -0-
                                       1995       165,000          -0-            8,000                -0-

Randolph H. Speer                      1997       200,000          -0-             -0-                 -0-
  President and Chief Operating        1996       200,000          -0-             -0-                 -0-
  Officer                              1995       200,000          -0-             -0-                 -0-

</TABLE>


                                  STOCK OPTIONS

There were no grants of stock options by the Company to the Named Officers
during 1997.

           AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END
                                  OPTION VALUES

The following table sets forth the information with respect to the Named
Officers concerning the exercise of options during 1997 and unexercised options
held as of December 31, 1997:
<TABLE>
<CAPTION>

           (a)                (b)            (c)                     (d)                            (e)
                                                            Number of Securities           Value of Unexercised
                                                           Underlying Unexercised         In-the-Money Options at
                                                            Options at FY-End (#)               FY-End ($)
                                                        ------------------------------  ----------------------------
                            Shares
                         Acquired on
           Name          Exercise (#)  Value Realized($) Exercisable   Unexercisable    Exercisable  Unexercisable
           ----          ------------  --------------    -----------   -------------    -----------  -------------

<S>                            <C>            <C>          <C>               <C>             <C>           <C>
  Michael L. Goldberg         -0-            -0-           200,000          -0-             -0-           -0-

  Randolph H. Speer           -0-            -0-           100,000          -0-             -0-           -0-
</TABLE>


                                       31
<PAGE>   32


COMPENSATION OF DIRECTORS

It has been the policy of the Company not to compensate its directors for their
services as directors; however, in July 1993, the Company granted options to
purchase 12,500 shares of the Company's Common Stock to each director as
compensation for their respective services as directors. It is the policy of the
Company not to pay its directors for attending Board or committee meetings, but
the Company reimburses directors for travel expenses incurred in attending such
meetings.

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Board of Directors of Rx Medical Services Corp. does not have a Compensation
Committee and, as a result, the Board of Directors makes determinations as to
executive officer compensation. The Board of Directors has not changed the
compensation of its executive officers since 1995. As of December 31, 1997, the
Company had two executive officers.

PERFORMANCE GRAPH

                COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
      AMONG RX MEDICAL SERVICES CORP., THE NASDAQ STOCK MARKET (U.S.) INDEX
              AND THE S & P HEALTH CARE (HOSPITAL MANAGEMENT) INDEX

<TABLE>
<CAPTION>
                                                                                Cumulative Total Return
                                                                  ----------------------------------------------------
                                                                   12/92    12/93   12/94    12/95    12/96    12/97
<S>                                                                 <C>      <C>      <C>      <C>       <C>      <C>
Rx MEDICAL SERVICES CORP.                                 RXMS      100      86       27       11        1        3

NASDAQ STOCK MARKET (U.S.)                                INAS      100      115     112      159      195      240

S & P HEALTH CARE (HOSPITAL MGMT)                         IHSM      100      151     160      224      263      230
</TABLE>
---------------------------
*  $100 invested on 12/31/92 in stock or index including reinvestment of
   dividends. Fiscal year ending December 31.


                                       32
<PAGE>   33



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
         AND MANAGEMENT

Each share of Preferred Stock of the Company contains voting rights equivalent
to one share of RXM Common Stock. The Company currently has two series of
preferred stock outstanding, designated Series C and F. Effective November 1,
1996, the Financing Source exercised its right to receive 625,000 shares of the
Company's Common Stock in converting the 1,250,000 shares of Series E Preferred
Stock that had been issued to the Financing Source in 1994 in connection with
the disposition of the balance of the Company's real estate portfolio. For a
description of the relative rights and preferences of each such series, see Note
6(a) to the Notes to Consolidated Financial Statements. On all matters submitted
for vote by the stockholders of the Company, including the election of
directors, the shares of Preferred Stock and RXM Common Stock vote together as a
single class except as may otherwise be required by law. At December 31, 1997,
the 1,325,000 shares in the name of the Financing Source were transferred to
Intercontinental Investment Associates, Ltd. ("IIA"), a Nevada limited liability
company affiliated with the Financing Source. At December 31, 1997, 422,488
shares of Series C Preferred Stock outstanding were owned of record and
beneficially by a current director and two former directors of the Company
individually.

The following table sets forth information as of March 16, 1998, with respect to
all stockholders known by the Company to be the direct or indirect beneficial
owners of 5% or more of the Company's voting securities and by the executive
officers and directors of the Company as a group. Each percentage is calculated
by assuming that the named stockholder converted or exercised all of such
stockholder's securities convertible within the next 60 days into, or
exercisable for, shares of RXM Common Stock at a time when no other stockholder
did so, irrespective of the conversion or exercise price thereof. Except as
otherwise noted, all persons and entities have sole voting and investment power
with respect to their shares.
<TABLE>
<CAPTION>

                                                                        AMOUNT AND NATURE
            NAME AND ADDRESS OF                                           OF BENEFICIAL            PERCENTAGE
             BENEFICIAL OWNER                   TITLE OF CLASS            OWNERSHIP (1)             OF CLASS
             ----------------                   --------------            -------------             --------
<S>                                              <C>                               <C>                      <C>
Michael L. Goldberg                                 Common                         514,633 (2)              5.6%
(also a director)                                 Preferred                         63,836 (3)              6.2%
888 East Las Olas Blvd., Suite 210
Fort Lauderdale, FL  33301

Morris Behar                                        Common                         257,245 (4)              2.8%
209 State Street                                  Preferred                        341,893 (5)             33.4%
Oldsmar, FL  34677

Kachina, Inc.                                       Common                         750,000 (6)              8.2%
6125 Memorial Drive
Dublin, OH  43017
</TABLE>



                                       33
<PAGE>   34
<TABLE>
<CAPTION>

<S>                                              <C>                               <C>                      <C>
Intercontinental Investment Assoc.                  Common                       1,325,000(7)              14.5%
6125 Memorial Drive
Dublin, OH  43017

Directors: (all with an address at
888 East Las Olas Blvd., Suite 210
Fort Lauderdale, FL  33301

Phillip E. Pearce                                   Common                          39,914(8)               .44%
Michael J. Pickering, M.D.                          Common                          82,345(9)               .90%
Randolph H. Speer                                   Common                         108,000(10)              1.2%

All Executive Officers, Directors                   Common                         744,892(11)              8.1%
 and Nominees as a Group                          Preferred                         63,836(12)              6.2%
</TABLE>

         (1)      As of March 16, 1998, there were 9,164,117 shares of RXM
                  Common Stock and 1,022,758 shares of Preferred Stock issued
                  and outstanding.

         (2)      Includes 241,250 shares representing stock options exercisable
                  within 60 days.

         (3)      Represents 1,535,103 shares of RXM Common Stock that may be
                  obtained by conversion of Series C Preferred Stock.

         (4)      Includes 25,000 shares representing stock options exercisable
                  within 60 days and 232,245 shares of RxM Common Stock
                  registered in the name of Gulf Coast Medical, Inc., a company
                  controlled by Mr. Behar.

         (5)      Represents 8,221,712 shares of RXM Common Stock that may be
                  obtained by conversion of Series C Preferred Stock. Of the
                  341,893 shares of Series C Preferred Stock attributable to Mr.
                  Behar, 56,26 shares are registered in the name of Gulf Coast
                  Medical, Inc.

         (6) (7)  In July 1996, Kachina distributed, in equal amounts, the
                  750,000 shares to Lance K. Poulsen, Donald H. Ayers, Rebecca
                  S. Parrett and Barbara C. Larson. These individuals are
                  officers, directors and the sole shareholders of the Financing
                  Source, Kachina and IIA and may be deemed to be the beneficial
                  owners of the shares of RXM Common Stock owned by the
                  Financing Source and its affiliates, Kachina and IIA.

         (8)      Consists of 39,914 shares representing stock options
                  exercisable within 60 days.

         (9)      Includes 56,409 shares representing stock options exercisable
                  within 60 days.

         (10)     Includes 100,000 shares representing stock options exercisable
                  within 60 days.

         (11)     Includes 437,573 shares representing stock options exercisable
                  within 60 days.

         (12)     Represents 1,535,103 shares of RXM Common Stock that may be
                  obtained by conversion of Series C Preferred Stock.


                                       34
<PAGE>   35




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Pursuant to an agreement, dated April 20, 1994 (the "Merger Agreement"), with an
affiliate of Kachina, Inc. ("Kachina"), the Company will sell, and Kachina will
purchase, up to 500,000 shares of RXM Common Stock at $6.00 per share, subject
to the completion of future acquisitions by the Company. This is in addition to
the 500,000 shares of RXM Common Stock previously issued to Kachina as part of
the Merger Agreement. The additional 500,000 shares are to be sold to Kachina on
the basis of 100,000 shares for every $4.0 million paid by the Company in
acquisition price, inclusive of consideration to be paid in cash, property,
services, stock, assumption of debt or other form of benefit to the seller.
Accordingly, the Company may receive up to an additional $3.0 million for the
additional shares of RXM Common Stock to be so issued. The Financing Source is
an affiliate of Kachina.

In conjunction with the Merger Agreement, on April 20, 1994, the Company entered
into an agreement-in-principle (the "Purchase Commitment") with the Financing
Source, pursuant to which the Financing Source, through one or more of its
subsidiaries or affiliates, would provide up to $20.0 million to be used to
purchase the medical accounts receivable of businesses which may be acquired in
the future by the Company. The terms of the Purchase Commitment are to be
substantially similar to the terms of the purchase arrangement between Manatee
and affiliates of the Financing Source, pursuant to which the Company's accounts
receivable are financed. The Company has utilized the Purchase Commitment to
obtain the funds required to acquire CHC in July 1995, the Company's hospital
management subsidiary (see Item 1. "Business"). In addition, the Company agreed
to employ a new executive officer for a one year term who would also be a member
of the Company's Board of Directors. Pursuant to that agreement, Randolph H.
Speer was appointed by the Company to the Board of Directors and elected
President and Chief Operating Officer and has been elected to serve on the Board
for a one year term or until his successor is elected and qualified.

On September 20, 1994, the Company entered into an agreement which resulted in
the disposition of the wrap mortgage portfolio owned by a partnership in which a
subsidiary of the Company is the general partner. See Item 1. "Business -
Discontinued Operations." The transaction entailed a transfer of the
partnership's mortgage portfolio and a return to the Company for cancellation of
the 286,287 shares of the Company's Series B Preferred Stock which was
contributed by the Company to the partnership. In addition, the sum of $200,000
has been paid in settlement of outstanding obligations totaling $242,000 owed to
an individual unaffiliated with the Company, who performed consulting services
to the partnership. The Financing Source provided the Company with a loan of
$200,000 to make the aforesaid settlement payment and the Financing Source
received as collateral, to secure repayment of that loan, a pledge of 286,287
shares of a new class (Series D) of the Company's Preferred Stock. The loan by
the Financing Source to the Company was by a note, originally for one year, at
an interest rate of 20%, payable monthly, interest only, with a balloon payment
of $200,000, plus any accrued interest, due on September 19, 1995. On September
26, 1995, the due date of this loan was extended until January 31, 1996, and
subsequently further extended until September 30, 1997. Effective December 31,
1996, however, the Financing Source canceled the note and added the principal
and accrued interest on








                                       35
<PAGE>   36

this loan, totaling $243,333.29, to the outstanding balance of the debt due to
Financing Source. As a result of the cancellation of the note, the shares of the
Company's Series D Preferred Stock were released from the pledge.

On October 20, 1994, the Company entered into an agreement, pursuant to which
the Company divested itself of its interests in, and future obligations with
respect to, the balance of its real estate portfolio. In consideration for the
payment of $1,250,000 in cash, provided to the Company by the Financing Source
pursuant to the transaction described below, and the issuance by the Company of
stock options to purchase 50,000 shares of RXM Common Stock exerciseable at
$1.00 per share, the Company was completely released from any and all liability
resulting from and out of the operations of its income properties.

To consummate the above-described transaction, the Company sold to the Financing
Source for $1,250,000, (a) 700,000 shares of RXM Common Stock and (b) 1,250,000
shares of a new Series E Convertible Preferred Stock. The Series E Preferred
Stock provides for an annual dividend of 12%, payable monthly, and is
convertible into Common Stock at the rate of one share of RXM Common Stock for
every two shares of Series E Preferred Stock. The conversion in any one calendar
quarter cannot exceed 156,250 shares of RXM Common Stock, and any shares of
Series E Preferred Stock not converted by November 1, 1996 shall automatically
convert to shares of RXM Common Stock as of that date. The Company agreed, with
respect to the 700,000 shares of RXM Common Stock issued on October 24, 1994,
which had a market value as of that date of $787,500, and the 625,000 shares of
RXM Common Stock to be issued on conversion of the Series E Preferred Stock, to
include all of these shares in a registration statement that the Company had
previously filed with the Securities and Exchange Commission, which registration
statement has not yet been declared effective. As of December 31, 1997, a total
of $304,589 has accrued on account of dividends payable on the Series E
Preferred Stock. As part of this transaction, and the transaction referred to
above, relating to the disposition of the Company's wrap mortgage portfolio, the
Company issued 250,000 shares of RXM Common Stock with a market value of
$265,625 on the date of issuance (September 26, 1994), to an affiliate of the
Financing Source.

In consideration of the funding of $1.0 million by the Financing Source to
facilitate the acquisition by the Company of CHC (see Item 1. "Business"), the
Company pledged to the Financing Source all of the issued and outstanding common
and preferred stock of CHC as collateral for the repayment of the loan.


                                       36
<PAGE>   37


                                     PART IV

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

(A)(1)   LIST OF FINANCIAL STATEMENTS

The following Consolidated Financial Statements of Rx Medical Services Corp. and
Report of Independent Accountants are filed as a part of this annual report:

<TABLE>
<CAPTION>

                                                                                                        Page
                                                                                                        ----

<S>                                                                                                      <C>
      Report of Independent Certified Public Accountants                                                 40
      Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995         41
      Consolidated Balance Sheets at December 31, 1997 and 1996                                        42-43
      Consolidated Statements of Shareholders' Deficit for the years ended December 31, 1997,
        1996 and 1995                                                                                    44
      Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995       45-46
      Notes to Consolidated Financial Statements                                                       47-65
</TABLE>

(A)(2)   LIST OF FINANCIAL STATEMENT SCHEDULE

The following consolidated financial statement schedule (numbered in accordance
with Regulation S-X) of Rx Medical Services Corp. for the years ended December
31, 1997, 1996 and 1995 are included in this Report:

<TABLE>
<CAPTION>
                                                                                                        Page
                                                                                                        ----
<S>                                                                                                      <C>
      Reports of Independent Certified Public Accountants on Schedule
           II - Valuation and Qualifying Accounts                                                        66
      Schedule II - Valuation and Qualifying Accounts                                                    67
</TABLE>

Schedules other than those listed above are omitted because they are not
applicable or the required information is shown in the financial statements or
notes thereto.

(A)(3)   LIST OF EXHIBITS:  (numbered in accordance with Item 601 of
                            Regulation S-K)




<TABLE>
<CAPTION>

          Exhibit                                                                              Incorporation by
           Number                             Description Of Document                              Reference
          --------    ------------------------------------------------------------------------ ----------------
<S>                   <C>                                                                            <C>
           3(a)       Certificate of Incorporation                                                   3(a)*
           3(b)       By-Laws                                                                        3(b)*
           3(c)       Certificate of Decrease in Number of Authorized and Outstanding  Shares        3(c)**
                        of Stock, filed with Nevada Secretary of State (December 1991)
           3(d)       Certificate  of  Decrease  in  Number  of  Authorized  and  Outstanding         ***
                        Shares, filed with Nevada Secretary of State (December 1993)
           4(a)       Certificate of Resolution  with respect to Series B Preferred  Stock of         4(a)****
                        Registrant
           4(b)       Certificate of Designation, Series C Preferred Stock                           4(b)o
           4(c)       Certificate of Designation, Series D Preferred Stock                           4(c)o





</TABLE>

                                       37

<PAGE>   38

<TABLE>
<CAPTION>

<S>        <C>        <C>                                                                            <C>
           4(d)       Certificate of Designation, Series E Preferred Stock                           4(d)o
           4(e)       Certificate of Designation, Series F Preferred Stock                           4(e)o
          10(a)       Sale and Subservicing Agreement dated as of October 7, 1993, by and          10(kk)+
                        among Manatee Medical Laboratories, Inc., NPFII-W, Inc. and National
                        Premier Financial Services, Inc.
          10(b)       Agreement of Merger, dated April 20, 1994, together with supplementary       10(a)++
                        letter from Kachina, Inc., dated April 20, 1994
          10(c)       Purchase Commitment, dated April 20, 1994, from NCFE                         10(b)++
          10(d)       Promissory Note, Security Agreement and Pledge Agreement, dated              10(c)+++
                        September 19, 1994, from Rx Medical Services Corp. to NCFE
          10(e)       Plan and Agreement of Merger, dated July 7, 1995, by and among Rx            10(a)++++
                        Medical Services Corp., CHC Acquisition Corp. and Consolidated
                        Health Corporation of Mississippi, Inc.
          10(f)       Asset Purchase Agreement, dated as of August 11, 1995, by and among         10(e)++++
                        Meris Laboratories, Inc., Rx Medical Services Corp. and Manatee
                        Medical Laboratories, Inc.[for northern California]
          10(g)       Asset  Purchase  Agreement, dated as of August 11, 1995, by and among       10(f)++++
                        Meris Laboratories, Inc., Rx Medical Services  Corp. and Manatee
                        Medical Laboratories, Inc. [for southern California]
          10(h)       Laboratory  Services Agreement, made as of August 12, 1995, between         10(g)++++
                        Meris Laboratories, Inc. and Rx Medical Services Corp.
          10(i)       Amendment to Asset Purchase Agreement, dated as of August 17, 1995 by       10(h)++++
                        and among Meris Laboratories, Inc., Rx Medical Services Corp. and
                        Manatee Medical Laboratories, Inc. [for southern California]
          10(j)       Pledge  Agreement, dated as of July 13, 1995, from Rx Medical Services      10(j)o
                        Corp. to NCFE
          10(k)         Hospital Lease Agreement, dated as of November 1, 1995,
                        between Smith 10(k)o County, MS and CHC Management, Inc.
          10(l)       Articles of Merger (CHC) filed November 14, 1995 with MS Secretary of       10(l)o
                        State
          10(m)       Operating Agreement, dated as of March 30, 1996, between NPF-X, Inc         10(m)o
                        and CHC Whitwell, Inc.
          10(n)       Operating  Agreement,  dated as of March 30, 1996, between NPF-X, Inc       10(n)o
                        and CHC Clintwood, Inc.
          10(o)       Option to Purchase  Agreement, effective as of March 29, 1996, between      10(o)o
                        NPF-X, Inc. and CHC
          10(p)       First Amendment to CHC Merger Agreement                                     10(p)o
          10(q)       Option Agreement on Whitwell Medical Center, Whitwell, TN                   10(q)o
          10(r)       Note Extension                                                              10(r)o
          10(s)       Asset Purchase  Agreement, dated August 28, 1996, between The Podiatry       2(a)oo
                        Hospital of Pittsburgh and CHC
          10(t)       Amendment to Asset Purchase Agreement, undated                               2(b)oo
          10(u)       Stipulation of Dismissal and Order                                          10(u)ooo
            11        Computation of Primary Earnings Per Share
            21        Subsidiaries of Registrant                                                  21o
          27.1        Financial Data Schedule for 1997 (for S.E.C. use only)
          27.2        Financial Data Schedule for 1996 (for S.E.C. use only)
          27.3        Financial Data Schedule for 1995 (for S.E.C. use only)

</TABLE>

Explanation of Incorporation by Reference:

      * Form 10 of Registrant, dated October 10, 1990, as amended by Form 8,
        dated March 15, 1991
    **  Amendment No. 2 to Form S-1 of Registrant, dated January 31, 1994
   ***  Current Report of Registrant on Form 8-K, dated January 7, 1994
  ****  Current Report of Registrant on Form 8-K, dated December 23, 1991, as
        amended on




                                       38
<PAGE>   39



<TABLE>
<CAPTION>

<S>                   <C>
                      December 29 and 31, 1991, and January 14 and March 14, 1992
      +               Amendment No. 1 to Form S-1 of Registrant, dated October 28, 1993
      ++              Current Report of Registrant on Form 8-K, dated April 20, 1994
      +++             Current Report of Registrant on Form 8-K, dated September 20, 1994
      ++++            Current Report of Registrant on Form 8-K, dated August 10, 1995
      o               Annual Report of Registrant on Form 10-K for fiscal year ended December 31, 1995
      oo              Current Report of Registrant on Form 8-K, dated April 3, 1997
      ooo             Current Report of Registrant on Form 8-K, dated January 29, 1998

</TABLE>
(B)      REPORTS ON FORM 8-K

         None.












                                       39
<PAGE>   40


                                             Suite 2000
                                             200 East Broward Boulevard
                                             Ft. Lauderdale, FL  33301-1915
                                             954 768-9900  o FAX 954 768-9908


                         REPORT OF INDEPENDENT CERTIFIED
                               PUBLIC ACCOUNTANTS




                                     GRANT THORNTON

                                     Grant Thornton LLP   Accountants and
                                                          Management Consultants

Board of Directors
Rx Medical Services Corp.

We have audited the accompanying consolidated balance sheets of Rx Medical
Services Corp. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' deficit, and cash flows for each of the
three years in the period ended December 31, 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Rx
Medical Services Corp. at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.

The accompanying financial statements have been prepared assuming that Rx
Medical Services Corp. will continue as a going concern. However, as more fully
described in Note 1, the Company has incurred recurring operating losses, has a
working capital deficiency, is delinquent in payments due to debt holders,
taxing authorities and others, is in default of certain loan covenants and is
dependent on the settlement of various lawsuits, the SEC investigation and on
continued funding by the senior lender. In addition, as described in Note 11,
there are uncertainties concerning the Company's compliance with various federal
and state statutes and certain provisions of the Omnibus Budget Reconciliation
Act of 1993, as well as, certain similar state statutes. The forgoing matters
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Notes 1 and 11. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.

/s/     GRANT THORNTON LLP

Fort Lauderdale, Florida
March 13, 1998




                                       40




<PAGE>   41

                            RX MEDICAL SERVICES CORP.
                      Consolidated Statements of Operations
                 (Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>

                                                        Years ended December 31,
                                                   --------------------------------
                                                     1997        1996         1995
                                                   --------    --------    --------
<S>                                                <C>         <C>         <C>
 Revenues:
  Hospitals and medical clinics                    $ 19,627    $ 16,926    $  1,844
  Pharmaceutical products                               345          54          --
                                                   --------    --------    --------
                                                     19,972      16,980       1,844
                                                   --------    --------    --------
Costs and expenses:
  Compensation and benefits                          11,232      10,546       2,310
  Pharmaceutical products                               288          45          --
  Supplies                                            1,822       1,889         168
  Fees for services                                   2,933       2,927         423
  Bad debts                                           1,705       2,313         723
  Depreciation and amortization                         176         160          73
  Occupancy                                             695         784         432
  Occupancy - related party                             962         805          --
  Equipment rental and maintenance                      549         472          63
  Equipment rental - related party                      183         244          --
  Other                                               2,302       1,978       1,079
                                                   --------    --------    --------
                                                     22,847      22,163       5,271
                                                   --------    --------    --------
Operating loss                                       (2,875)     (5,183)     (3,427)

Other income (expenses):
  Interest                                              (31)       (132)        (42)
  Interest - related party                           (6,354)     (4,540)     (1,373)
  Loss due to impairment of assets held for sale         --         (53)         --
  Loss due to impairment of goodwill                     --          --        (107)
  Loss on investment of partnership                      --        (108)         --
  Equity in earnings of partnership                      --          --          31
  Other income                                          113          28         187
                                                   --------    --------    --------
                                                     (6,272)     (4,805)     (1,304)
                                                   --------    --------    --------

Loss from continuing operations                      (9,147)     (9,988)     (4,731)

Gain (loss) from discontinued operations                181         229     (15,183)
                                                   --------    --------    --------

Net loss before extraordinary items                  (8,966)     (9,759)    (19,914)

Extraordinary items:
  Gain (loss) on settlement of liabilities              (27)      1,511        (507)
  Gain on purchase of accounts receivable                --         579          --
                                                   --------    --------    --------

 Net loss                                          $ (8,993)   $ (7,669)   $(20,421)
                                                   ========    ========    ========

Net loss per common share:
  Loss from continuing operations                  $  (1.03)   $  (1.20)   $  (0.58)
  Gain (loss) from discontinued operations             0.02        0.03       (1.78)
  Gain (loss) from extraordinary items                   --        0.24       (0.06)
                                                   --------    --------    --------

  Net loss per common share                        $  (1.01)   $  (0.93)   $  (2.42)
                                                   ========    ========    ========
</TABLE>


 The accompanying notes are an integral part of these financial statements.


                                       41
<PAGE>   42

                            RX MEDICAL SERVICES CORP.
                           Consolidated Balance Sheets
                             (Dollars in thousands)
<TABLE>
<CAPTION>

                                                                                   December 31
                                                                        ----------------------------------
                                                                            1997                  1996
                                                                        -----------            -----------
<S>                                                                     <C>                    <C>
 Assets:
   Current Assets:

     Cash                                                               $       110            $       685
     Accounts receivable (less allowance for doubtful accounts
       of $3,730 and $3,607 at 1997 and 1996, respectively)                   4,074                  4,106
     Inventories                                                                533                    301
     Other                                                                       85                    167
                                                                        -----------            -----------

          Total current assets                                                4,802                  5,259
                                                                        -----------            -----------

   Assets held for sale                                                          --                    750

   Property and equipment, at cost
     Land and building                                                          713                     --
     Equipment                                                                  930                    425
     Furniture, fixtures and improvements                                       192                     85
                                                                        -----------            -----------

                                                                              1,835                    510

     Less: accumulated depreciation and amortization                           (298)                  (129)
                                                                        -----------            -----------

                                                                              1,537                    381

   Investment in partnership                                                     --                     --

   Other assets (less allowance for doubtful accounts of $671
     at 1997 and 1996, respectively)                                            134                     --
                                                                        -----------            -----------

          Total assets                                                  $     6,473             $    6,390
                                                                        ===========            ===========
</TABLE>

 The accompanying notes are an integral part of these financial statements.










                                       42
<PAGE>   43

                            Rx Medical Services Corp.
                     Consolidated Balance Sheets (continued)
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                                         December 31
                                                                    --------------------
                                                                      1997        1996
                                                                    --------    --------
<S>                                                                 <C>         <C>
Liabilities and shareholders' deficit:
  Current liabilities:
    Notes payable                                                   $     20    $     --
    Notes payable - related party                                     40,232      32,022
    Accounts payable                                                   2,793       1,753
    Accrued liabilities                                                2,052       1,767
    Accrued liabilities - related party                                  640         245
    Accrued compensation, benefits and related taxes                     849         851
    Current portion of long-term debt                                  3,087         229
    Current portion of long-term debt - related party                     --       3,062
    Current portion of capital lease obligations                          41          41
                                                                    --------    --------
         Total current liabilities                                    49,714      39,970
  Long-term liabilities:
    Long-term debt                                                       202         592
    Net liabilities of discontinued operations                           100         100
    Obligations under capital leases                                      86         124
                                                                    --------    --------
         Total long-term liabilities                                     388         816
                                                                    --------    --------

         Total liabilities                                            50,102      40,786
                                                                    --------    --------

Commitments and contingencies                                             --          --

Shareholders' deficit:
  Convertible preferred stock, $.001 par value, authorized shares
    20,000,000, issued and outstanding 422,488 and 708,775
    shares at 1997 and 1996, respectively; aggregate liquidation
    preference of $2,134 at 1997 and 1996, respectively                    1           1
  Convertible preferred stock, $5.00 par value, authorized shares
    1,091,250, issued and outstanding 600,270 shares at 1997 and
    1996, respectively; aggregate liquidation preference of
    $3,602 and $3,362 at 1997 and 1996, respectively                   3,001       3,001
  Common stock, $.002 par value, authorized 25,000,000 shares,
    issued and outstanding 9,164,117 shares at 1997 and 1996,
    respectively                                                          18          18
  Additional paid-in capital                                          37,233      37,473
  Accumulated deficit                                                (83,881)    (74,888)
  Treasury stock, 605,554 and 589,450 shares of common stock,
    at par value, at 1997 and 1996, respectively                          (1)         (1)
                                                                    --------    --------
         Total shareholders' deficit                                 (43,629)    (34,396)
                                                                    --------    --------

         Total liabilities and shareholders' deficit                $  6,473    $  6,390
                                                                    ========    ========
</TABLE>

 The accompanying notes are an integral part of these financial statements.








                                       43
<PAGE>   44

                            RX MEDICAL SERVICES CORP.
                Consolidated Statements of Shareholders' Deficit
                        (Dollars and shares in thousands)
<TABLE>
<CAPTION>

                                           Convertible
                                         Preferred Stock            Common Stock  Additional   Accumu-         Treasury Stock
                                       ---------------------    ------------------- paid-in      lated     ----------------------
                                        Shares      Amount       Shares     Amount  capital     deficit      Shares      Amount
                                       ---------   ---------    ---------  -------- ---------  ---------   ---------   ----------
<S>                                       <C>      <C>             <C>      <C>     <C>        <C>                      <C>
Balance January 1, 1995                  1,959    $      2         8,567    $   15  $ 40,722   $(46,798)        --      $  --
Acquisitions                               600       3,001            --        --    (3,001)        --         --         --
Issued for cash                             --          --             1        --         2         --         --         --
Cancellation of options                     --          --            --        --       (46)        --         --         --
Dividends on preferred stock                --          --            --        --      (270)        --         --         --
Reacquisition of common stock               --          --           (29)       --       (41)        --         --         --
Issued for liabilities                      --          --            --        --       474         --         --         --

Net loss                                    --          --            --        --        --    (20,421)        --         --
                                         -----    --------         -----    ------  --------   --------      -----      -----
   Balance December 31, 1995             2,559       3,003         8,539        15    37,840    (67,219)        --         --

Conversion                              (1,250)         (1)          625         1        --         --         --         --
Reacquisition of common stock               --          --            --        --        --         --        589         (1)
Adjustments                                 --          --            --         2        (2)        --         --         --
Dividends on preferred stock                --          --            --        --      (365)        --         --         --
Net loss                                    --          --            --        --        --     (7,669)        --         --
                                         -----    --------         -----    ------  --------   --------      -----      -----
   Balance December 31, 1996             1,309       3,002         9,164        18    37,473    (74,888)       589         (1)

Reacquisition of common stock               --          --            --        --        --         --         17         --
Reacquisition and retirement
  of preferred stock                      (286)         --            --        --        --         --         --         --
Dividends on preferred stock                --          --            --        --      (240)        --         --         --
Net loss                                    --          --            --        --        --     (8,993)        --         --
                                         -----    --------         -----    ------  --------   --------      -----      -----
   Balance December 31, 1997             1,023    $  3,002         9,164   $    18  $ 37,233   $(83,881)       606      $  (1)
                                         =====    ========         =====   =======  ========   ========      =====      =====

</TABLE>















The accompanying notes are an integral part of these financial statements.






                                       44

<PAGE>   45

                            RX MEDICAL SERVICES CORP.
                      Consolidated Statements of Cash Flows
                             (Dollars in thousands)
<TABLE>
<CAPTION>

                                                               Years ended December 31,
                                                          ----------------------------------
                                                             1997        1996       1995
                                                          ---------   ---------   ----------
<S>                                                       <C>         <C>         <C>
 Cash flows from operating activities:
  Net loss                                                $ (8,993)   $ (7,669)   $(20,421)
  Adjustments to reconcile net loss to net
    cash used in operating activities:
    Depreciation and amortization                              176         160          73
    Provision for bad debts                                  1,705       2,313         723
    Loss due to impairment of goodwill                          --          --         107
    Loss on sale and disposal of property and equipment         13          86           6
    (Gain) loss on settlement of liabilities                    27      (1,511)        507
    Loss on investment (equity in earnings)
      of partnership                                            --         124         (31)
    Stock options canceled                                      --          --         (46)
    Loss due to impairment of assets held for sale              --          53          --
    Loss on settlement of management fees receivable            --         115          --
    Gain on purchase of accounts receivable                     --        (579)         --
    Changes in operating assets and
      liabilities, net of effects of acquisitions:
        Increase in accounts receivable                     (1,398)     (5,145)       (495)
        Increase in inventories                                (82)       (314)         --
        Increase in other assets                               (57)        (69)        (42)
        Increase in accounts payable
          and accrued liabilities                            1,016         168       2,104
        Increase in accrued liabilities - related party        395         245          --
        Change in discontinued operations                       --      (1,213)     10,456
                                                          --------    --------    --------
    Net cash used in operating activities                   (7,198)    (13,236)     (7,059)

Cash flows from investing activities:
  Proceeds from sale of property and equipment                 737          13          --
  Acquisition of property and equipment                       (348)       (282)        (19)
  Purchase of accounts receivable                               --      (4,348)         --
  Payments received on purchased accounts receivable            --       4,816          --
  Investment in partnership                                     --          --         (93)
  Acquisitions, net of cash acquired                        (1,166)         --        (834)
                                                          --------    --------    --------
    Net cash provided by (used in) investing activities       (777)        199        (946)

Cash flows from financing activities:
  Issuance of stock for cash                                    --          --           2
  Purchase of stock for cash                                    --          --         (41)
  Proceeds from notes payable                                   28          --          --
  Proceeds from notes payable - related party                8,210      13,876       8,413
  Proceeds from long term debt                                  --          21          --
  Payments on notes payable, long-term debt and
    obligations under capital leases                          (838)       (175)       (369)
                                                          --------    --------    --------
    Net cash provided by financing activities                7,400      13,722       8,005
                                                          --------    --------    --------

Net increase (decrease) in cash                               (575)        685          --

Cash - beginning of year                                       685          --          --
                                                          --------    --------    --------

Cash - end of year                                        $    110    $    685    $     --
                                                          ========    ========    ========
</TABLE>



                                       45



<PAGE>   46

                            RX MEDICAL SERVICES CORP.
                Consolidated Statements of Cash Flows (Continued)
                             (Dollars in thousands)
<TABLE>
<CAPTION>

                                                            Years ended December 31,
                                                          ----------------------------
                                                            1997      1996      1995
                                                          -------    -------   -------
<S>                                                       <C>        <C>       <C>
 The following is supplementary information
   relating to the consolidated statement of
   cash flows:

 Noncash investing and financing activities:
  Accounts receivable utilized to retire long-term debt   $   140    $    --   $    --
  Equipment purchased under capital lease                 $    --    $   287   $    --
                                                          =======    =======   =======
Details of businesses acquired:
  Fair value of assets acquired                           $ 1,543    $    --   $ 2,764
  Liabilities assumed                                     $  (377)   $    --   $(1,872)
                                                          =======    =======   =======
  Cash paid                                               $ 1,166    $    --   $ 1,000
  Less cash acquired                                      $    --    $    --   $   166
                                                          -------    -------   -------
  Net cash paid                                           $ 1,166    $    --   $   834
                                                          =======    =======   =======

</TABLE>




 For the years ended December 31, 1997, 1996 and 1995, interest paid, including
 interest on obligations under capitalized leases was $5,695, $4,359, and
 $3,471, respectively. No income taxes were paid during these periods.











 The accompanying notes are an integral part of these financial statements.










                                       46


<PAGE>   47

                            RX MEDICAL SERVICES CORP.
                   Notes to Consolidated Financial Statements

1.  Summary of Significant Accounting Policies

A.  PRINCIPLES OF CONSOLIDATION

The consolidated financial statements of Rx Medical Services Corp. ("RXM")
include the accounts of Rx Medical Services Corp. and its subsidiaries (the
"Company"). The subsidiaries are three wholly-owned operating companies,
Consolidated Health Corporation of Mississippi, Inc., Rx Medical Management,
Inc., and Rx Medical Imaging Corp. All significant intercompany transactions
have been eliminated.

Rx Medical Imaging Corp. is a minority partner in a related business. The
Company reports this investment, as well as its share of earnings or losses, by
application of the equity method.

B.  BASIS OF PRESENTATION

For all years presented, the medical diagnostic services business segment has
been reflected as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30 which provides for the reporting of operating
results of discontinued operations separately from the continuing operations
(see Note 3).

The Company has experienced significant losses in each of the past three years,
reflects a working capital deficit of $44.9 million at December 31, 1997, is in
default with respect to certain indebtedness and there are uncertainties
regarding the Company's compliance with federal and state self-referral
regulations while operating its medical diagnostic services business segment
(see Note 11c). However, the accompanying financial statements have been
prepared on the basis that the Company will continue as a going concern because
management believes it has an attainable plan to overcome these matters and
provide sufficient capital to operate for the coming year. The Company's ability
to continue as a going concern is also dependent on the settlement of various
lawsuits and the continued funding of its operations from its primary financing
source, National Century Financial Enterprises, Inc. (the "Financing Source")
(see Note 8) or an alternative source, without which funding the Company's
ability to continue as a going concern would be adversely impacted.

While the Company has not yet reached operational profitability, the Company has
several plans in progress to improve profitability, as well as cash flow,
including the continued development of its hospital management and
pharmaceutical products distribution businesses, while also seeking the
acquisition of ancillary related businesses. This expansion will focus on
increased revenues, market share and positive cash flow. Also, expense
reductions are expected to be achieved through the continuing implementation of
cost cutting and reorganization strategies.

C.  CASH AND CASH EQUIVALENTS

For purposes of the statement of cash flows, the Company considers cash
deposited with financial institutions and marketable securities with a maturity
of three months or less at the date of acquisition to be cash and cash
equivalents.

D.  INVENTORY

Inventory, which consists primarily of patient supplies, is stated at the lower
of cost or market; cost is determined using the first-in, first-out (FIFO)
method.

E.  PROPERTY AND EQUIPMENT

Depreciation on the building is computed on the straight-line method over 30
years. Depreciation on equipment, furniture, fixtures and improvements is
computed principally on the straight-line method over the estimated useful lives
of these assets, which range from three to eight years.





                                       47

<PAGE>   48
                           RX MEDICAL SERVICES CORP.
                   Notes to Consolidated Financial Statements


F.  GOODWILL

Goodwill represents the excess of cost over the fair value of net tangible and
identifiable intangible assets acquired. In assessing the continuing value of
the recorded goodwill, the Company determines its undiscounted cash flows over
the remaining life of the goodwill and compares this to the recorded value of
certain identifiable assets including goodwill net of related liabilities. Any
excess in the carrying value over the expected cash flows, discounted at the
Company's borrowing rate, is charged to operations.

At December 31, 1995 the Company determined that the net carrying amount of its
hospitals and medical clinics business segment was in excess of its fair value.
Excesses amounted to $0.1 million and this permanent impairment was recognized
in the year ended December 31, 1995 and was equal to 100% of remaining goodwill.

G.  REVENUES

Revenue from hospitals and medical clinics is recognized upon completion of
patient services and is recorded net of contractual allowances and amounts
estimated to be received under reimbursement arrangements with certain third
party payers. Approximately 50%, 48% and 34% of the Company's revenues for the
years ended December 31, 1997, 1996 and 1995, respectively, were reimbursements
provided by Medicare and Medicaid.

Contractual allowances represent the difference between the Company's basic fee
schedule and the estimated amount of available reimbursement from third party
payers, such as Medicare, Medicaid and certain clients. Contractual allowances
are deducted directly from gross revenues and accounts receivable at the time
the service is performed and recorded in the Company's financial statements at
the estimated net amount to be received. These revenues are subject to audit and
retroactive adjustment by the respective third party fiscal intermediaries. In
the opinion of management, retroactive adjustments, if any, would not be
material to the financial statements of the Company. An allowance for doubtful
accounts is established based on management's estimates of the net amounts to be
collected from third party payors and individuals considering past collection
history and the current status of such related receivable. Accordingly, the
allowance for doubtful accounts does not contain any amounts relative to
contractual allowances.

H.  FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires disclosure of estimated fair values of
financial instruments. These estimated fair values are to be disclosed whether
or not they are recognized in the balance sheet, provided it is practical to
estimate such values. Such information, which pertains to the Company's
financial instruments, is based on the requirements set forth in that Statement
and does not purport to represent the aggregate net fair value of the Company.
The Company estimates that the carrying amount approximates the fair value of
its financial instruments at December 31, 1997 due to the maturities of these
financial instruments.

I.  ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS

Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets and certain intangibles held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that carrying amount of an asset may not be recoverable.

At December 31, 1996 the Company determined that the net carrying amount of
assets held for sale at one of its medical clinics was in excess of fair market
value. The Company sold these assets in July 1997, for $0.75 million and,
accordingly reduced the carrying amount by $0.1 million. This impairment was
recognized in the year ended December 31, 1996.





                                       48
<PAGE>   49

                           RX MEDICAL SERVICES CORP.
                   Notes to Consolidated Financial Statements



J.  STOCK OPTIONS

Options granted under the Company's Stock Option Plans are accounted for under
APB 25, "Accounting for Stock Issued to Employees," and related interpretations.
In November 1995, the Financial Accounting Standards Board issued Statement 123,
"Accounting for Stock-Based Compensation," which requires additional proforma
disclosures for companies that will continue to account for employee stock
options under the intrinsic value method specified in APB 25. The Company plans
to continue to apply APB 25 and the only effect of this statement on the
Company's financial statements are the new disclosure requirements.

K.  NET LOSS PER COMMON SHARE

Statement Of Financial Accounting Standards No. 128, "Earnings Per Share,"
requires public companies to present basic earnings (net loss) per share and, if
applicable, diluted earnings (net loss) per share for all periods that
statements of operations are presented. This statement is effective for
financial statements issued for periods ending after December 15, 1997 and
requires restatement of earnings (net loss) per share for all prior periods
presented.

The Company has only presented basic net loss per share (see Note 6g) since (a)
the potential common shares of the Company would be anti-dilutive and (b) the
Company has reflected net losses from continuing operations for all periods
presented and thus the diluted net loss per share would be the same as basic net
loss per share.

L.  COMPREHENSIVE INCOME

Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," requires entities presenting a complete set of financial statements to
include details of comprehensive income that arises in the reporting period in a
financial statement that is displayed with the same prominence as other
financial statements. The statement does not affect the measurement of the
components of comprehensive income or introduce new categories of comprehensive
income. The statement does not apply to entities that have no items of
comprehensive income in any period presented. This statement is effective for
periods beginning after December 31, 1997. The only effect of this statement on
the Company's financial statements will be the new disclosure requirements.

M.  SEGMENT INFORMATION

Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information," requires disclosure of net profit or
loss, certain specific revenue and expense items and certain asset items by
reportable segments and how reportable segments are determined. The statement
defines a reportable segment as a component of an entity about which separate
financial information is produced internally, that is evaluated by the chief
operating decision-maker to assess performance and allocate resources. This
statement is effective for periods beginning after December 31, 1997 but is not
required to be applied to interim periods in the initial year. The only effect
of this statement on the Company's financial statements will be the new
disclosure requirements.

N.  USE OF ESTIMATES

In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

O.  CONCENTRATION OF CREDIT RISK

In connection with the Company's hospital and clinic operations, the Company
extends credit to individuals, government agencies and third party payors.





                                       49

<PAGE>   50

                           RX MEDICAL SERVICES CORP.
                   Notes to Consolidated Financial Statements



The Company does not have director and officer liability insurance. The Company
has agreed to indemnify all of its directors and officers from any potential
liability they may have as a result of their actions in fulfilling their
responsibilities as directors and officers.

P.  RECLASSIFICATIONS

Certain amounts in the prior years have been reclassified to conform with the
1997 consolidated financial statement presentation.

2.  Business Combinations

On April 3, 1997, the Company acquired the operating assets of an acute care
foot and ankle hospital with 13 licensed beds located in Pittsburgh,
Pennsylvania from the Podiatry Hospital of Pittsburgh, Pennsylvania, a
not-for-profit Pennsylvania corporation. The acquisition was effective
retroactive to January 1, 1997, when the Company assumed operational
responsibility for the hospital. This business combination was accounted for
using the purchase method of accounting.

The purchase price for the assets of the hospital, which consist of accounts
receivable, land, buildings, inventory and equipment, was $1.5 million, of which
$1.1 million was cash, $0.3 million was in the form of a purchase money second
mortgage taken back by the seller, and $0.1 million represents the assumption of
certain liabilities. The cash portion of the purchase price was funded by the
Financing Source.

The consolidated financial statements include the results of operations of this
acquisition from January 1, 1997.

The following unaudited proforma information combines the consolidated results
of operations of the Company and the hospital as if the acquisition had occurred
on January 1, 1996 (in thousands, except per share amounts):

                                          ----------------
                                             Year ended
                                             December 31,
                                                1996
                                          ----------------

      Net  revenues                           $21,455
      Net loss                                $(8,677)
      Net loss per common share               $ (1.00)

In July 1995, the Company acquired, through a merger transaction, Consolidated
Health Corporation of Mississippi, Inc. ("CHC"), a hospital company with
operations in Tennessee and Mississippi, for 1.09 million shares of the
Company's Series F Preferred Stock, an agreement to issue 330,000 shares of the
Company's Common Stock and $1.0 million in cash. This business combination was
accounted for using the purchase method of accounting. In connection with an
amendment to the merger agreement, effective May 1, 1996, 400,000 shares of the
Series F Preferred Stock were returned to the Company and the agreement to issue
the 330,000 shares of Common Stock was canceled.

The consolidated financial statements include the results of operations of this
acquisition from August 1, 1995.









                                       50
<PAGE>   51
                           RX MEDICAL SERVICES CORP.
                   Notes to Consolidated Financial Statements



The following unaudited proforma information combines the consolidated results
of operations of the Company and CHC as if the acquisition had occurred on
January 1, 1994 (in thousands, except per share amounts):

                                          ----------------
                                             Year ended
                                             December 31,
                                                1995
                                          ----------------

      Net  revenues                           $   4,802
      Net loss                                $ (20,629)
      Net loss per common share               $   (2.41)


The proforma results do not necessarily represent results which would have
occurred if the acquisitions had taken place at the beginning of the period, nor
are they indicative of the results of future consolidated operations.

3.  Discontinued Operations

In April 1996, due to continuing losses from the Company's medical diagnostic
services business and intense pressure from creditors, Manatee Medical
Laboratories, Inc. ("Manatee"), a wholly-owned subsidiary of the Company which
operated the medical diagnostic services business segment filed a voluntary
petition under Chapter 7 of the U.S. Bankruptcy Code. This resulted in the
closing of the Company's remaining medical diagnostic facilities.

Assets and liabilities at December 31, 1997 and 1996, and the results from
operations of discontinued operations for the years ended December 31, 1997,
1996 and 1995, are reflected below (in thousands):
<TABLE>
<CAPTION>

                                                                 --------------    --------------    ---------------
                                                                     1997              1996               1995
                                                                 --------------    --------------    ---------------
<S>                                                              <C>               <C>               <C>
   Assets and liabilities:
     Reserve for future costs                                    $         (100)   $         (100)

                                                                 ==============    ==============
     Net liabilities of discontinued operations                  $         (100)   $         (100)
                                                                 ==============    ==============

   Results from operations:
     Revenues                                                    $          --     $          --     $        11,496
     Costs and expenses                                                     --                --             (19,642)
     Other income                                                          181               229                  --
     Estimated loss until disposition and current estimated
        excess of cost over fair value                                      --                --              (7,037)

                                                                 ==============    ==============    ===============
     Gain (loss) from discontinued operations                    $         181     $         229     $       (15,183)
                                                                 ==============    ==============    ===============
</TABLE>















                                       51
<PAGE>   52
                           RX MEDICAL SERVICES CORP.
                   Notes to Consolidated Financial Statements





4.  Notes Payable

A.  NOTES PAYABLE

Notes payable consists of an unsecured promissory note due in monthly
installments of $2,873, which bears interest at 8.00% per annum and matures on
July 1, 1998.

B.  NOTES PAYABLE - RELATED PARTY

At December 31, 1997 and 1996, notes payable-related party included amounts due
to the Financing Source, through which the Company has obtained financing
collateralized by certain accounts receivable.

The agreements with the Financing Source provide that the Company will
periodically sell certain eligible accounts receivable to the Financing Source.
However, the terms of the agreements specify certain items of limited recourse,
including the ability to resell receivables which have aged beyond 150 days back
to the Company. While the Company believes that legally a sale of its
receivables has occurred, due to the existence of the terms of limited recourse,
this transaction does not qualify for treatment as a sale for accounting
purposes and, accordingly, such activity has been recorded as notes payable at
December 31, 1997 and 1996.

The notes payable due to the Financing Source at December 31, 1997 and 1996
consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                   --------------    --------------
                                                                                       1997              1996
                                                                                   --------------    --------------
<S>                                                                                 <C>               <C>
Notes payable, interest at 14%, maturing at various dates through July 1999,
   collateralized by accounts receivable (subject to sale and subservicing          $   39,479        $   31,966
   agreements)

Note payable, interest at 17%, matures July 15, 1998, collateralized by real               378                --
   estate

Note payable, interest at 11.5%, matures July 15, 1998, collateralized  by
   real estate                                                                             319                --

Unsecured note payable, interest at 12%, due on demand                                      56                56
                                                                                   --------------    --------------
                                                                                    $   40,232        $   32,022
                                                                                   ==============    ==============
</TABLE>








                                       52
<PAGE>   53
                           RX MEDICAL SERVICES CORP.
                   Notes to Consolidated Financial Statements






5.  Long-Term Debt

Long-term debt at December 31, 1997 and 1996 consisted of the following (in
thousands):
<TABLE>
<CAPTION>

                                                                                   --------------    --------------
                                                                                       1997              1996
                                                                                   --------------    --------------
<S>                                                                                 <C>               <C>
Unsecured promissory note payable to a trust (related party until November
   1997), interest at 9%, principal and interest payable due quarterly
   through April 1997 (in default)                                                  $    3,062        $    3,062

Note payable to individuals, interest at prime plus 2%, payable in twenty equal
   quarterly installments of principal and interest, commencing

   September  1994  through  June 1999,  collateralized  by  property  and the              --               324
   assets of a medical clinic

 Mortgage note payable to bank, interest at prime plus 1 1/2%, payable in
   monthly installments of principal and interest through December 2000,
   collateralized by property, equipment and accounts receivable                            --               219

Note payable to the Small Business Administration, interest at 8.95%, payable in
   monthly installments of principal and interest of $2,826 through March
   2011, collateralized by property, equipment and accounts receivable                      --               262

Unsecured  non-interest bearing note payable,  payable in monthly installments
   of  $2,000, through July 1996                                                            --                16

Mortgage note payable to a company, interest at PNC Bank prime, payable in
   monthly installments of principal and interest through February 2007,
   collateralized by real estate                                                           227                --
                                                                                   --------------    --------------
                                                                                         3,289             3,883

Less:  Scheduled current maturities and indebtedness in default                         (3,087)           (3,291)
                                                                                   --------------    --------------
                                                                                   $       202       $       592
                                                                                   ==============    ==============
</TABLE>


Scheduled principal maturities for each of the five years subsequent to December
31, 1997, and thereafter are estimated as follows (in thousands): 1998 - $3,087;
1999 - $25; 2000 - $25; 2001 - $25; 2002 - $25; thereafter $102.

6.   Shareholders' Equity

A. PREFERRED STOCK

December 31, 1997 the Company had authorized, issued and outstanding two series
of preferred stock as follows:


                                       53

<PAGE>   54
                           RX MEDICAL SERVICES CORP.
                   Notes to Consolidated Financial Statements





Series C Preferred Stock, par value of $.001, conversion price of $5.05 per
share, with voting rights equivalent to the Company's Common Stock. This series
of Preferred Stock is convertible into shares of the Company's Common Stock
quarterly, with the quarterly conversion being limited to 1% of the Company's
issued and outstanding shares of Common Stock at the end of each quarter. On
December 31, 1999, any remaining unconverted shares will automatically be
converted into the Company's Common Stock. This series of Preferred Stock does
not pay dividends. The Company has reserved sufficient shares of authorized and
unissued Common Stock to effect the conversion of Series C Preferred Stock. At
December 31, 1997, 422,488 issued and outstanding shares of Series C Preferred
Stock remain unconverted.

Series F Preferred Stock, par value of $5.00, conversion price of $5.05 per
share, with voting rights equivalent to the Company's Common Stock. This series
of Preferred Stock is convertible into shares of the Company's Common Stock
quarterly, without limitation. On July 1, 1998, any remaining unconverted shares
may be converted into the Company's Common Stock. This series of Preferred Stock
pays annual dividends of $.40 in arrears and at December 31, 1997 dividends in
arrears on this series of Preferred Stock aggregated approximately $600,270. The
Company has reserved sufficient shares of authorized and unissued Common Stock
to effect the conversion of Series F Preferred Stock. At December 31, 1997,
600,270 issued and outstanding shares of Series F Preferred Stock remain
unconverted.

B.  SETTLEMENT OF LITIGATION

On August 3, 1994 a judgment was entered in Broward County, Florida against the
Company in the amount of $666,920, plus post-judgment interest. On January 11,
1995, the Company lost its appeal of this judgment. This lawsuit is a direct
outgrowth of a judgment obtained against the Company in England by Hickstead,
Ltd. which alleged that the amount claimed represented damages resulting from a
breach by the Company to pay Hickstead on a contract to perform services. The
action resulted from an investment made by the Company in pursuit of financing
that never materialized. In September 1996, the Company settled this action. In
payment of $108,000 to Hickstead, the Company received a satisfaction of the
judgment. As additional consideration for this settlement, the Company, in
payment of $117,000, repurchased 50,000 shares of the Company's Common Stock
that had been delivered to Hickstead as security for the Company's performance
of the underlying agreement.

On October 17, 1994, an action was commenced against the Company by an equipment
manufacturer claiming breach of contract and rescission and seeking $1.1 million
in damages. The suit related to leased equipment (a CAT scanner) used in the
Company's discontinued medical diagnostic services business segment. The Company
lost this action and a judgment for $655,000 was obtained by the equipment
manufacturer against the Company in 1995. In September 1996, the Company paid
the sum of $105,000 in return for a complete satisfaction of the $655,000
judgment.

During 1996, the Company settled additional outstanding litigation with eight
creditors, which aggregated approximately $617,215, by paying the aggregate sum
of $393,600, including monies for the repurchase of an additional 539,450 shares
of the Company's Common Stock.

C.  REGISTRATION RIGHTS

Pursuant to several separate agreements, the Company is obligated on a best
efforts basis to register shares of issued, but restricted, Common Stock, Common
Stock issuable upon exercise of stock warrants, and Common Stock issuable upon
conversion of Preferred Stock. Certain of the agreements provide the holders of
the common stock with piggyback registration rights, and certain of the
agreements provide for demand registration rights. In either case, the Company
is obligated to pay all of the expenses associated with such registration
statements.





                                       54
<PAGE>   55
                           RX MEDICAL SERVICES CORP.
                   Notes to Consolidated Financial Statements







D.  STOCK ISSUANCES

Effective November 1, 1996, 1.25 million shares of Series E Preferred Stock,
representing all of the issued and outstanding shares of that class of Preferred
Stock, were converted into 625,000 shares of the Company's Common Stock at the
prescribed rate of one-half share of Common Stock for each share of Series E
Preferred Stock.

During 1995, the Company issued 1.09 million shares of Series F Preferred Stock
pursuant to an agreement to acquire a hospital company with operations in
Tennessee and Mississippi.

During 1995, the Company reacquired and retired 49,019 shares of the Company's
Common Stock for approximately $41,000.

E. WARRANTS

The Company issued warrants in conjunction with private placements of debt and
the Company's Common Stock and as consideration for other expenses. Certain of
these warrants were re-priced based on the market price of the Company's Common
Stock at the time they were re-priced. The following table summarizes the
warrant transactions for the years ended December 31, 1995, 1996, and 1997:
<TABLE>
<CAPTION>

                                                   -------------------    -------------------    -------------------
                                                         Shares               Grant Date           Exercise Price
                                                   -------------------    -------------------    -------------------
<S>                                                <C>                     <C>                         <C>
Outstanding at January 1, 1995                                118,690
          Canceled                                            (18,690)            8/93                  $13.80
                                                   -------------------
Outstanding at December 31, 1995                              100,000
          Canceled                                            (37,500)           11/93                  $ 8.00
                                                   -------------------
Outstanding at December 31, 1996                               62,500
          Canceled                                            (12,500)            4/94                  $ 2.63
                                                   -------------------
Outstanding at December 31, 1997                               50,000
                                                   ===================
</TABLE>


The outstanding warrants as of December 31, 1997 expire in December 1999.

F. STOCK OPTIONS

The Company's 1992 Long-Term Incentive Stock Option Plan provides for granting
of options of not more than 1,000,000 shares of Common Stock. Options granted
under the plans are exercisable in one-third installments annually from the date
of grant and have a term of four to ten years.

The Company has also granted stock options which are classified as
non-qualified, and which are not included in the 1992 Employees' Incentive Stock
Option Plan. Prior to December 31, 1995, the Company accounted for such options
under APB Opinion 25 and related Interpretations. Commencing January 1, 1996,
the Company accounts for non-qualified options issued to non-employees, under
SFAS 123, Accounting for Stock Based Compensation.

The exercise price of all options granted by the Company equals the market price
at the date of grant. No compensation expense has been recognized.






                                       55
<PAGE>   56

                           RX MEDICAL SERVICES CORP.
                   Notes to Consolidated Financial Statements




Had compensation cost for the Employees' Incentive Stock Option Plans and
non-qualified options issued to employees been determined based on the fair
value of the options at the grant dates consistent with the method of SFAS 123,
the Company's net loss and net loss per common share would have been changed to
the pro forma amounts indicated below.

<TABLE>
<CAPTION>
                                          ----------------       ---------------       ----------------
                                               1997                   1996                  1995
                                          ----------------       ---------------       ----------------
<S>                                           <C>                    <C>                   <C>
         Net loss
                 As reported                  $   (9,233)            $  (8,034)            $  (20,691)
                 Pro forma                        (9,233)               (8,034)               (20,807)

         Net loss per common share
                 As reported                  $    (1.01)            $   (0.93)            $    (2.42)
                 Pro forma                         (1.01)                (0.93)                 (2.43)
</TABLE>

The above pro forma disclosures may not be representative of the effects on
reported net income for future years as options vest over several years and the
Company may continue to grant options to employees.

The fair value of each option grant is estimated on the date of grant using the
binomial option-pricing model with the following weighted-average assumptions
used for grants in 1995: dividend yield of 0.0 percent; expected volatility of
90.38 percent: risk-free interest rates of 7.86 percent; and expected holding
period of 5 years. There were no options granted in 1997 and 1996; therefore no
proforma adjustments are required.

A summary of the status of the Company's fixed stock options as of December 31,
1997 and 1996, and changes during the years ending on those dates is as follows:
<TABLE>
<CAPTION>

                                     -------------------------------------    -------------------------------------
                                                     1997                                     1996
                                     -------------------------------------    -------------------------------------
                                                            Wieghted-                                 Weighted-
                                                             Average                                   Average
                                          Shares          Exercise Price           Shares           Exercise Price
                                     -----------------    ----------------    -----------------    ----------------
<S>                                           <C>             <C>                      <C>             <C>
Outstanding at beginning of the
  year                                        934,868         $ 2.79                   967,228         $ 2.62
Granted                                            --                                       --
Exercised                                          --                                       --
Expired                                      (85,000)         $ 1.95                   (32,360)        $ 7.81
Forfeited                                          --                                       --
                                                                                            --
                                     =================                        =================
Outstanding at end of the year                849,868         $ 2.49                   934,868         $ 2.79
                                     =================                        =================

Options exercisable at end of
  year                                        849,868                                  934,868
                                     =================                        =================

Weighted-average fair value of
  options granted during the year    $             --                         $             --
                                     =================                        =================
</TABLE>



                                       56
<PAGE>   57
                           RX MEDICAL SERVICES CORP.
                   Notes to Consolidated Financial Statements



The following information applies to options outstanding at December 31, 1997:
<TABLE>
<CAPTION>

                         --------------------------------------------------------    -------------------------------
                                           Options Outstanding                            Options Exercisable
                         --------------------------------------------------------    -------------------------------
                                            Weighted-             Weighted-                           Weighted-
      Range of                          Average Remaining      Average Exercise                        Average
  Exercise Prices          Shares        Contractual Life           Price             Shares        Exercise Price
---------------------    -----------    -------------------   -------------------    ----------    -----------------
<S>                          <C>               <C>                  <C>                 <C>             <C>
  $0.000 - $0.010            55,641            1.25                 $ .01               55,641          $ .01
       $0.04                  6,100            1.25                 $ .04                6,100          $ .04
  $0.0875 - $1.000          125,000            3.20                 $ .90              125,000          $ .90
  $1.938 - $2.625           603,932            2.11                 $2.54              603,932          $2.54
       $4.000                 7,375            4.66                 $4.00                7,375          $4.00
  $8.000 - $11.000           51,820            2.03                 $8.54               51,820          $8.54
                         -----------                                                 ----------
                            849,868                                                    849,868
                         ===========                                                 ==========
</TABLE>

G.  NET LOSS PER COMMON SHARE

The following table reflects the computation of the net loss per common share:
<TABLE>
<CAPTION>

                                     -------------------------------------------------------------------------------
                                                                Years ended December 31,
                                     -------------------------------------------------------------------------------
                                              1997                        1996                       1995
                                     ------------------------   -------------------------  -------------------------
                                                  Per-Share                   Per-Share                  Per-Share
                                       Amount       Amount        Amount       Amount        Amount       Amount
                                     -----------  -----------   -----------  ------------  -----------  ------------
<S>                                   <C>         <C>            <C>         <C>            <C>         <C>
Loss from continuing operations       $ (9,147)   $   (1.00)     $ (9,988)   $    (1.16)    $ (4,731)   $    (0.55)
Dividends on preferred stock              (240)       (0.03)         (365)        (0.04)        (270)        (0.03)
                                     -----------  -----------   -----------  ------------  -----------  ------------

Loss available to common
  shareholders'                         (9,387)       (1.03)      (10,353)        (1.20)      (5,001)        (0.58)
Gain(loss) from discontinued
  operations                               181         0.02           229           0.03     (15,183)        (1.78)
Extraordinary items - Gain (loss)          (27)       (0.00)        2,090           0.24        (507)        (0.06)
                                     ===========  ===========   ===========  ============  ===========  ============
Net loss                              $ (9,233)   $   (1.01)    $  (8,034)   $    (0.93)    $(20,691)   $    (2.42)
                                     ===========  ===========   ===========  ============  ===========  ============

Weighted average common
  shares outstanding                     9,164                      8,644                      8,557
                                     ===========                ===========                ===========
</TABLE>

The Company has issued potential common share securities (see Note 6a, 6e and
6f) that could potentially dilute basic earnings per share in the future. These
securities were not included in the computations of net loss per common share
presented in the financial statements because they were anti-dilutive.

No transactions occurred during the period January 1, 1998 to the date of the
financial statements that would have resulted in a material change in the number
of common shares or potential common shares outstanding had the transaction
occurred on or before December 31, 1997.









                                       57
<PAGE>   58
                           RX MEDICAL SERVICES CORP.
                   Notes to Consolidated Financial Statements





7.  Income Taxes

Income tax expense differs from the amounts computed by applying the statutory
federal tax rate to income before income taxes. The difference is reconciled as
follows (in thousands):
<TABLE>
<CAPTION>

                                                                          -----------    ------------   ------------
                                                                             1997           1996           1995
                                                                          -----------    ------------   ------------
<S>                                                                        <C>             <C>            <C>
Tax (benefit) expense computed at federal statutory rate                   $ (3,417)       $ (2,608)      $ (6,943)

Financial statement losses that are not deductible for income tax
  purposes                                                                       21              33            286

Financial statement losses and tax credits with  no tax benefit as a
  result of net operating loss carryforwards                                  3,396           2,575          6,657
                                                                          ===========    ============   ============
                                                                           $     --       $      --      $      --
                                                                          ===========    ============   ============
</TABLE>

At December 31, 1997, the Company has a federal net operating loss carryforward
of approximately $64.8 million. In addition, the Company has various state net
operating loss carryforwards.

As a result of certain cumulative changes in the Company's stock ownership over
the last few years, the use of the Company's federal net operating loss
carryforward may be substantially limited. The tax net operating loss
carryforward begins to expire in 2005.

Differences between pre-tax income for financial reporting purposes and taxable
income for income tax purposes relate primarily to allowances for doubtful
accounts, valuation reserves, accrued compensation and financial statement
expenses recorded for certain stock option transactions.

Deferred tax assets and liabilities at December 31, 1997, and 1996, arose from
the following items (in thousands):
<TABLE>
<CAPTION>

                                                                          -----------    -----------
                                                                             1997           1996
                                                                          -----------    -----------
<S>                                                                       <C>             <C>
      Deferred tax assets:
      Allowance for doubtful accounts receivable                          $   1,417       $  2,590
      Allowance for doubtful notes receivable                                     -             40
      Accrued compensation                                                      129            132
      Loss reserve from discontinued operations                                  38             38
      Outstanding stock options issued for services                             228            172
      Net operating loss carryforward                                        24,639         20,028
      Reserve for impairment on assets held for sale                              -             20
                                                                          -----------    -----------
                                                                             26,451         23,020
      Valuation allowance                                                    26,451         23,020
                                                                          ===========    ===========
      Net deferred amount                                                 $      --      $      --
                                                                          ===========    ===========

</TABLE>
No provision for income taxes has been provided on the gains (losses) from
discontinued operations (see Note 3) since existing net operating loss
carryforwards from continuing operations may be substantially limited.

8.  Related Party Transactions

The Financing Source is being categorized as a related party due to the
Financing Source's stock ownership in the Company. As of December 31, 1997, the
Company is indebted to the Financing Source in the amount of $40.2 million. The
Financing Source and a related affiliate own 2.1 million shares of the Company's
Common Stock.


                                       58

<PAGE>   59
                           RX MEDICAL SERVICES CORP.
                   Notes to Consolidated Financial Statements




The Company is indebted to a trust which the beneficiary of is related to Morris
Behar. Effective November 1997, Mr. Behar is no longer a director of the Company
and this is the reason why this indebtedness, in the amount of $3.1 million, is
not classified as being owed to a related party at December 31, 1997. This
indebtedness was classified as being owed to a related party at December 31,
1996.

9.  Extraordinary Items

During 1996, the Company recorded a gain on the settlement of $2.2 million of
outstanding liabilities with ten creditors by paying the aggregate sum of $0.7
million.

During February and March 1996, the Company purchased accounts receivable from
the Financing Source at a discounted cost of $4.3 million. During the year,
collections of these receivables resulted in a gain.

These items have been accounted for as extraordinary items in accordance with
APB 30, which provides for the reporting of such material, non-recurring events
separately from the continuing operations.

10.  Retirement Plan

The Company has a Combined Profit Sharing/Money Purchase Plan with a Cash or
Deferred Arrangement Option (the "Plan") to which both the Company and eligible
employees contribute. The Plan segregates the Company's employees into two
distinct participant groups (a) non-union participants and (b) union
participants.

The Company, pursuant to a union contract at one of the Company's hospitals,
contributes up to $550 per Plan year for eligible union participants. Company
contributions are discretionary per Plan year for eligible non-union
participants.

Employees are eligible to participate in the Plan based on the number of hours
worked in the Plan year and the attainment of a certain age. Company and
employee contributions vest 100% in the first year.

Company contributions to the Plan for the year ended December 31, 1997
aggregated approximately $68,190.








                                       59
<PAGE>   60
                           RX MEDICAL SERVICES CORP.
                   Notes to Consolidated Financial Statements






11.  Commitments and Contingencies

A.  LEASES

The Company leases its operating and other facilities, as well as certain
equipment, under noncancelable leases with initial lease terms of one to ten
years; also, the Company leases one of its facilities from an affiliate of the
Financing Source, a related party, with an initial lease term of twenty years.
Certain of the facilities leases provide for optional renewal periods. Scheduled
future minimum commitments under operating leases with remaining terms
subsequent to December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>

               ------------------------------         ------------------   ------------------
                                                             All             Related-Party
               Years ending December 31,                   Leases               Leases
               ------------------------------         ------------------   ------------------
<S>                        <C>                            <C>                  <C>
                           1998                           $ 1,573              $ 1,146
                           1999                             1,466                1,146
                           2000                             1,415                1,146
                           2001                             1,297                1,145
                           2002                             1,188                1,145
                        Thereafter                         15,214               15,179
                                                          -------              -------
                                                          $22,153              $20,907
                                                          =======              =======
</TABLE>


Rent expense was approximately (in thousands) $1,752, $1,646, and $167 for the
years ended December 31, 1997, 1996 and 1995, respectively.

B.  CONTRACTS

The Company has entered into contracts with various individuals and entities to
provide patient services at certain of the Company hospitals. Scheduled future
minimum commitments under these contracts with remaining terms subsequent to
December 31, 1997 are as follows (in thousands):

               -----------------------------
               Years ending December 31,
               -----------------------------
                           1998                   $    610
                           1999                        267
                           2000                         18
                           2001                         --
                           2002                         --
                        Thereafter                      --
                                                  ---------
                                                  $    895
                                                  =========


C.  GOVERNMENT REGULATION

The Company's operations are subject to extensive government regulation.
Industry compliance with such regulations is under constant scrutiny by
regulatory authorities and legislative bodies and regulations are subject to
change at any time. Certain proposed changes in regulations, if enacted, could
have an adverse effect on the Company's operations and such effects could be
material.





                                       60
<PAGE>   61
                           RX MEDICAL SERVICES CORP.
                   Notes to Consolidated Financial Statements



Federal and certain state regulations restrict the nature and types of financial
relationships that medical service providers receiving reimbursement under the
Medicare and Medicaid program may have with referring physicians (the
self-referral regulations). A financial relationship is defined by the federal
regulations as an ownership or investment interest through equity or debt or
certain compensation arrangements. The Company believes that there may have been
violations of certain applicable statutes and regulations with respect to the
operation of certain of its clinical laboratories in Florida.

The Omnibus Budget Reconciliation Act of 1989, often referred to as the "Stark
Act", included restrictions on physician financial relationships with
laboratories to which they refer patients but provided an exemption for publicly
traded entities that have total assets in excess of $100 million. The Omnibus
Budget Reconciliation Act of 1993 ("OBRA 1993") expanded these restrictions to
apply beyond physician financial relationships with laboratories to physician
relationships with entities that provide "Designated Health Services" (including
clinical laboratory services, radiology and other diagnostic services). However,
the Act deleted the previous exemption and substituted a requirement that the
entity have $75 million in stockholders' equity at the end of its most recent
fiscal year or on average during its prior three fiscal years. The OBRA 1993
amendments became effective on January 1, 1995.

For the period prior to January 1, 1995, should it be determined that the
Company did not comply with the federal regulations the Company may be subjected
to refunding a portion of Medicare and Medicaid revenues collected, in addition
to paying substantial penalties. As of January 1, 1995, the Company did not meet
the OBRA 1993 amendments to the Stark Act requiring $75 million in stockholders'
equity. Physician/shareholder referrals since January 1, 1995 could cause
penalties to be imposed of up to $15,000 for each item or service claimed, plus
twice the amount billed. The Company believes, however, that due to the filing
of the Chapter 7 bankruptcy petition for Manatee, the likelihood of such
enforcement actions occurring is remote.

In April 1992, the Florida Legislature enacted the Patient Self-Referral Act of
1992 (the "Florida Act") which prohibits referrals for certain designated health
services (including clinical laboratory testing and diagnostic imaging) by a
physician to a facility in which such physician has an investment. The effective
date of this prohibition was October 1, 1994 for investment interests acquired
prior to May 1, 1992; otherwise, the effective date of the Florida Act was July
1, 1992. The Company's financial relationships with referring physicians in
respect of its clinical laboratories in Florida since October 1, 1994 and its
imaging center in Fort. Lauderdale, Florida since July 1993 did not comply with
the Act and may require the Company to refund substantial revenues. The Company
believes, however, that due to the filing of the Chapter 7 bankruptcy petition
for Manatee, the likelihood of such enforcement actions occurring is remote.

In October 1993, the California legislature enacted legislation relating to
health care referrals which has a public company exception similar in scope to
the Stark Act as it existed prior to the OBRA 1993 amendments. The major
difference with the California self-referral legislation, effective January 1,
1995, is that it applies to both clinical laboratory and diagnostic imaging
services subsequent to January 1, 1995. The Company could be assessed
substantial fines and penalties. The Company believes, however, that due to the
filing of the Chapter 7 bankruptcy petition for Manatee, the likelihood of such
enforcement actions occurring is remote. Legislatures in other states are
considering or have considered similar legislation which, if enacted, may have
an adverse impact on the Company to the extent that the Company acquires
facilities in those states.

The Company's inability to meet the OBRA 1993 amendment to the Stark Act
requiring $75 million in stockholders' equity, and provisions of the Florida Act
and the California self-referral legislation, could result in the imposition of
penalties and the return of revenues collected for certain services provided,
which may aggregate up to approximately $50.0 million. The Company believes,
however, that due to the filing of the Chapter 7 bankruptcy petition for
Manatee, the likelihood of such enforcement actions occurring is remote.



                                       61


<PAGE>   62

                           RX MEDICAL SERVICES CORP.
                   Notes to Consolidated Financial Statements



As of April 1996, the Company no longer operates clinical laboratories and
imaging centers, thereby eliminating additional potential fines, penalties and
refunds that could be imposed under the Stark Act (as amended) and the State
Acts.

The Company may be liable for certain delinquency penalties associated with
untimely payment of reoccurring assessments at its Florida medical diagnostic
operations. The Company believes that in the event that such penalties are
levied, they will not have a material financial impact on the Company.

D.  LEGAL PROCEEDINGS

On July 22, 1994, two individuals who hold an aggregate of 1,125 shares of the
Company's Common Stock filed a stockholders' lawsuit against the Company and the
Company's Chief Executive Officer (who is also a director of the Company), in
the United States District Court for the Southern District of Florida under the
title ABRAHAM KRELOFF AND SHEILA RICH V. RX MEDICAL SERVICES CORP. AND MICHAEL
L. GOLDBERG (Case No. 94-6671-Civ-Zloch). The Company was served with the
summons and complaint on August 3, 1994. The two plaintiffs in this action
sought to represent a class composed of all persons who purchased or otherwise
acquired shares of the Company's Common Stock in the period from June 3, 1992
through April 22, 1994. The complaint alleged the dissemination of materially
false and misleading statements in connection with certain press releases and
filings by the Company with the Securities and Exchange Commission between 1991
and 1994 allegedly causing an artificial inflation of the market price of the
Company's Common Stock. The complaint sought damages in an unspecified amount.
The Company retained securities litigation counsel to represent it and Michael
L. Goldberg in this matter. The Company and Mr. Goldberg filed an answer denying
the allegations contained in the complaint and raising several affirmative
defenses. In February 1996, the parties entered into a stipulation in which
settlement of the class action lawsuit was reached. The Stipulation of Class
Settlement was filed but never acted upon by the Court. On January 29, 1998, the
lawsuit was voluntarily dismissed. An order Approving Stipulation of Dismissal
and Dismissing Action Without Prejudice was entered by the presiding Judge and
filed with the Clerk of the Court. In consideration for the voluntary dismissal
without prejudice, the Company agreed to pay plaintiffs' counsel their
out-of-pocket costs incurred in the lawsuit, amounting to approximately $16,000.
No release of any claims was given to the defendants by virtue of this
stipulation of dismissal.

The Company, in March 1995, received from the U.S. Securities and Exchange
Commission (the "Commission") a Formal Order Directing Private Investigation And
Designating Officers To Take Testimony In The Matter of Rx Medical Services
Corp., dated March 8, 1995. The Company has been advised by the Commission that
the investigation is confidential and should not be construed as an indication
by the Commission or its staff that any violation of law has occurred.

On July 21, 1995, an action was commenced against the Company and three of its
directors in the United States District Court, Eastern District of California
(Fresno), under the title SHARI RAINWATER AND GREG RAINWATER V. RX MEDICAL
SERVICE CORP., ET. AL. (Case No. CV-F-95-5596 REC/DIR). The complaint alleges
fraud and misrepresentation and breach of a written employment agreement and
seeks damages of not less than $600,000, declaratory relief and injunctive
relief. The suit relates to the acquisition by the Company, through a merger
transaction, of Quail Diagnostic Laboratories, Inc. in October 1992 and the
subsequent employment of Shari Rainwater as the officer in charge of the
Company's California clinical laboratory operations. Due to the filing of the
Chapter 7 petition in bankruptcy by Manatee, most of the claims made by the
plaintiffs can no longer be prosecuted. The only cause of action remaining to be
litigated is one in fraud and rescission against the Company as a result of the
merger. In March 1998, a tentative settlement was reached between the parties,
pursuant to which the plaintiffs have agreed to accept the sum of $200,000 in
complete satisfaction of their claims against the defendants. Upon receipt of
payment, the plaintiffs will file a dismissal of the action with prejudice and
general releases will be exchanged. It is anticipated that the settlement will
be finalized on or before May 1, 1998.




                                       62


<PAGE>   63
                           RX MEDICAL SERVICES CORP.
                   Notes to Consolidated Financial Statements



In February 1996, an action was commenced against the Company and Manatee by
Eduardo R. Latour, as Trustee for Physicians Reference Lab Short Term Trust (the
"Trust") in the Circuit Court for Pinellas County, Florida (Case No.
96-00683-CI-15). The beneficiary of the Trust is Deborah H. Behar, the wife of
Morris Behar. Mr. Behar was a director of the Company until November 1997 and
formerly an executive vice president and a director of Manatee, and was
previously the trustee of the Trust. The complaint filed in this action alleged
a default under a promissory note from Manatee, which note had been guaranteed
by the Company, and seeks damages in the amount of $3,060,000 against Manatee
and the Company. In addition, the complaint sought to foreclose a security
interest in certain assets of Manatee that had been pledged to the Trust by
Manatee. The promissory note and pledge had been delivered to the Trust in
connection with the Trust's sale, in December 1991, to Manatee of the
Physician's Reference Laboratory Services group of clinical laboratories located
in Florida. Due to the Manatee bankruptcy, the Company remained as the sole
defendant in the action. In March 1998, an agreement was reached, prior to the
date set for trial, to settle this lawsuit for a total of $577,500 payable in
one lump sum on or before April 30, 1998. The Financing Source guaranteed
payment of the settlement amount. Upon receipt of payment, the parties will file
a voluntary dismissal of the action with prejudice.

On April 4, 1996, Manatee filed a voluntary petition under Section 301 of
Chapter 7 of Title 11 of the United States Code, 11 U.S.C. Sections 101 et. seq.
in the Bankruptcy Court for the Southern District of Florida (Case No. 96-21552
BKC-RBR). On April 10, 1996, John P. Barbee of Fort Lauderdale, Florida was
appointed trustee of the bankrupt estate. The bankruptcy proceeding is pending.

On April 8, 1997, the Company commenced an action against Biologic Health
Resources (Florida) LLC ("BHR LLC") and five individuals, in the Circuit Court
for Dade County, Florida, under the title BIOLOGIC HEALTH CARE - FLORIDA, INC.
V. BIOLOGIC HEALTH RESOURCES (FLORIDA) LLC, ET. AL. (Case No. 97-07747 CA 25).
The complaint alleges that the principals of BHR conspired to violate the BHC
agreements by entering into direct competition with the BHC-FL operation, and
seeks injunctive relief and damages against two former BHC employees for
violations of restrictive covenants contained in their employment agreements,
and damages against BHR LLC and its principals for tortious interference with
the business of BHC-FL. A motion by the Company for a temporary injunction
against one of the former BHC-FL employees was granted in August, 1997. The
action is presently in discovery and no trial date has been set.

On June 10, 1997, the Company commenced an action against BHR in the Superior
Court of California, County of Santa Clara, under the title RX MEDICAL IMAGING
CORP V. BIOLOGIC HEALTH RESOURCES, ET. AL. (Case No. CV-766768). The complaint
alleges that the defendants violated the partnership agreement of BHC in a
number of respects, including misappropriation of partnership assets and
diverting partnership customers, and seeks a dissolution of BHC, an accounting
of BHC's affairs, and damages. On August 7, 1997, the defendants filed a
cross-complaint in the pending action against the Company, RxMIC, the Financing
Source, the Company's president and general counsel, and Bay Cities
Pharmaceutical Services and its two principals, seeking a dissolution of the
partnership and an accounting, and damages for breach of contract, breach of
fiduciary duty, fraud, recission, conversion, constructive trust, and conspiracy
to defraud. The Company asserts that the allegations contained in the
cross-complaint are totally without merit, and on behalf of itself and its two
employees the Company intends to vigorously defend against such allegations and
pursue the causes of action contained in the complaint. The action is presently
in discovery and no trial date has been set.





                                       63

<PAGE>   64
                           RX MEDICAL SERVICES CORP.
                   Notes to Consolidated Financial Statements



On January 29, 1998, an action was commenced by Morton Medical Center, Inc.
("MMC") in the Chancery Court of Scott County, Mississippi against CHC, Ameris
and Scott County (Civil Action Case Number 98-085). The suit relates to an
option originally held by MMC to purchase Scott Regional Hospital (the
"Hospital") from Scott County. In 1993, Scott County had leased the Hospital to
MMC and the lease contained the option to purchase, which MMC thereafter
assigned to CHC as partial consideration for CHC's agreement to manage the
Hospital for MMC. In 1996, CHC assigned the option to Ameris. The complaint
seeks a declaratory judgment that the option to purchase the Hospital is void on
public policy grounds and that CHC's assignment to Ameris lacked the required
approval of MMC and was therefore, invalid.. After the action was commenced, CHC
formally exercised the option to purchase, for itself or on behalf of Ameris,
should Ameris decide to purchase the Hospital. Pursuant to the grant of option,
the purchase price for the Hospital is $500,000, payable $100,000 at closing and
the balance over four years in equal annual installments. No date has been set
for closing, although the Company anticipates that MMC will seek to obtain a
temporary restraining order staying the closing of the purchase pending the
outcome of its lawsuit. The Company intends to vigorously oppose the lawsuit,
which is presently in discovery. No trial date has been set.

In addition to the foregoing, the Company is involved in routine litigation
arising in the ordinary course of its business which the Company believes would
not have a material adverse effect on its financial position.

E.  UNION CONTRACT

One of the Company's hospitals has entered into an agreement with the United
Mine Workers of America and its District 28 and its Local Union 7528 (the
"Union") whereby the Union acts as the sole and exclusive bargaining
representative in respect to wages, hours, other working conditions for all
employees affiliated with the Union. This agreement can be renegotiated
annually, by either party giving the other party written notice of its desire to
modify or terminate the agreement, 90 days before the agreements' anniversary
date of July 1.

12.  Subsequent Events

On February 4, 1998, the Company agreed to settle certain claims it had against
one of the hospitals the Company managed. The hospital agreed to pay the Company
the sum of $500,000, payable $200,000 in cash and $300,000 in a two year note
that bears interest at 8% per annum, in settlement of outstanding notes and
management fees. As part of the settlement, the Company agreed to terminate its
management responsibilities for this hospital retroactive to December 31, 1997.







                                       64
<PAGE>   65
                           RX MEDICAL SERVICES CORP.
                   Notes to Consolidated Financial Statements


13.  Segment  Information

The Company operates in two business segments: the operation and management of
hospitals and medical clinics, and the distribution of pharmaceutical products.
During 1995, the Company discontinued its medical diagnostic services business
segment which has been reported as net liabilities of discontinued operations in
the consolidated financial statements. The following presents information on the
two business segments (in thousands):
<TABLE>
<CAPTION>

                                --------------   --------------    ----------------   -------------   --------------
                                                   Hospitals
                                 Years ended      and Medical      Pharmaceutical
                                 December 31        Clinics           Products         Corporate          Total
                                --------------   --------------    ----------------   -------------   --------------
<S>                                 <C>               <C>
Revenues                            1997         $ 19,627          $    345           $    --         $  19,972
                                    1996         $ 16,926          $     54           $    --         $  16,980
                                    1995         $  1,844          $     --           $    --         $   1,844
                                --------------   --------------    ----------------   -------------   --------------
Operating profit (loss)             1997         $ (1,236)         $   (317)          $(1,322)        $  (2,875)
                                    1996         $ (3,429)         $   (201)          $(1,553)        $  (5,183)
                                    1995         $   (821)         $     --           $(2,606)        $  (3,427)
                                --------------   --------------    ----------------   -------------   --------------
Capital expenditures                1997         $    235          $     9            $   104         $     348
                                    1996         $    547          $     --           $    22         $     569
                                    1995         $     19          $     --           $    --         $      19
                                --------------   --------------    ----------------   -------------   --------------
 Depreciation and
   amortization expense             1997         $    140          $      1           $    35         $     176
                                    1996         $    131          $     --           $    29         $     160
                                    1995         $     30          $     --           $    43         $      73
                                --------------   --------------    ----------------   -------------   --------------
Identifiable assets at year end     1997         $  6,165          $     40           $   268         $   6,473
                                    1996         $  6,032          $     56           $   302         $   6,390
                                    1995         $  2,296          $    124           $   127         $   2,547
                                --------------   --------------    ----------------   -------------   --------------
</TABLE>

14.  Fourth Quarter Adjustments

In the fourth quarters of 1996 and 1995, the Company recorded significant
adjustments which effected the net losses for the years. Following is a summary
of such adjustments (unaudited, in thousands):
<TABLE>
<CAPTION>

                                                          -----------------    ----------------    -----------------
                                                                1997                1996                 1995
                                                          -----------------    ----------------    -----------------
<S>                                                       <C>                  <C>                 <C>
 Related party interest expense adjustments               $           --       $         (575)     $            --
 Gain on purchase of accounts receivable                              --                  579                   --
 Loss on settlement of liabilities                                    --                   --                 (856)
 Reserve for discontinued operations                                  --                   --               (1,313)
 Asset valuation adjustments                                          --                 (847)              (6,482)
                                                          =================    ================    =================
                                                          $           --       $         (843)     $        (8,651)
                                                          =================    ================    =================
</TABLE>









                                       65


<PAGE>   66

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
                                 ON SCHEDULE II

Board of Directors
Rx Medical Services Corp.

In connection with our audit of the consolidated financial statements of Rx
Medical Services Corp. referred to in our report dated March 13, 1998, which is
included in the Company's Annual Report on Form 10-K, we have also audited
Schedule II for the years ended December 31, 1997, 1996 and 1995. In our
opinion, the schedule presents fairly, in all material respects, the information
required to be set forth therein. Our report on the financial statements
referred to above includes an explanatory paragraph which discusses
uncertainties and other matters concerning the Company's compliance with various
federal and state regulations and conditions which raise substantial doubt about
the Company's ability to continue as a going concern.



/s/   GRANT THORNTON LLP

Fort Lauderdale, Florida
March 13, 1998








                                       66
<PAGE>   67
                            RX MEDICAL SERVICES CORP.
                                   Schedule II
                        Valuation and Qualifying Accounts
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                              Additions
                                               Balance at     charged to                                     Balance at
                                               beginning      costs and                                        end of
                                               of period       expenses        Deductions    Adjustments       period
                                            --------------    -----------      ----------   ------------    ---------------
<S>                                           <C>             <C>              <C>           <C>            <C>
 Year ended December 31, 1997:
   Allowance for doubtful
     accounts receivable                      $     3,607     $     1,705      $    798      $   (784)      $    $3,730
                                              ============    ============     =========     ==========     ============

 Allowance for uncollectible notes
    and other receivables                     $       671     $        --      $     --      $      --      $      $671
                                              ============    ============     =========     ==========     ============

 Year ended December 31, 1996:
   Allowance for doubtful
     accounts receivable                      $       380     $     3,227 (a)  $     --      $      --      $    $3,607
                                              ============    ============     =========     ==========     ============

 Allowance for uncollectible notes
    and other receivables                     $       627     $        89      $     45      $      --      $      $671
                                              ============    ============     =========     ==========     ============

 Year ended December 31, 1995:
   Allowance for doubtful
     accounts receivable                      $        --     $       380      $     --      $      --      $      $380
                                              ============    ============     =========     ==========     ============

 Allowance for uncollectible notes
    and other receivables                     $       106     $       521      $     --      $      --      $      $627
                                              ============    ============     =========     ==========     ============

</TABLE>



(a) includes $1,003 charged to gain on purchase of accounts receivable in the
Statement of Operations.







                                       67

<PAGE>   68


                                   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.

                            RX MEDICAL SERVICES CORP.



                            By:      /s/ Randolph H. Speer
                                     -------------------------------------
                                     Randolph H. Speer
                                     President and Chief Operating Officer

                              Dated: March 30, 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 date indicated.
<TABLE>
<CAPTION>


<S>                                 <C>                                <C>
/s/ Michael L. Goldberg             Director, Chairman and             Dated:   March 30, 1998
-----------------------             Chief Executive Officer
Michael L. Goldberg



/s/ Randolph H. Speer               Director, President, Chief         Dated:   March 30, 1998
-----------------------             Operating Officer and Principal
Randolph H. Speer                   Financial Officer



/s/ Phillip E. Pearce               Director                           Dated:   March 30, 1998
---------------------
Phillip E. Pearce



/s/ Michael J. Pickering            Director                           Dated:   March 30, 1998
------------------------
Michael J. Pickering, M. D.

</TABLE>









                                       68