<PAGE>   1

================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                  FORM 10-KSB

(MARK ONE)

   [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
         THE SECURITIES EXCHANGE ACT OF 1934
         FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
   [ ]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
         THE SECURITIES EXCHANGE ACT OF 1934
         FOR THE TRANSITION PERIOD FROM              TO
                                        ------------    ------------

                         COMMISSION FILE NUMBER 0-22115

                                 -----------

                        COMPLETE WELLNESS CENTERS, INC.
       (EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)


                   DELAWARE                           52-1910135
       (State or other jurisdiction of      (I.R.S. Employer Identification
                incorporation                           Number)
               or organization)


             725 INDEPENDENCE AVENUE, S.E., WASHINGTON, D.C. 20003
             (Address of principal executive offices and zip code)


                                 (202) 543-6800
                          (Issuer's telephone number)

SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT:  none

SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:

                  Common Stock, $.0001665 par value per share
                   Redeemable Common Stock Purchase Warrants

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

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.  [X]

     The issuer's revenues for the year ended December 31, 1997 were
$9,006,874.

     The aggregate market value of all of the voting stock held by
non-affiliates outstanding at March 31, 1998, was $5,373,215.  The amount
was computed by reference to the average bid and asked prices of the Common
Stock as of March 31, 1998.

     As of March 31, 1998, 2,149,286 shares of Common Stock were outstanding,
and 1,036,776 Redeemable Common Stock Purchase Warrants were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Not applicable.

     Transitional Small Business Disclosure Format (check one): Yes [ ]  No [X]
================================================================================
<PAGE>   2
Complete Wellness Centers, Inc.
Consolidated Financial Statements
10 KSB December 1997



                               TABLE OF CONTENTS

<TABLE>
<S>              <C>
Part I

Item 1           Business
Item 2           Properties
Item 3           Legal Proceedings
Item 4           Submission of Matters to a Vote of Security Holders


Part II

Item 5           Market for Common Equity and Related Stockholder Matters
Item 6           Management's Discussion and Analysis
Item 7           Financial Statements
Item 8           Changes in and Disagreements with Accounts on
                         Accounting and Financial Disclosure


Part III

Item 9           Directors, Executive Officers, Promoters and Control Persons;
                         Compliance with Section 16(a) of the Exchange Act
Item 10          Executive Compensation
Item 11          Security Ownership of Certain Beneficial Owners and Management
Item 12          Certain Relationships and Related Party Transactions
Item 13          Exhibits and Reports on Form 8-K
</TABLE>
<PAGE>   3
                                     PART I

ITEM 1.  BUSINESS

(a) GENERAL DEVELOPMENT OF BUSINESS

     Complete Wellness Centers, Inc. (the "Company" or "CWC") was incorporated
under the laws of the State of Delaware in November 1994.  The Company
completed an initial public offering of Common Stock and Redeemable Common
Stock Warrants in February 1997.  The Company controls, either through 100% or
majority ownership, seven separate independent operating subsidiaries and is
the managing member of a limited liability corporation.  The Company provides
administrative support services to all its subsidiaries including: (1)
management services; (2) legal services; (3) accounting services; (4)
purchasing services; and (5) support services.  All of the subsidiaries are
focused in the health care industry and each delivers a unique product or
service sold to consumers directly or through their sister companies.

     Complete Wellness Medical Centers, Inc. ("CWMC") was incorporated under
the laws of the State of Delaware in August 1997.  The Company is a 100% owner
of CWMC.  CWMC develops multi-disciplinary medical centers ("Integrated Medical
Centers") and furnishes certain support services to such facilities.  The
Integrated Medical Centers combine, in one practice, at the same location,
traditional health care providers, such as physicians and physical therapists
and alternative health care providers, such as chiropractors, acupuncturists
and massage therapists.  At December 31, 1997 CWMC was managing 85 Integrated
Medical Centers in 19 States and had 54 additional agreements with
chiropractors to develop and manage 51 Integrated Medical Centers in 2
additional states.

     CWMC develops Integrated Medical Centers generally through affiliations
with chiropractors (the "Affiliated Chiropractors") and their existing
chiropractic practices.  Management endeavors to enter into an agreement with a
chiropractor who has an existing chiropractic practice in a convenient location
and who is an individual who has demonstrated the entrepreneurial skills to
build a practice.  The existing practice is used as a base for the development
of an Integrated Medical Center.  Typically, CWMC establishes a new Integrated
Medical Center by forming a medical corporation, which is a general business
corporation wholly-owned by the company or a professional corporation that is
physician-owned, depending upon the applicable state law.  The Affiliated
Chiropractor establishes a management company which contracts with CWMC to
provide day-to-day management of the Integrated Medical Center.

     CWMC's development strategy is to develop additional Integrated Medical
Centers in local or regional groups or clusters.  CWMC plans to continue to
develop Integrated Medical Centers through affiliations with chiropractors and
their existing practices and health clubs and intends to begin development of
Integrated Medical Centers in connection with corporations, government offices,
or other organizations, in which cases the Integrated Medical Centers would be
developed in places such as office buildings.

     Complete Billing, Inc. ("CBI") was incorporated under the laws of the
State of Delaware in May 1997.  The Company is a 100% owner of CBI.  CBI is a
health care billing company, which provides a full range of billing and
collecting services to medical and chiropractic clinics both inside the
Company's network and to unaffiliated doctors.  CBI contracts with its clients
on a fixed fee of collection basis, unless state law dictates otherwise, which
ranges from 5%-8% of collections.  CBI has regional locations in Florida,
Maryland and New Jersey.  At December 31, 1997 CBI had 19 contracts
representing 20 clinics in 8 states.

     Optimum Health Services, Inc. ("OHS"), formerly known as Complete Wellness
Independent Physicians Association ("CWIPA") was incorporated under the laws of
the State of Delaware in May 1997.  The Company holds an 86.67% interest in
OHS, with 13.33% ownership held by the management of OHS.  OHS is a health care
Management Services Organization (MSO) currently providing services to Health
Maintenance Organizations.  The management team joined Complete Wellness with
their goal of providing a comprehensive wellness model of care.  In addition to
developing provider networks, OHS delivers support services which include
accepting delegated claims, credentialing, utilization management, quality
assurance, marketing, and provider relations functions.

     OHS is a multi-disciplinary integrated delivery system.  OHS's 1998 focus
is in the Florida market where they have contracted with approximately one
thousand physicians (>20% being Primary Care Physicians).  In the state of
Florida, OHS has contracted more than two hundred complimentary care
practitioners in various modalities including but not limited to; acupuncture,
chiropractic, nutrition, massage therapy, yoga and tai chi.  OHS anticipates
expanding into additional states in 1999.  OHS typically contracts for a
percentage of premium or carve-out pricing for alternative care and wellness
products.  We provide the following wellness package of services under these
same arrangements:  smoking cessation, weight management, and complimentary
care education programs.  OHS has the ability to create innovative
relationships for all these services or for a subset thereof.

     OHS network development focuses on contracting in geographically
underserved areas.  These locations are new sites for payers to provide health
care access to their membership.  These sites provide payers with expansion
capabilities and improve member
<PAGE>   4
satisfaction.  In addition, these centers typically have patient bases not
previously enrolled in managed care programs.  This provides payers with an
opportunity to expand their member base to new populations which had previously
not had access to their products.

     OHS is one of the only companies in the country developing a health care
delivery system, which integrates alternative care practitioners under a
managed care setting.  The management team's experience in managed care makes
them uniquely qualified to tailor programs to meet the scrutiny of
qualification under insurance settings.  OHS has established credentialing
protocols and designs of benefit programs for inclusion under any type of
insurance arrangement.  OHS develops systems for inclusion as a Preferred
Provider Organization, an insured benefit rider, and as a service under
standard benefit programs.

     The inclusion of physician access and wellness products provides OHS with
market differentiation.  These value-added services which exceed those services
typically provided by Management Services Organizations both in quality and
quantity provide OHS with future growth opportunity.

     Complete Wellness Smoking Cessation, Inc. ("Smokenders") was incorporated
under the laws of the State of Delaware in July 1997.  The Company holds an
88.23% interest in Smokenders, with 11.77% ownership held by management of
Smokenders.  Smokenders was formerly owned by Oxford Health Plans and was
purchased from that company on July 31, 1997.  Smokenders markets a patented
"Learn to Quit" kit to end users through a national network of trained
facilitators.  Smokenders' customers include government agencies, corporations,
CWMC, CWIPA and individuals.

     Smokenders is an adult education program which has as its goal, not only
the cessation of smoking for its clients, but the opportunity to be comfortable
as a non-smoker.  The company was created in 1969.  Since it was founded, more
than a million people have successfully quit smoking using the Smokenders'
patented techniques.  The company is trademarked in more than 20 countries
around the world.

     The dynamics of the program recognizes the complexity of smoking addiction
and approaches the challenge of dealing with it comprehensively.  The program
is not based on pandering to the fears of smokers about health hazards or
death.  Scare tactics are not used.

     Smokenders currently delivers its services in the following  three ways:

     1.  The Smokenders traditional seminar program consists of seven weekly
         meetings, each one about an hour in length, in which clients are
         provided step-by-step instruction from a trained moderator about ways
         to modify and then eliminate their smoking habit.  In weekly
         assignments, clients learn about the nature of their addiction, the
         effects of nicotine on their body, and utilize exercises to reinforce
         the new habit of non-smoking.  They engage in group participation, are
         put into a buddy system with another smoker and are taught ways to cut
         back on their nicotine intake.

     2.  The Smokenders' "Train the Trainer" program is designed to be used in
         very large corporations and government agencies.  Under this format,
         Smokenders trains employees within the large organization to deliver
         the program themselves.  They learn in a day-long training seminar how
         to motivate smokers to quit and effectively guide smokers through the
         program.

     3.  Smokenders also markets a "Learn How To Quit" kit, which includes a
         set of audio tapes as well as a complementary work-book.  This program
         allows clients to achieve success in the privacy of their own home or
         workplace.

     A recent survey conducted by the Johns Hopkins University from the records
of people who attended the traditional seminar program found that 81% of those
who completed the program successfully quit smoking.  46% remained smoke-free
after one year, and 38% were still non-smokers after three years.

     The Smokenders system is currently marketed to hospitals, health clinics,
weight-loss centers, private corporations, the military services, and other
federal and state governmental organizations.

     Complete Wellness Weight Management, Inc. ("CWWM") was incorporated under
the laws of the State of Delaware in December 1997.  The Company owns 100% of
CWWM.  CWWM is made up of 56 weight loss centers formerly owned by
Nutri/System, L.P. CWWM agreed to purchase the assets of these 56 centers,
subject to certain objectives to be accomplished by January 31, 1998 which date
constituted the final closing of the purchased assets.  CWWM markets, in a
retail setting, food, medically supervised weight loss programs and nutritional
supplements.  Included in the asset purchase is the perpetual right to use the
Nutri/System name and logo.  The Nutri/System program has both a traditional
(non-medical) and medical program.

     The Nutri/System Program is designed to assist in the treatment of
obesity.  Nutri/System clients receive a comprehensive approach to weight loss
involving nutritionally balanced menu plans, wellness and exercise information
and one-to-one counseling sessions with a trained Medical Staff.
<PAGE>   5
     The Nutri/System Menu Plan is designed to provide a nutritionally
balanced, low fat approach to calorie reduction.  Health and wellness
information is offered through the Program Participant Manual that has been
designed to provide clients with information about lifestyle changes that can
benefit their overall health.  The Participant Manual also contains information
on exercise and activity, to encourage clients to include this component as
part of their Nutri/System Program.

     The Traditional Nutri/System Program offers a Maintenance Program that
monitors the clients continued progress after they have reached their Goal
Weight.  Providing support with health and wellness information in this
component of the program completes the inclusive Nutri/System.

     The Medical Program was designed to assist in the treatment of obesity
using a comprehensive approach to weight loss involving prescription
medications, nutritionally balanced menu plans, and wellness and exercise
information.  In addition, the Medical Program offers professional supervision
consisting of scheduled visits with both a Nurse and a Medical Doctor
Physician.

     Weight loss authorities currently believe that prescription medications
for the treatment of obesity should be used in combination with caloric
restriction, behavior modification and exercise.  Therefore the Medical Program
was developed using the traditional Nutri/System program as its foundation.  In
this approach, the Staff Physician will prescribe drug combinations to eligible
clients following an initial screening process and a medical assessment.  Since
the Staff Physician only monitors the client's health as it is affected by the
Medical Program, the client's personal physician or health care provider will
continue to manage the client's other medical needs.

     As with the Traditional Nutri/System Program, clients participating in the
Medical Program can utilize the individualized Nutri/System Menu Plan designed
to provide a nutritionally balanced, low fat approach to calorie reduction.
The Medical Program also provides a Maintenance Program that incorporates the
Traditional Nutri/System Maintenance Program with the medical component, thus
rounding out the comprehensive Medical Program.


(b) NARRATIVE DESCRIPTION OF BUSINESS

     The Company's operating strategy is to (i) provide consumers the
opportunity to obtain, and the convenience of obtaining, under the supervision
of a medical doctor, complementary traditional and alternative medical
treatments in one location, (ii) facilitate the efficient provision of high
quality patient care through the use of credentialing standards and
standardized protocols, (iii) establish Integrated Medical Centers in local and
regional clusters for purposes of obtaining managed care contracts, (iv) assist
in marketing the Integrated Medical Centers regionally and nationally on a
coordinated basis and furnish them management, marketing, financing and other
advice and support, and (v) achieve operating efficiencies and economies of
scale through the implementation of an integrated management information
system, the rotation of health care providers among Integrated Medical Centers,
increased purchasing power with suppliers, and standardized protocols,
administrative systems, and procedures.

     The Company itself is not authorized or qualified to engage in any
activity which may be construed or be deemed to constitute the practice of
medicine but is an independent supplier of non-medical services only. The
physicians and chiropractors are responsible for all aspects of the practice of
medicine and chiropractic and the delivery of medical and chiropractic services
(subject to certain business guidelines determined in conjunction with the
Company), including but not limited to diagnosis, treatment, referrals and
therapy. In connection with any managed care contracts it may arrange on behalf
of the Integrated Medical Centers, the Company will need to manage the
Integrated Medical Centers' utilization of medical services to patients. If
under such contracts, the Integrated Medical Centers accept responsibility for
the treatment of their patients by specialists or at hospitals, the Company
will also need to manage the practitioners' referral patterns with respect to
specialty physician and hospital services.  The Company would only do so,
however, for payment purposes and would not, through such process, interfere
with the professional judgment of a medical practitioner or prohibit a
practitioner from providing any medical services.

     The objective of the Company's operating strategy is to facilitate the
provision of a high level of traditional and alternative medical care to
patients in a convenient, cost-effective manner. Key elements of the Company's
operating strategy are:

     One Location.  The Company seeks to provide consumers the opportunity to
obtain, and the convenience of obtaining, under the supervision of a medical
doctor, complementary traditional and alternative medical treatments in one
location. The Company believes that alternative medicine is growing in
popularity, and that supervision of treatment by a medical doctor may alleviate
some patient and third party payor concerns.

     Facilitate the Efficient Provision of High Quality Care.  All health care
services at an Integrated Medical Center are provided by health care
practitioners under the supervision of a licensed medical doctor. The Company
seeks qualified and reputable medical
<PAGE>   6
doctors. The Company further seeks to facilitate the efficient provision of
high quality care through the use of credentialing and standardized protocols.
Additionally, in many states, only medical doctors are permitted to order
certain laboratory and radiological tests. The Company believes that
supervision by a medical doctor and a medical doctor's access to more
sophisticated diagnostic testing services will enhance the quality of patient
care.

     Establish Networks of Integrated Medical Centers to Obtain Managed Care
Contracts.  A key component of the Company's operating strategy is to attract
both health care practitioners and managed care payors. The Company seeks to
attract health care practitioners by, among other things, providing them
greater access to managed care contracts than they could attain independently
and relieving them of certain administrative responsibilities. The Company
intends for its local and regional clusters of Integrated Medical Centers to
attract managed care contractors by providing single, integrated points of
market entry, thereby enabling managed care payors to more efficiently contract
for the provision of health care services for patient populations. The Company
within its OHS subsidiary credentials its licensed health care practitioners
through a credentialing function accredited by the National Committee for
Quality Assurance, has drafted new and improved standardized protocols and will
develop and implement a utilization management program, for the purpose of
attracting and managing its managed care contracts. The Company has signed five
(5) such contracts and will be implementing them in 1998.

     Provide Advice and Assistance. The Company intends to develop and
implement advertising and marketing programs for the Integrated Medical Centers
primarily at the regional and national levels, utilizing television, radio, and
print advertising as well as internal marketing promotions. The name of each
Integrated Medical Center includes the words "Complete Wellness Medical Center
(SM)." Each Integrated Medical Center displays signage bearing such words, or
the words "Complete Wellness Center (SM)." The Company's goal is to achieve
"brand name" awareness of the Integrated Medical Centers. There is no
assurance, however, that the Company will be able to realize this goal. An
individual Integrated Medical Center may also advertise its services locally,
and the Company provides advice in that regard upon request. The Company also
agrees to furnish the Integrated Medical Centers management services, financing
and other advice and support. By doing so, the Company seeks to relieve
providers, to a limited extent, from certain burdens of administering and
managing a medical practice.

     Achieve Operating Efficiencies and Economies of Scale.  The Company
intends and has organized its Integrated Medical Centers into regional groups
or clusters to utilize employees and serve patients more effectively, to
leverage management and other resources, to increase purchasing power with
suppliers, and to facilitate the development of networks of affiliated
physicians, chiropractors, and other health care practitioners.

     The Company plans to continue to develop Integrated Medical Centers
primarily by affiliating with chiropractors and their existing chiropractic
practices. Management endeavors to enter into agreements with chiropractors who
are located in convenient locations, and who have demonstrated the
entrepreneurial skills to build a practice. The Company believes that such
chiropractors will consider affiliation with Integrated Medical Centers to be
attractive because they may have greater access to managed care contracts in
the future through the Company and its network of Integrated Medical Centers,
will be relieved of certain administrative burdens, and may have the
opportunity to increase their practice income. An Integrated Medical Center is
usually established at the same location as the existing chiropractic practice,
although it could be established at a new or separate location.

     The Company has developed Integrated Medical Centers in connection with
health clubs. In such cases, the Integrated Medical Center would be established
at a location (such as a health club or office building) provided, leased or
licensed to the Company by the other party to the alliance. The Company would
in turn seek to affiliate with a chiropractor who has an existing chiropractic
practice located near the Integrated Medical Center. The chiropractor would
maintain his or her existing practice at its existing location, but would
arrange to see patients at the Integrated Medical Center as well. If the
Company were unable to affiliate with a chiropractor with an existing practice
located nearby, a chiropractor without an existing practice would take over and
work on site at the Integrated Medical Center.

     Various state and federal laws regulate the relationship between providers
of health care services and physicians, and, as such, the Company is subject to
these laws and regulations. The Company is also subject to laws and regulations
relating to business corporations in general.  During the past year and
continuing into 1998, the Company has, through its legal counsel, performed a
detailed regulatory review in each state in which the Company has established
Integrated Medical Centers.  The Company believes its operations are in
compliance with applicable laws. Every state imposes licensing requirements on
individual physicians and on certain other types of health care providers and
facilities. Many states require regulatory approval, including licenses to
render care or certificates of need, before establishing certain types of heath
care facilities or offering services which entail the acquisition of expensive
medical equipment.

     The laws of many states prohibit business corporations from engaging in
the practice of medicine, such as through employment arrangements with
physicians. These laws vary from state to state and are enforced by the state
courts and regulatory authorities with broad discretion. The Company does not
employ physicians to practice medicine, does not represent to the public that
it offers medical services, and does not control or interfere with the practice
of medicine by physicians at the Integrated Medical Centers.  The Medcorps are
formed as general business corporations wholly-owned by the Company in states
in which the Company believes
<PAGE>   7
general business corporations are permitted to own medical practices. In most
states, the Medcorps are formed as professional corporations owned by one or
more medical doctors licensed to practice medicine under applicable state law.

     The laws of some states prohibit physicians from splitting professional
fees. These statutes are sometimes quite broad and as a result prohibit
otherwise legitimate business arrangements. Laws in all states regulate the
business of insurance and the operation of health maintenance organizations, or
HMOs. Many states also regulate the establishment and operation of networks of
health care providers. There are a number of federal laws prohibiting certain
activities and arrangements relating to services or items reimbursable by
federal or state funded health care programs. Certain provisions of the Social
Security Act, commonly referred to as the "Anti-kickback Amendments," prohibit
the offer, payment, solicitation or receipt of any form of remuneration either
in return for the referral of federal or state health care reimbursement
program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services
covered by such federal or state health care funded programs.

     Federal law and the laws of many states regulate the sale of franchises.
Franchise laws require, among other things, that a disclosure document be
prepared and given to prospective franchisees. The Company believes that
Medcorps formed as business corporations wholly-owned by the Company or by
Complete Wellness Centers, L.L.C., a Delaware limited liability company which
is managed by the Company, are not subject to such laws. Medcorps formed as
physician-owned professional corporations may be subject to them. If such laws
are deemed to apply, the Company would be required to prepare and deliver a
disclosure document to the physician that owns the professional corporation,
who may be an employee of the Company. Although the Company believes that its
form of relationship with Medcorps and Admincorps is not the type intended to
be covered by such laws, the Company has engaged counsel to advise it in this
regard. There can be no assurance that review of the Company's business by
regulatory authorities will not result in a determination that could adversely
affect the operations of the Company or require structural and organizational
modifications of the Company's form of relationship with Integrated Medical
Centers that could have an adverse effect on the Company.

     The managed health care industry, including the provider practice
management industry, is highly competitive. The Company competes with other
companies for physicians and other practitioners of health care services as
well as for patients. The Company competes not only with national and regional
provider practice management companies, but also with local providers, many of
which are trying to combine their own services with those of other providers
into integrated delivery networks. Certain of the companies are significantly
larger, provide a wider variety of services, have greater financial and other
resources, have greater experience furnishing provider practice management
services, and have longer established relationships with buyers of these
services, than the Company, and provide at least some of the services provided
by the Company.

     The Company's overall strategy is to integrate the services of each of the
subsidiaries into the Medical Centers.  During 1998, the Company will make
available the products and services of the smoking cessation program of
Complete Wellness Smoking Cessation as well as the weight loss programs of
Nutri/System to its Integrated Medical Centers.  Also, it is planned to
transition at least half of the CWWM stores and turn them into Integrated
Medical Centers.

     The Company has developed and is in the process of implementing a
corporate computer network which ties together the major locations of the
Company to facilitate data transmission, e-mail, Internet access, Medical
Center communications and access to management information and data.  It is
expected that all entities of the Company and its affiliates will be integrated
into the system during 1998.

     As of February 28, 1998, the Company had 147 employees and the operating
Medcorps had a total of approximately 400 employees.  The Company's 147
employees consisted of 27 in finance and administration and 120 in sales and
marketing, mostly in its weight management subsidiary.

ITEM 2.  PROPERTIES

     The Company does not own any property.  Effective April 1, 1998, the
Company's executive and administrative offices will be located in approximately
6,300 square feet of office space in Washington, D.C.  The Company will pay
$10,000 per month rent on a 7 year sublease from Crestar Bank.  It also leases
approximately 1,395 square feet of office space in West Palm Beach, Florida.
The lease term began in March 1998 and expires in February 2000.  The current
monthly rental rate is $1,950 plus 6% sales tax.  Both facilities are in
satisfactory condition and are adequate for the Company's use.
<PAGE>   8
ITEM 3.  LEGAL PROCEEDINGS

     The Company or its affiliates currently have three legal proceedings in
various stages of litigation.  A doctor has initiated action against an
Integrated Medical Center and the Company for contested back wages.  Also, a
therapist has initiated a proceeding against another Medical Center for
contested back wages.  The Company has initiated legal action against two
Florida doctors for breach of their agreement with the Company.

     Also, in November, 1997 federal agents served search warrants and
subpoenas on the Company and four of its subsidiaries and affiliates.  Company
records and files were seized.  At this time, the government has not brought
any action against the Company or any of its subsidiaries, or personnel.  The
investigation is ongoing at this time.


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

     At the Annual Meeting held on June 10, 1997, the following items were
submitted to the security holders.

     1.  to elect a Board of Directors who shall hold office until the next
         Annual Meeting or until their successors are duly elected and shall
         have qualified ("Proposal One");

     2.  to ratify the selection of Ernst & Young LLP as independent
         accountants for the fiscal year ending December 31, 1997 ("Proposal
         Two");

     3.  to consider and vote upon a proposal to approve an amendment to the
         Company's 1996 Stock Option Plan to increase the number of shares of
         the Company's Common Stock that may be issued under the Option Plan by
         an additional amount of 200,000 shares of the Company's Common Stock
         ("Proposal Three"); and

     4.  to transact such other business as may properly come before the
         Meeting or any adjournments thereof.
<PAGE>   9
                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(a) MARKET INFORMATION

     The Company's Common Stock and Redeemable Common Stock Purchase Warrants
are traded on the Nasdaq SmallCap Market (Nasdaq SCM).


     The following table states the high and low quotation information by
quarter for the Company's Common Stock and Warrants based on actual trading, as
reported on Nasdaq SCM.

<TABLE>
<CAPTION>
                                 COMMON STOCK

                                            HIGH      LOW
                                            ----      ---
                        <S>                 <C>       <C>
                        1st Quarter, 1997   $ 6.00    $ 3.25
                        2nd Quarter, 1997   $ 5.00    $ 3.125
                        3rd Quarter, 1997   $ 4.375   $ 3.00
                        4th Quarter, 1997   $ 4.375   $ 1.375
</TABLE>

<TABLE>
<CAPTION>
                                   WARRANTS

                                            HIGH      LOW
                                            ----      ---
                        <S>                 <C>       <C>
                        1st Quarter, 1997   $ 1.43    $ 0.68
                        2nd Quarter, 1997   $ 1.625   $ 1.00
                        3rd Quarter, 1997   $ 2.250   $ 1.125
                        4th Quarter, 1997   $ 2.125   $ 0.75
</TABLE>


(b) HOLDERS

     As of December 31, 1997, there were 358 holders of record of the Company's
Common Stock and approximately 244 holders of record of its Redeemable Common
Stock Purchase Warrants.

(c) DIVIDENDS

     Holders of the Company's Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. There has been no declaration of dividends to date, and
none is expected in the foreseeable future. The Company anticipates that future
earnings will be retained to finance future operations and expansion. The
payment of dividends is within the discretion of the Board of Directors of the
Company and will depend on the Company's earnings, if any, capital
requirements, financial condition, and such other factors as are considered to
be relevant by the Board of Directors from time to time.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS

GENERAL

     Statements included in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" Section, and in other sections
of this Report and in prior and future filings by the Company with the
Securities and Exchange Commission, in the Company's prior and future press
releases and in oral statements made with the approval of an authorized
executive which are not historical or current facts are "forward looking
statements" made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
presently anticipated or projected. The Company wishes to caution readers not
to place undue reliance on any such forward-looking statements, which speak
only as of the date made. There are important risk factors that in some cases
have affected and in the future could affect the Company's actual results and
could cause the Company's actual financial and operating performance to differ
materially from that expressed in any forward-looking statement. The following
discussion and analysis should be read in conjunction with the Financial
Statements and notes appearing elsewhere in this report.

     The Company was established in November 1994. From its inception until
March 1995, the Company raised funds privately and developed the corporate
infrastructure, protocols, policies and procedures required to commence its
plan to develop multi-disciplinary medical clinics. In March 1995, the Company
began implementing the initial stages of its business plan. The Company formed
Complete Wellness Centers, L.L.C. ("CWC LLC"), a Delaware limited liability
company, as a vehicle for raising capital needed to open Integrated Medical
Centers. The Company is the managing member of CWC LLC and has a 1% equity
interest. The Company has obtained irrevocable and permanent voting proxies
from the holders of a majority of ownership interests in CWC LLC. The Company
consolidates the financial statements of CWC LLC in its financial statements.
<PAGE>   10
     Pursuant to an agreement entered into in July 1995, CWC LLC purchased
selected assets of a chiropractic practice for the purpose of establishing the
Company's first Integrated Medical Center in conjunction with a newly formed,
wholly-owned subsidiary of CWC LLC, Complete Wellness Medical Center of
Fredericksburg, Inc. ("CWC Fredericksburg"). Operations began at CWC
Fredericksburg on September 1, 1995.

     The Company began pursuing its primary development strategy in early 1996.
This strategy involves entering into an agreement with one or more
chiropractors and their existing chiropractic practices and Admincorps. The
chiropractor or existing chiropractic practice leases the office space and
equipment utilized by the existing chiropractic practice to the Company. The
chiropractor then incorporates the Admincorp, with which task the Company now
assists, and causes the Admincorp to ratify the agreement. In general, the
Admincorp assumes responsibility for the daily management functions of the
Integrated Medical Centers. The Company agrees to furnish the Admincorp certain
services, such as assistance with advertising, other practice development
activities, and medical doctor recruitment, to help the Admincorp perform such
daily management functions. The Company then forms the Medcorp and enters into
a long-term management agreement with the Medcorp to provide certain
administrative and management services. In addition, the Company subleases the
existing chiropractic practice's office space and equipment to the Medcorp. The
Medcorp employs the Affiliated Chiropractor(s) and one or more medical doctors.
Depending on the needs of the patient base, the Medcorp may also employ one or
more other traditional or alternative health care providers.

     The Company charges the Medcorp management fees for the goods and services
it provides the Medcorp. Such fees are generally based on a periodic
determination of the fair market value of such goods and services. The Company
also subleases the office space and equipment to the Medcorp for estimated fair
market value. With respect to Integrated Medical Centers that serve patients
covered by any federal or state funded health care program and certain other
Integrated Medical Centers, the management fees are pre-set for one year for
flat dollar amounts that represent the fair market value of the goods and
services the Company directly furnishes the Medcorp and of the services the
Company indirectly furnishes the Medcorp through its arrangement with the
Admincorp. The Admincorp charges the Company a monthly fee equal to the sum of
the management fees and rent that the Company charges the Medcorp, less a
specified fixed amount, however, with respect to certain Integrated Medical
Centers. In general, the Company charges the Admincorp a monthly integration
fee that is, depending on various factors, 9% to 20% (if the initial term of
the agreement is five years) or 10% to 15% (if the initial term of the
agreement is ten years) of the sum of (i) the management fee and rent that the
Company charges the Medcorp and (ii) the Medcorp's permissible expenses, until
the sum reaches $300,000 to $500,000 in any one year, and 10% of the sum for
the remainder of that year. (The "Integration Date" is the date on which a
medical doctor first sees a patient for an Integrated Medical Center.) With
respect to Integrated Medical Centers that serve patients covered by federal or
state funded health care programs and certain other Integrated Medical Centers,
the integration fees are fixed dollar amounts equal to estimated fair market
value of services provided by the Company to the Integrated Medical Centers,
subject to a 15% cap. The Company also may charge certain Admincorps an
operations fee of $250 per month, subject in certain cases to delayed or
contingent effectiveness. Except for the operations fee, however, the fees are
simply accrued, and actual payment of them is not required, unless and until,
and then only to the extent, that the Medcorps collect on their accounts
receivable in excess of certain permitted expenses, such as payroll expenses.
If the agreement with the Admincorp is terminated, the Admincorp is generally
entitled to receive from the Company 80% of the accounts receivable then due
the Company from the Medcorp, less the balance then due the Company from the
Admincorp, subject to the Medcorp collecting on its accounts receivable.  In
the case of certain Integrated Medical Centers, however, the Admincorp is
entitled to a pro rata portion of the Medcorp's accounts receivable as of the
date of termination, if and when collected.

     The Company's agreements with Affiliated Chiropractors and entities
controlled by them relating to the operation and management of the Integrated
Medical Centers are generally for initial terms of five or ten years. They may
be renewed in five year increments, up to four times, by mutual consent. An
Affiliated Chiropractor may terminate such an agreement if the Company
materially breaches it and, if the breach is correctable, the Company fails to
cure the breach within ten days after written notification. Agreements with
respect to four of the Integrated Medical Centers under management are also
terminable by the Affiliated Chiropractor if, for example, the combined
revenues of the Integrated Medical Center and existing chiropractic practice
during the first year after a start-up phase do not exceed 110% of the revenues
of the Affiliated Chiropractor's existing chiropractic practice for the one
year preceding the date the Affiliated Chiropractor agreed in writing to
develop the Integrated Medical Center in conjunction with the Company. The
start-up phase is generally three months following the Integration Date. The
loss of a substantial number of such agreements, or the loss of a substantial
number of Affiliated Chiropractors, would have a material adverse effect on the
Company.

     The Company currently plans to use this model for Integrated Medical
Centers to be developed pursuant to its expansion strategy, including those in
connection with strategic alliances with health clubs, corporations, government
offices, or other organizations. In the case of a strategic alliance, however,
office space for the Integrated Medical Center would be leased or licensed from
the other party to the strategic alliance rather than from the Affiliated
Chiropractor or his existing chiropractic practice, and the equipment would be
leased or purchased. In this regard, the Company entered into a master license
agreement with Bally Total Fitness Corporation in September 1996 to develop
Integrated Medical Centers within selected Bally Total Fitness Corporation
health clubs throughout the United States.  The Company has not yet proceeded
with the implementation of the agreement due to delay in selecting the pilot
site and Bally's deferral awaiting the outcome of the current government
investigation.

<PAGE>   11
     As of December 31, 1997, the Company was managing 85 Integrated Medical
Centers. The Company ceased operating seven Integrated Medical Center and plans
to dissolve the related Medcorps after having terminated its agreement with the
Affiliated Chiropractors and Admincorps. The Company anticipates no material
adverse financial effect as a result of such terminations. Of the remaining 78
Integrated Medical Centers, all were developed through CWC, Inc. in 1997.

     The Company integrated many of its existing Integrated Medical Centers
within a few weeks after the Affiliated Chiropractors entered into agreements
with the Company to develop such Integrated Medical Centers. The Company is now
taking up to six months to integrate clinics due to the substantial number of
agreements it has pending with chiropractors to develop Integrated Medical
Centers.

     The cost to the Company to develop an Integrated Medical Center not
connected with a strategic alliance has averaged $10,000.  This cost has
consisted of such things as computer software, legal fees, professional
credentialing, training, an administrative starter kit and travel. The Company
believes that the average cost to the Company to develop an Integrated Medical
Center in connection with a strategic alliance to be up to $150,000. These
funds are expected to be used for leasehold improvements, equipment,
professional salaries, information systems and working capital.

     The Company may from time to time advance additional funds to the Medcorps
to fund working capital requirements. If the Company does make such an advance,
the advance will bear interest (the current rate being 10% per annum), will be
secured by such collateral as the Company deems appropriate, and will be
repayable before the expiration of the initial term of the Company's agreement
with the Affiliated Chiropractor and the Admincorp.

     The Company intends to develop no fewer than 50 additional Integrated
Medical Centers by December 31, 1998. However, there can be no assurance that
the Company will develop the Integrated Medical Centers with respect to which
it had agreements with chiropractors as of December 31, 1997, will be able to
identify and recruit a sufficient number of additional chiropractors, or that
the average cost to the Company to develop Integrated Medical Centers will not
be greater than those discussed above.

     The Integrated Medical Centers developed prior to the date of the
completion of the IPO were financed by the issuance of the Company's notes,
shares of Common Stock, and shares of preferred stock, and by the sale of
membership interests in CWC LLC. The Integrated Medical Centers intended to be
developed by December 31, 1998 are expected to be financed by internal cash
flow of the Company and additional financing if necessary.

     During May 1997, the Company incorporated three new wholly owned
subsidiaries. Complete Wellness Research Institute, Inc., ("CWRI"), Complete
Wellness Education, Inc., ("CWEI"), both corporations of the state of Delaware,
and Complete Billing, Inc., ("CBI"), a state of Florida corporation. Two of the
three companies started operations in May 1997. CWEI has not yet begun
operations. CWRI provides clinic research and studies to pharmaceutical,
vitamin, natural product and medical device manufactures' within the Company's
network of clinics and has had limited operational results in 1997. CWEI,
through its consortium of nationally recognized doctors and authors, will
provide education and wellness articles and periodicals to national
publications and publishers. CBI is a healthcare billing company, which
provides services to medical and chiropractic clinics, both inside the
Company's clinic network and to unaffiliated doctors. Included in the Company's
September 30, 1997 consolidated financial statements are the results of
operations of these companies.

     Also, during May 1997 the Company entered into an agreement to become the
majority shareholder of a new company, Complete Wellness Independent Physicians
Association, Inc., ("CWIPA"), a Delaware corporation now named Optimum Health
Services, Inc. ("OHS").  The Company holds an 86.67% stake in CWIPA, with
13.33% ownership held by the management of CWIPA. CWIPA plans to build a
network of primary, specialty, hospital and ancillary healthcare providers,
including the Company's network of clinics, to attract managed care contracts,
Medicare, Medicaid and federal and state government contracts and self funded
corporation contracts. CWIPA began developing its provider network in June
1997.  CWIPA has entered into contracts to provide access to its network in
early 1998.

     During July 1997, a subsidiary of the Company acquired all of the
operating assets and business of Oxford Health Plan's Smokenders program for
$50,000. The subsidiary, Complete Wellness Smoking Cessation, Inc.,
("Smokenders") also agreed to pay Oxford Health Plan a royalty of 5% on gross
revenues for a 10 year period. In forming Smokenders, the Company contributed
$50,000 cash and a commitment to provide working capital as needed in an amount
not to exceed $198,000 in return for 88.23% of the Common Stock. Robert J.
Mrazek, the CEO of Smokenders and a director of the Company is to contribute
$22,000 in promissory notes in return for 11.77% of the common stock. The
promissory notes from Mr. Mrazek will accrue interest at 8%. Unpaid interest
and principle on the promissory notes will be payable no later than September
30, 2000. Smokenders plans to market its smoking cessation behavioral
modification program to corporations, federal and state government agencies and
individuals as well as seek strategic alliances with pharmaceutical companies
to develop an adjunct product for nicotine replacement therapies. Additionally,
the Smokenders program will be offered in the Company's Integrated Medical
Centers in 1998.

     On September 22, 1997, the Company signed a letter of intent with
Nutri/System, L.P. to acquire a national network of 147 weight
<PAGE>   12
management centers and RxPress, Inc., a mail order pharmacy. The acquisition
was subject to signing of a definitive agreement, the completion of due
diligence, approval by both boards, and the Company obtaining necessary
financing for the completion of the acquisition. In anticipation of a
definitive agreement, the Company placed a deposit with Nutri/System, L.P. in
the amount of $150,000 and received an exclusive right to acquire a minimum of
seven centers, of the Company's choice, currently owned by Nutri/System, L.P.
for one dollar each in the event this acquisition is not consummated;
otherwise, the deposit would be applied to the final acquisition.  In January,
1998, the Company acquired 56 weight loss centers from Nutri/System, L.P. for
the $150,000 and the assumption and assignment of the outstanding lease
obligations of the centers of approximately $320,000.


RESULTS OF OPERATIONS

     Twelve months ended December 31, 1997 compared to twelve months ended
December 31, 1996:

     Revenue.  During the twelve months ended December 31, 1997 and December
31, 1996, the Company had total revenue of $9,006,874 and $1,338,085,
respectively. The increase of $7,668,789 was due primarily to the addition of
78 Integrated Medical Centers after December 1996.

     Salary and Consulting Costs.  During the twelve months ended December 31,
1997 and December 31, 1996, the Company incurred salary and consulting costs of
$3,116,061 and $733,367, respectively. The increase of $2,382,694 was due to an
increase of $1,443,337 in costs resulting from the hiring of additional
employees at the corporate headquarters, at the new subsidiaries and the
Integrated Medical Centers, an increase of $191,511 in compensation expense
resulting from the grant of stock options and warrants to purchase Common
Stock, the fair market value of which exceeded their exercise price, and an
increase of $288,590 resulting from consulting fees in connection with the
development of corporate infrastructure and the operation of Integrated Medical
Centers.

     Management Fees.  During the twelve months ended December 31, 1997 and
December 31, 1996, the Company incurred management fees of $3,850,112 and
$468,991, respectively. These are fees that are paid to the Affiliated
Chiropractors' management companies for managing the day-to-day operations of
the Integrated Medical Centers. The fees are paid when the accounts receivable
of the Medcorps are collected by the Medcorps. The increase of $3,338,121 was
due primarily to the addition of 78 Integrated Medical Centers after December
1996.

     Rent.  During the twelve months ended December 31, 1997 and December 31,
1996, the Company incurred rent expenses of $139,081 and $102,149,
respectively. Rent consists of amounts paid for office space and certain
equipment by the Company and the Medcorps.  Rent for space and equipment for
the Integrated Medical Centers is paid when the accounts receivable of the
Medcorps are collected by the Medcorps. The increase of $36,932 was due
primarily to the addition of 78 Integrated Medical Centers after December 1996.

     Advertising and Marketing.  During the twelve months ended December 31,
1997 and December 31, 1996, the Company incurred advertising and marketing
expenses of $80,616 and $75,907, respectively. The increase of $4,709 was
attributable primarily to additional advertising for marketing and recruitment
purposes.

     Bad Debt Expense.  During the twelve months ended December 31, 1997 and
December 31, 1996 the Company incurred bad debt expense of $3,232,111 and
$301,618, respectively. The increase of $2,930,493 was due to an increase in
reserves for doubtful accounts of $3,682,286 as a result of the addition of 78
Integrated Medical Centers.

     General and Administrative.  During the twelve months ended December 31,
1997 and December 31, 1996, the Company incurred general and administrative
expenses of $2,775,886 and $1,025,327, respectively. The increase of $1,628,634
was due primarily to the addition of 78 Integrated Medical Centers after
December 1996 and consists of an increase of (i) $318,684 in accounting costs
and in legal costs, (ii) $22,711 in royalty costs associated with its Smokender
subsidiary, (iii) $732,721 in various costs, such as automobile, travel and
entertainment, telephone, bank services, and insurance, (iv) $75,000 in costs
attributable to a bridge financing completed in December 1997, and (v) $74,851
in costs attributed to acquisition, commissions, and bonuses.

     Depreciation and Amortization.  During the twelve months ended December
31, 1997 and December 31, 1996, the Company incurred depreciation and
amortization expense of $ 89,245 and $36,698, respectively. The increase of
$52,547 resulted from the addition of fixed assets, primarily computer software
and equipment, which tend to have depreciable lives of five years or less.

     Interest Income. During the twelve months ended December 31, 1997 and
December 31, 1996, the Company had interest income of $88,499 and $12,076,
respectively. The increase of $76,423 resulted from the investment of funds as
a result of the Company's Initial Public Offering in a series of short term
securities.

     Interest Expense. During the twelve months ended December 31, 1997, and
December 31, 1996, the Company had interest
<PAGE>   13
expenses of $31,041 and $59,094, respectively. The decrease of $28,052 resulted
from the retirement of the bridge financing loan repaid in February 1997.

     During 1996, the losses incurred by the consolidated CWC, LLC allocable to
the minority interest owners of the CWC, LLC, eliminated all net equity of the
minority interest owners. Accordingly, the Company has reflected 100% of the
operations of the CWC, LLC in its results of operations, without allocation to
the minority interest owners. In addition, the Company's investments in
Complete Wellness Smoking Cessation, Inc. represents 100% of the equity funding
of that entity. The Company has reflected 100% of the operations, assets, and
liabilities of the subsidiary due to the lack of minority interest investment
into the Company. The Company's investment in Optimum Health Services, Inc. was
made in conjunction with an investment by the minority interest owners. The
Company has included the effects of an allocation of approximately $42,000 of
the net losses incurred by Optimum Health Services, Inc. for the year ended
December 31, 1997 based on the minority interest owners investment in and
percentage ownership of Optimum Health Services, Inc.

     The Company has evaluated its tax position as of December 31, 1997 and its
expected tax position for the next three to five years and determined that,
based on assumptions and estimates utilized in its evaluation, it is more likely
than not that the Company will not be able to realize the economic benefits of
net operating losses incurred and certain other deferred items. Accordingly,
the Company has recorded a valuation allowance representing 100% of the net
deferred tax assets and has recognized a net tax provision of zero.

SEASONALITY

     The Company believes that the patient volumes at its Integrated Medical
Centers are not significantly affected by seasonality.


LIQUIDITY AND CAPITAL RESOURCES

     The Company has experienced net losses, negative cash flow, a deficit in
working capital, and an accumulated deficit each month since its inception. For
the years ended December 31, 1997 and December 31, 1996 the Company had
incurred a net loss of $(4,176,433) and of $(990,693), respectively. At
December 31, 1997, the Company had a working capital deficit of ($291,723), and
an accumulated deficit of $(5,364,415). Net cash used in operations for the
years ended December 31, 1997 and December 31, 1996 was $(3,320,204) and
$(1,117,079), respectively. Negative cash flow for each period was attributable
primarily to net losses in each of the periods and increases in accounts
receivable net of accounts payable and other current liabilities. For the years
ended December 31, 1997 and December 31, 1996, the Company used $370,680 and
$194,989, respectively, for purchases of equipment.

     From November 1994 to August 1996 development costs, capital expenditures
and working capital needs of the Company were primarily financed through the
issuance of notes, shares of Common Stock, and shares of preferred stock of the
Company.

     The Company has financed certain start-up operations through the sale of
minority interest in those operations. In 1996, approximately $470,000 was
raised through a private placement of CWC LLC Class A units. In 1997,
approximately $50,000 was raised through the sale of common stock to management
of CWIPA.

     In August 1996, the Company completed the Bridge Financing pursuant to
which it issued (i) an aggregate of $1.1 million principal amount of secured
promissory notes (the "Bridge Notes") that bore interest at the rate of 12% per
annum, were payable upon the earlier of the closing of the IPO or June 30,
1997, and were secured by substantially all of the Company's assets and (ii)
warrants entitling the holders to purchase that number of shares of Common
Stock determined by dividing the principal amount of the Bridge Notes by the
price per share of Common Stock offered in the IPO (the "Bridge Warrants"). The
Company agreed that the Bridge Warrants and the shares of Common Stock issuable
upon exercise of the Bridge Warrants would be included in the registration
statement for the IPO. A total of 183,333 shares of Common Stock were issuable
upon exercise of the Bridge Warrants at an exercise price of $.003 per share.
Proceeds of the Bridge Financing were used for the development of additional
Integrated Medical Centers, working capital, and general corporate purposes.
The Company also issued a warrant to purchase 3,333 shares of Common Stock to a
broker-dealer who acted as a placement agent for a portion of the Bridge
Financing. The fair value of the Bridge Warrants and broker/dealer warrants,
$5,920, was recognized as a discount on the Bridge Notes of which $3,920 was
amortized through December 31, 1996.

     On February 24, 1997, the Company successfully completed an initial public
offering of 1,000,000 shares of common stock and 1,000,000 redeemable common
stock purchase warrants from which it received net proceeds, after giving
effect to the underwriting discount and non-accountable expenses, of
approximately $5,281,000. The offering proceeds were received by the Company in
February 1997. In addition, the Company incurred approximately $595,000 in
transaction costs in connection with the offering.

     On March 20, 1997, the underwriter exercised 36,776 redeemable common
stock purchase warrants from a possible 150,000 included in the over-allotment
option. After giving effect to the underwriting discount, the Company received
approximately $3,200 in March 1997.

     On December 23, 1997, the Company completed a Bridge Financing of
$500,000. This temporary financing was used in the lease payment for the
acquisition of assets for Complete Wellness Weight Management, Inc. On January
23, 1998, the $500,000 Bridge Loan was converted to Preferred Stock. (See Note
14, subsequent events). Interest expense on this loan was $1,315 in 1997.

     The Company intends to develop no fewer than 50 Integrated Medical Centers
(including the 50 for which it had agreements with chiropractors as of December
31, 1997) during 1998. The average cost to the Company to develop an Integrated
Medical Center not connected with a strategic alliance is approximately
$10,000. There can be no assurance, however, that the Company will develop the
Integrated Medical Centers with respect to which it had agreements with
chiropractors as of December 31, 1997, will be able to identify and recruit a
sufficient number of additional chiropractors, or that the average costs to the
Company to develop Integrated Medical Centers will not be greater than those
mentioned above.

     The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
operational equipment or internal computer software that have time-sensitive
programs may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruption of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities. Similar failures in the Company's medical clinic, independent
physician's network, or medical billing company operations could result in an
impairment of revenue recognition due to significant future obligations,
impairment of
<PAGE>   14
future services provided by the Company's subsidiaries, or potential other
liability.

     The Company began assessing the implications of the Year 2000 during late
1997. At December 31, 1997, the process of evaluation the Company's services,
products and internal systems was underway and is expected to be completed in
1998. At this time, the actual impact of Year 2000 compliance on the Company's
future results of operations, capital spending, and business operations is not
known, but is not expected to be material.


NET OPERATING LOSSES

     At December 31, 1997, the Company and CWC LLC's wholly owned subsidiaries
had combined net operating loss carryforwards for income tax purposes of
approximately $2,571,922, which expire $192,000 in 2010, $921,000 in 2011, and
$1,458,922 in 2012. The Company files a consolidated federal tax return with its
wholly owned subsidiaries. CWC LLC is not included in this tax return. CWC LLC
is treated as a partnership for tax purposes and its gains and losses are
reflected at each member's level. Further, CWC LLC does not file a consolidated
tax return with its subsidiaries. Accordingly, the use of substantially all of
the combined net operating loss carryforwards will be limited to use to offset
future taxable income of each separate subsidiary in proportion to its share of
the tax losses generated to date. In addition, these carryforwards may be
significantly limited under the Internal Revenue Code of 1986, as amended, as a
result of ownership changes resulting from the Company's Preferred Stock
financing and other equity offerings. A valuation allowance of approximately
$457,592 has been established at December 31, 1997 to offset any benefit from
the net operating loss carryforwards, as it cannot be determined when or if the
Company will be able to utilize the net operating losses.


NEW ACCOUNTING PRONOUNCEMENTS

     In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings Per Share. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excluded the
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share.  In addition, the SEC staff issued Staff Accounting
Bulletin No. 98 ("SAB 98"), in February 1998.  SAB 98 requires that registrants
consider all potentially dilutive securities issued for nominal consideration
outstanding for all periods.  Under the previous SEC regulations in SAB 83, the
Company considered all potentially dilutive securities issued within a twelve
month period prior to the initial public offering date at a price below the
initial public offering price as outstanding for all periods.  All earnings per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the Statement 128 and SAB 98 requirements. The effect on
weighted average shares outstanding of securities that could potentially dilute
basic earnings per share in the future were not includedd in the computation of
diluted earnings per share because to do so would have been antidilutive for
the periods presented.

     In 1997, the Financial Accounting Standards Board issued three statements
related to financial statement disclosures, SFAS No. 129, Disclosure of
Information about Capital Structure (Statement 129), SFAS No. 130, Reporting
Comprehensive Income (Statement 130) and SFA No. 131, Disclosures about
Segments of an Enterprise and Related Information (Statement 131) each standard
is effective for years beginning after December 15, 1997. and therefore the
Company will adopt the new requirements retroactively in 1998. Management has
not completed its review of the statements, but does not anticipate that their
adoption will have a significant effect on the Company's historical financial
statement disclosures.

<PAGE>   15
ITEM 7.  FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Index                                                                                                                  Page No.
------                                                                                                                 --------

<S>                                                                                                                   <C>
Report of Independent Auditors.....................................................................................     16

Consolidated Balance Sheets as of December 31, 1997 and 1996.......................................................     17

Consolidated Statements of Operations for the Years Ended December 31, 1997 and 1996...............................     18

Consolidated Statements of Stockholders' Equity (Deficit) for the Years
     Ended December 31, 1997 and 1996..............................................................................     19

Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and 1996...............................     20

Notes to Consolidated Financial Statements ........................................................................     21
</TABLE>
<PAGE>   16
                         REPORT OF INDEPENDENT AUDITORS


The Board of Directors
Complete Wellness Centers, Inc.

     We have audited the accompanying consolidated balance sheets of Complete
Wellness Centers, Inc. (the "Company"), as of December 31, 1996 and 1997, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. 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 Complete Wellness Centers, Inc. at December 31, 1996 and 1997 and the
consolidated results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.

                             /s/ ERNST & YOUNG LLP

Washington, D.C.
March 30, 1998
<PAGE>   17
                        COMPLETE WELLNESS CENTERS, INC.
                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                         YEAR ENDED               YEAR ENDED
                                                                         DECEMBER 31,              DECEMBER 31
                                                                            1996                     1997
                                                                         -----------             ------------
<S>                                                                       <C>                    <C>
                         ASSETS

Current assets:
  Cash and cash equivalents                                               $  298,509             $   804,924
  Patient receivables, net of allowance for doubtful
    accounts of $143,422 and $3,825,708                                      540,444               2,758,841
  Inventory                                                                        0                  39,483
  Advances to officers and other assets                                       43,232                 437,736
  Deposit                                                                          0                 150,000
                                                                          ----------             -----------
Total current assets                                                         882,185               4,190,984
Furniture and equipment, net                                                 215,615                 504,215
                                                                          ----------             -----------
Total assets                                                              $1,097,800             $ 4,695,199
                                                                          ==========             ===========
           LIABILITIES AND STOCKHOLDERS' EQUITY/(DEFICIT)

Current liabilities:
   Accounts payable and accrued expenses                                  $  412,725            $ 1,003,865
   Accrued wages                                                              91,000                153,000
   Accrued management fees and leases                                        442,646              3,117,135
   Accrued interest                                                           52,010                  8,298
   Deferred tax liability                                                      8,241                      0
   Advances from affiliates                                                        0                154,976
   Notes payable - current                                                 1,098,000                 45,433
                                                                          ----------             -----------
Total current liabilities                                                  2,104,622              4,482,707
Convertible note payable                                                      25,000                 25,000
Notes payable                                                                      0                500,000
Minority interest                                                                  0                  7,179
Stockholders' equity/(deficit):
   Preferred Stock, $.01 par value per share,
     2,000,000 shares authorized of which 1,500 are
     designated Series A, 12% Cumulative Convertible
     Preferred Stock, no shares currently issued
     and outstanding                                                              14                      0
   Common Stock, $.0001665 par value per share,
     10,000,000 shares authorized, 714,967 shares and
     2,183,598 shares issued and outstanding at December
     31, 1996 and 1997, respectively                                             119                    363
   Additional capital                                                        156,027              5,044,365
   Accumulated deficit                                                    (1,187,982)            (5,364,415)
                                                                          ----------             -----------
Total stockholders' equity/(deficit)                                      (1,031,822)              (319,687)
                                                                          ----------             -----------
Total liabilities and stockholders' deficit                               $1,097,800             $4,695,199
                                                                          ==========             ===========
</TABLE>

                            See accompanying notes.
<PAGE>   18

                        COMPLETE WELLNESS CENTERS, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                                        YEAR ENDED         YEAR ENDED
                                                                                        DECEMBER 31,      DECEMBER 31,
                                                                                           1996               1997
                                                                                        -----------       -----------
<S>                                                                                      <C>               <C>
Operating revenue:
  Patient revenue                                                                        $1,307,859       $ 8,846,772
  Management services income                                                                 30,226            17,974
  Oher income                                                                                     0           142,128
                                                                                         ----------       -----------
Total operating revenue                                                                   1,338,085         9,006,874
Direct expenses:
  Salary and consulting costs                                                               733,367         3,116,061
  Management fees                                                                           468,991         3,850,112
  Rent                                                                                      102,149           139,081
  Advertising and marketing                                                                  75,907            80,616
  Bad debt expense                                                                          301,618         3,232,111
                                                                                         ----------       -----------
Total direct expenses                                                                     1,682,032        10,417,981
General and administrative                                                                1,025,327         2,775,886
Depreciation and amortization                                                                36,698            89,245
                                                                                         ----------       -----------
Operating loss                                                                           (1,405,972)       (4,276,238)
Interest expense                                                                            (59,094)          (31,041)
Interest income                                                                              12,071            88,499
Minority interest                                                                           470,543            42,347
                                                                                         ----------       -----------
Net loss before income taxes                                                               (982,452)       (4,176,433)
Income taxes                                                                                  8,241                 0
                                                                                         ----------       -----------
Net loss after income taxes                                                               ($990,693)      ($4,176,433)
                                                                                         ==========       ===========

Loss per share - basic                                                                       ($1.03)           ($1.98)

Weighted average common shares - basic                                                      965,006         2,113,096
</TABLE>


                            See accompanying notes.
<PAGE>   19
                        COMPLETE WELLNESS CENTERS, INC.
           CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY/(DEFICIT)


<TABLE>
<CAPTION>

                                          PREFERRED STOCK             COMMON STOCK        ADDITIONAL    ACCUMULATED
                                       SHARES        AMOUNT       SHARES       AMOUNT       CAPITAL       DEFICIT         TOTAL
                                       --------------------------------------------------------------------------------------------
<S>                                    <C>          <C>          <C>         <C>         <C>            <C>              <C>
Balance at December 31, 1995             1,350          14         567,300        95        137,013        (197,289)       (60,167)
     Issuance of common stock                0           0         110,000        18              0               0             18
     Exercise of stock options for
       shares of Complete Wellness
       Centers, Inc. common stock            0           0          37,667         6          1,449               0          1,455
     Recognition of the granting
       of below market
       common stock                          0           0               0         0         11,645               0         11,645
     Recognition of the granting
       of below market common
       stock warrants                        0           0               0         0          5,920               0          5,920
     Net loss                                0           0               0         0              0        (990,693)      (990,693)
                                       --------------------------------------------------------------------------------------------
Balance at December 31, 1996             1,350          14         714,967       119        156,027      (1,187,982)    (1,031,822)
     Issuance of common stock                                    1,000,000       167      4,687,205               0      4,687,372
     Conversion of preferred stock
       to common                        (1,350)        (14)        145,800        24            (10)              0              0
     Exercise of stock options for
       shares of Complete Wellness
       Centers, Inc. common
       stock                                 0           0         146,498        24          4,371               0          4,395
     Exercise of common stock
       warrants of Complete
       Wellness Centers, Inc.
       common stock                          0           0         176,333        29          5,261               0          5,290
     Recognition of the granting
       of below market
       common stock                          0           0               0         0          4,511               0          4,511
     Recognition of the granting
       of below market common
       stock warrants                        0           0               0         0        187,000               0        187,000
     Net loss                                0           0               0         0              0      (4,176,433)    (4,176,433)
                                       --------------------------------------------------------------------------------------------
Balance at December 31, 1997                 0          $0       2,183,598      $363     $5,044,365     ($5,364,415)     ($319,687)
                                       ============================================================================================
</TABLE>

                            See accompanying notes.
<PAGE>   20
                        COMPLETE WELLNESS CENTERS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                       YEAR ENDED      YEAR ENDED
                                                                       DECEMBER 31,   DECEMBER 31,
                                                                          1996            1997
                                                                       -----------    ------------
<S>                                                                     <C>           <C>
OPERATING ACTIVITIES
Net loss                                                                 ($990,693)   ($4,176,433)
Adjustments to reconcile net loss to net
     cash used in operating activities:
     Minority interest                                                    (470,543)       (42,347)
     Depreciation and amortization                                          36,698         89,245
     Provision for bad debts                                               301,618      3,232,111
     Amortization of debt discount                                           3,920          2,000
     Recognition of the compensatory granting
      of nonqualified stock options                                         11,645          4,511
     Recognition of the granting of common
      stock warrants                                                             0        187,000
     Changes in operating assets and
          liabilities:
          Patient receivables                                             (838,942)    (5,450,508)
          Advances to officers and other
            current assets                                                 (41,479)      (399,964)
          Deferred taxes                                                     8,241         (8,241)
          Accounts payable and other current liabilities                   862,456      3,292,422
                                                                        ----------     ----------
Net cash used in operating activities                                   (1,117,079)    (3,270,204)
INVESTING ACTIVITIES
Deposit for Nutrisystems acquisition                                             0       (150,000)
Purchase of equipment                                                     (194,989)      (370,680)
Investment in Smokenders                                                         0        (50,000)
                                                                        ----------     ----------
Net cash used in investing activities                                     (194,989)      (570,680)
FINANCING ACTIVITIES
Proceeds from bridge notes and warrants                                  1,100,000        500,000
Payment of bridge loan                                                           0     (1,100,000)
Proceeds from sale of common stock                                              18      4,687,205
Proceeds from notes payable                                                      0        200,409
Proceeds from sale of equity in
  complete Wellness Centers, LLC                                           446,000              0
Investment of minority stockholders in CWIPA                                     0         50,000
Payments of notes payable                                                     (730)             0
Exercise of warrants                                                             0          5,290
Exercise of stock options                                                    1,455          4,395
                                                                        ----------     ----------
Net cash provided by financing activities                                1,546,743      4,347,299
                                                                        ----------     ----------
Net increase in cash and cas equivalents                                   234,675        506,415
Cash and cash equivalents at beginning of year                              63,834        298,509
                                                                        ----------     ----------
Cash and cash equivalents at end of year                                  $298,509       $804,924
                                                                        ==========     ==========
</TABLE>

                            See accompanying notes.
<PAGE>   21
                        COMPLETE WELLNESS CENTERS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     YEARS ENDED DECEMBER 31, 1996 AND 1997


1.  ORGANIZATION AND PRESENTATION

     Complete Wellness Centers, Inc. (the "Company") was incorporated in
Delaware in November 1994.  The Company develops and operates integrated
medical delivery systems with a goal of providing consumers with a
comprehensive integrated wellness model of care.  The current primary
operations are integrated medical centers.  The Company also operates a medical
billing company, a smoking cessation program and is developing an integrated
delivery network in Florida.

    Integrated Medical Center Model

     The Company's integrated medical centers are generally developed and
operate under agreements whereby the Company will open new Integrated Medical
Centers in the same location as chiropractors' existing chiropractic practices
(the "Affiliated Practices"). The Integrated Medical Centers will employ a
physician (the "MD") on a salaried basis to supervise the provision of health
care services. Where permitted by state law, the Integrated Medical Centers
will be wholly owned by the Company. In other jurisdictions, the Integrated
Medical Centers will be wholly owned by another MD and managed by the Company.
The chiropractor will continue to operate his or her existing Affiliated
Practice separately from the Integrated Medical Center. The Company will not
acquire the Affiliated Practice, its patient base, or its tangible assets. In
addition, no consideration will be paid to the chiropractor at inception of the
arrangements.  As of December 31, 1997 the Company had integrated  85 centers.


2.  SIGNIFICANT ACCOUNTING POLICIES

    Principles of Consolidation

     The consolidated financial statements reflect the accounts of Complete
Wellness Centers, Inc., which includes 23 wholly owned subsidiaries, and 55
managed Integrated Medical Centers, CWC, LLC, which includes 7 wholly owned
subsidiaries, Complete Billing Inc., and its majority owned subsidiaries,
Complete Wellness Smoking Cessation, Inc. (88.23%), and Complete Wellness
Independent Physicians Association, Inc. (86.67%). Significant inter-company
transactions have been eliminated. The financial statements of CWC, LLC are
consolidated with the Company's financial statements because the Company has
unilateral, perpetual and non-temporary control (via signed irrevocable proxies
from the holders of a majority in interest of the membership interests of CWC,
LLC) over the assets and business operations of CWC, LLC and, notwithstanding
the lack of technical majority ownership, consolidation of CWC,LLC is necessary
to present fairly the financial position and results of operation of the
Company. The Company has recorded the net equity of any individuals holding a
minority percentage as minority interest.

    Use of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

    Cash and Equivalents

     The Company considers cash and cash equivalents to include currency on
hand, demand deposits, and all highly liquid investments with a maturity of
three months or less at the date of purchase.

    Inventory

     Inventory is recorded at the lower of cost using the average cost method or
net realized value. The Company establishes reserves as appropriate to account
for obsolescence of perishable inventory.

    Furniture and Equipment
<PAGE>   22
     Furniture and equipment are recorded at cost. Maintenance and repairs are
charged to expense as incurred. Depreciation is computed using the
straight-line method at rates intended to amortize the cost of the related
assets over their estimated useful lives.

     Furniture and equipment of the Company are reviewed for impairment whenever
events or circumstances indicate that the asset's undiscounted expected cash
flows are not sufficient to recover its carrying amount. The Company measures
an impairment loss by comparing the fair value of the asset to its carrying
amount. Fair value of an asset is calculated as the present value of expected
future cash flows.

    Revenue

     Patient revenue from services is reported at the estimated realizable
amounts from patients and third party payors for services rendered.
Substantially all of the patient service revenue of the Integrated Medical
Centers is paid by the patients and traditional commercial insurers. The
Integrated Medical Centers do not currently have any HMO contracts.

     The Company's Integrated Medical Centers provide certain patient services
at discounted rates based on the patients' demonstration of financial hardship
and need for the services rendered.  The amount of discount is based on the
level of demonstrable hardship on a case by case basis.  The Company and its
Integrated Medical Centers are under no obligation to provide such services but
do so as a community service.  Patient revenues related to such services are
recognized net of discounts allowed in the accompanying financial statements.
The Company does not measure the level of such services provided.

    Income Taxes

     Income taxes are provided using the liability method. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statements carrying amounts of existing
assets and liabilities and their respective tax bases (i.e., temporary
differences).

    Stock-Based Compensation

     The Company grants stock options for a fixed number of shares to employees
and certain consultants.  The Company has elected to continue to account for
stock-based compensation arrangements under APB Opinion No. 25 "Accounting for
Stock Issued to Employees," and accordingly recognizes compensation expense for
the stock option grants as the difference between the fair value and the
exercise price at the grant date. The pro forma information required by FASB
Statement No. 123, "Accounting for Stock-Based Compensation," which provides a
fair-value-based method of accounting alternative to account for stock-based
compensation issued to employees and consultants has been disclosed in Note 9.

     In addition, the SEC staff issued Staff Accounting Bulletin
No. 98 ("SAB 98"), issued by the SEC staff in February 1998.  SAB 98 requires
that registrants in initial public offerings consider all potentially dilutive
securities issued for nominal consideration outstanding for all periods.  Under
the previous SEC regulations in SAB 83, the Company considered all potentially
dilutive securities issued within a twelve month period prior to the initial
public offering date at a price below the initial public offering price as
outstanding for all periods.

    Fair Value of Financial Instruments

     Management has determined the estimated fair value of financial instruments
using available market information and valuation methodologies. Cash
equivalents, accounts receivable, accounts payable, notes payable and accrued
liabilities and other current assets and liabilities are carried at amounts
which reasonably approximate their fair values. Considerable judgment is
necessary to interpret market data and develop estimated fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts the Company could realize on disposition of the financial
instruments. The use of different market assumptions or estimation
methodologies may have an effect on the estimated fair value amounts.

    Reclassifications

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

    New Accounting Pronouncements

     In December 1997, the FASB's Emerging Issues Task Force issued consensus
97-2 "Application of APB Opinion No. 16 and FASB Statement No. 94 to Medical
Entities".  The standard is effective for fiscal years ending after December
15, 1998.  Early adoption is encouraged.  The Company elected to adopt the
provisions of this standard in the fourth quarter of 1997.  Under the
<PAGE>   23
provisions of this standard, integrated medical centers that are controlled but
not directly owned by the Company should be consolidated in the Company's
financial statements.  The Company has revised its financial statements for
1997 to reflect such centers on a consolidated basis.  Previously, the Company
had recognized only the fees derived from these centers through its management
agreements.  The effect of the change on the 1997 financial statements was not
significant.  The 1996 financial statements were not restated because the
change was inconsequential to those financial statements.

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes the dilutive
effects of options, warrants and convertible securities.  Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share.  In addition, the SEC staff issued Staff Accounting Bulletin No. 98
("SAB 98"), in February 1998.  SAB 98 requires that registrants consider all
potentially dilutive securities issued for nominal consideration outstanding
for all periods.  Under the previous SEC regulations in SAB 83, the Company
considered all potentially dilutive securities issued within a twelve month
period prior to the initial public offering date at a price below the initial
public offering price as outstanding for all periods.  All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the Statement 128 and SAB 98 requirements. The effect on weighted
average shares outstanding of securities that could potentially dilute basic
earnings per share in the future were not included in the computation of
diluted earnings per share because to do so would have been antidilutive for
the periods presented.

        In 1997, the Financial Accounting Standards Board issued three
statements related to financial statement disclosures, SFAS No. 129, Disclosure
of Information about Capital Structure (Statement 129), SFAS No. 130, Reporting
Comprehensive Income (Statement 130) and SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information (Statement 131).  Each
standard is effective for years beginning after December 15, 1997 and therefore
the Company will adopt the new requirements retroactively in 1998. Management
has not completed its review of the standards statements, but does not
anticipate that their adoption will have a significant effect on the Company's
historical financial statement disclosures.


3.  ACQUISITIONS

    Acquired Medical Centers

     In June 1997, CWC, LLC acquired the assets of Complete Wellness Medical
Center of Paula Drive, Inc., one of its affiliated Integrated Medical Centers,
in exchange for forgiveness of $35,000 of debt and all the assets of the clinic
Complete Wellness Medical Center of Dunedin.

    Smokenders

     On July 31, 1997, a subsidiary of the Company acquired substantially all of
the assets of a smoking cessation program owned by the Oxford Health Plan
(Smokenders) for $50,000.  The operating results of Smokenders have been
reflected in the accompanying financial statements since acquisition. The
acquisition is subject to two royalty arrangements, a 5% royalty on gross
revenues for a 10 year period to Oxford Health Plan and 12.4% of revenues with
a minimum of $26,000 to the founders of Smokenders.  At the same time, the CEO
of Smokenders, who is also a Director of the Company acquired an 11.77%
minority interest in Smokenders from the Company in return for a $22,000
promissory note bearing interest at 8% due September 30, 2000.  The transaction
was accounted for as a purchase.  The net purchase price has been allocated for
accounting purposes to the assets acquired, primarily the inventory of printed
materials.

    Nutri/systems

     On January 31, 1998, a subsidiary of the Company completed the acquisition
of 56 weight loss treatment centers from Nutri/system,L.P.  The results of
operations of these centers will be reflected in the Company's financial
statements until February 1998. The centers market, in a retail setting, food,
medically supervised weight loss programs and nutritional supplements.  The
purchase price of the centers included $150,000 in cash that had been deposited
with the seller in September 1997 and the assumption of certain lease
liabilities and other acquisition costs of approximately $400,000. The
transaction was accounted for as a purchase.  The purchase price, including
acquisition costs has been allocated for accounting purposes to the assets
acquired, primarily food inventory.


4.  ALLOWANCE FOR DOUBTFUL ACCOUNTS

     Details of the allowance for doubtful accounts receivable are as follows:


<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                       1996            1997

<S>                                                                                  <C>            <C>
Beginning Balance   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      $  5,650       $  143,422

Bad Debt Expense    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       301,618        3,232,111

Provision for third party allowances and adjustments                                     -             450,175

Accounts Written Off    . . . . . . . . . . . . . . . . . . . . . . . . . . . .      (163,846)            -
                                                                                     --------       ----------

Ending Balance    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      $143,422       $3,825,708
                                                                                     ========       ==========
</TABLE>
<PAGE>   24
5.  FURNITURE AND EQUIPMENT

     Furniture and equipment consists of the following:


<TABLE>
<CAPTION>
                                                                                                December 31,
                                                                                          --------------------------
                                                                                            1996            1997

<S>                                                                                       <C>             <C>
Furniture and Equipment (5 year life) . . . . . . . . . . . . . . . .                     $258,804        $ 638,084

Less Accumulated Depreciation and Amortization  . . . . . . . . . . .                     ($43,189)       ($133,869)
                                                                                          --------        ----------

                                                                                          $215,615        $ 504,215
                                                                                          ========        ==========
</TABLE>

<PAGE>   25
6.  DEBT

    1997 Bridge Note

     The Company, as part of a new financing (See Note 14), received $500,000 as
a Bridge Loan on December 19 1997. This note bears interest at 12% was
converted into Preferred Stock on January 23, 1998. The note, along with an
additional investment of $4,500,000 was converted into 100,000 shares of 12%
convertible Preferred Stock. (See note 14).

    Convertible Note Payable

     CWC, LLC as the result of the acquisition of the Fredericksburg Center,
has a $25,000 convertible note payable which bears interest at 8% and is due
July 17, 2000. Interest is payable quarterly while the principal is payable in
one installment on the due date. The note is secured by a lien on the assets of
Complete Wellness Centers of Fredericksburg. In the event of an initial public
offering for CWC, LLC, at the lender's option, the note will be convertible
into common stock of CWC, LLC at the initial public offering price equal to the
face value of the note.  This note was retired in February 1998 for $5,000.

    1996 Bridge Note

     On August 15, 1996, the Company completed a private placement of $1.1
million of 12% notes. In connection with the agreement, the lenders have been
issued detachable warrants with an exercise price of $0.003 to purchase 183,333
shares of Common Stock. An additional 3,333 warrants with an exercise price of
$.003 were given to a broker/dealer as consideration for assisting with the
financing. The fair value of the lender and broker/dealer warrants, $5,920, was
recognized as a discount on the loan, of which $3,920 was amortized through
December 31, 1996. The outstanding notes accrued interest at 12% ($52,010 at
December 31, 1996), payable quarterly beginning January 1, 1997. The loan was
secured by substantially all of the Company's assets. On February 24, 1997, the
principal plus accrued interest was repaid with the proceeds from the initial
public offering.


7.  INCOME TAXES

     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. The tax effects of
temporary differences that give rise to significant portions of the deferred
tax assets and deferred tax liabilities recognized as of December 31, 1996 and
1997 are presented below:

<TABLE>
<CAPTION>
                                                  December 31,
                                          ----------------------------
                                              1996            1997
                                          -----------      -----------
<S>                                       <C>              <C>
Deferred tax assets:
     Start-up costs...................    $     --              10,138
     Nonqualified stock options.......        4,658             11,448
     Bad debt expense.................       24,450            388,168
     Operating loss carryforward......      445,080          1,174,844
                                          -----------      -----------
          Total deferred tax assets...      474,188          1,584,598
Less valuation allowance..............     (457,592)        (1,579,770)
                                          -----------      -----------
Net deferred tax assets...............       16,596              4,828
Deferred tax liabilities:
     Depreciation.....................       (1,109)            (4,828)
                                          -----------      -----------
Total deferred tax liabilities........       (1,109)            (4,828)
                                          -----------      -----------
Net deferred tax amount...............     $ 15,487               -0-
                                          ===========      ===========
</TABLE>

The Company files a consolidated federal tax return with its wholly owned
subsidiaries. CWC, LLC is not included in this tax return.  CWC, LLC is treated
as a partnership for tax purposes and its gains and losses are reflected at
each member's level.  CWC, LLC does not file a consolidated tax return with its
subsidiaries.  At December 31, 1997, the Company had net operating loss
carryforwards for income tax purposes of approximately $2,571,922 and CWC, LLC's
wholly owned subsidiaries had combined net operating loss carryforwards for
income tax purposes of approximately $603,331, all of which expire between
2010 and 2011.  The use of substantially all of the combined net operating loss
carryforwards of CWC, LLC will be limited to use to offset future taxable
income of each separate subsidiary in proportion to their share of the tax
losses generated to date.  In addition, these carryforwards may be
<PAGE>   26
significantly limited under the Internal Revenue Code as a result of ownership
changes resulting from the Company's redeemable convertible Preferred Stock
financing and other equity offerings.

The Company has a cumulative pretax loss for financial reporting purposes.
Recognition of deferred tax assets will require generation of future taxable
income. There can be no assurance that the Company will generate earnings in
future years. Therefore, the Company established a valuation allowance on
deferred tax assets of $457,592 and $ 0 as of December 31, 1996 and 1997,
respectively.

     Significant components of the provision for income taxes are as follows for
the years ended:


<TABLE>
                                                     DECEMBER 31,
                                               -------------------------
                                               1996                1997
<S>                                        <C>               <C>
Current:
   Federal ............................... $ 16,778                 0
   State..................................    6,950                 0
                                           ---------         ---------
Total current ............................   23,728                 0

Deferred:
   Federal ...............................  (279,856)         (928,516)
   State..................................  (144,308)         (193,662)
   Increase in valuation allowance........   378,677         1,122,178
                                           ---------         ---------
Total deferred............................  (15,487)                0
                                           ---------         ---------
Total provision for income taxes.......... $  8,241                 0
                                           =========         =========
</TABLE>


     The effective tax rate on income before income taxes varies from the
statutory federal income tax rate for the years ended December 31, 1996 and
1997 as follows:

<TABLE>
                                                     DECEMBER 31,
                                               -------------------------
                                               1996                1997
<S>                                        <C>                <C>
Statutory rate ...........................    (34)%             (34)%
State taxes, net .........................     (4)%              (3)%
Other differences, net ...................       1%                1%
Valuation allowance ......................      38%               36%
                                             ------            ------
                                                 1%                0%
                                             ======            ======

</TABLE>

<PAGE>   27
8.  STOCKHOLDERS EQUITY

    Stock Split

     The Company effected a 1 for 3 stock split on November 13, 1996.  All
share amounts reflected herein have been adjusted to reflect the stock spit.

   Initial Public Offering

     On February 24, 1997, the Company closed on its Initial Public Offering.
At this time, 1 million shares of Common Stock, par value $0.0001665, and 1
million redeemable common stock purchase warrants were sold on a public market
for $6 per share and $0.10 per warrant, respectively. Net proceeds to the
Company after expenses of the Offering were $4,965,000. In conjunction with the
offering, all of the Series A (at that time) Preferred Stock then outstanding
was converted into 145,800 shares of Common Stock and the Company repaid the
principal plus accrued interest relating to the 1996 Bridge Financing Notes.

    Warrants

     The Company issued one warrant for each common share sold in connection
with its initial public offering.  The warrants are exercisable at any time
commencing August 19, 1997 until February 18, 2002 at $7.20 per share.  The
warrants are subject to adjustment in accordance with the certain anti-dilution
commitments and other provisions.


9.  STOCK OPTION PLAN

The Company has stock option plans providing for the grant of incentive and
non-qualified stock options to employees, directors, consultants and advisors.
Pursuant to the Plan, 800,000 shares of Common Stock have been reserved for
issuance. At December 31, 1997 the following options have been granted:


<TABLE>
<CAPTION>
                                          NUMBER OF
                                          OPTIONS/
                                          WARRANTS    EXERCISABLE        EXERCISE
    DATE OF GRANT                         GRANTED     AT 12/31/97         PRICE         FAIR VALUE
    -------------                         -------     -----------        --------       ----------


    <S>                                   <C>              <C>            <C>             <C>
    Employee Options:
    -----------------
    December 1, 1995                       36,667               0         $0.0300         $0.0100
    January 1, 1996                        56,667               0         $0.0300         $0.0300
    March 1, 1996                          40,000               0         $0.0300         $0.0400
    March 18, 1996                          1,500               0         $0.0300         $0.0400
    April 1, 1996                         116,667               0         $0.0300         $0.0400
    May 30, 1996                            1,000               0         $0.0300         $0.0500
    June 14, 1996                           1,000               0         $0.0300         $0.0600
    June 15, 1996                           1,000               0         $0.0300         $0.0600
    August 26, 1996                        46,667          15,556         $0.6000         $0.0600
    September 23, 1996                      5,000           1,667         $4.5000         $0.0600
    April 6, 1997                         157,000          52,333         $3.3750         $0.8433
    July 25, 1997                          89,733          11,250         $4.3750         $1.0932
    July 28, 1997                          32,510               0         $4.8125         $1.2025
    August 6, 1997                          7,500           3,750         $3.7500         $0.9370

    Non-Employee Options:
    ---------------------
    December 1, 1995                        4,333               0         $0.0300         $0.0040
    January 19, 1996                       23,333               0         $0.0300         $0.0100
    January 31, 1996                       50,000          30,000         $0.0300         $0.0100
    May 1, 1996                            13,332           3,333         $0.0300         $0.0300
    July 1, 1996                            5,000           5,000         $0.6000         $0.0200
    September 12, 1996                     16,667           5,556         $4.5000         $0.4800
    September 26, 1996                      6,667           2,223         $4.5000         $0.4800
    November 1, 1996                       11,000           3,667         $4.5000         $0.4800
    February 24, 1997                       8,000               0         $6.0000         $1.4992
    March 28, 1997                         10,000          10,000         $3.7500         $0.9370
    April 29, 1997                         15,000           4,000         $3.3800         $0.8445
</TABLE>
<PAGE>   28
<TABLE>
    <S>                                    <C>                  <C>       <C>             <C>
    May 15, 1997                            2,000               0         $3.3750         $0.8433
    May 16, 1997                           15,000               0         $3.3750         $0.8433
    July 25, 1997                          18,600               0         $4.3750         $1.0932
    July 28, 1997                          17,490               0         $4.8125         $1.2025
</TABLE>

     Options generally vest 33 1/3% each year beginning on the anniversary of
the grant date. During 1997, 3,333 of the 1996 incentive options were forfeited
and 20,000 of the non-qualified options were forfeited. The weighted average
remaining contractual life of the options outstanding at December 31, 1997 is
4.78. The weighted average price of exercisable options at December 31, 1997
was $2.25.

     The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations in accounting for its employee stock option because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25's intrinsic value method, compensation expense is
determined on the measurement date, that is the first date on which both the
number of shares the employee is entitled to receive and the exercise price, if
any, are known. Compensation expense is measured based on the award's intrinsic
value of the excess of the market price of the stock over the exercise price on
the measurement date. The Company has recorded $1,050 and $462 of compensation
expense and $10,595 and $4,049 of consulting expense related to stock options
granted below market value as of December 31, 1996 and 1997, respectively.
Additionally, the Company has recorded consulting expense of $5,920 and
$187,000 as of December 31, 1996 and 1997, respectively as a result of the
granting of Common Stock warrants during the years then ended.

     Had compensation costs for the Company's stock option plan been determined
based on the fair value at the date of grant for the awards in 1997 consistent
with the provisions of SFAS 123, the Company's net loss and loss per
share-diluted would have been as indicated below:

<TABLE>
<CAPTION>
                                                                                 1996               1997
                                                                              ----------        ------------
<S>                                                                           <C>               <C>
Net loss - as reported  . . . . . . . . . . . . . . . . . . . . . . . .       ($990,693)         (4,176,433)
Net loss - pro forma  . . . . . . . . . . . . . . . . . . . . . . . . . .     ($993,221)        ($4,314,674)
Loss per share - as reported  . . . . . . . . . . . . . . . . . . . . . .      ($1.03)             ($1.98)
Loss per share - pro forma  . . . . . . . . . . . . . . . . . . . . . . .      ($1.03)             ($2.04)
</TABLE>


     For the purposes of the pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period.

The fair value of each option grant is estimated on the date of grant using the
"minimum value" option-pricing model with the following weighted-average
assumptions for 1996: risk-free interest of 6.25%; expected life of the option
of 5 years; and a zero dividend yield; and the following weighted-average
assumptions for 1997: risk free interest of 5.75%; expected life of the option
of 5 years; and a zero dividend yield. The weighted average fair value of
options granted during 1997 and 1996 was $0.96 and $0.05, respectively.

     Option valuation models require the input of highly subjective
assumptions, including the expected stock price volatility.  Because the
Company's employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.


10. LEASE ARRANGEMENTS

     CWC, LLC leases space of its wholly owned Integrated Medical Centers
(Complete Wellness Centers of Fredericksburg and Complete Wellness Medical
Center of Dunedin). The Company leases its corporate office space on a
month-by-month basis.
<PAGE>   29
11. NET LOSS PER COMMON SHARE

The following table sets forth the computation of basis loss per share:

<TABLE>
<CAPTION>
                                                              1996                     1997

<S>                                                           <C>                      <C>
Weighted average common shares
         Outstanding                                          664,051                  1,703,808

Shares issued for nominal consideration
         Prior to the Initial Public Offering                 300,955                  409,287
                                                              ----------------------------------

                                                              965,006                  2,113,095

Loss allocable to common shareholders                         ($990,693)               ($4,176,433)

Basic loss per share                                          ($1.03)                  ($1.98)
</TABLE>


During 1996 and 1997 options and warrants to purchase 25,244 and 306,107 of the
Company's common stock respectively, whose exercise price exceeded that of the
average market price during the year were excluded from the above calculation
because of the anti-dilutive effect their inclusion would have on loss per
share.


12. RELATED PARTY

     In August 1996, the Company entered into a consulting agreement with
J.E.M, Inc. (JEM), the sole stockholders of which are Dr.  Kaplan, the
Company's Chief Operating Officer, and his wife. Under the terms of the
consulting agreement, JEM agreed to provide advice and assistance to the
Company in connection with identifying and affiliating with chiropractors and
their existing chiropractic practices and identifying, acquiring, and/or
managing businesses engaged in providing services ancillary to those provided
by Integrated Medical Centers. The Company agreed to pay JEM $6,000 per month
for its services. The consulting agreement expires in August 1999 and may be
terminated sooner by mutual agreement of the parties, by the Company for
"cause," defined as a violation by JEM of any material provision of the
consulting agreement not remedied within 30 days after notification or JEM's
conviction of a felony, upon termination of the employment agreement between
Dr. Kaplan and the Company, or by JEM's failure to meet certain performance
goals.
<PAGE>   30
13. CONTINGENCIES

    Federal Investigation

     Revenues from all Federal programs accounted for approximately 3%, of the
Company's net patient service revenues for the year ended December 31, 1997.
Laws and regulations governing the Medicare and Medicaid programs are complex
and subject to interpretation. In November 1997 federal agents served search
warrants and subpoenas on the Company and four of its subsidiaries and
affiliates.  Company records and files were seized. If the government review
finds wrongdoing, the Company would be subject to significant regulatory action
including fines, penalties, and possible exclusion from the Medicare and
Medicaid programs. Any such action would be material to the financial position
of the Company and could have a materially adverse effect on the results of
operations and cash flows of the Company.  The Company is not currently aware of
any pending or threatened allegations of potential wrongdoing as a result of
the investigation. Further, the Company believes that it is substantially in
compliance with all applicable laws and regulations.

    Professional Liability

     The Company has obtained an insurance policy that, subject to certain
conditions, provides both it and its subsidiaries medical malpractice insurance
and managed care errors and omissions insurance retroactive to the Integration
Dates of the Company's current Integrated Medical Centers and, one former
Integrated Medical Center. The policy provides coverage for $1,000,000 per
claim per Integrated Medical Center, subject to an aggregated limit of
$3,000,000 per Integrated Medical and Weight Loss Centers per year. The policy
will also cover the Company with respect to Integrated Medical Center as they
are opened. There is no deductible under the policy.

     The foregoing policy is a "claims made" policy. Thus, it provides coverage
for covered claims made during the policy's term but not for losses occurring
during the policy's term for which a claim is made subsequent to the expiration
of the term. Based on experience to date of the medical professionals employed,
it is believed that potential losses on any claims incurred but not reported
would not be material to the Company's financial position.

    Consulting Agreement

     The Company has a consulting agreement (the Kats Agreement) with Kats
Management, LLC (Kats Management), a company that has represented to the
Company that it provides management and consulting services to over 600
chiropractic clinics. Under the Kats Agreement, Kats Management agreed to
advise and assist the Company in (i) identifying and negotiating with
chiropractors and their existing chiropractic practices with which the Company
might affiliate for the purpose of developing additional Integrated Medical
Centers and (ii) developing Integrated Medical Centers. The Company agreed to
pay Kats Management for each agreement entered into by the Company with a
chiropractor identified by Kats Management (i) a commission equal to 5% of the
Company's integration fee under such agreement during the initial term of the
agreement and (ii) a fixed fee not to exceed $350.  In addition, the Company
granted Kats Management, subject to a vesting schedule, non-qualified options
to purchase 11,000 shares of Common Stock under the Company's 1994 Stock Option
Plan and paid Kats Management a $100,000 bonus in 1997.

    Integrated Medical Centers

     As of March 30, 1998, the Company was managing 91 Integrated Medical
Centers and had signed contracts with Affiliated Chiropractors to develop 50
additional Integrated Medical Centers. The Company estimates the cost of fully
integrating these new clinics to be approximately $500,000.


14. SUBSEQUENT EVENTS

    Sale of Redeemable Preferred Stock

Redeemable Preferred Stock

On January 23, 1998 the Company finalized a $5,000,000 private placement of
Senior Redeemable Preferred Stock (the "Preferred Stock") with Wexford
Management LLC ("Wexford"). The terms of the offering consisted of a $500,000
13% Bridge Loan (the "Bridge Loan") received by the Company on December 16,
1997, a $1,000,000 Preferred Stock purchase by Wexford on January 17, 1998, of
which $500,000 was used to retire the Bridge Loan and a $4,000,000 Preferred
Stock purchase by Wexford on January 23, 1998.
<PAGE>   31
The cost of the offering to the Company of approximately $550,000 was paid out
of the proceeds of the Preferred Stock offering.

The Preferred Stock was sold at $50 per share and carries a $0.01 par value.
The Preferred Stock accrues cash dividends at 8% payable quarterly in arrears
or at 10% payable quarterly in arrears if the Company chooses to pay the
dividend in additional preferred stock. After December 31, 2000 the dividend
rate will increase to 12%.  The Preferred Stock has a liquidation preference of
$50 per share plus accrued and unpaid dividends. Wexford has mandatory
redemption rights with respect to $3,000,000 of the Preferred Shares on the
earlier of December 31, 2000 or the completion of any financing by the Company
in excess of $5,000,000. The remaining $2,000,000 of Preferred Shares are
subject to mandatory redemption no later than five years after closing of the
transaction (January 23, 2003).  The Preferred Stock is redeemable at $50 per
share plus accrued and unpaid dividends.

Additionally, Wexford received warrants (the "Purchase Warrants"), with a term
of seven years, to purchase an aggregate of 2,850,000 of the Company's publicly
traded redeemable common stock purchase warrants (the "Warrants"). The Purchase
Warrants have an exercise price of $.01.  The Warrants have an exercise price
of $1.75.  Up to 1,350,000 of the Purchase Warrants are redeemable by the
Company at $0.01 per warrant  under certain conditions as follows:

(I)      337,500 Purchase Warrants are redeemable prior to March 31, 2000 if
         the fiscal 1999 pre-tax earnings of the Company equals or exceeds
         $1.25 per share on a fully diluted basis;

(II)     337,500 Purchase Warrants are redeemable prior to March 31, 2000 if
         the combined fiscal 1998 and 1999 pre-tax earnings of the Company
         equals or exceeds $1.90 per share on a fully diluted basis;

(III)    337,500 Purchase Warrants are redeemable prior to March 31, 2001 if
         the fiscal 2000 pre-tax earnings of the Company equals or exceeds
         $2.00 per share on a fully diluted basis;

(IV)     337,500 Purchase Warrants are redeemable prior to March 31, 2001 if
         the combined fiscal 1998, 1999 and 2000 combined pre-tax earnings of
         the Company equals or exceeds $4.10 per share on a fully diluted
         basis.

Wexford has the right to prohibit any significant transactions, financing,
dividends and related party transactions as part of the general conditions of
the transaction. Further, Wexford, has demand and piggyback registration rights
for any common stock issued or issuable pursuant to the Warrants.

Leases

During March 1998 the Company entered into an agreement to sublease office
space in Washington, DC for use as its corporate offices.  The space consists
of approximately 9,000 square feet at a cost of $10,000 per month. It is the
Company's intention to use approximately 6,000 square feet of the space and
sublet the remainder. The agreement is for seven years. The following table
reflects the Company's minimum obligation under the lease agreement:

<TABLE>
<S>              <C>
1998             $ 90,000
1999             $120,000
2000             $120,000
2001             $120,000
2002             $120,000
2003             $120,000
2004             $120,000
2005             $ 30,000
</TABLE>
<PAGE>   32
ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

   Not applicable.

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

(a) IDENTIFICATION OF DIRECTORS

<TABLE>
<CAPTION>
                 NAME               AGE    YEAR FIRST ELECTED      YEAR OF EXPIRATION
         -------------------       ----    ------------------      ------------------
         <S>                        <C>           <C>                     <C>
         C. Thomas McMillen  . .    45            1994                    1998
         E. Eugene Sharer  . . .    64            1996                    1998
         Robert J. Mrazek  . . .    52            1995                    1998
         James T. McMillen . . .    52            1994                    1998
         Eric S. Kaplan, D.C . .    45            1997                    1998
</TABLE>

(b) IDENTIFICATION OF EXECUTIVE OFFICERS

<TABLE>
<CAPTION>
                        NAME                              AGE     YEAR FIRST SERVED AS OFFICER
         ---------------------------------------------    ---     ----------------------------
         <S>                                               <C>                <C>
         C. Thomas McMillen  . . . . . . . . . . . . .     45                 1994
           Chairman of the Board
           and Chief Executive Officer

         E. Eugene Sharer  . . . . . . . . . . . . . .     64                 1996
           President and Treasurer

         Danielle F. Milano, M.D . . . . . . . .           42                 1996
         Vice President--Medical Affairs

         Eric S. Kaplan, D.C . . . . . . . . . . . . .     45                 1997
           Senior Vice President
           And Chief Operating Officer

         Michael T. Brigante  . . . . . . . . . . . .      43                 1997
           Vice President
           and Chief Financial Officer

         F. Ryan Knoll . . . . . . . . . . . . . . . .     28                 1997
         Secretary
</TABLE>

     C. Thomas McMillen, the Company's founder, has been the Chairman of the
Board of Directors and Chief Executive Officer since its formation in November
1994. He was also the President of the Company until April 1996. In 1993, Mr.
McMillen formed McMillen and Company, Inc., a health care consulting firm, and
subsequently from November 1993 through March 1994, assumed the role of Chief
Administrative Officer of Clinicorp, Inc., a publicly-traded physician practice
management company. Mr. McMillen was also a director of Clinicorp, Inc., from
January 1993 through December 1994. Clinicorp, Inc., filed for Chapter 11
bankruptcy protection in June 1996. From 1987 to 1993, Mr. McMillen served
three consecutive terms in the U.S. House of Representatives from the 4th
Congressional District of Maryland. He was named by President Clinton to
Co-Chair the President's Council on Physical Fitness and Sports in 1993.  Mr.
McMillen is currently a member of the Board of Directors of Kellstrom
Industries, Inc., Commodore Applied Technologies, Inc., CHG Inc., a subsidiary
of Chemring Group, PLC, and Orion Acquisition Corporation I (of which he is
also the secretary and treasurer). Mr. McMillen was also a director of
Integrated Communication Network, Inc. ("ICNI") until his resignation in
December 1996. In July and September 1996, two class action lawsuits were filed
against ICNI and all of its directors and officers alleging that the prospectus
for ICNI's initial public offering in June 1995 did not adequately disclose
certain risks associated with an investment in its securities. Mr. McMillen
became a director of ICNI upon the effectiveness of the
<PAGE>   33
registration statement of which such prospectus formed a part. Mr. McMillen is
the brother of James J. McMillen, a director of the Company.

     E. Eugene Sharer has been President, Chief Operating Officer, and a
director of the Company since April 1996, and Chief Financial Officer and
Treasurer since February 1997. He relinquished the CFO title in February, 1998
and the COO title in November 1997. From 1990 to 1995 he was President and
Chief Operating Officer of R.O.W. Sciences, Inc., a health research company. In
August 1995, Mr. Sharer formed Sharer Associates, a management consulting
company. From 1989 to 1990 he was Executive Vice President, Chief Operating
Officer and Director of Iverson Technology Corporation and from 1985 through
1988, he was President and Director of Calculon Corporation and a Vice
President of Atlantic Research Corporation, the parent company of Calculon.
Between 1980 and 1985, Mr. Sharer was Vice President of the Systems Group at
Computer Sciences Corporation.

     Danielle F. Milano, M.D., has been Vice President--Medical Affairs since
January 1996 and Secretary since February 1997.  She relinquished the
Secretary's position in July, 1997. From October 1994 to December 1995, she was
Medical Director of Rivington House Health Care Facility in New York, New York.
From October 1990 to October 1994, Dr. Milano was attending physician at New
York University School of Medicine and Director of the AIDS Clinic at Bellevue
Hospital in New York, New York.  She is a graduate of New York University
School of Medicine, completed her residency at Lenox Hill Hospital and is board
certified in internal medicine.  Dr. Milano resigned from the Company in
January, 1998.

     Eric S. Kaplan, D.C., has been Senior Vice President and a director since
April 1997. He served as Senior Director of Operations and Development from
August 1996 to April 1997. He was named Chief Operating Officer in November,
1997. From June 1993 to August 1996, Dr. Kaplan was president of two
subsidiaries of Clinicorp, Inc., Medical Diagnostic Imaging of America and
Clinicare Wellness Centers. From 1978 to June 1993, he was the founder and
owner of six chiropractic, weight loss, and medical clinics in south Florida.

     James J. McMillen, M.D., has been a director of the Company since November
1994. From 1977 to the present, Dr. McMillen has been in private medical
practice in St. Joseph, Missouri. He is board certified in internal medicine.
Dr. McMillen is the brother of C. Thomas McMillen.

     Robert J. Mrazek has been a director of the Company since January 1995.
Since 1993, Mr. Mrazek has been a legislative affairs consultant. From 1983 to
January 1993, he served five consecutive terms in the U.S. House of
Representatives from the 3rd Congressional District of New York.

     Michael T. Brigante has been Chief Financial Officer since February, 1998.
Mr. Brigante is an executive manager with over nineteen years of diversified
financial experience with public and private companies.  He worked with the
Thomas & Betts Corporation from 1978 through 1986 culminating his tenure as
controller.  From 1987 to 1988, Mr. Brigante served as senior manager of
international financial systems with SeaLand Corporation.  In 1988 Mr. Brigante
joined the MAC Group and served as chief financial officer and controller until
starting his own consulting firm in 1994.


ITEM 10. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

     The following table sets forth information concerning the annual
compensation of the Company's Chief Executive Officer for services in all
capacities to the Company during the Company's last fiscal year.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                        ANNUAL
                                          FISCAL     COMPENSATION
        NAME AND PRINCIPAL POSITION        YEAR         SALARY
    ---------------------------------     ------     ------------
    <S>                                    <C>           <C>
    C. Thomas McMillen  . . . . . . .      1997         $135,500
      Chief Executive Officer
    E. Eugene Sharer  . . . . . . . .      1997         $132,500
      President
    Eric S. Kaplan  . . . . . . . . .      1997         $120,000
      Chief Operating Officer
    Danielle F. Milano  . . . . . . .      1997         $120,000
      Vice President--Medical Affairs
    Michael T. Brigante . . . . . . .                   $ 90,000
      Vice President Finance and
      Chief Financial Officer
</TABLE>

----------
* Mr. McMillen did not receive any cash compensation for fiscal years 1995 or
  1996, nor were any options granted to him. For fiscal year 1996, compensation
  in the amount of $45,000 was accrued. In addition, the Company advanced to him
  without interest approximately $23,000 in 1996, which he repaid in February
  1997. See "Certain Relationships and Related Transactions." No other executive
  officer received compensation in excess of $100,000 during the Company's last
  fiscal year.
<PAGE>   34
DIRECTOR COMPENSATION

     The Company does not currently compensate, and does not anticipate
compensating its directors for their services as directors, except that each of
the Company's non-employee directors may receive a director's fee of $500 per
meeting for attendance at Board of Directors or committee meetings held after
December 1997. In addition, each of the Company's directors receives
reimbursement of all ordinary and necessary expenses incurred in attending any
meeting or any committee meeting of the Board of Directors. Currently, all
directors hold office until the next annual meeting of stockholders and until
their successors have been duly elected and qualified.  The Company's executive
officers are appointed annually and serve at the direction of the Board of
Directors, subject to the terms of existing employment agreements.

EMPLOYMENT AGREEMENTS

     In July 1996, the Company entered into an employment agreement with Mr.
McMillen providing for his employment, as Chairman of the Board and Chief
Executive Officer, for a term expiring in March 1999. The employment agreement
provides for an annual base salary for Mr. McMillen of $90,000 that increase to
$150,000 upon the closing of the IPO. All salary payments were accrued until
the closing of the IPO and paid with a portion of the net proceeds of the IPO.
Mr. McMillen may participate in all executive benefit plans and has the use of
a Company car. The agreement also provides, among other things, that if his
employment is terminated without cause (as defined in the agreement), the
Company will pay an amount equal to one year's base salary, payable over a one
year period. In 1996, the Company advanced approximately $23,000 to Mr.
McMillen without interest. Mr. McMillen repaid the amount in February 1997.

     In March 1996 the Company entered into an employment agreement with Mr.
Sharer providing for his employment as President and Chief Operating Officer
for a term expiring in March 1999. The employment agreement provides for an
annual base salary for Mr. Sharer of $150,000 effective upon closing of the
IPO, and for participation in all executive benefit plans, as well as an
automobile allowance of $1,000 per month. Mr. Sharer was granted options to
purchase 116,667 shares of the Company's Common Stock at an exercise price of
$0.03 per share. On the date of such grant, 16,667 of those options were
exercisable, of which 10,000 were exercised in 1996. The remaining options were
to vest in equal installments on April 1, 1997, April 1, 1998, and March 31,
1999.  Mr. Sharer exercised his vested options of 40,001 in December, 1997.
The agreement also provides, among other things, that, if his employment is
terminated without cause (as defined in the agreement) the Company will pay to
him an amount equal to one year's base salary, payable over a one year period.

     In January 1996, the Company entered into an employment agreement with Dr.
Milano, providing for her employment as Vice President-Medical Affairs, for a
term expiring on December 31, 1998. The employment agreement provides for an
annual base salary of $120,000 beginning August 1, 1996, of which $6,000 per
month was accrued until the closing of the IPO and paid with a portion of the
net proceeds of the IPO, a bonus of $1,000 for each Medcorp formed as a
professional corporation of which Dr. Milano is a shareholder, to be paid by
such Medcorp, and for participation in all executive benefit plans plus an
automobile allowance of $500 per month. Dr. Milano was granted options to
purchase 46,667 shares of the Company's Common Stock at an exercise price of
$0.03 per share. The options have vested as to 16,667 shares and will vest as
to 15,000 shares on October 1, 1997, and as to 15,000 shares on September 30,
1998.  Dr. Milano exercised her vested options of 31,667 in December, 1997.
Any additional compensation Dr. Milano receives for services as a shareholder
of a Medcorp formed as a professional corporation will be offset against her
base salary. The agreement also provides, among other things, that, if her
employment is terminated without cause (as defined in the agreement), the
Company will pay her an amount equal to six month's salary, payable over a six
month period.  She resigned from the Company in January, 1998.

     In March, 1996, the Company entered into an employment agreement with Mr.
Brigante for his services as corporate controller for a term expiring on
September 30, 1999.  The Employment Agreement provided for an annual base
salary for Mr. Brigante of $90,000 beginning January 1, 1997 and for
participation in all executive benefit plans plus an automobile allowance of
$500 per month.  Mr.  Brigante was granted options to purchase 40,000 shares of
the Company's common stock at an exercise price of $.03 per share.  The options
have vested as to 26,667 shares and will vest as to 13,333 shares on September
30, 1998.  Mr. Brigante exercised his vested options of 26,667 shares in
December 1997. On February 23, 1998, Mr. Brigante was elected to the position
of Vice President of Finance and Chief Financial  Officer.  His annual
compensation increased to $100,000 at that time.

     In August 1996, the Company entered into an employment agreement with Dr.
Kaplan providing for his employment as Senior Director for Operations and
Development for a term expiring in August 1999. The employment agreement
provides for a base salary of $4,000 per month, which was accrued until the
closing of the IPO. After such closing, Dr. Kaplan became entitled to an
automobile allowance of $500 per month. Dr. Kaplan was granted options to
purchase 46,667 shares of the Company's Common Stock at an exercise price of
$0.60 per share. The options have vested with respect to 30,000 shares and will
vest as to 16,667 shares on August 26, 1998. The agreement also provides, among
other
<PAGE>   35
things, that if his employment is terminated by mutual agreement or upon his
death or disability, the Company will pay an amount equal to $60,000, payable
over a six month period. On April 6, 1997, Dr. Kaplan became a Senior Vice
President and a director of the Company.

     Each of the employment agreements with Messrs. McMillen, Sharer, Brigante
and with Dr. Kaplan requires the full-time services of such employees. Mr.
McMillen's employment agreement requires that he devote a minimum of 40 hours
per week to his responsibilities as Chairman and Chief Executive Officer. The
agreements also contain covenants restricting the employee from engaging in any
activities competitive with the business of the Company during the term of such
agreement and for a period of one year thereafter, and prohibiting the employee
from disclosing confidential information regarding the Company.

STOCK OPTION PLANS

     1994 Stock Option Plan.  The Company's 1994 Stock Option Plan (the "1994
Plan") was adopted by the Company's Board of Directors and approved by the
shareholders of the Company in December 1994. The 1994 Plan was amended by the
Board of Directors, with shareholder approval, in 1995, so as to increase the
number of shares available under the 1994 Plan to 400,000 from 60,000. The
purpose of the 1994 Plan is to attract and retain qualified personnel, to
provide additional incentives to employees, officers, directors, consultants
and advisors of the Company, and to promote the Company's business. As of March
23, 1998, options to purchase 366,832 shares of Common Stock at a weighted
average per share exercise price of $0.34 were outstanding. A total of 33,168
shares of Common Stock were available for grant under the 1994 Plan at that
date. The 1994 Plan will terminate in April 2004, unless sooner terminated by
the Board of Directors.

     The 1994 Plan provides for the grant of both incentive stock options,
intended to qualify as such under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and nonqualified stock options. The Board may
delegate administration of the 1994 Plan to the Compensation Committee. Subject
to the limitations set forth in the 1994 Plan, the Board of Directors (or the
Compensation Committee) has the authority to select the persons to whom grants
are to be made, to designate the number of shares to be covered by each option,
to determine whether an option is to be an incentive stock option or a
nonqualified stock option, to establish vesting schedules, and, subject to
certain restrictions, to specify the type of consideration to be paid to the
Company upon exercise and to specify other terms of the options. The maximum
term of options granted under the 1994 Plan is ten years.  Options granted
under the 1994 Plan are nontransferable and generally expire 90 days after the
termination of an optionee's service to the Company.

     Although no specific vesting schedule is required under the 1994 Plan,
options previously granted under the 1994 Plan have generally provided for
vesting in three equal annual installments. The exercise price of incentive
stock options must equal at least the fair market value of the Common Stock on
the date of grant, except that the exercise price of incentive stock options
granted to any person who at the time of grant owns stock possessing more than
10% of the total combined voting power of all classes of stock must be at least
110% of the fair market value of such stock on the date of grant.

     1996 Stock Option Plan.  In October 1996, the Board of Directors of the
Company, with shareholder approval, adopted its 1996 Stock Option Plan (the
"1996 Plan") covering up to 200,000 shares of the Common Stock, pursuant to
which officers, directors, employees, advisors and consultants to the Company
are eligible to receive incentive and/or nonqualified stock options.  The 1996
Plan was modified as approved by the shareholders to 400,000 shares in June,
1997. The 1996 Plan, which expires in September 2006, is administered by the
Compensation Committee of the Board of Directors. The selection of
participants, allotment of shares, determination of price, and other conditions
relating to the grant of options will be determined by the Compensation
Committee in its sole discretion. Incentive stock options granted under the
1996 Plan are exercisable for a period of up to 10 years from the date of grant
at an exercise price which is not less than the fair market value of the Common
Stock on the date of the grant, except that the term of an incentive stock
option granted under the 1996 Plan to a shareholder owning more than 10% of the
outstanding Common Stock may not exceed five years and its exercise price may
not be less than 110% of the fair market value of the Common Stock on the date
of the grant. As of March 23, 1998, options to purchase an aggregate of 372,833
shares of Common Stock at a weighted average per share exercise price of $3.98
were out standing.  A total of 27,167 shares of Common Stock were available for
grant under the 1996 Plan at that date.
<PAGE>   36
1996 Restricted Stock Option Plan for Health Care Professionals.  In October
1996, the Board of Directors adopted, and the stockholders of the Company
approved, the 1996 Restricted Stock Option Plan for Health Care Professionals
(the "1996 Professionals Plan"), which expires in October 2006. The 1996
Professionals Plan permits the Company to grant nonqualified stock options to
licensed health care professionals affiliated with the Company and in most
cases employed by a Medcorp. The aggregate amount of Common Stock with respect
to which options may be granted may not exceed 100,000 shares. The Board of
Directors has delegated to the Compensation Committee the authority to grant
options under such a plan, to construct and interpret such plan, and to make
all other determinations and take all actions necessary or advisable for the
administration of such plan. The exercise price for options granted under the
1996 Professionals Plan may be no less than 85% of the fair market value of the
Common Stock on the date of grant.  Options granted under the 1996
Professionals Plan will expire no later than the tenth anniversary of the date
of grant. There have been 9,500 options granted under the 1996 Professionals
Plan as of March 23, 1998, at $2.25 per share.


EXECUTIVE BONUS PLAN

     Effective January 1, 1996, the Company established an Executive Bonus Plan
for Key Executives (the "Bonus Plan") to reward executive officers and other
key employees based upon the performance of the Company and such individuals.
Under the Bonus Plan, the Company has discretion to award bonuses in an
aggregate amount equal to 10% of the Company's pre-tax income for a particular
fiscal year (the "Bonus Fund"). The maximum amount of the Bonus Fund for any
year is $5 million. Under the terms of existing employment agreements, which
expire on various dates from December 1998 through August 1999, the Bonus Fund
has been allocated as follows: 30% to Mr. McMillen, 30% to Mr. Sharer, and 20%
to Dr. Kaplan, with 20% available for other employees. Awards under the Bonus
Fund are not exclusive of other bonuses that may be awarded by the Board of
Directors or the Compensation Committee from time to time.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information regarding the
beneficial ownership of the Company's voting securities as of March 23,1998 by
(i) each shareholder known by the Company to be the beneficial owner of more
than 5% of any class of the Company's voting securities, (ii) each director of
the Company and (iii) all officers and directors of the Company as a group.
Except as otherwise indicated, the Company believes that the beneficial owners
of the securities listed below have sole investment and voting power with
respect to such securities, subject to community property laws where
applicable.

<TABLE>
<CAPTION>
                                                        NUMBER OF SHARES
                                                            OF CLASS
                                                          BENEFICIALLY         PERCENTAGE OF CLASS
         NAME AND ADDRESS OF BENEFICIAL OWNER                OWNED             BENEFICIALLY OWNED
    -----------------------------------------------     ----------------       -------------------
    <S>                                                     <C>                        <C>
    COMMON STOCK
    C. Thomas McMillen(1) . . . . . . . . . . . . .         411,167                    19.1%
    725 Independence Avenue, S.E.
    Washington, D.C. 20003

    Robert J. Mrazek(4) . . . . . . . . . . . . . .          20,250                      *
    301 Constitution Ave., N.E.
    Washington, D.C. 20002

    Eric S. Kaplan (3). . . . . . . . . . . . . . .
    27 Marlwood Lane                                         46,673                     2.2%
    Palm Beach Gardens, FL  33418

    Michael T. Brigante (7)
    17 Daniel Drive
    Bell Meade, N.J. 08502. . . . . . . . . . . . .          26,667                     1.2%
</TABLE>
<PAGE>   37
<TABLE>
<CAPTION>
                                                        NUMBER OF SHARES
                                                            OF CLASS
                                                          BENEFICIALLY         PERCENTAGE OF CLASS
         NAME AND ADDRESS OF BENEFICIAL OWNER                OWNED             BENEFICIALLY OWNED
    -----------------------------------------------     ----------------       -------------------
    <S>                                                     <C>                        <C>
    E. Eugene Sharer(5) . . . . . . . . . . . . . .          50,001                     2.3%
    725 Independence Avenue, S.E.
    Washington, D.C. 20003

    James J. McMillen, M.D.(4)  . . . . . . . . . .           9,250                      *
    4004 Miller Road
    St. Joseph, MO 64505

    Reach Laboratories, Inc.(6) . . . . . . . . . .         110,000                     5.1%
    1000 NBC Center
    Lincoln, NE 68508

    R. Michael Floyd  . . . . . . . . . . . . . . .          72,866                     3.3%
    5817 Ogden Court
    Bethesda, MD 20816
    All officers and directors as a group (six              564,508                    26.3%
    persons)  . . . . . . . . . . . . . . . . . .
</TABLE>

---------------
* Percentage ownership is less than 1%

(1) Includes 34,500 shares as to which Mr. McMillen has sole voting power until
    December 31, 2000, pursuant to irrevocable proxies from four other holders
    of Common Stock. Does not include 16,667 shares subject to stock options
    which vest in July, 1998 nor 16,666 options which become exercisable in
    April, 1998.

(2) Includes 6,333 shares subject to warrants currently exercisable.

(3) Does not include 16,666 shares subject to stock options which become
    exercisable in April, 1998, 9,869 shares in July, 1998 and 16,880 shares in
    August, 1998.

(4) Mr. Mrazek and Dr. McMillen have each given Mr. McMillen an irrevocable
    proxy to vote their respective shares until December 31, 2000.

(5) Does not include 33,333 shares subject to stock options that become
    exercisable on April 1, 1997, and 5,000 options that became exercisable on
    April 6, 1997.

(6) The beneficial owners of Reach Laboratories, Inc., are Richard R. Endacott
    and Janice G. Peterson.

(7) Does not include 2,000 shares subject to stock options that became
    exercisable on April 4, 1998 and 10,000 shares exercisable on September 1,
    1998.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Six of the Company's seven Integrated Medical Centers under management at
January 31, 1997 were owned by Complete Wellness Centers, L.L.C. ("CWC LLC"), a
Delaware limited liability company. The Company is the managing member of CWC
LLC and owns 1% of its membership interests. The Company, as managing member,
has the authority and responsibility to make substantially all management
decisions for CWC LLC. In addition, the holders of more than 50% of the CWC LLC
membership interests have granted the Company an irrevocable proxy to vote
their membership interests as the Company sees fit. The proxy is valid for the
life of CWC LLC. As a result of these irrevocable proxies, the financial
statements of the Company and CWC LLC are consolidated for financial reporting
purposes. In the future, the Company does not plan to open any additional
Integrated Medical Centers owned directly or indirectly by CWC LLC, nor does it
plan for CWC LLC to raise any additional capital.

     The Company has an option to purchase all of the membership interests of
CWC LLC at an exercise price in an amount such that the other members would
receive a 12% preferred, cumulative, non-compounded, annual return plus a
multiple of their capital contributions ranging from 2 in the first year (1997)
to 4 in the
<PAGE>   38
seventh year (2003), after taking into account any previously returned capital
contribution and preferred cumulative return. The exercise price is payable to
the members within 120 days of the Company's exercise of the option. The price
may be paid, at the Company's election, either in cash, or, if any class of the
Company's securities is publicly traded, 75% in cash and 25% in securities of
that class valued at their initial public offering price. If securities
constitute part of the exercise price, the securities will not be registered
under the Securities Act of 1933, as amended, or applicable state securities
laws.

     CWC LLC has outstanding 13.3 Class A Units (membership interests other than
that of the managing member). The following officers and directors of the
Company or members of their immediate family hold the following interests in
CWC LLC: a trust for the benefit of Wilma Sharer, the spouse of the Company's
President and Chief Operating Officer, holds two Class A Units; Danielle
Milano, the Company's Vice President-Medical Affairs and Secretary, holds 1/5
of one Class A Unit; a trust for the benefit of Virginia Brigante holds 1/5
of one Class A Unit; a trust for the benefit of Jacqueline Brigante holds
11/50 of one Class A Unit. Virginia Brigante and Jacqueline Brigante are the
minor children of Michael T. Brigante, the Company's Vice President of Finance
and Chief Financial Officer. Each such person or trust granted to the Company
an irrevocable proxy to vote such person's respective ownership interest in CWC
LLC.

     In August 1996, the Company entered into a consulting agreement with
J.E.M., Inc. ("JEM"), the sole stockholders of which are Dr. Kaplan, the
Company's Senior Vice President and a director, and his wife. Under the terms
of the consulting agreement, JEM agreed to provide advice and assistance to the
Company in connection with identifying and affiliating with chiropractors and
their existing chiropractic practices and identifying, acquiring, and/or
managing businesses engaged in providing services ancillary to those provided
by Integrated Medical Centers. The Company agreed to pay JEM $6,000 per month
for its services. The term of the consulting agreement expires in August 1999
and may be terminated sooner by mutual agreement of the parties, by the Company
for "cause," defined as a violation by JEM of any material provision of the
consulting agreement not remedied within 30 days after notification or JEM's
conviction of a felony, upon termination of the employment agreement between
Dr. Kaplan and the Company, or JEM's failure to meet certain performance goals.

     The Company, Mr. McMillen, Dr. McMillen, Mr. Mrazek, two other holders of
Common Stock, and all holders of Series A Preferred Stock that were outstanding
prior to the effectiveness of the IPO and automatically converted into shares
of Common Stock at that time, are parties to a certain Stockholders' Agreement
dated March 20, 1995 (the "Stockholders' Agreement"), pursuant to which such
stockholders agreed to various restrictions on their ability to transfer the
shares of Common Stock or Series A Preferred Stock owned by them, among other
things. The holders of the Series A Preferred Stock, voting together as a
class, were given the right to elect one director to the Company's Board of
Directors, but never exercised the right. The Stockholders' Agreement is to
expire on March 20, 2015, or upon the earlier voluntary written agreement of
the Company and such stockholders. The Company believes that the parties to the
Stockholders' Agreement will agree to terminate it effective as of the
consummation of the IPO.

     At December 31, 1997, Dr. Milano served as an officer, director, and the
sole stockholder of selected Complete Wellness Medical Centers. In all cases,
Dr. Milano, the Integrated Medical Center, and the Company entered into a Stock
Transfer Agreement (the "Stock Transfer Agreement") pursuant to which (i) Dr.
Milano agreed not to sell, encumber, or otherwise transfer the shares of stock
in the Integrated Medical Centers owned by her without the written consent of
the Integrated Medical Centers and the Company and (ii) the Company has the
right, following the provision of notice, to direct the transfer of all or part
of such shares to such transferee as it may designate for the sum of ten
dollars, provided that the transferee is licensed to practice medicine in the
appropriate State. In order to facilitate the transfer, the Stock Transfer
Agreement required the contemporaneous execution by Dr. Milano of a stock
transfer assignment, a resignation as an officer and director of the Integrated
Medical Center, and an Agreement for Sale of Business by Transfer of Capital
Stock under which Dr. Milano agreed to transfer her shares in Integrated
Medical Centers for the sum of ten dollars to a transferee to be designated by
the Company for this purpose. In accordance with the Stock Transfer Agreement,
the Company holds the stock transfer assignment, the resignation, and the
Agreement for Sale of Business by Transfer of Capital Stock in escrow.
Additionally, the Stock Transfer Agreement prohibits Dr. Milano, without prior
written consent of the Integrated Medical Center and the Company, from amending
the charter or bylaws of the Integrated Medical Center, agreeing to the merger
or consolidation of the Integrated Medical Centers with or into another
corporation, dissolving or liquidating the Integrated Medical Centers,
authorizing the issuance of any additional shares of stock of the Integrated
Medical Centers, or approving any contract with Dr. Milano herself, members of
her family, or related parties. The Company and Dr. Milano also entered into an
indemnification agreement pursuant to which the Company agreed to indemnify her
from and against claims made against her in her capacity as an officer or
director of the Integrated Medical Centers.

     In 1996, the Company advanced approximately $23,000 to Mr. McMillen without
interest. Mr. McMillen repaid the amount in February 1997.

     Dr. McMillen, Mr. Mrazek, and two other individuals have each given Mr.
McMillen a proxy to vote on their behalf all of the shares of Common Stock
owned by them. Each proxy is irrevocable and valid until December 31, 2000.

     The Company believes that all prior transactions between the Company, its
officers, directors or other affiliates of the Company have been on terms no
less favorable than could have been obtained from unaffiliated third parties.
Any future transactions with
<PAGE>   39
officers, directors, 5% stockholders or affiliates must be for valid business
reasons, be on terms no less favorable to the Company than could be obtained
from unaffiliated third parties, and be approved by a majority of the
independent outside members of the Company's Board of Directors who do not have
an interest in the transaction.


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) NO EXHIBITS

(b) REPORTS ON FORM 8-K.

     The Company filed a Form 8-K on November 24, 1997 regarding service of
government search warrants and seizure of records.

                                   SIGNATURES

     In accordance with 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.

   COMPLETE WELLNESS CENTERS, INC.
             (Registrant)

By /s/ MICHAEL T. BRIGANTE
--------------------------
MICHAEL T. BRIGANTE, CHIEF FINANCIAL OFFICER                    March 31, 1998

    In accordance with 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.


    /s/ C. THOMAS MCMILLEN
    ----------------------
    C. THOMAS MCMILLEN, CHAIRMAN OF THE BOARD,
    CHIEF EXECUTIVE OFFICER, AND DIRECTOR               March 31, 1998


    /s/ E. EUGENE SHARER
    --------------------
    E. EUGENE SHARER, PRESIDENT,                        March 31, 1998
    TREASURER AND DIRECTOR


    /s/ JAMES T. MCMILLEN
    ---------------------
    JAMES T. MCMILLEN, DIRECTOR                         March 31, 1998


     /s/ ROBERT J. MRAZEK
    ---------------------
    ROBERT J. MRAZEK, DIRECTOR                          March 31, 1998


    /s/ ERIC S. KAPLAN
    ------------------
    ERIC S. KAPLAN, CHIEF OPERATING
    OFFICER AND DIRECTOR                                March 31, 1998


    /s/ MICHAEL T. BRIGANTE
    -----------------------
    MIHCAEL T. BRIGANTE, V.P. FINANCE
    AND CHIEF FINANCIAL OFFICER                         March 31, 1998