<PAGE>
 
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
    
                                 FORM 10-KSB/A
                                AMENDMENT NO. 2
     
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934 for the fiscal year ended December 31, 1997.

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

COMMISSION FILE NUMBER:  0-21145

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

               NEVADA                                     56-1668867
     (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)

ONE GLENHARDIE CORPORATE CENTER, 1275 DRUMMERS LANE, SUITE 100, WAYNE,
PENNSYLVANIA 19087
   (Address of principal executive offices)                           (Zip Code)

Issuer's telephone number:  610-975-9533

Securities registered under Section 12(b) of the Exchange Act:  NONE.

Securities registered under Section 12(g) of the Exchange Act:

                         COMMON STOCK, $.001 PAR VALUE
                               (Title of Class)

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

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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. [_]

State issuer's revenues for its most recent fiscal year: $11,803,000

The aggregate market value of the common stock held by non-affiliates as of
March 16, 1998 was $14,534,000.

As of March 16, 1998 there were 11,743,209 shares of common stock outstanding.

          DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement to be filed with the Securities and
Exchange Commission relative to the Company's 1998 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Report.

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):  YES _____ NO   X
                                                                         -----

                                       1
<PAGE>
 
                                     PART I

ITEM 1.   DESCRIPTION OF BUSINESS

GENERAL

     Covalent Group, Inc. (the "Company") through its subsidiary Covalent
Research Alliance Corp. ("CRA"), is a total research management organization
which designs and manages clinical trials in the drug and device development
process and with associated cost containment and quality of care components.
CRA specializes in cost effectiveness and outcomes studies for major customer
groups such as pharmaceutical companies, managed care organizations, insurers
and employers.  It offers a full array of integrated services including study
design, clinical trial monitoring and management, data management,
biostatistical analysis and regulatory affairs services.  CRA is structured to
deliver customized high quality solutions to its Fortune 500 and other clients.

     CRA utilizes its core expertise of clinical trials management to provide
high quality, medical outcomes and clinical research for its client base.  In
addition, experience gained with more than 40 managed care organizations
facilitates designing and conducting clinical studies for pharmaceutical clients
in a managed care environment, thereby, improving the market potential for a
drug manufacturer's product.   To aid its pharmaceutical and managed care
customers in clinical trials and outcomes research projects, CRA also has
developed a state-of-the-art interactive voice recognition system called Virtual
HouseCall, an automated system for collecting and reporting subjective patient
information.  Through educational components, the Company intends to influence
patient behavior crucial to patient compliance with prescription drug regimens
and self-management of chronic diseases.
    
     The Company was incorporated under the laws of the State of Nevada on
August 1, 1989 under the name of West End Ventures, Inc. ("West End").  West
End's only activity prior to the acquisition of its subsidiary, Future Medical
Technologies, Inc. ("FMT"), a New Jersey corporation incorporated on September
28, 1989 was the completion of its initial public offering on January
15, 1990.  On January 26, 1990, West End acquired 100% of the outstanding
securities of FMT. FMT was located in Decatur, Georgia and designed, 
manufactured and distributed disposable micro-biological analytical products and
ancillary equipment for the detection of yeast, mold or bacteria in liquids or 
air for use in industrial and clinical laboratories. The principal product of 
FMT was a disposable plastic device for analytical bacteria growth in liquid 
samples and the diagnosis of urinary tract infections. FMT also developed a 
Salmonella detection system with the intended purpose of increased speed and 
test reliability as a pratical means for broad scale sampling and testing.

     West End subsequently changed its name to Future Medical Technologies
International, Inc. ("FMTI"). On May 26, 1994, FMTI effected a one for five
reverse stock split. On February 22, 1995, the Company effected a five for seven
reverse stock split and completed the acquisition of 100% of the stock of CRA, a
Pennsylvania corporation, in exchange for 7,200,000 shares of post-split common
stock of FMTI.     
 
     On September 20, 1996, FMTI shareholders ratified the disposition of 100%
of the  stock of FMT, as of July 31, 1996.  At the same time, shareholders
approved the change of the parent organization's name from Future Medical
Technologies International, Inc. to Covalent Group, Inc.

CRO INDUSTRY OVERVIEW

     The CRO industry provides independent product development services for the
pharmaceutical and biotechnology industries.  Generally, CROs derive
substantially all of their revenue from the research and development
expenditures of pharmaceutical and biotechnology companies. According to the
Pharmaceutical Researchers and Manufacturers of America, global pharmaceutical
and

                                       2
<PAGE>
 
biotechnology industries spent an estimated $35 billion in 1995 on research and
development, of which the Company estimates $20 billion was spent on types of
services offered by the CRO industry.  Of this amount, approximately $3 billion
was outsourced to CROs.
 
     The Company believes that the following trends will lead to further growth
opportunities for CROs as pharmaceutical and biotechnology companies continue to
increase outsourcing of product development needs: (I) price pressure by managed
care organizations and pharmacy managers on pharmaceutical companies is forcing
drug manufacturers to consolidate, down-size, and look to less expensive fixed
cost alternatives than internal development, principally outsourcing to variable
cost CROs; (ii) pharmaceutical companies are seeking faster product development
times in order to maximize a new drug's patent and marketing exclusivity; (iii)
increasingly complex and stringent regulatory requirements have increased the
volume of data required for regulatory filings and increased demands on data
collection and analysis during the development process; (iv) biotechnology
companies are developing an increasing number of new drugs that require
regulatory approval and should continue to find CROs to be a cost effective
alternative to building an internal drug development capability; and (v) the
need for sophisticated data management is increasing to expedite the drug
development process.

     The Company's only subsidiary, CRA has positioned its clinical development
services to capitalize on these market trends.  As an additional element of its
strategy, CRA believes that it differentiates itself from other CROs by
expertise in the design and execution of clinical studies which meet the
requirements of managed care and third party payors thereby enhancing the
marketability of clients' prescription drugs over their life cycle.

BUSINESS OF THE COMPANY

     The Company provides a full range of CRO services specializing in clinical
studies that include various types of outcomes measurement.   The Company
provides clinical trial management, data management, biostatistical analysis,
medical and regulatory services, health economics and outcomes research.  The
principal categories of services offered are:

Clinical Trials
---------------
     
     CRA utilizes over 80 full time and independent contractor personnel with
experience in the pharmaceutical, biotech and managed care industries that it
believes can support the needs of the most rigorous clinical trials or medical
outcomes studies. CRA has assembled an extensive network of clinical
investigators, managed care organizations, and clinical research specialists,
which it uses to coordinate and conduct clinical research. Clinical
investigators in the network are contracted for a specific clinical study, on a
case by case basis, where their expertise with a specific disease will insure
the highest quality medical care, treatment and clinical evaluation. CRA's
clinical monitors are strategically located throughout the country to reduce the
cost of travel to clinical or managed care sites. CRA's clinical trial services
include project coordination, regulatory document processing, monitoring
services and quality control review.
     
Data Management
---------------

     CRA has automated the data management process associated with clinical
trials management through its use and customization of the industry standard
software from "BBN Software Products' Clintrial".  Clintrial protocols are used
to assist in the collection, validations, and reporting of clinical 

                                       3
<PAGE>
 
     
results to its pharmaceutical company clients as part of their submission to the
Food and Drug Administration ("FDA") or other regulatory agencies. CRA's data
management professionals provide case report form review and tracking; data
entry; integrated clinical/statistical reports; and manuscripts for publication.
      
Biostatistics
-------------

     CRA also provides comprehensive clinical statistics support.  CRA's
biostatisticians have extensive pharmaceutical/medical industry experience.
CRA's biostatistical services include clinical trials design; preparing
statistical analysis plans; representing clients at the FDA; and creating
statistical reports.

Medical and Regulatory Affairs Management
-----------------------------------------

     CRA's medical and regulatory group provides liaison services between its
clients and regulatory agencies in the preparation, review and submission of
Investigational New Drug ("IND"), New Drug Application ("NDA"), 510k, and
Product License Application ("PLA") documents.  CRA's medical services include
medical oversight of studies, review and interpretation of adverse experiences,
report writing and development of study protocols.  Regulatory services include
strategy design, document preparation and client consultation.

Quality Assurance and Compliance
--------------------------------

     CRA also provides field inspections that include investigator audits,
presubmission protocol compliance audits, Good Clinical Practice audits and
staff training.

Outcomes Research and Management
--------------------------------

     CRA provides its clients retrospective database studies, therapeutic end-
point determinations, cost effectiveness studies, drug utilization reviews, drug
utilization effectiveness reviews, and health status survey development as well
as patient drug compliance programs, patient education programs and costs
containment studies.

Wellness Measures
-----------------
    
     Wellness Measures is a division of CRA which provides a comprehensive set
of services (such as health fairs, holistic medicine alternatives, fitness,
nutrition and stress management programs) which improve the health of
individuals, insure proper utilization of health care services, reduce health
care costs, and improve morale and mental acuity. Wellness Measures' assessment
services allow its clients to make informed decisions that benefit their
companies, employees and their families.     

Virtual HouseCall
-----------------

Virtual HouseCall ("VHC"), as developed by CRA, is an interactive voice
recognition system that CRA believes excels in the type of data collection and
analysis required by healthcare industry segments focused on disease management.
Disease management is a comprehensive, integrated approach to care and
reimbursement with the goal of promoting maximum healthcare provider efficiency
and effectiveness.  Data collection becomes key to continuing assessment of
disease management programs.

                                       4
<PAGE>
 
     VHC is a telephone-based service that has been designed to reach large
numbers of patients in a personalized and supportive manner.  VHC automates the
administration of subjective quality of life surveys and psychosocial
assessments, provides patient access to disease specific educational and
resource libraries, and facilitates the publication of personalized reports
through on-demand printing services and faxes to healthcare providers and
patients.
 
     VHC is concentrating on five disease states that account for 70% of managed
care's patient expenditures.  Virtually all managed care organizations and many
pharmaceutical companies are developing disease management programs in the areas
of asthma, diabetes, hypertension, depression and congestive heart failure.  CRA
intends for VHC to play an important role in disease management programs.  Its
content is modular and customizable, and the computer platform and telephony
systems are highly scaleable.

     CRA has positioned VHC as a research and patient education service.  This
allows for the greatest flexibility for CRA's customers.  Surveys can be
administered once, while VHC-based patient tracking, assessment, education can
be provided as often as monthly.  Per transaction costs are calculated by type
of service, length and frequency of interaction, and the number of contacted
patients.

COMPETITION

     The Company competes primarily against internal research departments of
pharmaceutical companies and other CROs.  The CRO industry is highly fragmented
with several hundred small, limited services providers, and seven larger firms
with revenues in excess of $50 million each, the largest of which are:
Quintiles Transnational Corp.; Covance, Inc.; and Pharmaceutical Product
Development Inc.  These and some other competitors have substantially greater
capital and technical resources than the Company.

     Competitive factors that may influence a client's decision in choosing a
CRO include previous experience, references from existing clients, experience
with a particular type of project or area of clinical development, the quality
and timeliness of contract research, ability to recruit investigators and the
ability to provide a full range of services required by the client.  The Company
believes it competes favorably in these respects.

CONTRACTUAL ARRANGEMENTS

     Compensation for services is contracted at a fixed price, but may include
some variable components, and can cover a period of several months to several
years.  A portion of the contract fee is typically paid when a clinical trial is
initiated and the contract provides for milestone payments throughout the
duration of the trial.  Contracts can usually be terminated at any time by the
client, but are usually subject to termination fees.  Contracts may be
terminated for a number of reasons including insufficient patient enrollment,
unexpected results in the clinical trial or a client's decision to terminate
development of a particular drug.
 
BACKLOG

     The Company's backlog consists of anticipated revenue from contracts that
have been signed but not yet completed.  Once a project commences, revenue is
recognized over the life of the contract, which is consistent with industry
practice.

                                       5
<PAGE>
 
     As of December 31, 1997, the Company's backlog amounted to approximately
$10 million as compared to approximately $8 million at December 31, 1996.  The
Company believes backlog at any given time is not necessarily a meaningful
indicator of future revenue.  Clinical trials can be modified or terminated by
the client for any of the reasons mentioned above.

POTENTIAL LIABILITY
    
     The Company attempts to manage its liability risk through contractual
indemnification provisions with clients and investigators hired by the Company
on behalf of its clients and through insurance.  The contractual
indemnifications generally do not protect the Company against certain of its own
actions such as negligence.  The contractual arrangements are subject to
negotiation with clients and the terms and scope of such arrangements vary from
client to client and from trial to trial.  Although most of the Company's
clients are large well-capitalized companies, the financial performance of these
indemnitors is not secured.  Therefore, the Company bears the risk that the
indemnifying party may not have the financial ability to fulfill its
indemnification obligations.  The Company maintains professional liability
insurance which includes drug safety issues as well as  data processing errors
and omissions.  The Company could be materially and adversely affected if it
were required to pay damages or incur defense costs in connection with a claim
that is beyond the scope of an indemnity provision or beyond the level of
insurance coverage or where the indemnifying  party does not fulfill its
indemnification obligations. However, the Company believes that its current 
insurance coverage is adequate.     

EMPLOYEES
    
     At December 31, 1997, the Company employed 30 full time personnel and
contracts with approximately 50 independent contractors on an as-needed basis.
None of the employees are represented by a labor union and the Company believes
its relations with employees and independent contractors are good.
     
         
ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
          FINANCIAL CONDITION

          CAUTIONARY STATEMENT

     When used in this Report on Form 10-KSB and in other public statements,
both oral and written, by the Company and Company officers, the words
"estimate," "project," "intend," "believe," "anticipate" and similar expressions
are intended to identify forward-looking statements regarding events and
financial trends that may affect the Company's future operating results and
financial position.  Such statements are subject to risks and uncertainties that
could cause the Company's actual results and financial position to differ
materially.  Such factors include, among others: (i) the Company's success in
attracting new business; (ii) the size, duration and timing of clinical trials;
(iii) 

                                       6
<PAGE>
 
the termination, delay or cancellation of clinical trials; (iv) the intense
competition in the industry in which the Company competes; (v) the Company's
ability to obtain financing on satisfactory terms; (vi) the sensitivity of the
Company's business to general economic conditions; and (vii) other economic,
competitive, governmental and technological factors affecting the Company's
operations, markets, products, services and prices. The Company undertakes no
obligation to publicly release the result of any revision of these forward-
looking statements to reflect events or circumstances after the date they are
made or to reflect the occurrence of unanticipated events.

General
-------

     CRA is a research management organization that designs, coordinates and
monitors clinical trials in drug development for some of the world's leading
pharmaceutical firms.  In addition, using advanced technologies, the Company
works extensively in managed care, medical outcomes research and health
management programs that focus on compliance and provider/patient behavior
modification.  Revenue is derived principally from the identification,
placement, monitoring and management of clinical development studies in the
traditional pharmaceutical, as well as managed care environment.

     Clinical research service contracts generally have terms ranging from
several months to several years.  A portion of the contract fee is generally
payable upon execution of the contract, with the balance payable in installments
over the life of the contract.  Revenue and related cost of revenue are
recognized as specific contract terms are fulfilled under the percentage of
completion method.

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

Year 2000 Compliance
--------------------

     All research indicates that the Company's exposure to this problem will be
minimal.  The Company's computers, local area network servers, software, and
digital phone system have all been purchased within the last three years, and an
inventory has been conducted in order to identify those systems and software
that may require a Year 2000 fix.  The manufacturers of the Company's systems
have provided, or are on track to provide updates by the end of 1998.
 
     The Company's central focus is on its commercial clinical trials data
management system.  The manufacturer has indicated in writing that the system
has been "designed to operate before, during and after the year 2000 without
errors in representation occurring to any of the date data."  The Company
expects a minor software upgrade to the system by July 1998 under its normal
licensing agreement with the manufacturer.  The installation of the upgrade and
all recommended test suites will be implemented by the end of 1998.
 
     The Company will complete its Year 2000 compliance program by the end of
1998 at minimal cost.


                                       7
<PAGE>
 
Results of Operations
---------------------

   Fiscal year ended December 31, 1997 compared to fiscal year ended December
   --------------------------------------------------------------------------
   31, 1996.
   ---------

     Revenues in 1997 were $11,803,000 and represent services performed for 17
different clients compared to $10,352,000 in 1996 representing services for 11
different clients.  In 1997 no single client accounted for more than 21% of
total revenues as compared to 1996 when one pharmaceutical customer accounted
for 76% of the Company's revenues.

     Cost of revenues includes compensation and other expenses directly related
to conducting clinical studies. These costs increased by $1,891,000 from
$6,331,000 to $8,222,000 for the years ended December 31, 1996 and 1997,
respectively. As a percentage of revenues, the cost of revenues increased from
61% for the year ended December 31, 1996 to 70% for the year ended December 31,
1997. The increase in relative percent is due to different cost structures of 
the studies based on the work requested by the Company's clients in 1997. In 
1997, the mix of work requested by the Company's clients happened to be lower 
margin work as compared to 1996. The Company's fixed costs necessary to support 
its volume of clinical trials also increased in 1997, primarily as a result of 
increased personnel costs.

     Selling, general and administrative expenses include all administrative
personnel and business development, and all other support expenses not directly
related to specific contracts.  Selling, general and administrative expenses for
the year ended December 31, 1997 amounted to $2,563,000, as compared to
$2,254,000 for the same period last year.  Expenses in both years amounted to
22% of revenues.  The increase in the level of expenses of $309,000 is due to
the overall expansion of the business and costs associated with building the
necessary support infrastructure.

     Research and development expenses for the year ended December 31, 1997
amounted to $1,052,000 or 9% of revenues, as compared to $883,000 or 9% of
revenues for the same period last year.  These expenditures are directly related
to development of VHC, an interactive voice recognition system, whose platform
was essentially completed in 1997.  Future development expenses are expected to
be limited to maintenance costs associated with the system.
    
     Investment gain of $197,000 represents the gain recognized as a result of 
the exchange of a note receivable of $225,000 and related accrued interest of 
$13,000 for 300,000 shares of ABS Group, Inc. Common Stock.
     
     Interest income increased $16,000 from $94,000 for the year ended December
31, 1996 to $110,000 for the year ended December 31, 1997.
    
     The provision for income taxes amounted to $114,000 (before recording the
income tax benefit of $94,000 on the sale of FMT) for the year ended December
31, 1997 and is net of a federal tax credit applicable to qualified research
expenses and an adjustment to the income tax benefit of prior period net
operating loss.  In 1997, the Company reached agreement with the purchaser to
treat the sale of FMT as an asset sale under Internal Revenue Code Section 338
(h) (10).  Accordingly, the loss on the disposition of FMT is deductible for tax
purposes against future income.  As a result, during the first quarter of 1997,
the Company recorded an additional deferred tax asset of $94,000.  Management
anticipates the loss on disposal to be fully utilized.  As a result, the net
income tax provision recorded for the year ended December 31, 1997 was $20,000.
     
   Fiscal year ended December 31, 1996 compared to fiscal year ended December 
   --------------------------------------------------------------------------  
   31, 1995.
   ---------

     Revenues in 1996 were $10,352,000 compared to $1,492,000  for 1995.  The
increase in revenues of $8,860,000 is directly related to the increase in the
number and size of clinical development studies. In 1996, the Company worked on 
seven different clinical studies, each with revenue value that will exceed 
$1,000,000 when completed, as compared to only one trial with a revenue value 
in excess of $1,000,000 in 1995.

                                       8
<PAGE>
 
     Cost of revenues includes compensation and other expenses directly relating
to conducting clinical studies.  These costs increased by $5,876,000 from
$455,000 to $6,331,000 for the years ended December 31, 1995 and 1996,
respectively.  As a percentage of revenues, the cost of revenues increased from
30% for the year ended December 31, 1995 to 61% for the year ended December 31,
1996.  The increase in the relative percent of costs to revenues is due to the
growth in the number, size and complexity of clinical studies.
 
     Selling, general and administrative expenses include all administrative
personnel and business development, and all other expenses not directly
chargeable to a specific contract.  Selling, general and administrative expenses
for the year ended December 31, 1996 increased 32% to $2,253,000 as compared to
$1,713,000 for 1995.  As a percentage of revenue, selling, general and
administrative expenses decreased from 115% to 22% for the years ended December
31, 1995 and 1996, respectively.  The increase in the level of expenses from
1995 to 1996 is due to the general expansion of the business and costs
associated with building the necessary support infrastructure.  The decrease in
selling, general and administrative expenses as a percentage of revenues
reflects the growth of clinical trial services from 1995 to 1996.

     Research and development expense for the year ended December 31, 1996
amounted to $882,000 as compared to $180,000 for the prior period and relate to
costs associated with developing VHC, an interactive voice recognition system.

     Interest income increased $80,000 from $13,000 for the year ended December
31, 1995 to $93,000 for the year ended December 31, 1996 due to an increase in
cash which was not needed for current operations.

     As a result of the Company's net operating loss carry forward which
amounted to $310,000 for federal income tax purposes at December 31, 1996, the
Company did not provide for a federal tax liability for 1996.  Accordingly, a
provision for federal income tax is not reflected in the Company's Consolidated
Statements of Operations.  In 1996, the Company did account for a net deferred
tax asset and recognized a net current and deferred income tax benefit of
$34,000.
     
     Net loss from discontinued operations for the year ended December 31, 1996
amounted to $104,000 (net of income tax benefit of $53,000) and relates to seven
months of operations of FMT.  Following an assessment of the status of FMT's 
products and the additional investment required to fully develop its business, 
the Board of Directors concluded, subject to stockholder approval which was 
subsequently received, that it was in the best interest of the Company to sell 
FMT to a buyer willing to fund the additional required investment in research 
and development and operating expenses to further develop FMT's products.
 
     On July 26, 1996, an agreement was reached, and subsequently ratified by
the Company's shareholders on September 20, 1996, to sell all of the stock of
FMT for a $250,000 promissory note plus a licensing fee ranging from 5% to 2.5%
payable to the Company on any revenue of certain FMT products over the next five
years. In addition, the former officers of FMT agreed to donate back to the
Company 475,000 stock options of the Company with an exercise price of $2.875
per share which were scheduled to expire on March 22, 2000. The Company has not
received any license fees under the licensing agreement.
 
        The financial impact of this transaction resulted in a one time
nonrecurring loss of $328,000 which was charged to earnings in the third quarter
ended September 30, 1996.     
        
     In 1997 the Company did not receive the scheduled payments due on the note 
from the purchaser of FMT, ABS Group, Inc. ("ABS"). On December 31, 1997, the 
Company agreed to exchange the note which had a remaining principal balance of 
$225,000 and related accrued interest of $13,000 for 300,000 shares of common 
stock of ABS, which are subject to certain restrictions. The common shares
received were originally recorded at an amount equal to the carrying value of
the note, including accrued interest, which management believed approximated
fair value. However, based on recent discussions with the Securities and
Exchange Commission Staff management has revised the estimate of fair value for
the ABS common stock to $434,687 which represents the closing bid price per
share with a minimal discount due to the restrictions regarding the ability to
sell this stock. The effect of this restatement was to increase the net income
by $118,012 ($.01 per common share).    


                                       9
<PAGE>
 
Liquidity and Capital Resources
-------------------------------
    
 The Company's contracts usually require a portion of the contract amount to be
paid at the time the contract is initiated.  Additional payments are generally
made upon completion of negotiated performance requirements throughout the life
of the contract.  Cash receipts do not necessarily correspond to costs incurred
and revenue recognized (revenue recognition is based on the percentage of
completion accounting method).  The Company typically receives a low volume of
large-dollar receipts.  As a result, the number of days outstanding in accounts
receivable will fluctuate due to the timing and size of cash receipts.  Accounts
receivable decreased $992,000 to $2,135,000 at December 31, 1997 primarily due 
to the timing of progress payments for clinical trials. This was offset by costs
and estimated earnings in excess of related billings on uncompleted contracts 
which increased $1,402,000 to $1,408,000 at December 31, 1997. This increase was
attributable to four clinical trials, for which revenues have been recognized in
excess of progress payments made to date on those contracts. Accounts payable 
increased $1,115,000 to $1,803,000 at December 31, 1997 primarily due to an 
increase in payments due to investigator sites. These contractual payments are 
based on completing certain milestones during the clinical trial. Investigator 
fees are therefore accrued based on the work completed and paid at a later date.
      
     The Company's cash and cash equivalents balance at December 31, 1997 was
$1,795,000 as compared to $922,000 at December 31, 1996.  The increase in cash
was primarily due to operating results for the year including the above
mentioned increase in accounts receivable and the increase in accounts payable.

     The Company purchased $335,000 of equipment in 1997 as compared to $325,000
in 1996.  Purchases in 1997 were primarily for computers and office equipment.
The Company does not anticipate the need for significant capital expenditures in
1998.

     The Company has a line of credit with a commercial bank providing a maximum
credit facility of $1 million which bears interest at a rate not to exceed 1%
point above the bank's prime rate.  Borrowings outstanding under the credit line
are secured by substantially all of the assets of the Company.  No borrowings
were outstanding under the credit line at December 31, 1997.
 
     The Company's principal cash needs on both a short and long-term basis are
for the funding of its operations, and capital expenditure requirements.  The
Company expects to continue expanding its operations through internal growth,
expansion of its existing services, and the development of new service products
for clinical research and the healthcare industry.  The Company expects such
activities to be funded from existing cash and cash equivalents and cash flow
from operations.
 
     Management believes that the Company's operations and financial results are
not materially affected by inflation.

                                       10
<PAGE>
 
            
ITEM 13.  EXHIBITS

     (a)  Exhibits
    
          3.1  Certificate of Incorporation of West End Ventures, Inc., a Nevada
               corporation (predecessor to the Company) and all amendments
               thereto.(1)
          3.3  Bylaws of Covalent Group, Inc. (2)
          10.1 1996 Stock Option Plan. (3)
          10.2 1995 Stock Option Plan. (2)
          10.3 Lease between Dean Witter Realty Income Partnership II and 
               Covalent Group, Inc. dated November 14, 1996. (2)
          10.4 Credit Agreement with Corestates Bank dated April 25, 1997.(1)
          10.5 Stock Purchase Warrant Agreement between Berkshire International 
               Finance, Inc. and the Company dated June 20, 1996 (incorporated 
               by reference to Exhibit 4.1 to the Company's Amendment No. 1 to 
               Form S-3 filed July 15, 1998 (File No. 333-51079)).(1)
          10.6 Stock Purchase Warrant Agreement between S&F Consulting, Inc. and
               the Company dated June 20, 1996 (incorporated by reference to
               Exhibit 4.2 to the Company's Amendment No. 1 to Form S-3 filed
               July 15 1998 (File No. 333-51079)).(1)
          10.7 Stock Purchase Warrant Agreement between S&F Consulting, Inc. and
               the Company dated May 8, 1996 (incorporated by reference to
               Exhibit 4.3 to the Company's Amendment No. 1 to Form S-3 filed
               July 15, 1998 (File No. 333-51079)).(1)
          21   Subsidiaries of the Registrant. (2)
          23.1 Consent of Arthur Andersen LLP. 
          23.2 Consent of Baratz & Associates, P.A.
          27   Financial Data Schedule (in electronic format only).
           
     (b)  Form 8-K

          On December 31, 1997 the Company reported on Form 8-K stockholder
          ratification to appoint the firm of Arthur Andersen LLP as its
          independent auditors beginning January 1, 1998 to make an examination
          of the accounts of the Company for the year ended December 31, 1997.
          The Company had no disagreements with its previous independent
          auditors, Baratz & Associates, P.A. on any matter of accounting
          principles or practices, financial statement disclosure or auditing
          scope or procedure.
         
_________________________
(1)  Filed as an exhibit to the Company's Amendment No. 1 to its Report on Form
     10-KSB (No. 0-21145) filed with the Securities and Exchange Commission on
     July 15, 1998 and incorporated herein by reference.
(2)  Filed as an exhibit to the Company's Report on Form 10-KSB (No. 0-21145)
     filed with the Securities and Exchange Commission on March 30, 1998 and
     incorporated herein by reference.
(3)  Incorporated by reference from Proxy Statement for 1996 Annual Meeting.
          

                                       11
<PAGE>
 
    
                                  SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant 
caused this amendment to its report on Form 10-KSB to be signed on its behalf by
the undersigned, thereunto duly authorized.

                                      COVALENT GROUP, INC.
    
Dated:     August 13,1998
       ---------------------
                                           By:   /s/ Bruce LaMont
                                         ----------------------------------
                                                Bruce LaMont, President, Chief
                                                Executive Officer and Director
                                                     
                                       12
<PAGE>
 
                              COVALENT GROUP, INC.
                              --------------------
                     YEARS ENDED DECEMBER 31, 1997 AND 1996
                     --------------------------------------


                                     INDEX
                                     -----


                                                      Page(s)
                                                      -------


CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------

Report of Independent Public Accountants                  F-1


Consolidated Balance Sheets                               F-3


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-8

<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To Covalent Group, Inc.:
    
We have audited the accompanying consolidated balance sheet (as restated, See
Note 3) of Covalent Group, Inc. (a Nevada corporation) and subsidiary as of
December 31, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows (as restated, See Note 3) for the year ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
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 financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Covalent Group, Inc. and
subsidiary as of December 31, 1997, and the results of their operations and
their cash flows for the year ended December 31, 1997, in conformity with
generally accepted accounting principles.


                                      Arthur Andersen LLP

Philadelphia, Pa.,
    
 August 5, 1998
     
                                      F-1
<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To the Board of Directors and Stockholders
Covalent Group, Inc.
One Glenhardie Corporate Center
1275 Drummers Lane
Wayne, PA 19087


We have audited the accompanying consolidated balance sheet of Covalent Group,
Inc. as of December 31, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the 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 financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Covalent Group, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for the
year ended December 31, 1996, in conformity with generally accepted accounting
principles.


                                      Baratz and Associates, P.A.

Marlton, NJ
 February 5, 1997

                                      F-2
<PAGE>
 
                             COVALENT GROUP, INC.
                                AND SUBSIDIARY
                          CONSOLIDATED BALANCE SHEETS
 
 
<TABLE>     
<CAPTION>  
ASSETS                                                                         December 31,                   
                                                                               ------------                   
                                                                         1997                 1996             
                                                                   -------------         --------------         
<S>                                                                <C>                   <C>                   
CURRENT ASSETS                                                                                                
   Cash and cash equivalents                                          $1,794,530            $  922,010        
   Accounts receivable                                                 2,135,223             3,127,548        
   Prepaid expenses and other                                            170,934               107,649        
   Deferred income taxes                                                       -                96,363        
   Costs and estimated earnings in excess of                                                                  
     related billings on uncompleted contracts                         1,407,933                 6,243        
                                                                   -------------        --------------        
            TOTAL CURRENT ASSETS                                       5,508,620             4,259,813        
                                                                   -------------        --------------        
                                                                                                              
                                                                                                              
PROPERTY AND EQUIPMENT                                                                                        
   Equipment                                                             814,230               616,971        
   Furniture and fixtures                                                186,905               110,522        
   Leasehold improvements                                                 59,441                     -        
                                                                   -------------        --------------        
                                                                       1,060,576               727,493        
         Less - Accumulated depreciation                                (372,441)             (203,699)        
                                                                   -------------        --------------        
                        NET PROPERTY AND EQUIPMENT                       688,135               523,794        
                                                                   -------------        --------------        
                                                                                                              
DEFERRED INCOME TAXES                                                     91,940                     -        
                                                                   -------------        --------------        
OTHER ASSETS                                                             445,898               208,354        
                                                                   -------------        --------------        
                                                                                                              
TOTAL ASSETS                                                          $6,734,593            $4,991,961        
                                                                   =============        ==============         
</TABLE>      
 
                    The accompanying notes are an integral
                part of these consolidated financial statements

                                      F-3
<PAGE>
 
<TABLE>     
<CAPTION> 
                             COVALENT GROUP, INC.
                                AND SUBSIDIARY
                          CONSOLIDATED BALANCE SHEETS
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
                                                                                         December 31,
                                                                                         ------------
                                                                                 1997                   1996
                                                                                 ----                   ----
<S>                                                                     <C>                    <C>           
CURRENT LIABILITIES
   Accounts payable                                                          $ 1,803,057             $   687,931
   Accrued expenses                                                               98,419                   8,567
   Billings in excess of related costs and
    estimated earnings on uncompleted contracts                                  739,113                 585,868
                                                                        ----------------       -----------------
                   TOTAL CURRENT LIABILITIES                                   2,640,589               1,282,366
                                                                        ----------------       -----------------
 
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY
   Common stock, $.001 par value per
      share, 25,000,000 shares authorized,
      11,755,709 and 11,602,715 shares issued respectively                        11,756                  11,603
   Additional paid-in-capital                                                  9,265,508               9,083,632
   Accumulated deficit                                                        (5,132,944)             (5,385,640)
                                                                        ----------------       -----------------
                                                                               4,144,320               3,709,595
      LESS:
         Treasury Stock, at cost, 12,500 shares in 1997                          (50,316)                      -
                                                                        ----------------       -----------------
                   TOTAL STOCKHOLDERS' EQUITY                                  4,094,004               3,709,595
                                                                        ----------------       -----------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                   $ 6,734,593             $ 4,991,961
                                                                        ================       =================
</TABLE>     
 
                    The accompanying notes are an integral
                part of these consolidated financial statements

                                      F-4
<PAGE>
 
<TABLE>    
<CAPTION>
                             COVALENT GROUP, INC.
                                AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
                                                                                 Years Ended December 31,
                                                                                 ------------------------
                                                                                  1997             1996
                                                                                  ----             ---- 
<S>                                                                         <C>               <C>       
REVENUES                                                                       $11,803,334       $10,352,483
 
COST OF REVENUES                                                                 8,222,217         6,330,984
                                                                            --------------    --------------
 
GROSS PROFIT                                                                     3,581,117         4,021,499
                                                                            --------------    --------------
 
OPERATING EXPENSES
    Selling, general and administrative                                          2,563,173         2,253,741
    Research and development                                                     1,052,013           882,617
                                                                            --------------    --------------
 
TOTAL OPERATING EXPENSES                                                         3,615,186         3,136,358
                                                                            --------------    --------------
 
INCOME (LOSS) FROM OPERATIONS                                                      (34,069)          885,141

INVESTMENT GAIN                                                                    196,687               --

INTEREST INCOME                                                                    109,893            93,594
                                                                            --------------    --------------
 
INCOME FROM CONTINUING
  OPERATIONS BEFORE INCOME TAXES                                                   272,511           978,735
 
INCOME TAX PROVISION (BENEFIT)                                                      19,815           (34,356)
                                                                            --------------    --------------
 
INCOME FROM CONTINUING
  OPERATIONS                                                                       252,696         1,013,091
 
DISCONTINUED OPERATIONS
    Loss from operations                                                                 -          (103,736)
    Loss on disposal                                                                     -          (328,037)
                                                                            --------------    --------------
 
NET INCOME                                                                     $   252,696       $   581,318
                                                                            ==============    ==============
 
NET INCOME (LOSS) PER COMMON SHARE
  Income from Continuing Operations - Basic                                    $       .02       $       .09        
  Income from Continuing Operations - Diluted                                  $       .02       $       .08  
  Discontinued Operations - Basic                                              $         -       $       .04  
  Discontinued Operations - Diluted                                            $         -       $       .03  
  Net Income - Basic                                                           $       .02       $       .05  
  Net Income - Diluted                                                         $       .02       $       .05   
 
WEIGHTED AVERAGE COMMON AND COMMON
  EQUIVALENT SHARES OUTSTANDING
    BASIC                                                                       11,659,890        11,304,545
    DILUTED                                                                     12,398,172        12,001,660
</TABLE>      

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

                                      F-5
<PAGE>
 
                             COVALENT GROUP, INC.
                -----------------------------------------------
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                -----------------------------------------------
 
<TABLE>     
<CAPTION>                                                                      Additional
                                                        Common Stock            Paid-In          Unearned       Accumulated   
                                                        ------------      
                                                  Shares        Amount         Capital         Compensation       Deficit     
                                               -----------    -----------   --------------    ---------------   ---------------
<S>                                            <C>            <C>           <C>               <C>              <C> 
BALANCE,                                                                                                                       
  JANUARY 1, 1996                                  10,767,984     $10,768      $ 7,149,389       $   (57,575)    $(5,909,383)  
                                                                                                                               
Reclassification of unearned compensation                   -           -                -            57,575         (57,575)  
Proceeds from sale of common stock                    720,231         720        1,830,872                 -               -   
Exercise of stock options                             114,500         115          103,371                 -               -   
Net income                                                  -           -                -                 -         581,318   
                                               --------------  ----------   --------------    --------------   ---------------- 
                                                                                                                               
BALANCE,                                                                                                                       
  DECEMBER 31, 1996                                11,602,715      11,603        9,083,632                 -      (5,385,640)  
                                                                                                                               
Exercise of stock options                             152,994         153          140,592                 -               -   
Stock options granted to consultants                        -           -           41,284                 -               -   
Purchase of treasury stock                                  -           -                -                 -               -   
Net income                                                  -           -                -                 -         252,696   
                                               --------------  ----------   --------------    --------------   ---------------- 
BALANCE,                                                                                                                        
  DECEMBER 31, 1997                                11,755,709     $11,756      $ 9,265,508        $        -     $(5,132,944)   

                                               ==============  ==========   ==============    ==============   ================ 
                                        
<CAPTION> 
                                                       Treasury   Stock               
                                                       ----------------                            
                                                      Shares        Amount      Total  
                                                  -------------  ----------- -----------
<S>                                               <C>            <C>         <C> 
BALANCE,                                                      
  JANUARY 1, 1996                                             -   $       -  $ 1,193,199 
                                                                                   
Reclassification of unearned compensation                     -           -            -
Proceeds from sale of common stock                            -           -    1,831,592 
Exercise of stock options                                     -           -      103,486 
Net income                                                    -           -      581,318 
                                                  -------------  ----------  ----------- 
BALANCE,                                                                              
  DECEMBER 31, 1996                                           -           -    3,709,595    
                                                              -           -
Exercise of stock options                                     -           -      140,745    
Stock options granted to consultants                          -           -       41,284     
Purchase of treasury stock                              (12,500)    (50,316)     (50,316)  
Net income                                                    -           -      252,696   
                                                  -------------  ----------  -----------      
BALANCE,                                                                                                 
  DECEMBER 31, 1997                                     (12,500) $  (50,316) $ 4,094,004                 

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

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

                                      F-6
<PAGE>
 
                             COVALENT GROUP, INC.
                                AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>     
<CAPTION> 
                                                                                                        YEARS ENDED DECEMBER 31,
                                                                                                        -----------------------
                                                                                                           1997           1996
                                                                                                           ----           ----
<S>                                                                                                    <C>             <C> 
OPERATING ACTIVITIES:
 
Net income                                                                                             $   252,696     $   581,319
Adjustments to reconcile net income to
    net cash provided by (used in) operating activities
      Amortization and depreciation                                                                        171,100         142,443
      Investment Gain                                                                                     (196,687)              -
      Stock options issued to consultants                                                                   41,284
      Loss on disposal of subsidiary                                                                             -         328,037
      Deferred income taxes                                                                                  4,423        (96,363)
      Changes In assets and liabilities
       (Increase) decrease in -
        Accounts receivable                                                                                992,325      (3,002,812)
        Prepaid expenses and other                                                                          (8,285)        (43,526)
        Costs and estimated earnings in excess
          of related billings on uncompleted contracts                                                  (1,401,690)         (6,243)
        Other assets                                                                                       (40,857)           (223)
       Increase (decrease) in -
        Accounts payable                                                                                 1,115,126         558,268
        Accrued expenses                                                                                    89,852           4,537
        Billings in excess of related costs and
          estimated earnings on uncompleted contracts                                                      153,245         585,868
                                                                                                   ----------------    ------------
 
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES                                                      1,172,532        (948,695)
                                                                                                   ----------------    ------------
 
INVESTING ACTIVITIES:
 
Purchase of property and equipment                                                                        (335,441)       (324,652)
Net change in assets of discontinued operations                                                                  -         (40,555)
 
                                                                                                   ----------------    ------------
NET CASH USED IN INVESTING ACTIVITIES                                                                     (335,441)       (365,207)
                                                                                                   ----------------    ------------
 
FINANCING ACTIVITIES:
 
Proceeds from sale of stock, net                                                                                 -       1,831,592
Proceeds from exercise of stock options                                                                     85,745         103,485
Repayments on debt                                                                                               -          (5,000)
Purchase of treasury stock                                                                                 (50,316)              -
                                                                                                   ----------------    ------------
 
NET CASH PROVIDED BY FINANCING ACTIVITIES                                                                   35,429       1,930,077
                                                                                                   ----------------    ------------
 
NET INCREASE IN CASH AND CASH EQUIVALENTS                                                                  872,520         616,175
 
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                                               922,010         305,835
                                                                                                   ----------------    ------------
 
CASH AND CASH EQUIVALENTS, END OF YEAR                                                                 $ 1,794,530     $   922,010
                                                                                                   ================    ============
</TABLE>      

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

                                      F-7
<PAGE>
 
                             Covalent Group, Inc.
                              -------------------
                                And Subsidiary
                                --------------
                  Notes To Consolidated Financial Statements
                  ------------------------------------------

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

     Group, Inc. (the Company), formerly Future Medical Technologies
     International, Inc. (FMTI), is a leading contractual research organization,
     providing clinical research and development services to pharmaceutical,
     biotechnology, medical service and managed care organizations. The Company
     initiates, designs and monitors clinical trials, manages and analyzes
     clinical data and offers other related services and products.

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

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

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

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

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

    
     Restatement
     -----------

     Reference is made to Note 3 regarding the 1997 financial statement
     restatement to revise the estimate of the fair value of the ABS Group, Inc.
     Common Stock received in settlement of the outstanding note receivable due
     from ABS Group, Inc.     

     Revenue Recognition
     -------------------

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

     Cash and Cash Equivalents
     -------------------------

     The Company considers all highly liquid debt instruments purchased with an
     original maturity of three months or less to be cash equivalents.

                                      F-8
<PAGE>
 
    Property and Equipment
    ----------------------

    Property and equipment are recorded at cost. Depreciation is provided using
    the straight line method over the estimated useful lives of the assets which
    range from 3 to 7 years for equipment and from 3 to 7 years for furniture
    and fixtures. Depreciation expense for the years ended December 31, 1997 and
    1996 was $171,100 and $132,099 respectively. Expenditures for maintenance
    and repairs are charged to expense as incurred. When assets are sold or
    retired, the cost and accumulated depreciation are removed from the accounts
    and any gain or loss is included in income.
        
    
    Investments
    -----------

    Included in other assets is an investment in 300,000 shares of Common Stock
    of ABS Group, Inc. (See Note 3). The investment has been classified as long-
    term due to certain restrictions on the sale of this stock. This investment
    is carried at the closing bid price per share with a minimal discount due to
    the restrictions regarding the ability to sell this stock. The investment is
    classified as available for sale pursuant to Statement of Financial
    Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
    Equity Securities" (SFAS No. 115). Therefore any unrealized holding gains or
    losses will be presented as a separate component of stockholders'
    equity.     
    
    Research and Development Expenses
    ---------------------------------

    Research and development expenses ($1,052,013 in 1997; $882,617 in 1996) are
    charged to expense as incurred.

    Income Taxes
    ------------

    The Company accounts for income taxes under Statement of Financial
    Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS No. 109)
    which requires the liability method of accounting for deferred income taxes.
    Deferred tax assets and liabilities are determined based on the difference
    between the financial statement and tax bases of assets and liabilities.
    Deferred tax assets or liabilities at the end of each period are determined
    using the tax rate expected to be in effect when taxes are actually paid or
    recovered.

    Concentration of Credit Risk
    ----------------------------

    Financial instruments that potentially subject the Company to concentration
    of credit risk are accounts receivable and the Company's customer base
    principally comprises companies within the pharmaceutical industry.  The
    Company does not require collateral from its customers.

    Fair Value of Financial Instruments
    -----------------------------------

    The Company's financial instruments consist primarily of cash and cash
    equivalents, accounts receivable, costs and estimated earnings in excess of
    related billings on uncompleted contracts, accounts payable and accrued
    expenses and billings in excess of related costs and estimated earnings on
    uncompleted contracts. The book values of cash and cash equivalents,
    accounts receivable, costs and estimated earnings in excess of related
    billings on uncompleted contracts, accounts payable, accrued expenses and
    billings in excess of related costs and estimated earnings on uncompleted
    contracts are considered to be representative of their respective fair
    values.

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

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

                                      F-9
<PAGE>
 
    The weighted average common and common equivalent shares outstanding for
    purposes of calculating net income (loss) per common share are computed as
    follows:

<TABLE>
<CAPTION>
                                                                         Years Ended
                                                                              December 31,
                                                                              ------------
                                                                       1997                1996
                                                                       ----                ---- 
    <S>                                                            <C>                 <C>
    Weighted average common shares
      outstanding used for basic net income 
      (loss) per common share                                      11,659,890           11,304,545
 
 
    Dilutive effect of common stock
      options and warrants outstanding                                738,282              697,115
                                                                  ------------        -------------
 
   Weighted average common and
      common equivalent shares outstanding used for diluted
      net income (loss) per common share                           12,398,172           12,001,660
                                                                  ============        =============
</TABLE>

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

    In June 1997, the Financial Accounts Standards Board issued Statement of
    Financial Accounting Standards No. 130 " Reporting Comprehensive Income"
    (SFAS No. 130). SFAS No. 130 is effective for fiscal years beginning after
    December 15, 1997. SFAS No. 130 establishes standards for the reporting and
    display of comprehensive income in a set of financial statements.
    Comprehensive income is defined as the change in net assets of a business
    enterprise during a period from transactions generated from non-owner
    sources. It includes all changes in equity during a period except those
    resulting from investments by owners and distributions to owners. Management
    believes that the adoption of SFAS No. 130 will not have a material impact
    on the financial statements.

    In June 1997, the Financial Accounting Standards Board issued Statement of
    Financial Accounting Standards No. 131 " Disclosures about Segments of an
    Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 applies
    to all public companies and is effective for fiscal years beginning after
    December 15, 1997. SFAS No. 131 requires that business segment financial
    information be reported in the financial statements utilizing the management
    approach. The management approach is defined as the manner in which
    management organizes the segments within the enterprise for making operating
    decisions and assessing performance. Management believes the adoption of
    SFAS No. 131 will not have a material impact on the financial statements.

    Supplemental Cash Flow Information
    ----------------------------------

    Noncash investing and financing activities for the year ended December 31,
    1996 consisted of the sale of all of the outstanding common stock of a
    former subsidiary, Future Medical Technologies, Inc. (FMT) in consideration
    for a $250,000 note receivable, of which $25,000 was received in 1996.  The
    transaction was recorded as follows:

<TABLE> 
       <S>                             <C> 
       Net assets sold                 $  578,037
       Proceeds from sale                 250,000
                                       ----------

       Loss on disposition             $  328,037
                                       ==========
</TABLE> 

  Cash paid during the years ended December 31, 1997 and 1996 for income taxes
  were approximately $8,000 and $10,000 respectively.

                                     F-10
<PAGE>
 
    Reclassifications
    -----------------

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

3.  DISCONTINUED OPERATIONS:
    ----------------------- 

    On July 31, 1996, the Company sold all of the outstanding common stock of
    FMT for $250,000 and certain royalty payments due on the sale of certain
    products for up to five years. The selling price was payable in 1996 for
    $25,000 and the remaining balance was due in annual installments of $25,000
    (1997), $50,000 (1998 and 1999) and $100,000 (2000). Interest was charged at
    7% per annum. FMT was accounted for as discontinued operations and
    accordingly, assets, liabilities and operations were segregated in the
    accompanying consolidated balance sheets and statements of operations. As
    permitted under SFAS No. 95, discontinued operations have not been
    segregated in the 1996 consolidated statement of cash flows, therefore,
    certain captions will not agree with the consolidated balance sheet and
    statement of operations captions.

    Sales associated with FMT were $158,620 for the seven months ended July 31,
    1996.  Related losses were $157,176 for the same period.

    
    In 1997 the Company did not receive the scheduled payments on the note due
    from the purchaser of FMT, ABS Group, Inc. (ABS). On December 31, 1997, the
    Company agreed to exchange the note of $225,000 and related accrued interest
    of $13,000 for 300,000 shares of common stock of ABS, which are subject to
    certain restrictions. The common shares received were originally recorded at
    an amount equal to the carrying value of the note, including accrued
    interest, which management believed approximated fair value. However, based
    on recent discussions with the Securities and Exchange Commission Staff
    management has revised the estimate of fair value for the ABS common stock
    to $434,687 which represents the closing bid price per share with a minimal
    discount due to the restrictions regarding the ability to sell this stock.
    The effect of this restatement was to increase the net income by $118,012
    ($.01 per common share).     

4.  ACCOUNTS RECEIVABLE:
    --------------------

    Accounts receivable consisted of the following:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                   ------------------------------------
                                                           1997                 1996
                                                           ----                 ----
         <S>                                           <C>                  <C>
         Billed                                        $1,985,223           $3,127,548
         Unbilled                                         150,000                    -
                                                   --------------     -----------------
 
                                                       $2,135,223           $3,127,548
                                                   ==============     =================
</TABLE>
                                                                               
    No provisions for uncollectible accounts were made in 1997 and 1996; the
    Company considered all receivable balances fully collectible due to historic
    bad debt experience and the financial stability of prior and existing
    customers.

5.  LINE OF CREDIT:
    -------------- 

    During 1997, the Company obtained a demand line of credit facility with a
    bank.  Maximum borrowings under the facility are the lessor of $1,000,000 or
    75% of eligible accounts receivable, as defined, and bear interest at the
    bank's prime rate plus 1.0%.  There were no outstanding borrowings under
    this facility during 1997.

                                     F-11
<PAGE>
 
6.  STOCKHOLDERS' EQUITY:
    -------------------- 

    Common Stock Options
    --------------------

    The Company's 1996 stock incentive plan and 1995 employee stock option plan
    provide for the granting of incentive and non-qualified stock options for
    the purchase of shares of common stock to directors, officers, employees and
    consultants, as defined under the provisions of the plans. The Board of
    Directors determines the option exercise price per share, vesting period and
    expiration date (generally up to five years).

    The following table summarizes stock option activity:

<TABLE>
<CAPTION>
                                                                                                            Weighted
                                                                                                            Average
                                                                                     Range of               Exercise
                                                                                  Exercise Prices          Price Per
                                                        Number of Shares             Per Share               Share
                                                       ------------------      -------------------      --------------
<S>                                                    <C>                      <C>                      <C>
Options outstanding at December 31, 1995                        2,212,374             $.03 -$ 5.25               $2.54
   Granted                                                        354,500             3.88 -  6.13                4.15
   Exercised                                                     (114,500)             .88 -  5.00                1.06
   Retired                                                       (426,896)            2.88 -  5.00                3.32
   Gifted to Company                                             (475,000)            2.88 -  2.88                2.88
                                                       ------------------
                                                       
Options outstanding at December 31, 1996                        1,550,478              .03 -  6.13                2.67
                                                       
   Granted                                                        747,000             3.77 -  4.94                4.16
   Exercised                                                     (152,994)             .88 -  1.00                 .92
   Canceled                                                       (17,500)            3.94 -  4.63                4.28
                                                       ------------------
                                                       
Options outstanding at December 31, 1997                        2,126,984             $.03 - $6.13               $3.31
                                                       ==================
 
Exercisable Options outstanding at:
   December 31, 1996                                            1,377,853             $.03 - $6.13               $2.47
   December 31, 1997                                            1,354,859              .03 -  6.13                2.79
</TABLE>
                                        
     The following table summarizes information regarding stock options
     outstanding at December 31, 1997:

<TABLE>
<CAPTION>
                               Options Outstanding                                    Options Exercisable
                               -------------------                                    -------------------
                                               Weighted               Weighted                                    
                                               Average                Average                             Weighted
                           Number              Remaining              Exercise        Number              Average 
Range of Exercise          Outstanding At      Contractual Life       Price per       Exercisable at      Exercise
Prices                     12/31/97            in Years               Share           12/31/97            Price   
-----------------          ---------------     ----------------       ---------       --------------      --------
<S>                        <C>                 <C>                    <C>             <C>                 <C> 
  $         0.03                210,000                 2.0             $0.03             210,000          $0.03 
  $         0.88                103,984                  .7             $0.88             103,984          $0.88 
  $         1.00                 79,000                 2.7             $1.00              79,000          $1.00 
  $2.88 - $ 4.19              1,429,500                 3.9             $3.66             726,000          $3.26 
  $4.38 - $ 6.13                304,500                 3.2             $5.13             235,875          $5.27  
</TABLE>

                                     F-12
<PAGE>
 
     As of December 31, 1997, there were 1,354,859 options vested and
     exercisable and 675,000 stock options available for grant under the
     Company's stock option plans.

     The Company applies Accounting Principals Board Opinion No. 25 "Accounting
     for Stock Issued to Employees" and the related interpretations in
     accounting for its stock option plans. The disclosure requirements of
     statement of Financial Accounting Standards No. 123 "Accounting for Stock
     Based Compensation" (SFAS No. 123) were adopted by the Company in 1997. Had
     compensation cost for options granted during 1995 through 1997 under the
     stock options plan been determined based upon the fair value of the options
     at the date of grant, as prescribed by SFAS No. 123, the Company's pro
     forma net income and pro forma net income per share would have been reduced
     to the following amounts:

<TABLE>     
<CAPTION> 
                                                                                Years Ended December 31,      
                                                                          ------------------------------------
                                                                                1997                 1996     
                                                                          ----------------      --------------
          <S>                                                             <C>                   <C>           
          Net income                                                            $ 252,696             $581,318
          Pro forma net income (loss)                                             (15,481)             469,306
          Basic income per share                                                     0.02                 0.05
          Pro forma basic net income (loss) per share                                 -                   0.04
          Diluted net income per share                                               0.02                 0.05
          Pro forma diluted net income (loss) per share                               -                   0.04 
</TABLE>     
                                        
     The weighted average fair value of each stock options granted during the
     years ended December 31, 1997 and 1996 was $1.86 and $1.89 respectively. As
     of December 31, 1997, the weighted average remaining contractual life of
     each stock option outstanding was 3.4 years. The weighted average remaining
     contractual life of each stock option granted during the years ended
     December 31, 1997 and 1996 was 4.7 and 4.9 years, respectively. The fair
     value of each option grant is estimated on the date of grant using the
     Black - Scholes option pricing model with the following weighted average
     assumptions:

<TABLE>
<CAPTION>
                                                                         Years Ended             
                                                                         December 31,            
                                                            -------------------------------------
                                                                  1997                 1996      
                                                            ----------------      ---------------
          <S>                                               <C>                   <C>            
          Risk - free interest rate                              5.8% - 6.6%          6.0% - 6.8%
          Expected dividend yield                                         -                    - 
          Expected life                                            5 years              5 years     
          Expected volatility                                   40.0%                40.0% 
</TABLE>
                                        
     Because additional option grants are expected to be made each year, the
     above pro forma disclosures are not representative of pro forma effects of
     reported net income for future years.

     During 1997, the Company granted 25,000 stock options to an independent
     consultant for which the Company recorded consulting expense based upon the
     difference between the value of the stock options under the provisions of
     SFAS No. 123 and the exercise price per share on the date of grant.

     Common Stock Warrants
     ---------------------

     During 1996, the Company issued 250,000 common stock warrants with an
     exercise price of $2.75 per share to an investment banking firm in
     connection with an offering of common stock. The warrants were vested on
     the grant date.

                                     F-13
<PAGE>
 
7.   CUSTOMER INFORMATION:
     -------------------- 

     The following table summarizes significant customers with revenues in
     excess of 10% of total revenues (as a percentage of total revenues):

<TABLE>
<CAPTION>
                                                     Years Ended         
                                                     December 31,        
               Customer                          1997            1996    
               --------                       ----------       --------- 
               <S>                            <C>              <C>       
                 A                                21%             76%    
                 B                                20%              *     
                 C                                19%              *     
                 D                                14%              *      
</TABLE>

     *Revenues were less than 10% of total revenues.

     The above revenue amounts consist of separate clinical trials ranging from
     two to five.


8.   INCOME TAXES
     ------------

     The components of the income tax provision (benefit) are as follows:

<TABLE>    
<CAPTION>
                                               Years Ended December 31,      
                                           --------------------------------- 
                                                 1997               1996     
                                           --------------      ------------- 
          <S>                              <C>                 <C>           
          Current:                                                           
          Federal                             $         -        $         - 
            State                                  15,392              8,567 
                                           --------------     -------------- 
                                                   15,392              8,567 
                                           --------------     -------------- 
                                                                             
          Deferred:                                                          
            Federal                                 3,827            (35,155)
            State                                     596             (7,768)
                                           --------------     -------------- 
                                                                             
                                                    4,423            (42,923)
                                           --------------     -------------- 
                                                                             
                                              $    19,815        $   (34,356)
                                           ==============     ==============  
</TABLE>     

     Income tax expense differs from the amount currently payable because
     certain expenses, primarily depreciation and accruals, are reported in
     different periods for financial reporting and income tax purposes.

     The federal statutory income tax rate is reconciled to the effective income
     tax rate as follows:

<TABLE>    
<CAPTION>
                                                                Years Ended December 31,     
                                                          -----------------------------------
                                                                1997                 1996    
                                                          -------------        --------------
     <S>                                                  <C>                  <C>           
     Federal statutory rate                                        34.0 %                34.0%
     State income taxes, net of federal benefit                     6.6                   6.6
     Prior period net operating loss                             ( 34.6)                (37.1)
     Other                                                          1.3                     -
                                                          =============        ==============
                                                                    7.3%                  3.5%
                                                          =============        ============== 
</TABLE>     

                                     F-14
<PAGE>
 
     The components of the net current and long-term deferred tax assets and
     liabilities, measured under SFAS No. 109, are as follows:

<TABLE>    
<CAPTION>
                                                                         December 31,            
                                                            ----------------------------------- 
                                                                  1997                 1996     
                                                            --------------       --------------  
     <S>                                                    <C>                  <C>            
     Deferred tax assets -                                                                      
       Net operating loss carryforwards                           $220,684             $113,965 
                                                            --------------       --------------  
                                                                                                
     Deferred tax liabilities -                                                                    
       Investment valuation                                        (78,675)                  --
       Depreciation                                                (50,069)             (17,602)
                                                            --------------       --------------  
      Depreciation                                               (128,744)             (17,602)
                                                            --------------       --------------  
             Net deferred tax asset                               $ 91,940             $ 96,363 
                                                            --------------       --------------  
</TABLE>     

9.   EMPLOYEE BENEFIT PLAN:
     ----------------------

     The Company sponsors a 401(k) plan covering substantially all employees
     after a specified period of service. Eligible employees may contribute up
     to 15% of their annual compensation to the plan. The Company does not match
     employee contributions.

10.  LEASE COMMITMENTS:
     ----------------- 

     The Company leases office facilities and other equipment under
     noncancellable operating leases expiring through December 2001.  Rent
     expense charged to operations was $289,308 in 1997 and $75,240 in 1996.
     Future minimum annual rental commitments under the noncancellable lease
     obligations are $281,290 in 1998, $257,836 in 1999, $245,413 in 2000, and
     $245,413 in 2001.

                                     F-15
<PAGE>
 
                                 EXHIBIT INDEX
                                 -------------

Exhibit 23.1     Consent of Arthur Andersen, LLP

Exhibit 23.2     Consent of Boatz & Associates, P.A.

Exhibit 27       Financial Data Schedule