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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-KSB
                  Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                   For the fiscal year ended December 31, 1996
                           Commission File No.0-15893

                    CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
             (Exact name of registrant as specified in its charter)

                Nevada                                       91-1256470
   (State or Other Jurisdiction of                        (I.R.S. Employer
   Incorporation or Organization)                         Identification No.)

                            38 Pond Street, Suite 305
                          Franklin, Massachusetts 02038
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (508) 520-2422

             Securities registered pursuant to section 12(g) of Act:

                          Common Stock, $.012 Par Value
                                (Title of Class)

Indicate by check mark whether the registrant (l) 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),  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-B 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-KSB or any  amendment to
this Form 10-KSB. [ ]

Registrant's revenues for its most recent fiscal year $8,799,431


The aggregate market value of the common voting stock of the Registrant, held by
non-affiliates  was $2,674,335 at March 1, 1997, based upon the closing price of
the Common Stock on that date.

The  aggregate  number of shares of the voting  stock of the  Registrant,  which
includes the Common Stock held by  non-affiliates,  was  15,669,583  at March 1,
1997.

Documents   incorporated   by  reference:   list  the  following   documents  if
incorporated  by  reference  and the  part of the Form  10-KSB  into  which  the
document is  incorporated:  (1) any annual report to security  holders;  (2) any
proxy or information  statement;  and (3) any prospectus  filed pursuant to Rule
424(b) or (C) under the Securities Act of 1933. (The listed  documents should be
clearly described for identification purposes.)


Transitional Small Business disclosure format.     Yes  [ ]    No [X]


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<PAGE>

                                     PART I

Item 1. Description of Business

General*

                  The Company  provides  ancillary  health  care and  outpatient
rehabilitation  services through a network of outpatient clinics  principally in
the  Northeast  and  Mid-Atlantic  regions.  The Company  owns and  operates ten
clinics, five in Massachusetts,  one in Pennsylvania,  three in Delaware and one
in  Florida.   The  Company  also  provides   managed   ancillary   health  care
rehabilitation services through contract staffing, principally in Massachusetts,
Pennsylvania, Florida, Delaware and New York.

                  In 1992, following the Company's initial public offering,  the
Company operated nine facilities.  In 1993, the Company acquired nine additional
facilities. The Company returned one clinic to its seller in 1995 and closed two
clinics in each of 1995 and 1996 that were not  achieving  desired  results.  In
February 1997, the Company sold three clinics in  Pennsylvania  for $1.1 million
(See "Current Developments" below).

                  In 1996, the Company began development of a program of managed
rehabilitation  services  ("MRS"),  pursuant to which the Company  would furnish
contract development, staffing, administrative, payroll, billing, collection and
management  services to local,  independently  owned  community  based  clinics,
nursing homes and home health agencies.  The MRS system provides for the ability
to deliver contractual ancillary health care and rehabilitation services through
the  community  based  locations  that in  turn,  would  coordinate  the  actual
services.  The Company  expects that over time the MRS business  will become the
substantial focus of the Company's operations.

Industry Background

                  Physical and occupational  therapy is the process of aiding in
the restoration of individuals  disabled by injury or disease or recovering from
surgery.  Management  believes that the following  factors are  influencing  the
growth of outpatient physical and occupational therapy services:

                  Economic   Benefits  of  Physical  and  Occupational   Therapy
                  Services.  Purchasers  and  providers of health care  services
                  such as insurance companies, health maintenance organizations,
                  business and industry, are seeking ways to save on traditional
                  health  care  services.   Management   believes  physical  and
                  occupational   therapy  services  represent  a  cost-effective
                  service, by attempting to prevent short-term disabilities from
                  becoming chronic conditions, and by speeding the recovery from
                  surgery and musculoskeletal injuries.

                  Earlier  Hospital  Discharge.   Changes  in  health  insurance
                  reimbursement,  both public and private,  have  encouraged the
                  early  discharge  of  patients  in order to contain and reduce
                  costs.  Management believes early hospital discharge practices
                  foster  greater  numbers of individuals  requiring  outpatient
                  physical and occupational therapy services.

Outpatient Rehabilitation Services

                  The clinics provide pre-and  post-operative care and treatment
for a variety  of  orthopedic-related  disorders  and sports  related  injuries,
treatment of neurologically related injuries,  rehabilitation of injured workers
and  preventative  care.  A  patient  who is  referred  to one of the  Company's
rehabilitation facilities undergoes an initial evaluation and assessment process
that  results  in  the  development  of  a  rehabilitation  care  plan  designed
specifically for that patient.  Rehabilitation  services provided by the Company
include the following:

Conventional Clinical Services

                  All  facilities   provide   routine  acute  clinical   therapy
services.   Services  include   preventive  and   rehabilitative   services  for
neuromuscular,  musculoskeletal and cardiovascular  injury or disease.  Patients
treated are referred by physicians.  Licensed physical  therapists evaluate each
patient and  initiate a program of  rehabilitation  to achieve  each  individual
patient's  rehabilitation  goals.  Treatments or modalities rendered may include
traction,  ultrasound,   electrical  stimulation,   therapeutic  exercise,  heat
treatment and hydrotherapy.  The Company's charge for its services is based upon
the specific treatments  rendered.  Patients requiring such services are usually
treated  for one hour per day,  three days per week over a period of two to five
weeks.  Additionally,  wherever  appropriate,   post-treatment  maintenance  and
exercise  programs are provided to patients to continue their recovery on a cost
effective basis.

Occupational/Industrial Services

                  At several of the Company's facilities,  specific programs for
the injured workers  compensation  patient are rendered.  Services unique to the
injured worker are as follows:


                                       2
<PAGE>

                  Work  Capacity   Evaluation  (WCE)  -  WCE  is  an  intensive,
                  objective   evaluation  of  the  injured   worker's   physical
                  condition and capacity to perform the specific  requirement of
                  the  worker's  employment.  This  evaluation  is often used by
                  insurers to estimate the extent of rehabilitation treatment or
                  as a basis for settlement of disability claims.

                  Work Hardening - After the  acute-care  phase of an injury and
                  often as an outcome of a WCE, there is a transitional need for
                  the injured  worker to regain the physical  capacity to safely
                  perform  employment  requirements.   Work  hardening  provides
                  graduated   exercise   and  work   stimulation   therapies  to
                  rehabilitate  the injured  worker.  Patients in the  Company's
                  work hardening program gradually build up their treatment time
                  from  three to seven  hours per day,  five days per week for a
                  four to six week period.

Marketing

                  At each clinical  location,  the Company focuses its marketing
efforts on physicians, mainly orthopedic surgeons,  neurosurgeons,  physiatrist,
occupational medicine practitioners, and general practitioners,  which generally
account for the  majority of physical and  occupational  therapy  referrals.  In
marketing to the physician community,  the clinics emphasize their commitment to
quality  patient  care  and  communication  with  physicians  regarding  patient
progress. On a regional and corporate level, the Company seeks to improve and/or
establish  referral   relationships   with  health  maintenance   organizations,
preferred  provider  organizations,  industry and case  managers  and  insurance
companies.

Sources of Revenue/Reimbursement

                  Payor  sources  for  the  Company's   services  are  primarily
commercial  health  insurance,  managed  care  programs,  workers'  compensation
insurance,  Medicare and proceeds from personal injury cases.  Commercial health
insurance  and managed  care  programs  generally  provide  outpatient  services
coverage to patients utilizing the clinics, and the patient is normally required
to pay an annual deductible and a co-insurance payment. Workers' compensation is
a statutorily  defined  employee benefit which varies on a state by state basis.
Workers'  compensation  laws generally  require  employers to pay for employees'
costs  of  medical  rehabilitation,  lost  wages,  legal  fees and  other  costs
associated  with   work-related   injuries  and  disabilities  and,  in  certain
jurisdictions,  mandatory  vocational  rehabilitation.  These statutes generally
require  that these  benefits be offered to employees  without any  deductibles,
co-payments  or cost  sharing.  Companies  may  provide  such  coverage to their
employees  through  either the  purchase of  insurance  from  private  insurance
companies,   participation   in  state-run  funds  or  through   self-insurance.
Treatments  for patients who are parties to personal  injury cases are generally
paid for from the proceeds of settlements with insurance companies.

                  All of the Company's  clinics have been  certified as Medicare
providers.  Medicare  reimbursement for outpatient  physical and/or occupational
therapy furnished by a Medicare-certified  rehabilitation agency is equal to the
lesser  of  the  providers's   "reasonable  costs"  as  allowed  under  Medicare
regulations or the providers's customary charges.  Individual beneficiaries,  or
their "Medigap"  insurance carriers if such coverage exists, are required to pay
a deductible and co-payment amount, so that governmental payments to the Company
do not exceed 80% of the reasonable  costs of such  services.  The Company files
annual cost  reports for each of its  Certified  Rehab  Agencies  consisting  of
Delaware (three clinics) and Pennsylvania (one clinic). These cost reports serve
as the basis for  determining  the prior  year's  cost  settlements  and interim
Medicare payment rates for the next year.  Medicare  regulations  require that a
physician  must  certify  the  need for  physical  and/or  occupational  therapy
services for each patient and that these services must be provided in accordance
with an  established  plan of treatment  which is  periodically  revised.  State
Medicaid programs generally do not provide coverage for outpatient  physical and
occupational therapy, and, therefore,  Medicaid is not expected to be a material
payor for the Company.

                  The following table sets forth the Company Percentage Revenues
by category of payor for the fiscal years  1996 and 1995.

         Sources of Revenue/Reimbursement
                                                           1996         1995
                                                           ----         ----
                  Workers Compensation                      28%          10%
                  Health Maintenance Organizations          25%          13%
                  Motor Vehicle Insurance                   18%           6%
                  Medicare                                   8%           5%
                  Commercial Health Insurance                7%          39%
                  Blue Cross/Blue Shield                     5%           5%
                  Self Pay                                   4%           7%
                  Other                                      3%          12%
                  Medicaid                                   2%           3%
                                                         ------        -----
                  Total                                    100%         100%
                                                           ====         ====



                                       3
<PAGE>

Consolidated Rehabilitation Services

         The Company's  Consolidated  Rehabilitation  Services  ("CRS") division
provides  physical,  occupational,  speech and respiratory  therapist  staffing,
along with certified home health aids, certified nurses aides, and personal care
attendants typically under intermediate term contracts,  to schools,  hospitals,
nursing homes,  assisted living  facilities and home health care companies.  The
Company's CRS division has grown rapidly since its formation in September  1994.
The temporary staffing industry in general, has experienced dramatic growth over
the last decade.

Managed Rehabilitation Services

         The Company  continues  to develop a program of managed  rehabilitation
services  ("MRS"),  pursuant  to which the Company  would  enter into  licensing
arrangements  with local,  independently  owned  community  based  providers  of
rehabilitative therapy ("licensee"),  such as outpatient clinics, small contract
agencies and  independent  home care  agencies.  Under these  arrangements,  the
licensee would be the  coordinator of ancillary  health care and  rehabilitative
therapy  services,  while the Company  would  furnish the  licensee  with staff,
contract development, and management services.

         The  Company  believes  that HMOs and other  managed  care  payors  are
increasingly  seeking  providers that can deliver  multiple  services in diverse
settings covering entire service areas. Under the MRS program, the Company would
assist  its  licensee  to  develop a full  range of  ancillary  health  care and
rehabilitative   services,   including   physical,   occupational,   speech  and
respiratory  therapy, and provide for the delivery of these services in clinical
settings,  hospitals,  sub-acute care  facilities,  schools,  homes and assisted
living  residences.  Through its  contractual  relationships  with  managed care
payors,  the Company would direct  contracts  with such payors to its licensees.
The  Company  would also  furnish the  licensee  with  administrative,  payroll,
billing  and  collection  services,  assist the  licensee  with  staffing  on an
as-requested basis and advise the licensee on contract management.  For example,
based upon  experience  in the  Company's  own  clinics  and  contract  services
division,  the Company would advise  licensee on mix design --  establishing  an
optimal  balance  between  therapists and lesser paid therapist  assistants--and
employment  of  underutilized  clinic  staff  to  perform  therapy  at  off-site
locations.  Only one  licensee  would be  licensed  in any given  locality,  but
multiple  licensees could participate in contracts  arranged by the Company with
regional or national managed care payors.

         The  MRS  model  would  benefit  the  licensee  by  offering   contract
opportunities that otherwise would likely not be available to them and relieving
them of complex and costly  administrative  burdens. The model would benefit the
Company by  leveraging  off  expertise  developed in the  Company's  clinics and
contract  services  operations and expanding the Company's  operations  into new
regional markets with relatively  modest capital  outlays.  The Company would be
responsible to manage the operations of each MRS location.  The Company would be
compensated for these services through  administrative and management fees along
with a percentage of each MRS location's profitability.

         The  Company  expects  that over time the MRS  business  will  become a
substantial  focus of the  Company's  operations.  Presently,  the  Company  has
identified a number of potential licensees for the MRS business, and has entered
into MRS licensing agreements with respect to three locations.

Regulation

         The health  care  industry is subject to  numerous  federal,  state and
local  regulations.  Although many states prohibit  commercial  enterprises from
engaging in the corporate practice of medicine,  the states in which the Company
currently  operates do not prohibit the Company from providing  physical therapy
services.  There is a risk that the  corporate  practice  of  medicine  could be
interpreted in those states to include the practice of physical therapy also, or
that the corporate  practice of physical  therapy  itself could be  specifically
prohibited in some states.  In the event that the Company is found to be engaged
in a  prohibited  practice  in any  state,  the  Company  would be  required  to
restructure  its operations so as to be in compliance  with  applicable  law. In
addition,  the Company could be subject to fines and penalties.  In addition, if
the  Company  were to seek to expand  its  operations  to other  states in which
physical  therapy  services could not be provided by a corporation,  it would be
required  to  seek  other  arrangements  in  such  states,  which  could  reduce
profitability.

         Certain  states in which the Company  operates  have laws that  require
facilities that employ health  professionals and provide health related services
to be licensed.  The Company  believes that the  operations of its business,  as
presently  conducted,  do not and will not require certificates of need or other
approvals and licenses.  There can be no assurance,  however, that existing laws
or  regulations  will not be  interpreted  or modified to require the Company to
obtain such  approvals or licenses  and, if so, that such  approvals or licenses
could be obtained.

         All of the Company's clinics are certified Medicare providers. In order
to receive Medicare reimbursement,  a clinic must meet the applicable conditions
or  participation  set  forth by the  Department  of Health  and Human  Services
relating to the type of facility, its equipment,  record keeping,  personnel and
standards of medical care as well as  compliance  with all state and local laws.
Clinics are subject to periodic inspections to determine compliance.

         The Social Security Act imposes  criminal  sanctions  and/or  penalties
upon  persons  who pay or receive  any  "remuneration"  in  connection  with the
referral of Medicare or Medicaid  patients.  The  "anti-kickback"  laws prohibit
providers and others from offering or paying


                                       4
<PAGE>


(or soliciting or receiving), directly or indirectly, any remuneration to induce
or in return  for  making a  referral  for,  or  ordering  or  recommending  (or
arranging  for  ordering  or  recommending)  a  Medicare-covered  service.  Each
violation  of these  rules  may be  punished  by a fine (of up to  $250,000  for
individuals  and $500,000 for  corporations,  or twice the pecuniary gain to the
defendant or loss to another from the illegal  conduct) and or imprisonment  for
up to five years. In addition,  a provider may be excluded from participation in
Medicaid  or  Medicare   for   violation  of  these   prohibitions   through  an
administrative  proceeding,  without the need for any criminal proceeding.  Many
states  have  similar  laws,  which  apply  whether or not  Medicare or Medicaid
patients are involved.

         Because the anti-kickback  laws have been broadly  interpreted to apply
where even one purpose (as opposed to a sole or primary purpose) of a payment is
to induce  referrals,  they limit the  relationships  which the Company may have
with referral sources, including any ownership relationships.  The anti-kickback
laws  may  also  apply  to the  structure  of  acquisitions  by the  Company  of
physician-owned  physical therapy clinics, to the extent that any portion of the
purchase  price  or terms of  payment  are  deemed  to be an  inducement  to the
physician to make referrals to the clinic which,  under an  interpretive  letter
from the Office of Chief Counsel of the  Department of Health and Human Services
Inspector  General,  could include payments for goodwill.  Management  considers
these  anti-kickback  laws in planning its clinic  acquisitions,  marketing  and
other  activities,  and believes its  operations  are and will continue to be in
compliance  with  applicable  law,  but  no  assurance  can be  given  regarding
compliance in any  particular  factual  situation,  as there is no procedure for
obtaining advisory opinions from government officials.

         In addition, another federal law, known as the "Stark Law" was expanded
in 1993 to impose a  prohibition  on referrals of Medicare or Medicaid  patients
for physical  therapy  services by physicians who have a financial  relationship
with the provider  furnishing the services.  With certain specified  exceptions,
the referral prohibition will apply to any physician who has (or whose immediate
family member has) a direct or indirect ownership or investment  interest in, or
compensation  relationship with, a provider of physical therapy services such as
the Company's  clinics.  This law also prohibits  billing for services  rendered
pursuant to  prohibited  referral.  Penalties for  violation  include  denial of
payment for the services,  significant civil monetary  penalties,  and exclusion
from  Medicare  and  Medicaid.  Several  states have enacted laws similar to the
Stark  law,  but which  cover all  patients  as well.  The Stark law  covers any
financial  relationship between the Company and referring physicians,  including
any  financial  transaction  resulting  from a clinic  acquisition.  As with the
anti-kickback law, management will consider the Stark law in planning its clinic
acquisitions,  marketing and other  activities,  and expects that its operations
will be in compliance with applicable law. However, as noted above, no assurance
can be given regarding compliance in any particular factual situation,  as there
is no procedure for obtaining advisory opinions from government officials.

Competition

         The health care industry  generally  and the physical and  occupational
business in particular are highly  competitive and subject to continual  changes
in the manner in which providers are selected.  The  competitive  factors in the
physical and occupational therapy businesses are quality of care, cost treatment
outcomes,  convenience of location,  and relationships  with ability to meet the
needs of referral and payor sources.  The Company's  clinics compete directly or
indirectly with the physical and occupational  therapy departments of acute care
hospitals,  physician-owned  physical therapy clinics,  private physical therapy
clinics, and chiropractors.

Employees

         As of  March 1,  1997  the  Company  employed  154  full and  part-time
persons,  99 of whom are licensed  therapists,  23  assistants  and aides at the
Company's  outpatient   facilities,   14  of  whom  function  in  administrative
capacities  at such  outpatient  facilities  and 18 of whom are  employed in the
Company's executive office. None of the Company's employees are represented by a
labor union, and the Company is not aware of any current  activities to unionize
its employees.  Management of the Company considers the relationship between the
Company and its employees to be good.

         In the  states in which the  Company's  current  clinics  are  located,
persons performing physical and occupational therapy services are required to be
licensed  by the state.  All persons  currently  employed by the Company and its
clinics who are required to be licensed are  licensed,  and the Company  intends
that all future  employees  who are  required to be licensed  will be  licensed.
Management is not aware of any federal licensing requirements  applicable to its
employees. The Company carries professional liability insurance for its licensed
personnel.

Current Developments

         On February 28, 1997,  the Company  completed  the sale of three of its
four Pennsylvania clinics for a purchase price of $1,050,000 in cash and a note,
subject to adjustment.  The clinics  include those located in  Millersburg,  PA,
Mechanicsburg, PA and Shermans Dale, PA. The Company had purchased these clinics
from the buyer in 1993. The cash portion of the  transaction  was $900,000.  The
buyer also  assumed up to $230,000 in  associated  liabilities.  Pursuant to the
letter of intent,  the buyer agreed to advance certain operating expenses of the
clinics proposed to be sold pending closing of the  transaction,  which advances
would then be deducted  from the cash portion of the purchase  price at closing.
The buyer advanced  $100,000 during the month of February 1997, which amount was
deducted  at closing  from the  $900,000  cash  portion of the  purchase  price.
Additionally,  in January 1997 the Company  agreed to satisfy a note held by the
buyer issued in connection with the 1993 business acquisition in the approximate
amount of $413,000 by  assignment  to the note holder of $484,000 in face amount
of accounts receivable,  but only to the extent of collections in the amount due
under the note.


                                       5
<PAGE>

* Forward - looking Statements  May Prove Inaccurate

The Company has made certain forward-looking statements in this Annual Report on
Form  10-KSB  that are  subject  to  risks  and  uncertainties.  Forward-looking
statements  include  information  concerning  the  possible  future  results  of
operations   of  the  Company,   its   ancillary   healthcare   and   outpatient
rehabilitation  business and statements of information  preceded by, followed by
or that  include  the word  "believes",  "expects",  "anticipates",  or  similar
expressions.  For  those  statements,  the  Company  claims  the  protection  of
safe-harbor for forward-looking  statements  contained in the Private Securities
Litigation  Reform  Act of 1995.  The  reader is  cautioned  that the  following
important  factors,  in addition  to those  contained  elsewhere  in this Annual
report on Form  10-KSB  could  affect the future  results  of the  Company,  its
businesses  and could  cause  those  results  to differ  materially  from  those
expressed in the forward-looking  statements,  such as: material adverse changes
in the  economic  conditions  in the  markets  served  by  the  Company;  future
regulatory  actions and conditions in the Company's  operating areas,  including
competition   from   others  in  the   ancillary   healthcare   and   outpatient
rehabilitation market[s].













                                       6
<PAGE>



            Financial Statements and Pro Forma Financial Information

Pro Forma Financial Data

         The  following  Unaudited  Pro  Forma  Consolidated  Balance  Sheet and
Unaudited Pro Forma  Consolidated  Statements  of Operations  give effect to the
sale of three of the Company's  Pennsylvania  clinics pursuant to the terms of a
Asset Purchase Agreement between the Company and the Buyer (the  "Disposition").
These Unaudited Pro Forma  Consolidated  Financial  Statements have been derived
from the  Audited  Statements  of  Operations  of the Company for the year ended
December 31, 1996.  The  Unaudited  Pro Forma  Consolidated  Balance Sheet gives
effect to the  Disposition  as if it had  occurred on  December  31,  1996.  The
Unaudited Pro Forma  Consolidated  Statements  of Operations  give effect to the
Disposition  as if it had  occurred  at the  beginning  of each  of the  periods
presented.

         The Unaudited Pro Forma  Consolidated  Financial  Statements  should be
read in  conjunction  with the  notes  thereto  and the  Company's  consolidated
financial  statements  and related notes.  The Unaudited Pro Forma  Consolidated
Financial  Statements are presented for  informational  purposes only and do not
purport to be indicative of the results of operations  that actually  would have
resulted if the Disposition had been consummated previously nor which may result
from future operations.

                 Unaudited Pro Forma Consolidated Balance Sheet

<TABLE>
<CAPTION>
                                                                                 DECEMBER 31, 1996
                                                                --------------------------------------------------------
ASSETS                                                               ACTUAL          ADJUSTMENTS               PRO FORMA
<S>                                                             <C>                   <C>                     <C>
Current Assets:
  Cash and cash equivalents                                     $    37,141          $   900,000(1)          $   937,141
  Accounts receivable, net                                        1,817,036             (805,168)(2)           1,011,868
  Other current assets                                              711,628              (21,500)(3)             690,128
  Notes receivable - current portion                                   --                 30,000(1)               30,000
                                                                -----------          -----------             -----------
         Total current assets                                     2,565,805              103,332               2,669,137

  Property, plant and equipment, net                                453,861              (34,763)(4)             419,098
  Goodwill, net                                                   2,428,463                 --                 2,428,463
  Note receivable - long term portion                                  --                120,000(1)              120,000
  Deferred charges and other assets, net                            132,437                 --                   132,437
                                                                -----------          -----------             -----------
TOTAL                                                           $ 5,580,566          $   188,569             $ 5,769,135
                                                                ===========          ===========             ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable                                              $   778,358          $  (136,299)(2)         $   642,059
  Current portion long-term debt                                    353,023                 --                   353,023
  Accrued expenses                                                  550,123              (89,701)(2)             460,422
                                                                -----------          -----------             -----------
         Total current liabilities                                1,681,504             (226,000)              1,455,504

  Long-term debt                                                  1,804,550             (413,259)(2)           1,391,291
  Other accrued debt                                                   --                   --                      --

Stockholders' equity:

  Preferred stock, 10,000,000 shares
    authorized; Issued 1,727,305 in 1996 and 1995                 1,727,305                 --                 1,727,305
  Common stock, $.012 par value, 50,000,000
    shares authorized; Issued:  16,369,583 in 1996
    and 14,702,306 in 1995                                          196,435                 --                   196,435
  Additional paid-in capital                                      8,230,611                 --                 8,230,611
  Accumulated deficit                                            (7,972,339)             827,828(5)           (7,144,511)
  Less - treasury stock, 700,000 shares
    at cost                                                         (87,500)                --                   (87,500)
                                                                -----------          -----------             -----------
      Total stockholders' equity                                  2,094,512              827,828               2,922,340
                                                                -----------          -----------             -----------
   TOTAL                                                        $ 5,580,566          $   188,569             $ 5,769,135
                                                                ===========          ===========             ===========
</TABLE>

           See Notes to Unaudited Pro Forma Consolidated Balance Sheet


                                       7
<PAGE>


        Notes To Unaudited Pro Forma Consolidated Condensed Balance Sheet


(1)   Adjustments  to  reflect   proceeds  received  by  the  Company  from  the
      Disposition. The adjustments reflect proceeds of $900,000 in  cash  and  a
      $150,000 five-year note.

      Cash at closing                             $900,000
      Note receivable - current                     30,000
      Note receivable - long term                  120,000
                                                ----------

      Total purchase price                      $1,050,000
                                                ==========

(2)   Adjustment  to reflect the  exchange of certain  accounts  pursuant to the
      Disposition  and related  transactions.  The buyer received  approximately
      $805,168 of net accounts  receivable related to the assets disposed of and
      assumed  approximately  $226,000 of accounts payable. In January 1997, the
      Company  agreed to satisfy a note of the Company  held by the buyer in the
      amount of $413,259,  out of the proceeds of $484,000 in face amount of the
      aforesaid receivables. Accordingly, the pro forma adjustments also reflect
      the elimination of the liability under the note.

(3)   Adjustment to reflect deferred  financing expense that will be expensed on
      the  completion  of  the  Disposition.  In  April  of  1996,  the  Company
      renegotiated a promissory note in the principal amount of $413,259,  which
      note was issued to the buyer in  connection  with the  acquisition  by the
      Company of certain assets included in the Disposition. In consideration of
      the  renegotiation  of the note,  the  Company  issued  to the  noteholder
      120,000 shares of Common Stock deemed valued at $.25 per share, or $30,000
      in the aggregate.  This amount was being amortized as a deferred financing
      cost. The remaining unamortized portion of this deferred financing cost in
      the  amount  of  $21,500  will be  expensed  upon  the  completion  of the
      Disposition.

(4)   Adjustment  to  eliminate  the  net  value  of  the assets included in the
      Disposition, as follows:

      Fixed asset acquisition cost                 $89,050
      Accumulated depreciation                      54,287
                                                   -------

      Net fixed assets                              34,763
                                                   =======

(5)   Adjustment to reflect the gain realized upon the Disposition.


                                       8
<PAGE>

            Unaudited Pro Forma Consolidated Statements Of Operations

<TABLE>
<CAPTION>
                                                                   Fiscal Year Ended
                                                                   December 31, 1996
                                                    ------------------------------------------------
                                                                       Pro Forma
                                                      Actual          adjustments          Pro Forma
                                                      ------          -----------          ---------

<S>                                                 <C>                <C>                <C>
Revenue, net                                        $8,799,431         $2,156,678 (1)     $6,642,753
Costs and expenses:
  Operating costs                                    7,015,664          1,931,633 (2)      5,084,031
  Administrative and
    selling                                          1,771,723               -    (3)      1,771,723
  Depreciation and
    amortization                                       242,454             13,152 (4)        229,302
                                                    ----------         ----------         ----------

Total operating costs                                9,029,841          1,944,785          7,085,056
                                                    ----------         ----------         ----------
Operating (loss) income                               (230,410)           211,893           (442,303)

Interest expense                                      (298,564)           (39,299)(5)       (259,265)

Other income                                            86,562                381 (6)         86,181
                                                    ----------         ----------         ----------

Income (loss) before
  taxes and extraordinary
  income (charge)                                     (442,412)           172,975           (615,387)

Provision for taxes                                     30,830               -    (7)         30,830
                                                    ----------         ----------         ----------
Income (loss) before
  extraordinary income
  (charge)                                          $ (473,242)        $  172,975         $ (646,217)
                                                    ==========         ==========         ==========

Income (loss) before
  extraordinary income
  (charge) per share of
  common stock                                                                            $    (0.04)
                                                                                          ==========

Average number of
  common shares
  outstanding                                                                             14,787,803
                                                                                          ==========
</TABLE>

     See Notes to Unaudited Pro Forma Consolidated Statements of Operations



                                       9
<PAGE>


       Notes to Unaudited Pro Forma Consolidated Statements of Operations

(1)   Adjustment to  eliminate  actual net  revenues  for the  period  presented
      attributable to the assets disposed of.

(2)   Adjustment to eliminate direct actual and accrued expenses relating to the
      assets disposed of, which consist  principally of salaries,  wages, fringe
      benefits and other clinical costs.

(3)   Assumes no reduction in the Company's administrative  and selling expenses
      resulting from the Disposition.

(4)   Adjustment  to  eliminate  actual  depreciation  expense  for  the  assets
      disposed of.

(5)   In January 1997,  the Company agreed to satisfy a note of the Company held
      by the buyer in the amount of $413,259, out of the proceeds of $484,000 in
      face amount of receivables attributable to the assets disposed of. The pro
      forma   adjustment   eliminates   actual  and  accrued   interest  expense
      attributable to this note. Lower interest  expense  resulting from the use
      of proceeds of the Disposition to reduce the Company's outstanding debt is
      not reflected in the pro forma adjustments.

(6)   Excludes the gain on the Disposition.

(7)   The  Proforma adjustments  do not  assume  any  change to federal or state
      income taxes as the provision for income taxes  reflect  minimum taxes due
      various states in which the Company operates.


                                       10
<PAGE>

Item 2.  Description of Properties

The  Company's  principal  executive  offices  are  located  at 38 Pond  Street,
Franklin, Massachusetts. This office contains approximately 7,500 square feet of
space which the Company  currently  leases on five year lease  expiring  January
2002. The Company operates ten outpatient rehabilitation facilities all of which
are leased facilities typically located in a medical office building or shopping
center.  The Company's  typical  clinic  occupies  approximately  1,200 to 7,500
square feet of space with an average of approximately 3,200 square feet of space
per  location.  Each  clinic  employs  one  or  more  licensed  physical  and/or
occupational  therapists,  including a therapist  who is the  facility  manager,
office personnel,  aides and, at certain clinics,  athletic  trainers,  exercise
physiologists and other appropriate personnel.

Set forth  below is certain  information  concerning  the  Company's  outpatient
facilities.

<TABLE>
<CAPTION>
            Location                                   Sq. Ft.                              Year Opened
            --------                                   -------                              -----------
<S>                                                     <C>                                     <C>
         Attleboro, MA                                  2,800                                   1971
         Leominster, MA                                 3,400                                   1990
         Pittsfield, MA                                 2,500                                   1992
         West Bridgewater, MA                           3,500                                   1978
         Worcester, MA                                  1,200                                   1992
         Philadelphia, PA                               7,000                                   1992
         Wilmington, DE                                 1,600                                   1993
         Newark, DE                                     3,900                                   1993
         Newark, DE                                     1,700                                   1993
         Boca Raton, FL                                 1,875                                   1992
</TABLE>


Item 3.  Legal Proceedings

         The Company is a party to pending legal  proceedings,  arising from the
normal business operations of the Company. Management believes these proceedings
will not have a  material  impact on the  financial  condition  and  results  of
operations of the Company.

Item 4.  Submission of Matters to Vote of Security Holders

         None.




                                       11
<PAGE>

                                     PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder matters

         The  Company's  common stock is traded on the Nasdaq  Small-Cap  Market
under the  symbol  CHCA.  The  following  table  sets forth the high and low bid
prices  for the  common  stock,  as  reported  by the  National  Association  of
Securities  Dealers,  Inc.  for the period  indicated.  These  prices  represent
quotations  between dealers (not actual  transactions) and do not include retail
markups, markdowns or commissions.


         1996                            HIGH                     LOW
         ------------------------------------------------------------
         First Quarter                $0.5625                 $0.2500
         Second Quarter                0.6250                  0.3437
         Third Quarter                 0.5312                  0.3125
         Fourth Quarter                0.4375                  0.2500

         1995                            HIGH                     LOW
         ------------------------------------------------------------
         First Quarter                $1.0625                 $0.6250
         Second Quarter                0.8125                  0.5000
         Third Quarter                 0.5625                  0.3750
         Fourth Quarter                0.3750                  0.1875


          On December 31, 1996 the closing price of the  Company's  common stock
was $.3875 per share.  As of March 3, 1997, the number of stockholders of record
of the Company's common stock was approximately  600. The Company believes that,
in addition,  there are in excess of 600  beneficial  owners of its common stock
whose shares are held in "street name".

         The  Registrant  has not paid any cash  dividends  to date and does not
anticipate or contemplate paying dividends in the foreseeable  future. It is the
present  intention  of  management  to  utilize  all  available  funds  for  the
development of the Company's business.  There are no contractual restrictions on
dividends.

Recent Sales of Unregistered Securities

         In  January  1996,  the  Company  issued to a vendor a  three-year  12%
promissory note in the amount of $65,750 in satisfaction of an obligation to the
vendor in the same amount and agreed to issue shares of common stock,  valued as
of the date of the agreement,  in satisfaction of an additional $65,750 in trade
liabilities due such vendor.  Subsequently,  in June 1996, the Company issued to
the vendor  210,400  shares of common  stock,  constituting  $65,750 in value of
common  stock at $0.3125  per  share.  The note and the  shares  were  issued in
reliance upon Section 4(2) of the Securities Act for  transactions not involving
a public offering.

         In February  1996, the Company  renegotiated  a convertible  promissory
note and a promissory note in the aggregate  principal amount of $706,230,  both
of which were issued in connection with a business acquisition. As renegotiated,
the interest  rate of the notes was  increased to 9.5% and the term of the notes
was extended to 2002. In consideration of the renegotiation,  the Company issued
to the noteholder 177,778 shares of common stock,  constituting $50,000 in value
of common stock at $0.28125 per share. The Company also issued to the noteholder
three-year options to purchase 83,333 shares of the Company's common stock at an
exercise  price of $0.30 per  share.  The  shares  and  options  were  issued in
reliance upon Section 4(2) of the Securities Act for  transactions not involving
a public offering.

         In February  1996,  the Company issued 20,000 shares of common stock to
Christopher  Harkins as a stock bonus award. The shares were issued on a no-sale
theory or,  alternatively,  in reliance upon Section 4(2) of the  Securities Act
for transactions not involving a public offering.

         In April 1996, the Company renegotiated a 7.5% promissory note due 1996
in the principal amount of $413,000,  which note was issued in connection with a
business acquisition. As renegotiated,  the note will be due April 2001 and will
bear interest at 10% per annum.  Interest only will be payable  during the first
two years of the note, and the note will be self-liquidating  over the remaining
three years.  In  consideration  of the  renegotiation  of the note, the Company
issued to the noteholder 120,000 shares of common stock, constituting $30,000 in
value of common stock at $0.25 per share. The  renegotiated  note and the shares
were issued in reliance upon Section 4(2) of the Securities Act for transactions
not involving a public offering.


                                       12
<PAGE>


         In June 1996,  the Company  issued to Joel  Friedman  35,714  shares of
common stock upon  exercise of stock  options at an exercise  price of $0.28 per
share.  The shares were issued in reliance  upon Section 4(2) of the  Securities
Act for transactions not involving a public offering.

         In July 1996,  the holder of a  convertible  promissory  note issued in
connection with a business  acquisition  converted the note and certain accounts
payable  due the note holder into  common  stock.  The note with an  outstanding
balance of  $182,305  and the  accounts  payable  in the  amount of $6,399  were
converted at a price of $.45 per share into 419,342 shares of common stock.  The
shares were issued in  reliance  upon  Section  4(2) of the  Securities  Act for
transactions not involving a public offering.

         In September  1996, the Company issued 750,000 options to each of three
executive  officers at an exercise  price of $0.38 per share.  The options  were
issued on a no-sale theory or,  alternatively,  in reliance upon Section 4(2) of
the Securities Act for transactions not involving a public offering.

         In September 1996, the Company issued 108,000 shares of common stock to
Renaissance  and  certain  other  persons  in  consideration  of a loan  made by
Renaissance  and such other  persons to the  Company.  The shares were issued in
reliance upon Section 4(2) of the Securities Act for  transactions not involving
a public offering.

         In  September  1996,  the Company made stock  awards  totaling  300,000
shares as follows to its outside directors:  James Kenney (100,000 shares), Paul
Frankel (100,000 shares),  Goodhue Smith III (75,000 shares), and Sydney Dworkin
(25,000  shares).  The shares were issued as director  compensation at a rate of
25,000  shares for each year of service to the Board.  The share were  issued in
reliance of Section 4(2) of the Securities Act for  transactions not involving a
public offering.

         In December  1996,  the Company issued 96,000 shares of common stock to
Renaissance  and  certain  other  persons  in  consideration  of a loan  made by
Renaissance  and such other  persons to the  Company.  The shares were issued in
reliance upon Section 4(2) of the Securities Act for  transactions not involving
a public offering.



                                       13
<PAGE>


                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 6.  Overview

         The  Company  was  organized  and  commenced  operations  in  1984 as a
provider of diagnostic  imaging  services on a mobile  shared-service  basis. In
July 1991, it significantly  changed its operating  business by merging with PTS
Rehab, Inc., a privately-held provider of outpatient rehabilitation services and
contract services to hospitals.  Since this merger and its  corresponding  entry
into the  rehabilitative  services segment of health care, the Company has grown
as a provider of outpatient services through  acquisitions.  Consistent with the
Company's strategy to build a network of outpatient  rehabilitation  facilities,
in March 1993 the Company's  Board of Directors  approved a plan to  discontinue
and dispose of its  diagnostic  imaging  services  division.  During  1993,  the
Company  acquired  nine  outpatient  physical  therapy  clinics.  As the Company
integrated the 1992 and 1993 acquired facilities, certain of the facilities were
not achieving  desired  results.  The Company returned one clinic in 1994 to its
sellers,  closed two  clinics in 1995 and two in 1996.  In  February  1997,  the
Company sold three of its clinics in  Pennsylvania  for $1.1  million,  plus the
assumption   of  certain   associated   liabilities.   (See   "Business--Current
Developments").

         In  response  to the  decline  in the  Company's  working  capital  and
available  cash in 1995,  the  Company  extended  the time needed to satisfy its
obligations to vendors resulting in increased accounts payable. In addition,  as
discussed  below,  during 1995 and 1996,  the Company was unable to make certain
scheduled  payments  to note  holders and  certain  vendors and was  required to
negotiate extended payment terms, issue convertible promissory notes in exchange
for short-term  notes and issue common stock in exchange for trade payables.  If
the Company continues to incur operating  losses,  the Company's working capital
shortfalls will become even more  pronounced,  making it increasingly  difficult
for the Company to meet scheduled  debt  repayments.  The Company's  losses from
operations  in each of its four most  recent  years have  resulted  in it having
negative  net  tangible  assets at December  31,  1996 and  December  31,  1995.
Additionally,   the  Company  is   substantially   dependent  on  its  factoring
arrangements pursuant to which it has assigned a certain portion of its accounts
receivable  to support  its  operations.  The  matters  described  above make it
imperative for the Company to maintain its present factoring arrangements and to
take actions which will result in the Company being  profitable  and  generating
positive  cash  flow.  The  Company's  independent  auditors  have  included  an
explanatory  paragraph  in their  report  dated March 12, 1997 on the  Company's
financial statements stating that the financial statements have been prepared on
the  assumption  that the  Company  will  continue  as a going  concern and that
financing  uncertainties  raise substantial doubt about the Company's ability to
continue as a going concern. See the Financial Statements and notes thereto.

         The Company developed a strategic plan during 1996 for achieving future
profitable  operations,  which  includes both its existing  operations and a new
program  of  managed  rehabilitation  services.  This plan with  respect  to the
existing operations consists of the following components:

o        The Company integrated operations of its contract service division with
         operations at its clinics,  producing  greater  flexibility  with staff
         assignment,  reduced management cost, enhanced marketing capability and
         other efficiencies with respect to costs.

o        The  Company's  Consolidated   Rehabilitation   Services  division  has
         continued to experience  growth since its formation in September  1994.
         With the  integration of the outpatient  clinics with the Company's CRS
         division,  the Company intends to increase sales of its services in the
         areas that it  currently  serves.  This will  provide  the  Company the
         opportunity to seek contracts with the larger prospective customers for
         the Company's services in those marketplaces.

o        The Company  presently  holds  Certified Rehab Agency Status in several
         locations.   The  Company  intends  to  seek  Comprehensive  Outpatient
         Rehabilitation   Facility  (CORF)  status  in  those  states  where  it
         currently operates,  which will broaden the scope of services which the
         Company  may offer and enhance  reimbursement  rates for certain of the
         Company's existing services. In addition,  the Company is expanding the
         scope of its  activities to include the delivery of services  off-site,
         both  in-home  and at  ancillary  service  facilities  such as schools,
         nursing homes and assisted living residences.

         The Company  continues  to develop a program of managed  rehabilitation
services  ("MRS"),  pursuant  to which the Company  would  enter into  licensing
arrangements with  independently  owned,  community based providers of ancillary
health  care  and  rehabilitative  services  ("licensee"),  such  as  outpatient
clinics,  small contract  agencies,  and independent  home care agencies.  Under
these  arrangements,  the licensee would be the coordinator of ancillary  health
care and rehabilitative  services in outpatient  clinics,  hospitals,  sub-acute
care facilities,  schools, homes and or assisted living residences.  The Company
would  direct  service  contracts  to the  "licensee",  arrange  staffing  on an
as-requested basis, assume responsibility for administration,  payroll,  billing
and  collections and advise the "licensee" on contract  management.  The Company
expects that over time the MRS business will become a  substantial  focus of the
Company's operations.


                                       14
<PAGE>

Liquidity and Capital Resources

         The Company's  liquidity,  as measured by its cash decreased by $48,416
in  1996  as  compared  to  1995.  The  decrease  in cash  during  1996  was due
principally to losses caused by the Company's operations offset by proceeds from
issuance of debt, and to a lesser extent, from capital expenditures. The Company
was successful in renegotiating its term debt resulting in longer maturities and
lower monthly payments, in addition to converting a convertible  promissory note
to common stock during 1996.

         Net accounts  receivable were $1,817,036 at December 31, 1996, compared
to $2,016,846 at December 31, 1995. The net decrease of $199,810 was principally
due to an increase  in the  allowance  for  doubtful  accounts of  approximately
$160,000 and to a lesser extent,  a reduction of receivables from the closing of
two clinics in early 1996 offset by an increase in receivables from the contract
staffing business.

           Accounts  payable  decreased  by $21,530 in 1996 as compared to 1995.
The decrease is  attributable to the conversion of certain  accounts  payable in
the amount of $65,750 to the Company's common stock as well as the conversion to
term  debt,  payable  over  three  years,  of  certain  accounts  payable in the
approximate amount of $113,000.

         Cash used for investing  activities  in 1996  consisted of purchases of
equipment of $23,679 and in 1995 consisted of $138,075 to purchase equipment and
leasehold improvements.

         Financing  activities  in 1996  provided net cash of $84,000.  Proceeds
from the issuance of debt were $340,000, issuance of stock provided $10,000, and
payments of $266,000  were made in  long-term  debt.  Due to the  shortfalls  in
working capital as discussed above, the Company discontinued scheduled principal
and interest payments on several of its note payable obligations during 1995 and
1996.  During 1996,  the Company cured these  defaults in principal and interest
payments by renegotiating and extending the payment terms of these  obligations,
by issuing new convertible  promissory notes and by remitting  past-due payments
of principal and interest.  See "Debt Restructuring" below. Financing activities
in 1995  provided  net cash of $36,129.  Proceeds  from debt  totaled  $335,000,
issuance of common stock provided  $125,000,  and payments of $423,871 were made
on long-term debt.

         At  December  31,  1996,  the  Company  had  outstanding  approximately
$2,157,600 in notes payable and  long-term  debt. Of such amount,  approximately
$1,451,000 is related to business  acquisitions  completed prior to 1995. During
1996, several notes were renegotiated. The new notes have longer maturities with
lower monthly  payments,  but have higher  interest rates ranging between 7% and
10%. See "Debt  Restructuring"  below. Total long-term debt increased during the
twelve months ended  December 31, 1996 by $105,190  primarily as a result of the
conversion in July 1996 of a convertible  promissory note  previously  issued in
connection with a business acquisition, offset by debt payments, issuance of new
debt, and the conversion of certain accounts payable amounts to term debt. Under
the conversion of the promissory note, the outstanding  balance of approximately
$182,305 of the convertible promissory note and certain accounts payable due the
note holder of $6,399,  were converted to common stock at a conversion  price of
$.45 per share into 419,342 shares of common stock.

         In December  1996, the Company  determined  that a demand note payable,
which it had assumed in connection with a previous business acquisition in 1991,
the outstanding  balance of which was $89,231 would not have to be repaid.  This
loan was originally  payable to a bank that is now defunct,  the assets of which
were taken over by the Federal Deposit Insurance Corporation ("FDIC").  The FDIC
sold the loan to a third  party  which  subsequently  determined  the loan to be
uncollectible.  The third party returned the then deemed  uncollectible  loan to
the FDIC in April  1995.  The  Company  has not made any  principal  or interest
payments on the loan since 1991 and has not been contacted by the FDIC regarding
repayment of the loan since that time. Management has no plans to repay the loan
and  believes  that  it  is  unlikely  that  the  FDIC  will  demand  repayment.
Accordingly,  the Company  wrote-off  the  remaining  balance  under the loan of
$89,231,   which  has  been  reflected  as  other  income  in  the  accompanying
consolidated statement of operations for the year ended December 31, 1996.

         In June 1995,  Consolidated  Rehabilitation  Services,  Inc. ("CRS"), a
subsidiary  of the Company,  entered into a factoring  agreement  with a banking
institution  under  which  CRS  may  assign  its  receivables,  up to a  maximum
aggregate  balance of  $500,000.  Interest  is payable by the  Company at a rate
equal to the greater of 9% per annum,  2% over the designated  prime rate, or 5%
over 30-day LIBOR.  This factoring  agreement  expired in December 1996, but has
been deemed extended on a year-to-year  basis unless terminated by the factor on
30 days' prior notice. As of December 31, 1996 the Company had received proceeds
of approximately $507,000 under this agreement.

         In January 1996, PTS Rehab, Inc., a subsidiary of the Company,  entered
into a factoring  agreement with a lender providing for the proceed of up to 60%
of certain  of the  Company's  accounts  receivable,  up to a maximum  aggregate
balance  of  $750,000.  In January of 1997,  the  agreement  with the factor was
modified to allow up to a maximum aggregate  balance of $1,500,000.  Interest is
payable by the Company at a rate equal to the greater of 9% per annum or 2% over
the designated  prime rate. In addition,  the Company is obligated to make other
payments to the lender.  This factoring  agreement  expires in December 1997. At
December 31, 1996, $687,000 had been advanced under this agreement.


                                       15
<PAGE>

         In April of 1996,  the Company  entered into a $500,000  line of credit
with  Renaissance  Capital  Group,  Inc.  Pursuant to the  promissory  note, the
Company is obligated to pay interest on the unpaid  monthly  balance of the line
of credit at the rate of 10% per annum,  computed  in  arrears,  with the entire
principal  balance plus any unpaid interest due in full on April 17, 1999. As of
December  31,  1996,  $340,000  had been  advanced  to the  Company  under  this
arrangement.

         The Company  leases  clinic  facilities  under  several  non-cancelable
operating  leases  expiring at various times between 1996 and 2000. Rent expense
for these operating leases was $542,600 in 1996 as compared to $543,600 in 1995.
During 1997, the Company anticipates that minimum payments under  non-cancelable
operating leases will be approximately $505,500.

         Stockholders'  equity  increased by $116,260  during the twelve  months
ended December 31, 1996 primarily as a result of the issuance of common stock to
the  Company's  401(k)  profit  sharing plan of $53,935,  conversion  of certain
accounts  payable or debt to common stock totaling  $445,567,  renegotiation  of
certain  convertible  promissory  notes in the  amount of  $80,000  through  the
issuance  of common  stock and  exercise  of options by a member of the Board of
Directors  in  the  amount  of  $10,000,  offset  by a  net  loss  of  $473,242.
Stockholders  equity  decreased  by  $267,961  during  the twelve  months  ended
December  31,  1995  primarily  as  a  result  of  the  Company's  net  loss  of
approximately $609,000 offset by an increase in common stock and additional paid
in capital of approximately $341,000.

         The Company  completed  the sale of three of its  Pennsylvania  clinics
("the  Disposition")  for a purchase  price of $1,050,000  million in cash and a
note,  and  assumption  by the Buyer of  approximately  $230,000  of  associated
liabilities,   subject  to   adjustments.   The  clinics  sold   accounted   for
approximately  22% of the Company's  total  revenues for the year ended December
31, 1996.  The Company  intends to use the proceeds from the  disposition to pay
down debt and for other  general  corporate  purposes.  (See  "Business--Current
Developments").

         See also "Future Trends,  Demands,  Commitments and  Uncertainties" for
additional information relating to liquidity and future management plans.

Debt Restructuring

         In December  1994 and January  1995,  the  Company  issued  $500,000 of
short-term notes to a limited number of investors, payable in September 1995. In
connection with this financing, the Company issued two-year warrants to purchase
300,000 shares of common stock for $0.75 per share.  During August and September
1995,  certain  holders of these  short-term  notes  exchanged  $375,000  of the
outstanding  obligations for 10% convertible  promissory  notes in the principal
amount of $180,000,  payable on September  15, 1998.  In  conjunction  with this
transaction,  $195,000  of these notes were  converted  into  780,000  shares of
common stock.  Additionally,  the Company repaid $125,000 to a limited number of
investors  to satisfy the balance of the  short-term  notes which it obtained by
selling 500,000 shares of common stock.

         In  January  1995,  a holder of a 9%  convertible  promissory  note due
December  1997  (the  "1997  Note"),   issued  in  connection  with  a  business
acquisition,  exchanged  approximately $26,000 of the outstanding obligation for
30,000  shares of the  Company's  common  stock.  Additionally,  the same holder
forgave  approximately  $31,000 of the  outstanding  balance of another  note in
exchange for a new 9% convertible  promissory  note due December 1999 (the "1999
Note") in the  principal  amount of $235,000,  such amount  being the  remaining
outstanding  balance of the old note. The 1999 Note was convertible  into shares
of common  stock at a price per share  equal to the  greater of $0.75 or 100% of
the  average  bid and ask  price of the  common  stock  at the end of the  month
preceding the date of conversion.  In July of 1996, the Company renegotiated the
1997 Note and the 1999 Note,  which then had  aggregate  principal  and  accrued
interest of $399,904,  together with certain other liabilities (in the principal
amount of  approximately  $14,300)  due the holder of such notes.  In  September
1996, the holder agreed to convert the 1997 Note, together with a portion of the
other  liabilities,  in the total amount of $188,704 into shares of common stock
at a  conversion  price of $0.45 per share  (419,342  shares).  The holder  also
agreed  to  exchange  the  1999  Note,  together  with a  portion  of the  other
liabilities,  for a  convertible  promissory  note in the  principal  amount  of
$225,479.  The new note will bear  interest at 9% per annum,  have fixed monthly
payments  of  $2,500,  be due  with all then  unpaid  principal  in May 2001 and
continue to be convertible  into shares of common stock on the same terms as the
1999 Note.

         In  January  1996,  the  Company  issued to a vendor a  three-year  12%
promissory note in the amount of $65,750 in satisfaction of an obligation to the
vendor in the same  amount  and  agreed to issue  shares  of  common  stock,  in
satisfaction  of an  additional  $65,750 in trade  liabilities  due such vendor.
Subsequently,  the Company  issued to the vendor 210,400 shares of common stock,
constituting $65,750 in value of common stock at $0.3125 per share.

         In February  1996, the Company  renegotiated  a convertible  promissory
note and a promissory note in the aggregate  principal amount of $706,230,  both
of which were issued in connection with a business acquisition. As renegotiated,
the interest  rate of the notes was  increased to 9.5% and the term of the notes
was extended to 2002. In consideration of the renegotiation,  the Company issued
to the note holder 177,778 shares of common stock, constituting $50,000 in value
of common  stock at  $0.28125  per share.  The  Company  also issued to the note
holder three-year options to purchase 83,333 shares of the Company's


                                       16
<PAGE>


common stock at an exercise price of $0.30 per share.

         In April 1996, the Company  renegotiated a 7.5% convertible  promissory
note due May 1996 in the principal amount of $413,000,  which note was issued in
connection with a business acquisition.  As renegotiated,  the note would be due
April 2001 and would bear  interest  at 10% per  annum.  Interest  only would be
payable  during  the first two years of the note's  term,  and the note would be
self-liquidating  over  the  remaining  three  years.  In  consideration  of the
renegotiation  of the note, the Company issued to the note holder 120,000 shares
of common  stock,  constituting  $30,000  in value of common  stock at $0.25 per
share.  In January 1997, the Company agreed to satisfy the note by assignment to
the note holder of $484,000 in face amount of accounts  receivable,  but only to
the extent of collections in the amount due under the note.

         In  April  1996,  the  Company  issued  to a vendor  a  three-year  10%
promissory note in the amount of $32,128 in satisfaction of an obligation to the
vendor in the same amount.

         In  November  1996,  the  Company  issued  to a vendor a 16  month,  0%
promissory note in the amount of $80,000 in satisfaction of an obligation to the
vendor in the same amount.

Other Issuances of Shares

         The Company  issued an  additional  739,000  shares in 1996,  including
300,000 shares to its outside directors in consideration of past services on the
Board,  204,000  shares to  Renaissance  and certain other persons in connection
with the  Renaissance  line of credit to the Company,  20,000 shares to a former
executive as a stock bonus,  180,000  shares to the Company's  401(k) plan,  and
35,715 shares to a member of the Board of Director  resulting  from the exercise
of options.

Results of Operations

         Twelve Months Ended December 31, 1996
         Compared to Twelve Months Ended December 31, 1995

         Net revenues  increased 2.1% or $181,633 during the twelve months ended
December  31,  1996 as  compared  to the same  period in 1995.  Out-patient  net
revenues  increased  despite fewer clinics in operations  during 1996 as well as
the  continued  impact  of  managed  care.  Growth  resulted  from the  on-going
integration of the contract  services  division in the Company owned out-patient
clinics,  and, to a lesser  extent,  from  improved and more  efficient  billing
procedures in the clinical operations.

         Outpatient  physical  therapy  revenues  increased  by $135,641 or 1.6%
during the year ended  December 31, 1996 as compared to the same period in 1995.
Despite the closure of two  non-performing  clinics during 1996 and the on-going
impact of managed care, the increase in the outpatient  clinics is primarily the
result of the continued integration of the Company's contract services division.
Management  believes that utilization  constraints and fee reductions imposed by
managed care and the insurance  industry will be continuing  factors  accounting
for the limited  growth in the  outpatient  clinics.  Revenues in the  Company's
Consolidated  Rehabilitation  Services  division ("CRS") increased $45,992 or 1%
which to a certain extent,  is the result of new business being  integrated into
the outpatient clinics.

         Operating  costs  represented  79.7% of net revenues  during the twelve
months ended December 31, 1996 as compared to 84.1% for the same period of 1995.
The $228,532  decrease in operating  costs for the twelve months ended  December
31, 1996 was  principally  due to the continued  improvement of staff mix in the
out-patient  clinics and the resulting  reduction in subcontract labor expenses.
Additionally,  the Company  continued to achieve lower recruiting,  travel,  and
fringe benefit costs resulting from this change in staff mix.

         Administrative and selling costs constituted $1,771,723 or 20.1% of net
revenue  during the  twelve  months  ended  December  31,  1996 as  compared  to
$1,641,099  or  19.04%  for the same  period  of  1995.  The  increase  reflects
administrative  and selling expenses that were higher by $130,624 for the twelve
months ended December 31, 1996 compared to the prior year period.  A significant
portion of the increase relates to non-operational  expenses that included legal
and accounting costs associated with the filing of a registration  statement for
the sale of  shares  by  certain  stockholders,  stock  awards  associated  with
financing activities and Board of Directors  compensation,  and costs associated
with a proposed  underwriting.  To a lesser extent,  higher  administrative cost
resulted  from  compensation  expenses  paid to the  Company's  chief  executive
officer with no comparable  compensation expense during the first nine months of
1995.  In late  October  1996,  the  Company  closed  its New  York  office  and
eliminated  certain  administrative  positions  which is expected to result in a
reduction of approximately $500,000 in expenses annually.

         Depreciation  and  amortization  increased by $12,339 during the twelve
months  ended  December  31, 1996 as  compared  to the same period in 1995.  The
increase is attributable to higher depreciation  expense offset by fewer clinics
in operation  during 1996. In each of 1995 and also in 1996,  the Company closed
two non-performing clinics. When adverse events or


                                       17
<PAGE>

changes in circumstances indicate that previously anticipated cash flows warrant
reassessment,  the Company reviews the  recoverability  of goodwill by comparing
estimated  un-discounted  future  cash flows  from  clinical  activities  to the
carrying   value  of  goodwill.   Based  upon  the  Company's   1996  review  of
recoverability, it was determined that no impairment existed.

         Interest  expense  increased  by $115,541  for the twelve  months ended
December  31, 1996  respectively,  as  compared to the same period in 1995.  The
increase is  primarily  the result of the  Company's  continued  need to use its
factoring arrangements to support its operations, and to a lesser extent, higher
interest rates incurred on renegotiated term debt.

         The Company's tax provision is substantially the result of accruals for
state tax for current and prior fiscal years.

         As a result of the above  factors,  the Company  incurred net losses of
$473,242 for the twelve months ended December 31, 1996 as compared to net losses
of $608,855 for the same period during 1995.

Future Trends, Demands, Commitments and Uncertainties

         The Company's principal business is providing  rehabilitative services.
Demographic trends and new medical  technologies are expected to cause continued
growth for this  section  of the health  care  marketplace.  Continued  national
trends to contain  health care costs are expected to place  limitations  on high
technology testing and curtailed  utilization of medical specialists,  resulting
in increase  utilization of  rehabilitative  services.  Each of these trends are
expected to be favorable to the Company by  increasing  the need for  outpatient
rehabilitative  services.  The Company  intends to  participate in the growth of
rehabilitation  services through internal  expansion of its business and further
development of ancillary health care and contract rehabilitation services.

Item 7.  Financial Statements

                  The  Financial  Statements  of the  Company  are listed in the
                  "Index to Financial  Statements and Schedule" filed as part of
                  this Form 10K-SB.

Item 8.  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure

On October 29, 1996 the Company was notified by the firm of Price Waterhouse LLP
that it was resigning from the client auditor relationship.  On February 4, 1997
the Company  appointed the firm of Federman,  Lally & Remis LLC as the Company's
new  independent  public  accountants.  In  connection  with the  audits  of the
Company's financial  statements for each of its two most recent fiscal years and
through October 29, 1996, there have been no disagreements with Price Waterhouse
LLP on any matter of accounting  principles or  practices,  financial  statement
disclosure or auditing scope or procedure,  which  disagreements if not resolved
to the  satisfaction  of Price  Waterhouse  LLP would have  caused  them to make
reference thereto in their report on the financial statements for such years.



                                       18
<PAGE>


                                                       PART III

Item 9.  Directors,  Executive  Officers  Compliance  with  section 16(a) of the
         Exchange Act

         NAME                              AGE            POSITION
         ---------                         ---           ---------
         James Kenney                      55      Chairman of the Board(1)(3)
         Robert M. Whitty                  41      President and Director
         Joel Friedman                     56      Director(1)
         Sidney Dworkin                    76      Director(2)
         Paul W. Frankel, M.D., Ph.D.      47      Director(1)(3)
         Goodhue W. Smith, III             46      Director(1)(2)
         Raymond L. LeBlanc                40      Treasurer, Secretary  and
                                                   Chief Financial Officer

-----------------------

(1)      Member of the Executive Committee

(2)      Member of the Audit Committee

(3)      Member of Compensation Committee

         James Kenney  became a director in March 1993 and Chairman of the Board
of Directors  on November 1, 1996.  Mr.  Kenney is  currently an Executive  Vice
President of San Jacinto Securities in Dallas, TX. From February 1992 until June
1993, he had been a partner of Renaissance  Capital Group,  Inc., a Dallas money
management  firm.  From 1989 to  February  1992,  Mr.  Kenney  was  Senior  Vice
President of Capital  Institutional  Services  Inc., a brokerage firm located in
Dallas,  Texas that provides  third-party  financial and business research.  Mr.
Kenney  is also a  director  of  Amerishop  Corp.,  Industrial  Holdings,  Inc.,
Scientific Measurement Systems, Inc., Technol Medical Products, and Tricom, Inc.

         Joel Friedman became a director of the Company in December 1991. He was
Chairman and Chief  Executive  Officer from July 1994 to June 1996. Mr. Friedman
has been involved for the past twenty-five years in the financing and management
of several public and private companies and real estate ventures, most recently,
and for at least the past five years  through  Friedman  Enterprises,  Inc.  and
Founders  Capital  Corporation.  Mr.  Friedman  is also a member or the Board of
Directors of 3D Geophysical, Inc.

         Robert M. Whitty was elected  President  in November  1995 and became a
director of the Company in January 1997. Mr. Whitty has been a Vice President of
the Company since 1994. Prior thereto,  Mr. Whitty provided  consulting services
for various health care companies,  which services included financial  planning,
strategic planning,  acquisitions and business development.  Mr. Whitty has over
18 years of experience in the health care field.

         Paul W.  Frankel,  M.D.,  PH.D.  has  been a  member  of the  Board  of
Directors  since July 1994. Dr. Frankel is currently,  and has been since August
1993,  the  President  of Life  Extension  Institute,  Inc.,  a New York company
specializing in preventive health services.  From April 1992 to August 1993, Dr.
Frankel was a Partner and the  National  Medical  Director of Coopers & Lybrand.
For the  period  May 1988 to  February  1992,  Dr.  Frankel  served  in  various
positions for Metropolitan  Life Insurance  Company,  ultimately  serving as its
Vice President and National Medical Director.

         Goodhue W. Smith, III has been a member of the Board of Directors since
July 1994. In 1978, Mr. Smith founded  Duncan-Smith  Co., an investment  banking
firm in San Antonio,  Texas and has since such time served as its  Secretary and
Treasurer.  Mr.  Smith is also a Director  of  Citizens  National  Bank of Milam
County, and Ray Ellison Mortgage Acceptance Co.

         Sidney Dworkin was elected to the Board of Directors in March 1996. Mr.
Dworkin was a founder, former President, Chief Executive Officer and Chairman of
Revco,  Inc.  Between  1987 and the  present,  Mr.  Dworkin  has also  served as
Chairman of the Board of Stonegate  Trading,  Inc.,  an importer and exporter of
various  health and beauty aids,  groceries and  sundries.  Between 1988 and the
present,  Mr. Dworkin has served as Chief Executive  Officer of Advanced Modular
Systems,  which is engaged in the sale of modular  buildings.  Between June 1993
and  the   present,   Mr.   Dworkin  also  has  served  as  Chairman  of  Global
International,  Inc.,  which is  involved  in the sale and  leasing  of  modular
buildings to hospitals  and Chairman of the Board of Comtrex  Systems,  which is
engaged in the provision of data processing services. Mr. Dworkin also serves on
the Board of Directors of CCA industries, Inc., Interactive Technologies,  Inc.,
and  Northern  Technologies   International   Corporation,   all  of  which  are
publicly-traded companies.


                                       19
<PAGE>


         Raymond L. LeBlanc has been Controller of the Company since March 1996,
Treasurer  and Chief  Financial  Officer since June 1996,  and  Secretary  since
November 1, 1996.  Previously,  since 1987,  Mr.  LeBlanc was  Treasurer of Luzo
Foodservice Corporation, a food manufacturer, retailer and distributor.

         Renaissance  Capital  Partners  II Ltd.  ("Renaissance")  is  currently
entitled to designate  two directors  for  nomination to the Company's  Board of
Directors,  including a director  that it is entitled to designate as the holder
of a majority of the Company's  Series A Preferred  Stock (See  "Description  of
Securities -- Preferred Stock -- Series A Preferred Stock"). Messrs.
Kenney and Smith are designees of Renaissance.

         In 1996,  the Board of  Directors  held five  regularly  scheduled  and
special meetings.  All directors attended at least seventy-five percent (75%) of
the total number of meetings of the Board of  Directors  and the  committees  on
which they served. The Audit Committee met once during the Company's last fiscal
year. This committee  recommends to the Board of Directors a firm of independent
accountants  to audit the books  and  accounts  of the  Company.  The  committee
reviews the reports  prepared by the  independent  accountants and recommends to
the Board any actions  deemed  appropriate in connection  with the reports.  The
Executive  Committee of the Board of Directors of the Company was formed in 1995
to take such  action and carry out such  duties and  responsibilities  as may be
undertaken,  in the  discretion  of such  committee,  by the Board of Directors.
During 1996,  this  committee  met once.  The Board of Directors has no standing
nomination committee, or other committee performing similar functions.  However,
the Board of  Directors,  meeting as a whole,  constitutes  a committee  for the
issuance of options and other awards under the Company's  Stock  Incentive  Plan
and Stock Option Plan.

                      Compliance With Section 16(a) of the
                         Securities Exchange Act of 1934

To the Company's knowledge, based solely on review of the copies of such reports
furnished to the Company,  during the fiscal year ended December 31, 1996,  none
of the officers,  directors  and  ten-percent  beneficial  owners of the Company
failed to file timely any such reports  under  Section  16(a) of the  Securities
Exchange Act of 1934.



                                       20
<PAGE>


Item 10.  Executive Compensation

         The  following  summary  compensation  table sets forth,  for the three
fiscal years ended  December 31, 1996, the cash  compensation  of each Executive
Officer of the Company  whose total salary and bonuses  exceeded  $100,000  (the
"Named Executive Officers").

<TABLE>
<CAPTION>
                                            Summary Compensation Table
                                                                                   Long Term Compensation
                                 Annual Compensation                            Awards                    Payout
==========================================================================================================================
                                                                     Restricted                                  All Other
Name and                                             Other Annual         Stock       Options/         LTIP        Compen-
Principal Position   Year          Salary     Bonus  Compensation        Awards         SARs          Payout       sations
--------------------------------------------------------------------------------------------------------------------------
<S>                  <C>          <C>             <C>           <C>           <C>      <C>                <C>           <C>
Joel Friedman,       1996         $53,366         0             0             0        787,667 (4)         0             0
Chairman of the      1995          75,000         0             0             0      1,250,000             0             0
Board and Chief      1994               0         0             0             0              0             0             0
Executive
Officer(1)
--------------------------------------------------------------------------------------------------------------------------
Alan Mantell,        1996         120,000         0             0             0        787,667 (4)         0             0
Chief Executive
Officer(2)
--------------------------------------------------------------------------------------------------------------------------
Robert M.            1996         140,000         0             0             0        781,666             0             0
Whitty,              1995         106,000         0             0             0              0             0             0
President (3)
==========================================================================================================================
</TABLE>

(1)      Joel Friedman was Chief Executive Officer of the Company from July 1994
         to June 1, 1996.

(2)      Mr. Mantell was Chief  Executive  Officer of the Company from June 1996
         through November 1996.

(3)      Mr. Whitty was elected President of the Company in November 1995.

(4)      Options to acquire  500,000 shares awarded to each of Messrs.  Friedman
         and Mantell  expired  unexercised  upon  termination  of  employment in
         November 1996.

         The aggregate amount of any miscellaneous compensation not set forth in
the table or the description of benefit plans,  including any personal  benefits
valued  at  their  incremental  cost  to the  Company,  received  in 1996 by any
executive  officers  included  in the  above  table did not  exceed  10% of such
person's 1996 cash compensation.

1989 Stock Incentive Plan

         Under its 1989 Stock  Incentive  Plan (the "Plan"),  the Company grants
awards of common stock to those persons  determined by the Board of Directors to
be key  employees  who are  responsible  for the  management  and  growth of the
company. The size of the award is generally determined on the basis of the level
of responsibility of the employee.  Types of awards include  non-statutory stock
options,  incentive  options  (qualifying  under  Section 422 A of the  Internal
Revenue Code of 1986),  restricted  stock awards and stock  appreciation  rights
(SARs).  Options and stock  appreciation  rights generally expire ten years from
the grant date and unless  otherwise  provided,  are exercisable on a cumulative
basis  with  respect  to  20%  of the  optioned  shares  on  each  of  the  five
anniversaries  after the grant date.  Restrictions  on  restricted  stock awards
generally lapse with respect to 20% of the shares subject to the award after the
expiration of each year following the grant date and the portions of such awards
for  which   restrictions  have  not  lapsed  are  subject  to  forfeiture  upon
termination  of  employment.  The  Company  may grant  options  to  purchase  an
aggregate of 500,000 shares of common stock under the Plan, 380,000 of which are
currently  available for grant.  No stock options or other awards under the Plan
were granted  during  1996,  nor were any options  exercised by the  individuals
named in the Summary Compensation Table during 1996.

1994 Stock Option Plan

         The  Company  adopted  the 1994 Stock  Option  Plan (the  "1994  Plan")
effective  November  3,  1994.  The  terms and  conditions  of the 1994 Plan are
substantially  identical  to the 1989 Plan,  except  that the 1994 Plan does not
provide for  granting of SAR's.  In  September  1996,  the Company  accepted the
surrender  of  options to acquire  833,333  shares  under the 1994 Plan that the
holder had earlier agreed to return. At that time, the Company issued options to
acquire 2,250,000  shares,  as set forth in the table below.  Options to acquire
1,000,000 shares granted in September 1996 expired unexercised in November 1996.
As of December 31, 1996,  options to acquire  1,449,999 were available for grant
under the 1994 Plan.


                                       21
<PAGE>


         The following table sets forth information concerning grants of options
by the Company in 1996:

<TABLE>
<CAPTION>
                                       Option/SAR Grants In Last Fiscal Year
===================================================================================================================
                                                    Percentage of Total
                             Number of Securities    Options Granted to
                              Underlying Options    Employees in Fiscal      Exercise or Base
Name                               Granted                  Year             Price per Share       Expiration Date
------------------------------------------------------------------------------------------------------------------
<S>                                  <C>                     <C>                  <C>                 <C>  <C>
 J. Friedman                         37,667                                       $.28                2/01/01
                                    750,000(1)               34%                   .38                9/01/06
------------------------------------------------------------------------------------------------------------------
 A. Mantell                          37,667                                        .28                2/01/01
                                    750,000(1)               34%                   .38                9/01/06
------------------------------------------------------------------------------------------------------------------
 R. M. Whitty                        31,666                                        .28                2/01/01
                                    750,000(1)               32%                   .38                9/01/06
===================================================================================================================
</TABLE>


(1)      Granted under the 1994 Plan. Of the 750,000  options  granted,  250,000
         vested immediately and the remaining 500,000 were to vest as determined
         by the Board of Directors. The unvested options of Messrs. Friedman and
         Mantell expired  unexercised upon their  termination of employment with
         the Company in November 1996.

         The following table sets forth  information  concerning any exercise of
stock options  during the Company's  fiscal year ended  December 31, 1996 by the
Named  Executive  Officers,  the number and value of options  owned by the named
individuals and the value of any  in-the-money  unexercised  stock options as of
December 31, 1996:

<TABLE>
<CAPTION>
                                  Aggregate Option Exercises In Last Fiscal Year

                                                                                             Value of Unexercised
                                                       Number of Unexercised Options        In-the-money Options at
                                                             held at 12/31/96                December 31, 1996(1)
=======================================================================================================================
                        Shares
                     Acquired on
                       Exercise      Value Realized    Exercisable     Unexercisable     Exercisable     Unexercisable
-----------------------------------------------------------------------------------------------------------------------
<S>                     <C>              <C>             <C>                 <C>             <C>               <C>
J. Friedman             35,714           $3,571          251,912             0               $191              0

A. Mantell                0                0             287,666             0              3,766              0

R. M. Whitty              0                0             281,666          500,000           3,166              0

=======================================================================================================================
</TABLE>

(1)      Based on the average bid and ask price on the NASDAQ  Small-Cap  Market
         of the Company's common stock on that date ($0.38).




                                       22
<PAGE>


Compensation of Directors

         Non-employee  directors are entitled to receive $500 per meeting of the
Board of Directors  attended,  which fees were waived  during 1996. In September
1996,  the Board of Directors  made stock  awards to its outside  directors at a
rate of 25,000  shares for each year of service  since  1993.  Pursuant  to such
awards,  Messrs.  Kenney,  Frankel,  Smith, and Dworkin received 100,000 shares,
100,000 shares, 75,000 shares and 25,000 shares respectively.

         In September 1996, Mr. Friedman  surrendered  options  covering 833,000
shares of common stock which were granted in December  1994 pursuant to the 1994
Plan. The exercise of the options  surrendered by Mr. Friedman was contingent on
the common stock reaching prices  significantly  higher than the market price at
the time of the surrender.  New options  covering 750,000 shares of common stock
were granted to Mr.  Friedman in September  1996,  with exercise prices equal to
$0.38 per  share  (the fair  market  value per share on the date of the  grant),
pursuant  to the 1994 Plan.  Of the  750,000  options  granted,  250,000  vested
immediately and the remaining 500,000 were to vest as determined by the Board of
Directors.  The unvested  options of Mr. Friedman  expired  unexercised upon his
termination  of employment  with the Company in November  1996.  The old options
held by Mr.  Friedman  were  designed to further  compensate  and provide for an
incentive  for  such  employee.  The  Compensation  Committee  believed  that by
awarding Mr.  Friedman new options with exercise  prices at $0.38 per share (the
fair  market  value per share on the date of the  grant),  would  result in fair
compensation  for his efforts.  The  Compensation  Committee  also believed that
exchanging  "out-of-the-money"  options is a cost-effective  method of retaining
key members and  preserving the important  motivating  effect that stock options
have.

         Under the Company's stock option plans, directors who are not employees
of the  Company  (other  than  directors  who are  members  of the Stock  Option
Committee  of the  particular  plan) are  eligible  to be granted  non-qualified
options  under such plan.  The Board of Directors or the Stock Option  Committee
(the  "Committee") of each plan, as the case may be, has discretion to determine
the number of shares subject to each non-qualified option (subject to the number
of shares  available for grant under the  particular  plan),  the exercise price
thereof  (provided  such price is not less than the par value of the  underlying
shares of common  stock),  the term  thereof (but not in excess of 10 years from
the date of grant, subject to earlier termination in certain circumstances), and
the manner in which the option becomes exercisable (amounts, intervals and other
conditions).  Directors who are employees of the Company (but not members of the
Committee of the  particular  plan) are eligible to be granted  incentive  stock
options  under such plans.  The Board or Committee of each plan, as the case may
be,  also has  discretion  to  determine  the  number of shares  subject to each
incentive  stock  option  ("ISO"),  the  exercise  price  and  other  terms  and
conditions  thereof,  but their discretion as to the exercise price, the term of
each ISO and the  number of ISO's  that may vest in any year is  limited  by the
Internal Revenue Code of 1986, as amended.





                                       23
<PAGE>


Item 11.  Security Ownership of Certain Beneficial Owners and Management

         The following  table sets forth  information at December 31, 1996 based
on  information  obtained  from the persons  named  below,  with  respect to the
beneficial  ownership  of shares of Common Stock by (I) each person known by the
Company  to be the  owner of more  than 5% of the  outstanding  shares of Common
Stock,  (ii) each director,  (iii) each named  executive  officer,  and (iv) all
executive officers and directors as a group. Unless otherwise noted, the Company
believes  that all persons  named in the table have sole  voting and  investment
power with respect to all shares of Common Stock beneficially owned by them.


<TABLE>
<CAPTION>
============================================================================================================
                                                           Amount and Nature of
Name and Address of Beneficial Owner                       Beneficial Ownership            Percent of Class
------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                                    <C>
Renaissance Capital Partners II, Ltd.                           9,257,217(1)                           46.8%
8080 N. Central Expwy.
Suite 210-LAN 59
Dallas, TX  75206
------------------------------------------------------------------------------------------------------------
Joel Friedman                                                     564,434(2)                            3.5%
------------------------------------------------------------------------------------------------------------
Sidney Dworkin                                                    466,951(3)                            2.9%
------------------------------------------------------------------------------------------------------------
James Kenney                                                      180,000(4)                            1.1%
------------------------------------------------------------------------------------------------------------
Dr. Paul Frankel                                                  180,000(5)                            1.1%
------------------------------------------------------------------------------------------------------------
Goodhue W. Smith, III                                             122,000(6)                    Less than 1%
------------------------------------------------------------------------------------------------------------
Robert M. Whitty                                                  281,666(7)                            1.8%
------------------------------------------------------------------------------------------------------------
Alan Mantell                                                      296,667(8)                            1.9%
------------------------------------------------------------------------------------------------------------
All executive officers and directors as a group                 2,091,708(9)                           12.3%
(7 persons)
============================================================================================================
</TABLE>


(1)      Includes the right to acquire 4,098,217 shares issuable upon conversion
         of outstanding Series A Preferred Stock and Series B Preferred Stock.

(2)      Includes 251,912 shares subject to currently  exercisable stock options
         and the right to acquire  27,475  shares  upon  conversion  of Series A
         Preferred  Stock.  Also includes 98,903 shares of Common Stock owned by
         Mr. Friedman's children or which Mr. Friedman's children have the right
         to acquire upon  conversion of shares of Series A Preferred Stock as to
         which Mr. Friedman disclaims beneficial ownership.

(3)      Includes  160,000  shares  issuable  upon a conversion of a convertible
         promissory note, 50,000 shares issuable upon exercise of warrants. Also
         includes 40,000 shares owned by a partnership of which Mr. Dworkin is a
         partner,  80,000 shares  issuable upon  conversion of a promissory note
         held by such  partnership  and 25,000 shares  issuable upon exercise of
         warrants held by such partnership.

(4)      Includes 80,000 shares subject to currently exercisable stock options.

(5)      Includes 30,000 shares subject to currently exercisable stock options.

(6)      Includes 30,000 shares subject to currently  exercisable stock options.
         Does not include 15,000 shares owned by Duncan-Smith  Co., of which Mr.
         Smith is an officer.

(7)      Consists of currently exercisable stock options.

(8)      Includes currently exercisable stock options to acquire 287,667 shares.

(9)      Includes 961,245 shares subject to currently exercisable  non-qualified
         stock options,  the right to acquire  54,950 shares upon  conversion of
         outstanding  Series A Preferred  Stock,  75,000  shares  issuable  upon
         exercise of warrants,  and 240,000 shares  issuable upon the conversion
         of convertible notes.



                                       24
<PAGE>


Item 12.  Certain Relationships and Related Transactions

              Effective  June  30,  1994,   certain  holders  of  the  Company's
convertible  debt,  converted  certain  promissory  notes from the Company  into
common stock of the Company and into a newly issued,  Series A Preferred  Stock.
Directors and affiliates of the Company who  participated in the conversion were
as follows:

              Renaissance Capital Partners II, Ltd. ("Renaissance"): Convertible
              debt  and  accrued  interest  of  $3,695,984  was  converted  into
              5,000,000  shares of common stock and 1,195,984 shares of Series A
              Preferred  Stock. The Series A Preferred Stock may be converted at
              any time, at the option of the holder  thereof,  into common stock
              at a conversion  price of $.57 per share of common stock,  subject
              to  adjustment,  on the  basis of the par  value  of the  Series A
              Preferred Stock of $1.00 per share. See "Description of Securities
              -- Preferred Stock -- Series A Preferred Stock."

              Joel Friedman (the Company's  former  Chairman and Chief Executive
              Officer):  Convertible  debt and  accrued  interest of $51,375 was
              converted  into 71,429 shares of common stock and 15,661 shares of
              Series A Preferred Stock.  Mr.  Friedman's  children  collectively
              converted  an  identical  amount of debt and  accrued  interest on
              identical terms.

              Christopher Harkins (the Company's former President):  Convertible
              debt and accrued  interest of $25,688  was  converted  into 51,375
              shares of common stock of the Company.

              Diedre Benson (see below):  Convertible  debt and accrued interest
              of $555,722 was converted into 1,111,444 shares of common stock of
              the Company.

              On September  8, 1994,  effective  November 11, 1994,  the Company
entered into a  Termination  Agreement  with Arnold E. Benson (the  "Termination
Agreement"), the former Chairman of the Board and Chief Executive Officer of the
Company.  In  November  1994,  Mr.  Benson and his wife  Diedre  Benson  sold an
aggregate  of  2,500,000  shares of common  stock owned by Diedre  Benson for an
aggregate  of  $1,075,000.  Mr.  Benson  received a payment  from the Company of
$175,000 as severance in  consideration  of the  termination  of his  Employment
Agreement.

              The Company  granted to Health Care Partners,  Inc., a designee of
Mr. Benson,  on the Effective Date of the  Termination  Agreement,  an option to
purchase up to an aggregate of 400,000 shares of common stock for $.50 per share
for a period of three years.  The Company also agreed to provide Mr. Benson with
other benefits,  including the payment of health, life and disability  insurance
costs  through  November  1996  and  certain  expenses  in  connection  with the
negotiation of the  Termination  Agreement.  Mr. Benson and Mrs.  Benson entered
into a  non-competition  agreement  with the  Company  with  respect  to certain
activities  effective for a period of two years from the  effective  date of the
agreement.  Mr.  Benson  resigned  from the Board of Directors of the Company on
November 11, 1994.

              On  September  8, 1994,  Renaissance  loaned the Company  $100,000
pursuant  to a  convertible  promissory  note,  convertible  at  the  option  of
Renaissance  into  common  stock at a  conversion  price of $0.33 per share.  On
October 24, 1994,  the Company  exchanged the  convertible  promissory  note for
100,000 shares of Series B Preferred Stock.  Additionally,  Renaissance invested
$400,000 to acquire  400,000  shares of Series B Preferred  Stock.  The Series B
Preferred  Stock may be  converted  at any  time,  at the  option of the  holder
thereof,  into common stock at a conversion price of $0.25 per share, subject to
adjustment,  on the basis of the par value of the  Series B  Preferred  Stock of
$1.00 per share.  See  "Description of Securities -- Preferred Stock -- Series B
Preferred  Stock." James Kenney,  now the Chairman of the Board of Directors and
then a  Director  of the  Company  was,  until  June 1993 a general  partner  of
Renaissance.  Renaissance  has the right to designate two members for nomination
to the Board of Directors of the Company.  Mr. Kenney and Goodhue W. Smith,  III
are currently the designees of Renaissance to the Board.

              Under the terms of the Series A  Preferred  Stock and the Series B
Preferred  Stock,  the  Company  has agreed  that it will not issue in excess of
1,500,000 additional shares of common stock in any single transaction or related
series of transactions without the consent of the majority holders of the Series
A  Preferred  Stock  and  the  Series  B  Preferred  Stock.  Renaissance  owns a
substantial  majority of the Series A Preferred  Stock and is the sole holder of
the outstanding shares of Series B Preferred Stock of the Company.

              In January 1995, Sidney Dworkin, a director of the Company, loaned
the Company  $100,000  pursuant to a  convertible  promissory  note and received
warrants  to  purchase  50,000  shares of common  stock for $0.75 per share.  In
August 1995,  Mr.  Dworkin  exchanged the note for 80,000 shares of common stock
and a  convertible  promissory  note in the  principal  amount  of  $80,000.  In
addition,  a partnership  in which Mr.  Dworkin is a partner  loaned the Company
$50,000 under the same terms and received a warrant to purchase 25,000 shares of
common stock for $0.75 per share.  In August,  1995,  the note was exchanged for
40,000 shares of common stock and a convertible promissory note in the amount of
$40,000.


                                       25
<PAGE>

              In November  1995,  Joel  Friedman,  then the  Chairman  and Chief
Executive of the Company,  and Robert M. Whitty,  the  President of the Company,
jointly and severally  guaranteed those accounts  receivable of the Company that
were pledged to Capital  Factors,  Inc., a lender to the Company.  The amount of
the line of credit secured by the Company's accounts receivable is $500,000.  In
January 1996, additional guarantees were provided by Messrs. Friedman and Whitty
in connection  with an additional  line of credit  secured by receivables in the
amount of $750,000. Subsequent to Mr. Friedman's resignation on November 1, 1996
as the  Company's  Chairman  and as an officer of the  Company,  Mr.  Friedman's
guarantees were released.

              At the end of December 1995, Joel Friedman and Alan Mantell,  then
Chief Operating Officer of the Company,  each loaned the Company $30,000 to fund
certain  obligations  of the Company.  The loans were repaid at the beginning of
January 1996.

              In April 1996, the Company  executed a promissory note in favor of
Renaissance  in  connection  with a  $500,000  line of credit.  Pursuant  to the
promissory  note, the Company is obligated to pay interest on the unpaid monthly
balance of the line of credit at the rate of 10% per annum, computed in arrears,
with the entire principal  balance plus any unpaid interest due in full on April
17, 1999.  As of December 31,  1996,  $340,000 had been  advanced to the Company
under these  arrangements.  Of this amount,  $265,000 was loaned by Renaissance,
and the  balance  by the  following  persons  participating  in the  loan:  Alan
Mantell,  $15,000; Joel Friedman,  $15,000; Goodhue Smith, a member of the Board
of Directors,  $20,000;  and  Duncan-Smith  Co., an entity  affiliated  with Mr.
Smith,   $25,000.  In  September  and  December  1996,  the  Company  issued  to
Renaissance and the other  participants in the Renaissance credit line shares of
common  stock in  consideration  of  their  loans to the  Company,  as  follows:
Renaissance,  159,000 shares;  Mr. Mantell,  9,000 shares;  Mr. Friedman,  9,000
shares; Mr. Smith, 12,000 shares; and Duncan-Smith Co., 15,000 shares.



                                       26
<PAGE>


                                     PART IV

Item 13.  Exhibits, Lists and Reports on Form 8-K

(a)(1)    The Registrant's financial statement together with a separate table of
          content are annex t hereto.

(b)       Exhibits: See Index to Exhibits


                                Index to Exhibits

Exhibit No.

3.1       Articles of Incorporation (incorporated herein by reference to Exhibit
          3.1 to the  Company's  Annual report on Form 10-KSB for the year ended
          December 31, 1995 (the "1995 Form 10-K").

3.2       By-Laws of the Company  (incorporated  herein by  reference to Exhibit
          3.2 to 1995 Form 10-KSB).

3.3       Certificate  of  Designation  (incorporated  herein  by  reference  to
          Exhibit 3.3 to the Company's Annual Report on Form 10-KSB for the year
          ended December 31, 1989).

10.1      Employment  Agreement  between the Company  and  Christopher  Harkins,
          dated June 3, 1993  (incorporated  herein by reference to Exhibit 10.1
          to 1995 Form 10-KSB).

10.2      Termination  Agreement  between the Company and Arnold  Benson,  dated
          September 8, 1994 (Incorporated herein by reference to Exhibit 10.2 to
          1995 Form 10-KSB).

10.3      1989 Stock  Option Plan  (incorporated  herein by reference to Exhibit
          10.3 to 1995 Form 10-KSB).

10.4      1994 Stock  Option Plan  (incorporated  herein by reference to Exhibit
          10.4 to 1995 Form 10-KSB).

10.5      Health Care Factoring Agreement between the Company and Capital Health
          Care  Financing,  dated  January  15,  1996  (incorporated  herein  by
          reference to Exhibit 10.5 to 1995 Form 10- KSB).

21.1      Subsidiaries  of the Registrant  (incorporated  herein by reference to
          Exhibit 21.1 to 1995 Form 10-KSB).

27        Financial Data Schedule.

-------------------


(b)       Reports on Form 8-K

          (I)       Current  Report  on Form  8-K  filed  on  November  6,  1996
                    reporting on Changes in Registrant's Certifying Accountant.


                                       27
<PAGE>


                       Financial Statements and Schedules

                                Table of Contents



Consolidated Health Care Associates, Inc.
                                                                            Page
                                                                            ----

    Independent Auditors' Report - Price Waterhouse LLP                      F-2

    Independent Auditors' Report - Federman, Lally  & Remis LLC              F-3

    Consolidated statements and notes as of December 31, 1996,
    and 1995 and for the years then ended:

        Consolidated Balance Sheets                                          F-4

        Consolidated Statements of Operations                                F-5

        Consolidated Statements of Stockholders' Equity                      F-6

        Consolidated Statements of Cash Flows                                F-7

        Notes to Consolidated Financial Statements                   F-7 to F-18






                                      F-1
<PAGE>


                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Consolidated Health Care Associates, Inc.

In our opinion, the accompanying  consolidated financial statements appearing on
pages F-4 through F -16 present fairly, in all material respects,  the financial
position of Consolidated  Health Care  Associates,  Inc. and its subsidiaries at
December 31, 1995,  and the result of their  operations and their cash flows for
the year, in conformity with generally  accepted  accounting  principles.  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  audit.  We  conducted  our audit of these  statements  in  accordance  with
generally accepted auditing standards which 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,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audit  provides a reasonable  basis for the opinion  expressed
above.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  described  in Note 15 to the
financial statements,  the Company's ability to meet all its obligations as they
become due is dependent on the continued  availability of financing arrangements
for factoring receivables and on the availability of other sources of financing.
These  financing  uncertainties  raise  substantial  doubt  about the  Company's
ability to continue as a going  concern.  Management's  plans in this regard are
described in Note 15. The financial  statements  do not include any  adjustments
that might result from the outcome of this uncertainty.



Price Waterhouse LLP

Providence, RI
April 5, 1996




                                      F-2
<PAGE>


                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
Consolidated Health Care Associates, Inc.

We have audited the  accompanying  consolidated  balance  sheet of  Consolidated
Health Care  Associates,  Inc. and subsidiaries as of December 31, 1996, and the
related consolidated  statements of operations,  stockholders'  equity, and cash
flows for the year then ended. These consolidated  financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance  about  whether  the  consolidated  financial  statements  are free of
material  misstatement.  An audit includes examining,  on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 audit provides a reasonable  basis
for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Consolidated Health
Care Associates,  Inc. and subsidiaries as of December 31, 1996, and the results
of their  operations  and their cash flows for the year then ended in conformity
with generally accepted accounting principles.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern.  As described in Note 15, the
Company  has  suffered  recurring  losses,  including  a net loss in  excess  of
$473,000 for the year ended December 31, 1996, and has an accumulated deficit in
excess of $7,972,000  as of December 31, 1996,  which raises  substantial  doubt
about its ability to continue as a going concern.  Management's  plans regarding
these  matters  are also  described  in Note 15. The  accompanying  consolidated
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.




Federman, Lally  & Remis LLC

Farmington, Connecticut
March 12, 1997



                                      F-3
<PAGE>

<TABLE>
<CAPTION>
=========================================================================================================================
                                      CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
=========================================================================================================================
                              Consolidated Balance Sheets as of December 31, 1996 and 1995
=========================================================================================================================
<S>                                                                                         <C>                <C>
ASSETS:                                                                                           1996               1995
-------                                                                                           ----               ----
  Current assets:
      Cash                                                                                  $   37,141         $   85,557
      Accounts receivable (net of allowance of $977,000 in 1996 and $815,000 in
         1995)                                                                               1,817,036          2,016,846
      Other accounts receivable                                                                535,225            116,260
      Other current assets                                                                     176,403            102,056
                                                                                            ----------          ---------

      Total current assets                                                                   2,565,805          2,320,719
                                                                                            ----------          ---------

  Property and equipment, at cost:
      Equipment and leasehold improvements                                                   1,316,166          1,292,487
      Less accumulated depreciation and amortization                                          (862,305)          (694,903)
                                                                                            ----------          ---------
         Property and equipment, net                                                           453,861            597,584
                                                                                            ----------          ---------

  Other assets:
     Goodwill (net of accumulated amortization of $384,342 in 1996 and $309,290
         in 1995)                                                                            2,428,463          2,503,515
     Other                                                                                     132,437            144,979
                                                                                            ----------          ---------

     Total other assets                                                                      2,560,900          2,648,494
                                                                                            ----------          ---------

  TOTAL                                                                                     $5,580,566         $5,566,797
                                                                                           ===========         ==========

LIABILITIES AND STOCKHOLDERS' EQUITY:
  Current liabilities:
     Notes payable and current portion of long-term debt                                     $ 353,023          $ 521,248
     Accounts payable                                                                          778,358            799,888
     Accrued personnel costs                                                                   377,085            326,468
     Accrued expenses and other liabilities                                                    173,038            214,583
                                                                                            ----------          ---------

     Total current liabilities                                                               1,681,504          1,862,187

  Long-term debt                                                                             1,804,550          1,699,360
  Other liabilities                                                                                 -              26,998
                                                                                            ----------          ---------

  Total liabilities                                                                          3,486,054          3,588,545
                                                                                            ----------          ---------

  Commitments and contingencies (Notes 6 and 10))

  Stockholders' equity:
     Preferred stock, 10,000,000 shares authorized; issued and outstanding 1,727,305
     in 1996 and 1995                                                                        1,727,305          1,727,305
     Common stock, $.012 par value, 50,000,000 shares authorized; issued
     16,369,583 in 1996, and 14,702,306 in 1995                                                196,435            176,428
     Additional paid-in capital                                                              8,230,611          7,661,116
     Accumulated deficit                                                                    (7,972,339)        (7,499,097)
                                                                                            ----------          ---------
                                                                                             2,182,012          2,065,752
     Less-treasury stock, 700,000 shares of common stock, at cost                              (87,500)           (87,500)
                                                                                            ----------          ---------
   Total stockholders' equity                                                                2,094,512          1,978,252
                                                                                            ----------          ---------

  TOTAL                                                                                     $5,580,566         $5,566,797
                                                                                            ==========         ==========
-------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
=========================================================================================================================
</TABLE>

                                      F-4
<PAGE>


<TABLE>
<CAPTION>
===============================================================================================================
                                   CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
===============================================================================================================
                                     Consolidated Statements of Operations
                                For the Years Ended December 31, 1996 and 1995
===============================================================================================================
                                                                                  1996                  1995
                                                                              ---------------------------------
<S>                                                                           <C>                    <C>
Revenue, net                                                                  $ 8,799,431            $8,617,798
                                                                              -----------           -----------
Costs and expenses:
   Operating costs                                                              7,015,664             7,244,196
   Administrative and selling costs                                             1,771,723             1,641,099
   Depreciation and amortization                                                  242,454               230,115
                                                                              -----------           -----------

Total costs and expenses                                                        9,029,841             9,115,410
                                                                              -----------           -----------

Operating loss                                                                   (230,410)             (497,612)

Interest expense                                                                 (298,564)             (183,023)

Other income, net                                                                  86,562               81,780
                                                                              -----------           -----------

Loss before income tax provision                                                 (442,412)             (598,855)

Income tax provision                                                               30,830                10,000
                                                                              -----------           -----------

Net loss                                                                      $  (473,242)          $  (608,855)
                                                                              ===========           ===========

Net loss per share                                                                  $(.04)                $(.05)
                                                                              ===========           ===========

---------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
===============================================================================================================
</TABLE>




                                      F-5
<PAGE>

<TABLE>
<CAPTION>
==================================================================================================================================
                                            CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
==================================================================================================================================
                                         Consolidated Statements of Stockholders' Equity
                                          For the Years Ended December 31, 1996 and 1995
==================================================================================================================================
                                                                                                 Additional
                                             Preferred          Common           Treasury          Paid-In         Accumulated
                                               Stock             Stock            Stock            Capital           Deficit
==================================================================================================================================
<S>              <C>                        <C>                 <C>             <C>              <C>               <C>
Balance, January 1, 1995                    $1,727,305          $159,268        $(87,500)        $7,337,382        $(6,890,242)

Common stock issued                                               17,160                            323,734

Net loss for the year                                                                                                 (608,855)
                                            ----------          --------        --------         ----------        -----------

Balance, December 31, 1995                  $1,727,305          $176,428        $(87,500)        $7,661,116        $(7,499,097)

Common stock issued                                               20,007                            569,495

Net loss for the year                                                                                                 (473,242)
                                            ----------          --------        --------         ----------        -----------

Balance, December 31, 1996                  $1,727,305          $196,435        $(87,500)        $8,230,611        $(7,972,339)
                                            ==========          ========        ========         ==========        ============

----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
==================================================================================================================================
</TABLE>


                                      F-6
<PAGE>

<TABLE>
<CAPTION>
===========================================================================================================
                                 CONSOLIDATED HEALTH CARE ASSOCIATES, INC.
===========================================================================================================
                                   Consolidated Statements of Cash Flows
                              For the Years Ended December 31, 1996 and 1995
===========================================================================================================
                                                                                1996               1995
-----------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                 <C>
Cash Flows From Operating Activities:

  Net loss                                                                    $(473,242)         $(608,855)

  Adjustments to reconcile net loss to net cash from operating activities:
     Depreciation                                                               167,402            156,000
     Amortization of goodwill                                                    75,052             74,115
     Loss on disposal of fixed assets                                                 -              2,500
     Gain on debt restructuring                                                 (89,231)           (31,372)
     Non-cash interest expense                                                   21,434             18,277
     Non-cash expense for 401K contribution                                      53,935             79,500
     Non-cash compensation expenses                                             118,750                  -
    (Increase) decrease in accounts receivable                                 (179,155)           139,319
    (Increase) decrease in other current assets                                 (13,191)          (151,643)
    (Increase) decrease in other assets                                          41,002             93,017
     Increase (decrease) in accounts payable, accrued personnel  costs,
     accrued expenses, and other liabilities                                    168,507            203,504
                                                                            -----------          ---------

  Net cash used for operating activities                                       (108,737)           (25,638)
                                                                            -----------          ---------
Cash Flows From Investing Activities:

  Purchases of equipment                                                        (23,679)          (138,075)
                                                                            -----------          ---------

Cash Flows From Financing Activities:

  Proceeds from issuance of debt                                                340,000            335,000
  Proceeds from issuance of common stock                                         10,000            125,000
  Principal payments on debt                                                   (266,000)          (423,871)
                                                                            -----------          ---------

  Net cash provided by financing activities                                      84,000             36,129
                                                                            -----------          ---------

  Net decrease in cash                                                          (48,416)          (127,584)

  Cash, beginning of year                                                        85,557            213,141
                                                                            -----------          ---------

  Cash, end of year                                                         $    37,141          $  85,557
                                                                            ===========          =========

-----------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
===========================================================================================================
</TABLE>




                                      F-7
<PAGE>

Consolidated Health Care Associates, Inc.
Notes to Consolidated Financial Statements
December 31, 1996 and 1995

1.       Summary of Significant Accounting Policies

Consolidated Health Care Associates, Inc. (the Company or CHCA) is a provider of
therapeutic rehabilitation services including physical,  occupational and speech
therapy.  Services are provided on a local and regional  basis through a network
of outpatient clinics, as well as through managed rehabilitation  contracts. The
Company  owns  and  operates  ten  clinics,   five  in  Massachusetts,   one  in
Pennsylvania,  three in Delaware and one in Florida.  The Company also  provides
managed ancillary health care rehabilitation services through contract staffing,
principally in Massachusetts, Pennsylvania, Florida, Delaware and New York.

The following is a summary of significant  accounting  policies  followed by the
Company in the preparation of the consolidated financial statements.

Principles of Consolidation

The accompanying  consolidated  financial statements include the accounts of the
Company and its wholly-owned  subsidiaries,  Consolidated Imaging Systems, Inc.,
Associated Billing Corporation,  PTS Rehab, Inc. and Consolidated Rehabilitation
Services, Inc. All significant intercompany  transactions and balances have been
eliminated.

Revenues and Accounts Receivable

Revenues are recorded when services are provided at the estimated net realizable
amounts  from   patients,   third  party  payors  and   contracted   agreements.
Substantially all of the Company's accounts  receivable are due from third-party
insurance companies or government agencies.

Property and Equipment

Property and equipment is recorded at cost. Depreciation is determined utilizing
the straight-line method over the estimated useful lives of equipment, furniture
and fixtures, and leasehold improvements as follows:

                    Equipment                          5 - 7 years
                    Furniture and fixtures             5 - 7 years
                    Leasehold improvements                10 years

When  property or equipment  is retired or  otherwise  disposed of, the cost and
related accumulated depreciation is removed from the accounts with any resulting
gain or loss  reflected in net income.  Maintenance  and repairs are expensed as
incurred.

Goodwill

The  excess  of the  purchase  price  over the fair  value of the net  assets of
acquired  physical  therapy  clinics has been  recorded as goodwill and is being
amortized over 27-40 years using the straight-line  method.  Management believes
this  amortization   period  is  reasonable  for  its  clinics  with  profitable
operations.  When  adverse  events or changes  in  circumstances  indicate  that
previously anticipated cash flows warrant reassessment,  the Company reviews the
recoverability of goodwill by comparing estimated undiscounted future cash flows
from clinical  activities to the carrying value of goodwill.  If such cash flows
are less than the carrying value of the goodwill, an impairment loss is measured
as the amount by which  goodwill  exceeds the present  value of  estimated  cash
flows using a discount rate commensurate with the risks involved.

Income Taxes

Income taxes are provided  utilizing the asset and liability method.  Under this
method,  deferred tax assets and  liabilities  are  recognized for the estimated
future tax  consequences  attributable  to  differences  between  the  financial
statement  carrying  amounts  of  existing  assets  and  liabilities  and  their
respective  tax bases.  Deferred tax assets and  liabilities  are measured using
enacted tax rates in effect for the year in which those differences are expected
to be recovered or settled.


                                      F-8
<PAGE>


Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  reported  amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial  statements and revenues and
expenses  during the period  reported.  Actual  results  could differ from those
estimates.  Estimates  are used  when  accounting  for  allowance  for  doubtful
accounts, depreciation and amortization, employee benefit plans, taxes, deferred
taxes and contingencies.

Fair Value of Financial Instruments

The carrying amounts of cash,  accounts  receivable,  accounts payable,  accrued
personnel costs,  other accrued  expenses,  and other liabilities are reasonable
estimates  of  their  fair  value  because  of  the  short   maturity  of  those
instruments.  It is not  practical for the Company to estimate the fair value of
long-term debt without the Company incurring excessive costs.

New Accounting Pronouncements

The Financial  Accounting Standards Board (the FASB) issued Financial Accounting
Standard  No.121,  "Accounting  for the  Impairment of  Long-Lived  Assets to be
Disposed of" (FAS 121) in March 1995.  FAS 121 requires that  long-lived  assets
and certain  indefinite  intangible  assets be reviewed for impairment  whenever
changes in  circumstances  indicate that the carrying amount of an asset may not
be  recoverable.  The entity must  estimate  the future  cash flows  expected to
result from the use of the asset and its eventual disposition,  and to recognize
an impairment loss for any  differences  between the fair value of the asset and
the  carrying  amount of the asset.  The Company  adopted  FAS 121 in 1996.  The
effect on the  Company's  financial  position  or  results  of  operations  from
adoption of FAS 121 is not material.

The  FASB  issued  Financial   Accounting  Standard  No.  123,  "Accounting  for
Stock-Based  Compensation"  (FAS  123)  in  October  1995  effective  for  years
beginning after December 15, 1995. FAS 123 was implemented by the Company during
1996.  FAS 123,  establishes a fair  value-based  method of accounting for stock
options and other  equity  instruments.  It requires  the use of that method for
transactions  with other than employees and encourages its use for  transactions
with  employees.  Under  provisions  of FAS 123,  the Company is not required to
change its method of accounting for stock based  compensation and management has
retained its current method of accounting.

The FASB issued Financial Accounting Standard No. 125, "Accounting for Transfers
and Servicing of Financial Assets and  Extinguishment  of Liabilities" (FAS 125)
in June of 1996. The effective date of FAS 125 was December 31, 1996, and was to
be applied prospectively to transfers and servicing of assets and extinguishment
of liabilities  occurring after that date. The FASB issued Financial  Accounting
Standard No. 127,  "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125" (FAS 127) in December of 1996. FAS 127 delays the application
of FAS 125 until  December  31,  1997.  The  effect on the  Company's  financial
position or results of  operations  from the adoption of FAS 125 is not expected
to be material.

Reclassifications

Certain 1995 amounts have been reclassified to agree with the 1996 presentation.

2.            Accounts Receivable Financing

Substantially all of the Company's accounts  receivable are due from third-party
insurance  companies or  government  agencies.  Beginning  in 1995,  the Company
factors  with  recourse  all  of  the  accounts   receivable   of   Consolidated
Rehabilitation Services, Inc. and certain accounts receivable of PTS Rehab, Inc.
Subsequent to year end, the Company  renegotiated  its factoring  arrangement to
increase the credit line from $1,250,000 to $2,000,000, as set forth in Note 16.

The Company accounts for these factoring arrangements as sales. During the years
ended  December  31,  1996  and  1995  the  Company   received   $2,938,000  and
$1,377210,000   of  proceeds   from  the   factoring  of  accounts   receivable,
respectively. At December 31, 1996 and 1995, the Company was contingently liable
for  approximately  $1,407,000  and  $327,000  of such  accounts,  respectively.
Reserves are included in the allowance for doubtful accounts in the accompanying
balance  sheet to provide for the  estimated  uncollectible  portion of accounts
receivable  with  recourse.  Service fees charged by the factoring  agent during
1996 and 1995  totaled  $45,000 and $18,700  respectively,  and are  included as
interest expense on the accompanying  consolidated statements of operations.  At
December 31, 1996 and 1995, the Company had transferred  accounts  receivable in
excess of the  proceeds it received  from its factor of $535,225  and  $116,216,
respectively,  which are  reflected  as other  receivables  in the  accompanying
consolidated balance sheets.

In November 1995,  Joel Friedman,  then the Chairman and Chief  Executive of the
Company,  and Robert M.  Whitty,  the  President  of the  Company,  jointly  and
severally  guaranteed those accounts receivable of the Company that were pledged
to Capital  Factors,  Inc., a lender to the  Company.  The amount of the line of
credit secured by the Company's accounts receivable


                                      F-9
<PAGE>


is $500,000.  In January 1996,  additional  guarantees  were provided by Messrs.
Friedman and Whitty in connection  with an additional  line of credit secured by
receivables in the amount of $750,000.  Subsequent to Mr. Friedman's resignation
on November 1, 1996 as the Company's  Chairman and as an officer of the Company,
Mr. Friedman's guarantees were released.


3.       Goodwill

Goodwill  was recorded  during the period from 1991 through 1993 in  conjunction
with the Company's  acquisitions of physical  therapy clinics in  Massachusetts,
Pennsylvania, Delaware and Florida during that period. Since these acquisitions,
the Company has experienced  lower than  anticipated  patient volumes at certain
clinics which it attributes to utilization  constraints  imposed by managed care
and third party  payers and the impact of new  competitors  in these  geographic
markets.  Revenues at these  facilities  have also  declined  from  management's
original   expectations  at  the  time  of  the  acquisitions   because  of  the
unanticipated  increase in customers covered by managed care. Revenues have also
been  adversely  affected by  reductions  in workers  compensation  and personal
injury reimbursement rates.

These trends,  which are expected to continue in the  foreseeable  future,  have
adversely impacted the Company's profitability in its Pennsylvania, Delaware and
Florida  clinics.  As a  consequence,  during  the fourth  quarter of 1994,  the
Company revised its original projections developed at the time of acquisition to
more  accurately  reflect the effects of these trends.  The resulting  cash flow
projections   indicated   that  the  Company  would  not  recover  the  goodwill
attributable  to certain of its clinics.  Accordingly,  the Company  recorded an
impairment  charge of $3,209,439 during the fourth quarter of 1994. The majority
of the clinics to which this  impairment  charge  relates were acquired in 1993.
Although the patient  volumes and,  therefore,  revenues at these clinics during
the first  several  months of 1994 were  lower than  anticipated  when they were
acquired,   such  shortfalls  were  initially   attributed  to  adverse  weather
conditions and other nonrecurring factors and, therefore,  were considered to be
a temporary  phenomenon.  In the fourth quarter of 1994 it was  determined  that
there were also factors of a more permanent nature, related primarily to managed
health care and  competition,  to which a portion of these  shortfalls  at these
clinics could be attributed.  No such  impairment  charges were incurred  during
1996 or 1995.

Changes in goodwill during 1996 and 1995 are summarized as follows:


===========================================================================
                                               1996                1995
---------------------------------------------------------------------------
Balance, January 1,                         $2,503,515          $2,577,630
Goodwill amortization                          (75,052)            (74,115)
                                            ---------           ----------

Balance, December 31,                       $2,428,463          $2,503,515
                                            ==========          ==========

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


4.              Revenue, Net

Revenue is reported net of allowances as follows:

<TABLE>
<CAPTION>
==================================================================================================
                                                                   1996                  1995
==================================================================================================
<S>                                                             <C>                   <C>
Revenue                                                         $12,003,250           $11,659,001
Allowances for contractual and other adjustments                 (3,203,819)           (3,041,203)
                                                                -----------           -----------

Revenue, net                                                    $ 8,799,431           $ 8,617,798
                                                                ===========           ===========

=================================================================================================
</TABLE>



                                      F-10
<PAGE>



5.   Supplemental  Disclosure  of Cash  Flows  and  Noncash  Investing  and
     Financing Activities

During 1996,  the Company  issued  419,342  shares of common stock to reduce the
outstanding principal of long-term debt by $182,802.  Additionally,  the Company
issued 180,000 shares of common stock,  valued at $53,935, to the Company's 401K
plan,  210,400  shares  of  common  stock,  valued  at  $65,750  to a vendor  in
satisfaction  of an obligation in the same amount,  and 501,778 shares of common
stock,  valued at $154,812 to noteholders as consideration for certain financing
activities on behalf of the Company.  In addition,  $108,000 of accounts payable
were converted to term debt.

During 1995, the Company issued  1,310,000  shares of common stock to reduce the
outstanding principal of long-term debt by $345,688.  Additionally,  the Company
issued 120,000 shares of common stock,  valued at $79,500, to the Company's 401K
plan.


6.   Lease Commitments

The Company  leases clinic  facilities  under several  non-cancelable  operating
leases  expiring at various times between 1996 and 2000.  Rent expense for these
operating leases was $542,600 in 1996 and $543,600 in 1995.

Future minimum payments under  non-cancelable  facility operating leases for the
five years subsequent to December 31, 1996 are:



                                                      Operating
                                                        Leases
================================================================
1997                                                  $505,491
1998                                                   245,948
1999                                                    56,207
2000                                                    30,296
2001                                                    31,825
                                                      --------

Total minimum lease payments                          $869,767
                                                      -------

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




                                      F-11
<PAGE>




7.       Notes Payable and Long-Term Debt

Notes payable and long-term debt consists of:

<TABLE>
<CAPTION>
                                                                                           1996               1995
                                                                                           ----               ----
<S>                                                                                      <C>                <C>
Convertible promissory notes (convertible into 292,184 shares of CHCA                    $702,530           $900,858
common stock) with interest rate of 7-10% issued in connection with business
acquisitions, payable in monthly installments through 2002

Convertible promissory notes (convertible into 238,474 of CHCA common                     461,251            502,968
stock) with interest rate of 7-10% issued to employees in connection with
business acquisitions, payable in monthly installments through 2001

Promissory notes to Renaissance Capital Partners and other stockholders with              340,000                  -
interest at 10%, payable in full in April 1999

Promissory notes issued in connection with business acquisitions, with average            297,262            396,600
interest rate of 7-10%, payable monthly through 2001

Convertible promissory notes (convertible into 160,000 shares of CHCA                     120,000            120,000
common stock) bearing interest of 10%, issued to a Director; principal payable
in full September 1998

Non-interest bearing note payable with monthly payments through 1997                       84,750             25,000

Convertible promissory notes (convertible into 80,000 shares of CHCA                       60,000             60,000
common stock) bearing interest of 10% payable monthly; principal payable in
full September 1998

Promissory note with interest rate of 12%, payable in monthly installments                 49,781             65,750
through 1999

Promissory notes with average interest rates of  9-11% payable in monthly                  41,999                  -
installments through 1999

Demand notes with interest paid monthly at prime rate plus 4%                                   -             89,432

Non-interest bearing loan payable to officers; paid in January 1996                             -             60,000
                                                                                       ----------         ----------

Total long-term debt                                                                    2,157,573          2,220,608

Less:   current portion of debt                                                          (353,023)          (521,248)
                                                                                       ----------         ----------
Long-term debt                                                                         $1,804,550         $1,699,360
                                                                                       ==========         ==========
</TABLE>

Substantially all of the Company's assets are security for the above debt.

At December  31, 1996 and 1995,  the Company was in default for  non-payment  of
principal  and  interest  on  one  or  more  of its  note  payable  obligations.
Subsequently,  the Company cured these defaults by  renegotiating  and extending
the payment terms of these  obligations,  by issuing new convertible  promissory
notes and by remitting past-due payments of principal and interest.



                                      F-12
<PAGE>


In January 1996, pursuant to an arbitration agreement,  the Company entered into
a three-year 12% note payable agreement for $65,750 with a vendor. Additionally,
the Company  issued  $65,750 worth of the Company's  common stock to the vendor,
based upon the market price of the stock at the time of the agreement.

In February 1996, the Company  renegotiated a convertible  promissory note and a
promissory  note,  both of which  were  issued  in  connection  with a  business
acquisition.  Under the  renegotiated  agreements,  the interest  rate for these
notes was  increased to 9.5% and the term of the notes was extended to 2002.  In
consideration, the Company issued warrants to the note holder to purchase 83,333
shares of the  Company's  common  stock at $0.30 per share.  The warrants may be
exercised anytime for a period of 3 years.  Additionally,  the Company issued to
the note holder  $50,000 worth of the  Company's  common stock based upon market
prices in effect as of the date of the renegotiated agreements.

In April 1996, the Company renegotiated a convertible promissory note held by an
employee issued in connection with a business acquisition,  which was originally
due in  1996.  The new  renegotiated  note was  extended  for  five  years  with
interest-only payments at 10% to be made in 1996 and 1997. In consideration, the
Company  released the employee from  non-compete  agreements  and issued $30,000
worth of the Company's common stock based upon market prices in effect as of the
date of the agreement.

In April 1996, the Company executed a promissory note in favor of Renaissance in
connection with a $500,000 line of credit.  Pursuant to the promissory note, the
Company is obligated to pay interest on the unpaid  monthly  balance of the line
of credit at the rate of 10% per annum,  computed  in  arrears,  with the entire
principal  balance plus any unpaid interest due in full on April 17, 1999. As of
December  31,  1996,  $340,000  had been  advanced  to the  Company  under these
arrangements.  Of this  amount,  $265,000  was  loaned by  Renaissance,  and the
balance  by the  following  persons  participating  in the loan:  Alan  Mantell,
$15,000;  Joel  Friedman,  $15,000;  Goodhue  Smith,  a member  of the  Board of
Directors,  $20,000;  and Duncan-Smith Co., an entity affiliated with Mr. Smith,
$25,000.  In September and December 1996, the Company issued to Renaissance  and
the other  participants in the Renaissance credit line shares of common stock in
consideration of their loans to the Company,  as follows:  Renaissance,  159,000
shares; Mr. Mantell, 9,000 shares; Mr. Friedman, 9,000 shares; Mr. Smith, 12,000
shares; and Duncan-Smith Co., 15,000 shares.

In July 1996, the holder of a convertible  promissory  note issued in connection
with a business acquisition  converted the note and certain accounts payable due
the note holder to common stock. The note,  which had an outstanding  balance of
$182,305 and the accounts  payable in the amount of $6,399 were  converted  into
419,342 shares of common stock at a price of $.45 per share.

In December 1996, the Company  determined  that a demand note payable,  which it
had assumed in connection  with a previous  business  acquisition  in 1991,  the
outstanding  balance of which was $89,231 would not have to be repaid. This loan
was originally  payable to a bank that is now defunct,  the assets of which were
taken over by the Federal Deposit Insurance Corporation ("FDIC").  The FDIC sold
the  loan  to a  third  party  which  subsequently  determined  the  loan  to be
uncollectible.  The third party returned the then deemed  uncollectible  loan to
the FDIC in April  1995.  The  Company  has not made any  principal  or interest
payments on the loan since 1991 and has not been contacted by the FDIC regarding
repayment of the loan since that time. Management has no plans to repay the loan
and  believes  that  it  is  unlikely  that  the  FDIC  will  demand  repayment.
Accordingly,  the Company  wrote-off  the  remaining  balance  under the loan of
$89,231,   which  has  been  reflected  as  other  income  in  the  accompanying
consolidated statement of operations for the year ended December 31, 1996.

In December 1994 and January  1995,  the Company  issued  $500,000 of short-term
notes, payable in September 1995. In connection with this financing, the Company
issued  warrants to purchase  300,000  shares of the  Company's  common stock at
$0.75 per share. These warrants may be exercised at any time for a period of two
years.  During August and September  1995,  certain  holders of these short term
notes  exchanged  $375,000 of the  outstanding  obligations  for  three-year 10%
convertible promissory notes, payable on September 15, 1998. In conjunction with
this transaction,  $195,000 of these notes were converted into 780,000 shares of
the Company's  common stock.  Additionally,  the Company repaid $125,000 to note
holders and raised  equivalent  funds by issuing 500,000 shares of the Company's
common stock.

During 1995, a holder of a convertible  promissory  note,  issued in conjunction
with a business acquisition,  exchanged approximately $26,000 of the outstanding
obligation for 30,000 shares of the Company's common stock.



                                      F-13
<PAGE>


Aggregate annual long-term debt maturities for the next five years are:


          =============================================================
          Year Ending December 31,

          1997                                                 $353,023

          1998                                                 $410,719

          1999                                                 $569,982

          2000                                                 $241,002

          2001                                                 $283,075

          2002 and thereafter                                  $299,772
                                                             ----------

          Total                                              $2,157,573
                                                             ==========

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


8.       Stockholders' Equity

Preferred Stock and Common Stock

At December 31, 1996 and 1995, the Company had  outstanding  shares of preferred
and common stock as follows:

                                        Preferred    Preferred        Common
                                         Series A     Series B         Stock

Balance, January 1, 1995                1,227,305      500,000      13,272,306

Number of shares issued for
    Reduction of debt                           0            0       1,310,000
    Contribution to 401(k) plan                 0            0         120,000
                                        ---------     --------      ----------
Total of shares issued                          0            0       1,430,306
                                        ---------     --------      ----------

Balance, December 31, 1995              1,227,305      500,000      14,702,306
                                        ---------     --------      ----------

Number of shares issued for
    Reduction of debt                           0            0       1,187,277
    Contribution to 401(k) plan                 0            0         180,000
    Directors' compensation                     0            0         300,000
                                        ---------     --------      ----------
Total of shares issued                          0            0       1,667,277
                                        ---------     --------      ----------

Balance, December 31, 1996              1,227,305      500,000      16,369,583
                                        =========      =======      ==========

In connection  with the exchange of  convertible  debt as of June  30,1994,  the
Company issued 1,227,305 shares of Series A preferred  stock.  Additionally,  on
October 24, 1994 the Company issued 500,000 shares of Series B preferred  stock.
The  holders of the  preferred  stock have the right to convert  such stock into
Company  common stock at a conversion  price of $.75 per share (1.333  shares of
common  stock for each  share of Series  A) and $.33 per  share  (3.0  shares of
common  stock  for  each  share  of  Series  B)  for  Series  A  and  Series  B,
respectively.  The preferred stock requires cumulative  dividends at the rate of
6% per annum.  Cumulative  dividends in arrears totaled $259,096 and $155,458 at
December 31, 1996 and 1995, respectively.  No dividends were declared in 1996 or
1995;  therefore,  cumulative  dividends  in  arrears  are not  recorded  in the
accompanying  consolidated  balance  sheets.  In the event the Company raises in
excess of $1.5 million additional equity at a per share price in excess of $.75,
the holders of Series A and B  preferred  stock are  required  to convert  their
preferred stock into common stock.

Options

The Company has stock options  outstanding to participants  under the 1994 Stock
Option Plan (the 1994 Plan) approved by stockholders on June 20, 1995, effective
November  3, 1994.  The 1994 Plan  provides  the  Company  the  ability to grant
options to purchase an aggregate of 3,000,000  shares of common stock.  Types of
grants under the 1994 Plan include non-statutory stock


                                      F-14
<PAGE>

options,  incentive  (performance)  stock options and  restricted  stock awards.
Options  granted under the Plan will be exercisable as determined by the Options
Committee of the Board of Directors (the Committee). The Committee may prescribe
the options granted become exercisable in installments or provide that an option
may be exercisable in full immediately upon the date of the grant.

     At the end of 1994 the Company  granted  1,800,000  options to its officers
and directors to acquire the Company's stock at $.97 per share,  the fair market
value at the date of grant. At the time of the grant,  600,000 were  immediately
vested with  1,000,000 of the balance to be vested only upon the  achievement of
certain future  performance  goals and 200,000  options  ratably vested over the
next four  years.  During  1995,  666,667 of these  options  expired  due to the
non-achievement   of  certain   goals  and  the   termination   of  an  officer.
Additionally,  50,000  options  became  vested  in 1995 in  accordance  with the
vesting schedule.  The Company also has stock options outstanding under the 1989
Stock  Incentive Plan ( the Plan).  The Company grants awards of common stock to
those  persons  determined by the Board of Directors to be key employees who are
responsible for the management and growth of the Company.  The size of the award
is  generally  determined  on the  basis of the level of  responsibility  of the
employee. Types of awards include non-statutory stock options, incentive options
(qualifying  under  Section  422A of the  Internal  Revenue  Code of  1986)  and
restricted stock awards.  Options generally expire ten years from the grant date
and unless  otherwise  provided,  are  exercisable  on a  cumulative  basis with
respect to 20% of the optioned  shares on each of the five  anniversaries  after
the grant date.  Restrictions  on restricted  stock awards  generally lapse with
respect to 20% of the shares  subject to the award after the  expiration of each
year  following  the  grant  date and the  portions  of such  awards  for  which
restrictions  have not lapsed are  subject to  forfeiture  upon  termination  of
employment.  The Company may grant  options to purchase an  aggregate of 500,000
shares of common stock under the Plan, 380,000 of which are currently  available
for grant.  No stock options or other awards under the Plan were granted  during
1996.

The Company also has other option awards. Of these, due to the termination of an
officer,  204,584  options  issued to the officer  prior to 1994,  were canceled
during 1995.

Stock option transactions during 1996 and 1995 were as follows:


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
                                      1989 Stock       Weighted       1994 Stock         Weighted        Other         Weighted
                                      Option Plan      Average        Option Plan        Average         Option         Average
                                                       Exercise                          Exercise        Plans         Exercise
                                                       Price                             Price                            Price
-------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>               <C>          <C>                 <C>          <C>               <C>
Balance January 1, 1995                 120,000           $1.31        1,800,000           $0.97        668,084           $0.48
-------------------------------------------------------------------------------------------------------------------------------
     Granted                                  0                                0                              0
-------------------------------------------------------------------------------------------------------------------------------
     Expired                                  0                         (416,667)          $0.97              0
-------------------------------------------------------------------------------------------------------------------------------
     Canceled                          (100,000)          $1.31         (250,000)          $0.97       (104,584)          $0.45
-------------------------------------------------------------------------------------------------------------------------------
     Exercised                                0                                0                              0
-------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1995                20,000           $1.31        1,133,333           $0.97        563,500           $0.49
-------------------------------------------------------------------------------------------------------------------------------
     Granted                                  0                        2,357,000           $0.38        333,333           $0.36
-------------------------------------------------------------------------------------------------------------------------------
     Expired                                  0                       (1,000,000)          $0.38       (563,500)
-------------------------------------------------------------------------------------------------------------------------------
     Canceled                                 0                         (933,333)          $0.97       (250,000)          $0.45
-------------------------------------------------------------------------------------------------------------------------------
     Exercised                                0                          (35,714)          $0.28              0
-------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1996                20,000           $1.31        1,521,286           $0.45         83,333           $0.30
                                      =========                        =========                     ==========
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

In accordance  with the terms of APB No. 25, the Company records no compensation
expense for its stock option awards. However, the majority of all options can be
forfeited  based  upon the  discretion  of the Board of  Directors,  if in their
opinion  expectations  have not been met, which currently the Board of Directors
has not defined.  Therefore  there is no material pro forma effect that would be
disclosed. Additionally, the weighted average recurring contractual lives of the
options cannot be determined.


                                      F-15
<PAGE>

Warrants

Warrants  were  issued  in  conjunction  with  various  placements  of stock and
refinancing of debt. A summary of warrants outstanding is as follows:

                                                   1996           1995
                                                   ----           ----

Balance outstanding, January 1,                  881,000         581,000

         Issued                                        0         300,000

         Expired                                 431,000               0
                                                 -------         -------

Balance outstanding, December 31,                450,000         881,000
                                                 =======         =======

Exercise price range for warrants             $0.75 - $2.08    $0.75 - $2.08


9.       Net Loss Per Share

Net loss per share is computed by dividing  the net loss for the year,  adjusted
for undeclared cumulative preferred dividends, by the weighted average number of
common  shares  issued  during  each  year.  The  number of  shares  used in the
computation  for the years ended  December 31, 1996 and 1995 is  15,834,220  and
13,771,855 respectively.

10.      Litigation

There are actions  pending against the Company arising out of the normal conduct
of business.  In the opinion of  management  the amounts,  if any,  which may be
awarded as a result of these claims would not have a  significant  impact on the
Company's consolidated financial position and results of operations.

11.      Related Parties

During  1996,  the Company  retained  the  services of a  management  consultant
company which is affiliated with a current director of the Company.  The Company
incurred  approximately  $20,520  in  consulting  fees in  connection  with  the
services  rendered by this  company,  the entire  amount of which is included in
accounts payable in the accompanying  consolidated  balance sheet as of December
31, 1996.  During 1995, the Company retained legal services from the law firm of
a former director of the Company, for which it was paid $32,937.

As set forth in Note 7, during 1996 the Company was advanced  $340,000  under an
arrangement  with  Renaissance,  a major  stockholder  of the Company.  Interest
expense related to this loan was $10,600 for 1996.

The Company rents rehabilitation clinics from an employee.  Total rental expense
of $133,520 was paid by the Company in 1996 and 1995.

12.      Employee Costs and Benefit Plan

Effective  March 1,1992,  the Company adopted the 401(k) Savings Plan (the Plan)
of its subsidiary  company,  PTS Rehab,  Inc., for all eligible employees of the
Company and its  subsidiaries.  Under the  provisions  of the Plan,  the Company
matches 100% of the first 3% of employee  contributions.  All employees who have
reached 21 years of age and have completed one year of service with a minimum of
1,000  hours  worked  per year are  eligible  to  participate  in the Plan.  The
Company's  expense in 1996 and 1995 related to the plan was $50,100 and $79,500,
respectively. During 1996 and 1995 the Company issued 180,000 and 120,000 shares
of common stock to the Plan reflecting the Company's  matching  contribution for
employee's contributions during 1995 and 1994, respectively.



                                      F-16
<PAGE>


13.      Accrued Expenses and Other Liabilities

Components of accrued expenses and other liabilities are as follows:

                                             1996                  1995
                                             ----                  ----
Accrued expenses                           $129,038              $214,583
Accrued corporate taxes                      44,000                     -
                                           --------              --------
Total                                      $173,038              $215,583
                                           ========              ========


14.      Income Taxes and Deferred Income Taxes

The provision for income taxes on income from continuing  operations in 1996 and
1995 is  comprised of minimum  taxes due to various  states in which the Company
operates.  The tax effects of temporary  differences  that give rise to deferred
tax assets and liabilities are as follows:

                                            1996                  1995
                                            ----                  ----
Deferred tax assets:
  Net operating loss carry forwards      $1,108,000              $809,000
  Goodwill                                1,231,000             1,249,000
  Provision for doubtful accounts           391,000               326,000
  Other (investment tax credits)              4,000                 4,000
                                         ----------             ---------
                                          2,734,000             2,388,000
                                         ----------             ---------


Deferred tax liabilities:
    Fixed assets                            (80,000)              (81,000)
    Cash to accrual Section 481A
      Adjustment                            (60,000)              (89,000)
                                         ----------            ----------
                                           (140,000)             (170,000)
                                         ----------            ----------
                                          2,594,000             2,218,000
  Valuation allowance                    (2,594,000)           (2,218,000)
                                         ----------            ----------

  Net deferred tax asset                 $        -            $        -
                                         ==========            ==========

A valuation  allowance must be established  for deferred tax assets if, based on
the weight of available  evidence,  it is more likely than not that some portion
or all of  the  deferred  tax  asset  will  not be  realized.  The  Company  has
determined  that a valuation  allowance is required since it is not certain that
the results of future  operations  will generate  sufficient  taxable  income to
realize the deferred  tax asset.  During the year ended  December 31, 1996,  the
valuation  allowance  increased  by  $376,000  which  included a decrease in the
beginning-of-the-year  valuation  allowance  caused by a change in circumstances
that caused a change in judgment about the  realizability of deferred tax assets
of $517,000.  During the year ended December 31, 1995,  the valuation  allowance
increased by $100,000.

At December 31, 1996,  the Company has Federal net operating loss carry forwards
available to reduce future  taxable  income of  approximately  $2,770,000.  This
carry forward expires in varying amounts from  approximately  1999 through 2011.
It is  the  Company's  understanding  that a  substantial  change  in  ownership
occurred during 1994 as defined under Section 382 of the Internal  Revenue Code.
In general, a substantial change in ownership may significantly limit the future
utilization of tax loss carry forwards incurred prior to an ownership change. As
of December 31, 1996, approximately $451,000 of the Company's net operating loss
carry  forward  continues  to be limited  under  Section 382.  This  limitation,
itself,  will expire  during 1997.  Accordingly,  for tax year 1997,  all of the
Company's net operating loss carry forwards should be available to reduce future
income.

15.      Liquidity

The  Company  has  suffered  recurring  losses in each of the past  four  years,
including a net loss of $473,242 and  $608,855 for the years ended  December 31,
1996 and 1995,  respectively.  The Company  also has an  accumulated  deficit of
$7,972,339 as of December 31, 1996. As a result,  during both 1996 and 1995, the
Company was unable to make certain scheduled  principal and interest payments to
note  holders and was required to negotiate  extended  payment  terms in certain
cases and issue convertible


                                      F-17
<PAGE>

promissory  notes in exchange for short-term  notes in other cases. In addition,
the Company is dependent  upon its factoring  arrangements  pursuant to which it
assigned  a  substantial   portion  of  its  accounts  receivable  to  meet  its
obligations.  These matters raise  substantial doubt about the Company's ability
to continue as a going concern.

However,  as described in Note 16,  subsequent  to December 31, 1996 the Company
successfully  negotiated a new  agreement  with its accounts  receivable  factor
under which the maximum  borrowing were increased from $1,250,000 to $2,000,000.
The Company  also sold three of its four  Pennsylvania  clinics for  $900,000 in
cash, $150,000 in notes receivable, and the assumption of approximately $230,000
in associated liabilities. Management intends to use the proceeds of the sale of
these clinics to reduce its outstanding debt and for continued operating needs.

The  accompanying   consolidated   financial   statements  do  not  include  any
adjustments that might result from the outcome of this uncertainty.

16.      Subsequent Events

In  January  1997,  the  Company  executed  a new  agreement  with its  accounts
receivable  factor.  The new  agreement  increases  the maximum  borrowing  from
$1,250,000 to $2,000,000.

In February  1997, the Company sold three of its four  Pennsylvania  clinics for
$900,000 in cash and $150,000 in notes  receivable.  The purchaser  also assumed
approximately $230,000 in liabilities.  Approximately 22% of the Company's total
1996 revenues were attributable to these clinics.  The proceeds from the sale of
these clinics are intended to be used to reduce the Company's  outstanding  debt
and to fund current operations.



                                      F-18

<PAGE>



SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934, the registrant has duly caused this Form 10-KSB to be signed on its
behalf by the undersigned, thereunto duly authorized.

                               Consolidated Health Care Associates, Inc.


Date: March 31, 1997           /s/ Robert M. Whitty
                               ------------------------------------------
                               ROBERT M. WHITTY
                               President

Date: March 31, 1997           /s/ Raymond L. LeBlanc
                               ------------------------------------------
                               RAYMOND L. LEBLANC
                               Treasurer, Secretary, and Chief Financial Officer

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

Date: March 31, 1997           /s/ James W. Kenney
                               ------------------------------------------
                               JAMES W. KENNEY
                               Director

Date: March 31, 1997           /s/ Joel Friedman
                               ------------------------------------------
                               JOEL FRIEDMAN
                               Director

Date: March 31, 1997           /s/ Robert M. Whitty
                               ------------------------------------------
                               ROBERT M. WHITTY
                               Director

Date: March 31, 1997           /s/ Paul Frankel
                               ------------------------------------------
                               PAUL FRANKEL
                               Director

Date: March   , 1997           /s/ Goodhue W. Smith III
                               ------------------------------------------
                               GOODHUE W. SMITH III
                               Director

Date: March   , 1997           /s/ Sidney Dworkin
                               ------------------------------------------
                               SIDNEY DWORKIN
                               Director


                                        i