<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
     For the fiscal year ended: December 31, 1998
                                      OR
[_]  Transition Report Pursuant to Section 13 or 15 (d) of the Securities
     Exchange Act of 1934 For the transition period from         to 
     Commission file number: 0-21428

                   OCCUPATIONAL HEALTH + REHABILITATION INC
            (Exact name of registrant as specified in its charter)

               DELAWARE                                13-3464527
   (STATE OR OTHER JURISDICTION OF       (I.R.S. EMPLOYER IDENTIFICATION NO.)
    INCORPORATION OR ORGANIZATION)

        175 DERBY STREET, SUITE 36
          HINGHAM, MASSACHUSETTS                          02043
 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)              (ZIP CODE)

                                (781) 741-5175
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                                      NAME OF EACH EXCHANGE
TITLE OF EACH CLASS                                     ON WHICH REGISTERED
-------------------                                   ----------------------  
       None                                               Not Applicable

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                         Common Stock, $.001 par value
                         -----------------------------
                               (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
filing requirements for the past 90 days.

YES [X]  NO [_].

   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [_]
 
   The aggregate market value of the voting Common Stock held by non-affiliates
of the registrant on March 22, 1999 was $2,820,761.13 based on the closing price
of $5.6875 per share.  The number of shares outstanding of the registrant's
Common Stock as of March 22, 1999 was 1,479,444.

================================================================================
<PAGE>
 
                   OCCUPATIONAL HEALTH + REHABILITATION INC

                          Annual Report on Form 10-K
                  For the Fiscal Year Ended December 31, 1998

                               Table of Contents

<TABLE> 
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<S>                                                                                                     <C> 
PART I

   Item 1.    Business.........................................................................           3

   Item 2.    Properties.......................................................................          15

   Item 3.    Legal Proceedings................................................................          15

   Item 4.    Submission of Matters to a Vote of Security Holders..............................          15


PART II

   Item 5.    Market of Registrants's Common Equity and Related Stockholder Matters............          16

   Item 6.    Selected Financial Data..........................................................          17

   Item 7.    Management's Discussion and Analysis of Financial Condition and Results of
              Operations.......................................................................          18

   Item 7A.   Quantitative and Qualitative Disclosures about Market Risk.......................          25

   Item 8.    Financial Statements and Supplementary Data......................................          25

   Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial
              Disclosure.......................................................................          25

PART III

   Item 10.   Directors and Executive Officers of the Registrant...............................          26

   Item 11.   Executive Compensation...........................................................          30

   Item 12.   Security Ownership of Certain Beneficial Owners and Management...................          33

   Item 13.   Certain Relationships and Related Transactions...................................          36

PART IV

   Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K..................          37

   Index to Consolidated Financial Statements and Financial Statements Schedules...............         F-1

   Signatures .................................................................................         S-1
   Exhibit Index
</TABLE> 
<PAGE>
 
                                    PART I

ITEM 1.   BUSINESS

GENERAL

     Occupational Health + Rehabilitation Inc (the "Company"), a leading
provider of occupational health services, develops and operates
multidisciplinary, outpatient healthcare services delivery sites and provides 
on-site services to employers for the prevention, treatment and management of
work-related injuries and illnesses. The Company currently operates twenty-five
occupational healthcare and related service centers in six states serving over
5,000 employers and also provides workplace health services at employer
locations throughout the Northeast. The Company's centers provide high quality
patient care and a high level of service, which in combination reduce workers'
compensation costs for employers. The Company believes it is the leading
provider of occupational health services in its established markets as a result
of its commitment to quality care and service.

     The Company has developed a system of clinical and operating protocols as
well as proprietary information systems to track the resulting patient outcomes
(the "OH+R System"), all focused on reducing the cost of work-related
injuries. The most effective way to reduce cost is to prevent injuries from
occurring. The OH+R System includes a full array of services designed to reduce
the frequency and severity of work-related injuries and to assure regulatory
compliance. Many of these services may also be delivered on-site at the
workplace. Prevention and compliance services include pre-placement
examinations, medical surveillance, drug and alcohol testing, physicals and 
work-site safety programs.

     The Company's treatment approach for work-related injuries and illnesses is
based on documented, proprietary clinical protocols combining state-of-the-art
medical, rehabilitation and case management services in an integrated system of
care focused on addressing the needs of both employers and employees. Employers'
costs are reduced, and their workers are back on the job more quickly compared
to national averages. Employees receive better care, maintain a positive
attitude and have a greatly reduced probability of developing chronic problems.
Utilizing the OH+R System, which continues to evolve, occupational medicine
physicians and other clinical staff associated with the Company have
consistently generated substantial, documented savings as compared to national
averages in both the lost work days and the medical costs associated with work-
related injuries and illnesses.

     The Company's strategic plan is to expand its network of centers throughout
the Northeast, principally through joint ventures, service agreements or other
affiliations with health systems, acquisitions of occupational medicine and
related services practices, and to continue expanding its workplace health
programs. The Company currently has ten health system affiliations in place.

     The Company was incorporated in Delaware in 1988. On June 6, 1996,
Occupational Health + Rehabilitation Inc ("OH+R") merged with and into (the
"Merger") Telor Ophthalmic Pharmaceuticals, Inc. ("Telor"). Telor initially
operated as an ophthalmic pharmaceutical company. Following the failure of its
lead product candidate, Telor curtailed its research and development programs
and sought a merger candidate. Pursuant to the terms of the Merger, Telor was
the surviving corporation. Simultaneously with the Merger, however, Telor's name
was changed to Occupational Health + Rehabilitation Inc, and the business of the
surviving corporation was changed to the business of OH+R. The Merger was
accounted for as a ''reverse acquisition'' whereby OH+R was deemed to have
acquired Telor for financial reporting purposes.

     The Company maintains its principal executive offices at 175 Derby Street,
Suite 36, Hingham, Massachusetts 02043, telephone number (781) 741-5175.

                                       3
<PAGE>
 
INDUSTRY OVERVIEW

     Work-related injuries and illnesses are a large source of lost productivity
and costs for businesses in the United States. In 1996, workers' compensation
costs in the U.S. were estimated at $121 billion according to the National
Safety Council. Wage and productivity losses accounted for approximately 50% of
these total costs. The primary occupational healthcare market, which includes
primary care treatment of injuries and non-injury health care services such as
prevention and compliance services (the "Primary Occupational Healthcare") ,
represented $10 billion of these costs. Although a small portion of these total
costs, the Company believes Primary Occupational Healthcare is a critical
determinant of other costs. Functioning as the gatekeeper, the primary
occupational medicine physician greatly influences "down stream" medical costs,
as well as, when an injured employee returns to work, thereby controlling lost
work days.

     The rapid increase of workers' compensation costs nationally in past years
has resulted in employers taking more active roles in preventing and managing
workplace injuries. This typically includes the establishment of safety
committees, emphasis on ergonomics in the workplace, drug testing and other
efforts to reduce the number of injuries and the establishment of preferred
provider relationships to ensure prompt and appropriate treatment of work-
related injuries when they do occur. Employer demand for comprehensive and
sophisticated health care services to support these programs has been a key
factor in the development of the occupational healthcare industry.

     The occupational healthcare market is highly fragmented, consisting
primarily of individual or small-group practices and hospital-based programs.
Greater capital requirements, the need for more sophisticated management and
marketing, and changes in the competitive environment, including the formation
of larger integrated networks such as the Company's, have created increased
interest in affiliating with larger, professionally managed organizations. As a
result of these factors, the Company believes that there is an opportunity to
consolidate private practices and hospital programs in the Northeast.

STRATEGY

     The Company's mission is to reduce the cost of work-related injuries and
illnesses and other healthcare costs for employers and to improve the health
status of employees through high-quality care and outstanding service.  The
Company's strategic objective is to develop a comprehensive regional network of
occupational healthcare delivery sites and to expand its workplace health
services to become the dominant occupational health provider in the Northeast.

     The Company intends to build its network of delivery sites through:

     .    Joint ventures, service agreements or other contractual arrangements
          with health systems designed to augment provider's existing
          occupational health programs and to create networks of occupational
          health services throughout the health system and its affiliates.

     .    Acquisitions of existing occupational medicine,  physical therapy and
          other related services practices.

     .    Start-up of Company centers in strategic locations.

     .    Strategic alliances with workers' compensation insurers, managed care
          companies, provider groups such as integrated delivery systems, group
          health insurers, and health maintenance organizations.

     Subsequent to an acquisition, joint venture or other contractual
relationship, new centers are converted to the Company's practice model through
implementation of the OH+R System. New services are added as required to provide
the Company's full-service offering. Workplace health services are often
delivered at employer locations within the service area of a center and are a
natural extension of center operations. The Company's direct sales efforts and
word-of-mouth recommendations from satisfied clients are the source of workplace
health opportunities not 

                                       4
<PAGE>
 
proximate to a center.

     The Company's operating strategy is based upon:

     .    Integration of Services--Prevention and compliance services provide
          important baseline information to clinicians as well as knowledge of
          the work site, which make the treatment of subsequent injuries more
          effective. Close management and coordination of all aspects of an
          injured worker's care are essential to ensuring the earliest possible
          return to work. Management and coordination are difficult, if not
          impossible, when clinicians are not working within an integrated
          system. Such a system significantly reduces the number of
          communications required for a given case and eases the coordination
          effort, while enhancing the quality of care and patient convenience.

       .  Quality Care and Outstanding Service--For a number of reasons, injured
          workers often receive second-class care. A lack of quality care is
          costly to both the injured/ill worker and the employer. The worker
          faces longer recovery time and the employer bears the burden of lost
          work days including the associated indemnity, lost production and
          staff replacement costs. The Company is committed to providing
          outstanding service--to patients, to employers and to third parties.
          From van pick-ups for injured workers to custom services addressing an
          employer's specific needs, the Company is dedicated to delivering a
          level of service that is expected from companies noted for
          extraordinary service, but atypical for healthcare providers.

     .    Outcome Tracking and Reporting--The OH+R System is focused on
          achieving successful outcomes--cost-effectively returning injured
          workers back to the job as quickly as possible while minimizing the
          risk of re-injury. Since the inception of its first center, the
          Company has tracked outcome statistics. The Company believes these
          extensive outcome statistics demonstrate its ability to return injured
          workers back to the job faster and for costs substantially lower than
          the national averages.

     .    Low Cost Provider--The Company believes that future success in
          virtually any segment of healthcare services will require delivery of
          quality care at the lowest possible price. The Company believes it is
          a low cost provider, and it continuously is working to further reduce
          the cost of providing care by increasing the productivity of
          clinicians and administrative personnel. The Company routinely refines
          and revises the OH+R System to increase efficiency and effectiveness.

     .    "At Risk" Reimbursement--The Company believes that case rates,
          capitation and eventually outcome-based reimbursement will become more
          prevalent in workers' compensation. The Company offers case rates,
          capped fee-for-service programs and other innovative pricing programs,
          which differentiate the Company from its competitors. The Company
          believes its outcome data and management information systems enable it
          to properly price and manage ''at risk'' reimbursement programs,
          enhancing the Company's profitability while providing increased
          accountability for results to client employers.

SERVICES

     The Company's services address the diverse healthcare needs and challenges
faced by employers in the workplace. Specializing in the prevention, treatment
and management of work-related injuries and illnesses, the Company is able to
meet the needs of single site, regional multi-site or national employers. The
Company's services are delivered in a variety of venues including the Company's
full service centers, in the workplace or through contract arrangements with
providers or hospitals affiliated with its health system partners.

     The Company's full service centers are typically staffed with multi-
disciplinary teams, including physicians, physician assistants, nurse
practitioners, nurses, physical and occupational therapists, as well as a
manager, a client relations director, and support personnel.   Each center also
has specialists such as orthopedists and physiatrists on staff or has
established relationships with local specialty physicians who have compatible
treatment philosophies.

                                       5
<PAGE>
 
     In support of both center operations and workplace health initiatives, the
Company also provides an after-hours program to coordinate second and third
shift injuries through local emergency departments. This program ensures that
the injured employee is referred back into the Company's organized system of
care to assure continuity of care.

     The Company's Medical Policy Board is the focal point for maintaining and
enhancing the Company's reputation for clinical excellence.  The Medical Policy
Board is comprised of physicians who are associated with the Company and who are
established, recognized leaders in occupational healthcare.  The Medical Policy
Board oversees the establishment of "best practice" standards, the development
of clinical protocols and quality assurance programs, and  the recruitment and
training of clinical personnel.

Specific services provided by the Company include:

Prevention/Compliance:

     A safe work environment is a critical factor impacting costs associated
with work-related injuries and illnesses. To optimize workplace safety and
productivity, the Company offers a full array of services designed to prevent
injuries before they occur and to meet regulatory compliance requirements. The
expertise and experience of the Company's occupational health specialists
differentiate the Company's prevention and compliance services. Through treating
work-related injuries, the Company's clinicians gain significant insights into
employers' safety issues thereby improving the efficacy of prevention programs.
The Company's expertise in health and safety regulatory matters provides
employers with a critical resource to assist them in addressing increasingly
complex federal and state regulations.

Specific prevention and compliance services include:

     .    Physical Examinations
          -    Preplacement
          -    Executive
          -    DOT
          -    Annual
          -    Medical Monitoring/Surveillance
     .    Screenings
          -    Drug & Alcohol Testing
          -    Hazardous substances
          -    Pulmonary Function Tests
     .    Safety Programs
     .    Health Promotion
 
Treatment/Management:
 
     Where an injured worker receives initial treatment for a work-related
injury or illness is critical to the eventual outcome of the case. The urgent
care provider is the medical gatekeeper and single most important player in
controlling case cost. When the Company acts as the gatekeeper, whether in a
Company center, in the workplace, or through its network providers, it controls
the cost of treatment provided plus the costs of specialist and ancillary
services by ensuring that referrals are appropriate and required. The Company's
prevention/compliance efforts provide an in-depth understanding of the workplace
and the workforce facilitating optimal treatment plans and early return to work.
Lost work days are minimized when care is controlled and effectively
coordinated.

     The Company's treatment protocols, which have been demonstrated to be
effective through outcome studies documenting reduced medical costs and fewer
lost work days, are based on a sports medicine philosophy of early intervention
and aggressive treatment to maximize a patient's recovery while minimizing the
ultimate costs associated with the case.

                                       6
<PAGE>
 
     As part of the Company's injury treatment services, the multi-disciplinary
clinical team controls and coordinates all aspects of an injured worker's care.
This includes referrals to specialists who are part of a network of physicians
who understand workers' compensation and the special requirements of treating
work-related injuries. Within a typical Company full service center,  medical
and rehabilitation team members work within an integrated system of formal,
defined protocols.  This approach facilitates superior, ongoing communication
among clinician team members regarding the most appropriate treatment plan thus
eliminating "system delays" (i.e., time lost as patients deal with several,
unrelated providers).

     Another element to successfully managing work-related injuries is
continuous communication to all the "key players" including the employer,
employee, and insurance representative. With expectations and treatment plans
clearly communicated to all involved, the Company's commitment to goal-oriented,
cost-effective, quality care is evident.

     When an individual is not treating with the Company, specialty evaluations
are often used to bring a case to closure and/or to create return to work
programs for both work-related and non-work-related cases.  The Company's
occupational medicine physicians and therapists bring a unique set of skills and
experiences to these evaluations including in-depth understanding of the
workplace. Referrals for these services typically come from employers, insurers,
or lawyers.

Treatment/management services are summarized below:

     .    Urgent Care
     .    Physical and occupational therapy
     .    Specialist Referrals
     .    Case Management
     .    Speciality Evaluations
          -    Independent Medical Examinations
          -    Disability Examinations
 
Workplace Health:

     The workplace is often the most effective place for the Company to deliver
its services for work-related injuries/illnesses as well as to reduce other
employee healthcare costs. Furthermore, many employers recognize the value of
medical personnel managing integrated disability management programs which cover
both work-related and non-work-related injuries and illnesses. The Company has
assembled a fully integrated continuum of workplace health services that
systematically address workplace safety, aim to minimize absenteeism of
employees who have work-related and non-work-related injuries and illnesses, and
strive to reduce the cost of chronic diseases. Employers may choose to have all
or some of these services delivered at the workplace through staffing contracts
or in conjunction with the Company's center resources.

Consulting/Advisory Services

     Based on its depth of occupational medicine expertise, the Company provides
a variety of consulting/advisory services for clients as follows:

     .    Healthcare policy development
     .    Regulatory compliance
     .    ADA compliance
     .    Environmental medicine
     .    Medical Review Officer (MRO)

                                       7
<PAGE>
 
OUTCOMES

     The Company has significant experience with data management and outcomes
tracking and  has created a state-of-the-art reporting tool that enables
employers to track all costs and utilization of services received within the
Company's network of care.  The Company believes that its  multi-disciplinary
clinical teams have consistently outperformed others by returning injured
employees back to work more quickly and at lower cost, while maintaining a
greater than 95% patient satisfaction rate.

     To continually ensure and monitor the effectiveness of the services
provided by the Company, the Company regularly compares its outcome results
against national benchmarks and individual employer statistics. In comparison to
national statistics reported by the National Council on Compensation Insurance
and the National Safety Council in 1996, the Company has demonstrated
significant savings in medical and indemnity costs. The Company's most recent
studies in 1997 indicate that average medical costs per case is approximately
$466 as compared to a national average of $2,528. In addition, on average only
approximately 5% of the cases treated at Company centers result in lost work
days (LWDs) while national averages indicate that 18% of all cases result in
LWDs. Further, the Company's average was approximately 7 lost work days for each
LWD case it treated as compared to 22 days nationally.


FUTURE SERVICE OFFERINGS

     The Company is also developing programs in other markets in which its core
competencies are relevant.  For example, many states are implementing
legislation providing premium discounts on auto insurance for consumers agreeing
to use specified preferred provider networks if they are injured in an accident.
The Company's expertise in treating and managing work-related musculoskeletal
injuries within the medicolegal environment of workers' compensation may
position it to address the high costs of auto injuries.  Further, as the
acceptance of alternative medicine disciplines continues to increase throughout
the United States, the Company is exploring the feasibility of introducing such
approaches to the OH+R System.

SALES AND MARKETING

     The Company markets through a direct sales force primarily to employers,
but also to insurers and third-party administrators. These parties strongly
influence (and in many instances direct) an injured worker's choice of provider.
In addition, employers select providers for prevention and compliance services.

     Through a sales planning and forecasting process, markets are analyzed and
resources are allocated and consistently monitored to ensure maximum results.
Client relations directors (CRDs), typically located at each Company center, are
responsible for client retention and new client prospecting activities. The
personal sales efforts of each CRD are supported by direct mail, selective
advertising and public relations programs focused on reinforcing the Company's
position as a leader in occupational health.

AGREEMENTS WITH MEDICAL PROVIDERS

     Medical and other professional services at the Company's centers are
provided through independently organized professional corporations
(collectively, the "Medical Providers") that enter into management agreements
with the Company or its affiliated joint ventures, which subcontract with the
Company. The Company provides a wide array of business services under these
management and submanagement agreements, such as providing personnel, practice
and facilities management, real estate services, billing and collection,
accounting, tax and financial management, human resource management, risk
management, insurance, sales, marketing and information-based services such as
process management and outcome analysis. The Company provides services under
these management agreements as an independent contractor, and the medical
personnel at the centers under the direction of the Medical Providers provide
all medical services and retain sole responsibility for all medical decisions.
The management agreements grant 

                                       8
<PAGE>
 
the Medical Providers a non-exclusive license to use the Company's service mark
"Occupational Health + Rehabilitation." The management agreements typically
have automatically renewing terms and specific termination rights. Management
fees payable to the Company vary depending upon the particular circumstances and
applicable legal requirements. These fees may include an assignment of certain
accounts receivable, an allocation of a certain portion of net revenue or a flat
fee for each service provided by the Company.

EXPANSION PLAN

     The Company's objective is to build a comprehensive regional occupational
health system with full-service occupational health centers, workplace health
sites and a variety of network providers typically affiliated with the Company's
health system partners. Forming ventures, alliances and other contractual
relationships with hospitals and health systems in markets in which the Company
operates is a key strategy for the Company. The Company's management team is
comprised of healthcare executives who are experienced in corporate development
as well as the integration and operation of the resulting acquisitions, ventures
and alliances. In addition, the OH+R System, with its documented protocols
covering all aspects of center and workplace health operations, facilitates
effective assimilation of new operations. The Company believes that occupational
health services, like all other segments of the healthcare industry, will feel
the pressure of managed care and other cost containment efforts from employers.
These pressures and the expected continuance of regulatory complexities in the
workers' compensation and health and safety systems will cause a need, in the
Company's opinion, for physicians and hospitals with occupational health
programs to seek affiliations with larger, professionally managed organizations
such as the Company that specialize in occupational health.  Because of the many
factors involved in building such a network, there can be no assurance that the
Company will be successful in meeting its expansion goals.

HOSPITAL JOINT VENTURES, AFFILIATIONS AND SERVICE AGREEMENTS

     The Company's intended principal method of expansion is entering into joint
ventures, affiliations, service agreements or other contractual arrangements
with health systems to develop and operate comprehensive occupational health
programs based upon network delivery sites including  full-service centers,
satellite locations and/or network providers based upon market opportunities.
There are approximately 1,500 hospital-based occupational health programs in the
United States, approximately 300 of which are in the New England and Middle
Atlantic states.

     Most hospital occupational health programs have developed by default.
Employers and injured employees have naturally looked to the local hospital for
treatment of work-related injuries. In addition, as OSHA and other safety and
health regulations came into existence, hospitals again were the logical, and
often only, place for employers to turn for service. The majority of the
occupational health services offered by hospitals are delivered by functional
departments where occupational health is a small percentage of the services
rendered. Management of care, employer communications and, ultimately,
successful outcomes are extremely difficult to accomplish. Therefore, many
health systems are looking to acknowledged experts in the field such as the
Company for effective outsourcing of their hospital-based occupational health
programs.

By affiliating or contracting with the Company, health systems benefit from:

     .    The OH+R System--a proven clinical and operating system

     .    The Company's expertise in sales and marketing to increase market
          share, occupation health revenues and referrals for other health
          system services

     .    Access to the Company's regional network of multi-location clients

     .    The Company's expertise in profitably delivering high quality care and
          outstanding service at the center level

     .    Enhanced relationships with employers, many of whom are becoming
          directly involved in contracting with 

                                       9
<PAGE>
 
          health systems to provide health care for their employees

     .    The Company's entrepreneurial work environment that provides
          incentives for performance

     .    Minimizing capital requirements

     Health system relationships allow the Company to leverage the name and
position of the institution within a community to ease market entry and expedite
building market share. In addition, as healthcare reform continues, integrated
healthcare delivery systems are expected to develop around networks of
hospitals. Employers will contract with these systems to provide for all the
healthcare needs of their employees, including the prevention and treatment of
work-related injuries and illnesses. It is strategically important for the
Company to have links to these systems to be well-positioned to become the
occupational health provider for a system.

     At the end of 1996, the Company had hospital joint ventures in effect with
a member of the Care Group System, New England Baptist Hospital in Boston,
Massachusetts, and a member of the Central Maine Health System, Central Maine
Medical Center in Lewiston, Maine. During 1997, joint ventures with Maine Health
System, the parent company of Maine Medical Center in Portland, Maine, and the
Care New England Health System in Warwick, Rhode Island were consummated. In
both of these cases, existing hospital-owned occupational health centers were
combined with existing OH+R centers. The combined Maine Medical Center/OH+R
center is now the dominant occupational healthcare provider in the Portland
area. The Care New England Health System network, includes three hospitals
located in the Providence, Rhode Island area. The combined Care New England/OH+R
center is now the dominant occupational healthcare provider in the Warwick,
Rhode Island area.

     Additionally in 1997, the Company entered into a strategic relationship
with Eastern Maine Health Care ("EMH"), the parent of Eastern Maine Medical
Center in Bangor, Maine. Eastern Maine Medical Center is a 348 bed general
medical and surgical hospital in Bangor that provides tertiary care throughout
Northern Maine. Through an exclusive affiliation with EMH and related parties,
the Company provides comprehensive occupational health services to employers and
their employees in Northern and Eastern Maine.

     During 1998, the Company continued to expand its strategic relationships
with hospital systems through the establishment of joint ventures, service
agreements, clinical affiliations and other contractual arrangements involving
the delivery of occupational health services. These relationships included the
formation of a joint venture with Baystate Health Systems in Springfield,
Massachusetts, the establishment of a clinical coordination arrangement with
Southern New Hampshire Medical Center of Nashua, New Hampshire, the provision of
workplace health services in eastern Massachusetts in concert with the Lahey
Clinic of Burlington, Massachusetts, an agreement to manage and administer the
occupational health services of Western Maine Health's Stephens Memorial
Hospital located in Norway, Maine and an agreement to provide certain healthcare
practice services to Northern Cumberland Memorial Hospital located in Bridgton,
Maine. Baystate Health Systems is the largest health care delivery system in
Western Massachusetts. It is the parent company of four hospitals located in
Western Massachusetts. Southern New Hampshire Medical Center is a 188-bed health
care facility providing a wide range of health services and programs throughout
southern New Hampshire and is academically affiliated with Dartmouth Medical
School. Lahey Clinic is a group practice of approximately 500 physicians, which
provides primary and specialty care at three hospitals and community-based
practices in 37 towns throughout eastern Massachusetts. Western Maine Health,
anchored by Stephens Memorial Hospital is the premier hospital in Western Maine.
Northern Cumberland Memorial Hospital is a member of the Central Maine Medical
Center Health System, and services 20 surrounding Maine communities and the
Mount Washington region of New Hampshire.

     The Company is continuously exploring other potential health system
affiliations throughout the Northeast. Typically under these affiliations, the
Company provides all necessary personnel and assumes management responsibility
for the day-to-day operation of the occupational health entity. In return for
such services, the Company will receive fees customarily including a component
based upon the net revenue attained by the entity and its operating profit
performance, as well as reimbursement of all of the Company's personnel costs
and other expenses 

                                       10
<PAGE>
 
incurred. Further, in a typical joint venture scenario, the Company will also
own 51% or more of the occupational health entity with the health system owning
the remainder.

ACQUISITIONS, STRATEGIC ALLIANCES AND SELECTIVE START-UPS

     By acquiring private practices that perform occupational medicine, physical
therapy or related services, the Company can enter a new geographical area or
consolidate its position within an existing market. Therapy practices receive
referrals of injured workers from local specialty physicians which can
complement the Company's direct marketing to employers. Alternatively,
occupational medicine practices including medical consulting practices focused
on occupational and environmental health issues have established relationships
with employers to whom the Company's more comprehensive services may be
provided.  Finally, related service practices, such as primary care and sports
medicine can often be expanded  by implementing the OH+R System to service the
occupational medicine needs of employers as well as offer an expanded array of
services to the injured worker.

     During 1997, the Company continued to implement its acquisition strategy
through its purchases of Immediate Care Health Center ("ICHC"), Business Health
Management ("BHM"), New England Health Center ("NEHC") and Occupational Medical
Services ("OMS"). ICHC is a leading provider of occupational medicine and urgent
care services in the Burlington, Vermont area. BHM provides medical consulting
services regarding occupational and environmental health issues, workplace
medical services, medical surveillance programs, and drug testing programs.
BHM's client list includes various Fortune 500 employers. NEHC provides a broad
array of occupational medicine services and is a leading occupational medicine
provider northwest of Boston, Massachusetts, servicing hundreds of employer and
governmental clients. OMS, the Company's first acquisition in New York, is a
leading medical practice in Albany specializing in occupational medicine. OMS
serves a client base of more than 250 employers representing a broad cross
section of industries throughout the Capital District Region.

     In 1998, the Company continued to further implement its acquisition
strategy and expansion of its related services platform through its purchase of
Sports Medicine Systems, Inc ("SMS") and Southern New Hampshire Medical Center's
Occupational Health Center ("OHC"). As a result of the SMS acquisition, the
Company manages two practices that provide orthopedics, podiatry, physiatry,
physical therapy, and athletic training services in Boston and Brookline,
Massachusetts. The Company believes that this will enable the Company to provide
its clients with an internal resource for specialty orthopedic referrals as well
as offer their employees specialty care services for non-workers' compensation
cases. Following the closing of the acquisition, SMS' Boston practice was
promptly relocated into the Company's already existing location in Boston
producing immediate economies and synergies. OHC consists of four centers
located in Bedford, Concord, Milford and Nashua, New Hampshire, which provide
comprehensive occupational health services, including urgent care treatment and
prevention/compliance services such as medical surveillance programs, pre-
placement physicals, respirator programs, and drug and alcohol testing. OHC has
been a prominent provider of occupational health services in southern New
Hampshire for over a decade, serving a client base of more than 2,000 employers
and representing a broad cross section of industries throughout its service
area.

     In the first quarter of 1999, the Company continued to implement its
acquisition and expansion of services strategy with its purchase of certain
assets of Return To Work, Inc. ("RTW") located in Springfield, Massachusetts and
a NovaCare, Inc. owned facility in Londonderry, New Hampshire ("NovaCare New
Hampshire"). RTW is a physical therapy practice that has been merged into the
Company's joint venture with Baystate Health System. The incorporation of this
acquisition will allow the Springfield center to realize the Company's standard
integrated services model. NovaCare New Hampshire is a newly designed
occupational health center, located just outside of Manchester, New Hampshire.
The center provides a broad range of occupational health services, including
urgent care treatment and rehabilitation for work-related injuries, and
prevention/compliance services such as medical surveillance programs, pre-
placement physicals, respirator programs, and drug and alcohol testing. In a
move to create efficiencies and synergies, the Company will merge and relocate
its Bedford, New Hampshire center into this site in late March 1999, so that the
Company can effectively serve the greater Manchester, New Hampshire marketplace.

     The Company will also consider establishing start-up centers when
appropriate and in a cost effective manner. This approach is most suitable for
geographic areas proximate to existing Company centers or where a large source
of patients can be assured through arrangements with large employers and third
party administrators. Often start-ups can be developed in concert with a local
provider enabling the Company to minimize its investments particularly during
the site's early growth phase. Consistent with this approach, in the third
quarter of 1998, the Company began to offer certain occupational health services
in St. Albans, Vermont in concert with a local physical therapy provider. 

                                       11
<PAGE>
 
The Company will continue to explore similar opportunities throughout its
marketplace when conditions warrant such an approach.


COMPETITION

     Most organizations providing care for work-related injuries and illnesses
in the Northeast are local providers or hospitals. The fundamental difference
between the Company and these providers is the Company's focus on combining
multiple disciplines to address the needs of a single market segment--work-
related injuries and illnesses. Other providers are generally organized to
provide services, such as physical therapy, to a wide variety of market segments
with differing needs regardless of the source of the injury or type of patient
or injury.

     The vast majority of the Company's competitors are local operations and
typically provide only some of the services required to successfully resolve
work-related injuries and illnesses. Hospitals typically provide most of the
required services but not as part of a tightly integrated, formal care system.
Injured workers tend to be a small segment of the patients seen by the
individual hospital departments involved, and department personnel tend not to
have any particular training or expertise in work-related injuries and
illnesses.

     OccuSystems, Inc., which held  that it was  the nation's largest physician
practice management company focusing on occupational healthcare merged with CRA
Managed Care, Inc in 1997 to form Concentra Managed Care, Inc.  The Company
further understands that other large and diversified national healthcare
companies including HEALTHSOUTH Corporation and NovaCare, Inc. have begun to
offer occupational health services in certain locations. Although the Company
has not yet seen a significant occupational healthcare presence from these
companies in the markets in which the Company currently operates and many of the
other markets it is exploring in the Northeast, there can be no assurance that
these competitors will not establish such services in these markets. These
companies are larger than the Company and have greater financial resources.

LAWS AND REGULATIONS

 General

     As a participant in the healthcare industry, the Company's operations and
relationships are subject to extensive and increasing regulation by a number of
governmental entities at the federal, state and local levels. The Company is
also subject to laws and regulations relating to business corporations in
general. The Company believes that its operations are in material compliance
with applicable laws. Nevertheless, because of the special nature of the
Company's relationship with the Medical Providers, many aspects of the Company's
business operations have not been the subject of state or federal regulatory
interpretation, and there can be no assurance that a review of the Company's or
the Medical Providers' business by courts or regulatory authorities will not
result in a determination that could adversely affect the operations of the
Company or the Medical Providers or that the healthcare regulatory environment
will not change so as to restrict the Company's or the Medical Providers'
existing operations or their expansion.

 Workers' Compensation Legislation

     The federal government and each state in which the Company does business
administer workers' compensation programs, which require employers to cover
medical expenses, lost wages and other costs resulting from work-related
injuries, illnesses and disabilities. Medical costs are paid to healthcare
providers through the employers' purchase of insurance from private workers'
compensation carriers, participation in a state fund or by self-insurance.
Changes in workers' compensation laws or regulations may create a greater or
lesser demand for some or all of the Company's services, require the Company to
develop new or modified services or ways of doing business to meet the needs of
the marketplace and compete effectively or modify the fees that the Company may
charge for its services.

     Many states are considering or have enacted legislation reforming their
workers' compensation laws. These reforms generally give employers greater
control over who will provide medical care to their employees and where 

                                       12
<PAGE>
 
those services will be provided, and attempt to contain medical costs associated
with workers' compensation claims. Some states have implemented diagnosis-
specific fee schedules that set maximum reimbursement levels for healthcare
services. The federal government and certain states provide for a
"reasonableness" review of medical costs paid or reimbursed by workers'
compensation.

     When not governed by a fee schedule, the Company adjusts its charges to the
usual and customary levels authorized by the payor.

 Corporate Practice of Medicine and Other Laws

     Most states limit the practice of medicine to licensed individuals or
professional organizations comprised of licensed individuals and prohibit
physicians and other licensed individuals from splitting professional fees with
non-licensed persons. Many states also limit the scope of business relationships
between business entities such as the Company and licensed professionals and
professional corporations, particularly with respect to non-physicians
exercising control over physicians engaged in the practice of medicine.  Many
states require regulatory approval, including certificates of need, before
establishing certain types of healthcare facilities, offering certain services
or making expenditures in excess of statutory thresholds for healthcare
equipment, facilities or programs.

     Laws and regulations relating to the corporate practice of medicine, the
sharing of professional fees, certificates of need and similar issues vary
widely from state to state, are often vague and are seldom interpreted by courts
or regulatory agencies in a manner that provides guidance with respect to
business operations such as those of the Company. Although the Company attempts
to structure all of its operations so that they comply with the relevant state
statutes and believes that its operations and planned activities do not violate
any applicable medical practice, fee-splitting, certificates of need or similar
laws, there can be no assurance that (i) courts or governmental officials with
the power to interpret or enforce these laws and regulations will not assert
that the Company or certain transactions in which it is involved are in
violation of such laws and regulations and (ii) future interpretations of such
laws and regulations will not require structural and organizational
modifications of the Company's business. In addition, the laws and regulations
of some states could restrict expansion of the Company's operations into those
states.

 Fraud and Abuse Laws

     A federal law (the "Anti-Kickback Statute") prohibits any offer, payment,
solicitation or receipt of any form of remuneration to induce or in return for
the referral of Medicare or state health program patients or patient care
opportunities, or in return for the purchase, lease or order of, or arranging
for, items or services that are covered by Medicare or state health programs.
Violations of the statute can result in the imposition of substantial civil and
criminal penalties. In addition, certain anti-referral provisions (the "Stark
Amendments") prohibit a physician with a "financial interest" in an entity
from referring a patient to that entity for the provision of certain "designated
medical services''; some of which are provided by the Medical Providers that
engage the Company's management services.

     Most states have statutes, regulations or professional codes that restrict
a physician from accepting various kinds of remuneration in exchange for making
referrals. Several states are considering legislation that would prohibit
referrals by a physician to an entity in which the physician has a specified
financial interest.

     All of the foregoing laws are subject to modification and interpretation,
have not often been interpreted by appropriate authorities in a manner directly
relevant to the Company's business and are enforced by authorities vested with
broad discretion. The Company has attempted to structure all of its operations
so that they comply with all applicable federal and state anti-referral
prohibitions. The Company also continually monitors developments in this area.
If these laws are interpreted in a manner contrary to the Company's
interpretation, reinterpreted or amended, or if new legislation is enacted with
respect to healthcare fraud and abuse or similar issues, the Company will seek
to restructure any affected operations so as to maintain compliance with
applicable law. No assurance can be given that such restructuring will be
possible, or, if possible, will not adversely affect the Company's business.

                                       13
<PAGE>
 
 Antitrust Laws

     Federal, and many state, laws prohibit anti-competitive conduct, including
price fixing, improper exercise of monopoly power, concerted refusals to deal
and division of markets.  Violations of the Sherman Act, the primary federal
antitrust statute, are felonies punishable by significant fines.  While the
Company believes that it is in compliance with relevant antitrust laws, no
assurance can be given that the Company's business practices will be interpreted
by federal and state enforcement agencies to comply with such laws, and any
violation of such laws could have a material adverse effect on the Company and
its business.

 Uncertainties Related to Changing Healthcare Environment

     Over the last several years, the healthcare industry has experienced
change. Although managed care has yet to become a major factor in occupational
healthcare, the Company anticipates that managed care programs, including
capitation plans, may play an increasing role in the delivery of occupational
healthcare services. Further, competition in the occupational healthcare
industry may shift from individual practitioners to specialized provider groups
such as those managed by the Company, insurance companies, health maintenance
organizations and other significant providers of managed care products. To
facilitate the Company's managed care strategy, the Company is offering risk-
sharing products for the workers' compensation industry that will be marketed to
employers, insurers and managed care organizations. No assurance can be given
that the Company will prosper in the changing healthcare environment or that the
Company's strategy to develop managed care programs will succeed in meeting
employers' and workers' occupational healthcare needs.

     Other changes in the healthcare environment may result from an Internal
Revenue Service ruling related to whole-hospital joint ventures with tax-exempt
organizations. The Company currently has no reason to believe that this specific
ruling will be extended to joint ventures concerning ancillary services such as
occupational health for tax-exempt hospitals; however, if so extended, the
Company's structure for joint ventures with tax-exempt hospitals may differ from
the Company's typical model so as not to jeopardize the tax-exempt status of
these hospitals.

 Environmental

     The Company and the Medical Providers are subject to various federal, state
and local statutes and ordinances regulating the disposal of infectious waste.
If any environmental regulatory agency finds the Company's facilities to be in
violation of waste laws, penalties and fines may be imposed for each day of
violation, and the affected facility could be forced to cease operations. The
Company believes that its waste handling and discharge practices are in material
compliance with the applicable law.

SEASONALITY

     The Company is subject to the natural seasonal swing that impacts the
various employers and employees it serves. Although the Company hopes that as it
continues its growth and development efforts it may be able to anticipate the
effect of these swings and provide services aimed to ameliorate this impact,
there can be no assurance that it can completely alleviate the effects of
seasonality. Historically, the Company has noticed these impacts in portions of
the first and fourth quarters. Traditionally, revenues are lower during these
periods since patient visits decrease due to the occurrence of plant closings,
vacations, holidays, a reduction in new employee hirings and the impact of
severe weather conditions in the Northeast. These activities also cause a
decrease in drug and alcohol testings, medical monitoring services and pre-hire
examinations. The Company has also noticed similar impacts during the summer
months, but typically to a lesser degree than during the first and fourth
quarters.

EMPLOYEES

     As of February 19, 1999, the Company employed 393 individuals on a full and
part-time basis. The total licensed or clinical professionals contracted or
associated with the Company are 210, including physicians, physician 

                                       14
<PAGE>
 
assistants, nurses, nurse practitioners, medical assistants, physical and
occupational therapists, and assistant physical and occupational therapists.
None of the Company's employees are covered by collective bargaining agreements.
The Company has not experienced any work stoppages and considers its relations
with its employees to be good.

IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS

     Statements contained in this Annual Report on Form 10-K, including in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," contain forward-looking statements within the meaning of Section
21E of the Securities Exchange Act, which statements are intended to be subject
to the "safe-harbor" provisions of the Private Securities Litigation Reform Act
of 1995. The forward-looking statements are based on management's current
expectations and are subject to many risks and uncertainties, which could cause
actual results to differ materially from such statements. Such statements
include statements regarding the Company's objective to develop a comprehensive
regional network of occupational healthcare centers providing integrated
services through multi-disciplinary teams. Among the risks and uncertainties
that will affect the Company's actual results in achieving this objective are
locating and identifying suitable acquisition candidates, the ability to
consummate acquisitions on favorable terms, the success of such acquisitions, if
completed, the costs and delays inherent in managing growth, the ability to
attract and retain qualified professionals and other employees to expand and
complement the Company's services, the uncertainty associated with and the
potential impact of Year 2000 issues, the availability of sufficient financing,
the attractiveness of the Company's capital stock to finance acquisitions,
strategies pursued by competitors, the restrictions imposed by government
regulation, changes in the industry resulting from changes in workers'
compensation laws and regulations and in the healthcare environment generally
and other risks described in this Annual Report on Form 10-K and the Company's
other filings with the Securities and Exchange Commission.

ITEM 2.   PROPERTIES

     The Company rents approximately 5,250 square feet of office space for its
corporate offices in Hingham, Massachusetts, and is currently investigating the
possibility of adding approximately 1,700 square feet of additional office space
during the second quarter of 1999.

     The Company's centers range in sizes from approximately 725 square feet to
15,239 square feet and have lease terms of three years to six years with varying
renewal or extension rights.  A typical center ranges in size from approximately
4,000 to 10,000 square feet and has four to eight rooms used for examination and
trauma, a laboratory, an x-ray room and ancillary areas for reception, drug
testing collection, rehabilitation, client education and administration. The
centers generally are open from nine to twelve hours per day at least five days
per week.

     The Company believes that its facilities are adequate for its reasonably
foreseeable needs.

ITEM 3.   LEGAL PROCEEDINGS

     The Company is not a party to any material legal proceedings and is not
aware of any threatened litigation that could have a material adverse effect
upon its business, operating results or financial condition.

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

     During the fourth quarter of the fiscal year ended December 31, 1998, there
were no matters submitted to a vote of security holders.

                                       15
<PAGE>
 
                                    PART II

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

     Prior to the Merger on June 6, 1996, Telor's common stock was traded on the
Nasdaq National Market under the symbol TELR. Since that date, the Company's
Common Stock has been traded on the Nasdaq SmallCap Market under the symbol
OHRI. The following table sets forth the high and low bid quotations for the
Company's Common Stock as reported by Nasdaq during the periods shown below.

<TABLE>
<CAPTION>
                                               HIGH      LOW
                                              -------  --------
          <S>                                 <C>      <C>
          Quarter ended March 31, 1997......  $ 7 1/2  $      5
          Quarter ended June 30, 1997.......    4 3/4     2 1/2
          Quarter ended September 30, 1997..   5 3/16     2 1/4
          Quarter ended December 31, 1997...    5 1/2     2 7/8
          Quarter ended March 31, 1998......    4 1/4   2 15/16
          Quarter ended June 30, 1998.......        5    3 7/16
          Quarter ended September 30, 1998..    7 1/2     4 3/4
          Quarter ended December 31, 1998...    6 1/2         3
</TABLE>

     The foregoing represent inter-dealer prices, without retail mark-up, mark-
down or commission and may not necessarily represent actual transactions. As of
March 9, 1999, there were approximately 69 holders of record of the Company's
Common Stock.

     The Company must comply with continuing listing standards for continued 
inclusion on the Nasdaq SmallCap Market, including the maintenance of a minimum 
of two active market makers for its Common Stock. The Company does not currently
have two such active market makers although it is actively seeking additional 
market makers. If the Company cannot demonstrate compliance with the minimum 
market maker requirement by April 30, 1999, it will likely be delisted from the 
Nasdaq SmallCap Market. If the Company were to be delisted from the Nasdaq 
SmallCap Market, trading, if any, in the Common Stock will be conducted in the 
non-Nasdaq over-the-counter market. As a result of such delisting, an investor 
could find it more difficult to purchase or dispose of, or to obtain accurate 
quotations as to the market value of, the Common Stock, and the cumulative 
effect of the same could cause a decline in the market price of the Common 
Stock.

     The Company has never paid any cash dividends on its Common Stock. The
Company currently intends to retain earnings, if any, for use in its business
and does not anticipate paying any cash dividends in the foreseeable future. The
payment of future dividends will be at the discretion of the Board of Directors
of the Company and will depend, among other things, upon the Company's earnings,
capital requirements and financial condition. In addition, the consent of
holders of the members of the Board of Directors nominated solely by the holders
of Series A Convertible Preferred Stock is required before any dividends (other
than dividends payable in Common Stock) may be declared and paid upon or set
aside for the Common Stock of the Company in any year. Further, dividends will
be payable on the shares of Series A Convertible Preferred Stock when and if
declared by the Board of Directors after November 5, 1999 and will thereafter
accrue at an annual cumulative rate of $0.48 per share, subject to certain
adjustments. Finally, compliance with various financial covenants imposed by one
of the Company's lenders could limit the Company's ability to pay dividends.

     The transfer agent and registrar for the Company's Common Stock is Boston
EquiServe, L.P.

                                       16
<PAGE>
 
ITEM 6.  SELECTED FINANCIAL DATA

     The consolidated statement of operations data set forth below with respect
to the years ended December 31, 1998, 1997 and 1996 and the consolidated balance
sheet data as of December 31, 1998 and 1997 are derived from, and are qualified
by reference to, the audited Consolidated Financial Statements included
elsewhere in this report and should be read in conjunction with those financial
statements and notes thereto. The consolidated statement of operations data for
the years ended December 31, 1995 and 1994 and the consolidated balance sheet
data at December 31, 1996, 1995 and 1994 are derived from financial statements
not included herein. Due to the "reverse acquisition" accounting treatment of
the Merger, the data for periods prior to the Merger represent the financial
results of OH+R rather than Telor. Historical results should not be taken as
necessarily indicative of the results that may be expected for any future
period.

<TABLE>
<CAPTION>
                                                                      (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)

                                                                                   YEAR ENDED DECEMBER 31,
                                                                ---------------------------------------------------------- 
                                                                   1998        1997        1996        1995        1994  
                                                                  ------      ------      ------      ------      ------ 
<S>                                                             <C>         <C>          <C>         <C>         <C>          
CONSOLIDATED STATEMENT OF OPERATIONS DATA:

Revenue                                                         $  23,083   $  18,307    $   9,041   $  5,835    $  2,584
Expenses:
 Operating                                                         19,970      17,209        9,063      6,407       2,618   
 General and administrative                                         3,035       2,590        1,570      1,102       1,139   
 Depreciation amortization                                            759         658          449        365         222  
                                                                ----------------------------------------------------------       
                                                                   23,764      20,457       11,082      7,874       3,979  
                                                                ----------------------------------------------------------  
                                                                     (681)     (2,150)      (2,041)    (2,039)     (1,395)
                                                                                               
Nonoperating gains (losses):
 Interest income                                                      171         334          135         38          38   
 Interest expense                                                    (179)       (248)        (252)       (97)        (53)  
 Minority interest in net (profits) losses of
   subsidiaries                                                      (318)        183          308        322
 Gain on disposition of investment                                                217
                                                                ----------------------------------------------------------   
Loss before income taxes and cumulative
   effect of a change in accounting principle                      (1,007)     (1,664)      (1,850)    (1,776)     (1,410)
 Income Taxes                                                           0           0            0          0           0
                                                                ----------------------------------------------------------   
Loss before cumulative effect of a change
   in accounting principle                                         (1,007)     (1,664)      (1,850)    (1,776)     (1,410)
Cumulative effect of change in accounting
   principle                                                         (155)
                                                                ----------------------------------------------------------   
Net loss                                                        $  (1,162)  $  (1,664)   $  (1,850)  $ (1,776)   $ (1,410)
                                                                ==========================================================
Net loss available to common      
   shareholders                                                 $  (1,177)  $  (1,681)   $  (1,850)  $ (1,776)   $ (1,410)
                                                                ==========================================================
Loss before cumulative effect of a change
   in accounting principle                                      $   (0.69)  $   (1.07)   $   (1.64)  $  (2.69)   $  (2.68)
Cumulative effect of change in accounting
   principle                                                        (0.11)
                                                                ----------------------------------------------------------
Net loss per common share                                       $   (0.80)  $   (1.07)   $   (1.64)  $  (2.69)   $  (2.68)
                                                                ==========================================================
 
Weighted average common shares
   outstanding                                                  1,479,141   1,573,471    1,129,611    661,306     526,685
                                                                ==========================================================
</TABLE> 

                                       17
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                           DECEMBER 31,
                                                            
CONSOLIDATED BALANCE SHEET DATA:                     1998        1997         1996          1995         1994
                                                     ----        ----        -----          ----         ----
<S>                                               <C>          <C>         <C>           <C>         <C>    
Working capital (deficit)                         $  3,694     $  5,197    $  8,846      $  (340)    $  1,217
Total assets                                        14,479       14,573      15,476        4,249        3,505
Long-term debt less, current portion                 1,116        1,386         746        1,161          670
Redeemable convertible preferred stock               8,455        8,440       8,423        7,179        6,019
Stockholder's equity (deficit)                         581        1,757       3,415       (6,187)      (3,851)
</TABLE>

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

OVERVIEW

  The Company specializes in occupational health care throughout the
Northeastern United States. The Company develops and operates multidisciplinary
outpatient healthcare centers and provides on-site services to employers for the
prevention, treatment and management of work-related injuries and illnesses. The
Company operates the centers typically under management and submanagement
agreements with professional corporations that practice exclusively through such
centers. Additionally, the Company has entered into joint ventures with hospital
related organizations to provide management and related services to the centers
established by the joint ventures.

  The Company is the surviving corporation of the Merger of OH+R into Telor.
Pursuant to the Merger, the ophthalmic pharmaceutical business of Telor ceased,
and the business of the surviving corporation was changed to the business of
OH+R.

  The Company's operations have been funded primarily through venture capital
investments and the Merger. The Company's growth has resulted predominantly from
the formation of joint ventures, acquisitions and development of businesses
principally engaged in occupational health care.

  The following table sets forth, for the periods indicated, the relative
percentages which certain items in the Company's consolidated statements of
operations bear to total revenue. The following information should be read in
conjunction with the consolidated financial statements and notes thereto
included elsewhere in this report. Historical results and percentage
relationships are not necessarily indicative of the results that may be expected
for any future period.

<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                                    --------------------------
                                                      1998     1997      1996
                                                      ----     ----      ----
     <S>                                            <C>       <C>      <C>
     Total revenue................................   100.0%   100.0%    100.0%
     Operating....................................   (86.5)   (94.0)   (100.2)
     General and administrative...................   (13.1)   (14.2)    (17.4)
     Depreciation and amortization................    (3.3)    (3.6)     (5.0)
     Interest income..............................     0.7      1.9       1.5
     Interest expense.............................    (0.8)    (1.4)     (2.8)
     Minority interest in net (profits) losses 
       of subsidiaries............................    (1.4)     1.0       3.4
     Gain on disposition of investment............      --      1.2        --
     Cumulative effect of change in accounting
       principle..................................    (0.7)      --        --
                                                     ------------------------

     Net loss.....................................    (5.1)%   (9.1)%   (20.5)% 
                                                     ========================
</TABLE>

                                       18
<PAGE>
 
RESULTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS)
---------------------                              

Years Ended December 31, 1998 and 1997
--------------------------------------

Revenue

     Revenue increased 26.1% to approximately $23,083 in 1998 from approximately
$18,307 in 1997. Of the approximately $4,776 increase in revenue in 1998
compared to 1997, approximately $5,205 was attributable to centers owned at the
end of 1997, and $2,955 was attributable to centers acquired or brought on line
in 1998. These amounts were offset by $3,384 of revenue which related primarily
to the Company's share of a partnership in which the Company sold its interest
on December 31, 1997.


Operating, General  and Administrative Expenses

     Operating expenses increased 16.0% to approximately $19,970 in 1998 from
approximately $17,209 in 1997. This increase was principally due to the
acquisition and development of additional centers. As a percentage of revenue,
however, operating expenses declined by approximately 7.5% to 86.5% in 1998 from
94.0% in 1997. The centers, in aggregate, improved their profitability in 1998
as individual centers continued to achieve improved critical mass in terms of
volume.

     General and administrative expenses increased 17.2% to approximately $3,035
in 1998 from $2,590 in 1997. As a percentage of revenue, general and
administrative expenses declined by approximately 1.1% to 13.1% in 1998 from
14.2% in 1997. The Company believes that as additional acquisitions are
completed, further leveraging of existing management will occur, and, as a
result, general and administrative costs will continue to decline as a
percentage of total revenue.

Depreciation and Amortization

     Depreciation and amortization expense increased 15.3% to approximately $759
in 1998 from approximately $658 in 1997. The increase occurred primarily as a
result of the Company's having additional growth through center development and
acquisitions. As a percentage of revenue, depreciation and amortization was 3.3%
in 1998 compared to 3.6% in 1997. The 1998 amount is reflective of the change in
accounting principle noted below which was adopted as of January 1, 1998.

Interest Income

     Interest income is generated primarily from cash invested in highly liquid
funds with a maturity of three months or less. Interest income decreased 48.8%
to approximately $171 in 1998 from $334 in 1997. The decrease was related to the
Company's having less cash available to invest in 1998 as compared to 1997,
since the Company has continued to utilize cash for acquisitions and other
general corporate needs.

Interest Expense

     Interest expense decreased to approximately $179 in 1998 from approximately
$248 in 1997. The decrease was due to the Company utilizing its existing cash to
meet acquisition and other general corporate needs versus borrowing on its
available lines of credit. As a percentage of total revenue, interest expense
was 0.8% in 1998 and 1.4% in 1997.

Minority Interest

     Minority interest represents the share of (profits) and losses of certain
joint venture investors with the

                                       19
<PAGE>
 
Company. In 1998, the minority interest in net profits of subsidiaries was
approximately $318 as compared to the minority interest in net losses of
subsidiaries of approximately $183 in 1997. During 1998, the financial
performance of the joint venture centers continued to improve compared to the
prior year.

Cumulative Effect of Change in Accounting Principle

     The Company adopted the provisions of Statement of Position 98-5, Reporting
the Costs of Start-Up Activities, (SOP 98-5), which requires that costs related
to start-up activities be expensed as incurred in its financial statement for
the year ended December 31, 1998. Prior to 1998, the Company capitalized its
preopening costs in connection with new centers and its costs associated with
new product lines. The Company adopted SOP 98-5 on December 31, 1998
retroactively to January, 1, 1998. The effect of the adoption of SOP 98-5 was a
charge of $155 to expense costs that had been capitalized prior to January 1,
1998.


Years Ended December 31, 1997 and 1996
--------------------------------------

Revenue

     Revenue increased 102.5% to approximately $18,307 in 1997 from
approximately $9,041 in 1996. Of the approximately $9,266 increase in revenue in
1997 compared to 1996, approximately $3,061 (33%) was attributable to centers
owned at the end of 1996 and $6,205 (67%) was attributable to centers acquired
in 1997.

Operating, General and Administrative Expenses

     Operating expenses increased 89.9% to approximately $17,209 in 1997 from
approximately $9,063 in 1996. This increase was principally due to the
acquisition and development of additional centers. As a percentage of revenues,
operating expenses declined approximately 6.2% to 94.0% in 1997 as compared to
100.2% in 1996. The Centers in aggregate, achieved profitability in 1997 as
individual centers reached critical mass in terms of volume. In prior years,
many centers were in a start-up mode and incurred expenses to establish
infrastructure.

     General and administrative expenses increased 65.0% to approximately $2,590
in 1997 from $1,570 in 1996. The increase was the result of the Company
expanding its corporate staff to support the growth in centers. As a percentage
of revenues, general and administrative expenses declined approximately 18.4% to
14.2% in 1997 as compared to 17.4% in 1996.

Depreciation and Amortization

     Depreciation and amortization expense increased 46.6% to approximately $658
in 1997 from approximately $449 in 1996. The increase occurred primarily as a
result of the Company having additional growth through center development and
acquisitions. As a percentage of revenue, depreciation and amortization was 3.6%
in 1997 compared to 5.0% in 1996.

Interest Income

     Interest income is generated primarily from cash invested in highly liquid
funds with a maturity of three months or less. Interest income increased 147.4%
to approximately $334 in 1997 from $135 in 1996. The increase was related to
funds received through the Merger and from the sale of preferred stock through a
private placement.

Minority Interest

     Minority interest represents the share of (profits) and losses of joint
venture investors with the Company. In 1997, the minority interest in net losses
of subsidiaries was $183 compared to $308 for 1996 as the joint venture centers
operating performance improved.

                                       20
<PAGE>
 
Gain on Disposition of Investment

     The gain on disposition of investment relates to the restructuring of one
of the Company's joint ventures. In connection with such restructuring, the
ownership of the joint venture changed whereby the Company assumed an additional
24% ownership interest in the joint venture. Through this transaction, each
party in the joint venture forgave outstanding indebtedness. Additionally,
certain assets associated with one of the joint venture sites were purchased by
one of the Company's partners in consideration for the forgiveness of the
Company's note payable to its partner of approximately $536 and for cash of
approximately $56. This restructuring resulted in the gain on disposition of
investment of $217 to the Company.


SEASONALITY

     The Company is subject to the natural seasonal swing that impacts the
various employers and employees it serves. Although the Company hopes that as it
continues its growth and development efforts it may be able to anticipate the
effect of these swings and provide services aimed to ameliorate this impact,
there can be no assurance that it can completely alleviate the effects of
seasonality. Historically, the Company has noticed these impacts in portions of
the first and fourth quarters. Traditionally, revenues are lower during these
periods, since patient visits decrease due to the occurrence of plant closings,
vacations, holidays, a reduction in new employee hirings and the impact of
severe weather conditions in the Northeast. These activities also cause a
decrease in drug and alcohol testings, medical monitoring services and pre-hire
examinations. The Company has also noticed similar impacts during the summer
months, but typically to a lesser degree than during the first and fourth
quarters.

LIQUIDITY AND CAPITAL RESOURCES

     Since inception, the Company's funding requirements have been met through a
combination of issuances of capital stock, long-term debt and other commitments,
the utilization of capital leases and loans to finance equipment purchases, the
sale of certain accounts receivable and the creation of minority interests. Net
proceeds from the sale of capital stock have totaled approximately $14 million,
including the Company's private placement of its Series A Convertible Preferred
Stock on November 6, 1996. The proceeds from the sale of this preferred stock
provided the Company with cash proceeds of approximately $8.4 million, net of
expenses. During 1996, the Company received approximately $3.8 million from the
sale of certain accounts receivable. At December 31, 1998, the Company had $3.7
million in working capital, a decrease of $1.5 million from December 31, 1997.
The Company has utilized its funds in its expansion effort and for working
capital. The Company's principal sources of liquidity as of December 31, 1998
consisted of (i) cash and cash equivalents aggregating approximately $1.6
million and (ii) accounts and notes receivable of approximately $5.4 million.

     Net cash used in operating activities by the Company in 1998 was
approximately $195 as compared to approximately $2,996 for 1997 and $2,696 for
1996. During these years, the primary uses of cash were the funding of working
capital in centers in early stages of development or centers which were recently
acquired and to fund Company operating losses. In addition, during 1996 the
Company also funded certain expenses related to the Merger. During 1997 the
Company also provided funding for working capital for certain centers where an
accounts receivable financing agreement was terminated and for expenses relating
to opening a new location during the fourth quarter. The operating losses cited
above were offset by non-cash expenses, such as depreciation and amortization,
and by fluctuations in working capital. Working capital fluctuations have been
primarily from increases in accounts receivable and other current assets offset
by increases in accounts payable and accrued expenses.

     Net cash used (provided) by investing activities was $1,561, $1,192 and
$(2,758) in 1998, 1997 and 1996, respectively. The Company's investing
activities in 1998 include a contribution to a joint venture, the acquisition of
four free standing occupational medical centers and a physician and physical
therapy practice with an aggregate cash outlay of $469. The Company's investing
activities in 1997 included the purchase of physician practices and investments
in joint ventures with an aggregate cash outlay of $1,375. The Company has an
equity interest equal to or in excess of 51% in all joint ventures. During 1996,
the Company's investing activities included the Merger

                                       21
<PAGE>
 
pursuant to which the Company received approximately $4.5 million of cash. This
amount was used to fund the $892 acquisition of an ambulatory care facility and
a rehabilitation business. Additional investing activities included the use of
$484, $381, and $286 in 1998, 1997 and 1996 respectively, for costs in excess of
purchase price for certain acquisitions and fixed asset additions of $608, $458
and $130 in 1998, 1997, and 1996, respectively. Fixed asset additions for 1998
related primarily to computer related costs and the renovation of two existing
centers while 1997 included primarily the buildout of a new center as well as
computer equipment. In 1997, approximately $345 of cash that had been pledged
for certain letters of credit in 1996 was released. The Company also received
$702 in cash from the sale of its interest in a partnership net of a gain of $50
on the transaction in 1997.

     Net cash used (provided) by financing activities was $862, $248 and
$(8,185) in 1998, 1997 and 1996, respectively. The Company used funds of
approximately $917, $596, and $746 in 1998, 1997 and 1996 respectively, for the
payment of long-term and other current obligations. In 1997, the Company
received approximately $331 from interest bearing working capital loans from
joint venture partners. In 1996, cash of $8.0 million net, was provided by
financing activities primarily as a result of a sale of preferred stock through
a private placement. Also, the Company received advances of $300 under a bank
line of credit and $200 in other short-term loans in 1996.

     The Company expects that its principal use of funds in the near future will
be in connection with acquisitions and the formation of joint venture entities,
working capital requirements, debt repayments and purchases of property and
equipment and possibly the payment of dividends on the Company's Series A
Convertible Preferred Stock, when and if declared by the Board of Directors,
after November 5, 1999. Such dividends accrue at an annual cumulative rate of
$0.48 per share, subject to certain adjustments.

     During November of 1997, the Company entered into a financing arrangement
with BankBoston, N.A. whereby it has access to two separate credit facilities.
The first credit facility provided the Company with $2.5 million for working
capital and acquisition needs (the "Company Line"). The second facility provided
up to $4.5 million to be utilized by the Company's existing and future joint
ventures (the "JV Line"). During December of 1998, the allocation of the $7,000
aggregate credit facility was changed to provide $5,000 for the Company Line and
$2,000 for the JV Line. The borrowing base for the JV Line is eighty-five
percent (85%) of the joint ventures' accounts receivable less than 120 days old.
In addition, during 1998 the Company secured a $500 Master Lease Agreement from
BancBoston Leasing, as well as received a commitment for an increase in such
line to $2,000 (the "Lease Line"). The Company closed on the additional Lease
Line during the first quarter of 1999. The Lease Line and the credit facilities
expire on December 31, 1999. The credit facilities and the Lease Line had an
outstanding balance of $287 as of December 31, 1998.

     The Company expects that the cash received as the result of the Merger,
proceeds received upon the sale of 1,416,667 shares of its Series A Convertible
Preferred Stock, the previously mentioned credit facilities and line, and cash
generated from operations will be adequate through December 31, 1999 to provide
working capital, fund debt repayments, to finance any necessary capital
expenditures, and to fund the 1999 portion of the above referenced dividend
payments, if any. However, the Company believes that the level of financial
resources available to it is an important competitive factor and it will seek
refinancing opportunities, as well as further financings during the 1999 fiscal
year in anticipation of the maturity of the credit facilities and the Company's
future needs during subsequent fiscal years. The Company will also consider
raising additional equity capital on an on-going basis as market factors and its
needs suggest, since additional resources may be necessary to fund acquisitions
by the Company.

Impact of Year 2000

     The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "Year 2000" problem
is pervasive and complex, as virtually every computer operation will be affected
in the same way by the rollover of the two digit year value to 00. The issue is
whether information technology and non-information technology systems will
properly recognize date sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate erroneous
data or cause a system to fail.

     The Company presently expects that its core operations and essential
functions will be ready for the Year 2000 transition. The Company has formed a
Year 2000 committee (the "Y2K Committee") to provide a centralized management
function for the entire organization. The Y2K Committee was formally organized
in June 1998 and is comprised of members from various functional groups within
the Company including operations, information services, finance and legal. The
Y2K Committee's mission is to lead and assist the Company in identifying,
addressing and monitoring the Company's year 2000 readiness.

                                       22
<PAGE>
 
     The Y2K Committee has addressed the Year 2000 problem by creating a plan
that was developed by using a bottom-up planning approach. The plan includes
both global goals and specific analysis of potential problem areas. From a
global perspective, the plan involves six steps - awareness, assessment,
testing, remediation, implementation and monitoring. The specific analysis phase
includes focus on (a) critical computer hardware and software applications that
are internally maintained; (b) critical computer hardware and software
applications that are maintained by third-party vendors; (c) non-critical
applications regardless of maintenance responsibility; (d) hardware generally;
(e) medical equipment with embedded applications; and (f) computer applications
of the Company's significant payors and suppliers. The Company is utilizing
principally internal resources to identify, correct or reprogram, and test its
systems for Year 2000 compliance, however, it has and it will continue to
utilize external resources when it deems it appropriate.

     The Company has completed the awareness portion of its plan and
substantially completed the assessment step. As a result of these two phases in
the plan, the Company has identified certain critical computer applications.
Critical computer applications are deemed to be those which are fundamental to
the Company's core business mission, the failure of which would have a
significant adverse impact on the Company. The Company has currently identified
both its practice management system and its general ledger software applications
as being critical. The Company has determined that its clinical applications are
not considered critical since to the extent any of these applications are
computer based, manual systems are appropriately available.

     Thus, with regards to these areas, the Company has proceeded to the
testing, remediation and implementation phase. The Company completed its review
and testing of its practice management system during the first quarter of 1999.
These tests indicated that existing software issues relevant to the Year 2000
problem could be corrected appropriately by utilizing so-called "patches"
provided by the software vendor. Implementation of these "patches" has begun
where necessary. Further, the Company has completed a number of acquisitions and
joint ventures in recent years and some of the information systems associated
with these entities have not been fully integrated with the Company's
information systems. As the Company continues to grow, its capital budget for
the fiscal year-ended December 31, 1999 is designed to convert these acquired
systems to Year 2000 ready programs. The Y2K Committee has reviewed the
implementation of the 1999 capital budget and has organized the schedule to
assure that any existing non-compliant systems not susceptible to correction by
a patch are completed by the end of the third quarter of 1999. Since
acquisitions and other development transactions are expected to continue
throughout 1999 and beyond the Year 2000, the Company has established systems
and protocols to assure the timely conversion of information systems acquired in
future transactions so that any adverse impacts are minimized.

     During the third and fourth quarters of 1998, the Company began to
implement a conversion and upgrade of its general ledger system to address the
demands placed upon the existing systems due to the Company's continued growth.
In connection with this conversion process, the Company believes that it has
received appropriate warranties and assurances from its vendors that these
systems will be Year 2000 compliant.

     An assessment of the Company's hardware indicates that certain equipment is
not Year 2000 compliant. The cost of this replacement is not expected to be
material as the shelf life of the Company's personal computers is 3-5 years and
as a result historically each year approximately 25% of all personal computers
are replaced or upgraded. The Company believes all personal computers purchased
in 1997 and 1998 are Year 2000 compliant and expects that the same will continue
for the fiscal year ending December 31, 1999.

     The Company has not completed its review of embedded applications that
control certain medical and other equipment. The Company expects to complete
this review during the second quarter of 1999. The nature of the Company's
business is such that any failure of these type applications is not expected to
have a material adverse effect on its business. In particular, the Company has
focused on reviewing and testing those applications the failure of which would
be likely to cause a significant risk of either producing inaccurate information
regarding a patient's risk of illness or injury or causing death or serious
injury to patients under treatment in the Company's facilities. The Company
believes that, because of the types of services it primarily provides and the
nature of its patient population, there is a minimum likelihood of death or
serious injury occurring because of the failure of an embedded application. The

                                       23
<PAGE>
 
Company expects to complete its review of this area during the third quarter of
1999 and to implement solutions based on its findings. The current estimated
costs for equipment to be potentially replaced as a result of this review is
approximately $50,000. The Company has included this estimate in its 1999
capital budget referenced below.

     The Company has sent inquiries to its significant equipment and medical
suppliers concerning the Year 2000 compliance of their significant computer
applications. Responses have been received from approximately 50% of those
suppliers solicited. Although a review of these responses is still in process,
no significant problems have yet been identified. Second requests are expected
to be mailed to all non-respondents during the second quarter of 1999.

     During the third and fourth quarters of 1998 the Company sent inquiries to
its significant third-party payors. The Company's third-party payors are a
highly diffuse group and involves a class of several thousand parties. For the
purposes of these initial inquiries sent in 1998 "significant" was deemed to
mean a payor that represented $5,000 to $10,000 in revenue generation during the
last twelve months depending on a center's revenue size. Although several
hundred responses to those 1998 inquiries have been received to date and are
still forthcoming and no serious payor issues have yet to be identified, the
Company intends to narrow its focus during the second quarter of 1999 to a
higher dollar revenue generating class. This narrower class not only will
receive additional written inquiries if necessary, but will also be interviewed
by telephone, if the Company deems it appropriate, as to their Year 2000
capabilities. Since the Company's revenues are derived from reimbursement by
governmental and private third-party payors, it is obvious that the Company is
dependent upon such payors' evaluation of their own Year 2000 compliance status
to assess such risks. If such payors are incorrect in their evaluation of their
Year 2000 compliance status, this could result in delays or errors in
reimbursement to the Company by such payors, the effects of which could be
material to the Company.

     As noted above, the Company is executing the Year 2000 plan primarily with
existing internal resources. The Company does not separately track the internal
costs associated with the Year 2000 plan; however, the principal costs are
related to payroll and the associated benefits for its information services
group. Year 2000 remediation costs are incorporated into the Company's general
capital budget for the fiscal year-ended 1999. The overall capital budget for
1999 is approximately $1,000,000. The costs included in this capital budget
involving remediation of Year 2000 issues are not currently expected to be
material to the results of operations or the financial condition of the Company.

     Since to date the Company has been focusing on the conversion and
replacement of critical non-compliant systems, it has not yet developed
contingency plans for potential interruptions. The Company anticipates
developing such contingency plans during the second and third quarters of fiscal
1999.

     Guidance from the Securities and Exchange Commission requires the Company
to describe its "reasonably likely worst case scenario" in connection with Year
2000 issues. As discussed above, while there is always the potential risk of
serious injury or death resulting from a failure of embedded applications in
medical and other equipment used by the Company, the Company does not believe
that such events are reasonably likely to occur. The Company believes that the
most reasonably likely worst case to which it would be exposed is that,
notwithstanding the Company's attempts to obtain year 2000 compliance assurance
from third-party payors, there is a material failure in such payors' systems,
which prevents or substantially delays reimbursement to the Company for its
services. In such event, the Company would be forced to rely on cash on hand and
available borrowing capacity to the extent of any shortfall in reimbursement,
and could be forced to incur additional costs for personnel and other resources
necessary to resolve any payment issues. It is not possible at this time to
predict the nature or amount of such costs or the materiality of any
reimbursement issues that may arise as a result of the failure of payors'
payment systems, the effect of which could be substantial. The Company continues
to endeavor to obtain reliable information from its payors as to their
compliance status, and will attempt to adopt and revise its contingency plans
for dealing with payment issues if, as and when such issues become susceptible
of prediction.

     Based on the information currently available, the Company believes that its
risk associated with problems arising from Year 2000 issues is not significant.
However, because of the many uncertainties associated with Year 2000 compliance
issues, and because the Company's assessment is necessarily based on information
from third-party

                                       24
<PAGE>
 
vendors, payors and suppliers, there can be no assurance that the Company's
assessment is correct or as to the materiality or effect of any failure of such
assessment to be correct. The Company will continue with its assessment process
as described above and, to the extent that changes in such assessment require
it, will attempt to develop alternatives or modifications to its compliance plan
described above. There can, however, be no assurance that such compliance plan,
as it may be changed, augmented or modified from time to time, will be
successful.

     Various of the Company's disclosures and announcements concerning its
products and Year 2000 programs are intended to constitute "Year 2000 Readiness
Disclosures" as defined in the recently-enacted Year 2000 Information and
Readiness Disclosure Act. The Act provides added protection from liability for
certain public and private statements concerning an entity's Year 2000 readiness
and the Year 2000 readiness of its products and services. The Act also
potentially provides added protection from liability for certain types of Year
2000 disclosures made after January 1, 1996, and before the date of enactment of
the Act.


INFLATION

     The Company does not believe that inflation had a significant impact on its
results of operations during the last three years. Further, inflation is not
expected to adversely affect the Company in the future unless it increases
substantially, and the Company is unable to pass through the increases in its
billings and collections.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The auditors' reports, consolidated financial statements and financial
statement schedules that are listed in the Index to Consolidated Financial
Statements and Financial Statement Schedules on page F-1 hereof are incorporated
herein by reference.

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

     Not applicable

                                       25
<PAGE>
 
                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
        NAME                AGE          POSITION WITH THE COMPANY
        ----                ---          -------------------------
<S>                         <C>   <C>  
John C. Garbarino.........  46    President, Chief Executive Officer and
                                  Director
                                  
Richard P. Quinlan........  40    Chief Financial Officer, Treasurer, Secretary
                                  and General Counsel
                                  
Lynne M. Rosen............  37    Senior Vice President, Operations and
                                  Assistant Secretary
                                  
H. Nicholas Kirby.........  50    Senior Vice President, Corporate Development
                                  
Pamela G. Fine............  39    Senior Vice President, Sales and Marketing
                                  
Edward L. Cahill..........  46    Director
                                  
Kevin J. Dougherty........  52    Director
                                  
Angus M. Duthie...........  59    Director
                                  
Donald W. Hughes..........  48    Director
                                  
Frank H. Leone............  54    Director
                                  
Steven W. Garfinkle.......  41    Director
</TABLE>

     John C. Garbarino, a founder of OH+R, was its President and Chief Executive
Officer and a director since its formation in July 1992 and has been President,
Chief Executive Officer and a director of the Company since the Merger. From
February 1991 through June 1992, Mr. Garbarino served as President and Chief
Executive Officer of Occupational Orthopaedic Systems, Inc., a management
company that operated Occupational Orthopaedic Center, Inc., a company which was
the initial acquisition of OH+R. From 1985 to January 1991, Mr. Garbarino was
associated in various capacities with Foster Management Company ("Foster"), a
private investment company specializing in developing businesses to consolidate
fragmented industries. In his association with Foster, Mr. Garbarino was a
general partner and consultant and held various senior executive positions
(including Chief Executive Officer, Chief Operating Officer and Chief Financial
Officer) in Chartwell Group Ltd., a Foster portfolio company organized to
consolidate through acquisitions the highly fragmented premium priced segment of
the interior furnishings industry. Previously, Mr. Garbarino participated in the
venture capital industry as a founder and general partner of Fairfield Venture
Partners, L.P. and as vice president and treasurer of Business Development
Services, Inc., a venture capital subsidiary of General Electric Company. Mr.
Garbarino is a C.P.A. and previously worked at Ernst & Whinney (a predecessor to
Ernst & Young LLP).

     Richard P. Quinlan joined the Company as Chief Financial Officer,
Treasurer, Secretary and General Counsel in November 1996. From December 1991 to
October 1996, Mr. Quinlan was Senior Vice President and General Counsel of
AdvantageHEALTH Corporation ("AdvantageHEALTH"). AdvantageHEALTH is a provider
of physical rehabilitation services, subacute services, home health services,
and senior living/assisted living services in the Northeast United States, and
now a wholly-owned subsidiary of HEALTHSOUTH Corporation, a provider of
outpatient and rehabilitative healthcare services. From June 1985 to November
1991, he practiced law with Nutter, McClennen & Fish in Boston, Massachusetts
and served as a partner during his final two years there.

     Lynne M. Rosen, a founder of OH+R, has been with OH+R since its formation
in July 1992. During 1997, Ms. Rosen was appointed Senior Vice President,
Planning and Development, and subsequently in March, 1999, Ms. Rosen was
appointed Senior Vice President, Operations. Ms. Rosen had previously held the
positions of Vice President and Assistant Secretary since the Merger. From April
1988 through June 1992, Ms. Rosen held various

                                       26
<PAGE>
 
positions with Occupational Orthopaedic Center, Inc., including general manager.
Ms. Rosen was an athletic trainer at the University of Pennsylvania Sports
Medicine Center from 1986 to March 1988 and at the University of Rhode Island
from 1985 to 1986. She has published several papers and made a number of
presentations in the area of orthopedic rehabilitation.

     H. Nicholas Kirby, was appointed to Senior Vice President, Corporate
Development in January, 1998. Previously he served as Vice President, Corporate
Development of the Company since June 1996. From August 1994 to June 1996, he
was OH+R's Director of Operations in Maine. Mr. Kirby was a founder and
President of LINK Performance and Recovery Systems, Inc. ("LINK") from January
1986 until the sale of the company to OH+R in August 1994. LINK was an
occupational health company headquartered in Portland, Maine.

     Pamela G. Fine joined the Company in January 1999 as Senior Vice President,
Sales and Marketing. From September 1997 to January 1999. Ms. Fine was Vice
President of Sales for Mariner Medical Services, a business unit of Mariner 
Post-Acute Network, responsible for the provision of subacute and long-term
pharmacy and home health services. From 1991 to 1997, Ms. Fine was with Olsten
Health Services, the largest provider of home nursing and infusion services
nationwide. While with Olsten, she held several sales management positions of
increasing responsibility, including, Director of Sales for New England; a
region comprised of 43 branch locations and $150 million dollars in revenue. In
1982, Ms. Fine began her sales and marketing career with E.I. DuPont de Nemours,
with their Medical Products Department. She held various sales positions with
DuPont, until 1990 when the Specialty Diagnostics Division was purchased by
Ortho Diagnostics, a wholly owned subsidiary of Johnson & Johnson. Ms. Fine
moved to Ortho Diagnostics as Account Executive for the Northeast, where she
remained until 1991.

     Edward L. Cahill has served as a director of the Company since November
1996. Mr. Cahill is a founding partner of Cahill, Warnock & Company, LLC
("Cahill, Warnock"), an asset management firm established to invest in small
public companies. Prior to founding Cahill, Warnock in July 1995, Mr. Cahill had
been a Managing Director at Alex. Brown & Sons Incorporated where, from 1986
through 1995, he headed the firm's Health Care Investment Banking Group. Mr.
Cahill is also a director of Jay Jacobs, Inc., MD/Bio and several private
companies.

     Kevin J. Dougherty served as a director of OH+R since July 1993 and has
been a director of the Company since the Merger. Mr. Dougherty is currently a
General Partner of The Venture Capital Fund of New England, a venture capital
firm he joined in April 1986. Previously, he participated in the venture capital
industry as Vice President of 3i Capital Corporation from 1985 to 1986, and as
Vice President of Massachusetts Capital Resource Company from 1981 to 1985.
Prior to that, Mr. Dougherty served as a commercial banker at Bankers Trust
Company and the First National Bank of Boston.

     Angus M. Duthie served as a director of OH+R since June 1992 and has been a
director of the Company since the Merger. Mr. Duthie is currently a General
Partner of Prince Ventures, L.P., a venture capital firm he co-founded in 1978.
Mr. Duthie has over 28 years of experience involving portfolio management. He
currently serves on the board of directors of KENETECH, Inc.

     Donald W. Hughes has served as director of the Company since December 1997
and is Vice President and Chief Financial Officer of Cahill, Warnock. Prior to
joining Cahill, Warnock in February 1997, Mr. Hughes served as Vice President,
Chief Financial Officer and Secretary of Capstone Pharmacy Services, Inc.
(Nasdaq: DOSE) since December 1995 and as Executive Vice President and Chief
Financial Officer of Broventure Company Inc., a closely-held investment
management company from July 1984 to November 1995.

     Frank H. Leone has served as a director of the Company since July 1998. In
1985, Mr. Leone founded and has since served as President/Chief Executive
Officer of RYAN Associates, and he is the founder and Executive Director of the
National Association of Occupational Health Professionals (N.A.O.H.P.). Mr.
Leone is also the executive editor of four leading occupational health
periodicals: "VISIONS", "Partners", the "Workers' Compensation Managed Care
Bulletin", and the "Clinical Care Update".

                                       27
<PAGE>
 
     Steven W. Garfinkle has served as a director of the Company since July
1998. Mr. Garfinkle, who is currently a private health care consultant, served
as Chairman and Chief Executive Officer of Prism Health Group Inc. ("Prism")
from 1992 until Prism was sold to Mariner Health, Inc. in 1997. Mr. Garfinkle
also served as President of New England Health Strategies from 1991 to 1992.
From 1982 to 1991 Mr. Garfinkle served as Chief Operating Officer and in several
senior management positions for the Mediplex Group, Inc.

     The directors are elected to three year terms or until their successors
have been duly elected and qualified. The terms of Angus M. Duthie, John C.
Garbarino and Steven W. Garfinkle expire in 1999. The terms of Edward L. Cahill
and Donald W. Hughes expire in 2000. The term of Kevin J. Dougherty and Frank H.
Leone expire at the 2001 Annual Meeting of Stockholders.

     Pursuant to the terms of the Series A Convertible Preferred Stock contained
in the Company's Restated Certificate of Incorporation, as amended, the holders
of the Series A Convertible Preferred Stock, voting as a single class, are
entitled to elect two directors of the Company. Mr. Cahill and Mr. Hughes
currently serve as these directors. Pursuant to the terms of a Stockholders'
Agreement (the "Stockholders' Agreement") dated as of November 6, 1996 by and
among the Company and certain of the Company's stockholders, such stockholders
have agreed to vote all of their shares of Preferred Stock and Common Stock to
elect certain nominees to the Company's Board of Directors. The Stockholders'
Agreement provides that such nominees are to be determined as follows: (a) the
Chief Executive Officer of the Company (presently, John C. Garbarino); (b) a
person designated by the Telor Principal Stockholders, as defined in the
Stockholders' Agreement (presently, Angus M. Duthie); (c) a person designated by
the OH+R Principal Stockholders, as defined in the Stockholders' Agreement
(presently, Kevin J. Dougherty); (d) two persons designated by Cahill, Warnock
Strategic Partners Fund, L.P. (presently, Edward L. Cahill and Donald W.
Hughes); and (e) two persons unaffiliated with the management of the Company,
the ("Independent Directors") and mutually agreeable to all of the other
directors (presently, Frank H. Leone and Steven W. Garfinkle).

     Executive officers serve at the discretion of the Company's Board of
Directors. There are no family relationships among the executive officers and
directors nor are there any arrangements or understandings between any executive
officer and any other person pursuant to which the executive officer was
selected.


OTHER KEY OFFICERS

Other key contributing officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME                               AGE       POSITION WITH THE COMPANY
----                               ---       -------------------------                                    
<S>                                <C>       <C>
David R. McLarnon..............    44        Vice President, Operations                                 
Laura C. Miller................    36        Vice President, Operations Support, and Medical Policy Board
Patti E. Walkover..............    44        Vice President, Network Operations                         
Raymond M. Sessler.............    41        Vice President, Information Systems                        
Janice M. Goguen...............    35        Corporate Controller and Assistant Secretary               
William B. Patterson, MD, MPH..    50        Chairman, Medical Policy Board                              
</TABLE>

     David R. McLarnon joined the Company as Vice President, Operations in
December 1996. From January 1994 to November 1996, Mr. McLarnon was Corporate
Vice President, Ambulatory Division of AdvantageHEALTH Corporation, which merged
with HEALTHSOUTH Corporation, and was responsible for outpatient rehabilitation
operations in a seven-state region. From June, 1992 to December, 1993, Mr.
McLarnon held positions with The Mediplex Group, pursuant to which he served as
an administrator of outpatient rehabilitation services for the company's
operations in Denver, Colorado as well as provided development and
administrative services for certain 

                                       28
<PAGE>
 
of the company's comprehensive outpatient rehabilitation facilities in Florida.

     Laura C. Miller joined the Company in March 1992 as a Staff Physical
Therapist and subsequently has advanced to several other positions of increasing
responsibility within the Company. In June 1994, Ms. Miller was promoted to a
Senior Therapist and then in January 1995 appointed a Center Director. In
January 1996, Ms. Miller was named Director of Operations support and Director
of Rehabilitation and then in March 1998 was elected to her current position of
Vice President, Operations Support for the Company. From September 1991 to March
1993, Ms. Miller served as Director of Clinical Services at Bedminster Physical
Rehabilitation Center in Bedminster, New Jersey.

     Patti E. Walkover joined the Company in March 1999 as Vice President,
Network Operations. From April 1996 to February 1999, Ms. Walkover served as
Vice President, New Markets and Vice President of Operations, respectively, for
Healthcare First, a regionally based workers' compensation managed care company,
where she was responsible for network development and operations in New England
and New York. Healthcare First was acquired by Gates McDonald in October, 1998.
Ms. Walkover was Director of Occupational Health and Workers' Compensation
Managed Care at VHA East in Philadelphia, from February 1993 to March 1996 where
she developed the TeamWorks occupational health plan. Her prior positions
include Program Director for the Occupational Health Center at Chester County
Hospital (January 1992 to January 1993), and Administrative Director at the
Crozier Center for Occupational Health (November 1989 to December 1991) a multi-
site occupational health program in greater Philadelphia.

     Raymond M. Sessler joined the Company as Vice President, Information
Services in January 1998. From 1989 through 1997, Mr. Sessler served as Director
of Information Technology at Harvard Pilgrim Health Care, one of the largest
health maintenance organizations in the nation. As Director of Information
Technology, Mr. Sessler was responsible for enterprise system integration and
managed a $55 million annual operating budget.

     Janice M. Goguen joined the Company as Corporate Controller in October
1997. From November 1992 through October 1997, Ms. Goguen was Corporate
Controller for AdvantageHEALTH Corporation, which merged with HEALTHSOUTH
Corporation. From August 1985 to November 1992, Ms. Goguen was employed by Ernst
& Young, LLP where she planned, managed and executed audits of publicly held,
privately owned and non-profit companies. Ms. Goguen is a Certified Public
Accountant.

     William B. Patterson, MD, MPH, was appointed as Chairman of the Company's
Medical Policy Board in September 1998.  Previously he served as Medical
Director of the Company's Massachusetts operations since August 1997, when New
England Health Center, a company of which he was the founder and President since
1990, was acquired by the Company.  Dr. Patterson is board certified in internal
and occupational medicine.  He has served as President of the New England
College of Occupational and Environmental Medicine and is currently on its Board
of Directors.  Dr. Patterson also currently serves as an assistant professor at
the Boston University School of Public Health.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's executive officers and directors and persons who beneficially own
more than ten percent of the Company's Common Stock to file reports of ownership
and changes in ownership with the Securities and Exchange Commission. Based
solely on reports and other information submitted by the executive officers,
directors and such beneficial owners, the Company believes that during the
fiscal year ended December 31, 1998, all such reports were timely filed except
Form 3's were filed late with respect to the appointment to the Board of
Directors of Frank H. Leone and Steven W. Garfinkle and an amended Form 5 will 
need to be filed with respect to a transfer of shares held by John C. Garbarino 
to certain of his children as a gift during December 1998.

                                       29
<PAGE>
 
ITEM 11.   EXECUTIVE COMPENSATION

SUMMARY COMPENSATION

     The following table sets forth certain information regarding the
compensation paid by the Company to the Company's Chief Executive Officer, and
the only other executive officers whose salary and bonus exceeded $100,000 in
1998 (together the "Named Executive Officers") for services rendered in all
capacities to the Company and its subsidiaries for the fiscal years ended
December 31, 1998, 1997 and 1996.

                          SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                    LONG TERM 
                                                                                                   COMPENSATION
                                                                                                      AWARDS 
                                                                                                      ------
                                                                                                    SECURITIES           (1)
                                                                           ANNUAL COMPENSATION      UNDERLYING        ALL OTHER
                                                                           --------------------     ----------
NAME AND PRINCIPAL POSITION                                      YEAR      SALARY ($) BONUS ($)      OPTIONS        COMPENSATION $ 
---------------------------                                      ----      ---------  ---------      -------        -------------- 
<S>                                                              <C>       <C>        <C>           <C>             <C>      
John C. Garbarino..........................................      1998      180,000        ---         60,000            3,494    
   President and Chief Executive Officer                         1997      180,000        ---            ---            6,170    
                                                                 1996      174,088     25,000        128,319            3,670     
                                                                                                                    
Richard P. Quinlan (2).....................................      1998      140,000     10,000         10,000            7,138
   Chief Financial Officer, Treasurer, Secretary                 1997      140,000        ---            ---            7,674
   and General Counsel                                           1996       19,923        ---         45,000              936
                                                                                                                    
Lynne M. Rosen.............................................      1998      139,711        ---         10,000            2,922
   Sr. Vice President, Planning and                              1997      108,654        ---            ---            2,915
   Development                                                   1996       99,115                    27,080            1,938
                                                                                                                    
H. Nicholas Kirby..........................................      1998      129,515        ----        20,000            1,609
   Senior Vice President,                                        1997       87,907        ---            ---            1,485  
   Corporate Development                                         1996       78,509         688        18,496            1,500
</TABLE>

     (1)  Includes primarily the Company's contribution under the Company's
          401(k) plan and car allowances.
     (2)  Mr. Quinlan joined the Company in November 1996.

OPTION GRANTS

The following table sets forth information with respect to stock options granted
to the Named Executive Officers during the fiscal year ended December 31, 1998.

                                       30
<PAGE>
 
                       OPTION GRANTS IN LAST FISCAL YEAR

                               INDIVIDUAL GRANTS
                               -----------------

<TABLE>
<CAPTION>
                                NUMBER OF        % OF TOTAL                                REALIZABLE VALUE
                               SECURITIES         OPTIONS                                   ASSUMED ANNUAL
                               UNDERLYING        GRANTED TO    EXERCISE                    RATES OF STOCK         
                             OPTIONS GRANTED     EMPLOYEES      PRICE     EXPIRATION      PRICE APPRECIATION
NAME                              (#)             IN 1997       ($/SH)      DATE          FOR OPTION TERM (1) 
                                                                                          -------------------
                                                                                          5% ($)        10% 
---------------------------  ---------------     ----------    --------   ----------      ------------------- 
<S>                          <C>                 <C>           <C>        <C>             <C>         <C>     
John C. Garbarino..........  60,000  (2)           21.90%      $3.00      01/16/08        $113,400    $286,800
                                                                                   
Richard P. Quinlan.........   5,000  (2)            1.82%      $3.00      01/16/08        $  9,450    $ 23,900
 ...........................   5,000  (3)            1.82%      $3.00      01/16/08        $  9,450    $ 23,900
                                                                                   
Lynne M. Rosen.............   5,000  (2)            1.82%      $3.00      01/16/08        $  9,450    $ 23,900   
 ...........................   5,000  (3)            1.82%      $3.00      01/16/08        $  9,450    $ 23,900   

H. Nicholas Kirby..........   5,000  (2)            1.82%      $3.00      01/16/08        $  9,450    $ 23,900  
 ...........................  15,000  (3)            5.47%      $3.00      01/16/08        $ 28,350    $ 71,700  
</TABLE> 

(1)  The dollar amounts under these columns are the result of calculations
     assuming 5% and 10% growth rates as set by the Securities and Exchange
     Commission and, therefore, are not intended to forecast future price
     appreciation, if any, of the Company's Common Stock.
(2)  100% to vest fully on December 31, 1999 if various goals and other criteria
     are achieved.
(3)  Options granted vest ratably over four (4) years on each of the first four
     anniversary dates of the grant date.

                                       31
<PAGE>
 
OPTION EXERCISES AND YEAR-END VALUES

The following table sets forth information concerning option holdings as of
December 31, 1998 with respect to the Named Executive Officers.

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

<TABLE>
<CAPTION>
 
                               SHARES                               NUMBER OF SECURITIES              VALUE OF UNEXERCISED
                              ACQUIRED                             UNDERLYING UNEXERCISED             IN-THE MONEY OPTIONS
                                 ON            VALUE                 OPTIONS AT FY-END (#)              AT FY-END ($) (1)
                                                                ------------------------------    ----------------------------
NAME                         EXERCISE (#)    REALIZED ($)       EXERCISABLE      UNEXERCISABLE    EXERCISABLE    UNEXERCISABLE
                             ------------    ------------       ------------     -------------    -----------    -------------
<S>                          <C>             <C>                <C>              <C>              <C>            <C>
John C. Garbarino........         ---               ---            104,540          110,000           64,965          52,500
Richard P. Quinlan.......         ---               ---             22,500           32,500              ---           8,750
Lynne M. Rosen...........         ---               ---             21,537           23,540           11,825           8,750
H. Nicholas Kirby........         ---               ---             11,372           29,248            5,936          18,965
</TABLE>

     (1)  Based on the fair market value of the Company's Common Stock as of
          December 31, 1998 ($3.875) minus the exercise price of options.

EMPLOYMENT AGREEMENTS

     John C. Garbarino has an employment agreement with the Company dated June
6, 1996. The term of the agreement is two years from such date and renews
automatically for successive one-year periods until terminated. The agreement
provides for an annual salary of $180,000, subject to increase on an annual
basis in the discretion of the Board of Directors, and bonus as may be
determined by the Compensation Committee of the Board of Directors. Mr.
Garbarino is subject to a covenant not to compete with the Company for six
months after the termination of his employment. If the Company terminates the
agreement without ''cause'' (as defined in the agreement), or if Mr. Garbarino
becomes incapacitated, or if Mr. Garbarino resigns from the Company for ''just
cause'' (as defined in the agreement), then the Company is obligated to pay to
Mr. Garbarino six months' base salary in consideration of his covenant not to
compete.

DIRECTOR COMPENSATION

     Except for the Independent Directors, the Company's directors do not
receive any cash compensation for service on the Board of Directors or any
committee thereof, but all directors are reimbursed for expenses actually
incurred in connection with attending meetings of the Board of Directors and any
committee thereof. Commencing on January 1, 1999, each of the Independent
Directors receives $1,200 for each meeting of the Board of Directors he attends.
Pursuant to the Company's 1993 Stock Plan, each director who is not an employee
of the Company is granted a non-qualified stock option on the date of his or her
election to purchase 1,200 shares of the Company's Common Stock. The exercise
price for each such option is the fair market value of the Company's Common
Stock on the date of grant. Such options vest ratably over three years on each
of the first three anniversary dates of the grant date and are exercisable for a
period of ten years. Pursuant to the Company's 1993 Stock Plan, at each annual
meeting of stockholders or special meeting in lieu thereof, each director who is
not then an employee of the Company and who has been in continued and
uninterrupted service of the Company as a director for at least the last six
months is granted a non-qualified stock option to purchase 800 shares of the
Company's Common Stock. The exercise price of each such option is the fair
market value of the Company's Common Stock on the date of grant. Such option has
a term of ten years and is immediately exercisable in full as of the date of the
next annual meeting of stockholders or special meeting in lieu thereof following
the annual meeting or special meeting in lieu thereof in which the option was
granted, whether or not such director is re-elected at that meeting, provided
that such director has been in the continued and uninterrupted service of the
Company as a director from the date of grant through the day prior to the
subsequent annual meeting. The Company has exhausted the available shares of
Common Stock under the 1993 Stock Plan.

                                       32
<PAGE>
 
     Upon election to the Board, each Independent Director was granted a non-
qualified stock option to purchase 20,000 shares of the Company's Common Stock.
The exercise price of each such option was the fair market value of the
Company's Common Stock on the date of grant.  Such options vest ratably over
four years on each of the first four anniversary dates and are exercisable for a
period of ten years.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 9, 1999 by (i) each person
known by the Company to own beneficially more than five percent of the Common
Stock of the Company, (ii) each director of the Company, (iii) each Named
Executive Officer and (iv) all directors and executive officers of the Company
as a group. Except as otherwise indicated, all shares are owned directly. Except
as indicated by footnote, and subject to community property laws where
applicable, the Company believes that the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
indicated.

<TABLE>
<CAPTION>
                                                                         SHARES               
                                                                      BENEFICIALLY    PERCENT 
NAME AND ADDRESS OF BENEFICIAL OWNER                                    OWNED (1)    OF CLASS 
------------------------------------                                  ------------   ---------
<S>                                                                   <C>            <C>      
Cahill, Warnock Strategic Partners Fund, L.P. (2)........                679,042      31.5%   
   One South Street, Suite 2150                                                               
   Baltimore, MD 21202                                                                        
Prince Venture Partners III, L.P. (3)....................                400,045      27.0%   
   10 South Wacker Drive                                                                      
   Chicago, IL 60606                                                                          
Partech International Entities (4).......................                283,333      16.1%   
   50 California Street, Suite 3200                                                           
   San Francisco, CA 94111                                                                    
Venrock Entities (5).....................................                246,784      15.0%   
   30 Rockefeller Plaza, Room 5508                                                            
   New York, NY 10112                                                                         
BancBoston Ventures, Inc. (6)............................                215,636      13.7%   
   100 Federal Street                                                                         
   Boston, MA 02110                                                                           
The Venture Capital Fund of New England III, L.P. (7)....                182,303      11.8%   
   160 Federal Street, 23rd Floor                                                             
   Boston, MA 02110                                                                           
Asset Management Associates 1989, L.P. (8)...............                173,685      11.1%   
   2275 East Bayshore Road                                                                    
   Palo Alto, CA 94303                                                                        
State of Wisconsin Investment Board (9)..................                 74,850       5.1%   
John C. Garbarino (10)...................................                176,609      11.1%   
   175 Derby Street, Suite 36                                                                 
   Hingham, MA 02043                                                                          
Lynne M. Rosen (11)......................................                 45,568       3.0%   
Richard P. Quinlan (12)..................................                 28,750       1.9%   
H. Nicholas Kirby (13)...................................                 22,653       1.5%    
</TABLE> 

                                       33
<PAGE>
 
<TABLE> 
<S>                                                       <C>           <C>  
Kevin J. Dougherty (14)................................     1,600          *
Angus M. Duthie (15)...................................     1,600          *
Edward L. Cahill (16)..................................     1,600          *
Donald W. Hughes (17)..................................       400          *
Frank H. Leone.........................................       ---          *
Steven W. Garfinkle....................................       ---          *
    All directors and executive officers as a group....   278,780       16.9%
       (11 persons) (8)
</TABLE>

____________________________________
* Less than 1%

(1)  Each of the stockholders who is a party to a certain Stockholders'
     Agreement (the "Stockholders' Agreement") dated as of November 6, 1996 by
     and among the Company and certain of its stockholders may be deemed to
     share voting power with respect to, and may be deemed to beneficially own,
     all of the shares of the Preferred Stock and Common Stock subject to the
     Stockholders' Agreement. Such stockholders disclaim such beneficial
     ownership.

(2)  Consists of 679,042 shares of Common Stock issuable upon conversion of
     shares of the Company's Series A Convertible Preferred Stock (the
     ''Preferred Stock''). Edward L. Cahill, a director of the Company, is a
     General Partner of Cahill, Warnock Strategic Partners, L.P., the General
     Partner of Cahill, Warnock Strategic Partners Fund, L.P. David L. Warnock
     is also a General Partner of Cahill, Warnock Strategic Partners, L.P. The
     General Partners of Cahill, Warnock Strategic Partners, L.P. share voting
     and investment power with respect to the shares held by Cahill, Warnock
     Strategic Partners Fund, L.P. and may be deemed to be the beneficial owners
     of such shares. Each of the General Partners of Cahill, Warnock Strategic
     Partners, L.P. disclaims beneficial ownership of the shares held by Cahill,
     Warnock Strategic Partners Fund, L.P.

(3)  Angus M. Duthie, a director of the Company, is a General Partner of Prince
     Ventures, L.P., the General Partner of Prince Venture Partners III, L.P.
     James W. Fordyce, Mark J. Gabrielson and Gregory F. Zaic are also General
     Partners of Prince Ventures, L.P. The General Partners of Prince Ventures,
     L.P. share voting and investment power with respect to the shares held by
     Prince Venture Partners III, L.P. and may be deemed to be the beneficial
     owners of such shares. Each of the General Partners of Prince Ventures,
     L.P. disclaims beneficial ownership of the shares held by Prince Venture
     Partners III, L.P.

(4)  Consist of 86,667 shares of Common Stock issuable upon conversion of shares
     of Preferred Stock held by Axa U. S. Growth Fund, LLC (the "Axa Conversion
     Shares"), 173,334 shares of Common Stock issuable upon conversion of shares
     of Preferred Stock held by U.S. Growth Fund Partners, C.V. (the "GFP
     Conversion Shares"), 16,667 shares of Common Stock issuable upon conversion
     of shares of Preferred Stock held by Double Black Diamond II, LLC (the "DBD
     Conversion Shares") and 6,665 shares of Common Stock issuable upon
     conversion of shares of Preferred Stock held by Almanori Limited (the
     "Almanori Conversion Shares"). As the investment managing member of Axa
     U.S. Growth Fund, LLC, PAX V, LLC may be deemed to beneficially own the Axa
     Conversion Shares.  Based on a Schedule 13G dated February 10, 1998, AXA-
     UAP may also be deemed to beneficially own the Axa Conversion Shares.  As
     the investment general partner of U.S. Growth Fund Partners, C.V., PAR, V
     V.O.F. may be deemed to beneficially own the GFP Conversion Shares. As a
     non-managing member of PAX V, LLC and a general partner of PAR V V.O.F.,
     Dave Sherry and Glenn Solomon may be deem to beneficially own the Axa
     Conversion Shares and the GFP Conversion Shares.  As a managing member of
     PAX V, LLC and PAR V V.O.F. , PAR SF, LLC may be deemed to beneficially own
     the Axa Conversion Shares and the GFP Conversion Shares.  As a managing
     member of PAR SF, LLC and 

                                       34
<PAGE>
 
     Double Black Diamond II, LLC, Vincent Worms may be deemed to beneficially
     own the Axa Conversion Shares, the GFP Conversion Shares and the DBD
     Conversion Shares. As a managing member of PAR SF, LLC and Double Black
     Diamond II, LLC Thomas McKinley may be deemed to own the Axa Conversion
     Shares, the GFP Conversion Shares and the DBD Conversion Shares. As a non-
     managing member of PAX V, LLC, Scott Matson and Philippe Cases may be
     deemed to own the Axa Conversion Shares. Each of PAX V, LLC, PAR, SF, LLC,
     Vincent Worms, Thomas McKinley, Scott Matson, Philippe Cases, Dave Sherry
     and Glenn Solomon disclaims beneficial ownership of the Axa Conversion
     Shares, except to the extent of their respective proportionate pecuniary
     interest therein. Each of PAR V V.O.F., PAR SF, LLC, Vincent Worms, Thomas
     McKinley, Dave Sherry and Glenn Solomon disclaims beneficial ownership of
     the GFP Conversion Shares, except to the extent of their respective
     proportionate pecuniary interests therein. Each of Vincent Worms and Thomas
     McKinley disclaims beneficial ownership of the DBD Conversion Shares,
     except to the extent of their respective proportionate pecuniary interests
     therein.

(5)  Consists of 55,316 shares of Common Stock and 66,667 shares of Common Stock
     issuable upon conversion of shares of Preferred Stock held by Venrock
     Associates and 24,801 shares of Common Stock and 100,000 shares of Common
     Stock issuable upon conversion of shares of Preferred Stock held by Venrock
     Associates II, L.P. Patrick F. Latterell, Ted H. McCourtney, Anthony B.
     Evnin, David R. Hathaway, Anthony Sun, Kimberley A. Rummelsberg, and Ray A.
     Rothrock are General Partners of Venrock Associates and of Venrock
     Associates II, L.P. The General Partners of Venrock Associates and of
     Venrock Associates II, L.P. share voting and investment power with respect
     to the shares held by Venrock Associates and by Venrock Associates II, L.P.
     and may be deemed to be the beneficial owners of such shares. Each of the
     General Partners of Venrock Associates and Venrock Associates II, L.P.
     disclaims beneficial ownership of the shares held by Venrock Associates and
     Venrock Associates II, L.P.

(6)  Includes 100,000 shares of Common Stock issuable upon conversion of shares
     of Preferred Stock.

(7)  Includes 66,667 shares of Common Stock issuable upon conversion of shares
     of Preferred Stock. Kevin J. Dougherty, a director of the Company, is a
     General Partner of FH&Co. III, L.P., the General Partner of The Venture
     Capital Fund of New England III, L.P. Richard A. Farrell, Harry J. Healer,
     Jr. and William C. Mills III are also General Partners of FH&Co. III, L.P.
     The General Partners of FH&Co. III, L.P. share voting and investment power
     with respect to the shares held by The Venture Capital Fund of New England
     III, L.P. and may be deemed to be the beneficial owners of such shares.
     Each of the General Partners of FH&Co. III, L.P. disclaims beneficial
     ownership of the shares held by The Venture Capital Fund of New England
     III, L.P.

(8)  Includes 83,333 shares of Common Stock issuable upon conversion of shares
     of Preferred Stock. Craig C. Taylor, Franklin P. Johnson Jr., John F. Shoch
     and W. Ferrell Sanders are General Partners of AMC Partners 89, L.P., the
     General Partner of Asset Management Associates 1989, L.P. The General
     Partners of AMC Partners 89, L.P. share and investment voting power with
     respect to the shares held by Asset Management Associates 1989, L.P. and
     may be deemed to be the beneficial owners of such shares. Each of the
     General Partners of AMC Partners 89, L.P. disclaims beneficial ownership of
     the shares held by Asset Management Associates 1989, L.P.

(9)  Shares reported as beneficially owned by State of Wisconsin Investment
     Board in a Schedule 13G filed with the SEC dated January 29, 1999.

(10) Includes 104,540 shares of Common Stock issuable upon the exercise of
     options that are exercisable within 60 days of March 9, 1999.

(11) Includes 22,787 shares of Common Stock issuable upon the exercise of
     options that are exercisable within 60 days of March 9, 1999.

(12) Includes 23,750 shares of Common Stock issuable upon the exercise of
     options that are exercisable within 60 

                                       35
<PAGE>
 
     days of March 9, 1999.

(13) Includes 15,653 shares of Common Stock issuable upon the exercise of
     options that are exercisable within 60 days of March 9, 1999.

(14) Consists entirely of  shares of Common Stock issuable upon the exercise of
     options that are exercisable within 60 days of March 9, 1999.  Mr.
     Dougherty disclaims any beneficial ownership in the shares held by The
     Venture Capital Fund of New England III, L.P. See Note 7.

(15) Consists entirely of shares of Common Stock issuable upon the exercise of
     options that are exercisable upon the exercise of options that are
     exercisable within 60 days of March 9, 1999.  Mr. Duthie disclaims any
     beneficial ownership in the shares held by Prince Venture Partners III,
     L.P. See Note 3.

(16) Consists entirely of shares of Common Stock issuable upon the exercise of
     options that are exercisable within 60 days of March 9, 1999.  Does not
     include 679,042 shares of Common Stock issuable upon conversion of shares
     of Preferred Stock held by Cahill, Warnock Strategic Partners Fund, L.P.
     (see Note 1) and 37,625 shares of Common Stock issuable upon conversion of
     shares of Preferred Stock held by Strategic Associates, L.P. Mr. Cahill is
     a Member of Cahill Warnock & Company, LLC, the General Partner of Strategic
     Associates, L.P. Mr. Cahill disclaims any beneficial ownership of the
     shares held by Cahill, Warnock Strategies Partners Fund, L.P. and Strategic
     Associates, L.P.

(17) Consists entirely of shares of Common stock issuable upon the exercise of
     options that are exercisable within 60 days of March 9, 1999.

(18) Includes an aggregate of 171,930 shares of Common Stock issuable upon the
     exercise of options that are exercisable within 60 days of March 9, 1999.
     Does not include an aggregate of 515,681 shares of Common Stock and an
     aggregate of 783,334 shares of Common Stock issuable upon conversion of
     shares of Preferred Stock with respect to which certain directors disclaim
     beneficial ownership. See Notes 2, 3, 7, 14, 15 and 16.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     No relationships or related transactions exist that require reporting by
the Company for the year ended December 31, 1998.

                                       36
<PAGE>
 
                                    PART IV

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

     (a)(1) and (2) Financial Statements and Schedules

     The auditors' report, consolidated financial statements and financial
statement schedules listed in the Index to Consolidated Financial Statements and
Financial Statement Schedules on page F-1 hereof are filed as part of this
report, commencing on page F-2 hereof.

     (a)(3) Exhibits

2.01(a)   Agreement and Plan of Merger by and between the Company and
          Occupational Health + Rehabilitation Inc dated as of February 22, 1996
          (Filed as Exhibit 10.50 to Form 10-K for the year ended December 31,
          1995, File No. 0-21428, and incorporated by reference herein).
 
    (b)   Amendment No. 1 to the Agreement and Plan of Merger, dated as of April
          30, 1996 (Filed as Exhibit 2.1(b) to Form 8-K/A dated June 6, 1996,
          File No. 0-21428, and incorporated by reference herein).
 
    (c)   Amendment No. 2 to the Agreement and Plan of Merger, dated as of May
          10, 1996 (Filed as Exhibit 2.1(c) to Form 8-K/A dated June 6, 1996,
          File No. 0-21428, and incorporated by reference herein).
 
2.02      Asset Purchase Agreement by and between Argosy Health, L.P. and the
          Company dated as of September 11, 1996 (Filed as Exhibit 2.01 to Form
          8-K dated as of September 11, 1996, File No. 0-21428, and incorporated
          by reference herein).

2.03      Purchase Agreement dated December 31, 1997 by and among Argosy Health
          Northeast, Northeast Venture Partners, Argosy Health, L.P., Gwynedd
          Partners, Inc., G. Linton Sheppard, Jay W. Vandegrift and the Company
          (Filed as Exhibit 2.01 to Form 8-K dated December 31, 1997, File No. 0
          -21428, and incorporated by reference herein)

3.01(a)   Restated Certificate of Incorporation (Filed as Exhibit 4.1 to Form 8-
          K/A dated June 6, 1996, File No. 0-21428, and incorporated by
          reference herein).
 
    (b)   Certificate of Designations (Filed as Exhibit 4.1 to Form 8-K dated
          November 6, 1996, File No. 0-21428, and incorporated by reference
          herein).
 
3.02      Restated Bylaws, as amended.*
 
4.01      Form of Common Stock Certificate (Filed as Exhibit 4.01 to Form 10-Q
          dated June 30, 1996, File No. 0-21428, and incorporated by reference
          herein).
 
4.02      Form of Series A Convertible Preferred Stock Certificate (Filed as
          Exhibit 4.2 to Form 8-K dated November 6, 1996, File No. 0-21428, and
          incorporated by reference herein).

4.03(a)   Revolving Credit Agreement dated as of November 13, 1997, by and
          between the Company and BankBoston, N.A. **

    (b)   Letter Agreement dated December 30, 1998 by and between the Company
          and BankBoston, N.A. modifying certain terms of the Revolving Credit
          Agreement between the parties dated as of November 13, 1997 +

                                       37
<PAGE>
 
10.01     Form of Common Stock Purchase Warrant to purchase 4,195 shares of the
          Company's Common Stock, held by each of Stephan Deutsch, Mark DeNino,
          Mehrdad Motamed, Ira Singer and Steven Blazar.*
 
10.02     Termination Agreement among the Company and certain security holders
          dated as of June 1, 1996.*

10.03     Employment Agreement by and between the Company and John C. Garbarino
          dated as of June 6, 1996 (Filed as Exhibit 10.02 to Form 10-Q dated
          June 30, 1996, File No. 0-21428, and incorporated by reference
          herein).

10.04 (a) Registration Rights Agreement among the Company and certain
          securityholders dated as of June 6, 1996 (Filed as Exhibit 10.01 to
          Form 10-Q dated June 30, 1996, File No. 0-21428, and incorporated by
          reference herein).

      (b) Amendment No. 1 to Registration Rights Agreement among the Company and
          certain securityholders dated as of November 6, 1996.*

10.05     Registration Rights Agreement between the Company and New England
          Occupational Health Services, P.C. dated as of August 1, 1997 (Filed
          as Exhibit 10.01 to Form 10-Q for the quarterly period ended September
          30, 1997, File No. 0-21428, and incorporated by reference herein).

10.06 (a) Series A Convertible Preferred Stock Purchase Agreement among the
          Company and certain securityholders dated as of November 6, 1996.*
 
      (b) Stockholders' Agreement among the Company and securityholders of
          Series A Convertible Preferred Stock dated as of November 6, 1996.*
 
      (c) Registration Rights Agreement between the Company and securityholders
          of Series A Convertible Preferred Stock dated as of November 6, 1996.*

10.07     Registration Rights Agreement between the Company and Business Health
          Management, P.C. dated as of March 4, 1997 (Filed as Exhibit 10.01 to
          Form 10-Q for the quarterly period ended March 31, 1997, File No.0-
          21428, and incorporated by reference herein).

11.01     Statement re Computation of Per Share Earnings.+
 
21.01     Subsidiaries of the Company.+
 
23.01     Consent of Ernst & Young LLP.+
 
27.01     Financial Data Schedule.+
 
   *      Previously filed as the exhibit stated in Form 10-K for the fiscal
          year ended December 31, 1996, File No. 0-21428, and incorporated by
          reference herein.

   **     Previously filed as the exhibit stated in Form 10-K for the fiscal
          year-ended December 31, 1997, File No. 0-21428, and incorporated by
          reference herein.
 
    +     Filed herewith

    The Company agrees to furnish to the Commission a copy of any instrument
evidencing long-term debt, which 

                                       38
<PAGE>
 
is not otherwise required to be filed.

     (b) Reports on Form 8-K

     No reports on Form 8-K were filed for events occurring during the last
     quarter of the fiscal year ended December 31, 1998.

                                       39
<PAGE>
 
                   Occupational Health + Rehabilitation Inc

                       Consolidated Financial Statements

                    Years ended December 31, 1998 and 1997

                                   CONTENTS

Report of Independent Auditors............................................F-2

Consolidated Financial Statements

Consolidated Balance Sheets...............................................F-3
Consolidated Statements of Operations.....................................F-4
Consolidated Statements of Stockholders' Equity (Deficit)
  and Redeemable Stock....................................................F-5
Consolidated Statements of Cash Flows.....................................F-6
Notes to Consolidated Financial Statements................................F-7



                                      F-1
<PAGE>
 
                        Report of Independent Auditors

Board of Directors
Occupational Health + Rehabilitation Inc

We have audited the accompanying consolidated balance sheets of Occupational 
Health + Rehabilitation Inc and subsidiaries (the Company) as of December 31, 
1998 and 1997, and the related consolidated statements of operations, 
stockholders' equity (deficit) and redeemable stock, and cash flows for each of 
the three years in the period ended December 31, 1998.  These financial 
statements are the responsibility of the Company's management.  Our 
responsibility is to express an opinion on these financial statements based on 
our audits.

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

In our opinion, the consolidated financial statements referred to above present 
fairly, in all material respects, the consolidated financial position of 
Occupational Health + Rehabilitation Inc and subsidiaries at December 31, 1998
and 1997, and the consolidated 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.

As described in Note 2 to the consolidated financial statements, the Company 
changed its method of accounting for start-up costs in 1998.


                                             ERNST & YOUNG LLP

Boston, Massachusetts
March 12, 1999

                                      F-2
<PAGE>
 
                   Occupational Health + Rehabilitation Inc

                          Consolidated Balance Sheets
                     (in thousands, except share amounts)


                                                  DECEMBER 31
                                               1998       1997
ASSETS                                       --------------------
Current Assets:
   Cash and cash equivalents                 $ 1,562      $ 4,180
   Accounts receivable, less allowance for
     doubtful accounts of $439 and $180 in
     1998 and 1997, respectively               5,137        3,207
   Note receivable                               292          210
   Prepaid expenses and other assets             349          456
                                             --------------------
Total current assets                           7,340        8,053

Property and equipment, net                    2,181        1,539
Goodwill, less accumulated amortization
     $508 and $278 in 1998 and 1997            4,574        3,985
Note receivable                                  175          707
Other assets                                     209          289

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

Total assets                                 $14,479      $14,573
                                             ====================


                                                  DECEMBER 31
                                               1998       1997
                                             --------------------
LIABILITIES, REDEEMABLE STOCK AND
  STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses      $ 2,593      $ 2,073
  Current portion of long-term debt              901          663
  Current portion of obligations under
     capital leases                              152          120
                                             --------------------
Total current liabilities                      3,646        2,856

Long-term debt, less current maturities          999        1,264
Obligations under capital leases                 117          122
                                             --------------------
Total liabilities                              4,762        4,242

Minority interests                               681          134
Redeemable, convertible preferred stock,
  Series A, $.001 par value, $8,500,002
  liquidation value, 1,666,667 shares
  authorized, 1,416,667 shares issued
  and outstanding                              8,455        8,440
Stockholders' equity:
  Preferred stock, $.001 par value-
     3,333,333 shares authorized, none
     issued and outstanding
  Common stock, $.001 par value-
     10,000,000 shares authorized,
     1,579,479 shares issued in 1998 and
     1997 and 1,479,444 and 1,478,977
     shares outstanding in 1998 and 1997,
     respectively                                  1            1
  Additional paid-in capital                  10,620       10,619
  Accumulated deficit                         (9,540)      (8,363)
  Less treasury stock, at cost, 100,502
     shares                                     (500)        (500)
                                             --------------------
Total stockholders' equity                       581        1,757
                                             --------------------

Total liabilities, redeemable stock and 
  stockholder's equity                       $14,479      $14,573
                                             ====================

See accompanying notes.

                                      F-3
<PAGE>
 
                   Occupational Health + Rehabilitation Inc

                     Consolidated Statements of Operations
              (in thousands, except share and per-share amounts)

<TABLE> 
<CAPTION> 
                                                    YEAR ENDED DECEMBER 31 
                                               1998           1997         1996 
                                            --------------------------------------
<S>                                         <C>           <C>          <C> 
REVENUE                                      $   23,083   $   18,307   $    9,041
Expenses:                                                                       
  Operating                                      19,970       17,209        9,063
  General and administrative                      3,035        2,590        1,570
  Depreciation and amortization                     759          658          449 
                                            --------------------------------------
                                                 23,764       20,457       11,082 
                                            --------------------------------------
                                                   (681)      (2,150)      (2,041) 

Nonoperating gains (losses):
  Interest income                                   171          334          135  
  Interest expense                                 (179)        (248)        (252) 
  Minority interest in net (profits)                                             
     losses of subsidiaries                        (318)         183          308  
  Gain on disposition of investment                              217 
                                            --------------------------------------

Loss before income taxes and cumulative
  effect of a change in accounting               (1,007)      (1,664)      (1,850)
  principle                                                                     
Income taxes                                          -            -            - 
                                            --------------------------------------


Loss before cumulative effect of a change
     in accounting principle                     (1,007)      (1,664)      (1,850) 
Cumulative effect of change in accounting
     principle                                     (155)
                                            --------------------------------------

Net loss                                     $   (1,162)  $   (1,664)  $   (1,850) 
                                            ======================================

Net loss available to common shareholders    $   (1,177)  $   (1,681)  $   (1,850) 
                                            ======================================

Per share amounts:
  Loss before cumulative effect of a
     change in accounting principle          $    (0.69)  $    (1.07)  $    (1.64) 
  Cumulative effect of change in
     accounting principle                    $    (0.11)  
                                            --------------------------------------

Net loss per common share                    $    (0.80)  $    (1.07)  $    (1.64) 
                                            ======================================

Weighted-average common shares
  outstanding                                 1,479,141    1,573,471    1,129,611 
                                            ======================================
</TABLE> 

See accompanying notes.

                                      F-4


<PAGE>
 
                   Occupational Health + Rehabilitation Inc

Consolidated Statements of Stockholders' Equity (Deficit) and Redeemable Stock
                     (in thousands, except share amounts)

<TABLE> 
<CAPTION> 
                                                                               ADDITIONAL
                                                          COMMON STOCK           PAID-IN    ACCUMULATED       TREASURY STOCK
                                                      SHARES        AMOUNT       CAPITAL      DEFICIT       SHARES       AMOUNT
                                                  --------------------------------------------------------------------------------- 
<S>                                               <C>               <C>        <C>          <C>             <C>          <C> 
Balance at December 31, 1995                          671,855         $   7       $    11      $(6,205)
     Exercise of stock options                          6,810                           8
     Exchange of OH+R common stock for                                                   
          Telor common shares                         785,995             1         4,264
     Waiver of preferred stock dividend                                                          1,373
     Conversion of 4,137,843 shares of                                                   
          OH+R Series 1 and 2 preferred                                                  
          stock                                       585,901                       5,806
     Conversion of 674,605 shares of                                                     
          OH+R common stock                          (579,084)           (7)            7 
     Issuance of redeemable preferred stock
          (less issuance costs of $77)
     Net loss                                                                                   (1,850)
                                                  --------------------------------------------------------------------------------- 
Balance at December 31, 1996                        1,471,477             1        10,096       (6,682)
     Issuance of common stock related to
          Argosy Health Northeast                     100,502                         500
     Issuance of common stock related to
          practice acquisition                          7,500                          23
     Accretion of preferred stock issuance costs                                                   (17)
     Acquisition of 100,502 shares of treasury
          stock                                      (100,502)                                              100,502      $  (500)
     Net loss                                                                                   (1,664)
                                                  --------------------------------------------------------------------------------- 
Balance at December 31, 1997                        1,478,977             1        10,619       (8,363)     100,502         (500)
     Accretion of preferred stock issuance costs                                                   (15)
     Exercise of stock options                            467                           1
     Net loss                                                                                   (1,162)
                                                  --------------------------------------------------------------------------------- 
Balance at December 31, 1998                        1,479,444         $   1       $10,620      $(9,540)     100,502         (500)
                                                  ================================================================================= 

<CAPTION>                                   
                                                          TOTAL          REDEEMABLE          REDEEMABLE          REDEEMABLE
                                                       STOCKHOLDERS'    CONVERTIBLE         CONVERTIBLE         CONVERTIBLE
                                                          EQUITY       PREFERRED STOCK     PREFERRED STOCK     PREFERRED STOCK 
                                                         (DEFICIT)         SERIES 1            SERIES 2            SERIES A
                                                  --------------------------------------------------------------------------------- 
<S>                                               <C>                  <C>                 <C>                 <C> 
Balance at December 31, 1995                              $(6,187)          $2,700             $ 4,479
     Exercise of stock options                                  8
     Exchange of OH+R common stock for                                                   
          Telor common shares                               4,265
     Waiver of preferred stock dividend                     1,373             (700)               (672)
     Conversion of 4,137,843 shares of                                                   
          OH+R Series 1 and 2 preferred                                                  
          stock                                             5,806           (2,000)             (3,807)
     Conversion of 674,605 shares of                                                     
          OH+R common stock                      
     Issuance of redeemable preferred stock       
          (less issuance costs of $77)                                                                              $8,423
     Net loss                                              (1,850)                                             
                                                  ---------------------------------------------------------------------------------
Balance at December 31, 1996                                3,415                0                   0               8,423
     Issuance of common stock related to          
          Argosy Health Northeast                             500
     Issuance of common stock related to          
          practice acquisition                                 23                                                       
     Accretion of preferred stock issuance costs              (17)                                                      17 
     Acquisition of 100,502 shares of treasury    
          stock                                              (500)
     Net loss                                              (1,664)
                                                  ---------------------------------------------------------------------------------
Balance at December 31, 1997                                1,757               -0-                 -0-              8,440
     Accretion of preferred stock issuance costs              (15)                                                      15
     Exercise of stock options                                  1
     Net loss                                              (1,162)
                                                  --------------------------------------------------------------------------------- 
Balance at December 31, 1998                              $   581           $   -0-            $    -0-             $8,455 
                                                  =================================================================================
</TABLE> 
                                                  
See accompanying notes.

                                      F-5
<PAGE>
 
                   Occupational Health + Rehabilitation Inc

                     Consolidated Statements of Cash Flows
                                (in thousands)

<TABLE> 
<CAPTION> 
                                                                             YEAR ENDED DECEMBER 31
                                                                          1998         1997       1996  
                                                                       ----------------------------------
<S>                                                                    <C>          <C>         <C> 
OPERATING ACTIVITIES
Net loss                                                                $(1,162)    $(1,664)    $(1,850)  
Adjustments to reconcile net loss to net cash
 used by operating activities:
   Depreciation and amortization                                            759         658         449  
   Cumulative effect of change in
     accounting principle                                                   155 
   Amortization of discount                                                   -           8          23      
   Minority interest in profits (losses) of
     subsidiaries                                                           308        (183)       (308)  
   Gain on disposition of investment                                          -        (217)
   Changes in operating assets and liabilities:
         Accounts receivable                                             (1,294)     (2,416)     (1,325)
         Prepaid expenses and other current assets                          526         (67)        (48)            
         Due from related party, net                                          -         253         366
         Deposits and other noncurrent assets                                 -         (27)        398
         Accounts payable and accrued
          expenses and other long-term liabilities                          513         659        (401)
                                                                     -------------------------------------
Net cash used by operating activities                                      (195)     (2,996)     (2,696)      

INVESTING ACTIVITIES
(Funding) release of restricted cash                                                    345        (345) 
Cash paid for intangibles                                                  (484)       (381)       (286)   
Refund of security deposit                                                              (25)
Property and equipment additions                                           (608)       (458)       (130) 
Cash received from sale of partnership interest                                         702
Cash received in (paid for) acquisitions                                   (469)     (1,375)      3,519    
                                                                     -------------------------------------
Net cash (used) provided by investing activities                         (1,561)     (1,192)      2,758 

FINANCING ACTIVITIES
Proceeds from sale of preferred stock, net                                                        8,423
Proceeds from sale of common stock                                            1                       8
Proceeds from long-term debt                                                            331         500  
Payments of long-term debt                                                 (780)       (457)       (638)
Payments of capital lease obligations                                      (137)       (139)       (108)   
Cash received by partnership                                                 54          17
                                                                     -------------------------------------
Net cash (used) provided by financing activities                           (862)       (248)      8,185      
                                                                     -------------------------------------
Net (decrease) increase in unrestricted cash
 and cash equivalents                                                    (2,618)     (4,436)      8,247            
Unrestricted cash and cash equivalents at 
 beginning of year                                                        4,180       8,616         369   
                                                                     ------------------------------------- 
Unrestricted cash and cash equivalents at end of year                  $  1,562    $  4,180     $ 8,616 
                                                                     =====================================
</TABLE> 

NON-CASH FINANCING TRANSACTIONS
The Company issued notes payable as partial consideration for business 
 combinations amounting to $700 and $1,132 in 1998 and 1997, respectively. (See 
 Note 3)
The Company forgave notes payable of $536 in 1997. (See Note 3)

See accompanying notes.

                                      F-6


<PAGE>
 
                   Occupational Health + Rehabilitation Inc

                  Notes to Consolidated Financial Statements

             (Dollar amounts in thousands, except per share data)

                               December 31, 1998


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

Occupational Health + Rehabilitation Inc (the Company) specializes in 
occupational health care throughout the Northeastern United States. The Company 
develops and operates multidisciplinary, outpatient health care centers and 
provides on-site services to employers for the prevention, treatment and 
management of work-related injuries and illnesses. The Company operates the 
centers typically under management and submanagement agreements with 
professional corporations (Physician Practices) that practice exclusively 
through such centers. Additionally, the Company has entered into joint ventures 
with hospital related organizations to provide management and related services 
to the centers established by the joint ventures.

In June 1996, Occupational Health + Rehabilitation Inc (OH+R) merged with and 
into (the Merger) Telor Ophthalmic Pharmaceuticals, Inc (Telor), with Telor 
being the surviving corporation. In connection with the Merger, Telor changed 
its name to Occupational Health + Rehabilitation Inc and assumed the business of
OH+R in exchange for all outstanding shares of OH+R capital stock, outstanding 
options held by employees, directors and consultants and warrants to purchase 
shares of OH+R common stock. Effective on the date of the Merger, the 
outstanding equity of OH+R was converted at a rate of .1415957 to 1. The number 
of shares of common stock, $.001 par value, outstanding after the Merger were 
1,467,417. The Merger was accounted for as a "reverse acquisition" whereby OH+R 
was deemed to have acquired Telor for financial reporting purposes. Consistent 
with the reverse acquisition accounting treatment, historical financial 
statements for the Company for periods prior to the date of the Merger are those
of OH+R. Under the purchase method of accounting, balances and results of 
operations of Telor are included in the Company's financial statements from the 
date of the Merger forward. Effective June 7, 1996, the Company was listed on 
the NASDAQ SmallCap Market under the symbol "OHRI".

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company, its 
wholly-owned subsidiary and its majority-owned subsidiaries, joint ventures and 
partnerships. All of the outstanding voting equity instruments of the Physician
Practices are owned by a shareholder nominated by the Company. Through option or
employee agreements, the Company restricts transfer of Physician Practice
ownership without its consent and can,

                                      F-7
<PAGE>
 

                   Occupational Health + Rehabilitation Inc

             Notes to Consolidated Financial Statements (continued)

              (Dollar amount in thousands, except per share data)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

at any time, require the nominated shareholder to transfer ownership to a 
Company designee. It is through this structure and through long-term management 
agreements entered into with the Physician Practices that the Company has an 
other than temporary controlling financial interest in the Physician Practices.

Most states in which the Company operates have various laws and regulations that
are often vague and seldomly interpreted by courts or agencies limiting the
corporate practice of medicine and the sharing of fees between physicians and
non-physicians. The Company believes it has structured all of its operations so
that they comply with such laws and regulations; however, there can be no
assurance that an enforcement agency could find to the contrary or that future
interpretations of such laws and regulations will not require structure and
organizational modifications of the Company's business.

All significant intercompany accounts and transactions have been eliminated.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on hand, demand deposits and short-term 
investments with original maturities of three months or less.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Depreciation is computed by straight-
line and declining-balance methods over the useful lives of the respective
assets. Leasehold improvements are amortized on a straight-line basis over the
shorter of the lease term or the estimated useful life of the asset.
Depreciation of assets under capital leases is included with depreciation.

GOODWILL

Goodwill is amortized using the straight-line method over periods of 20 to 40 
years.  The carrying value of goodwill will be reviewed if the facts and 
circumstances suggest that it may be impaired.  If this review indicates that 
goodwill will not be recoverable, as determined based on the discounted cash 
flows of the entity acquired, over the remaining amortization period, the 
Company's carrying value of the goodwill will be reduced by the estimated 
shortfall of cash flows.  No such impairment existed at December 31, 1998.

                                      F-8

<PAGE>
 
                   Occupational Health + Rehabilitation Inc

             Notes to Consolidated Financial Statements (continued)

              (Dollar amount in thousands, except per share data)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION

Revenue is recorded at estimated net amounts to be received from employers, 
third-party payors and others for services rendered.  The Company operates in 
certain states that regulate the amounts which the Company can charge for its 
services associated with work-related injuries and illnesses.

PROFESSIONAL LIABILITY COVERAGE

The Company maintains entity professional liability insurance coverage on a 
claims-made basis in all states it has centers operating.  The Company also 
maintains professional liability insurance coverage in the name of its employed 
physicians on a claims-made basis in all states, but Massachusetts which is on 
an occurrence basis. Management is unaware of any claims that may result in a 
loss in excess of amounts covered by its existing insurance.

STOCK COMPENSATION ARRANGEMENTS

The Company accounts for its stock compensation arrangements under the 
provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and 
accordingly recognizes no compensation expense for the issue thereof.

The Company has adopted the disclosure-only provisions of Statement of 
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based 
Compensation and will continue to account for its stock option plans in 
accordance with the provisions of APB Opinion No. 25.

ESTIMATES AND ASSUMPTIONS

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

                                      F-9


<PAGE>
 
                    Occupation Health + Rehabilitation Inc

            Notes to Consolidated Financial Statements (continued)

             (Dollar amounts in thousands, except per share data)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist of cash and cash equivalents, 
accounts receivable, accounts payable and accrued expenses, and long-term debt. 
The Company believes that the carrying value of its financial instruments 
approximates fair value.  The Company has made this determination for its 
fixed-rate long-term debt based upon interest rates currently available to it to
refinance such debt.

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

As of January 1, 1998, the Company adopted SFAS No. 130, Reporting 
Comprehensive Income.  SFAS No. 130 establishes rules for the reporting and 
display of comprehensive income and its components.  The adoption of SFAS No. 
130 had no impact on the Company's financial statements.

As of January 1, 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
standards and requirements for the way that public business enterprises report
information about operating segments in annual financial statements and in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
All of the Company's efforts are devoted to occupational health care services
that are managed and reported in one segment. Additionally, the Company is
located in the Northeastern United States and derives all of its revenues from
services provided in the United States.

NET LOSS PER COMMON SHARE

The Company calculates earnings per share in accordance with SFAS No. 128,
Earnings per Share, which requires disclosure of basic and diluted earnings per
share. Basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities while diluted earnings per share includes
such amounts. In 1998 and 1997, respectively, for purposes of the net loss per
share calculation, the net loss has been increased by $15 and $17 of preferred
stock accretion. In 1996, the net loss per common share calculation assumes the
retroactive conversion of the series 1 and 2 preferred stock and common stock in
connection with the Merger (see



                                     F-10








<PAGE>
 

                   Occupational Health + Rehabilitation Inc

             Notes to Consolidated Financial Statements (continued)

              (Dollar amount in thousands, except per share data)


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Note 1). The effect of options, warrants, convertible preferred stock and a 
convertible note payable is not considered as it would be anti-dilutive for the 
years presented.  Additional disclosures regarding these potentially dilutive 
securities are included in Notes 5 and 8.

2. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT

In April 1998, the American Institute of Certified Public Accountants issued 
Statement of Position 98-5, Reporting the Costs of Start-Up Activities, which 
requires that costs related to start-up activities be expensed as incurred.  
Prior to 1998, the Company capitalized its preopening costs in connection with
new centers and its costs associated with new service lines.  The effect of 
adoption of SOP 98-5 was to record a charge for the cumulative effect of an 
accounting change of $155 ($0.10 per share) to expense costs that had been 
capitalized prior to January 1, 1998.

3. JOINT VENTURES AND ACQUISITIONS

JOINT VENTURES

During 1998, the Company entered into a joint venture with a hospital system, 
with an aggregate initial contribution of $250 in cash and notes payable. The 
Company holds a 51% interest in the joint venture limited liability company.  
The Company also has a management contract with the joint venture for an 
initial term of ten years with automatic renewals for successive five-year
terms.

During 1997, the Company entered into two joint ventures with two hospital 
systems, with an aggregate initial contribution of $329 in cash and fixed
assets. The Company holds a 51% interest in one joint venture, and a 75%
interest in the other. Both joint ventures are limited liability companies. The
Company also has a management contract with each of the joint ventures for an
initial term of five years with automatic renewals for successive five-year
terms.

During 1996, the Company consummated a joint venture for aggregate consideration
of $160, payable in cash and notes, and additional contingent consideration of 
up to $100.  Goodwill recognized in this transaction was $120.  The Company 
holds a 90% interest in the joint venture limited liability company.


                                     F-11

<PAGE>
 
                   Occupational Health + Rehabilitation Inc

            Notes to Consolidated Financial Statements (continued)

              (Dollar amount in thousands, except per share data)

3.   JOINT VENTURES AND ACQUISITIONS (CONTINUED)

In April 1996, the Company entered into a partnership to provide management and 
related services to the centers established by the partnership. The Company made
a capital contribution to the partnership of $204 in cash, acquiring an interest
of 51%. Under the terms of a related agreement, the Company issued a promissory 
note payable in the amount of $536 and incurred a short-term obligation of $105 
for the purchase of 51% of the assets, properties and rights in a center owned 
by its joint venture partner and operated by the Company. The Company's joint 
venture partner acquired from the Company a 49% interest in the assets of 
another center. The exchange of assets of the two centers was consummated at the
fair value of the tangible and intangible net assets of the centers. Goodwill of
$337 was recorded by OH+R in connection with these transactions. Both parties 
contributed their respective interest in their previously owned centers to the 
partnership.

On September 30, 1997 the partnership was converted to a limited liability 
company, and the Company assumed an additional 24% ownership interest in the 
joint venture for a total ownership percentage of 75%. Through this transaction,
each party forgave outstanding indebtedness. Additionally, certain assets 
associated with one of the partnership centers were transferred in 
consideration for the forgiveness of the Company's note payable of approximately
$536 and cash of approximately $56. The Company recorded a gain of $217 in 
connection with this transaction.

Effective September 1, 1996 the Company purchased a 70% undivided interest in 
the assets of a business division of an unrelated company, which provided 
industrial on-site occupational and physical therapy and related assessments in 
certain Mid-Atlantic States. In connection with the transaction, a general 
partnership was formed. The aggregate purchase price was approximately $1,300 
and was financed through available cash resources and shares of Common Stock of 
the Company. Goodwill recognized in this transaction was $764.

On December 31, 1997, the Company sold its general partnership interest in this 
entity. The Company received consideration in the form of the return of 100,502 
shares of the Company common stock, a secured promissory note for $917 (the 
Note) and miscellaneous assets. In addition, the Company's former partner 
discharged debt owned to OH+R by a cash payment of $750. A gain of $51 was 
recognized in connection with this transaction. The Note originally had a term 
of three years and an interest rate of 9% per annum and was secured by various 
pledges and guarantees by the buyer, certain

                                     F-12
<PAGE>
 
                   Occupational Health + Rehabilitation Inc

            Notes to Consolidated Financial Statements (continued)

              (Dollar amount in thousands, except per share data)

3. JOINT VENTURES AND ACQUISITIONS (CONTINUED)

individuals and affiliates of the buyer. The note was subsequently renegotiated 
in October of 1998 to include quarterly principal payments with an interest rate
of 12% per annum payable through September 2000. The note is unsecured, yet 
remains subject to certain guarantees.

ACQUISITIONS

During 1998, the Company purchased four freestanding occupational medicine 
centers located in New Hampshire, and a physician and physical therapy practice 
located in Massachusetts. The combined purchase price was $919. The remainder of
the purchase price is due in the form of notes payable in varying installments 
through 2001. Goodwill recognized in these transactions was $344. 

During 1997, the Company purchased five physician practices located in New 
England and New York. The combined purchase price was $2,329. The remainder of 
the purchase price is due in the form of notes payable in varying installments 
through 2002, contingent payments and a convertible subordinated promissory 
note. Additionally, the Company issued 7,500 shares of stock relating to these 
acquisitions. Goodwill recognized in these transactions was $2,162.

In conjunction with certain acquisitions, the Company has entered into 
contractual arrangements whereby  the selling parties are entitled to 
receive contingent cash consideration based upon the achievement of certain 
minimum operating results. Obligations related to these contingencies are 
reflected as additional goodwill in the period they become known.

All acquisitions have been accounted for using the purchase method of
accounting. Accordingly, the purchase price was allocated to the assets acquired
and liabilities assumed based upon their estimated fair values at the dates of
acquisition. The results of operations of the acquired practices are included in
the consolidated financial statements from the respective dates of acquisition.

                                     F-13
<PAGE>
 
                   Occupational Health + Rehabilitation Inc

            Notes to Consolidated Financial Statements (continued)

              (Dollar amount in thousands, except per share data)


3.   JOINT VENTURES AND ACQUISITIONS (CONTINUED)

The pro forma results of operations as if the 1998 and 1997 acquisitions and 
joint ventures had occurred at the beginning of the preceding fiscal year is as 
follows:

<TABLE> 
<CAPTION> 
                                                            (UNAUDITED)
                                                            DECEMBER 31
                                                         1998         1997
                                                      -----------------------
<S>                                                    <C>          <C>    
Total revenue                                          $25,738      $23,291 
Net loss                                                (1,276)      (1,851)
Net loss per share                                       (0.86)       (1.18)
</TABLE> 

The pro forma financial information is not necessarily indicative of the results
of operations as they would have been had the transactions been effected on the 
assumed dates or of the future results of operations of the combined entities.

4.   PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE> 
<CAPTION> 
                                                            DECEMBER 31
                                                         1998         1997
                                                      -----------------------
<S>                                                    <C>           <C>    
Medical equipment                                      $ 1,201       $  975
Furniture and office equipment                           1,483          996
Leasehold improvements                                     778          375
Vehicles                                                    13           13
                                                      -----------------------
                                                         3,475        2,359
Less accumulated depreciation                           (1,294)        (820)
                                                      -----------------------

                                                       $ 2,181       $1,539
                                                      =======================
</TABLE> 

                                     F-14
<PAGE>
 
                   Occupational Health + Rehabilitation Inc

            Notes to Consolidated Financial Statements (continued)

              (Dollar amount in thousands, except per share data)


4.   PROPERTY AND EQUIPMENT (CONTINUED)

The Company entered into capital lease obligations of $85, $245 and $33 in 1998,
1997 and 1996, respectively. The cost of certain equipment leased under capital 
lease agreements was $772 and $687 at December 31, 1998 and 1997, respectively. 
Accumulated depreciation on these capitalized lease assets was $330 and $218 at 
December 31, 1998 and 1997, respectively. Depreciation expense on these 
capitalized assets was $474, $354 and $207 in 1998, 1997 and 1996, respectively.

5.   LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE> 
<CAPTION> 
                                                                         DECEMBER 31         
                                                                     1998           1997     
                                                               ------------------------------
<S>                                                              <C>               <C> 
Promissory notes, bearing interest rates ranging from 0%
  to 8.5%, due in annual installments through December
  2002                                                           $1,613            $1,640
Line of credit with bank, bearing interest at the bank's
  base rate plus 0.50% (8.25% at December 31, 1998),
  secured by certain accounts receivable                            287               287
                                                               ------------------------------
                                                                  1,900             1,927
Less current portion                                               (901)             (663)
                                                               ------------------------------  

                                                                 $  999            $1,264   
                                                               ==============================  
</TABLE> 

A $250 promissory note included above contains provisions whereby it may convert
into 25,000 shares of common stock upon the occurrence of certain specified 
events.

The Company has two separate lines of credit facilities. The first facility, as 
amended, provides the Company with $5,000 for working capital and acquisition 
needs (the Company Line). The second facility, as amended, provides up to $2,000
to be utilized by the Company's existing and future joint ventures (the JV 
Line). The borrowing base of the JV Line is eighty-five percent (85%) of the 
joint ventures' accounts receivable less than 120 days old. Both facilities 
expire on December 31, 1999. The interest rate for the Company Line and the JV 
Line was 8.25% as of December 31, 1998 and is due quarterly in arrears.

                                     F-15
<PAGE>
 
                   Occupational Health + Rehabilitation Inc

            Notes to Consolidated Financial Statements (continued)

              (Dollar amount in thousands, except per share data)


5.   LONG-TERM DEBT (CONTINUED)

The Company Line contains covenants that require the maintenance of certain 
financial ratios and other minimum financial standards while both facilities 
impose restrictions on certain capital expenditures and related indebtedness. As
of December 31, 1998, there was an outstanding balance of $287 on the JV Line 
and no balance outstanding under the Company Line.

In addition, during 1998 the Company entered into a $500 Master Lease Agreement 
to provide secured financing of $500 (increased to $2,000 in February 1999). The
facility expires on December 31, 1999. The interest rate for the Master Lease 
Agreement approximates 8.6% as of December 31, 1998. As of December 31, 1998, no
amounts are outstanding.

Aggregate maturities of obligations under long-term debt agreements are as 
follows:

<TABLE> 
     <S>                                <C> 
     1999                               $  901
     2000                                  460
     2001                                  245  
     2002                                  294
                                        ------

                                        $1,900
                                        ======
</TABLE> 

Interest paid in 1998, 1997 and 1996 was $168, $147 and $218, respectively.

6.   LEASES

The Company maintains operating leases for commercial property and office 
equipment. The commercial leases contain renewal options and require the Company
to pay certain utilities and taxes over established base amounts. Operating 
lease expenses were $1,625, $1,395 and $925 for 1998, 1997 and 1996, 
respectively.

                                     F-16
<PAGE>
 
                   Occupational Health + Rehabilitation Inc

            Notes to Consolidated Financial Statements (continued)

              (Dollar amount in thousands, except per share data)


6.   LEASES (CONTINUED)

Future minimum lease payments under capital leases and noncancelable operating 
leases are as follows:

<TABLE> 
<CAPTION>
                                                     CAPITAL      OPERATING
                                                     LEASES        LEASES
                                                  ---------------------------
     <S>                                            <C>           <C> 
     1999                                           $ 173           $1,716
     2000                                              97            1,003
     2001                                              27              777 
     2002                                               3              442
     2003                                               0              206   
                                                  ---------------------------

     Total minimum lease payments                     300           $4,144
                                                                  ===========
     Less amounts representing interest               (31)
                                                  ---------

     Present value of net minimum lease payments    $ 269
                                                  =========
</TABLE> 

7.   INCOME TAXES

The Company provides for income taxes under the liability method. At December 
31, 1998, the Company had net operating loss carryforwards for federal income 
tax purposes of approximately $8,880, which begin to expire in 2008. The future 
utilization of net operating loss carryforwards may be subject to limitations 
under the change in stock ownership rules of the Internal Revenue Code. For 
financial reporting purposes, a valuation allowance of $3,902 ($3,310 in 1997) 
has been recognized to offset the deferred tax assets related to these 
carryforwards and other temporary differences, since uncertainty exists with 
respect to future realization of such deferred tax assets.

                                     F-17
<PAGE>
 
                    Occupational Health + Rehabilitation Inc

            Notes to Consolidated Financial Statements (continued)

              (Dollar amount in thousands, except per share data)


7.  INCOME TAXES (CONTINUED)

The significant components of the Company's deferred tax liabilities and assets 
are as follows at December 31:

<TABLE> 
<CAPTION> 
                                                         DECEMBER 31
                                                       1998       1997
                                                  ------------------------
 <S>                                              <C>           <C> 
 Deferred tax assets:                    
                                         
   Net operating loss carryforwards                 $  3,552    $  3,212
   Other                                                 457         181  
                                                  ------------------------
   Total deferred tax assets                           4,009       3,393
 Less valuation allowance                             (3,902)     (3,310)
                                                  ------------------------
 Net deferred tax asset                                  107          83
                                         
 Deferred tax liabilities:                
                                         
 Depreciation and amortization                          (107)        (83)
                                                  ------------------------
 Net deferred tax assets                            $      -    $      -
                                                  ========================
</TABLE> 

The valuation allowance increased $592 in 1998 primarily due to the increase in 
net operating loss carryovers.

                                     F-18
<PAGE>
 

                   Occupational Health + Rehabilitation Inc

            Notes to Consolidated Financial Statements (continued)

              (Dollar amount in thousands, except per share data)

8.  STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK

PREFERRED STOCK

At December 31, 1998, 5,000,000 shares of preferred stock $.001 par value, were 
authorized, with 1,666,667 of such shares designated as Series A Convertible 
Preferred Stock.

On November 6, 1996, the Company issued 1,416,667 shares of redeemable, 
convertible Series A Preferred Stock (Series A) in a private placement at a
purchase price of $6.00 per share.

Each share of Series A is convertible, at the option of the holder, into one 
share of Common Stock, subject to certain adjustments. The holders of Series A  
are entitled to vote as a single class with the holders of the Common Stock, and
each share of Series A is entitled to the number of votes that is equal to the 
number of shares of Common Stock into which each share of Preferred Stock is 
convertible at the time of such vote.

The holders of Series A Stock are entitled to certain registration rights with 
respect to the Common Stock into which the Series A is convertible. Dividends 
will be payable on the shares of Series A when and if declared by the Board of 
Directors after three years from the date of issuance and will thereafter accrue
at an annual cumulative rate of $.48 per share, subject to certain adjustments.

Holders of shares of Series A constituting a majority of the then outstanding 
shares of Series A may, by giving notice to the Company at any time after 
November 5, 2001, require the Company to redeem all of the outstanding shares of
Series A at $6.00 per share plus an amount equal to all dividends accrued or 
declared but unpaid thereon, payable in four equal installments over a four-year
period.

In the event of voluntary or involuntary liquidation, dissolution or winding up
of the Company the holders of shares of Series A shall be paid an amount equal
to the greater of (i)$6.00 per share plus all accrued but unpaid dividends or 
(ii) the amount per share had each share been converted to Common Stock 
immediately prior to liquidation, dissolution or winding up.

                                     F-19


<PAGE>
 
                   Occupational Health + Rehabilitation Inc

             Notes to Consolidated Financial Statements (continued)

              (Dollar amount in thousands, except per share data)


8. STOCKHOLDERS' EQUITY AND REDEEMABLE PREFERRED STOCK (CONTINUED)

COMMON STOCK/TREASURY STOCK

On September 11, 1996, the Company agreed to issue 100,502 shares of Common 
Stock with a purchase price of $4,975 as partial consideration for the purchase 
of a 70% interest in a division of an unrelated company (Seller) (see Note 3). 
The shares were delivered to Seller on January 6, 1997. At December 31, 1996, 
the Company recorded $500 as a liability in order to accrue for the amount due 
to the Seller. During December 1997, the Company sold its interest in Seller as 
previously noted in Note 3. The Company received its 100,502 shares of common 
stock and recorded the $500 value as treasury stock.

SHARES RESERVED FOR FUTURE ISSUANCE

At December 31, 1998, the Company has reserved shares of common stock for future
issuance for the following purposes:

     Series A Preferred Stock                     1,416,667
     Stock Plans                                    660,000
     Warrants                                        20,975
                                                -------------

                                                  2,097,642
                                                =============


WARRANTS

The Company has issued stock purchase warrants which provide the holders the 
right to purchase an aggregate of 20,975 shares of Common Stock at $8.83 per 
share. The warrants are exercisable in part or in whole from July 1, 1997 until 
August 31, 1999.

9. BENEFIT PLANS

STOCK PLANS

1998 Stock Plan: In January 1998, the Company's board of directors adopted the
1998 Stock Plan, subject to stockholder approval which was received in July
1998. The 1998 Stock Plan provides for the granting of up to 150,000 non-
qualified stock options, "incentive stock options" (ISOs) and stock appreciation
rights to employees, directors and consultants of the Company.

                                     F-20


<PAGE>
 
                   Occupational Health + Rehabilitation Inc

            Notes to Consolidated Financial Statements (continued)

              (Dollar amount in thousands, except per share data)

9. BENEFIT PLANS (CONTINUED)

1996 Stock Plan: In October 1996, the Company's board of directors adopted the 
1996 Stock Plan, which provides for the granting of up to 265,000 nonqualified 
stock options, ISOs and stock appreciation rights to employees, directors and 
consultants of the Company.

Nonqualified options granted may not be at a price less than 50% of fair market 
value of the common stock, and ISOs granted may not be at a price of less than 
100% of fair market value of the common stock on the date of grant. Granting of
incentive stock options is subject to the approval of the 1996 Stock Plan by the
Company's stockholders.

1993 Stock Plan: The Company's 1993 Stock Plan provides for the granting of 
options to purchase up to 245,000 shares of the Company's Common Stock.

1988 Stock Plan: Pursuant to the 1988 Stock Plan, the Company may grant 
incentive stock options, nonqualified stock options and common stock purchase 
rights. The Company has reserved 32,354 shares of common stock for the issuance 
under this plan.

The options in all of the above plans generally become exercisable over a 
four-year period and expire over a period not exceeding ten years. The exercise 
price of an ISO generally shall not be less than the fair market value of Common
Stock on the date of grant. The exercise price of a non-qualified stock option 
shall not be less than 50% of the fair market value of Common Stock on the date
of grant.

A summary of the activity under the stock plans follows.

<TABLE> 
<CAPTION> 
                                                  WEIGHTED-             WEIGHTED-              WEIGHTED-  
                                                  AVERAGE               AVERAGE                AVERAGE  
                                                  EXERCISE              EXERCISE               EXERCISE 
                                        1998       PRICE     1997        PRICE      1996         PRICE     
                                   -------------------------------------------------------------------------
<S>                                <C>            <C>      <C>          <C>       <C>          <C>        
Outstanding at beginning of the                                                               
 year                                 389,810      $3.84   438,769      $ 5.75     78,731      $  1.78                           
Options assumed in connection
 with the Merger                                                                   34,205        28.78
Granted                               273,976       3.78    41,099        6.00    366,783         5.55    
Exercised                                (467)      1.77                            4,448         1.88
Canceled                              (56,415)      3.33   (90,058)      10.89    (45,398)       13.23 
                                   -------------------------------------------------------------------------

Outstanding at end of the year        606,904      $4.62   389,810      $ 3.84    438,769      $  5.75
                                   =========================================================================
</TABLE> 

                                     F-21


<PAGE>
 
                   Occupational Health + Rehabilitation Inc.

            Notes to Consolidated Financial Statements (Continued)

              (Dollar amount in thousands, except per share data)


9. BENEFIT PLANS (CONTINUED)

Related information for options outstanding and exercisable as of December 31, 
1998, under the stock plans, is as follows:


<TABLE> 
<CAPTION> 
                                                      WEIGHTED-AVERAGE
RANGE OF EXERCISE        OPTIONS        OPTIONS        REMAINING LIFE
     PRICES            OUTSTANDING    EXERCISABLE          (YEARS)  
--------------------------------------------------------------------------
<S>                    <C>            <C>             <C>  
  $1.77                    49,523       48,308            5.45
  $3.00                    91,190            0            9.08
  $3.50-$5.13             231,442       46,573            2.65
  $6.00                   231,949      108,602            8.28
  $8.75-$81.25              2,800        2,256            5.75
</TABLE> 


PRO FORMA INFORMATION FOR STOCK-BASED COMPENSATION

Pro forma information regarding net income and earnings per share, as if the 
Company had used the fair value method of SFAS 123 to account for stock options 
issued under its Plans, is presented below. The fair value of stock activity 
under these plans was estimated at the date of grant using the minimum value 
method for options granted prior to the date of the Merger (see Note 1) and the 
Black-Scholes option pricing model for options granted on and subsequent to the 
date of the Merger. The following weighted-average assumptions were used to 
determine the fair value for 1998, 1997 and 1996, respectively; a risk-free
interest rate of 5.3% in 1998 and 6.3% in 1997 and 1996 each year, an expected
dividend yield of 0% each year, an average volatility factor of the expected
market price of the Company's common stock over the expected life of the option
of 1.028 - 1.042 in 1998, .897 in 1997 and 1.276 for options granted between
June 7, 1996 and December 31, 1996, and a weighted-average expected life of the
options of six years.

For purposes of pro forma disclosures, the estimated fair value of options is 
amortized to expense over the related vesting period. Pro forma information is 
as follows:

<TABLE> 
<CAPTION> 
                                    1998      1997      1996
                                 -------------------------------
<S>                               <C>       <C>        <C>   
Pro forma net loss                $(1,660)  $(1,935)   $(2,281)
Pro forma net loss per share      $ (1.12)  $ (1.23)   $ (2.02)
</TABLE> 

                                     F-22




<PAGE>
 
                   Occupational Health + Rehabilitation Inc.

            Notes to Consolidated Financial Statements (continued)

             (Dollar amount in thousands, except per share data)


9. BENEFIT PLANS (CONTINUED)

401(K) PLAN

The Company has a qualified 401(k) plan for all employees meeting certain 
eligibility requirements. The Company contributes a stipulated percentage based 
on employee contributions. Company contributions to the 401(k) plan were 
$153, $132 and $67 during 1998, 1997 and 1996, respectively


                                     F-23


<PAGE>
 
SIGNATURES

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

                                        Occupational Health + Rehabilitation Inc

March 30, 1999

                                        By: /s/ John C. Garbarino
                                            ------------------------------------
                                            JOHN C. GARBARINO
                                            PRESIDENT, CHIEF EXECUTIVE OFFICER
                                            AND DIRECTOR

     PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

<TABLE> 
<CAPTION> 
         SIGNATURE                           TITLE                                             DATE
         ---------                           -----                                             ----
<S>                                          <C>                                          <C>             
    /s/ John C. Garbarino                    President, Chief Executive Officer           March 30, 1999  
----------------------------------           (principal executive officer)
      JOHN C. GARBARINO                                                   
                                                                                                        
                                                                                                        
    /s/ Richard P. Quinlan                   Chief Financial Officer,                     March 30, 1999  
----------------------------------           General Counsel              
       RICHARD P. QUINLAN                    (principal financial and accounting officer)                 
                                                          
                                                                                                          
     /s/ Edward L. Cahill                    Director                                     March 30, 1999  
---------------------------------                                                                         
       EDWARD L. CAHILL                                                                                   
                                                                                                          
    /s/ Kevin J. Dougherty                   Director                                     March 30, 1999  
---------------------------------                                                                         
       KEVIN J. DOUGHERTY                                                                                 
                                                                                                          
     /s/ Angus M. Duthie                     Director                                     March 30, 1999  
---------------------------------                                                                         
        ANGUS M. DUTHIE                                                                                   
                                                                                                          
    /s/ Donald W. Hughes                     Director                                     March 30, 1999  
---------------------------------                                                                         
       DONALD W. HUGHES                                                                                   
                                                                                                          
      /s/ Frank H. Leone                     Director                                     March 30, 1999  
---------------------------------                                                                         
         FRANK H. LEONE                                                                                   
                                                                                                          
    /s/ Steven W. Garfinkle                  Director                                     March 30, 1999  
---------------------------------            
       STEVEN W. GARFINKLE
</TABLE> 
<PAGE>
 
                                 EXHIBIT INDEX



EXHIBIT NO.                             DESCRIPTION
-----------                             -----------
 
 4.03 (b)      Letter Agreement by and between the Company and BankBoston, N.A.
               modifying certain terms of their Revolving Credit Agreement dated
               as of November 13, 1997 between the parties.
 
11.01          Statement re Computation of Per Share Earnings.
 
21.01          Subsidiaries of the Company.
 
23.01          Consent of Ernst & Young LLP.
 
27.01          Financial Data Schedule.