<PAGE>
 
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                        
                                   Form 10-K

 X  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
---
OF 1934 (FEE REQUIRED)
                      For the Year ended December 31, 1998
                                       or
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
---
1934  FOR THE TRANSITION PERIOD FROM ______ TO ________.

                            HEALTHCOR HOLDINGS, INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                                  <C>                                              <C>
           Delaware                                              8090                                      75-2294072
 (State or other jurisdiction                        (Primary Standard Industrial                       (I.R.S. Employer
of incorporation or organization)                     Classification Code Number)                      Identification No.)
</TABLE>

                   8150 North Central Expressway, Suite M2000
                              Dallas, Texas 75206
                                 (214) 692-4663
  (Address, including zip code, and telephone number, including area code, of
                   registrant's principal executive offices)

          Securities registered pursuant to Section 12(b) of the Act: None
          Securities registered pursuant to Section 12(g) of the Act:

                    Common Stock; par value $0.01 per share
                               (Title of Class)
 
          Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and  (2) has been subject to the
filing requirements for the past 90 days.

                              Yes  X       No  
                                  ---         ---

          Indicate by check mark if the disclosure of delinquent filers pursuant
to Item 405 of Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.   [ ]

          The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant, computed by reference to the price at which
the stock was sold, or average of the closing bid and asked prices, as of April
7, 1999 was $10,343,340.  All outstanding shares of common stock, except for
shares held by executive officers and members of the Board of Directors and
their affiliates, are deemed to be held by non-affiliates.

                      Documents Incorporated by Reference
                      -----------------------------------

          Part III incorporates by reference portions of the Registrant's
definitive Proxy Statement for its 1998 Annual Meeting of Stockholders.

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All statements, other than statements of historical facts, included in this
report, including the Company's ability to achieve significant expected cost
savings or synergies from the closing or consolidation of offices and other
restructuring efforts, and the plans, objectives and expectations of management,
are forward looking statements. These forward-looking statements are based on
the Company's current expectations. Although the Company believes that the
expectations reflected in such forward looking statements are reasonable, there
can be no assurance that such expectations will prove to be correct. Because
forward looking statements involve risks and uncertainties, the Company's actual
results could differ materially. The Company disclaims any intent or obligation
to update its forward-looking statements.

                                     PART I

ITEM 1.  BUSINESS

                              Recent Developments
                                        
  Recent Financial Performance.  HealthCor's net revenues for the three months
ended December 31, 1998, decreased by 28% to $24.9 million compared to $34.6
million recorded in the same period of 1997.  HealthCor reported a net loss for
the quarter ended December 31, 1998 of $(64.2) million compared to net loss for
the fourth quarter of 1997 of $(15.4) million. The Company also recorded a loss
per share for the quarter of $(6.36) on 10.1 million average shares outstanding
compared to a loss of $(1.53) per share on 10.1 million average shares
outstanding in the fourth quarter of 1997.

  HealthCor's net revenues during 1998 decreased by 19.1% to $115.8 million
compared to $143.2 million recorded in 1997. The net loss for 1998 was $(98.3)
million compared to net loss of ($15.6) million in 1997. The net loss per share
for 1998 was $(9.74) on 10.1 million average shares outstanding compared to
basic loss per share of $(1.56) on 10.1 million shares outstanding in 1997.

  The net loss for the three months ended December 31, 1998, resulted from among
the following factors.  The Company recorded a pre-tax goodwill write-off of
$27.0 million as a result of certain unamortized goodwill balances that were
evaluated and deemed impaired.  In addition, the Company also recorded an
additional provision for doubtful accounts of $20.6 million and a loss on
disposition of assets of $1.5 million.

  The Company does not have adequate liquidity or available sources of financing
to meet its contractual debt obligations and settle its other liabilities.
These factors raise substantial doubt about its ability to continue as a going
concern.  Management's plans in regard to these matters are discussed at "Recent
Developments  Sale of Company."  Also, see "Management's Discussion and Analysis
- Liquidity and Capital Resources."

  In connection with their 1998 audit, the Company's independent public
accountants have issued a material weakness letter under standards established
by the American Institute of Certified Public Accountants.  During 1998,
HealthCor experienced a significant amount of turnover in its operations and
financial personnel.  The Company also converted several of its billing systems.
As a result of the changes in personnel, the conversion process was not
adequately supervised, resulting in significant, unreconciled conversion
differences.  These differences were charged off in 1998.  In addition, the lack
of experienced and trained operations and finance personnel during 1998 resulted
in the untimely reconciliation, processing and evaluation of certain cash,
accounts receivable, accounts payable, and third-party reimbursement accounts.
As a result, significant adjustments were required to the consolidated financial
statements at December 31, 1998.  Management is aware of the weakness in its
accounting processes and the lack of trained staff.  Despite the Company's
awareness of the material weakness and ongoing efforts to recruit additional
accounting professionals, train the current staff, and improve accounting and
financial reporting systems, there can be no assurance that the Company's
efforts will result in any improvement of the Company's financial position.

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  Pending Litigation. On March 20, 1998, the Company and several of its former
officers were named as defendants in a lawsuit alleging certain violations of
federal securities laws by the Company.  The plaintiffs in the lawsuit seek to
represent a class of persons who purchased shares of the Company's Common Stock
from March 31, 1997 through and including March 31, 1998.  The Company has filed
a motion to dismiss the lawsuit which is pending before court for determination,
otherwise the Company intends to vigorously defend the lawsuit.  The Company
intends to vigorously defend the lawsuit but is unable to assess the likelihood
of success in this litigation, which is in the early stage of fact finding.  An
adverse result in the litigation could have a material adverse effect on the
Company's business and operations.

  Regulatory Changes; Closing of Nursing Offices. Congress has adopted a per-
beneficiary limit on reimbursement for home nursing services based upon
historical cost, and on March 31, 1998 and August 11, 1998, published
regulations which set forth the national and regional medians on which such
limits should be based.  The per-beneficiary limits had an adverse effect on the
Company's Medicare nursing operations.

  Other regulatory changes have reduced the level of reimbursement available to
the Company. On January 2, 1998 and August 11, 1998, HCFA published final
Medicare nursing per-visit cost limitation guidelines, which reduced per-visit
cost limitations for the Company by approximately 18%-20% for 1998. Also,
regulations effective February 1, 1998, eliminated venipuncture as a qualifying
service for Medicare nursing visits, which materially reduced the Company's
Medicare nursing revenues. In addition, reimbursement rates for Medicare home
oxygen services, which represented approximately 6% of the Company's annualized
revenues in 1997, were reduced by 25.0% in 1998, and are to be reduced by an
additional 5% in 1999.

  During the first quarter of 1998, the Company was subject to Medicare cost
limitations for home nursing that were lower than the Company's operating
expenses for that period, resulting in the Company's Medicare nursing expenses
exceeding reimbursable limits by $5.6 million.  This amount was recorded at
March 31, 1998.  To achieve cost savings in order to attempt to operate within
the Medicare nursing cost limitations, the Company closed substantially all of
its remaining Medicare nursing offices during 1998. These actions and the
regulatory and reimbursement changes described above reduced 1998 Medicare
nursing revenue from the 1997 level by at least  $47.8 million or 82.6%.

  Accounts Receivable Management. The Company's results for 1998 were adversely
affected by additional provisions for doubtful accounts of $31.6 million. The
additional provisions for doubtful accounts resulted from the Company's
continued difficulties in collecting from certain managed care organizations,
its failure to timely file claims with payors, difficulty in obtaining accurate
patient data, and maintenance of effective quality control and processes and
procedures in the revenue cycle.

  Senior Notes; Credit Facilities.  On December 1, 1997, the Company issued
$80.0 million aggregate principal amount of its 11% Senior Notes due 2004 (the
"Notes").  On January 13, 1998, the Company filed a Registration Statement on
Form S-4 with respect to the Notes and on February 10, 1998, commenced an Offer
to Exchange the Notes for registered Exchange Notes (the "Senior Notes"). The
Exchange Offer was completed during the second quarter of 1998. The Company is
currently in default under the Senior Notes as it was unable to meet its
December 1, 1998 interest payment obligation.  On December 23, 1998, the
principal holders of the 11% Senior Notes (the "Principal Holders") provided
working capital advances of $6.0 million under a convertible loan agreement.
Through April 21, 1999, the Principal Holders have amended the convertible loan
agreement five times to provide additional working capital advances of $8.1
million.  The convertible loan agreement is due December 31, 1999, and accrues
interest at 11% per annum increasing to 13% per annum in the event of any non-
payment of principal or interest amounts due.  The convertible loan agreement is
secured by a pledge of the stock of the Company, as well as a security interest
in substantially all of the assets of the Company and its subsidiaries.  As of
April 21, 1999, the Company is in default of several of the financial covenants
in the convertible loan agreement.  The lender, however, has agreed to
forbearances for the default on both the convertible loan agreement and the
Senior Notes.

  In the second quarter of 1998, the Company replaced its revolving credit line
with a two-year secured line of credit with a maximum availability of $7.8
million at December 31, 1998.  Advances are based on 80% of the net 

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collectible value of the Company's accounts receivable. "Net Collectible Value"
is defined as the amount the Company bills third party payors less patient co-
payments and deductible obligations and contractual allowances established by
the Company and acceptable to the lender. Interest on the outstanding balance of
the facility is payable monthly at an annual rate of the prime rate plus two
percent. The Company will also pay a collateral management fee of 0.083% per
month on the average outstanding balance. Collection of the receivables by the
Company will be credited to the facility on a daily basis. Advances under this
facility may be used to finance the working capital and general corporate
requirements of the Company. The Company had approximately $5.8 million
outstanding under the line and availability of $2.0 million at December 31,
1998. The Company also had a separate loan of $2.0 million outstanding, secured
by the stock of a subsidiary, from the same lender at December 31, 1998. The
loan carries the same interest rate as the line and is due on demand.

  The secured line of credit, 11% Senior Notes and the convertible loan
agreement all contain cross default provisions.  In the event that there is
default under one of the agreements, these provisions trigger a cross default of
the other agreements.  There has been no default under the provisions of the
secured line of credit and the Principal Holders of the Senior Notes and the
convertible loan agreement have issued forbearances to the Company.  The
Principal Holders have the risk for default for both the Senior Notes and the
convertible loan agreement and amendments.

  Sale of Company.  The Company has engaged the consulting firm of Chanin,
Kirkland, and Messina (CKM) to act as financial advisor and agent to the Company
in connection with (a) the private placement or raising of (i) a revolving
Credit Facility; (ii) a term loan; (iii) subordinated notes; and (iv) equity on
a best efforts basis on terms satisfactory to the Company and (b) the potential
re-capitalization or restructuring of the balance sheet of the Company.  In that
capacity, CKM has been engaged in contacting individuals and companies that may
be interested in acquiring all or parts of the Company's assets and/or
operations.  As of April 21, 1999, the Company was continuing to evaluate
various inquiries but had not accepted any offer.  The Company continues to
receive inquiries and requests for information on its operations.  The Company
continues to seek buyers of Quest Personnel Services (Quest), its personnel
placement division; and CCS, its Texas Medicaid waivered nursing program.  There
is no assurance that the Company will be successful in finding a buyer for all
or part of the Company, Quest or CCS.

  While CKM is marketing the Company, management has implemented an operating
strategy that is designed to position the Company to continue operating in the
event a suitable buyer is not found.  Management is evaluating the Company's
current payor contracts to determine if it should cancel, renegotiate or
continue to accept the current terms.  Management is considering steps to
increase payor and provider awareness of the Company as an active provider in
each of the communities where it has a presence.  Finally, management is
evaluating each of its offices by product line to determine what actions need to
be taken to increase productivity, volume, and efficiency of operations. While
these actions are designed to improve profitability by product line, there is no
assurance that the outcomes will result in any improvement of the Company's
financial position.

The Company

  The Company currently has 51 offices in eight states.  The Company has
diversified its business mix from 98% home nursing in 1990 to 8.7% home nursing
for the year ended December 31, 1998. This shift reflects the addition and
growth of respiratory therapy/home medical equipment and infusion therapy
services and the closure of substantially all of its Medicare nursing offices.
The Company expects that it will continue to shift its business mix towards
respiratory therapy/home medical equipment and infusion therapy. Home nursing,
however, will continue to represent a part of the Company's business mix because
managed care organizations and other referral sources offer the benefit to their
subscribers.  Due to the low rates currently being paid for home nursing, the
Company will continue to evaluate its nursing operations to ensure that it is
offering services at a cost and rate that benefits the Company.

  The Company believes its development and implementation of financial and
clinical management information systems for providing home health care will
result in a competitive advantage when fully operational. Upon the complete
implementation of its proprietary medical information system network,
Medisyn(TM), expected to occur in 

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late 1999, the Company believes that it will be able to achieve additional cost
savings, increase productivity and capture outcomes data that will provide
advantages in obtaining managed care business and adapting to regulatory and
reimbursement changes.

Industry Overview

  Home health care has been among the fastest growing segments of the health
care industry with estimated annual expenditures of $42.0 billion in 1998, up
from an estimated $12.9 billion in 1990, representing a compounded annual growth
rate of approximately 16%. The underlying growth factors in the home health care
industry include: (i) the cost-effective nature of home health care; (ii) an
increasing number of patients due to growth in the elderly population; (iii)
technological advances that expand the range of home health care procedures; and
(iv) patient preference for treatment in the home.  The Company believes, that
despite ascertainable published information on the health care sector, that the
industry has experienced severe financial pressure and has contracted
significantly.

  The home health care industry is highly fragmented with more than 20,000
providers delivering home health care services in the United States, most of
which use unsophisticated information technology systems. Many of these
companies are local providers that offer a limited scope of services in a
defined geographical area and lack the capital necessary to substantially expand
their operations. Managed care organizations and cost containment initiatives by
payors have driven the growth of home health care by emphasizing lower cost
alternatives to hospitals and skilled nursing facilities. These organizations
and payors seek coordinated, consistent quality home health care across broad
geographic areas in order to serve their patients more effectively.

Business Strategy

  Provide One-Stop Shop Home Health Care Services. HealthCor provides payors,
physicians and patients with fully integrated one-stop shop home health care
services in several of its markets. The integration of comprehensive home health
care services enhances the Company's appeal to managed care organizations and
other referral sources that prefer single-source providers of home health care.
The Company believes that full integration of services enables it to provide
highly coordinated patient care and to increase revenues and profitability by
providing multiple services to an individual patient referral.

  Focus on Managed Care Relationships. The Company has intensified its managed
care marketing efforts in order to take advantage of the increased market
penetration of managed care organizations in the home health care market and the
federal government's increasing preference for Medicare beneficiaries to enroll
in managed care plans. HealthCor is a provider for a number of large managed
care plans.

  Enhance Productivity through Information Technology. The Company seeks to
enhance its productivity through the development and use of innovative
management information technology that collects and integrates demographic,
financial and clinical information. The Company is developing and implementing a
proprietary financial and clinical management information system, Medisyn(TM).
The Company believes that Medisyn(TM) will improve operations by efficiently
servicing increased volumes of managed care referrals, increase productivity
gains, reduce costs and provide outcomes data to payors in an environment
increasingly influenced by managed care organizations and reimbursement changes.
The Company continues to transition its field offices to the CIMS, the
proprietary patient intake system.  Data entered into CIMS is transmitted to the
Company's billing centers increasing the speed and quality of data submission to
the payors.  In addition, the Company is installing SSI as the front-end editing
system to ensure quality control and provide electronic claims submission to the
majority of the Company's major payors.  See "Financial and Clinical Management
Information Systems."

  Sale of Company.  The Company has engaged the consulting firm of Chanin,
Kirkland, and Messina (CKM) to act as financial advisor and agent to the Company
in connection with (a) the private placement or raising of (i) a revolving
Credit Facility; (ii) a term loan; (iii) subordinated notes; and (iv) equity on
a best efforts basis on terms satisfactory to the Company and (b) the potential
re-capitalization or restructuring of the balance sheet of the Company.  In that
capacity, CKM has been engaged in contacting individuals and companies that may
be interested 

                                       5
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in acquiring all or parts of the Company's assets and/or operations. As of April
21, 1999, the Company was continuing to evaluate various inquiries but had not
accepted any offer. The Company continues to receive inquiries and requests for
information on its operations. The Company continues to seek buyers of Quest
Personnel Services (Quest), its personnel placement division business; and CCS,
its Texas Medicaid waivered nursing program. There is no assurance that the
Company will be successful in finding a buyer for all or part of the Company,
Quest or CCS.

  While CKM is marketing the Company, management has implemented an operating
strategy that is designed to position the Company to continue operating in the
event a suitable buyer is not found.  Management is evaluating the Company's
current payor contracts to determine if it should cancel, renegotiate or
continue to accept the current terms.  Management is considering steps to
increase payor and provider awareness of the Company as an active provider in
each of the communities where it has a presence.  Finally, management is
evaluating each of its offices by product line to determine what actions need to
be taken to increase productivity, volume, and efficiency of operations. While
these actions are designed to improve profitability by product line, there is no
assurance that the outcomes will result in any improvement of the Company's
financial position.

Managed Care Relationships

  The market for home health services has changed dramatically during 1998.  Due
to the cost of care, number of home health companies and increased competition,
there are very few contracts that remain exclusive to one provider.  The Company
has one exclusive capitated contract with Physician Health Partners ("the Plan")
in Denver, Colorado.  The Plan has 42,846 enrolled lives.  The only remaining
exclusive fee for service contract is with Heritage Southwest Medical Group
("Heritage") located in Dallas, Texas.  Heritage has approximately 100,000
enrolled lives.  The Company competes directly for all other business with other
home health companies.

  The Company is currently bidding for additional capitated contracts with
several managed care organizations in two markets.  The Company is negotiating
the contracts consistent with its strategy to price managed care contracts
profitably and continue to provide quality service.  There is no guarantee that
the Company will be successful in winning the contracts either on an exclusive
or non-exclusive basis.

Services and Products

  Home Health. The Company provides a wide range of nursing services to
individuals with acute illness, long-term chronic health conditions, permanent
disabilities, terminal illness or post-procedural needs. Patients are typically
referred to the Company by primary care or specialty physicians and managed care
case managers. After reviewing the patient's medical records and treatment plan
(which are displayed on PtCT Units), a nurse, therapist or home health aide,
where appropriate, provides care to the patient in the home. The plan of care
may require a few visits over a short period of time or many visits over several
years. The Company provides the following home nursing services:

    General nursing care is the periodic assessment of the appropriateness of
  home health care, the performance of clinical procedures, and instruction of
  the patient and the family or other care giver regarding proper treatments.
  Such care is provided by registered nurses or licensed practical nurses.
  Patients receiving such care typically include stabilized postoperative
  patients, patients who are acutely ill but who do not require hospitalization,
  and patients who are chronically or terminally ill.

    Specialty nursing care is the provision of specialized nursing services such
  as geriatric, pediatric or neonatal nursing. Such care is provided by nurses
  with the appropriate experience or certification in such specialty. Specialty
  nursing care also involves the instruction of the patient and the family or
  other care giver in the self-administration of certain procedures, such as
  wound care and infection control, emergency procedures and the proper handling
  and usage of medication, medical supplies and equipment.

    Therapy services consist of rehabilitation therapies such as physical,
  occupational and speech therapy to patients recovering from strokes, trauma or
  certain surgeries, high risk pregnancies, postpartum care, AIDS 

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  therapy, various medical social services, and case management services to
  insurance companies and self-insured employers.

    Home health aide care is the provision of personal care services and
  assistance with activities of daily living such as personal hygiene and meal
  preparation. The Company's home health aides must pass certain competency
  tests and are supervised by a registered nurse.

    Primary home health care is provided by the Company through state
  administered programs that pay for unskilled homemaker services to the elderly
  or the disabled, as ordered by a physician. A registered nurse makes the
  initial assessment and assigns a homemaker to provide housekeeping, shopping
  and limited personal care.

    Home Respiratory Therapy/Home Medical Equipment. The Company provides a wide
  variety of home respiratory, monitoring and medical equipment. Respiratory
  therapists provide care to the patient according to the physician-directed
  plan of care and educate the patient and the family or other care giver
  regarding treatment requirements, use of equipment and self-care. The Company
  rents, sells and services respiratory equipment for patient use in the home
  and supplies patients with aerosol medications for use in respiratory therapy
  treatments. The Company's principal respiratory services include:

    Oxygen systems that assist patients with breathing. The Company provides
  three types of oxygen systems: (i) oxygen concentrators, which are stationary
  units that filter ordinary air in order to provide a continuous flow of oxygen
  and are generally the most cost effective supply of oxygen for patients who
  require a continuous flow of supplemental oxygen; (ii) liquid oxygen systems,
  which are containers used for patients who require a continuous high flow of
  supplemental oxygen; and (iii) high pressure oxygen cylinders, which provide
  an ambulatory patient with the ability to obtain supplemental oxygen outside
  of the home.

    Nebulizers that deliver aerosol medications that are inhaled directly by the
  patients. Nebulizers are used to treat patients with asthma, chronic
  obstructive pulmonary disease, cystic fibrosis and neurologically related
  respiratory problems, and patients with AIDS.

    Home ventilators that mechanically sustain a patient's respiratory function
  in cases of severe respiratory failure.

    Continuous positive airway pressure therapy that forces air through
  respiratory passageways during sleep. This treatment is provided to adults
  with sleep apnea, a condition in which a patient's normal breathing patterns
  are disturbed during sleep. Monitoring services are usually provided with this
  therapy.

  The Company also leases and sells convalescent equipment, in connection with
the provision of its other services to patients in the home. Such equipment
includes hospital beds, wheelchairs, walkers, and patient lifts as well as
medical and surgical supplies such as stethoscopes, orthopedic supplies, urinary
catheters, syringes, and needles. The Company is able to increase revenues by
providing home medical equipment and supplies to its patients who are also
receiving nursing, respiratory therapy or infusion therapy.

  The Company also provides monitoring services to assist physicians with
diagnosis. The Company's principal monitoring services currently comprise a
small portion of the Company's business.  Monitoring services include:

    Cardiac monitoring for the detection of arrhythmias, a condition that is
  responsible for an estimated 500,000 deaths each year in the United States.
  The Company provides cardiac loop event recorders which are monitored
  electronically and are efficient and cost-effective arrhythmia detection
  devices.

    Uterine monitoring which detects records and sends uterine activity
  information to a prenatal monitoring center. Such monitoring is designed to
  alert health care professionals of pre-term labor in high-risk pregnancies.

    Apnea monitors provided to certain high risk newborn infants warn parents of
  apnea episodes as a preventative measure against sudden infant death syndrome.

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<PAGE>
 
  Home Infusion Therapy. The Company offers comprehensive home infusion
therapies. Home infusion therapy involves the administration of nutrients,
antibiotics and other medications intravenously (into the vein), subcutaneously
(under the skin), intramuscularly (into the muscle), intrathecally or epidurally
(via spinal routes), or through feeding tubes into the digestive tract. Infusion
therapy often begins during hospitalization of a patient and continues in the
home. New patients are instructed in the administration of infusion therapy and
related services by a registered nurse who provides the patient's first home
treatment and continuing supervision of care. The Company's principal infusion
therapies follow:

    Anti-infective therapy is the infusion of antibiotic medications into a
  patient's bloodstream to treat a variety of infections and diseases.

    Enteral nutrition is the infusion of essential nutrients through a feeding
  tube, and is necessary for patients who are unable to orally ingest adequate
  nutrients.

    Total Parenteral Nutrition is the intraveneous infusion of a nutrient
  solution to restore and/or maintain electrolyte balance and nutritional
  status.

    Pain management is provided to patients experiencing acute pain as a result
  of traumatic injury, surgical procedures disease or other medical disorders.
  The Company provides a comprehensive approach to pain management that includes
  a thorough knowledge of available agents, routes of administration and
  appropriate dosage levels as directed.

    Chemotherapy is provided in the home or in other locations and allows
  patients with cancer an alternative to frequent and expensive hospital stays.

    Pentamidine is an agent used specifically in the treatment of patients with
  AIDS who have experienced one or more episodes of pneumocystis carinii
  pneumonia.

Financial and Clinical Management Information Systems

  The Company is implementing a proprietary financial and clinical management
information system, Medisyn(TM), which is comprised of several financial and
clinical components integrated through a central interface engine. Medisyn(TM)
is designed to integrate all aspects of the Company's operations by providing
centralized information management for each patient by linking clinical services
to its financial systems. The Company believes that Medisyn(TM) will enable it
to service increased volumes of managed care referrals, reduce costs and result
in more efficient collection of receivables. The Company also believes
Medisyn(TM) will provide competitive advantages by generating data that will
enhance the Company's ability to price and manage the Company's services and
products in a managed care environment and by measuring more accurately the
quality and cost of care that is delivered in the home. The Company believes
that it is the only home health care provider implementing this technology, and
has filed a patent application with respect to Medisyn(TM) with the United
States Patent Office.

  Medisyn(TM) consists of the following four principal components, which
interface with the others through a central interface engine: (i) a proprietary,
customer information management system (CIMS); (ii) hand-held clinical system
point of care computers (PtCT Units); (iii) an integrated financial services
system (the Lawson System); and (iv) a contract management and billing system
(the Innovative Managed Care System or IMACS). Medisyn(TM) processes referrals
through CIMS, which captures patient information, creates a patient profile and
interfaces with the appropriate billing system(s) to create a billing record.
CIMS also assures that the requested services are authorized by the payor. If
the referral includes nursing services, the visit and clinical information will
be recorded at the patient's home in a PtCT Unit and transmitted via modem to a
central data base to be included in the patient profile. After services have
been provided, the IMACS system applies the contract terms of the payor and
generates a customized invoice, and through an interface provides this
information to the Company's financial systems, including cash posting and the
general ledger. A description of each principal component follows.

                                       8
<PAGE>
 
  CIMS. CIMS coordinates all services for patients by assigning each patient a
single identification number and developing for each patient a readily
accessible comprehensive patient profile comprised of demographic, clinical,
case management and billing information. By integrating customer information
management for all of the Company's services, the Company is able to more
effectively service increased volumes of referrals from managed care payors.
CIMS enables the Company to record demographic data, obtain payor verification,
payor authorizations and diagnosis, all of which the Company believes will
enable it to more efficiently service managed care and other payor
relationships.

  PtCT Units. The Company's nurses and home health aides are equipped with PtCT
Units, which are hand-held clinical system point of care computers. The PtCT
Units allow each of the Company's nurses to have an electronic patient chart in
hand and to transmit directly to the Company's system via modem clinical,
payroll and billing information. Once the clinical data has been recorded, the
system enables the Company to develop clinical assessments of patients via
computer generated documentation. Same-day reporting capabilities reduce
paperwork and transcription errors, which has increased certain nurse
productivity. The system also expedites the processing of payroll data,
accelerates the transfer of information to attending physicians, and improves
the consistency and completeness of the assessments generated.

  Integrated Financial Services System.  The Company has substantially
implemented the Lawson System, which is an integrated suite of financial
services software, including a general ledger, accounts payable, materials
management/purchasing, payroll and human resource elements.  The general ledger,
accounts payable, payroll and human resource systems are fully operational.

  IMACS.  IMACS, the Company's contract management and billing system, will
enable the Company to capture the essential elements of payor relationships
(including relationships with managed care organizations, other private payors,
Medicaid and Medicare), to assess pricing, eligibility, utilization and other
information necessary to assure accurate billing and to enhance contract
profitability.  In addition, IMACS will allow the Company to more effectively
manage payor contract terms and to provide payors with a consolidated bill for
multiple services. Full implementation of IMACS is expected to be complete in
late 1999.

  The Company is in the process of installing the SSI Group, Inc. Claims
Management and Eligibility modules.  These system modules will ensure the
accuracy of HealthCor's claims processing and insurance
verification/authorization process.  The Claims Management module automates the
claim form collection process from initial filing with the primary payor through
submission to the secondary payor.  The Eligibility module automates
verification/authorization of patient insurance benefits.  Management feels
that, once installed, the system will significantly improve the quality and
timeliness of billing submission to third party payors.  The system is expected
to be operational in late 1999.

Marketing

  During 1998, the Company's marketing efforts were disrupted due to a reduction
in work force, numerous resignations within the field sales force and national
account management and spending cuts in marketing programs and spending plans.
By the end of 1998, the Company had lost or eliminated 10 of 25 marketing
positions that existed in 1997.  In addition, the closure of 56 Medicare nursing
offices had a negative impact on several key integrated service contracts that
required the entire contracted area to be served.  Accordingly during 1998, the
Company implemented a change in marketing strategy from programs designed to
generate additional revenue and strengthen key relationships to one of contract
and key account maintenance.

  The Company is currently attempting to strategically rebuild its sales and
marketing staff in the key markets, with core strategies and programs that will
result in revenue growth during the second half of 1999.  The Company still
believes that a strategy built around meeting managed care organization's
demands for pricing, value added services, billing and other special needs will
result in increased business growth and other long term benefits.

                                       9
<PAGE>
 
Quality Improvement

  The Company believes that the quality of services is critical to its ability
to obtain referrals and increase revenues and profitability.  To assure the
delivery of high-quality patient care, and the overall quality of service, the
Company's Continuous Quality Improvement plan (CQI) was developed.  Each product
line has CQI indicators to address those areas, which historically have had
complaints or problems.  In addition, each office, using the FADE method (focus,
analyze, develop, and execute), develops indicators unique to their need or
area.  There is a corporatewide client satisfaction survey, randomly selected,
totaled and evaluated companywide as well as by product line.

  The Company has a validation/verification process beginning with a centralized
call center.  The call center is responsible for taking referrals, verifying
benefits, confirming billing instructions and requesting authorization.  This
information is entered into a Central Customer Information Management System
(CIMS) which provides information directly to the field offices.  Information is
only entered once in CIMS, which reduces data entry errors.  The billing
verification process involves the use and comparison of different sets of data,
one from CIMS and another from Patient Care Technologies (PTCT), which is the
nursing electronic charting system, and/or delivery tickets and reports
generated at the field level for HME and pharmacy.

  The Company is JCAHO accredited in its major market areas.

Human Resource Management

  The Company continuously recruits, screens, trains and offers benefits and
other programs in an effort to attract and retain its personnel.  The Company
also recruits through Quest Personnel Resources, its personnel placement
division, reducing certain recruiting fees and expenses. Recruiting is conducted
primarily through advertising, personnel agencies, direct contact with community
groups and the use of bonuses.

  The Company routinely develops and distributes quality improvement in-service
materials, manuals, and forms to its staff.  In addition, skilled nurses are
initially assigned to a nurse preceptor until the Company believes that these
new nurses have acquired a sufficient degree of home health care knowledge and
experience.  The Company also has implemented an infusion therapy verification
program for skilled nurses.  The Company is recognized as a provider of
continuing education units by the Texas Nursing Association, which is accredited
by the American Nursing Credentialing Center.

  The retention of qualified employees is a high priority for the Company.  As
of December 31, 1998, the Company employed over 2,000 individuals.  Management
believes that the Company's employee relations are good. None of the Company's
employees are represented by a labor union or other collective bargaining
organization.

Insurance

  The Company maintains professional liability insurance covering the negligent
acts and omissions of its home health care personnel while rendering services.
This policy provides coverage of $5.0 million in the aggregate or $5.0 million
per occurrence for each policy year.  The Company believes that the insurance
which it maintains, in relation to the size of its business, is customary in the
home health care industry; however, there can be no assurance that any such
insurance will be adequate to cover the Company's liabilities.  The Company
maintains product liability insurance on all of the medical equipment, supplies
and pharmaceuticals that it sells, leases or provides to its home health care
patients.  This insurance provides coverage of $2.0 million in the aggregate or
$1.0 million per occurrence for each policy year. The Company also maintains
umbrella coverage in excess of its general liability insurance which provides
$5.0 million in the aggregate or $5.0 million per occurrence for each policy
year.

                                       10
<PAGE>
 
Competition

  Changes in the Medicare reimbursement structure, increasing agings of accounts
receivables for services provided under managed care contracts and market share
pricing forced many home health providers out of business in 1998.  While much
the same is forecasted for  1999, competition within the home health industry
remains intense for patients enrolled in either Medicare or managed care plans.
During the last half of 1998 low contract pricing proposals by the competition
and low margin contract pricing for services provided under current contracts
forced the Company to withdraw several contract proposals and cancel a major
contract due to delayed payment for services provided.

  Consolidation within the industry through mergers and acquisitions remained
common in 1998 and may continue throughout 1999.  The merged organizations may
intensify the competitiveness within the marketplace if they are successful at
providing expanded geographical coverage, employee talent, and marketing and
financial resources.  The durable medical equipment ("DME") competitive bidding
process, intensified regulatory scrutiny, and low margin reimbursement for
services will continue to challenge the company during 1999.

Regulation

  The Company's business is subject to extensive and increasing regulation by
federal, state and local government. Federal agencies which regulate aspects of
the Company's business include the DHHS, HCFA, the Office of the Inspector
General, the Food and Drug Administration, the Department of Labor, the Drug
Enforcement Agency, and the Occupational Safety and Health Administration. In
most states, home health care providers are regulated by the state department of
health and board of pharmacy.

  The Company is subject to federal laws regulating the repackaging and
dispensing of drugs and regulating interstate motor-carrier transportation and
state laws regulating pharmacies, nursing services and certain types of home
health agency activities. Under state laws, the Company's offices must be
licensed prior to commencing business and must renew their licenses
periodically.  Further, Company offices participating in the Medicare Program as
home health agencies or enrolled as durable medical equipment suppliers must
meet the Medicare conditions of participation or supplier standards.  In
addition, certain of the Company's employees are subject to state laws and
regulations governing the professional practice of respiratory therapy, pharmacy
and nursing. Failure to comply with regulatory laws could expose the Company to
criminal and civil penalties, and jeopardize the licensure of one or more of its
home health care agencies, or their participation in the Medicare, Medicaid and
other reimbursement programs.

  As a provider of services under the Medicare and Medicaid programs, the
Company is subject to the various "anti-fraud and abuse" laws, including the
federal health care programs anti-kickback statute.  This law prohibits the
knowing and willful offer, payment, solicitation or receipt of any form of
remuneration to induce the referral of business reimbursable under a federal
health care program or in return for the purchase, lease, order, arranging for,
or recommendation of items or services covered by any such program.  Federal
health care programs are any health care plans or programs that are funded by
the United States (other than certain federal employee health insurance
benefits) and certain state health care programs that receive federal funds
under various programs, such as Medicaid.  A related law forbids the offer or
transfer of any item or service for less than fair market value, or certain
waivers of copayment obligations, to a beneficiary of Medicare or a state health
care program that is likely to influence the beneficiary's selection of health
care providers.  Violations of the anti-fraud and abuse laws can result in the
imposition of substantial civil and criminal penalties and, potentially,
exclusion from furnishing services under any federal health care programs. In
addition, the states in which the Company operates generally have laws that
prohibit certain direct or indirect payments or fee-splitting arrangements
between health care providers where they are designed to obtain the referral of
patients to a particular provider.

  Congress adopted legislation in 1989, known as the "Stark" Law, that generally
prohibits a physician ordering clinical laboratory services for a Medicare
beneficiary where the entity providing that service has a financial relationship
(including direct or indirect ownership or compensation relationships) with the
physician (or a member of his immediate family), and prohibits such entity from
billing for or receiving reimbursement for such services, 

                                       11
<PAGE>
 
unless a specified exemption is available. Additional legislation became
effective as of January 1, 1993 known as "Stark II," that extends the Stark Law
prohibitions to services under state Medicaid programs, and beyond clinical
laboratory services to all "designated health services," including home health
services, durable medical equipment and supplies, outpatient prescription drugs,
and parenteral and enteral nutrients, equipment, and supplies. Violations of the
Stark Law may also trigger civil monetary penalties and program exclusion.
Pursuant to Stark II, physicians who are compensated by the Company are
prohibited from making referrals to the Company, and the Company is prohibited
from seeking reimbursement for services rendered to such patients unless an
exception applies. Several of the states in which the Company conducts business
have also enacted statutes similar in scope and purpose to the federal fraud and
abuse laws and the Stark Laws. The scope of the Stark Law is evolving in that
extensive amendments to the implementing regulations have been proposed, but not
yet issued in final form. The Company believes that it is in compliance with all
such laws.

  Various federal and state laws impose criminal and civil penalties for making
false claims for Medicare, Medicaid or other health care reimbursements.  The
Company believes that it bills for its services under such programs accurately.
However, the rules governing coverage of, and reimbursements for, the Company's
services are complex.  There can be no assurance that these rules will be
interpreted in a manner consistent with the Company's billing practices.

  In May 1995, the federal government instituted Operation Restore Trust, a
health care fraud and abuse initiative focusing on nursing homes, home health
care agencies and durable medical equipment companies located in the five states
with the largest Medicare populations.  Texas, the Company's corporate base, was
one of the original targeted states.  The purpose of this initiative is to
identify fraudulent and abusive practices such as billing for services not
provided, providing unnecessary services and making prohibited referral payments
to health care professionals. Operation Restore Trust has been responsible for
significant fines, penalties and settlements. Operation Restore Trust was
expanded to cover twelve additional states for the next two years.  The program
was also expanded to include reviews of psychiatric hospitals, certain
independent laboratories and partial hospitalization benefits. Further, the
government now applies similar investigation techniques in all fifty states and
throughout the Medicare and Medicaid programs.  One of the results of the
program has been increased auditing and inspection of the records of health care
providers and stricter interpretations of Medicare regulations governing
reimbursement and other issues.  Specifically, the government plans to double
the number of comprehensive home health agency audits it performs each year
(from 900 to 1800) and also to increase the number of claims reviewed by 25.0%
(from 200,000 to 250,000). In general, the application of these anti-fraud and
abuse laws is evolving.

  During 1997 and 1998, the home health care industry experienced several
significant regulatory and reimbursement changes. In February 1997, the Company
learned that HCFA planned to adopt mileage limitations restricting the distance
between a nursing agency's principal office and its branches. Texas, where the
Company has significant operations, announced that it intended to implement even
more restrictive mileage limitation rules for branch offices.  As a result of a
moratorium on new Medicare provider numbers, HCFA imposed a delay in permitting
branch office transfers.

  The Balanced Budget Act of 1997 ("BBA"), enacted in August 1997, and amended
in the Tax and Trade Relief Extension Act of 1998, established a new
reimbursement system for home nursing services provided by Medicare
participating home health agencies, effective for cost reporting periods
beginning on or after October 1, 1997, which significantly reduced their
Medicare payments.  Under this interim payment system ("IPS"), a home health
agency is reimbursed the lowest of :  (1) its actual costs to the extent deemed
reasonable under Medicare reasonable cost reimbursement rules; (2) revised
Medicare per-visit cost limits; and (3) new Medicare per-beneficiary cost
limits.  At present, the IPS is to remain in effect until a new prospective
payment system ("PPS") for home health agency services is adopted for cost
reporting periods beginning on or after October 1, 2000.  The prospective
payment system has not yet been developed.  Significantly, these changes reduced
the Company's Medicare reimbursements in 1998 due to the reduced payment
limitations.

          The BBA also reduced the Medicare national payment amounts for oxygen
and oxygen equipment used in home respiratory therapy by 25% effective January
1, 1998, and an additional 5% effective January 1, 1999, as well as eliminating
inflation updates to the payment rates for those years.  Reimbursements for
Medicare home oxygen 

                                       12
<PAGE>
 
services represented approximately 6% of the Company's annualized revenues in
1997. Further, the BBA has generally eliminated inflation updates under the
Medicare durable medical equipment benefits, which had been based upon annual
increases in the Consumer Price Index, for the period 1998 through 2002. Many of
the Company's services other than home nursing are covered by Medicare under the
durable medical equipment benefit. Further, the BBA also limits payments for
covered drugs and biologicals billed by Medicare suppliers to 95% of the average
wholesale price in each of the years 1998 through 2002.

  The Medicare Program has also instructed its regional Medicare carriers to
identify items and services covered under the durable medical equipment benefit
that have inherently unreasonable payment rates, based upon price surveys and
other means.  Such unreasonable payment levels may be reduced by up to 15% per
year until reduced to reasonable levels.  Carriers can impose these reductions
with only an abbreviated notice and comment procedure.  How such future
reductions may impact the Company is unknown.

  The Medicare Program has also proposed extensive revisions to the Conditions
of Participation for home nursing agencies and the coverage standards for
durable medical equipment suppliers, some of which were recently adopted in
final form.  These regulatory amendments would, among other things, generally
heighten the requirements to participate in the Medicare Program, require
background investigations of all employees, and require the use of standardized
measures of quality of care and patient outcomes.  The Company believes that it
will have the capacity to comply with both the proposed and adopted regulatory
changes.

  The BBA contains other provisions that would reduce Medicare reimbursements to
acute care hospitals for some Medicare patients who are discharged after a very
short inpatient stay from a hospital to a home health agency's care.  This
provision could have the effect of reducing referrals for home health services
by amendments require that reimbursements be based upon the site where the
service is rendered rather than the location of the home health agency's
principal office.  The BBA also requires surety bonds for Medicare and Medicaid
participating home health agencies and durable medical equipment suppliers.
However, the federal government has not yet implemented the surety bonding
requirement.  If the Company is unable to obtain surety bonds when such
requirements are implemented, which may happen at any time, it could no longer
participate in the Medicare Program, which would have a material negative impact
on the Company.  Other regulatory changes have reduced which services are
covered under the Medicare Program for participating home health agencies.
Rules effective February 1, 1998, eliminated venipuncture as a qualifying
service for Medicare home health nursing benefits, which negatively impacted the
Company's Medicare home health agency revenues.

  Partially in response to these regulatory changes, the Company has closed
substantially all of its remaining Medicare home nursing offices during 1998.

Investment Considerations

Ability to Continue as a Going Concern

  The accompanying 1998 consolidated financial statements of the Company have
been prepared under generally accepted accounting principles assuming that the
Company will continue as a going concern.  The Company recorded a net loss of
approximately $(98.3) million in 1998 and has negative working capital of
$(93.0) million at December 31, 1998.  In addition, at April 21, 1999, the
Company is in default on its 11% Senior Notes.  The Company does not have
adequate liquidity or available sources of financing to meet its contractual
debt obligations and settle its other liabilities.  These factors raise
substantial doubt about its ability to continue as a going concern.  The 1998
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.

                                       13
<PAGE>
 
Recent Financial Losses

  The Company reported a net loss for the quarter ended December 31, 1998 of
$(64.2) million compared to a net loss for the quarter ended December 31, 1997
of $(15.4) million.  The Company also recorded a loss per share for the quarter
ended December 31, 1998 of $(6.36) compared to a loss of $(1.53) per share for
the quarter ended December 31, 1997.  The Company recorded a loss for 1998 of
$(98.3) million compared to a net loss of $(15.6) million in 1997.  Net loss per
share was $(9.74) in 1998 compared to $(1.56) per share in 1997.  The Company's
net loss in 1998 was partially attributable to pre-tax goodwill write-offs of
$31.8 million as a result of certain unamortized goodwill balances that were
evaluated and deemed impaired.  The Company also recorded an additional
provision for doubtful accounts of $31.6 million and a loss on disposition of
assets of $1.5 million. In addition the Company's Medicare nursing operations in
the first quarter of 1998 exceeded cost limitations by $5.6 million.

Pending Litigation

  On March 20, 1998, the Company and several of its former officers were named
as defendants in a lawsuit alleging certain violations of federal securities
laws by the Company.  The plaintiffs in the lawsuit seek to represent a class of
persons who purchased shares of the Company's common stock from March 31, 1997
through and including March 31, 1998.  The Company has filed a motion to dismiss
the lawsuit which is pending before court for determination, otherwise the
Company intends to vigorously defend the lawsuit.  The Company is currently
unable to assess the likelihood of success in this litigation, which is in the
early stages of fact finding.  An adverse result in the litigation could have a
material adverse effect on the Company's business and operations.

Delisting from The NASDAQ National Market

  The Company has been informed by NASDAQ National Market System ("NASDAQ") that
it fails to meet certain of the revised listing standards for inclusion on the
NASDAQ National Market, including a minimum bid price of $5.00 per share.  The
Company had been traded on the NASDAQ National Market since August, 1996.

Substantial Leverage

  The Company has substantial indebtedness and increased debt service
obligations compared to prior years. At December 31, 1998, the Company had
approximately $97.6 million of consolidated indebtedness (including capital
leases and lines of credit) as compared to the Company's stockholders' deficit
of $59.0 million.  The Company expects that it will be necessary for its
operating results to improve significantly in order to permit it to meet the
debt service obligations under the Senior Notes and other credit facilities and
there can be no assurance that the Company will be able to make any interest
payments thereunder.  The ability of the Company to improve its operating
results will depend upon a variety of factors, including economic, financial,
competitive, regulatory and other factors beyond its control.  There can be no
assurance that the Company will generate sufficient earnings or cash flow from
operations in the future to service the Senior Notes and to meet its working
capital, capital expenditure and other requirements.  The implementation of the
Company's restructuring plan has generated significantly greater negative cash
flow than in 1997.  The Company is unable to service the Senior Notes using
earnings or cash flow from operations and is examining alternate means of
repayment that could include restructuring or refinancing its indebtedness or
sale or merger of the Company.  There can be no assurance that the Company would
be able to effect such a restructuring or refinancing if permitted to do so.
The Company's ability to make payments with respect to the Senior Notes and to
satisfy its other debt obligations will depend on its future operating
performance, or sale or merger, each of which will be affected by governmental
regulations, prevailing economic conditions, financial factors, and other
factors, certain of which are beyond the Company's control.

  The degree to which the Company is leveraged has important consequences,
including: (i) the Company's ability to obtain additional financing in the
future for operating expenses, acquisitions or general corporate purposes is
impaired; (ii) a substantial portion of the Company's cash flows from operations
be dedicated to the payment of principal and interest on its indebtedness,
thereby reducing the funds available for operations; (iii) certain of the
Company's indebtedness, contain financial and other restrictive covenants,
including those restricting the incurrence 

                                       14
<PAGE>
 
of additional indebtedness, the creation of liens, the payment of dividends,
sales of assets and minimum net worth requirements; and (iv) the Company's
leverage substantially increases the Company's vulnerability to changes in the
industry, including, among other things, government regulations and changing
economic conditions.

Dependence on Reimbursement by Third-Party Payors; Accounts Receivable

  In 1998, the percentages of the Company's net revenues from Medicare, Medicaid
and other third-party payors were approximately 14.8%, 17.8% and 67.4%,
respectively, and in 1997, the percentages of the Company's net revenues derived
from Medicare, Medicaid and other third-party payors were approximately 51.9%,
3.9% and 44.2%, respectively.  The net revenues and profitability of the Company
are affected by the continuing efforts of all payors to contain or reduce the
costs of health care by, among other things, reducing reimbursement rates,
narrowing the scope of covered services, increasing case management review of
services and negotiating reduced contract pricing.  In addition, the home health
care industry is characterized by long collection cycles for accounts receivable
due to the complex and time consuming requirements for obtaining reimbursement
from private and governmental third-party payors. Furthermore, reimbursement
from government payors is subject to audit and retroactive adjustment.  Any
changes in reimbursement levels under Medicare, Medicaid or third-party payor
programs and any changes in applicable government regulations could have a
material adverse effect on the Company's business, financial condition, cash
flows or results of operations.  Changes in the mix of the Company's patients
among Medicare, Medicaid and third-party payor categories could have a material
adverse effect on the Company's business, financial condition, cash flows or
results of operations. In addition, patients, including Medicare and Medicaid
beneficiaries, increasingly are participating in managed care plans.  Managed
care organizations, in turn, are increasingly becoming involved in monitoring
and determining the appropriate health care settings for their enrollees based
primarily on cost and quality of care.

  The Company recorded additional provisions for doubtful accounts of $31.6
million in 1998 due to the Company's continued difficulties in collecting from
certain managed care payors as well as its failure to timely file claims with
payors, difficulty in obtaining accurate patient data, and maintenance of
effective quality control and processes and procedures in the revenue cycle (see
Management Information Systems discussion).  Managed care organizations are
increasingly challenging the billings of home health care providers and limiting
reimbursements to home health care companies.  This is an important trend in the
home health care industry and there can be no assurance that this trend will not
continue and continue to have a material adverse effect on the Company in the
future.  Furthermore, there can be no assurance that the Company will be able to
maintain its current payor or revenue mix.  See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Regulation."

Medicare Reimbursement Reforms; Closing of Nursing Offices

  The Company is subject to changes in federal, state and local laws and
regulations which may have a significant effect on operating methods, costs, and
reimbursement amounts provided by governmental and other third-party payors.
The federal government is continuing to review and assess alternative health
care delivery systems and payment methodologies.  During 1997 and 1998, the
federal government implemented reductions in planned Medicare spending, a number
of which directly affect the home health care industry.  In late 1997, the
Company learned that the Medicare Program planned to adopt restrictions on the
extent to which home care companies participating as Medicare home health
agencies could operate as branch offices, in part depending upon the distance
between an agency's principal office and its branches. Texas, where the Company
has significant operations, announced that it intended to implement even more
restrictive mileage limitation rules for branch offices.

  The Balanced Budget Act, as amended in 1998, established a new reimbursement
system for home nursing services provided by Medicare participating home health
agencies effective for cost reporting periods beginning on or after October 1,
1997 which significantly reduced their Medicare payments.  Under this interim
payment system ("IPS"), a home health agency is reimbursed the lowest of:  (1)
its actual costs to the extent deemed reasonable under Medicare reasonable cost
reimbursement rules; (2) revised Medicare per-visit cost limits; and (3) new
Medicare per-beneficiary cost limits.  At present, the IPS is to remain in
effect until a new prospective payment 

                                       15
<PAGE>
 
system for home health agency services is adopted for cost reporting periods
beginning on or after October 1, 2000. The prospective payment system has not
yet been developed.

  The BBA also reduced the Medicare national payment amounts for oxygen and
oxygen equipment used in home respiratory therapy by 25% effective January 1,
1998, and an additional 5% effective January 1, 1999, as well as eliminating
inflation updates to the payment rates for those years.  Reimbursements for
Medicare home oxygen services represented approximately 6% of the Company's
annualized revenues in 1997.  Further, the BBA has generally eliminated
inflation updates under the Medicare durable medical equipment benefits, which
had been based upon annual increases in the Consumer Price Index, for the period
1998 through 2002.  Many of the Company's services other than home nursing are
covered by Medicare under the durable medical equipment benefit.  Further, the
BBA also limits payments for covered drugs and biologicals billed by Medicare
suppliers to 95% of the average wholesale price in each of the years 1998
through 2002.

  The Medicare Program has also instructed its regional Medicare carriers to
identify items and services covered under the durable medical equipment benefit
that have inherently unreasonable payment rates based upon price surveys and
other means.  Such unreasonable payment levels may be reduced by up to 15% per
year until reduced to reasonable levels.  Carriers can impose these reductions
with only an abbreviated notice and comment procedure.  How such future
reductions may impact the Company is unknown.

  The Medicare Program has also proposed extensive revisions to the Conditions
of Participation for home nursing agencies and the coverage standards for
durable medical equipment suppliers, some of which were recently adopted in
final form.  These regulatory amendments would, among other things, generally
heighten the requirements to participate in the Medicare Program, require
background investigations of all employees, and require the use of standardized
measures of quality of care and patient outcomes.  The Company believes that it
will have the capacity to comply with both the proposed and adopted regulatory
changes.

  The BBA contains other provisions reducing Medicare reimbursements to acute
care hospitals for some Medicare patients who are discharged from the hospital
after a very short inpatient stay to a home health agency's care.  This
provision could have the effect of reducing referrals for home health services
by giving hospitals the incentive to retain some Medicare patients longer.
Other recent amendments require that reimbursements be based upon the site where
the service is rendered rather than the location of the home health agency's
principal office.  The BBA also requires surety bonds for Medicare or Medicaid
participating home health agencies and suppliers of durable medical equipment.
However, the federal government has not yet implemented the surety bonding
requirement.  If the company is unable to obtain surety bonds when such
requirements are implemented, which may happen at any time, it could no longer
participate in the Medicare Program, which would have a material negative impact
on the Company.  Other regulatory changes have reduced which services are
covered under the Medicare Program for participating home health agencies.
Rules effective February 1, 1998, eliminated venipuncture as a qualifying
service for Medicare home health nursing benefits, which negatively impacted the
Company's Medicare home health agency revenues.

  During 1997 the Company was subject to Medicare cost limitations for home
nursing that were lower than the Company's operating expenses for that period,
resulting in the Company's Medicare nursing expenses exceeding reimbursable
limits by $8.4 million.  As a result of the closing of substantially all of its
remaining Medicare nursing offices during 1998, the Company's Medicare nursing
revenue was reduced from the 1997 level by at least $47.8 million or 82.6%.
Based upon these and past initiatives to reduce Medicare costs and possible
further cost containment or other initiatives in the future, the Company expects
that the reimbursements received from the Medicare program to be subject to
continued risk of future reductions.  These changes in Medicare reimbursements
for home health care have reduced reimbursements available to the Company in
1998 and could have a material adverse effect on the Company's future business,
financial condition, cash flows or results of operations.  The Company is also
subject to audit of the reimbursements it receives under the Medicare program.
Any significant audit adjustment could have a material adverse effect on the
Company's business, financial condition, cash flows or results of operations.
See " -- Effect of Government Regulations," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Regulation."

                                       16
<PAGE>
 
Dependence on Referral Sources

  The growth and profitability of the Company depend in part on its ability to
establish and maintain close working relationships with referral sources,
including managed care organizations, payors, hospitals, physicians and other
health care professionals. The Company has experienced a significant decline in
the number of Medicare nursing referrals from such sources. There can be no
assurance that the Company will be able to successfully maintain significant
existing referral sources and develop new referral sources, or that certain of
its referral sources, such as managed care organizations and hospitals, will not
become providers of home health care services. Historically, independent home
health care companies have encountered significant competition from hospital-
based home health care organizations whose parent hospitals have financial and
operating relationships with referring physicians. There can be no assurance
that these physicians will refer cases to independent home health care companies
or, if these physicians do refer cases to independent home health care
companies, that the Company will be able to obtain referrals from these sources.
The loss of existing referral sources or the failure to develop important new
referral sources (such as managed care organizations) could have a material
adverse effect on the Company's business, financial condition, cash flows or
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."

Effect of Government Regulations

  The Company's business is subject to extensive and increasing regulation by
federal, state and local governments, including the DHHS, HCFA, the Office of
the Inspector General, the Food and Drug Administration, the Department of
Labor, the Drug Enforcement Agency and the Occupational Safety and Health
Administration, as well as state departments of health and other local
regulatory agencies. The government recently has devoted substantial attention
to this industry and may continue to do so in the future, which could have a
material adverse effect on the Company. Federal laws governing the Company's
activities include regulations concerning the repackaging and dispensing of
drugs, Medicare certification of home health agencies, Medicare coverage
standards and reimbursement policies and various health care anti-fraud and
abuse policies. The facilities operated by the Company must comply with all
applicable laws, regulations and licensing standards. In addition, many of the
Company's employees must maintain certain licenses in order to provide some of
the services offered by the Company. In January 1998, one of the Company's home
health agencies was threatened by DHHS with a finding that it was not in
compliance with Medicare home health Conditions of Participation and that it
would be terminated from the Medicare program.  Because the Company decided to
close this agency as part of its restructuring, the Company voluntarily withdrew
this home health agency from Medicare participation rather than appealing the
threatened adverse determination.  There can be no assurance that federal, state
or local governments will not change existing standards or impose additional
standards or that the Company will meet, or continue to meet, existing or future
standards relating to all or a portion of the Company's activities.  See
Medicare Reimbursement Reforms; Revenue Adjustments; Closing of Nursing Offices"
and "Business -- Regulation."

Operation Restore Trust

  In May 1995, the federal government instituted Operation Restore Trust, a
health care fraud and abuse initiative focusing on nursing homes, home health
care agencies and durable medical equipment companies located in the five states
with the largest Medicare populations. Texas, where the Company has significant
business volume, was one of the original targeted states. The purpose of this
initiative is to identify fraudulent and abusive practices such as billing for
services not provided, providing unnecessary services and making prohibited
referral payments to health care professionals. Operation Restore Trust has been
responsible for significant fines, penalties and settlements. Operation Restore
Trust was recently expanded to cover twelve additional states for the next two
years. The program was also expanded to include reviews of psychiatric
hospitals, certain independent laboratories and partial hospitalization
benefits. Further, the government now applies similar investigation techniques
in all fifty states and throughout the Medicare and Medicaid programs. Heath
care fraud is now the second highest federal law enforcement priority, second
only to violent crime.  One of the results of the program has been increased
auditing and inspection of the records of health care providers and stricter
interpretations of Medicare regulations governing reimbursement and other
issues. Specifically, the government plans to double the number of comprehensive
home health agency audits it performs each year (from 900 to 1800) and also to
increase the number of claims reviewed 

                                       17
<PAGE>
 
by 25.0% (from 200,000 to 250,000). Management believes that it is in compliance
with anti-fraud and above laws, but cannot predict the effect of Operation
Restore Trust and similar anti-fraud and abase initiatives on the Company or its
results of operations. See "Business -- Regulation."

Management Information Systems

  Servicing a high volume of referrals from managed care organizations and other
payors requires the integration of complex and technical financial and clinical
information. Medisyn(TM), the Company's management information system, is not
yet fully implemented, and there can be no assurance that the Company will
successfully implement the remaining components of Medisyn(TM), or that the
Company will not experience unanticipated delays and expenses in such
implementation and integration. Successful implementation of Medisyn(TM) is an
important part of the Company's business strategy, and failure to successfully
implement the remaining components of Medisyn(TM), or to achieve expected cost
savings, improved productivity and more effective collection of receivables,
could have a material adverse effect on the Company's business, financial
condition, cash flows or results of operations.  There can be no assurance that
the implementation of Medisyn(TM) will enable the Company to successfully
respond to such changes in the future. It is also impossible to predict the
effect of future regulatory changes on the ability of the Company's management
information systems to serve the Company's needs in an efficient and profitable
manner. Any malfunction or increase in expenses in connection with the Company's
management information systems could have a material adverse effect on the
Company's business, financial condition, cash flows or results of operations.
See "Business -- Financial and Clinical Management Information Systems" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Changes in Key Personnel

  On February 25, 1999, the Company announced that  S. Wayne Bazzle, the
Company's Chairman of the Board and Chief Executive Officer, and Cheryl C.
Bazzle, the Company's President and Chief Operating Officer resigned from all
positions of the Company.  In addition, two senior vice presidents have
resigned.  The Bazzles will continue to provide consulting services to the
Company.  The Company also announced that Michael D. Ayres, the Chief Financial
Officer, has been named acting Chief Executive Officer and Charles E. Dowling
has been appointed as Senior Vice President for Operations.  On April 12, 1999,
the Company appointed Mr. Ayres as the President and Treasurer.  The Company has
retained Victor Palmieri of the Palmieri Company to assist the Board of
Directors in assessing the Company's business plans and financial viability.  On
April 12, 1999, the Palmieri agreement with the Company was amended to provide
services on a per diem basis instead of full time.

Competition

  Changes in the Medicare reimbursement structure, increasing receivables for
services provided under contracts and market share pricing forced many home
health providers out of business in 1998.  While much the same is forecasted for
1999, competition within the home health industry remains intense for patients
enrolled in either Medicare or managed care plans.  During the last half of 1998
low contract pricing proposals by the competition, and low margin contract
pricing for services provided under current contracts, forced the Company to
withdraw several contract proposals, and cancel a major contract due to delayed
payment for services provided.

  Consolidation within the industry through mergers and acquisitions remained
strong in 1998 and will continue throughout 1999.  The merged organizations will
intensify the competitiveness within the marketplace as they add expanded
geographical coverage, employee talent, marketing and financial resources.  The
competitive bidding project, intensified regulatory scrutiny, and low margin
reimbursement for the Company's services will continue to challenge the Company
during 1999.

Liability and Adequacy of Insurance

  In recent years, physicians, hospitals and other participants in the health
care industry have been subjected to an increasing number of lawsuits alleging
malpractice, product liability or negligence, many of which involve large claims
and significant defense costs. The Company may be subject to such suits. The
Company currently maintains 

                                       18
<PAGE>
 
liability insurance intended to cover such claims. While the Company has been
able to obtain liability insurance in the past, such insurance varies in cost
and may not be available in the future on acceptable terms, if at all. A
successful claim against the Company in excess of the Company's insurance
coverage could have a material adverse effect upon the Company's financial
condition and results of operations. See "Business -- Insurance."

Control by Executive Officers and Directors

  As of December 31, 1998, the Company's executive officers and directors and
their affiliates beneficially owned 51.8% of the outstanding shares of the
Company's common stock, par value $0.01 per share (the "Common Stock"). As a
result, these stockholders, acting together, were able to control the Company in
matters requiring approval by the stockholders of the Company, including the
election of directors. Effective with the resignations of S. Wayne Bazzle,
Chairman of the Board and Chief Executive Officer, and Cheryl C. Bazzle, the
Company's President and Chief Operating Officer, the remaining executive
officers and directors own less than 1% of the Company's outstanding shares of
common stock.

                                       19
<PAGE>
 
ITEM 2.  PROPERTIES

  The Company currently leases all of its office space. The executive offices,
consisting of approximately 57,400 square feet, are subject to a lease expiring
November 2006. The rent payable thereunder is $77,583 monthly.

  The following is a list of the Company's home health care offices.

<TABLE>
<CAPTION>
    
       Texas                                 Texas (Cont'd)               Arizona             Kansas        
       -----                                 -------------                -------             ------        
       <S>                              <C>                         <C>                        <C>          
                                                                                                            
       Amarillo                              Mission                      Casa Grande         Olathe        
       Aransas Pass                          Odessa                       Chandler                          
       Beaumont                              Plano                        Mesa                Colorado      
                                                                                              --------      
       Bryan                                 San Antonio                  Payson                            
       Corsicana                             Seven Points                 Sun City            Denver        
       Dallas                                Sherman                      Tucson                            
       Deleon                                Stephenville                                     Arkansas      
                                                                                              --------      
       El Paso                               Sulphur Springs              Missouri                          
                                                                          --------                          
       Falfurrias                            Texarkana                                        Fayetteville  
       Fort Worth                            Tyler                        Columbia            Fort Smith    
       Grand Prairie                         Wichita Falls                                    Hot Springs   
       Houston                                                            New Mexico          Jonesboro     
                                                                          ----------                        
       Jasper                                Oklahoma                                         Little Rock   
                                             --------                                                       
       Kileen                                                             Raton               Lowell        
       League City                           Ft. Gibson                                       Russellville  
       Lubbock                               Lawton                                                         
       Lufkin                                Oklahoma City                                                  
       Marshall                              Ponca City                                                     
       Mineral Wells                                                                                         
</TABLE> 

ITEM 3.  LEGAL PROCEEDINGS

  On March 20, 1998, the Company and several of its former officers were named
as defendants in a lawsuit alleging certain violations of federal securities
laws by the Company.  The plaintiffs in the lawsuit seek to represent a class of
persons who purchased shares of the Company's common stock from March 31, 1997
through and including March 31, 1998.  The Company has filed a motion to dismiss
the lawsuit which is pending before court for determination, otherwise, the
Company intends to vigorously defend the lawsuit but is currently unable to
assess the likelihood of success in this litigation, which is in the early
stages of fact finding.  An adverse result in the litigation could have a
material adverse effect on the Company's business and operations.

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

  None.

                                       20
<PAGE>
 
                                    PART II

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

  The Company has been informed by NASDAQ National Market System ("NASDAQ") that
it fails to meet certain of the revised listing standards for inclusion on the
NASDAQ National Market, including a minimum bid price of $5.00 per share.  The
Company had been traded on the NASDAQ National Market since August, 1996.

  The following table sets forth representative bid quotations of the common
stock for each quarter since the date of the Offering as provided by NASDAQ. The
following bid quotations reflect interdealer prices without retail mark-ups,
mark-downs or commissions, and may not necessarily represent actual
transactions:

<TABLE> 
<CAPTION> 
 
                                 Bid Quotations ($)
                                 ------------------
1997                             High          Low
---                              -----         ----
<S>                              <C>           <C>   
First Quarter                     11.50        7.13
Second Quarter                    10.13        6.25
Third Quarter                     10.50        4.19
Fourth Quarter                     7.63        3.13
 
1998
----              
First Quarter                      4.38        1.81
Second Quarter                     2.44        1.13
Third Quarter                      1.69        0.19
Fourth Quarter                     0.50        0.06
</TABLE>

  On January 31, 1999, there were 359 holders of  record of the common stock.
Most of the Company's stockholders have their holdings in the street name of a
broker/dealer. The Company believes that the total number of stockholders ranges
between 1,400 and 1,700 individuals and entities.

  The Company has not paid cash dividends on its common stock and does not
anticipate paying any such dividends in the foreseeable future. The Company is
prohibited from declaring or paying any dividends under its indebtedness.

                                       21
<PAGE>
 
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

  The following tables set forth selected consolidated financial data which have
been derived  from the consolidated financial statements of the Company.  The
selected consolidated financial data at and for the years ended December 31,
1998, 1997, 1996, 1995 and 1994, have been derived from the audited consolidated
financial statements of the Company, audited by Arthur Andersen LLP, independent
public accountants.  The following selected consolidated financial data is
qualified in its entirety and should be read in conjunction with the Company's
consolidated financial statements and related notes included elsewhere in this
report.  See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,
                                                                  --------------------------------------------------------
                                                                     1998        1997(1)        1996      1995      1994
                                                                  ----------   ------------   --------   -------   -------
                                                                           (in thousands, except per share data)
<S>                                                               <C>          <C>            <C>        <C>       <C> 
Statement of Operations Data:
Net revenues...................................................    $115,741     $143,205      $106,785   $81,557   $57,151
Direct expenses................................................      59,720       67,380        48,314    41,392    30,337
                                                                   --------     --------      --------   -------   -------
Gross profit...................................................      56,021       75,825        58,471    40,165    26,814
Other costs and expenses:......................................
  General and administrative...................................      57,614       62,038        41,418    30,663    21,280
  Depreciation and amortization................................       7,344        4,984         2,579     1,240       789
  Goodwill write-off and restructuring costs...................      33,063        9,850            --        --        --
  Provision for doubtful accounts..............................      45,094       14,057         3,580     1,489     1,115
                                                                   --------     --------      --------   -------   -------
         Total costs and expenses..............................     143,115       90,929        47,577    33,392    23,184
                                                                   --------     --------      --------   -------   -------
Income (loss) from operations..................................     (87,094)     (15,104)       10,894     6,773     3,630
Interest, net..................................................      11,303        5,318         2,144       987       244
                                                                   --------     --------      --------   -------   -------
Income (loss) before income taxes..............................     (98,397)     (20,422)        8,750     5,786     3,386
Provision (credit) for income taxes............................        (127)      (4,784)        3,418     2,202     1,359
                                                                   --------     --------      --------   -------   -------
Net income (loss)..............................................    $(98,270)    $(15,638)     $  5,332   $ 3,584   $ 2,027
                                                                   ========     ========      ========   =======   =======

Net income (loss) per common share.............................    $  (9.74)    $  (1.56)     $    .69   $   .57   $   .32
Net income (loss) per common share-assuming dilution...........    $  (9.74)    $  (1.56)     $    .66   $   .55   $   .31

Weighted average common shares outstanding.....................      10,091       10,054         7,770     6,297     6,297
Weighted average common shares outstanding and
     dilutive common stock options.............................      10,091       10,054         8,040     6,546     6,490
</TABLE>

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                  ----------------------------------------------------
                                                                    1998        1997       1996       1995      1994
                                                                  ---------   --------   --------   --------   -------
                                                                                     (in thousands)
<S>                                                               <C>         <C>        <C>        <C>        <C> 
Balance Sheet Data:
Cash and cash equivalents                                         $  5,948    $ 21,820   $      -   $ 1,628    $ 3,775
Working capital (deficit)                                          (92,989)     45,025      5,774    (1,737)     1,296
Property and equipment, net                                         21,341      29,132     22,288    11,054      3,880
Total assets                                                        74,263     163,841    100,303    52,573     24,504
Total debt, including capital leases                                97,595      90,353     24,432    19,584      4,374
Redeemable convertible preferred stock                                  --          --         --     5,340      5,340
Stockholders' equity (deficit)                                     (59,007)     39,262     54,555    12,062      7,074
</TABLE>

(1) See Note 5 of the Notes to Consolidated Financial Statements for  the
    effects of acquisitions and dispositions completed during 1997 as if such
    acquisitions and dispositions were effective at the beginning of 1997.
    There were no acquisitions during 1998.

                                       22
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

  This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements.

  The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and related notes contained elsewhere herein.
 
Overview

  The Company is one of the largest providers of comprehensive home health care
services based in the southwestern and central United States, providing home
nursing, respiratory therapy/home medical equipment and infusion therapy.  The
Company currently has 51 offices in eight states.  For the year ended December
31, 1998, the Company had net revenues of $115.7 million and a net loss of
$(98.3) million.  The net loss includes significant pre-tax charges during 1998,
including goodwill write-offs of $31.8 million as a result of certain
unamortized goodwill balances that were evaluated and deemed impaired,
additional provisions for doubtful accounts of  $31.6 million and a loss on
disposition of assets of  $1.5 million.  In addition, 1998 results were
adversely affected by the Company's Medicare nursing operations exceeding
Medicare nursing cost limitations by $5.6 million.

  The Company has diversified its business mix from 98% home nursing in 1990 to
8.6% home nursing for the year ended December 31, 1998. This shift represents
the closure of substantially all of the Company's Medicare nursing offices and
the growth of respiratory therapy/home medical equipment line of business.

  The Company's revenue mix has changed dramatically as a result of the Medicare
branch closures, internal growth, shifting from predominantly nursing services
to respiratory therapy/home medical equipment and infusion therapy businesses.
Following is a breakdown of net revenue mix (dollars in thousands):

<TABLE>
<CAPTION>
                                                                       Years Ended December 31,
                                                              ------------------------------------------
                                                                  1998           1997           1996
                                                                  ----           ----           ----
<S>                                                           <C>            <C>            <C>
Nursing....................................................          22.0%          52.4%          56.9%
Respiratory therapy/medical equipment......................          50.9           29.8           27.1
Infusion therapy...........................................          15.6           13.6           14.9
Other......................................................          11.5            4.2            1.1
                                                                    -----          -----          -----
  Total....................................................         100.0%         100.0%         100.0%
                                                                    =====          =====          =====
</TABLE>

  The Company is paid for its services and products primarily by Medicare,
Medicaid and private payors, including managed care organizations, insurance
companies and other third-party payors. The following table represents the
Company's payor mix:

<TABLE>
<CAPTION>
                                                                         Years Ended December 31,
                                                                ------------------------------------------
                                                                    1998           1997           1996
                                                                    ----           ----           ----
<S>                                                             <C>            <C>            <C>
Medicare Part A (cost-based).................................           2.3%          38.2%          50.1%
Medicare Part B (charge-based)...............................          12.5           13.7           18.4
Medicaid.....................................................          17.8            3.9            4.4
Commercial payors and others.................................          67.4           44.2           27.1
                                                                      -----          -----          -----
  Total......................................................         100.0%         100.0%         100.0%
                                                                      =====          =====          =====
</TABLE>
                                        
  Medicare reimburses the Company for both Part A and Part B services. Medicare
Part A reimburses the Company on a "cost basis" based on the lower of the
Company's allowable cost as defined by Medicare regulations, not to exceed
annual per beneficiary and per visit cost limits, or the Company's actual
charges. Allowable cost is generally the actual cost directly related to
providing home nursing, plus an overhead allocation. A cost report 

                                       23
<PAGE>
 
evidencing the fiscal year allowable costs, visit data, charges and other
financial information is filed annually and subject to audit. Medicare Part B is
paid on a fixed fee-for-service basis similar to third-party payors, such as
managed care organizations.

Results of Operations

  The following table sets forth certain items included in the Company's
consolidated statements of operations as a percentage of net revenues:

<TABLE>
<CAPTION>
                                                                                    Years Ended December 31,
                                                                     -------------------------------------------------------
                                                                          1998               1997                1996
                                                                          ----               ----                ----
<S>                                                                  <C>               <C>                 <C>
Net revenues......................................................            100.0%              100.0%              100.0%
Direct expenses...................................................             51.6                47.0                45.2
                                                                             ------              ------               -----
Gross profit......................................................             48.4                53.0                54.8
Other costs and expenses:
  General and administration......................................             49.8                43.3                38.8
  Depreciation and amortization...................................              6.3                 3.5                 2.4
  Goodwill write-off and restructuring costs......................             28.6                 6.9                  --
  Provision for doubtful accounts.................................             39.0                 9.8                 3.4
                                                                             ------              ------               -----
    Total operating expenses......................................            123.7                63.5                44.6
                                                                             ------              ------               -----
Income (loss) from operations.....................................            (75.3)              (10.5)               10.2
Interest, net.....................................................              9.7                 3.7                 2.0
                                                                             ------              ------               -----
Income (loss) before income taxes.................................            (85.0)              (14.2)                8.2
Provision (credit) for income taxes...............................             (0.1)               (3.3)                3.2
                                                                             ------              ------               -----
Net income (loss).................................................            (84.9)%             (10.9)%               5.0%
                                                                             ======              ======               =====
</TABLE>
                                        
Years Ended December 31, 1998 and 1997

  Net Revenues. Net revenues decreased to $115.7 million in 1998 from $143.2
million in 1997, a decrease of $27.4 million, or 19.1%. This decrease is
attributable to a reduction in Medicare nursing revenues resulting from
regulatory changes and office closures and is partially offset by growth in
revenue in the respiratory therapy/medical equipment line of business.

  As a result of the Medicare per-visit cost and per-beneficiary limitations
enacted by the Medicare Interim Payment System (IPS), the Company recorded a
$5.6 million adjustment during 1998.  This revenue adjustment is based on
estimates of the potential effect these reimbursement changes will have on the
Company's 1998 results of operations.  The actual effects related to the per-
beneficiary limits could differ from the estimates used during 1998.

  Direct Expenses. Direct expenses decreased from $67.4 million for 1997 to
$59.7 million in 1998, a decrease of $7.7 million, or 11.4%.  This decrease is
partially attributable to closing Medicare nursing offices during the year.  As
a percentage of net revenues, direct expenses increased to 51.6% for the year
ended December 31, 1998, from 47.0% for the comparable period in 1997.  Direct
expenses include all costs directly related to the production of net revenues,
including salary and employee benefit costs, rental equipment depreciation,
medical supplies, and product purchase costs.

  General and Administrative. General and administrative expenses decreased from
$62.0 million for 1997 to $57.6 million in 1998, a decrease of $4.4 million, or
7.1%. This decrease was primarily the result of the closure of nursing offices
and their associated overhead expenses.  General and administrative expenses
increased as a percentage of net revenues to 49.8% in 1998 from 43.3% in 1997.
The rapid reduction of Medicare nursing revenues contributed to a higher ratio
of general and administrative expenses.  Respiratory therapy/medical equipment
and infusion therapy businesses are proportionately higher profit
business/services because the majority of all personnel costs are classified in
this category.

                                       24
<PAGE>
 
  Depreciation and Amortization. Depreciation and amortization expense increased
from $5.0 million for 1997 to $7.3 million in 1998, an increase of $2.3 million,
or 46.0%. This increase was primarily the result of the effect of a change in
useful life estimate to 5 years for all property and equipment partially offset
by the closure of nursing offices.

  Goodwill Write Off.  Goodwill write offs and restructuring costs increased
from $9.8 million in 1997 to $33.1 million in 1998, an increase of $23.3 million
or 237.7%.  As a result of the Company's continued operating losses and negative
cash flows, lack of a definitive recapitalization plan, uncertain future
operating prospects, and Medicare regulatory and reimbursement changes that
forced the Company to close Medicare nursing offices, certain of the Company's
unamortized goodwill balances were evaluated as impaired during 1998 and 1997
causing the Company to reduce the carrying value of its recorded goodwill.

  Provision for Doubtful Accounts. The provision for doubtful accounts increased
to $45.1 million in 1998 from $14.1 million for 1997, an increase of $31.0
million, or 219.9%. This increase is the result of additional provisions for
doubtful accounts of $31.6 million for 1998. These additional provisions for
doubtful accounts resulted from the Company's increased difficulties in
collecting from certain managed care relationships, its failure to timely file
claims with payors, difficulty in obtaining accurate patient data, and
maintenance of effective quality control and processes and procedures in the
revenue cycle.

  Interest, Net. Interest, net increased to $11.5 million for 1998 from $5.5
million in 1997, an increase of $6.0 million or 109.1%.  This increase is
primarily the result of the issuance of the 11% Senior Notes on December 1,
1997.

  Provision (Credit) for Income Taxes. The provision (credit) for income taxes
decreased to a credit of $0.1 million for 1998 from $4.8 million in 1997, a
decrease of $4.9 million, or 111.4%. The decrease is a result of the inability
to carry the 1998 loss back to prior periods.  Benefits from the 1998 loss were
fully reserved at December 31, 1998.

Years Ended December 31, 1997 and 1996

  Net Revenues. Net revenues increased to $143.2 million in 1997 from $106.8
million in 1996, an increase of $36.4 million, or 34.1%. This increase was
primarily the result of additional revenues from acquisitions and from internal
growth in respiratory therapy, infusion therapy and managed care nursing
revenues, partially offset by a decrease in Medicare nursing revenues from
certain offices resulting from regulatory changes and declining visit volumes.
Operating results for 1997 were adversely affected by the Company's Medicare
nursing operations exceeding cost limitations by a pre-tax amount of $8.4
million.

  Direct Expenses. Direct expenses increased to $67.4 million for 1997 from
$48.3 million in 1996, an increase of $19.1 million, or 39.5%. This increase is
the result of the direct expenses associated with the operations of companies
acquired during 1996 and 1997 and internal growth. As a percentage of net
revenues, direct expenses increased to 47.0% for the year ended December 31,
1997, from 45.2% for the comparable period in 1996, primarily as a result of
higher costs incurred by the Company for pharmaceutical and nursing supplies and
higher costs incurred for respiratory sales and rental equipment. Direct
expenses include all costs directly related to the production of net revenues,
including salary and employee benefit costs, rental equipment depreciation,
medical supplies, and product purchase costs.

  General and Administrative. General and administrative expenses increased to
$62.0 million for 1997 from $41.4 million in 1996, an increase of $20.6 million,
or 49.8%. This increase was primarily the result of additional field office
expenses associated with the operations of acquired companies and increased
central office costs. General and administrative expenses increased as a
percentage of net revenues to 43.3% in 1997 from 38.8% in 1996, primarily as a
result of increased development costs of Medisyn(TM) and other central office
expenses.

                                       25
<PAGE>
 
  Depreciation and Amortization. Depreciation and amortization expense increased
to $5.0 million for 1997 from $2.6 million in 1996, an increase of $2.4 million,
or 93.3%. This increase was primarily due to the amortization of goodwill
associated with acquisitions and depreciation of capital expenditures relating
to Medisyn(TM).

  Goodwill Write Off and Restructuring Charge. In response to Medicare
regulatory and reimbursement changes that imposed significant reductions in per-
beneficiary visit reimbursement and in the annual per-beneficiary total
reimbursement amount, both of which had an unfavorable impact on the Company's
financial condition and results of operations, the Company implemented a
restructuring plan predominantly related to its Medicare nursing operations to
close or consolidate 32 offices and reduce headcount to attempt to mitigate the
financial impact of  these changes. As a result of the restructuring plan, for
the three months ended December 31, 1997, the Company reduced the carrying value
of its recorded goodwill by approximately $8.3 million and recorded
approximately $1.6 million in restructuring costs, consisting of direct
severance costs of terminated employees of $0.4 million and future lease
termination costs and other costs related to office closings of approximately
$1.2 million.

  Provision for Doubtful Accounts. The provision for doubtful accounts increased
to $14.1 million in 1997 from $3.6 million for 1996, an increase of $10.5
million, or 292.6%. This increase was the result of increased revenues and
additional provisions for doubtful accounts of $8.4 million for 1997. These
additional provisions for doubtful accounts resulted from the Company's
evaluation of certain accounts receivable in view of the then current industry
environment.

  Interest, Net. Interest, net increased to $5.3 million for 1997 from $2.1
million in 1996, or 148.0%. This increase resulted from interest costs
associated with indebtedness incurred in connection with acquisitions, increased
working capital borrowings to finance additional managed care business and
accounts receivable, interest on equipment leases to service additional home
medical equipment business and leases associated with the implementation and
development of Medisyn(TM), higher borrowing costs associated with the 11%
Senior Notes issued on December 1, 1997, and the write-off of financing fees of
$0.3 million incurred in connection with the Company's early repayment of a bank
credit agreement.

  Provision (Credit) for Income Taxes. The provision (credit) for income taxes
decreased to a credit of $4.8 million for 1997 from an expense of $3.4 million
in 1996, a decrease of $8.2 million. This decrease was a result of the 1997 loss
and resulting carryback to prior years, partially offset by $0.5 million in
state income taxes in 1997.

Liquidity and Capital Resources

  The Company's primary capital requirements will be for debt service, for
additional working capital to fund the Company's managed care business and
accounts receivable. The Company recorded a net loss of $(98.3) million during
1998 and had negative cash flow from operations.  The Company expects to report
additional net losses and negative cash flow amounts in 1999.  This has
negatively impacted the availability of the Company's current financing sources
and is expected to decrease the Company's overall liquidity position during
1999.  In addition, at April 21, 1999, the Company is in default on its Senior
Notes.  The Company does not have adequate liquidity or available sources of
financing to meet its contractual debt obligations and settle its other
liabilities.  If the Company is unable to generate sufficient cash flow levels
and the principal holders of the Senior Notes do not continue to support the
Company's current liquidity needs, there is a substantial prospect that the
Company or one of its subsidiaries would be required to seek protection under
the U.S. Bankruptcy Code.

  Management is implementing actions that are designed to increase the
collection rate on current revenues and decrease direct, indirect, and
administrative and general costs within the two first quarters of 1999.
Management is evaluating all of the current operating locations to determine if
each is operating at its optimum efficiency and has adequate volume to provide a
positive operating margin.  Locations not meeting minimum performance criteria
will be considered for consolidation or closure.  Additionally, management is
actively marketing for the sale of non-core operating segments of the Company.

  At December 31, 1998, the Company had negative working capital of $(93.0)
million as compared to working capital of $45.0 million as of December 31, 1997.
This decrease is primarily a result of the reclassification of the 

                                       26
<PAGE>
 
Company's Senior Notes and its related accrued interest as a short term
liability as a result of the Company's default on the indenture.

  During the year ended December 31, 1998, the Company had capital expenditures
of $7.2 million.

  Capital expenditures were used for medical equipment to service the
respiratory therapy medical equipment line of business.  Accounts receivable at
December 31, 1998, were $28.5 million, compared to $49.3 million at December 31,
1997.  Days of Sales Outstanding ("DSO"), defined as trade accounts receivable
divided by average daily net revenues for the preceding three months, were 106
as of December 31, 1998, compared to 94 at December 31, 1997.  Management
increased the Company's reserve for doubtful accounts by $20.6 million during
the fourth quarter as a result of its inability to improve the collection of the
accounts receivable.  Efforts to automate the process using Medisyn(TM) were
unsuccessful and control over the collection of necessary information to bill
and collect the accounts were not effective in decreasing billed amounts during
1998.  As a result, the accounts aged beyond the dates allowed for timely filing
and probability of collection was very low.  The Company hired a Vice President
of Patient Accounting and a Director of Patient Accounting on March 15, 1999.
Their sole responsibility is to implement policies, procedures and controls to
ensure that the Company's accounts receivables are collected to the maximum
amount allowed and within specified time frames.  The Company is continuing
intensified initiatives to address the increase in DSO, including commencing
installation of an electronic claims submission system, and more closely
managing the billing and collecting process to increase efficiency and
effectiveness.

  Net cash used in operating activities increased from $(7.3) million for the
year ended December 31, 1997, to $(20.4) million for the year ended 1998, or an
additional cash outflow of $11.2 million.  The 1998 net loss, increase in
accounts receivable and the payments on debt obligations and interest were
primarily responsible for the reduction in operating cash during 1998.  Net cash
used in investing activities decreased from $21.5 million for the year ended
1997 to cash used in investing activities of $7.3 million for the year ended
1998.  Net cash provided by financing activities decreased from $56.5 million
for the year ended 1997 to $11.8 million for the year ended 1998 primarily as a
result of reduced net borrowings.  The Company utilizes capital leases to
acquire equipment, primary information technology equipment and medical
equipment needed to accommodate increased sales volume in the respiratory
therapy/medical equipment business.  Such lease amounts were $5.2 million and
$0.07 million for the years ended 1997 and 1998, respectively.  The Company
obtained lease financing and deferred payment terms from two significant home
medical/respiratory equipment vendors during 1998.

  As of December 31, 1998, the Company had a cash balance of $5.9 million.  The
Indenture under the Company's Senior Notes prohibits the Company from incurring
additional indebtedness (other than limited permitted indebtedness) or issuing
preferred equity interests (as defined in the Indenture) unless the consolidated
fixed charge ratio is greater than 2.0 to 1.  At December 31, 1998, the
Company's consolidated fixed charge ratio is less than 2.0 to 1.  In addition,
the Company did not pay its December 1, 1998, interest obligation and is
currently in default of the Indenture. The lender, however, has agreed to
forbearances for the default.  The Indenture does permit the Company to incur
indebtedness under any credit facility in an amount not to exceed $20.0 million.

  The Company has a two-year secured line of credit with a maximum potential
availability of $7.8 million at December 31, 1998, subject to a borrowing base
with reference to accounts payable.  The advances are based on 80% of the net
collectable value of the Company's accounts receivable.  "Net Collectable Value"
is defined as the amount the Company bills third party payors less patient co-
payments and deductible obligations and contractual allowances established by
the Company and acceptable to the lender.  Interest on the outstanding balance
of the facility is payable monthly at an annual rate of the prime rate plus two
percent.  The Company will also pay a collateral management fee of 0.083% per
month on the average outstanding balance.  Collections of receivables by the
Company will be credited to the facility on a daily basis.  Advances under this
facility may be used to finance the working capital and general corporate
requirements of the Company.

                                       27
<PAGE>
 
Year 2000 Issue

  The statements in the following section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
 
  Many existing computer programs and databases use two digits to identify a
year in the date field (i.e., 98 would represent 1998).  These programs and
databases were not originally designed to operate after December 31, 1999.  If
not corrected, many computer programs and databases could fail or create
erroneous results relating to the year 2000.  If the Company, its significant
customers, or suppliers fail to make necessary modifications and conversions on
a timely basis, the Year 2000 issue could have a material adverse effect on the
Company operations.  However, the impact cannot be quantified at this time.

  The Company has assessed the exposures related to the impact on its computer
programs and databases of the Year 2000 issue.  Key management information
systems and operational systems, including equipment with embedded
microprocessors, have been inventoried and assessed, and detailed plans have
been or are currently being implemented for the required program and database
modifications or replacements.  Progress against these plans is monitored and
reported to management on a regular basis.  Implementation of required changes
to critical systems is expected to be completed during fiscal 1999.  The Company
is also focusing on major payors, which consist of third-party payors such as
state and federal  government, and managed care plans and certain key software
suppliers to assess their compliance.  The Company expects to complete such
assessment by June 30, 1999.  In the event a material payor or supplier is not
Year 2000 compliant, the Company's business, financial condition and results of
operations could be materially and adversely affected.

  The cost incurred to date related to these programs have not been material and
the Company does not expect its future costs related to these programs to be
material.  Such costs have been and will continue to be funded through operating
cash flows.  The Company presently believes that the total cost of achieving
Year 2000 compliance will not be material to its financial condition, liquidity,
or results of operations.

  Time and costs estimates are based on currently available information.
Developments that could affect estimates include, but are not limited to, the
availability and costs of trained personnel; the ability to locate and correct
all relevant computer code and systems; and remediation success of the Company's
payors and significant suppliers.

  The proceeding "Year 2000 Readiness Disclosure" contains various forward-
looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934 and the Section 27A Securities Act of 1933.  These forward-looking
statements represent the Company's beliefs or expectations regarding future
events.  When used in the "Year 2000 Readiness Disclosure", the words
"believes," "expects," "estimates" and similar expressions are intended to
identify forward-looking statements.  Forward-looking statements include,
without limitation, the Company's expectations as to when it will complete the
modification and testing phases of its Year 2000 project plan as well as its
Year 2000 contingency plans; its estimated cost of achieving Year 2000
readiness; and the Company's belief that its internal systems will be Year 2000
compliant in a timely manner.  All forward-looking statements involve a number
of risks and uncertainties that could cause the actual results to differ
materially from the projected results.  Factors that may cause these differences
include, but are not limited to, the availability of qualified personnel and
other information technology resources; the ability to identify and remediate
all date sensitive lines of computer code or to replace embedded computer chips
in affected systems or equipment, and the actions of governmental agencies or
other third parties with respect to Year 2000 problems.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

  Consolidated financial statements and supplementary data are included herein.
See Item 14 of this report.

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

 None.

                                       28
<PAGE>
 
                                   PART III
                                        
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  Information with respect to Item 10 is incorporated by reference from the
Company's definitive Proxy Statement to be filed with the Commission not later
than 120 days after the end of the Company's fiscal year.

ITEM 11.  EXECUTIVE COMPENSATION

  Information with respect to Item 11 is incorporated by reference from the
Company's definitive Proxy Statement to be filed with the Commission not later
than 120 days after the end of the Company's fiscal year.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT
 
  Information with respect to Item 12 is incorporated by reference from the
Company's definitive Proxy Statement to be filed with the Commission not later
than 120 days after the end of the Company's fiscal year.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  Information with respect to Item 13 is incorporated by reference from the
Company's definitive Proxy Statement to be filed with the Commission not later
than 120 days after the end of the Company's fiscal year.

                                       29
<PAGE>
 
                                   PART  IV
                                        
ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
    ON  FORM 8-K

 (a) 1.  Index to Financial Statements

            The following Financial Statements are included herein:

 
<TABLE>
<CAPTION>
                                                                                                                 Page
                                                                                                                 ----
HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

<S>                                                                                                            <C>
    Report of Independent Public Accountants..................................................................        30

    Consolidated Balance Sheets as of December 31, 1998 and 1997..............................................        31

    Consolidated Statements of Operations for the Years Ended December 31,
       1998, 1997, and 1996...................................................................................        32

    Consolidated Statements of Stockholders' Equity  (Deficit) for the Years Ended
       December 31, 1998, 1997, and 1996......................................................................        33

    Consolidated Statements of Cash Flows for the Years Ended December 31,
       1998, 1997, and 1996...................................................................................        34

    Notes to Consolidated Financial Statements................................................................        35


   2.  Index to Financial Schedules

            The following Financial Statement Schedule is included herein:

     Schedule II--Valuation and Qualifying Accounts.........................................................          53

   3.  Index to Exhibits

          The Exhibits filed as part of this Report on Form 10-K are listed in the Index to Exhibits immediately following
          the consolidated financial statements.
</TABLE>

(b)   Reports on Form 8-K.

 There was no Report on Form 8-K filed during the three month period ended
 December 31, 1998.

                                       30
<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                                        

To the Board of Directors,
HealthCor Holdings, Inc.:

We have audited the accompanying consolidated balance sheets of HealthCor
Holdings, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1998.  These financial statements and the schedule referred to
below are the responsibility of the Company's management.  Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HealthCor Holdings,
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.

The accompanying 1998 consolidated financial statements of the Company have been
prepared under generally accepted accounting principles assuming that the
Company will continue as a going concern.  As discussed in Note 2 to the
financial statements, the Company recorded a net loss of approximately
$(98,300,000) in 1998 and has negative working capital of approximately
$(93,000,000) at December 31, 1998.  In addition, at April 21, 1999, the Company
is in default on its 11% Senior Notes.  The Company does not have adequate
liquidity or available sources of financing to meet its contractual debt
obligations and settle its other liabilities.  If the Company is unable to
generate sufficient cash flow levels and the principal holders of the 11% Senior
Notes do not continue to support the Company's current liquidity needs, there is
a substantial prospect that the Company or one of its subsidiaries would be
required to seek protection under the U.S. Bankruptcy Code.  These factors raise
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2.  The
1998 consolidated financial statements do not include any adjustments relating
to the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might result should the Company be unable
to continue as a going concern.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole.  The schedule listed in the index to
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements.  This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.



                               ARTHUR ANDERSEN LLP
Dallas, Texas,
 April 21, 1999

                                       31
<PAGE>
 
                   HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                                     December 31,
                                                                                   ------------------------------------------------
                                     ASSETS                                                1998                        1997
                                                                                   ---------------------        -------------------
<S>                                                                                <C>                          <C>
Current assets:
  Cash and cash equivalents.....................................................           $  5,947,953               $ 21,820,308
  Accounts receivable, net of allowance for doubtful accounts
    of $33,195,000 and $11,441,000 in 1998 and 1997, respectively...............             28,462,019                 49,263,806
  Income tax receivable.........................................................                107,264                  5,828,888
  Supplies inventory............................................................              3,799,806                  4,258,834
  Prepaid expenses and other....................................................              1,059,117                  1,358,026
  Deferred income taxes.........................................................                     --                    973,233
                                                                                           ------------               ------------
         Total current assets...................................................             39,376,159                 83,503,095
Property and equipment, net of accumulated depreciation of
  $31,479,747 and $23,539,595 in 1998 and 1997, respectively....................             21,340,745                 29,131,578
Excess of cost of acquired businesses over fair values of
  net assets acquired, net of accumulated amortization of
  $36,086,000 and $3,404,000 in 1998 and 1997, respectively.....................             11,031,320                 48,085,306
Other assets....................................................................              2,515,122                  3,121,044
                                                                                           ------------               ------------
         Total assets...........................................................           $ 74,263,346               $163,841,023
                                                                                           ============               ============
LIABILITIES AND STOCKHOLDERS'  EQUITY (DEFICIT)

Current liabilities:
  Accrued payroll and related expenses..........................................           $  5,676,069               $  8,130,484
  Accounts payable and accrued expenses.........................................             16,790,513                 10,619,559
  Accrued interest payable......................................................              5,369,526                    785,212
  Payable to third party........................................................              7,734,000                 10,628,000
  Line of credit payable........................................................              7,798,632                         --
  Current portion of long-term debt (including debt in default).................             86,641,015                  1,576,502
  Current portion of capital lease obligations..................................              2,355,784                  6,738,548
                                                                                           ------------               ------------
         Total current liabilities..............................................            132,365,539                 38,478,305

Deferred income taxes and other.................................................                104,868                  4,063,260
Long-term debt..................................................................                109,929                    644,236
11% Senior Notes................................................................                     --                 80,000,000
Capital lease obligations.......................................................                689,781                  1,393,691
                                                                                           ------------               ------------
         Total liabilities......................................................            133,270,117                124,579,492

Commitments and contingencies

Stockholders' equity (deficit):
  Common stock, $.01 par value, 40,000,000 shares
    authorized; 10,092,680 and 10,089,346 shares issued and
    outstanding in 1998 and 1997, respectively..................................                100,926                    100,893
  Additional paid-in capital....................................................             39,908,781                 39,906,814
  Retained deficit..............................................................            (99,016,478)                  (746,176)
                                                                                           ------------               ------------
         Total stockholders' equity (deficit)...................................            (59,006,771)                39,261,531
                                                                                           ------------               ------------
         Total liabilities and stockholders' equity (deficit)...................           $ 74,263,346               $163,841,023
                                                                                           ============               ============

The accompanying notes are an integral part of these consolidated balance sheets.

</TABLE>

                                       32
<PAGE>
 
                   HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                           For the Years Ended December 31,
                                                             ------------------------------------------------------------
                                                                    1998                 1997                 1996
                                                             ------------------   ------------------   ------------------
<S>                                                          <C>                  <C>                  <C>
Net revenues..............................................        $115,741,421         $143,204,750         $106,785,152

Direct expenses...........................................          59,719,603           67,380,199           48,313,631
                                                                  ------------         ------------         ------------

Gross profit..............................................          56,021,818           75,824,551           58,471,521

Other costs and expenses:

  General and administrative..............................          57,613,997           62,038,783           41,417,970
  Depreciation and amortization...........................           7,344,069            4,983,681            2,578,751
  Goodwill write-off and restructuring costs..............          33,063,557            9,850,000                    -
  Provision for doubtful accounts.........................          45,094,345           14,057,018            3,580,394
                                                                  ------------         ------------         ------------

        Total costs and expenses..........................         143,115,968           90,929,482           47,577,115
                                                                  ------------         ------------         ------------

Income (loss) from operations.............................         (87,094,150)         (15,104,931)          10,894,406

Other income (expense):

  Interest income.........................................             181,668              141,625               44,454
  Interest expense........................................         (11,485,236)          (5,459,343)          (2,188,466)
                                                                  ------------         ------------         ------------

        Total other income (expense)......................         (11,303,568)          (5,317,718)          (2,144,012)
                                                                  ------------         ------------         ------------

Income (loss) before income taxes.........................         (98,397,718)         (20,422,649)           8,750,394

Provision (credit) for income taxes.......................            (127,416)          (4,784,236)           3,418,386
                                                                  ------------         ------------         ------------

Net income (loss).........................................        $(98,270,302)        $(15,638,413)        $  5,332,008
                                                                  ============         ============         ============

Net income (loss) per common share........................              $(9.74)              $(1.56)                $.69
Net income (loss) per common share-assuming dilution......              $(9.74)              $(1.56)                $.66

Weighted average common shares outstanding................          10,091,340           10,053,734            7,770,175
Weighted average common shares outstanding and
       dilutive common stock options......................          10,091,340           10,053,734            8,040,250

  The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       33
<PAGE>
 
                   HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                     
                                                Common Stock        Additional        
                                            ---------------------     Paid-in       Retained  
                                              Shares      Amount      Capital        Deficit          Total
                                            ----------   --------   -----------   -------------   -------------
<S>                                         <C>          <C>        <C>           <C>             <C>
Balance, December 31, 1995...............    3,062,803   $ 30,628   $ 2,471,129   $  9,560,229    $ 12,061,986

  Exercise of common stock
    warrants.............................      150,000      1,500       298,500             --         300,000

  Conversion of Series A and B
    preferred stock to common
    stock................................    3,339,297     33,393     5,306,421             --       5,339,814

  Issuance of common stock in
    initial public offering, net.........    3,300,000     33,000    29,835,101             --      29,868,101

  Issuance of common stock to
    ESOP.................................      130,000      1,300     1,466,200             --       1,467,500

  Exercise of stock options..............       33,867        338        78,229             --          78,567

  Tax benefit from early
    dispositions of option stock.........           --         --       106,572             --         106,572

  Net income.............................           --         --            --      5,332,008       5,332,008
                                            ----------   --------   -----------   ------------    ------------

Balance, December 31, 1996...............   10,015,967    100,159    39,562,152     14,892,237      54,554,548

  Exercise of stock options..............       73,379        734       344,662             --         345,396

  Net loss...............................           --         --            --    (15,638,413)    (15,638,413)
                                            ----------   --------   -----------   ------------    ------------

Balance, December 31, 1997...............   10,089,346    100,893    39,906,814       (746,176)     39,261,531

 Exercise of stock options...............        3,334         33         1,967             --           2,000

  Net loss...............................           --         --            --    (98,270,302)    (98,270,302)
                                            ----------   --------   -----------   ------------    ------------

Balance, December 31, 1998...............   10,092,680   $100,926   $39,908,781   $(99,016,478)   $(59,006,771)
                                            ==========   ========   ===========   ============    ============


The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       34
<PAGE>
 
                   HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
                                        
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                        
<TABLE>
<CAPTION>
                                                                                      For the Years Ended December 31,
                                                                               ----------------------------------------------
                                                                                    1998            1997            1996
                                                                               --------------   -------------   -------------
<S>                                                                            <C>              <C>             <C>
Cash flows from operating activities:
  Net income (loss).........................................................    $(98,270,302)   $(15,638,413)   $  5,332,008
  Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
     Depreciation and amortization..........................................      12,074,974       8,248,711       4,773,892
     Goodwill write-off.....................................................      31,781,138       8,300,000               -
     Loss on disposition of fixed assets....................................       4,326,901          28,677          69,855
     Changes in operating assets and liabilities, net
       of acquired businesses:
       Accounts receivable, net.............................................      20,801,787     (15,078,900)    (13,099,993)
       Supplies inventory...................................................         459,028        (726,362)       (755,657)
       Prepaid expenses and other assets....................................         904,831       2,496,119      (1,295,126)
       Deferred income taxes................................................              --          (5,000)      1,124,060
       Accrued ESOP contribution............................................          49,685              --         (60,079)
       Third-party payor settlement.........................................      (2,894,000)      1,912,146        (322,566)
       Accounts payable and accrued expenses................................         967,324       4,674,358       3,330,133
       Income taxes payable/receivable......................................       5,435,995      (5,042,341)     (1,821,149)
       Deferred revenue.....................................................       3,958,392      (2,291,274)      3,281,537
                                                                                ------------    ------------    ------------
          Net cash provided by (used in) operating activities...............     (20,404,247)    (13,122,279)        556,915
                                                                                ------------    ------------    ------------
 
Cash flows from investing activities:
  Payments for business acquisitions, net of cash
     acquired...............................................................               -     (15,073,578)    (21,032,649)
  Additions to property and equipment.......................................      (7,296,586)     (6,436,244)     (7,866,845)
                                                                                ------------    ------------    ------------
          Net cash used in investing activities.............................      (7,296,586)    (21,509,822)    (28,899,494)
                                                                                ------------    ------------    ------------
 
Cash flows from financing activities:
  Proceeds from issuance of debt, net.......................................      73,929,174      35,859,427      65,896,628
  Proceeds from issuance of 11 % Senior Notes, net..........................              --      77,100,000              --
  Payments on debt and capital lease obligations............................     (62,102,696)    (56,852,414)    (69,535,229)
  Issuance of common stock, net.............................................           2,000         345,396      30,353,240
                                                                                ------------    ------------    ------------
          Net cash provided by financing
                      activities............................................      11,828,478      56,452,409      26,714,639
                                                                                ------------    ------------    ------------
 
Net increase (decrease) in cash and cash equivalents........................     (15,872,355)     21,820,308      (1,627,940)
 
Cash and cash equivalents, beginning of period..............................      21,820,308              --       1,627,940
                                                                                ------------    ------------    ------------
 
Cash and cash equivalents, end of period....................................    $  5,947,953    $ 21,820,308    $         --
                                                                                ============    ============    ============
 
Supplemental disclosure of cash flow information:
  Debt issued in acquisitions...............................................   $          --    $  1,450,000    $  3,266,068
  Liabilities and debt assumed in acquisitions..............................              --         772,209         635,753
  Issuance of capital lease obligations.....................................              --       5,248,725       3,530,474
  Issuance of common stock to employee stock option plan....................              --              --       1,467,500
  Interest paid.............................................................       5,730,018       4,985,000       2,025,000
  Income taxes paid.........................................................         232,580       2,006,000       4,055,000
</TABLE>

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

                                       35
<PAGE>
 
                   HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES
                                        
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       December 31, 1998, 1997, and 1996
                                        
1. General:

  HealthCor Holdings, Inc., a Delaware corporation, and subsidiaries (the
"Company") commenced operations in October 1989 and provide home healthcare
services to patients including nursing, respiratory therapy, infusion therapy,
and medical equipment.  As of December 31, 1998, the Company has operations in
Arizona, Colorado, Kansas, Missouri, Oklahoma, Texas, New Mexico, and Arkansas.

2. Basis of Reporting and Current Operating Environment:

  The 1998 consolidated financial statements of the Company have been prepared
under generally accepted accounting principles assuming that the Company will
continue as a going concern.  The Company recorded a net loss of approximately
$(98,300,000) in 1998 and has negative working capital of approximately
$(93,000,000) at December 31, 1998.  In addition, at April 15, 1999, the Company
is in default on its 11% Senior Notes due 2004 ("11% Senior Notes").  The
Company does not have adequate liquidity or available sources of financing to
meet its contractual debt obligations and settle its other liabilities.  If the
Company is unable to generate sufficient cash flow levels and the principal
holders of the 11% Senior Notes do not continue to support the Company's current
liquidity needs, there is a substantial prospect that the Company or one of its
subsidiaries would be required to seek protection under the U.S. Bankruptcy
Code.  These factors raise substantial doubt about its ability to continue as a
going concern.  The 1998 financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that might result should the
Company be unable to continue as a going concern.

  The Company did not pay its December 1, 1998 interest obligation of $4,400,000
on the 11% Senior Notes.  On December 23, 1998, the principal holders of the 11%
Senior Notes provided working capital advances of $6,000,000 under a convertible
loan agreement (see Note 7).  Through April 21, 1999, the principal holders have
amended the convertible loan agreement five times to provide additional working
capital advances of $8,100,000.  Management continues to pursue a sale or merger
of the Company.

  On February 25, 1999, the Company announced that its chairman and chief
executive officer and its president and chief operating officer resigned from
all positions of the Company.  On April 12, 1999, the Company appointed a new
president.

3. Summary of Significant Accounting Policies:

Principles of Consolidation and Presentation

  The consolidated financial statements of the Company include the accounts of
HealthCor Holdings, Inc. and its wholly owned subsidiaries, HealthCor, Inc.
(HealthCor), HealthCor Oxygen & Medical Equipment, Inc. (HOME), HealthCor
Pharmacy, Inc., Physicians Home Health Network, Inc., HealthCor Rehabilitation
Services, Inc., Quest Personnel Services, Inc., HealthCor Foundation, and
CareNetwork, Inc.  All significant intercompany transactions and accounts 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 (including accounts receivable and
goodwill) and liabilities and disclosure of contingent assets and liabilities at
the date of the financial 

                                       36
<PAGE>
 
statements and the reported amounts of revenues (including net revenues recorded
by the Company) and expenses during the reporting period. Actual results could
differ from these estimates.

Cash and Cash Equivalents

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

Supplies Inventory

  Supplies inventories are stated at the lower of cost (first-in, first-out
method) or market and consist primarily of medical and pharmaceutical supplies
sold directly to patients for use in their homes.

Property and Equipment

  Property and equipment are stated at cost or fair market value at the
acquisition date (see Note 5).  The cost of equipment held under capital leases
is equal to the lower of the net present value of the minimum lease commitments
or the fair value of the leased property at the inception of the lease (see Note
9).  Property and equipment are depreciated using the straight-line method over
a useful life of 5 years.

Excess of Costs of Acquired Businesses Over the Fair Values of Net Assets
Acquired

  The value of excess costs of acquired businesses over the fair values of net
assets acquired (goodwill) is recorded at the date of acquisition. Through 1998,
goodwill is being amortized on a straight-line basis over a 40-year period.

  The Company reviews the carrying value of goodwill on an acquisition-by-
acquisition basis to determine if facts and circumstances exist which would
suggest that goodwill may be impaired or that the amortization period needs to
be modified.  Among the factors the Company considers in making the evaluation
are changes in the Company's market position, regulatory changes, reputation,
profitability and geographic penetration.  If indicators are present which may
indicate impairment is probable, the Company will prepare a projection of the
undiscounted cash flows of the specific acquisition and determine if goodwill is
recoverable based on these undiscounted cash flows. If impairment is indicated,
then an adjustment will be made to reduce the carrying amount of the goodwill to
its fair value.  During 1998 and 1997, the Company recorded charges for goodwill
impairment (see Note 13).  No such charge was required in 1996.

Other Assets

  Other assets include financing costs relating to the costs of issuing the 11%
Senior Notes.  The deferred financing costs are being amortized on a straight-
line basis over the life of the notes (see Note 7).

Income Taxes

  Deferred income taxes are provided for temporary differences between the
financial statement and income tax basis of assets and liabilities in accordance
with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes."

Net Income (Loss) Per Common Share

  In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share," which requires publicly held companies with
potentially dilutive securities to change their earnings per share computation
for years ending after December 15, 1997, and show a basic earnings per share
(based on the weighted average number of common shares outstanding) and a
diluted earnings per share (based on the weighted average number of 

                                       37
<PAGE>
 
common shares outstanding plus the effect of all dilutive securities, such as
stock options and warrants). The Company adopted SFAS No. 128 in the fourth
quarter of 1997 (see Note 17).

Stock-Based Compensation

  The Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
effective January 1, 1996. SFAS No. 123 allows companies adopting the
pronouncement to either change the actual accounting methods for stock-based
compensation or to disclose certain pro forma results of operations as if the
pronouncement had been adopted.  The Company accounts for its stock option plans
under the provisions of Accounting Principles Board Opinion No. 25 ("APB No.
25") and has disclosed the pro forma information required by SFAS No. 123 in
Note 14.

Net Revenues, Allowance for Doubtful Accounts, and Estimated Settlements with
Third-Party Payors

  Revenues are recognized on the date services and related products are provided
to patients and are recorded at estimated net realizable amounts from patients,
third-party payors, and others for services rendered.  During 1998, the Company
experienced a reduction in net revenues primarily as a result of the Medicare
nursing office closures discussed in Note 13.

  The Company estimates its contractual allowances and allowance for doubtful
accounts based on contractual arrangements, historical and anticipated payment
experience and agings of its accounts receivable.  As payment experience
changes, the Company adjusts its allowances by charges to the statements of
operations.  During 1998, the Company experienced continued deteriorating
collections from payors (including managed care providers) and increased levels
of past due accounts receivable due to, among other things, its failure to
timely file claims with payors, difficulty in obtaining accurate patient data
and maintenance of effective quality control and processes and procedures in the
revenue cycle.  As a result, during the third and fourth quarters of 1998, the
Company reduced the estimated collection factors used in determining the
allowance for doubtful accounts.  In addition, during the fourth quarter of
1998, the Company wrote off unreconciled differences in its accounts receivable
balances.  These factors increased the provision for doubtful accounts by
approximately $4,000,000 and $20,600,000 during the third and fourth quarters of
1998, respectively.  There can be no assurance that additional charges will not
be required in the future based on changes in the estimated payment factors.

  For the years ended December 31, 1998, 1997, and 1996, approximately 2%, 38%
and 50% of net patient service revenues were derived under federal third-party
reimbursement programs which are based on cost reimbursement and case payment
principles. These revenues are subject to audit and retroactive adjustment by
the respective third-party fiscal intermediary.  Settlements based on third-
party reimbursement program audits are recorded in the year they become known.
The Company establishes allowances for reimbursements in anticipation of such
settlements.

  Certain capital expenditures relating to the implementation of a new
management information system were expensed for third-party reimbursement
purposes resulting in deferred revenue of approximately $3,824,000 at December
31, 1997.  As a result of the closing of substantially all of its Medicare
nursing offices during 1998, the remaining unamortized deferred revenue and
corresponding software development costs of approximately $3,649,200 were
adjusted in 1998.  This adjustment had no effect on the Company's 1998 results
from operations.

Direct expenses

  Direct expenses include salaries, wages and related benefits, medical
supplies, equipment and related depreciation, and other direct costs of
delivering home medical services.

Reclassifications

  Certain amounts for prior periods have been reclassified to conform to the
current year presentation.

                                       38
<PAGE>
 
4. Current liabilities:

  Accrued payroll and related expenses consist of the following:

<TABLE>
<CAPTION>
                                                                                    1998               1997
                                                                                 ----------         ----------    
     <S>                                                                      <C>                <C>
     Salaries............................................................        $4,092,354         $4,332,983
     Workers' compensation...............................................           793,665            912,999
     Life, medical and related insurance.................................           262,443            992,494
     Other...............................................................           527,607          1,892,008
                                                                                 ----------         ----------
                                                                                 $5,676,069         $8,130,484
                                                                                 ==========         ==========
</TABLE>
                                        
  Accounts payable and accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                                                     1998                1997
                                                                                  -----------         -----------    
<S>                                                                            <C>                 <C>
     Accounts payable....................................................         $14,210,698         $ 5,218,745
     Accrued expenses....................................................           1,391,565           3,840,236
     Accrued restructuring charges.......................................           1,188,250           1,560,578
                                                                                  -----------         -----------
                                                                                  $16,790,513         $10,619,559
                                                                                  ===========         ===========
     </TABLE>
     
5. Acquisitions and Dispositions:
     
  The Company made no acquisitions during the year ended December 31, 1998.
However, during the fourth quarter of 1998, the Company sold, for cash, Southern
Medical Mart, a provider of home respiratory, monitoring and medical equipment
services in Louisiana, and VNS Health Services, Inc., a provider of Medicare,
Medicaid and private duty nursing services, in Santa Fe and Espanola, New
Mexico.  The Company recorded a total loss on sale for these transactions of
approximately $1,500,000.

1997  Acquisitions

  Effective January 1, 1997, the Company acquired Sterling Health Services,
Inc., a provider of home nursing services in Kansas City, Missouri.

  Effective April 1, 1997, the Company acquired, for $900,000 in cash and
$100,000 in debt, the net assets of  VNS Health Services, Inc., which provides
Medicare, Medicaid and private duty nursing services in Santa Fe and Espanola,
New Mexico.

  Effective April 19, 1997, the Company acquired, for $8,500,000 in cash and
$1,000,000 in debt, all of the outstanding capital stock of CareNetwork, Inc.,
which provides nursing services in Little Rock, Ft. Smith, Lowell and Hot
Springs, Arkansas.

  Effective June 1, 1997, the Company acquired, for $3,100,000 in cash and
$250,000 in debt, the net assets of American Medical Home Care, Inc., which
sells and leases home medical equipment, respiratory therapy services and
rehabilitation equipment in Tucson, Arizona.

  Effective December 31, 1997, the Company acquired, for $1,124,000 in cash, the
net assets of certain Texas operations of Lutheran Health System, which provides
comprehensive home health services throughout north central and east Texas.

                                       39
<PAGE>
 
  The following is a summary of the net assets acquired and liabilities assumed
in connection with the foregoing acquisitions in 1997:

<TABLE>
<CAPTION>
<S>                                                                             <C>
         Assets acquired:
           Current assets...................................................     $ 2,620,749
           Other assets.....................................................       2,257,573
                                                                                 -----------
               Total assets.................................................       4,878,322
                                                                              
         Liabilities assumed:                                                 
           Current liabilities..............................................         969,295
           Other liabilities................................................       4,282,209
                                                                                 -----------
             Total liabilities..............................................       5,251,504
                                                                                 -----------
                                                                              
         Net assets acquired................................................        (373,182)
                                                                              
         Purchase price, including acquisition costs........................      16,523,578
                                                                                 -----------
                                                                              
         Excess cost of businesses acquired.................................     $16,896,760
                                                                                 ===========
</TABLE>
                                        
Pro Forma Information

  The following unaudited pro forma information reflects the effects on the
consolidated statements of operations assuming that the 1997 acquisitions were
consummated as of January 1, 1997. This information does not purport to be
indicative of the results that would have actually been obtained if the
acquisitions had occurred on such date. Therefore, pro forma information cannot
be considered indicative of future operations. The unaudited pro forma
information for the year ended December 31, 1997 is as follows (in thousands,
except per share amount):

<TABLE>
<S>                                                                           <C>
          Net revenues...............................................................         $ 161,521
          Net loss...................................................................         (  16,176)
          Net loss per common share..................................................             (1.61)
</TABLE>

6. Bank Credit Facility:

  During 1997, the Company was party to a bank credit facility, dated as of
October 31, 1996, that was amended to provide for aggregate borrowings of  $75.0
million, consisting of a $30.0 million revolving credit line and a $45.0 million
term facility for acquisitions. At September 30, 1997, the Company was not in
compliance with several of the financial covenants contained in the bank credit
facility.  The lenders waived the Company's existing defaults through December
1, 1997, at which date the outstanding loans under the then existing bank credit
facility were repaid with proceeds from the 11% Senior Notes (see Note 7).
Simultaneously with the closing of the 11% Senior Notes, the Company entered
into a new bank credit facility, consisting of a three-year revolving credit
facility providing up to $20.0 million of availability.  At December 31, 1997,
the Company was in default of several of the financial covenants under the new
bank credit facility and was unable to incur indebtedness under the facility.

  During the second quarter of 1998, the Company replaced its bank credit
facility with a two-year secured line of credit with a maximum availability of
$7.8 million at December 31, 1998.  Advances are based on 80% of the net
collectible value of the Company's accounts receivable.  "Net Collectible Value"
is defined as the amount the Company bills third-party payors less patient co-
payments and deductible obligations and contractual allowances established by
the Company and acceptable to the lender.  Interest on the outstanding balance
of the facility is payable monthly at an annual rate of the prime rate plus two
percent.  The Company also pays a collateral management fee of 0.083% per month
on the average outstanding balance. Collections of accounts receivable by the
Company are credited to the facility on a daily basis.  Advances under this
facility may be used to finance the working capital and general corporate
requirements of the Company.  As of  December 31, 1998, the Company had
approximately $5.8 million outstanding under the line and availability of $2.0
million.  The Company also 

                                       40
<PAGE>
 
separately had a $2.0 million loan outstanding, secured by the stock of a
subsidiary, from the same lender at December 31, 1998. The loan carries the same
interest rate as the line and is due on demand.

7. 11 % Senior Notes and Other Debt:

  During 1997, the Company engaged Bear Stearns, Inc. and Chase Securities Inc.
to offer 11% Senior Notes to refinance indebtedness outstanding under the bank
credit facility.  On December 1, 1997, the offering was completed, and the
Company sold $80.0 million principal amount of 11 % Senior Notes to qualified
institutional buyers in reliance on the exemption from the registration
requirements of the Securities Act of 1933 provided by Rule 144A.  The Company
filed a Form S-4 registration statement with the Securities and Exchange
Commission to register the 11% Senior Notes so the original restricted notes
could be exchanged, at the option of  the holder, for identical notes without
resale or transfer restrictions.  The exchange offer was completed during the
second quarter of 1998.

  The 11% Senior Notes are general unsecured obligations of the Company ranking
senior in right of  payment of all subordinated indebtedness and equal in right
of payment of all other obligations.  The 11% Senior Notes bear interest at the
rate of 11 % per annum, payable in arrears on June 1 and December 1 of each
year, commencing June 1, 1998.  The 11% Senior Notes are fully and
unconditionally guaranteed on a senior, unsecured and joint and several basis by
all of the Company's present and future subsidiaries.  Proceeds of the 11%
Senior Notes were $77,100,000 after offering expenses of $2,900,000 that are
being amortized over the duration of the 11% Senior Notes on a straight-line
basis.

  The Company did not pay its December 1, 1998 interest obligation of $4,400,000
on the 11% Senior Notes.  As a result, the Company is currently in default of
the indenture and has classified the 11% Senior Notes as a current liability in
the accompanying 1998 consolidated balance sheet.  However, as of April 21,
1999, the noteholders have not exercised the acceleration provisions under the
indenture.  The indenture also effectively prohibits the Company from incurring
additional indebtedness (other than certain limited permitted indebtedness).

  On December 23, 1998, the principal holders of the 11% Senior Notes provided
working capital advances of  $6,000,000 under a convertible loan agreement.
Through April 21, 1999, the principal holders have amended the convertible loan
agreement five times to provide additional working capital advances of
$8,100,000.  The convertible loan is due December 31, 1999, and accrues interest
at 11% per annum increasing to 13% per annum in the event of any non-payment of
principal or interest amounts due.  The agreement is secured by a pledge of the
stock of the Company, as well as a security interest in substantially all of the
assets of the Company and its subsidiaries.  As of April 21, 1999, the Company
is in default of several of the financial covenants in the convertible loan
agreement.

  The secured line of credit (see Note 6), 11% Senior Notes and the convertible
loan agreement all contain cross default provisions.  In the event that there is
default under one of the agreements, these provisions trigger a cross default of
the other agreements.  There has been no default under the provisions of the
secured line of credit and the principal holders of the Senior Notes and the
convertible loan agreement have issued forbearances to the Company.  The
principal holders have the risk for default for both the Senior Notes and the
convertible loan agreement and amendments.

  The unamortized financing costs of $3,083,035 at December 31, 1998 will be
charged to operations at the date the 11% Senior Notes are paid or otherwise
settled.

                                       41
<PAGE>

  Debt obligations consist of the following:

<TABLE>
<CAPTION>
                                                                                    1998                1997
                                                                              -----------------   ----------------
<S>                                                                           <C>                 <C>

Notes payable to individuals in connection with
  acquisitions; principal and interest payable monthly at
  rates ranging from 5.5% to 8.5%, matures through May
  2000, unsecured..........................................................       $    545,343        $ 2,214,674

11 % Senior Notes due 2004 (currently in default)..........................         80,000,000         80,000,000

Convertible loan...........................................................          6,000,000                 --

Other......................................................................            205,602              6,064
                                                                                  ------------        -----------
                                                                                    86,750,945         82,220,738
         Less: current portion.............................................        (86,641,016)        (1,576,502)
                                                                                  ------------        -----------
                                                                                  $    109,929        $80,644,236
                                                                                  ============        ===========
</TABLE>

  Aggregate maturities of long-term obligations subsequent to December 31, 1998,
are as follows:

<TABLE>
<S>                                                                                  <C>
1999..............................................................................        $ 86,641,016
2000..............................................................................             109,929
                                                                                          ------------
                                                                                            86,750,945
Less -- Current portion...........................................................         (86,641,016)
                                                                                          ------------
          Total...................................................................        $    109,929
                                                                                          ============
</TABLE>

8. Property and Equipment:

  Property and equipment consist of the following:


<TABLE>
<CAPTION>
                                                                                     1998                1997
                                                                               -----------------   -----------------

<S>                                                                            <C>                 <C>
Furniture and equipment.....................................................       $  4,203,443        $  4,526,781
Transportation equipment....................................................          1,240,000           1,316,796
Leasehold improvements......................................................          1,285,957           1,188,413
Medical equipment...........................................................         29,268,826          26,282,878
Computer equipment..........................................................         11,384,209          10,800,688
Software development costs..................................................          5,438,057           8,555,617
                                                                                   ------------        ------------
                                                                                     52,820,492          52,671,173
Less -- Accumulated depreciation............................................        (31,479,747)        (23,539,595)
                                                                                   ------------        ------------
Property and equipment, net.................................................       $ 21,340,745        $ 29,131,578
                                                                                   ============        ============
</TABLE>

9. Lease Commitments:

  The Company leases office space, furniture, and equipment under noncancelable
operating lease agreements which expire on various dates up to 2009 and contain
renewal options for up to 5 years.

  The Company leases various office equipment under capital lease arrangements.
The capitalized value of leases amounted to approximately $11,188,000 and
$11,272,000 at December 31, 1998 and 1997, respectively, and net book value
amounted to approximately $3,619,000 and $6,008,000 at December 31, 1998 and
1997, respectively. Future minimum lease payments at December 31, 1998, under
the capital leases and noncancelable operating leases with initial or remaining
terms of one year or more are as follows:

                                       42
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                      Operating         Capital
                                                                                       Leases            Leases
                                                                                    -------------   ----------------

<S>                                                                                 <C>             <C>
1999.............................................................................     $ 3,273,149       $ 2,505,640
2000.............................................................................       2,342,015           407,538
2001.............................................................................       1,498,072           323,735
2002.............................................................................       1,129,058            23,534
2003 and thereafter..............................................................       3,169,338                --
                                                                                      -----------       -----------
Total minimum payments...........................................................     $11,411,632         3,260,447
                                                                                      ===========
Amount representing interest.....................................................                          (214,882)
                                                                                                        -----------
Present value of minimum payments................................................                         3,045,565
Current portion..................................................................                        (2,355,784)
                                                                                                        -----------
Total............................................................................                       $   689,781
                                                                                                        ===========
</TABLE>

  Rent expense under all operating leases was approximately $4,083,000 and
$3,736,000, $3,050,000, for the years ended December 31, 1998, 1997, and 1996,
respectively.

10. Income Taxes:

  The provision for income taxes includes the following components:

<TABLE>
<CAPTION>
                                                            1998                 1997                1996
                                                     ------------------   ------------------   -----------------
<S>                                                  <C>                  <C>                  <C>

Current:
  Federal.........................................        $      --         $ (4,858,888)          $2,571,912
  State...........................................         (127,416)             514,500              326,233
                                                          ---------         ------------           ----------
                                                           (127,416)          (4,344,388)           2,898,145
                                                          ---------         ------------           ----------
Deferred:                                           
  Federal.........................................               --             (439,848)             468,175
  State...........................................               --                   --               52,066
                                                          ---------         ------------           ----------
                                                                 --             (439,848)             520,241
                                                          ---------         ------------           ----------
          Total...................................        $(127,416)        $( 4,784,236)          $3,418,386
                                                          =========         ============           ==========
</TABLE>

  The reconciliation of the provision (credit) for income taxes to the federal
statutory rate is as follows:


<TABLE>
<CAPTION>
                                                            1998                 1997                1996
                                                     ------------------   ------------------   -----------------
<S>                                                  <C>                  <C>                  <C>
Income taxes at statutory rate....................      $(33,411,903)         $(6,943,701)          $2,975,134
Deferred income tax valuation allowance...........        33,411,903            2,068,595                   --
Amortization......................................                --              153,000              148,931
State taxes, net of federal tax effect............          (127,416)             322,400              249,691
Other.............................................                --             (384,530)              44,630
                                                        ------------          -----------           ----------
                                                        $   (127,416)         $(4,784,236)          $3,418,386
                                                        ============          ===========           ==========
</TABLE>

                                       43
<PAGE>
 
  Deferred tax assets and deferred tax liabilities consist of the following
items:

<TABLE>
<CAPTION>
                                                                              1998                    1997
                                                                      ---------------------   ---------------------
Deferred tax assets:
<S>                                                                   <C>                     <C>
  Allowance for doubtful accounts..................................        $  6,509,790             $  (467,443)
  Self-insurance and workers' compensation.........................             414,697                 720,312
  Amounts due to third-party payors................................           2,938,920               4,038,640
  Accrued payroll and related expenses.............................             586,019                 223,751
  State income taxes...............................................              34,465                 (17,170)
  Amortization.....................................................          11,807,484               2,222,298
  Net operating loss carryforward..................................          25,675,404                      --
                                                                           ------------             -----------
          Total before valuation allowance.........................          47,966,779               6,720,388
  Valuation allowance..............................................         (45,367,652)             (3,524,857)
                                                                           ------------             -----------
          Net deferred tax assets..................................           2,599,127               3,195,531
                                                                   
Deferred tax liabilities:                                          
  Depreciation and amortization....................................            (951,589)             (1,561,269)
  Deferred software cost, net of deferred revenue..................          (2,015,023)             (1,746,639)
  Deferred compensation expense....................................                  --                (255,108)
  Accrued restructuring costs......................................             451,466                 451,466
  Other............................................................             (62,328)                (62,328)
                                                                           ------------             -----------
          Total....................................................          (2,577,474)             (3,173,878)
                                                                           ------------             -----------
  Other tax liability..............................................             (21,653)                (21,653)
                                                                           ------------             -----------
Total net tax (liabilities) assets................................. $                --     $                --
                                                                   ====================    ====================
</TABLE>

Due to the loss recorded in 1998 and 1997, the Company fully reserved its net
deferred asset balance at December 31, 1998 and 1997.  The Company had an
estimated tax loss carryforward of $62.7 million at December 31, 1998, which
expires beginning in 2012.

11. Redeemable Convertible Preferred Stock:

  In 1989, the Company sold 2,000,000 shares of its Series A preferred stock
($.01 par value) for $2,000,000, less issuance costs of $85,532, to an unrelated
entity.  The shares were converted into 2,000,000 shares of the Company's common
stock coincident with the Company's initial public offering (IPO) on August 8,
1996.

  In 1992, the Company issued 1,071,438 shares of its Series B preferred stock
($.01 par value) for $3,000,025 to the Series A preferred stock investor and an
unrelated investor and 178,575 shares of its Series B preferred stock for
$500,010 to the Company's Employee Stock Ownership Plan (ESOP).  The Company
paid $72,636 in costs associated with these two issuances.  The Series B
preferred shares were convertible into 1,562,517 shares of the Company's common
stock. The conversion rate was subject to adjustment of up to $1.25 for one
(312,503 additional shares) common share based on the Company's post issuance
earnings level. On November 28, 1994, the 178,575 Series B preferred shares held
by the ESOP were converted to 223,220 common shares.  The remaining Series B
preferred shares were converted into 1,339,297 shares of common stock coincident
with the Company's IPO on August 8, 1996.

12. Common Stock:

  The Company completed an IPO of 3,000,000 shares of its common stock, $.01 par
value, on August 8, 1996, and on September 11, 1996, the underwriters exercised
their overallotment option to purchase an additional 300,000 shares.  The
Company used the net proceeds from the IPO of approximately $29,800,000 to repay
outstanding indebtedness under its bank credit facilities and for general
corporate purposes.  In addition, on July 26, 1996, the Company declared a 5 for
2 stock split in the form of a stock dividend of its common stock.  The
accompanying consolidated financial statements give retroactive effect to the
stock split.

                                       44
<PAGE>
 
  On December 28, 1998, the Company's securities ceased to be listed on the
Nasdaq SmallCap Market as the result of its failure to meet the minimum bid
price requirement.  The Company's securities continue to be listed on the OTC
Bulletin Board.

13. Goodwill Write-Off and Restructuring Costs:

  During 1997, the home health care industry experienced several significant
regulatory and reimbursement changes. In February 1997, the Health Care
Financing Administration ("HCFA") announced that it intended to implement
mileage limitations restricting the distance between a nursing agency's
principal office and its branches. Texas, where the Company had significant
operations, announced that it intended to implement even more restrictive
mileage limitation rules for branch offices.  During 1998, following a
moratorium on new Medicare provider numbers announced by President Clinton, HCFA
imposed a delay in permitting branch office transfers. The 1997 Federal Budget
contained other reimbursement changes that reduced the level of reimbursement
available to the Company.

  On January 2, 1998 and August 11, 1998, HCFA published Medicare nursing per-
visit cost limitation guidelines which reduced per-visit cost limitations for
the Company by approximately 18%-20% for 1998. Also, regulations effective
February 1, 1998, eliminated venipuncture as a covered service for Medicare
nursing visits, which materially reduced the Company's Medicare nursing
revenues. In addition, reimbursement rates for Medicare home oxygen services,
which represented approximately 6% of the Company's annualized revenues for the
year ended December 31, 1997, were reduced by 25.0% beginning January 1, 1998,
with an additional 5.0% reduction effective in 1999. Congress also adopted a
per-beneficiary limit on reimbursement for nursing services based upon
historical cost, and on March 31, 1998 and August 11, 1998, published
regulations which set forth the national and regional medians on which such
limits should be based.  During late 1997, the Company estimated that the per-
beneficiary limits would have a material adverse effect on the Company's
Medicare nursing operations.

  In late December 1997, after passage of the 1997 Federal Budget, the Company
began to assess the potential financial effects of the above described
regulatory changes on its Medicare nursing and home oxygen service businesses.
Coincident  therewith, the Company developed and implemented a restructuring
plan to close certain Medicare nursing offices in order to mitigate the
financial impact of the changes. In addition, the changes prompted the Company
to evaluate whether its long-lived assets were impaired at December 31, 1997.
As a result, during the fourth quarter of 1997, the Company reduced the carrying
value of its recorded goodwill by approximately $8,300,000, recognized
additional Medicare cost limitations for 1997 aggregating $5,600,000, announced
significant headcount reductions, and the closure of 32 Medicare nursing field
offices. The offices were closed at March 31, 1998. In addition, during the
fourth quarter of 1997, the Company recorded $1,575,000 in restructuring costs,
consisting of direct severance costs for terminated employees of $375,000 and
future lease termination costs and other costs related to office closings of
approximately $1,200,000.

  During early 1998, the Company continued to evaluate the ongoing prospects of
its Medicare nursing business.  In connection with the Company's decision in the
second quarter of 1998 to close substantially all of its remaining Medicare
nursing offices, the Company determined that an additional goodwill impairment
charge of approximately $4,800,000 was required at June 30, 1998.

  As a result of the Company's continued operating losses and negative cash
flows, lack of a definitive recapitalization plan and uncertain future operating
prospects, the Company evaluated its unamortized goodwill balances for
impairment during the fourth quarter of 1998.  As a result, an additional charge
of approximately $27,037,000 was recorded.  This amount includes approximately
$1,495,000 of goodwill related to a personnel placement business held-for-sale
at December 31, 1998.  The Company's remaining goodwill balances at December
31,1998 relate primarily to its infusion therapy operations.  In addition,
beginning January 1, 1999, goodwill will be amortized on a straight-line basis
over a 10-year period.

                                       45
<PAGE>
 
14. Employee Benefit Plans:

  The Company has two qualified incentive stock option plans and has reserved
387,500 shares of the Company's common stock, all of which were granted, for
issuance under the 1989 plan and 237,500 shares under the 1996 plan.  Options
for 187,000 shares have been granted under the 1996 stock option plan and 50,500
are available for future grants.  The Company accounts for its stock option
plans in accordance with the provisions of APB No. 25, under which no
compensation cost is recognized for financial statement purposes.

  Pro forma information regarding net income (loss) and net income (loss) per
share and net income (loss) per share assuming dilution is required by SFAS No.
123.  The fair value of each option grant is estimated as of the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: risk-free
interest rates of 5.25%, 6.0 % and 6.5 %; expected dividend yield of zero;
expected option lives until exercise date of 6.5 years; and expected price
volatility of 35%, 35 % and 25%, respectively.  Had compensation cost for stock
options granted in 1998, 1997 and 1996 been determined based on the fair value
at the grant dates for options awarded consistent with the provisions of SFAS
No. 123, the Company's net income (loss) and net income (loss) per common share
and net income (loss) per common share assuming dilution for the years ended
December 31, 1998, 1997 and 1996, would have been reduced to the following pro
forma amounts:

<TABLE>
<CAPTION>
                                                                             1998            1997           1996
                                                                         -------------   -------------   ----------
    <S>                                          <C>                     <C>             <C>             <C>
    Net income (loss).........................   As reported...........  $(98,270,302)   $(15,638,413)   $5,332,008
                                                  Pro forma............   (98,457,758)   $(15,868,618)   $5,206,173
                                                             
    Net income (loss) per common share........   As reported...........  $      (9.74)   $      (1.56)   $      .69
                                                 Pro  forma............  $      (9.76)   $      (1.58)   $      .67
                                                             
    Net income (loss) per common share-                      
         Assuming dilution....................   As reported...........  $      (9.74)   $      (1.56)   $      .66
                                                 Pro  forma............  $      (9.76)   $      (1.58)   $      .65
</TABLE>

  Since the provisions of SFAS No. 123 have not been applied to options granted
prior to January 1, 1995, the resulting pro forma compensation cost is not
representative of the pro forma compensation expected to be presented in future
years.

  Options to purchase shares of the Company's common stock have been granted to
nonofficer and noninvestor directors and key employees. Options are granted at
fair market value at the dates of grant.  Options granted become exercisable at
the rate of 1/3 per year, and expire 10 years after the date of grant.

  Information on stock options and related information is as follows:

<TABLE>
<CAPTION>
                                                 1998                             1997                             1996
                                     ----------------------------     ----------------------------     -----------------------------
                                       Number of        Wtd. Avg.       Number of        Wtd. Avg.       Number of         Wtd. Avg.
                                        Shares          Ex. Price        Shares          Ex. Price         Shares          Ex. Price
                                     -------------      ---------     -------------      ---------     --------------      ---------

<S>                                  <C>                <C>           <C>                <C>           <C>                 <C>
Outstanding at beginning of year          414,457           $4.49          356,926           $5.63           359,627          $ 4.68

Granted                                    58,000            1.86       235,500 (1)           6.14            48,250           10.13

Exercised                                  (3,334)           5.00          (73,379)           5.07           (33,867)           2.32

Forfeited                                (116,887)           3.75      (104,590)(1)           6.10           (17,084)           5.04
                                      -----------           -----     ------------           -----     -------------          ------

                                                                                                
Outstanding at end of year                352,236            4.29          414,457           $4.49           356,926          $ 5.63
                                      ===========           =====     ============           =====     =============          ======

                                                                                                
Exercisable at end of year                194,034            4.65          188,891           $3.86           198,884          $ 4.06
                                      ===========           =====     ============           =====     =============          ======

                                                                                                
Price range                          $1.50--$9.00                     $.80 - $9.00                     $.80 - $11.50
                                      ===========                     ============                     =============
                                                                                                
Weighted-average fair value of                                                                  
options granted during the year       $      0.85                     $       3.87                     $        4.26 
                                      ===========                     ============                     ============= 
</TABLE>

                                       46
<PAGE>
 
(1)  Excludes 174,783 options repriced on September 16, 1997, at $5.00 per share
from $8.03 per share weighted average exercise price.  Such options were treated
as an option modification for purposes of computing the weighted average fair
value of options granted during 1997.

  The following table summarizes information about stock options that are
outstanding at December 31, 1998:
                                                                            
<TABLE>
<CAPTION>
                                           Options Outstanding               Options Exercisable
                               ----------------------------------------   -------------------------
                                                 Weighted-
                                   Number         Average     Weighted-       Number       Weighted-
              Range of         Outstanding at    Remaining     Average    Exercisable at    Average
              Exercise          December 31,    Contractual   Exercise     December 31,    Exercise
               Prices               1998           Life         Price          1998          Price
          ------------------   --------------   -----------   ---------   --------------   ---------
<S>                            <C>              <C>           <C>         <C>              <C>
 
            $1.50 to 2.16              87,300     7.4 years       $1.91       29,300         $2.00
             3.75 to 5.20             259,437     7.5              5.02      159,568          5.05
             7.04 to 9.00               5,499     8.0              7.40        5,166          7.29
                                      -------                                -------         -----
                                                                                      
            $1.50 to 9.00             352,236     7.51             4.29      194,034         $4.65
                                      =======                                =======         =====
</TABLE>

  On April 1, 1990, the Company established an Employee Stock Ownership Plan
(ESOP), which awards shares of the Company's common stock on a noncontributory
basis to eligible employees of the Company. The Company contributed 130,000 and
125,000 common shares in 1996 and 1995. Participants are not vested in any
amounts allocated to them until they have completed at least 1,000 hours of
service per year for one year. After five such years, a participant is 100%
vested in such amounts. Generally, a participant also will be fully vested upon
attaining age 65 or in the event of total and permanent disability, death or
termination of the ESOP. ESOP shares which are committed to be released are
treated as outstanding for earnings per share computations. During 1998 and
1997, the Board of Directors authorized no contribution to the ESOP.

  Effective April 1, 1991, the Company formed a deferred compensation plan
structured under Section 401(k) of the Internal Revenue Code.  The plan covers
substantially all employees meeting certain minimum service requirements.  Under
the plan, contributions are made by the employees and matched by the Company
subject to certain limitations.  The Company's contribution to this plan was
approximately $542,000, $329,000, and $157,000 for the years ended December 31,
1998, 1997, and 1996, respectively.

15. Commitments and Contingencies:

Litigation

  On March 20, 1998, the Company and several of its former officers were named
as defendants in a lawsuit alleging certain violations of federal securities
laws by the Company.  The plaintiffs in the lawsuit seek to represent a class of
persons who purchased shares of the Company's common stock from March 31, 1997
through and including March 31, 1998.  The Company has filed a motion to dismiss
the lawsuit which is currently pending determination by the court, otherwise,
the Company intends to vigorously defend the lawsuit but is currently unable to
assess the likelihood of success in this litigation, which is in the early
stages of fact finding. An adverse result in the litigation could have a
material adverse effect on the Company's business and operations.

  In addition, the Company, in the normal course of business, is party to
various other matters of litigation.  Management is of the opinion that the
eventual outcome of these matters will not have a material adverse effect on the
Company's financial position or results of operations.

  The healthcare industry is subject to numerous laws and regulations of
federal, state and local governments.  These laws and regulations include, but
are not necessarily limited to, matters such as licensure, accreditation,

                                       47
<PAGE>
 
government healthcare program participation requirements, reimbursement for
patient services, and Medicare and Medicaid fraud and abuse.  Recently,
government activity has increased with respect to investigations and allegations
concerning possible violations of fraud and abuse statutes and regulations by
healthcare providers.  Violations of these laws and regulations could result in
expulsion from government healthcare programs together with the imposition of
significant fines and penalties, as well as significant repayments for patient
services previously billed.  Management believes that the Company is in
compliance with fraud and abuse as well as other applicable government laws and
regulations.  While no regulatory inquiries have been made, compliance with such
laws and regulations can be subject to future government review and
interpretation as well as regulatory actions unknown or unasserted at this time.

Self-Insurance

  The Company self-insures its employees and their dependents for injury and
hospitalization.  The Company self-insures claims up to $75,000 per person, with
an insurance company covering claims in excess of this amount up to a maximum of
$1,000,000 per person.  A liability is accrued for claims incurred but not yet
reported (IBNR) based on historical claims paid information as provided by the
respective insurance company.  The IBNR liability at December 31, 1998 and 1997,
was approximately $320,000 and $1,005,000, respectively.  The Company has paid
claims of approximately $2,597,000, $1,126,000, and $1,101,000 for the years
ended December 31, 1998, 1997, and 1996, respectively.

16. Segment Reporting

  The Company has three reportable segments:  nursing, respiratory
therapy/medical equipment (HME), and infusion therapy.  The Company's reportable
segments are strategic business units defined by lines of service.  Each engages
in business activities which are key to the Company providing fully integrated
comprehensive home health care services.

  The nursing segment derives its revenue from a wide range of  nursing services
to individuals with acute illness, long term chronic health conditions,
permanent disabilities, terminal illness or post-procedural needs.  Patients are
typically referred to the Company by primary care or specialty physicians and
managed care case managers.  The HME segment derives its revenue from home
respiratory monitoring and medical equipment.  The Company rents, sells and
services respiratory equipment for patient use in the home and supplies patients
with aerosol medications for use in respiratory therapy treatments.  Finally,
the infusion therapy segment derives its revenues from the administration of
nutrients, antibiotics and other medications intravenously (into the vein),
subcutaneously (under the skin), intramuscularly (into the muscle),
intrathecally or epidurally (via spinal routes), or through feeding tubes into
the digestive tract.

  The accounting policies of the segments are the same as those described in the
summary of significant accounting policies.  The following tables summarize the
segment information by lines of service.

                                       48
<PAGE>
 
As of and for the year ended December 31, 1998:

<TABLE>
<CAPTION>
                                                                                      Infusion
                                            Nursing                HME                Therapy               Total
                                       ------------------   ------------------   ------------------   ------------------
                                                          
 
<S>                                    <C>                  <C>                  <C>                  <C>
Net revenues                                $ 33,039,098         $ 58,956,377          $18,104,011         $110,099,486
Direct expenses                               27,832,100           17,103,888           10,798,038           55,734,026
                                            ------------         ------------          -----------         ------------
   Gross profit                                5,206,998           41,852,489            7,305,973           54,365,460
 
Depreciation and amortization                  8,578,472           23,255,113              298,633           32,132,218
General and administrative                    20,516,048           29,784,910            6,272,396           56,573,354
Provision for doubtful accounts                7,075,748           29,128,773            8,868,611           45,073,132
Interest expense                               8,447,743              153,244                5,606            8,606,593
Income tax benefit                               (94,046)             (36,357)            (119,677)            (250,080)
                                            ------------         ------------          -----------         ------------
   Net loss                                 $(39,316,967)        $(40,433,194)         $(8,019,596)        $(87,769,757)
                                            ============         ============          ===========         ============
</TABLE>
                                                                                
Reconciliation to consolidated statement of operations for the year ended
December 31, 1998:

<TABLE>
<S>                                                                                       <C>
Total net revenues for reportable segments                                                      $110,099,486
Total net revenues for non-reportable segments (1)                                                 5,466,777
Unallocated amounts                                                                                  175,158
                                                                                                ------------
       Consolidated net revenues                                                                $115,741,421
                                                                                                ============
 
Total net loss from reportable segments                                                         $(87,769,757)
Total net income from non-reportable segments (1)                                                   (936,906)
Unallocated Amounts:
     Net revenues                                                                                    175,158
     Depreciation and amortization                                                                (6,737,917)
     Interest expense                                                                             (2,696,976)
     Income taxes                                                                                   (125,854)
     General and administrative                                                                     (178,050)
                                                                                                ------------
       Consolidated net loss                                                                    $(98,270,302)
                                                                                                ============
</TABLE>

<TABLE>
<CAPTION>
 
                                                                                     Infusion
                                              Nursing               HME               Therapy              Total
                                         -----------------   -----------------   -----------------   -----------------
                                                          
 
<S>                                      <C>                 <C>                 <C>                 <C>
Total assets                                    $9,208,060         $37,654,282         $18,461,398         $65,323,740
</TABLE>

Reconciliation to consolidated balance sheet as of December 31, 1998:

<TABLE>
<S>                                                                                       <C>
Total assets for reportable segments                                                             $65,323,740
Total assets for non-reportable segments (1)                                                         754,632
Unallocated amounts                                                                                8,184,974
                                                                                                 -----------
   Consolidated total assets                                                                     $74,263,346
                                                                                                 ===========
</TABLE>

                                       49
<PAGE>
 
As of and for the year ended December 31, 1997:

<TABLE>
<CAPTION>
                                                                                     Infusion
                                            Nursing                HME                Therapy              Total
                                       ------------------   ------------------   -----------------   ------------------
                                                         
<S>                                    <C>                  <C>                  <C>                 <C>
Net revenues                                 $75,591,166          $42,722,064          $19,487,029        $137,800,259
Direct expenses                               40,696,130           14,303,501            7,804,481          62,804,112
                                             -----------          -----------          -----------        ------------
        Gross profit                          34,895,036           28,418,563           11,682,548          74,996,147
 
Depreciation and amortization                  1,801,875              758,745              228,946           2,789,566
General and administrative                    38,505,671           19,532,169            5,634,154          63,671,994
Provision for doubtful accounts                2,948,679            8,789,785            2,318,553          14,057,017
Interest expense                               2,848,209              206,046                6,861           3,061,116
Income tax expense (benefit)                  (1,366,219)             952,769            2,273,580           1,860,130
                                             -----------          -----------          -----------        ------------
        Net income (loss)                    $(9,843,179)         $(1,820,951)         $ 1,220,454        $(10,443,676)
                                             ===========          ===========          ===========        ============
</TABLE>

Reconciliation to consolidated statement of operations for the year ended
December 31, 1997:

<TABLE>
<S>                                                                                       <C>
Total net revenues for reportable segments                                                     $137,800,259
Total net revenues for non-reportable segments (1)                                                5,967,406
Unallocated amounts                                                                                (562,915)
                                                                                               ------------
       Consolidated net revenues                                                               $143,204,750
                                                                                               ============
 
Total net loss from reportable segments                                                        $(10,443,676)
Total net income from non-reportable segments (1)                                                    58,158
Unallocated Amounts:
     Net revenues                                                                                  (562,915)
     Depreciation and amortization                                                              (10,445,266)
     Interest expense                                                                            (2,256,602)
     Income taxes                                                                                 6,700,000
     General and administrative                                                                   1,311,888
                                                                                               ------------
                 Consolidated net loss                                                         $(15,638,413)
                                                                                               ============
</TABLE>

<TABLE>
<CAPTION>
                                                                                   Infusion
                                            Nursing               HME               Therapy              Total
                                       -----------------   -----------------   -----------------   -----------------

<S>                                    <C>                 <C>                 <C>                 <C>
Total assets                                 $42,957,631         $65,779,404         $22,225,141        $130,962,176
</TABLE>

Reconciliation to consolidated balance sheet at December 31, 1997:

<TABLE>
<S>                                                                                       <C>
Total assets for reportable segments                                                           $130,962,176
Total assets for non-reportable segments (1)                                                      2,392,307
Unallocated amounts (2)                                                                          30,486,540
                                                                                               ------------
Consolidated total assets                                                                      $163,841,023
                                                                                               ============
</TABLE>

                                       50
<PAGE>
 
For the year ended December 31, 1996:

<TABLE>
<CAPTION>
                                                                                   Infusion
                                            Nursing               HME               Therapy              Total
                                       -----------------   -----------------   -----------------   -----------------
 
<S>                                    <C>                 <C>                 <C>                 <C>
Net revenues                                 $64,251,594         $28,999,266         $15,892,206        $109,143,066
Direct expenses                               32,380,114           8,068,472           6,995,825          47,444,411
                                             -----------         -----------         -----------        ------------
   Gross profit                               31,871,480          20,930,794           8,896,381          61,698,655
 
Depreciation and amortization                  1,165,771             386,778             139,376           1,691,925
General and administrative                    28,870,412          12,797,913           3,470,523          45,138,848
Provision for doubtful accounts                  722,919           2,007,400             450,075           3,180,394
Interest expense                                 896,691              57,286               3,548             957,525
Income tax expense                                84,117           2,215,752           1,890,556           4,190,425
                                             -----------         -----------         -----------        ------------
   Net income                                $   131,570         $ 3,465,665         $ 2,942,303        $  6,539,538
                                             ===========         ===========         ===========        ============
</TABLE>

Reconciliation to consolidated statement of earnings for the year ended December
31, 1996:

<TABLE>
<S>                                                                                       <C>
Total net revenues for reportable segments                                                     $109,143,066
Total net revenues for non-reportable segments                                                    1,180,654
Unallocated amounts                                                                              (3,538,568)
                                                                                               ------------
       Consolidated net revenues                                                               $106,785,152
                                                                                               ============
 
Total net income from reportable segments                                                      $  6,539,538
Total net income from non-reportable segments                                                        91,061
Unallocated amounts:
     Net revenues                                                                                (3,538,568)
     Depreciation and amortization                                                                 (884,284)
     Provision for doubtful accounts                                                               (400,000)
     Interest Expense                                                                            (1,185,708)
     Income Taxes                                                                                   830,258
     General and adminsitrative                                                                   3,879,711
                                                                                               ------------
       Consolidated net income                                                                 $  5,332,008
                                                                                               ============
</TABLE>

(1)  Non-reportable segments do not meet the definition of the quantitative
thresholds for a reportable operating segment and are attributable to a nurse
staffing business and the holding company for certain of the Company's assets
and liabilities.  Neither of these entities has ever met the definition or
quantitative thresholds for determining reportable segments.
(2)  Includes $23 million in short-term investments purchased with the proceeds
from the Senior Notes (see Note 7) recorded on the balance sheet of the holding
company, a non-reportable segment.

                                       51
<PAGE>
 
17. Net Income (Loss) Per Common Share:

  The following table sets forth the computation of basic and diluted net income
(loss) per common share:

<TABLE>
<CAPTION>
                                                                                 Years Ended December 31,
                                                                     1998                  1997                  1996
                                                                --------------        -------------           ------------      
<S>                                                        <C>                   <C>                   <C>
 Numerator:
     Net income (loss)..................................         $(98,270,302)         $(15,638,413)           $5,332,008
                                                                 ============          ============            ==========
 Denominator:
     Weighted average common shares issued..............           10,091,340            10,053,734             7,770,175
     Effect of dilutive stock options:
         Assuming exercise of options, reduced by the
              number of common shares which could have           ------------                                  ----------
              been purchased with the proceeds from
              exercise of such options..................                   --                    --               270,075
                                                                 ------------          ------------            ----------  
     Weighted average number of common shares
         outstanding and dilutive stock options........            10,091,340            10,053,734             8,040,250
                                                                 ============          ============            ==========
 Net income (loss) per common share....................          $      (9.74)         $      (1.56)           $    (0.69)
 Net income (loss) per common share - assuming         
                                      dilution.........          $      (9.74)         $      (1.56)           $     0.66
</TABLE>

18. Fair Value of Financial Instruments:

  On January 1, 1995, the Company adopted SFAS No. 107, "Disclosure About Fair
Value of Financial Instruments."  Cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities are reflected in the
consolidated financial statements at fair value because of the short-term
maturity of those instruments.  Because of the financial issues faced by the
Company at December 31, 1998 (see Note 2), the Company cannot reasonably
estimate the fair value of its 11% Senior Notes at December 31, 1998.  The fair
value of the Company's long-term debt (including the 11% Senior Notes) and
capital lease obligations at December 31, 1997 were determined to approximate
its carrying value since the 11% Senior Notes were issued on December 1, 1997.

19. Consolidated Quarterly Data (unaudited):

  The following is a summary of the consolidated quarterly results of operations
of the Company for the years ended December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                      Three Months Ended
                                                     ----------------------------------------------------
1998                                                 March 31     June 30    September 30    December 31
--------------------------------------------------   ---------   ---------   -------------   ------------
<S>                                                  <C>         <C>         <C>             <C>
                                                          (in thousands, except per share amounts)
 
Net revenues......................................    $32,682    $ 30,259        $ 27,950       $ 24,850
 
Gross profit......................................     14,881      14,363          14,349         12,429
 
Loss from operations..............................     (3,128)    (15,841)         (7,300)       (60,825)
 
Loss before income taxes..........................     (5,488)    (18,517)        (10,231)       (64,162)
 
Net loss..........................................     (5,488)    (18,715)         (9,883)       (64,184)
 
Net loss per common share.........................      (0.54)      (1.85)          (0.98)         (6.36)
Net loss per common share-
     assuming dilution............................      (0.54)      (1.85)          (0.98)         (6.36)
 
Weighted average common shares outstanding........     10,090      10,095          10,095         10,091
Weighted average common shares outstanding
     and dilutive common stock options............     10,090      10,095          10,095         10,091
</TABLE>

                                       52
<PAGE>
 
<TABLE>
<CAPTION>
                                                                           Three Months Ended
                                                            -------------------------------------------------
1997                                                        March 31   June 30    September 30   December 31
----                                                        --------   --------   ------------   ------------
                                                                (in thousands, except per share amounts)
<S>                                                         <C>        <C>        <C>            <C>
Net revenues.............................................    $33,765   $34,314         $40,504      $ 34,622
 
Gross profit.............................................     19,961    16,588          23,052        16,224
 
Income (loss) from operations............................      3,675    (4,069)          3,592       (18,303)
 
Income (loss) before income taxes........................      3,014    (5,185)          2,154       (20,406)
 
Net income (loss)........................................      1,808    (3,336)          1,293       (15,403)
 
Net income (loss) per common share.......................        .18      (.33)            .13         (1.53)
Net income (loss) per common share-
     assuming dilution...................................        .18      (.33)            .13         (1.53)
Weighted average common shares outstanding...............     10,023    10,041          10,064        10,086
Weighted average common shares outstanding
     and dilutive common stock options...................     10,178    10,041          10,159        10,086
</TABLE>

  During the three months ended December 31, 1998, net revenues and net income
were adversely affected by a goodwill write-off of $27,037,000 and an increase
in the provision for doubtful accounts of $20,600,000.

  During the three months ended September 30, 1998, net income was adversely
affected by an increase in the provision for doubtful accounts of  $4,000,000.

  During the three months ended June 30, 1998, net revenues and net income were
adversely affected by a $900,000 revenue adjustment related to Medicare nursing
cost limitations, an increase in the provision for doubtful accounts of
$7,000,000 and by a goodwill write off of $4,800,000.

  During the three months ended March 31, 1998, net revenues and net income were
adversely affected by a $5,600,000 revenue adjustment related to Medicare
nursing per-beneficiary cost limitations.

                     *************************************

                                       53
<PAGE>
 
                   HEALTHCOR HOLDINGS, INC. AND SUBSIDIARIES

                       VALUATION AND QUALIFYING ACCOUNTS

             For the Years Ended December 31, 1998, 1997, and 1996

<TABLE>
<CAPTION>
 
                                                           Additions       Additions
                                         Balance at       Charged to          from                                 Balance
                                          Beginning        Costs and        Acquired                               at End
            Classification                of Period        Expenses        Companies        Deductions            of Period
            --------------               ----------        --------        ----------       ----------            ---------
 
December 31, 1998:
 
<S>                                      <C>              <C>              <C>             <C>                    <C>
  Allowance for Doubtful Accounts.....   $11,441,000      $45,094,000      $       --      $(23,340,000)(b)      $33,195,000
  Accrued Restructuring Costs.........     1,575,000               --              --          (387,000)           1,188,000
  Accumulated Amortization of                                                                                
      Intangible Assets...............     3,404,000       32,682,000              --                --           36,086,000
                                         -----------      -----------      ----------      ------------          -----------
                                                                                                             
          Total Reserves and             $16,420,000      $77,776,000      $       --      $(23,727,000)         $70,469,000
           Allowances                    ===========      ===========      ==========      ============          ===========
                                                                                                             
December 31, 1997:                                                                                           
                                                                                                             
  Allowance for Doubtful Accounts.....   $ 5,101,000      $14,057,000      $4,122,000      $(11,839,000)(b)      $11,441,000
                                                                                                             
  Accrued Restructuring Costs.........            --        1,575,000              --                --            1,575,000
                                                                                                             
  Accumulated Amortization of                                                                                
      Intangible Assets...............     2,038,000        9,641,000              --        (8,275,000)(c)        3,404,000
                                         -----------      -----------      ----------      ------------          -----------
                                                                                                             
          Total Reserves and             $ 7,139,000      $25,273,000      $4,122,000      $(20,114,000)         $16,420,000
           Allowances                    ===========      ===========      ==========      ============          ===========
                                                                                                             
December 31, 1996:                                                                                           
                                                                                                             
  Allowance for Doubtful Accounts.....   $ 2,056,000      $ 3,580,000      $2,753,000      $ (3,288,000)(b)      $ 5,101,000
                                                                                                             
  Accumulated Amortization of                                                                                
      Intangible Assets...............     1,186,000          852,000              --                --            2,038,000
                                         -----------      -----------      ----------      ------------          -----------
                                                                                                             
          Total Reserves and             $ 3,242,000      $ 4,432,000      $2,753,000      $ (3,288,000)         $ 7,139,000
           Allowances                    ===========      ===========      ==========      ============          ===========
</TABLE>

-----------
(a)  This schedule should be read in conjunction with the Company's audited
     consolidated financial statements and related notes thereto.

(b)  Write-off of uncollectible receivables net of recoveries.

                                       54
<PAGE>
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on April 21,
1999 on its behalf by the undersigned thereunto duly authorized.

                                HEALTHCOR HOLDINGS, INC.

                                By: /S/ Michael D. Ayres
                                    --------------------
                                    Michael D. Ayres
                                    President and Treasurer

  Each person whose signature appears below hereby authorizes S. Wayne Bazzle
and Cheryl C. Bazzle, or either of them, as attorneys-in-fact to sign on his or
her behalf, individually and in the capacity stated below and to file all
amendments and supplements to the Annual Report on Form 10-K.

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

      Signature                         Title                    Date
      ---------                         -----                    ----


   /S/ Michael D. Ayres        President and Treasurer       April 21, 1999
---------------------------
      Michael D. Ayres

   /S/ Sue Collins             Secretary                     April 21, 1999
---------------------------
      Sue Collins

   /S/ Charles E. Dowling      Vice President                April 21, 1999  
---------------------------
      Charles E. Dowling
 
   /S/ Robert B. Crates        Director                      April 21, 1999
---------------------------
      Robert B. Crates
 
   /S/ Jane B. Finley          Director                      April 21, 1999
---------------------------
      Jane B. Finley, Ph.D.
 
   /S/ Michael J. Foster       Director                      April 21, 1999
---------------------------
      Michael  J. Foster

                                       55
<PAGE>
 
                                 EXHIBIT INDEX
                                        
<TABLE>                 
<C>                  <S>
 (a)  Exhibits

           1.1   --  Purchase Agreement dated November 24, 1997, by and among the Company, the guarantors named on
                     the signature pages thereto, Bear, Stearns & Co. Inc. and Chase Securities Inc  (incorporated by
                     reference to the Company's Registration Statement on Form S-4 (File No. 333-44175), as filed with
                     the Securities and Exchange Commission on January 13, 1998).
           3.1   --  Amended and Restated Certificate of Incorporation of the Company (incorporated by reference to
                     the Company's Registration Statement on Form S-1 (File No. 333-5779), as filed with the Commission
                     on June 12, 1996).
           3.2   --  Amended and Restated Bylaws of the Company (incorporated by reference to the Company's
                     Registration Statement on Form S-1 (File No. 333-5779), as filed with the Commission on June 12,
                     1996).
           4.1   --  Specimen Stock Certificate of the Company (incorporated by reference to the Company's
                     Registration Statement on Form S-1 (File No. 333-5779), as filed with the Commission on June 12,
                     1996).
           4.2   --  Indenture dated as of December 1, 1997, by and among the Company, the Guarantors Signatories
                     Thereto and Norwest Bank Minnesota, National Association, as Trustee (incorporated by reference to
                     the Company's Registration Statement on Form S-4 (File No. 333-44175), as filed with the Securities
                     and Exchange Commission on January 13, 1998).
           4.3   --  First Supplemental Indenture dated as of December 2, 1997 to Indenture dated as of December 1,
                     1997, by and among the Company, the Guarantors Signatories Thereto and Norwest Bank Minnesota,
                     National Association, as Trustee (incorporated by reference to the Company's Registration Statement
                     on Form S-4 (File No. 333-44175), as filed with the Securities and Exchange Commission on January
                     13, 1998).
           4.4   --  Form of Global Note (included in Exhibit 4.2).
           4.5   --  Registration Rights Agreement dated as of December 1, 1997, by and among Bear Stearns & Co.
                     Inc., Chase Securities Inc., the Company, and certain subsidiaries of the Company, as Guarantors
                     (incorporated by reference to the Company's Registration Statement on Form S-4 (File No.
                     333-44175), as filed with the Securities and Exchange Commission on January 13, 1998).
           4.6   --  Second Amended and Restated Credit Agreement dated December 1, 1997, by and among Texas
                     Commerce Bank National Association, as Agent and an Issuing Bank, the Several Financial
                     Institutions from time to time a party thereto and the Company (incorporated by reference to the
                     Company's Registration Statement on Form S-4 (File No. 333-44175), as filed with the Securities and
                     Exchange Commission on January 13, 1998).
          10.1   --  Registration Rights Agreement, dated as of June 1, 1992 between the Company and certain
                     stockholders of the Company (incorporated by reference to the Company's Registration Statement on
                     Form S-1 (File No. 333-5779) as filed with the Commission on June 12, 1996).
          10.2   --  The Company Employee Stock Ownership Plan and Trust, dated April 1, 1990, as amended
                     (incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-5779)
                     as filed with the Commission on June 12, 1996).
          10.3   --  Form of HealthCor Holdings, Inc. 1996 Long-Term Incentive Plan (incorporated by reference to
                     the Company's Registration Statement on Form S-1 (File No. 333-5779) as filed with the Commission
                     on June 12, 1996).
          10.4   --  HealthCor Holdings, Inc. Employee Stock Ownership Plan and Trust, dated April 1, 1990, as
                     amended  (incorporated by reference to the Company's Registration Statement on Form S-1 (File No.
                     333-5779) as filed with the Commission on June 12, 1996).
          10.5   --  Warrant Agreement between the Company and an individual to purchase Common Stock of the
                     Company, dated as of November 1, 1994 (incorporated by reference to the Company's Registration
                     Statement on Form S-1 (File No. 333-5779) as filed with the Commission on June 12, 1996).
</TABLE>



                                      56
<PAGE>
 
<TABLE>
<C>                  <S>
          10.6   --  Form of Indemnification Agreement entered into between the Company and its executive officers
                     and directors (incorporated by reference to the Company's Registration Statement on Form S-1 (File
                     No. 333-5779) as filed with the Commission on June 12, 1996).
          10.7   --  Stock Purchase Agreement, dated April 15, 1996, by and between I Care Home I.V. Affiliates,
                     Inc., I Care of Arkansas, Inc., I Care, Inc. and the Company (incorporated by reference to the
                     Company's Registration Statement on Form S-1 (File No. 333-5779) as filed with the Commission on
                     June 12, 1996).
          10.8   --  Asset Purchase Agreement, dated as of September 1, 1996, by and between HealthCor Oxygen and
                     Medical Equipment, Inc. and Southern Medical Mart, Inc. (incorporated by reference to the Company's
                     Current Report on Form 8-K, as filed with the Commission on November 12, 1996).
          10.9   --  Credit Agreement, dated as of October 31, 1996, by and between HealthCor Holdings, Inc.,
                     HealthCor, Inc. and the certain financial institutions named therein (incorporated by reference to
                     the Company's Annual Report on Form 10-K, as filed with the Commission on April 15, 1997).
         10.10   --  Form of Change of Control Agreement  (incorporated by reference to the Company's Registration
                     Statement on Form S-4 (File No. 333-44175) as filed with the Commission on January 13, 1998.
         10.11   --  Loan and Security Agreement dated as of May 19, 1998, by and among HealthCor Holdings, Inc. and
                     its subsidiaries as Borrower and HCFP Funding, Inc. as Lender, with Amendment No. 1 thereto dated
                     as of September 14, 1998, Amendment No. 2 thereto dated as of November 16, 1998, Amendment No. 3
                     thereto dated as of January 5, 1999 and Amendment No. 4 thereto dated as of March 1, 1999.
         10.12   --  Convertible Loan Agreement dated as of December 31, 1998, by and among HealthCor Holdings, Inc.
                     as the Borrower, the Lenders from time to time party to the Agreement and Credit Suisse First
                     Boston Management Corporation, as Agent for the Lenders, with the First Amendment thereto dated as
                     of February 22, 1999, the Second Amendment thereto dated as of March 2, 1999, the Third Amendment
                     thereto dated as of March 15, 1999, the Fourth Amendment thereto dated as of March 30, 1999, the
                     Fifth Amendment thereto dated as of April 13, 1999.
         10-13   --  Employment Termination Agreement dated as of February 25, 1999 by and between HealthCor
                     Holdings, Inc. and S. Wayne Bazzle.
         10-14   --  Employment Termination Agreement dated as of February 25, 1999 by and between HealthCor
                     Holdings, Inc. and Cheryl C. Bazzle.
         10-15   --  Tatum CFO Retainer Agreement dated as of January 1, 1999.
         10.16   --  Consulting Agreement dated as of April 12, 1999, by and among HealthCor Holdings, Inc. and The
                     Palmieri Company.
         10.17   --  Consulting Agreement dated as of January 1 ,1999, by and among HealthCor Holdings, Inc. and
                     Chanin, Kirkland, and Messina with Amendment No. 1 dated April 1, 1999.
          11.1   --  Computation of net income (loss) per common share.
                  
          23.1   --  Consent of Arthur Andersen LLP, independent public accountants.
</TABLE>




                                      57