UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K


(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

                                       or

[  ]     Transition  report  pursuant  to Section 13 or 15(d) of the  Securities
         Exchange  Act of  1934  For the  transition  period  from  ____________
         to________________


                         Commission File Number 0-21209


                           ADVANCED HEALTH CORPORATION
             (Exact name of registrant as specified in its charter)
           Delaware                                13-3893841
(State or other jurisdiction                      (IRS employer
of incorporation or organization)             identification number)



         560 White Plains Road                           10591
         Tarrytown, New York                           (Zip code)
(Address of principal executive offices)


Registrants' telephone number, including area code:  (914) 524-4200

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

Securities  registered  pursuant to Section 12(g) of the Act: Common Stock, $.01
                                                               par value


         Indicate  by check  mark  whether  the  registrant:  (1) has  filed all
reports  required to be filed by Section 13 or 15(d) of the Securities  Exchange
Act of 1934 during the preceding 12 months (or for such shorter  period that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]


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


         The  aggregate  market  value of the  shares  of Common  Stock  held by
non-affiliates  of the registrant is $90,233,257,  based on the closing price of
the Common Stock on March 25, 1997.


         As of March 25,  1997,  there  were  7,166,941  shares of Common  Stock
outstanding.


                       DOCUMENTS INCORPORATED BY REFERENCE


         Portions of the  registrant's  definitive  Proxy Statement for the 1997
Annual  Meeting of  Stockholders  to be filed with the  Securities  and Exchange
Commission  within  120 days  after  December  31,  1996,  are  incorporated  by
reference in Part III hereof.

<PAGE>


                           ADVANCED HEALTH CORPORATION

              FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

                                Table of Contents

<TABLE>
<CAPTION>

                                                                                                              Page
                                                                                                              ----

                                     PART I
<S>        <C>                                                                                                <C>
Item 1.    Business                                                                                             3
Item 2.    Properties                                                                                          14
Item 3.    Legal Proceedings                                                                                   14
Item 4.    Submission of Matters to a Vote of Security Holders                                                 15



                              PART II

Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters                               16
Item 6.    Selected Financial Data                                                                             16
Item 7.    Management's Discussion and Analysis of Financial Condition and Results of
           Operations                                                                                          17
Item 8.    Financial Statements and Supplementary Data                                                         19
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial
           Disclosure                                                                                          20



                             PART III

Item 10.   Directors and Executive Officers of the Registrant                                                  21
Item 11.   Executive Compensation                                                                              21
Item 12.   Security Ownership of Certain Beneficial Owners and Management                                      21
Item 13.   Certain Relationships and Related Transactions                                                      21



                              PART IV

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K                                     22

           Signatures                                                                                          23

           Financial Statements                                                                      F-1

</TABLE>

                                      -2-
<PAGE>


                                     PART I

ITEM 1.  BUSINESS
------

Overview

         Advanced Health  Corporation  (the "Company")  provides a full range of
integrated  management  services and clinical  information  systems to physician
group practices,  single legal entities  comprised of multiple  physicians,  and
physician networks,  aggregations of individual  physicians and physician groups
formed for the purpose of entering into contracts with third-party  payors.  The
management  services  provided by the Company  include  physician  practice  and
network development,  marketing, payor contracting, financial and administrative
management,  clinical  information  management,  human  resource  management and
practice and network governance.  The Company developed its clinical information
systems to provide  physicians,  at the point of care and on a real-time  basis,
with patient-specific clinical and payor information and the ability to generate
patient medical orders and facilitate the  implementation of disease  management
programs.   Through  the  management  of  multi-specialty  and  single-specialty
physician  group  practices and  networks,  the Company  focuses its  management
efforts on  high-cost,  high-volume  disease  specialties,  such as  cardiology,
oncology and orthopedics.  The Company  currently  manages four  multi-specialty
physician  group practices and four  single-specialty  physician group practices
comprised of more than 170 physicians in the New York  metropolitan  area and 11
physician networks with approximately  1,500 physicians in the greater New York,
Philadelphia  and Atlanta  metropolitan  areas,  and  provides  physician  group
consulting  services  to more than 100  physicians.  The  Company  believes  its
management  services and clinical  information systems will enable physicians to
enhance the quality and reduce the cost of health care.

         The  Company's  predecessor,  Med-E-Systems  Corporation  ("MES"),  was
incorporated on August 27, 1993 as a clinical  information  systems  development
company.  Effective  August 23,  1995,  MES became a  subsidiary  of the Company
through a tax-free reorganization.  The Company was subsequently merged with and
into Majean, Inc., a Delaware corporation, and the surviving corporation changed
its name to  Advanced  Health  Corporation.  On  October 2,  1996,  the  Company
consummated  the  initial  public  offering  (the  "IPO")  of its  Common  Stock
(including the exercise of the underwriters' over-allotment option). In the IPO,
the Company sold 2,645,000  shares of Common Stock at an initial public offering
price of $13.00 per share.

Industry

         Increasing  concern  over the rising  cost of health care in the United
States has led to the  development of managed care  organizations  and programs.
Under such  programs,  managed  care payors  typically  govern the  provision of
health  care with the  objective  of  ensuring  delivery  of  quality  care in a
cost-effective  manner. The traditional  fee-for-service  method of compensating
health care providers  offers few  incentives  for the efficient  utilization of
resources and is generally  believed to contribute to health care cost increases
at rates  significantly  higher than  inflation.  Consequently,  fee-for-service
reimbursement  is rapidly being  replaced by alternative  reimbursement  models,
including capitated and other fixed-fee  arrangements.  The growth in enrollment
in these new  reimbursement  models is shifting the financial risk of delivering
health care from payors to providers.

         As a result of this changing health care environment,  health care cost
containment pressures have increased physician management responsibilities while
lowering reimbursement rates to physicians. Consequently, physician compensation
has  declined.  Because  the  majority  of  all  physicians  currently  practice
individually  or in  two-person  groups,  their  ability  to lower  costs and to
negotiate  with  payors  is  limited.  Individual  physicians  and  small  group
practices  also tend to have limited  administrative  capacity,  limited ties to
other health care providers (restricting their ability to coordinate care across
a variety of specialties),  limited capital to invest in new clinical  equipment
and

----------
Med-E-Practice(TM),    Smart    Scripts(TM),    Internet   Script    Writer(TM),
Med-E-Visit(TM),   Practice   Management   Integrator(TM),    Med-E-Network(TM),
Med-E-Net  Central(TM),   Med-E-Net  Office(TM),  Med-E-Net  Integrator(TM)  and
Med-E-Net Cardiology(TM) are trademarks of the Company.

                                      -3-

<PAGE>


technologies and limited  purchasing power with vendors of medical supplies.  In
addition,  individual  physicians and small group  practices  typically lack the
information  systems necessary to enter into and manage  risk-sharing  contracts
with payors and to implement disease management programs efficiently.

         In response to the foregoing factors,  individual  physicians and small
group  practices are  increasingly  affiliating  with larger group practices and
physician  practice  management  companies  ("PPMs").   By  acquiring  physician
practices,  PPMs are successfully providing physicians with lower administrative
costs,  leverage  with vendors and payors and  economies  of scale  necessary to
attract capital resources. In addition, management companies and consultants are
organizing independent physician practices,  independent physician associations,
physician  hospital  organizations  and other  physician  organizations  for the
purpose of enabling physicians to contract with managed care payors.

         The Company  believes  that  significant  opportunities  exist,  in the
consolidating  health  care  industry,  to assist  physicians  in  managing  the
administrative  aspects of group practices and networks.  More importantly,  the
Company believes that even greater  opportunities  exist to assist physicians in
managing the  clinical  aspects of group  practices  and  networks.  The Company
believes its integrated  physician practice and network management  services and
clinical  information systems will enable physicians to more effectively control
both the quality and cost of health care.

Strategy

         The  objective  of the  Company  is to  become a  leading  provider  of
integrated  management  services and clinical  information  systems to physician
organizations.  By enabling  physicians to develop and efficiently  manage group
practices and networks,  the Company seeks to assist  physicians in facilitating
risk-based   managed  care  contracts,   developing  and  implementing   disease
management  programs and  monitoring  and  controlling  health care outcomes and
costs. The Company's  strategy includes (i) establishing  long-term  contractual
alliances with physician  organizations,  (ii) managing  high-cost,  high-volume
disease  specialties  such  as  cardiology,   oncology  and  orthopedics,  (iii)
providing  physicians  with  clinical  information  at the  point of care,  (iv)
focusing on selected geographic markets that offer  concentrations of physicians
seeking the company's services and (v) continuing to develop relationships with
key industry participants.

Physician Practice and Network Services

         The  Company  provides  physicians  with a  full  range  of  integrated
services to form and develop  group  practices  and  networks,  to manage  group
practice and network  operations,  to develop disease management programs and to
manage medical risk.  These  integrated  services  include  clinical support and
administrative  and  marketing  services  as well as  point-of-care  information
systems and support. The Company often initially provides physician practice and
network services pursuant to a consulting arrangement. The Company believes that
its point-of-care  information  systems provide  physicians with the information
needed to improve the quality and reduce the cost of health care.

         In  addition  to  providing   administrative   management  services  to
physician organizations,  the Company seeks to differentiate itself by assisting
physicians  in managing the  clinical  aspects of their  practices.  The Company
believes  that its  integrated  management  services  and  clinical  information
systems will enhance the ability of physician  group  practices  and networks to
implement disease  management  programs and to manage practices under risk-based
contracts.   The  Company  is  working  to  assist   physicians   in  developing
disease-specific  clinical  practice  guidelines and in practicing in accordance
with  applicable  standards  of care.  The  Company  has  initially  focused the
implementation  of  its  single-specialty  disease  management  strategy  on the
creation of an  integrated  comprehensive  cardiovascular  care  program,  which
includes physician group practices, networks and medical support services. It is
anticipated  that this disease  management  program  will be  delivered  through
linked  practices and networks of  cardiovascular  specialists  under management
and/or development by the Company who will provide integrated, high-quality care
for  patients  based on clinical  care  guidelines  developed  by the  physician
networks. The


                                      -4-


<PAGE>


Company anticipates that the physicians within these practices and networks will
be linked together by the Company's clinical information systems.

         The  Company  markets its  physician  practice  management  and network
management  services through (i) direct sales methods,  (ii) consultative  sales
that include providing advice on the development, consolidation and financing of
group  practices  and  networks  and (iii)  cross-selling  to  customers  of its
clinical information systems.

         The Company offers a comprehensive set of physician practice management
services,  including practice  formation,  operations  development and strategic
planning,   marketing,   payor   contracting  and   management,   financial  and
administrative  management,  clinical  information  management,  human  resource
management and practice governance.

         The Company's  physician  network  management  services include network
development and strategic  planning,  disease  management  program  development,
payor  marketing  and  contracting,  financial  and  administrative  management,
clinical information management and network governance.

Clinical Information Systems

         The  Company  has  developed  clinical  information  systems  that link
physician  users at the point of care and on a real-time basis with patient data
and  clinical  guidelines  maintained  by the  Company  and third  parties.  The
Company's  clinical   information  systems  consist  of  proprietary   software,
third-party hardware,  proprietary and third-party databases and related support
services.  The  Company's  clinical  information  systems are  designed to allow
physicians (i) to access patient-specific  clinical and payor information,  (ii)
to generate patient instructions,  prescriptions and orders for tests, specialty
referrals  and specialty  procedures  and (iii) to access  databases  containing
managed care and disease management guidelines, diagnostic/treatment preferences
and guidelines affecting medical orders.

         The Company's clinical  information  systems are designed to complement
existing  health  care  information  systems and to  function  with  third-party
applications. The clinical information system connects to physician users either
through  the use of a hand-held  computer  equipped  with a wireless  modem or a
desktop computer using a standard  wireline modem. It is anticipated that access
to the  Company's  clinical  information  systems will be delivered to physician
users and other health care  professionals via both private and public networks,
including  the  Internet.   The  Company's   product  suites  operate  within  a
client/server-based  open  architecture.  The  Company's  products  support HL-7
interfaces, incorporate TCP/IP protocols for real-time data transmission and run
on the Microsoft Windows operating system and standard hardware  platforms.  The
Company employs proprietary  processes and standard commercial security measures
to ensure the privacy of the data communication paths within its products.

         The  Company has made only  limited  commercial  sales of its  clinical
information  systems to date. In addition to providing its clinical  information
systems to its affiliated physicians,  the Company intends to continue licensing
its clinical  information systems to third-party health care  organizations.  In
addition,  the Company  markets its  clinical  information  systems to physician
group practices and networks together with its management services.

         On September 27, 1995, the Company entered into a software  license and
integration  agreement  with Merck Medco  Managed  Care,  Inc. for the Company's
prescription  writing  software,  which  provides  formulary  management,   drug
utilization and review ("DUR") edits and linkage to drug therapy  protocols.  On
August 1, 1995,  the Company signed an agreement to provide  disease  management
information  systems and software to an affiliate of PCS Health  Systems,  Inc.,
the managed care unit of Eli Lilly & Company.  The Eli Lilly & Company affiliate
has agreed to sponsor two pilot  programs  involving  the software  applications
developed by the Company.

         The Company  continues to pursue  strategic  relationships  with health
care  providers as well as hospital  information  systems  companies,  physician
practice  management  systems  companies and on-line services  companies for the
purpose of further developing and marketing its information systems.


                                      -5-

<PAGE>


         The Company  offers a broad range of clinical  information  systems for
physician users,  presently  through two suites of applications,  Med-E-Practice
and  Med-E-Network.  Med-E-Practice is designed to be used directly by physician
group practices in support of clinical  decision making,  clinical  ordering and
administrative  management.  Med-E-Network is designed to support administrative
and clinical  decision  making for physician  networks  engaged in capitated and
other fixed-fee  arrangements  under managed care contracts.  These systems have
only been developed by the Company recently,  and the initial limited commercial
installations of the Med-E-Practice suite of applications  occurred in June 1996
and of the Med-E-Network suite of applications in February 1997.

         The following table summarizes the two suites of applications presently
offered and being developed by the Company:

Product Name                  Product Description

Med-E-Practice
    Smart Scripts             Pharmaceutical  prescription writing applications
                              providing  formulary  management,  DUR  edits and
                              diagnostic   coding   linkage  to  drug   therapy
                              protocols.

    Med-E-Visit               Patient   encounter   application   generating  a
                              Superbill with fully qualified  diagnostic coding
                              linked to  appropriate  billing codes required to
                              support outcomes analysis.

    Referral                  Supports  multiple referral networks by recording
                              referral    information    and   providing   both
                              network-specific  referral rules and  appropriate
                              network specialists.

    Conditions Editor         Tracks and maintains an active conditions list by
                              patient.

    Allergies Editor          Maintains active and inactive allergy  conditions
                              by patient, supporting charting and DUR editing.


    Practice Management       Allows Med-E-Practice  applications  to  integrate
      Integrator              with third-party  physician  practice  management
                              systems using industry standard HL-7 records.


    Clinical Note             Allows  physicians to complete  clinical notes at
                              the point of care. Currently in development.


Med-E-Network
    Med-E-Net Central         Provides  centralized   administrative  functions
                              necessary   to   manage   risk-taking   specialty
                              networks.

    Med-E-Net Office          Integrates physicians in geographically dispersed
                              networks.

    Med-E-Net Integrator      Provides integration and connectivity between the
                              applications  in  the  Med-E-Network   suite  and
                              third-party databases.


    Med-E-Net Cardiology      Provides   cardiology-specific    extensions   to
                              Med-E-Network for managing risk-taking cardiology
                              networks.



         Med-E-Practice   provides   administrative  and  clinical  support  for
physician  group  practices.  The  Med-E-Practice suite is  designed  for use by
physicians  at the point of care and on a  real-time  basis and is  intended  to
allow  better  care  decisions  by  providing  better  information.  All  of the
applications in the Med-E-Practice  suite are designed to be run on a pen-based,
portable, wireless computer for use in a busy ambulatory practice.

         Med-E-Network is a suite of network management  applications supporting
physician  networks engaged in risk-based  contracts with payors.  Med-E-Network
automates  network   configuration,   maintenance  of  network  rules,  referral
management,  utilization review management, claims and encounter submissions and
financial and clinical reporting.  Med-E-Network  utilizes a relational database
engine which  integrates  various sources of information and provides a flexible
repository for developing administrative, financial and clinical reports.


                                      -6-

<PAGE>

         The  Company  believes  that the  timely  development  of new  clinical
information  applications and the enhancement of existing  clinical  information
systems  are  important  to its  competitive  position.  The  Company's  current
activities are directed toward this type of product  development.  The Company's
product  development  strategy is directed toward creating new applications that
(i)  increase  the  functionality  of current  products  by  providing  enhanced
interfaces to third-party  systems and data  repositories,  (ii) expand coverage
along the  continuum of clinical  care,  (iii)  increase  coverage to additional
disease and procedure groups and (iv) provide customers with a range of decision
support  systems at various  price  points.  The  Company has  approximately  30
professionals dedicated to systems development.

Concentration of Revenues

         In the year ended  December  31, 1995,  Madison  Medical -- The Private
Practice Group of New York, L.L.P.  ("Madison")  accounted for approximately 36%
of the Company's revenues.  In the year ended December 31, 1996, Madison and the
Advanced  Heart  Physicians & Surgeons  Network,  P.C.  ("AHP&S")  accounted for
approximately 47% and 19% of revenues,  respectively.  The Company's  management
services  agreements  generally have an initial term of five to 20 years and may
be terminated  only for cause.  The  management  services  agreement  with AHP&S
restricts  the  Company's  ability to  provide  management  services  to certain
cardiology  physician groups in the New York metropolitan area. In addition,  in
the year ended  December 31, 1995,  the Company's  disease  management  software
license and integration agreement with an affiliate of PCS Health Systems, Inc.,
the managed care unit of Eli Lilly & Company, accounted for approximately 32% of
the Company's revenues. Although such affiliate of PCS Health Systems has agreed
to sponsor two pilot programs involving the software  applications  developed by
the Company, it has no obligation  thereafter to use or distribute the Company's
software.  Although the Company seeks to build long-term customer relationships,
no assurance can be given that such relationships will continue. Any termination
or significant  deterioration of the Company's  relationships with its principal
customers  could  have a  material  adverse  effect on the  Company's  business,
financial condition and results of operations.  In addition,  a deterioration in
the  financial  condition of any of its  principal  customers  would  materially
adversely affect the Company's financial condition and results of operations.

Contractual Relationships with Affiliated Physicians

         The Company typically  establishes a majority-owned  management service
organization  ("MSO") for each physician  organization it manages.  The MSO is a
joint  venture  between the  physician  organization  and the Company,  with the
Company  owning at least 51% of the  equity in the MSO.  The MSO  enters  into a
long-term management services agreement with the physician organization pursuant
to which the MSO  provides  group  practice  management  or  network  management
services that provide both administrative and clinical support to members of the
physician  organization.  The MSO concurrently  enters into a services agreement
with the Company  pursuant to which it gains access to  management  services and
clinical  information  systems  from  the  Company.  The  MSO's  assets  consist
primarily  of its  management  service  contracts  with the  physician  group or
network served and its liabilities  consist  primarily of its obligations  under
its agreement with the Company and its obligations to its employees. For certain
MSOs, a  stockholders  agreement  is entered  into among the MSO, the  physician
organization and the Company.  The stockholders  agreement,  among other things,
(i)  restricts  the transfer of MSO equity,  (ii) provides the terms upon which,
after the occurrence of the Trigger Event (as hereinafter defined), the MSO can,
at the Company's  option,  be merged with and into a wholly-owned  subsidiary of
the Company in a  transaction  in which  interests of the  physician  groups and
networks  in such  MSO  would  be  exchanged  for  Common  Stock  (the  "Roll Up
Transaction")  and (iii) grants to the physician  organization  the right to put
its  equity  in the  MSO  to  the  Company  at a  price  equal  to  110%  of the
then-current  fair  market  value of the shares of Common  Stock that would have
otherwise  been  issued  in the  Roll Up  Transaction  if the  Company  does not
exercise  its option to cause the Roll Up  Transaction  to occur within one year
after the  occurrence  of the  Trigger  Event.  In the case of each such MSO,  a
Trigger Event will occur at such time as (i) the Company is providing  physician
practice  management  services to at least 300  physicians,  (ii) the Company is
providing  physician network  management  services to at least 2,000 physicians,
(iii) the Company has at least $75,000,000 in stockholders'  equity and (iv) the
Company's  Common Stock is publicly  traded.  The Company has  reserved  548,224
shares  of  Common  Stock  for  issuance  upon the  merger of such MSOs into the
Company.


                                      -7-

<PAGE>


         Physician Practices. The management services agreements between the MSO
and a physician  practice  group  generally  have an initial  term of five to 20
years and are  automatically  renewable for additional  terms.  Such  agreements
typically are subject to early  termination for cause.  The management  services
agreements  generally  obligate an MSO to provide certain  non-medical  practice
management  services to the physician  practice group for a monthly fee. The fee
paid to the MSO is generally a  combination  of fixed fees for certain  services
and percentage  fees for certain  services.  For  risk-based  contracts that the
physician  practice group enters into, the  management  services  agreement will
generally provide for additional  management fees based upon savings  recognized
by the physician practice group because of any cost efficiencies  resulting from
the MSO's performance.  The fees are set to be competitive within the geographic
area in which the physician practice group is located.  A provision  restricting
the physician  practice  group from  competing  against the MSO or employing the
MSO's employees is generally included in the agreement.

         Physician Networks.  The management services agreements between the MSO
and a physician  network  generally  have an initial term of at least five years
and are automatically  renewable for additional terms. Such agreements typically
are subject to early termination for cause. The management  services  agreements
generally  obligate an MSO to provide certain  non-medical  practice  management
services  to the  physician  network  for a fee.  The  fee  paid  to the MSO for
risk-based or capitated contracts is generally a service fee equal to the actual
cost, not to exceed a specified percentage of capitated revenues,  for providing
the non-medical management services plus an incentive based on savings generated
by the  network.  The  fee  paid to the MSO  for  fee-for-service  contracts  is
generally equal to the administrative fees included in the managed care contract
plus a  management  processing  fee  agreed  upon by the  MSO and the  physician
network.  The fees are set to be competitive within the geographic area in which
the physician network is located. In the agreement, the physician network agrees
that the MSO will be the exclusive provider of non-medical  management  services
to the physician network.

         Capitated and Other Fixed-Fee Arrangements.  In the future, the Company
anticipates  entering  into  managed  care  or  capitated  arrangements,  either
indirectly through the assignment of managed care contracts entered into between
its  affiliated  physicians  and  third-party  payors or  directly  through  the
formation of an independent  physician association ("IPA"). The Company does not
now have  capitated  contracts  (although  the Company does  provide  management
services to physician  groups and networks that have entered into such capitated
contracts).  The  Company  has  little  experience  in  managing  capitated-risk
arrangements  and has no  experience in forming or managing an IPA. With respect
to the  assignment  of capitated  revenues to the  Company,  the Company will be
dependent on the  physician  group  practices  and networks  entering  into such
agreements,  the terms and  conditions of which are determined by the physicians
in  their  sole  discretion,  and  providing  medical  services  thereunder.  In
addition, the Company is dependent upon the continued alliance of the physicians
with the group  practice  and network  clients of the  Company.  The Company had
previously reported, at the insistence of the accounting staff of the Securities
and Exchange  Commission  (the "SEC"),  that it would recognize in its financial
statements  only those assigned  revenues  associated  with the provision of its
management services (typically expected to be approximately 10% of the capitated
payments  made),  with the  balance  of such  payments  being  paid  over to the
physicians providing the services pursuant to such agreements. Subsequently, but
prior to the Company either  earning,  recording or reporting any such revenues,
SEC   accounting   releases  have   indicated  that  because  of  the  increased
risk-sharing  relationships,  revenues for the full amount of the  capitated fee
should be  reflected  in full in the  Company's  statement  of  operations  when
earned.  The Company has not earned,  recognized  or recorded  any such  revenue
through  December  31,  1996.  Revenues  under  any  managed  care or  capitated
arrangements  entered  into  directly by the Company  will  generally be a fixed
amount per enrollee. Under such an arrangement,  the Company would contract with
affiliated  physicians for the provision of health care services and the Company
would be  responsible  for the  provision of all or a portion of the health care
requirements of such enrollees.  To the extent that enrollees  require more care
than is  anticipated  by the Company  upon  entering  into such a contract,  the
Company's  revenues under such contracts may be insufficient to cover its costs,
in which event the Company  would  suffer a loss.  The Company  expects to enter
into reinsurance agreements with third-party insurers in respect of a portion of
such risk.


                                      -8-

<PAGE>


Proprietary Rights

         The Company is relying upon the effectiveness of protection provided by
a combination  of patent,  trade secret and copyright  laws,  nondisclosure  and
other  contractual   provisions  and  technological   measures  to  protect  its
proprietary position in its methodologies,  databases and software.  The Company
has two U.S. patent applications and a foreign patent application having subject
matter common with both U.S.  applications,  but no issued  patents.  The patent
applications are directed to the Company's Smart Scripts prescription management
system and related  technologies.  No assurance can be provided that a patent or
patents will be issued or will provide the Company with adequate protection. Nor
can any  assurance  be given that  patent,  trade  secrets,  copyright  or other
intellectual  property rights can be successfully  asserted in any court action.
The  Company  also  has  copyrights  in its  software,  user  documentation  and
databases.  The copyright  protection accorded to databases,  however, is fairly
limited. While the arrangement and selection of data are protectable, the actual
data are not,  and others are free to create  databases  that  perform  the same
function.  The Company  distributes its clinical  information  systems  products
under  agreements  that grant  customers  non-exclusive  licenses and  generally
contain terms and conditions restricting the disclosure and use of the Company's
systems.  In  addition,  the  Company  attempts  to protect  the  secrecy of its
proprietary  databases  and other  trade  secrets  and  proprietary  information
through  confidentiality  agreements  with  employees,   consultants  and  third
parties.

         The Company believes that, aside from the various legal  protections of
its proprietary information and technologies,  factors such as the technological
and creative  skills of its  personnel and product  maintenance  and support are
integral to  establishing  and  maintaining  its position within the health care
industry.  Although the Company  believes that its products do not infringe upon
the  proprietary  rights of third parties,  there can be no assurance that third
parties will not assert infringement claims against the Company in the future.

Competition

         The provision of physician practice and network management  services is
a highly  competitive  business in which the Company competes for contracts with
several  national  and many  regional  and local  companies.  The  Company  also
competes with traditional managers of health care services that directly recruit
and manage  physicians.  In addition,  certain of the Company's  competitors are
dedicated to or  specialize  in the  management  of  single-specialty  practices
focused on diseases such as cardiology, oncology and orthopedics, specialties on
which the Company intends to focus.  Certain of the Company's  competitors  have
access to  substantially  greater  financial  resources  than the  Company.  The
Company  believes that  competition in this industry is generally  based on cost
and quality of services.

         The market for health care  information  systems and services is highly
competitive  and rapidly  changing.  The  Company  believes  that the  principal
competitive factors for clinical  information systems are the proprietary nature
of methodologies,  databases and technical resources, the usefulness of the data
and  reports   generated  by  the  software,   customer   service  and  support,
compatibility with the customer's existing  information  systems,  potential for
product enhancement, vendor reputation, price and the effectiveness of marketing
and sales efforts.

         The  Company's   competitors   include  other   providers  of  clinical
information  systems and  practice  management  systems.  Many of the  Company's
competitors  and  potential   competitors   have  greater   financial,   product
development,  technical and marketing resources than the Company,  and currently
have, or may develop or acquire,  substantial  installed  customer  bases in the
health  care  industry.  In  addition,  as the market for  clinical  information
systems and practice  management  systems develops,  additional  competitors may
enter the market and competition may intensify.  While the Company believes that
it will successfully  differentiate its clinical  information systems from those
of its competitors,  there can be no assurance that future  competition will not
have a material adverse effect on the Company.


                                      -9-

<PAGE>


Government Regulation

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

         Reimbursement.  Inasmuch as a portion of the revenues of the  Company's
affiliated   physician   group  practices  is  derived  from  payments  made  by
government-sponsored  health care programs (principally,  Medicare, Medicaid and
state reimbursed programs), any change in reimbursement  regulations,  policies,
practices,  interpretations or statutes could adversely affect the operations of
the Company.  The federal  Medicare program adopted a system of reimbursement of
physician  services,  a  resource-based  relative value scale ("RBRVS")  payment
methodology, which took effect in 1992 and was fully implemented by December 31,
1996.  The Company  expects that the RBRVS fee schedule and other future changes
in Medicare  reimbursement  will result,  in some cases,  in a reduction and, in
some cases,  in an increase from historical  levels in the per-patient  Medicare
revenue  received  by  certain  of the  physician  organizations  with which the
Company  contracts.  Although the Company does not believe such  reductions will
have a material adverse effect on the Company's operating results, the RBRVS fee
schedule  may be adopted by other  payors,  which could have a material  adverse
effect on the Company.

         Billing.  There are also state and federal civil and criminal  statutes
imposing  substantial   penalties,   including  civil  and  criminal  fines  and
imprisonment,  on health care providers  that  fraudulently  or wrongfully  bill
governmental or other third-party  payors for health care services.  The federal
law  prohibiting  false billings allows a private person to bring a civil action
in the name of the U.S. government for violations of its provisions. The Company
believes it is in material  compliance with such laws, but there is no assurance
that  the  Company's  activities  will  not  be  challenged  or  scrutinized  by
governmental authorities.  Moreover,  technical Medicare and other reimbursement
rules  affect the  structure  of  physician  billing  arrangements.  The Company
believes it is in material  compliance  with such  regulations,  but  regulatory
authorities  may  differ and in such  event the  Company  may have to modify its
relationship with physician  organizations.  Noncompliance with such regulations
may adversely affect the business, financial condition and results of operations
of the Company and subject it and affiliated  physician  groups to penalties and
additional costs.

         Corporate  Practice  of  Medicine.  The  laws of many  states  prohibit
business corporations such as the Company from practicing medicine and employing
physicians  to practice  medicine.  These laws forbid both direct  control  over
medical decisions and indirect interference such as splitting medical fees' with
physicians or controlling  budgetary allotments for patient care. Laws regarding
the corporate  practice of medicine vary from state to state and are enforced by
the courts and by regulatory authorities. New York State, for example, prohibits
percentage  payments from physicians or physician groups to management  entities
for services other than billing and collecting and prohibits management entities
from engaging in the delivery of medical services. All of the management service
agreements ("MSAs") between the Company's  majority-owned MSOs and the physician
groups and networks  they serve  specifically  address this issue.  First,  each
explicitly  provides that the physician  organization  retains  complete control
over medical  decision making,  and that the MSO may neither  interfere with the
professional judgment of medical personnel nor control,  direct or supervise the
provision of medical services.  Furthermore, the MSAs make it clear that the MSO
may not perform any  services or  activities  which  constitute  the practice of
medicine.  For instance,  the MSO has no responsibility  in decisions  regarding
level of  patient  care,  credentialing  or quality  monitoring.  Administrative
policies,  budgets and fee schedules  affecting the delivery of medical services
are  developed  by a Joint  Management  Advisory  Board,  which is at all  times
controlled by medical group physicians.  In contrast, each MSO controlled by the
Company is a management organization whose role is to assist with and coordinate
administrative   functions  and  to  advise  the  physician   group  as  to  the
relationship   between   its   performance


                                      -10-

<PAGE>


of medical  activities and the  administrative  and business  functioning of its
practice.  The Company  believes it is in material  compliance with  regulations
regarding  the  corporate  practice of medicine,  but  regulatory  authority may
differ and in such event  expansion of the  operations of the Company to certain
jurisdictions  may  require it to comply  with such  jurisdictions'  regulations
which could lead to structural and organizational modifications of the Company's
form of relationships with physician organizations.  Such changes, if any, could
have a material adverse effect on the Company.

         Anti-Kickback Statutes.  Certain provisions of the Social Security Act,
commonly referred to as the "Antikickback Statute," prohibit the offer, payment,
solicitation  or receipt of any form of  remuneration in return for the referral
of Medicare or state health program patients or patient care  opportunities,  or
in return for the recommendation, arrangement, purchase, lease or order of items
or  services  that are  covered  by  Medicare  or  state  health  programs.  The
Anti-kickback  Statute  is broad in scope and has been  broadly  interpreted  by
courts in many  jurisdictions.  Read literally,  the statute places at risk many
legitimate business  arrangements,  potentially  subjecting such arrangements to
lengthy,  expensive  investigations  and  prosecutions  initiated by federal and
state governmental officials.  Many states, including those in which the Company
does business,  have adopted similar  prohibitions  against payments intended to
induce referrals of Medicaid and other third-party  payor patients.  The Company
believes  that,  although  it is  receiving  remuneration  under the  management
services agreements for management services,  it is not in a position to make or
influence  the  referral of patients or  services  reimbursed  under  government
programs to the physician  groups and,  therefore,  believes it has not violated
the  Anti-kickback  Statute.  The  Company  also is not a separate  provider  of
Medicare or state health program reimbursed services.  To the extent the Company
is deemed to be  either a  referral  source  or a  separate  provider  under its
management  services  agreements and to receive  referrals from physicians,  the
financial  arrangements  under such agreements  could be subject to scrutiny and
prosecution  under the  Anti-kickback  Statute.  Violation of the  Anti-kickback
Statute  is a  felony,  punishable  by fines up to  $25,000  per  violation  and
imprisonment  for up to five years.  In addition,  the  Department of Health and
Human Services may impose civil penalties excluding violators from participation
in Medicare or state health programs.

         In July 1991, in part to address concerns  regarding the  Anti-kickback
Statute, the federal government  published  regulations that provide exceptions,
or "safe  harbors,"  for  transactions  that will be deemed not to  violate  the
Anti-kickback  Statute.  Among the safe harbors included in the regulations were
provisions  relating  to the  sale of  practitioner  practices,  management  and
personal services agreements and employee relationships. Additional safe harbors
were   published  in  September   1993  offering  new   protections   under  the
Anti-kickback  Statute to eight  activities,  including  referrals  within group
practices  consisting of active investors.  Proposed amendments to clarify these
safe  harbors  were  published  in July 1994  which,  if  adopted,  would  cause
substantive  retroactive  changes to the 1991 regulations.  Although the Company
believes  that  it is  not  in  violation  of  the  Anti-kickback  Statute,  its
operations may not fit within any of the existing or proposed safe harbors.

         Significant  prohibitions  against physician  referrals were enacted by
Congress in the Omnibus Budget  Reconciliation Act of 1993. These  prohibitions,
commonly known as "Stark II," amended prior physician  self-referral legislation
known as "Stark I" by  dramatically  enlarging the field of  physician-owned  or
physician-interested   entities  to  which  the  referral   prohibitions  apply.
Effective January 1, 1995, Stark II prohibits,  subject to certain exemptions, a
physician or a member of his immediate family from referring  Medicare  patients
to an entity providing  "designated  health services" in which the physician has
an ownership or  investment  interest,  or with which the  physician has entered
into a compensation  arrangement  including the  physician's own group practice.
The designated health services include radiology and other diagnostic  services,
radiation therapy services,  physical and occupational therapy services, durable
medical  equipment,  parenteral and enteral  nutrients,  equipment and supplies,
prosthetics,  orthotics, outpatient prescription drugs, home health services and
inpatient and outpatient hospital services. The penalties for violating Stark II
include  a  prohibition  on  payment  by these  government  programs  and  civil
penalties  of as much as $15,000 for each  violative  referral  and $100,000 for
participation  in a  "circumvention  scheme."  The  Company  believes  that  its
activities  are not in  violation  of Stark I or Stark  II.  However,  the Stark
legislation is broad and ambiguous.  Interpretative  regulations  clarifying the
provisions of Stark II have not been issued. While the Company believes it is in
compliance  with the Stark  legislation,  future  regulations  could require the
Company to modify the form of its  relationships  with physician  organizations.
Moreover,  the violation of Stark

                                      -11-

<PAGE>


I or II by the  Company's  affiliated  physician  organizations  could result in
significant  fines and loss or reimbursement  which could  materially  adversely
affect the  Company.  Many states in which the Company  conducts  business  have
enacted similar laws applicable to all services.

         PIP Regulations.  The Health Care Finance  Administration  ("HCFA") has
issued final regulations (the "PIP  regulations")  covering the use of physician
incentive plans ("PIPs") by health maintenance  organizations ("HMOs") and other
managed  care  contractors  and  subcontractors  ("Organizations"),  potentially
including the Company.  Any  Organization  that contracts with a physician group
that  places  the  individual  physician  members  of the  group at  substantial
financial  risk for the  provision  of services  (e.g.,  if a primary care group
takes risk but subcontracts  with a specialty group to provide certain services)
must satisfy certain disclosure,  survey and stop-loss  requirements.  Under the
PIP regulations,  payments of any kind, direct or indirect,  to induce providers
to  reduce  or  limit  covered  or  medically  necessary  services  ("Prohibited
Payments") are prohibited.  Further,  where there are no Prohibited Payments but
there is risk sharing among  participating  providers  related to utilization of
services  by  their   patients,   the   regulations   contain  three  groups  of
requirements:   (i)  requirements  for  physician  incentive  plans  that  place
physicians at "substantial financial risk;" (ii) disclosure requirements for all
Organizations  with  PIPs;  and (iii)  requirements  related  to  subcontracting
arrangements.  In  the  case  of  substantial  financial  risk  (defined  in the
regulations  according to several methods, but essentially risk in excess of 25%
of the maximum payments  anticipated  under a plan with less than 25,000 covered
lives), Organizations must: (1) conduct enrollee surveys and (2) ensure that all
providers have specified stop-loss protection. The violation of the requirements
of  the  PIP  regulations  may  result  in a  variety  of  sanctions,  including
suspension  of  enrollment  of new  Medicaid  or  Medicare  members,  or a civil
monetary  penalty  of  $25,000  for  each  determination  of  noncompliance.  In
addition,  because of the increasing  public  concerns  regarding  PIPs, the PIP
regulations  may  become  the  model  for  the  industry  as a  whole.  The  new
regulations  could have an affect on the ability of the  Company to  effectively
reduce the costs of  providing  services by limiting the amount of risk that may
be imposed upon physicians.

         Anti-Trust.  Because  the  affiliated  physician  organizations  remain
separate legal entities,  they may be deemed  competitors  subject to a range of
antitrust laws which prohibit anti-competitive conduct,  including price fixing,
concerted refusals to deal and division of market. The Company intends to comply
with such state and federal  laws as may affect its  development  of  integrated
health care delivery  networks,  but there can be no assurance  that a review of
the Company's business by courts or regulatory  authorities will not result in a
determination  that could adversely  affect the operation of the Company and its
affiliated physician groups.

         Insurance  Regulations.  Laws in all states  regulate  the  business of
insurance and the operation of HMOs. Many states also regulate the establishment
and  operation of networks of health care  providers.  There can be no assurance
that  regulatory  authorities of the states in which the Company  operates would
not apply these laws to require  licensure  of the  Company's  operations  as an
insurer,  as an HMO or as a provider  network.  On August 10, 1995, the National
Association of Insurance Commissioners (the "NAIC") issued a report opining that
certain  risk-transferring arrangements may entail the business of insurance, to
which state licensure laws apply,  but that licensure laws would not apply where
an unlicensed entity contracts to assume  "downstream risk" from a duly licensed
health insurer or HMO for health care provided to that carrier's enrollees.  The
NAIC's  conclusions are not binding on the states. The Company does not now have
capitated  contracts  and will  enter  into such  contracts  only with  licensed
insurance  companies  and HMOs,  and only if allowed by state law.  The  Company
believes that it is in compliance with these laws in the states in which it does
business, but there can be no assurance that future interpretations of insurance
laws and health care network laws by the regulatory  authorities in these states
or in the states into which the Company may expand will not require licensure or
a restructuring of some or all of the Company's operations.

         Health Care Reform.  As a result of the continued  escalation of health
care costs and the inability of many  individuals  to obtain  health  insurance,
numerous proposals have been or may be introduced in the U.S. Congress and state
legislatures relating to health care reform. There can be no assurance as to the
ultimate content, timing or effect of any health care reform legislation, nor is
it possible at this time to estimate the impact of potential legislation,  which
may be material, on the Company.


                                      -12-

<PAGE>


         Confidentiality  of Patient  Records.  The  confidentiality  of patient
records  and the  circumstances  under  which such  records  may be  released is
subject to substantial  regulation under state and federal laws and regulations.
To protect  patient  confidentiality,  data entries to the  Company's  databases
delete any patient identifiers, including name, address, hospital and physician.
The Company  believes that its procedures  comply with the laws and  regulations
regarding the collection of patient data in substantially all jurisdictions, but
regulations  governing patient  confidentiality  rights are evolving rapidly and
are often difficult to apply. Additional legislation governing the dissemination
of medical  record  information  has been proposed at both the state and federal
level.  This  legislation may require  holders of such  information to implement
security  measures that may be of substantial cost to the Company.  There can be
no assurance that changes to state or federal laws would not materially restrict
the  ability  of the  Company to obtain  patient  information  originating  from
records.

         FDA Regulation.  Certain  products,  including  software  applications,
intended  for use in the  diagnosis  of disease or other  conditions,  or in the
cure, treatment,  mitigation or prevention of disease, are subject to regulation
by the United States Food and Drug  Administration (the "FDA") under the Federal
Food,  Drug and Cosmetic Act of 1938, as amended (the "FDCA").  The FDCA imposes
substantial regulatory controls over the manufacturing, testing, labeling, sale,
distribution,  marketing  and  promotion  of medical  devices and other  related
activities.  These regulatory controls can include, for example, compliance with
the  following:  manufacturer  establishment  registration  and device  listing;
current good manufacturing  practices; FDA clearance of a premarket notification
submission or FDA approval of a premarket approval  application;  medical device
adverse  event   reporting;   and  general   prohibitions   on  misbranding  and
adulteration.  Violations  of the FDCA can result in severe  criminal  and civil
penalties, and other sanctions,  including, but not limited to, product seizure,
recall, repair or refund orders, withdrawal or denial of premarket notifications
or  premarket  approval   applications,   denial  or  suspension  of  government
contracts  and  injunctions  against  unlawful  product  manufacture,  labeling,
promotion and distribution or other activities.

         In its 1989 Draft Policy for the  Regulation of Computer  Products (the
"1989  Draft  Policy  Statement"),  the FDA stated  that it  intended  to exempt
certain clinical  decision support software products from a number of regulatory
controls. Under the 1989 Draft Policy Statement, the FDA stated that it intended
to exempt  decision  support  software  products that involve  "competent  human
intervention  before any impact on human health  occurs  (e.g.,  where  clinical
judgment and  experience  can be used to check and  interpret a system  output)"
from the following controls:  manufacturer establishment registration and device
listing, premarket notification and compliance with the medical device reporting
and current good manufacturing  practice  regulations.  In the 1989 Draft Policy
Statement,  the FDA stated  that until it  formally  exempted  decision  support
software  products from these  requirements,  manufacturers of eligible decision
support software products would be required to comply with those controls.

         Since issuing the 1989 Draft Policy Statement, the FDA has not issued a
final  policy on this  issue  and has not  formally  exempted  any  products  as
discussed in the 1989 Draft Policy  Statement.  The FDA has referred to the 1989
Draft Policy Statement in official  presentations  regarding software regulation
and in  decisions  and  opinions  regarding  the  regulatory  status of  various
products.  Over the last few years,  however, the FDA has stated that it intends
to issue a new policy  concerning  computer products and has been increasing its
efforts  to  develop  this  policy  in recent  months.  Under  this new  policy,
exemptions  from  regulatory  controls,  if any,  would be based  upon a product
specific  "risk factor"  analysis.  For purposes of this  analysis,  the FDA has
considered, among other things, the following: (i) seriousness of the disease to
be  diagnosed  or  treated;  (ii) time frame for use of the  information;  (iii)
whether the data output is provided or manipulated in a novel or non-traditional
manner;  (iv)  whether  the  software  provides   individualized   patient  care
recommendations;  (v) whether the  mechanism by which the software  arrives at a
decision is hidden or  transparent;  and (vi)  whether the product  provides new
capabilities  for the  user.  Given  the  FDA's  intent  to  issue a new  policy
concerning the regulation of computer software,  there can be no assurance as to
the effect of such a policy, if any, upon the regulatory status of the Company's
products.

         The  Company's  clinical  information  systems  are  intended to assist
health care providers in analyzing  economic and quality data related to patient
care and  expected  outcomes  in order to  maximize  the  cost-effectiveness  of
general treatment plans and practice protocols.  These products are not intended
to provide  specific  diagnostic  data or results or affect the use of  specific
therapeutic interventions for individual patients. As such, the Company


                                      -13-

<PAGE>


believes that its clinical information systems are not medical devices under the
FDCA and,  thus,  are not subject to the controls  imposed on  manufacturers  of
medical  devices  and do not fall  within  the  scope of the 1989  Draft  Policy
Statement. The Company further believes that to the extent that its products are
determined to be medical  devices,  they fall within the exemptions for decision
support systems provided by the 1989 Draft Policy Statement. The Company has not
taken action to comply with the  requirements  that would otherwise apply if the
Company's products were determined to be non-exempt medical devices.

         There can be no assurance  that the FDA will not make a request or take
other  action to require the Company to comply with any or all current or future
controls applicable to medical devices under the FDCA. There can be no assurance
that, if such a request were made or other action were taken,  the Company could
comply in a timely  manner,  if at all, or that any failure to comply  would not
have a material adverse effect on the Company's business, financial condition or
results of operations, or that the Company would not be subjected to significant
penalties  or  other  sanctions.  There  can be no  assurance  that the FDA will
continue  to permit  any or all of the  exemptions  provided  in the 1989  Draft
Policy  Statement,  or in a new policy  statement,  if any, or that the FDA will
promulgate  regulations formally  implementing such exemptions.  There can be no
assurance that the Company's current or future clinical information systems will
qualify for future  exemptions,  if any, nor can there be any assurance that any
future  requirements  will not have a material  adverse  effect on the Company's
business, financial condition or results of operations.

         The health care industry is subject to changing political, economic and
regulatory  influences that may affect the procurement  practices and operations
of health care industry participants.  During the past several years, government
regulation of reimbursement  rates in the United States health care industry has
increased.  Lawmakers  continue to propose  programs to reform the United States
health  care  system,  which may  contain  proposals  to  increase  governmental
involvement in health care, lower  reimbursement  rates and otherwise change the
operating  environment  for  the  Company's  customers.   Health  care  industry
participants   may  react  to  these   proposals  by   curtailing  or  deferring
investments, including investments in the Company's products. The Company cannot
predict what impact,  if any, such factors may have on its  business,  financial
condition and results of operations.

Employees

         As of December 31, 1996, the Company had a total of  approximately  110
employees,  approximately 30 of whom were employed in the Company's  information
systems  subsidiary.  None of the Company's employees is subject to a collective
bargaining  agreement.  The Company has never  experienced  a work  stoppage and
believes that its employee relations are satisfactory.


ITEM 2.  PROPERTIES
------

         The Company  currently  occupies  26,302  square feet of leased  office
space in  Tarrytown,  New York,  4,065  square  feet of leased  office  space in
Marietta,   Georgia,  1,180  square  feet  of  leased  office  space  in  Wayne,
Pennsylvania  and 10,742  square feet of leased  office and data center space in
Chicago,  Illinois.  The current  lease for the  Tarrytown  office has an annual
rental of  approximately  $500,000 and expires in March 2002.  The lease for the
Marietta   office   expires  in  January  2001  and  has  an  annual  rental  of
approximately  $50,000.  The lease for the Wayne office  expires in October 1997
and has an annual  rental of  approximately  $20,000.  The lease for the Chicago
office  expires  in March  2001 and has an  annual  rental of  $184,000  for the
current year.  The Company  believes that these  facilities are adequate for the
foreseeable future.


ITEM 3.  LEGAL PROCEEDINGS
------

         The Company is not a party to any litigation that would have a material
adverse effect on its business, results of operations or financial condition.



                                      -14-
<PAGE>


Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

         None.





                                      -15-
<PAGE>


                                     PART II

Item 5.  MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS

         The Common Stock began trading  over-the-counter on the Nasdaq National
Market  under the symbol  "ADVH" on October  3, 1996.  The high and low  closing
prices for the period from such date  through  December 31, 1996 were $16.87 and
$12.50,  respectively.  As of March  25,  1997,  there  were  approximately  170
registered holders of the Common Stock.

         The Company has not declared or paid any cash  dividends on its capital
stock since  inception and does not expect to pay  dividends in the  foreseeable
future.  The Company  presently  intends to retain future  earnings,  if any, to
finance the expansion of its business.  The payment of any cash dividends in the
future will depend on the Company's earnings,  financial  condition,  results of
operations,  capital needs and other factors  deemed  pertinent by the Company's
Board of Directors, subject to laws and regulations then in effect.


Item 6.  SELECTED FINANCIAL DATA

         The selected  consolidated  statement of operations  data for the years
ended  December  31,  1994,  1995 and 1996,  and the  balance  sheet  data as of
December  31,  1995  and  1996,  are  derived  from the  Consolidated  Financial
Statements of the Company included elsewhere in this Annual Report on Form 10-K,
which have been audited by Arthur Andersen LLP,  independent public accountants.
The  selected  consolidated  statement  of  operations  data for the period from
inception  (August 27, 1993) to December 31, 1993 and the selected  consolidated
balance  sheet  data as of  December  31,  1993 and 1994  are  derived  from the
consolidated  financial  statements  of the Company  which have been  audited by
Arthur Andersen LLP, independent public accountants,  but which are not included
in this Annual Report on Form 10-K. The selected consolidated financial data set
forth below is  qualified  by  reference  to, and should be read in  conjunction
with, the Company's  Consolidated Financial Statements and the Notes thereto and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" contained elsewhere in this Annual Report on Form 10-K.

<TABLE>
<CAPTION>

                                                                               Year Ended
                                      Period from Inception                    December 31,
                                      (August 27, 1993) to     ------------------------------------------
                                      December 31, 1993             1994          1995         1996
                                     ----------------------        ------        ------       ------
                                                   (In thousands, except per share data)

Statement of Operations Data:
    <S>                                           <C>               <C>           <C>          <C>

    Revenues                                      $   --            $    379      $ 1,054      $19,136
    Cost of revenues                                  --                  12          340        9,707
                                                  -------            --------     --------     -------
    Gross profit                                      --                 367          714        9,429
    Operating expenses                               521               2,900        6,412       11,886
                                                  -------            --------     --------     -------
    Operating loss                                  (521)             (2,533)      (5,698)      (2,442)
    Other income (expense)                            --                 (15)          (8)          15
                                                  -------            --------     --------     -------
    Net loss before income taxes                    (521)             (2,548)      (5,706)      (2,445)
    Income tax benefit                                --                  --           --          977
                                                  -------            --------     --------     -------
    Net loss                                      $ (521)            $(2,548)     $(5,706)     $(1,465)
                                                  =======            ========     ========     =======
    Net loss per share                            $(0.23)            $ (1.03)     $ (1.47)     $ (0.26)
                                                  =======            ========     ========     =======
   Weighted average number of common
          shares and common share equivalents
          outstanding                              2,229               2,482        3,893        5,635
                                                  =======            ========     ========     =======
</TABLE>



                                      -16-

<PAGE>

<TABLE>
<CAPTION>

                                                                December 31,
                                           ---------------------------------------------------
<S>                                              <C>         <C>        <C>         <C>
                                                 1993        1994       1995        1996
                                                ------      ------     ------      ------
                                                               (In thousands)
Balance Sheet Data:
    Cash and cash equivalents                   $    7      $    7     $1,464      $12,086
    Investments in marketable securities            --          --         --        7,390
    Working capital (deficit)                     (435)     (1,032)      (741)      26,683
    Total assets                                    27         913      6,462       35,400
    Total debt                                      --         416        567          235
    Total stockholders' equity (deficit)          (416)       (325)     2,675       31,884
</TABLE>


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

         The following  discussion  of the results of  operations  and financial
condition of the Company  should be read in  conjunction  with the  Consolidated
Financial  Statements  and the notes thereto  included  elsewhere in this Annual
Report on Form 10-K.

Overview

         The Company provides a full range of integrated management services and
clinical   information  systems  to  physician  group  practices  and  physician
networks.  The  Company  generates  revenues  from  (i) fees  for  managing  and
providing  consulting  services  to  physician  group  practices,  (ii) fees for
managing  physician  networks and (iii) fees for use and support of its clinical
information  systems,   including  recurring  license,   software  installation,
software  integration,  training and data conversion fees. The Company contracts
with its physician practice and network management clients pursuant to long-term
agreements  with its MSOs,  the  results of which MSOs are  consolidated  in the
Consolidated Financial Statements.

         To date,  the Company has been dependent on a small number of contracts
to generate the majority of its  revenues.  See  "Business --  Concentration  of
Revenues." The Company  expects that the  concentration  of its revenues will be
reduced as the Company enters into  additional  contracts to provide  management
services and clinical information systems to physician organizations.

         The Company  believes that its  historical  results of operations  from
period to period are not  comparable  and that such results are not  necessarily
indicative  of  results  for  any  future  periods  because  the  Company  was a
development  stage  company  investing  in  technology  development  and did not
provide physician practice and network management services prior to December 11,
1995.

Acquisitions

         On August 28, 1995,  the Company  acquired  certain  assets and assumed
certain liabilities of Peltz Ventimiglia,  Inc. ("Peltz"),  a physician practice
management consulting company with physician clients located throughout the East
Coast of the United  States,  for 75,996  shares of Common Stock and  contingent
warrants  to purchase  113,995  shares of Common  Stock at $4.38 per share.  The
warrants  are  only  exercisable,  as  contingent  consideration,  based  on the
achievement of targeted operating performance criteria.

         On September 1, 1995,  the Company  acquired U.S.  Health  Connections,
Inc.  ("Health  Connections"),   a  network  management  company  servicing  the
Southeastern United States and headquartered in Atlanta,  Georgia,  for $150,000
in cash, 30,193 shares of the Common Stock and $150,000 in notes payable.  As of
December 31, 1996, none of such notes payable remained outstanding. The purchase
price also  included an  additional  56,611  shares of



                                      -17-

<PAGE>


Common  Stock issued into escrow at closing.  These  escrowed  shares  represent
contingent  consideration  that  will  be  released  from  escrow  based  on the
achievement of targeted operating  performance  criteria and accounted for based
on the then fair market value.

         On April 1, 1996,  the Company  acquired  certain  assets of Benenson &
Associates,  Inc.  ("Benenson"),  a physician network  development  company with
approximately 10 network clients located throughout the East Coast of the United
States,  for 8,937  shares of Common  Stock and $45,000 in cash,  payable in two
installments  of  $22,500  each on the  closing  date and the first  anniversary
thereof.

Results of Operations

  Year Ended December 31, 1996 and 1995

         Total revenues for the year ended December 31, 1996 increased  to $19.1
million  from $1.1 million in the year ended  December 31, 1995,  primarily as a
result of the  increased  activity in the Company's  group  practice and network
management  services.  The provision of physician group practice  management and
related services and network  management  services  accounted for  approximately
$15.1 million of the Company's net revenue for the year ended  December 31, 1996
as compared  to $.3 million in the year ended  December  31,  1995.  The Company
earned  fees  for the use  and  support  of its  clinical  information  systems,
including the recognition of license revenues and software, systems and training
revenues, of approximately $4.0 million for the year ended December 31, 1996, as
compared to $.7 million in the year ended December 31, 1995.

         Cost of revenues for the year ended December 31, 1996 increased to $9.7
million from approximately $.3 million for the year ended December 31, 1995. The
increase in cost of revenues  related  primarily to the  non-medical  and system
expenses  outsourced  to  the  Company  from  physician  group  practices  under
management.

         Operating  expenses for the year ended  December 31, 1996  increased to
$11.9  million  from $6.4  million for the year ended  December  31,  1995.  The
increase in operating  expenses  reflected  expenses related to the provision of
physician  group practice  management  services for the full year ended December
31, 1996,  the Company did not begin to provide  such  services  until  December
1995.

         An income tax benefit of  approximately  $1.0  million was  recorded in
1996 as a result of the  Company's  determination,  based on  profitable  fourth
quarter operations, that the related deferred income tax asset would be realized
through the  generation  of taxable  income in the future.  No such  benefit was
recorded in 1995.

         The net loss for the year  ended  December  31,  1996 was $1.5  million
compared to a loss of $5.7 million for the year ended December 31, 1995.


  Year Ended December 31, 1995 and 1994

         Total revenues for the year ended December 31, 1995  increased  to $1.1
million from $378,878 in the year ended December 31, 1994, primarily as a result
of the initiation of the Company's  physician group practice services to Madison
in December 1995,  which generated  approximately  $505,000 of the Company's net
revenue for the year ended  December  31,  1995.  The  Company  began to provide
physician  network  management  services in September 1995,  which accounted for
approximately  $163,000 of the Company's net revenue for the year ended December
31,  1995.  The  Company  earned  fees for the use and  support of its  clinical
information  systems,  including the  recognition of license  revenues under its
contract with an affiliate of PCS Health Systems, Inc., the managed care unit of
Eli Lilly &  Company,  and  software  installation  and  training  revenues,  of
approximately  $386,000 for the year ended  December  31,  1995,  as compared to
$378,878 of such revenues for the year ended December 31, 1994.

         Operating  expenses for the year ended  December 31, 1995  increased to
$6.4  million  from $2.9  million  for the year ended  December  31,  1994.  The
increase in operating  expenses was due to the increases in staffing and general
corporate expenses required to fund the Company's  transition from a development
stage company involved in the development of clinical  information  systems to a
full service physician practice and network management company.

         The net loss for the year  ended  December  31,  1995 was $5.7  million
compared to a loss of $2.5 million for the year ended December 31, 1994.



                                      -18-

<PAGE>
  Liquidity and Capital Resources

         At December  31,  1996,  the Company had cash and cash  equivalents  of
$12.1  million  and  marketable  securities  of $7.4  million,  compared to $1.5
million of cash at December 31, 1995.

         The  Company's  operations  used  net cash of  $11.0  million  and $4.3
million  in 1996  and  1995,  respectively.  The  increased  use of cash in 1996
resulted  primarily  from the purchase of accounts  receivable  from a physician
practice under Company  management  for an aggregate  amount of $4.5 million and
$1.1 million from the recognition of revenue deferred at December 31, 1995. Cash
flows from  investing  activities  increased,  as a result of the  investment of
proceeds from the Company's  IPO in marketable  securities,  to $8.6 million for
the year ended  December 31, 1996  compared with $1.0 million for the year ended
December 31, 1995.  Net cash provided by financing  activities was $30.2 million
for the year  ended  December  31,  1996 and  related to the  completion  of the
Company's  IPO.  Net cash  provided by financing  activities  for the year ended
December  31,  1995 was  $6.8  million  primarily  attributable  to the  private
placement of equity securities. See "-- Acquisitions" above.

         The Company's operating plan for 1997 includes continued development of
the Company's  integrated  management services and clinical information systems.
The principal  categories of  expenditures  include  further  development of the
Company's clinical information systems, as well as ongoing business  development
and marketing.  The Company  believes that the net proceeds of the IPO, cash and
investments  on hand,  interest  income and  revenues  from  operations  will be
sufficient to fund planned operations of the Company through at least the end of
1998

         During  January and  February  1997,  the Company  loaned $2 million to
Madison, a physician  practice it currently manages,  secured by the physicians'
49%  ownership  interest  in its MSO.  The loan bears  interest  at prime plus 2
percent and is to be repaid in 12 equal monthly  installments  beginning January
1998. Furthermore, the Company provided a letter of credit on behalf  of Madison
that  expires  January 8,  1998,  in the  amount of $1.8  million by  depositing
restricted cash with the lending  institution  that issued the letter of credit.
The Company has no other planned material capital  expenditures or other capital
commitments.

         From time to time in the ordinary  course of its business,  the Company
evaluates  possible  acquisitions of businesses,  products and technologies that
are  complementary  to  those  of the  Company.  The  Company  currently  has no
agreements or understandings,  and is not engaged in active  negotiations,  with
respect to any such acquisition.

         Under certain  specified  circumstances,  the Company has the option to
cause certain MSOs to be merged with and into a  wholly-owned  subsidiary of the
Company in a  transaction  in which the  interests of the  physician  groups and
networks in such MSOs would be exchanged  for Common  Stock of the Company.  The
Company  has  reserved   548,224  shares  of  Common  Stock  for  issuance  upon
consummation  of the Roll Up  Transaction,  all of which  will be  issued if the
Company effects the Roll Up Transaction.  In addition,  certain of the physician
groups and networks managed by the Company have rights to require the Company to
purchase all or part of such physicians' interest in their respective MSO in the
event that the Company does not consummate  the Roll Up  Transaction  within one
year after the satisfaction of specified  conditions.  There can be no assurance
that the Company will have the financial resources to purchase such interests in
accordance  with its  obligations at the time any such rights are exercised,  or
that the Company  would be able to obtain  financing  on  satisfactory  terms or
conditions, if at all, to purchase such interests. In addition,  pursuant to its
agreement  with one of its physician  group  practice  clients,  the Company has
agreed, under certain circumstances,  to advance funds to such group practice to
finance working capital.  To date, the Company has not made any advances to such
group  practice  under  the  agreement  and it does not  expect  to do so in the
future.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                              Financial Statements
<TABLE>
<CAPTION>
<S>                                                                                    <C>
                                                                                       Page
                                                                                       ----
Report of Independent Public Accountants                                               F-1
Consolidated Balance Sheets as of December 31, 1995 and 1996                           F-2
Consolidated Statements of Operations for the years ended December 31,
     1994, 1995 and 1996                                                               F-3
Consolidated Statements of Stockholders' Equity (Deficit) for the  years
     ended December 31, 1994, 1995 and 1996                                            F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1994,
     1995 and 1996                                                                     F-5
Notes to Consolidated Financial Statements                                             F-6
</TABLE>

                         Financial Statement Schedules


         All schedules have been omitted  because they are not applicable or not
required or because the  required  information  is included in the  Consolidated
Financial Statements or notes thereto.



                                      -19-

<PAGE>


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

         None.




                                      -20-

<PAGE>


                                    PART III


ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The  information  called  for by this  item is  incorporated  herein by
reference to the sections of the definitive Proxy Statement to be filed with the
Securities  and Exchange  Commission  not later than 120 days after December 31,
1996, and delivered to  stockholders  in connection with the 1997 Annual Meeting
of Stockholders,  captioned  "Election of Directors,"  "Executive  Officers" and
"Disclosure Pursuant to Section 16 of the Exchange Act."


ITEM 11.    EXECUTIVE COMPENSATION

         The  information  called  for by this  item is  incorporated  herein by
reference to the sections of the definitive Proxy Statement to be filed with the
Securities  and Exchange  Commission  not later than 120 days after December 31,
1996, and delivered to  stockholders  in connection with the 1997 Annual Meeting
of Stockholders, captioned "Meetings of the Board of Directors and Committees of
the Board of Directors;  Compensation of Directors" and "Executive  Compensation
and Related Information."


ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  information  called  for by this  item is  incorporated  herein by
reference to the section of the definitive  Proxy Statement to be filed with the
Securities  and Exchange  Commission  not later than 120 days after December 31,
1996, and delivered to  stockholders  in connection with the 1997 Annual Meeting
of Stockholders,  captioned  "Security  Ownership of Certain  Beneficial Owners,
Directors and Management."


ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  information  called  for by this  item is  incorporated  herein by
reference to the section of the definitive  Proxy Statement to be filed with the
Securities  and Exchange  Commission  not later than 120 days after December 31,
1996, and delivered to  stockholders  in connection with the 1997 Annual Meeting
of Stockholders, captioned "Certain Transactions."



                                      -21-

<PAGE>


                                     PART IV


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

          (a)     Documents Filed as Part of the Report

                  1.        Financial Statements

                            The  financial  statements  listed  under Item 8 are
                            filed as part of this report.

                  2.        Financial Statement Schedules

                            Schedules have been omitted  because they are either
                            not applicable or the required  information has been
                            disclosed  in  the  financial  statements  or  notes
                            thereto.

                  3.        Exhibits

                            The  exhibits  listed  on the  accompanying  Exhibit
                            Index   are   filed  as  part  of  this   report  or
                            incorporated by reference herein.

          (b)     Reports on Form 8-K

                  No Current  Reports  on Form 8-K were filed by the  registrant
                  during the fourth quarter of the year ended December 31, 1996.



                                      -22-

<PAGE>


                                   SIGNATURES

          Pursuant to the  requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto duly  authorized,  on the 30th day of
March, 1997.

                                    ADVANCED HEALTH CORPORATION


                                    By   /s/ Jonathan Edelson
                                      ------------------------
                                      Jonathan Edelson, M.D.
                                      Chairman of the Board and
                                      Chief Executive Officer

          Pursuant to the  requirements of the Securities  Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
<S>                      <C>                                               <C>

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

  /s/ Jonathan Edelson    Chairman of the Board, Chief Executive           March 30, 1997
-----------------------       Officer and Director (Principal Executive
Jonathan Edelson, M.D.        Officer)

 /s/ Steven Hochberg      President and Director                           March 30, 1997
-----------------------
Steven Hochberg

 /s/ Alan B. Masarek      Chief Operating Officer and Chief Financial      March 30, 1997
-----------------------       Officer (Principal Financial and
Alan B. Masarek               Accounting Officer)


 /s/ James T. Carney
----------------------    Director                                         March 30, 1997
James T. Carney

 /s/ Barry Kurokawa
----------------------    Director                                         March 30, 1997
Barry Kurokawa

 /s/ Jonathan Lieber
----------------------    Director                                         March 30, 1997
Jonathan Lieber
</TABLE>


<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Advanced Health Corporation:


We have audited the accompanying  consolidated balance sheets of Advanced Health
Corporation (a Delaware  corporation)  and  subsidiaries as of December 31, 1995
and 1996, and the related consolidated  statements of operations,  shareholders'
equity  (deficit)  and cash flows for the three years ended  December  31, 1996.
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 financial  statements  referred to above present fairly, in
all material respects, the financial position of Advanced Health Corporation and
subsidiaries  as of  December  31,  1995  and  1996,  and the  results  of their
operations  and their cash flows for the three years ended  December 31, 1996 in
conformity with generally accepted accounting principles.




                                                       ARTHUR ANDERSEN LLP



New York, New York
March 28, 1997

                                       F-1


<PAGE>




                  ADVANCED HEALTH CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                                        December 31,
                                          ASSETS                                                    1995                1996
                                          ------                                            --------------     -------------
<S>                                                                                        <C>                <C>
CURRENT ASSETS:
    Cash and cash equivalents                                                               $     1,464,427    $    12,085,990
    Investments in marketable securities (Note 5)                                                      -             7,389,971
    Accounts receivable, net                                                                      1,020,558          8,636,696
    Note receivable                                                                                 125,000               -
    Prepaid expenses                                                                                278,305            182,027
    Advances to affiliates (Note 4)                                                                    -               646,738
    Deferred income taxes, net (Note 11)                                                               -               976,792
                                                                                            ---------------    ---------------
              Total current assets                                                                2,888,290         29,918,214

PROPERTY AND EQUIPMENT, net (Note 6)                                                              1,538,898          2,053,049

INTANGIBLE ASSETS, net (Note 7)                                                                   1,875,611          1,857,763

OTHER ASSETS (Notes 2 and 4)                                                                        159,112          1,570,536
                                                                                            ---------------    ---------------
              Total assets                                                                  $     6,461,911    $    35,399,562
                                                                                            ===============    ===============
                     LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
    Accounts payable                                                                        $     1,312,571    $     1,968,203
    Accrued expenses (Note 8)                                                                       407,241            912,764
    Deferred revenue                                                                              1,500,000            200,000
    Loan payable related to acquisition (Note 3)                                                    150,000             22,500
    Current portion of capital lease obligations (Note 12)                                          259,805            131,441
                                                                                            ---------------    ---------------
              Total current liabilities                                                           3,629,617          3,234,908

DEFERRED REVENUE                                                                                       -               200,000
CAPITAL LEASE OBLIGATIONS (Note 12)                                                                 157,254             80,775
                                                                                            ---------------    ---------------
              Total liabilities                                                                   3,786,871          3,515,683
                                                                                            ---------------    ---------------

COMMITMENTS (Note 13)

SHAREHOLDERS' EQUITY (DEFICIT):
    Preferred stock, $.01 par value; 5,000,000 shares authorized; 0 shares issued and
       outstanding                                                                                     -                  -
    Common stock, $.01 par value; 15,000,000 shares authorized; 4,491,270 and 7,166,941
       shares issued and outstanding, respectively                                                   44,913             71,669
    Additional paid-in capital                                                                   11,481,478         42,068,864
    Accumulated deficit                                                                          (8,776,351)       (10,241,539)
    Unrealized gain on marketable securities, net of deferred income taxes                             -                59,885
    Less:  Treasury stock, at cost; 8,937 shares, respectively                                      (75,000)           (75,000)
                                                                                            ---------------    ---------------
              Total shareholders' equity (deficit)                                                2,675,040         31,883,879
                                                                                            ---------------    ---------------
              Total liabilities and shareholders' equity (deficit)                          $     6,461,911    $    35,399,562
                                                                                            ===============    ===============
</TABLE>

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

                                       F-2


<PAGE>



                  ADVANCED HEALTH CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>

                                                                       For the Years Ended December 31,
                                                              ----------------------------------------------------


                                                                   1994               1995                1996
                                                                   ----               ----                ----

<S>                                                             <C>             <C>             <C>
REVENUE FROM MSOs                                                $       --      $    341,657    $ 15,124,806

REVENUE                                                               203,878         712,292       4,011,420

REVENUE FROM RELATED PARTY                                            175,000            --              --
                                                                 ------------    ------------    ------------
          Total revenues                                              378,878       1,053,949      19,136,226

COST OF REVENUES                                                       12,297         340,326       9,706,667
                                                                 ------------    ------------    ------------

          Gross profit                                                366,581         713,623       9,429,559

OPERATING EXPENSES                                                  2,900,477       6,412,367      11,886,216
                                                                 ------------    ------------    ------------

          Operating loss                                           (2,533,896)     (5,698,744)     (2,456,657)

INTEREST EXPENSE                                                      (15,034)         (7,863)       (164,656)

INTEREST INCOME                                                          --              --           179,333
                                                                 ------------    ------------    ------------

          Net loss before income taxes                             (2,548,930)     (5,706,607)     (2,441,980)

INCOME TAX BENEFIT (Note 11)                                             --              --           976,792
                                                                 ------------    ------------    ------------

          Net loss                                               $ (2,548,930)   $ (5,706,607)   $ (1,465,188)
                                                                 ============    ============    ============

PER SHARE INFORMATION (Note 2):
   Net loss per share                                            $      (1.03)   $      (1.47)   $      (0.26)
                                                                 ============    ============    ============
   Weighted average common shares and common share equivalents
     outstanding                                                    2,482,213       3,893,244       5,634,898
                                                                 ============    ============    ============



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

                                       F-3

<PAGE>


                  ADVANCED HEALTH CORPORATION AND SUBSIDIARIES
            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)


                                                                                              Common Stock
                                                                                             Subscriptions
                                                   Common Stock          Additional            Receivable
                                           ----------------------------   Paid-in       --------------------------     Accumulated
                                           Shares        Par Value        Capital         Shares        Amount          Deficit
                                         ------------   ------------    ------------    ----------    ------------    ------------
<S>                                         <C>         <C>             <C>                <C>        <C>             <C>
BALANCE, January 1, 1994                    1,773,389   $     17,734    $     90,611       185,893    $     (3,120)   $ (520,814)

  Sale and issuance of common stock
  (Note 10a)                                   25,319            253         639,402            --              --              --

  Issuance of Series B Convertible
  Preferred Stock (Note 10)                   252,831          2,529       1,997,574            --              --              --
  Net loss                                         --             --              --            --              --      (2,548,930)
                                         ------------   ------------    ------------    ----------    ------------    ------------

BALANCE, December 31, 1994                  2,051,539         20,516       2,727,587       185,893          (3,120)     (3,069,744)

  Issuance of Common Stock (Note 10a)          50,641            506            (506)           --              --              --
  Issuance of Series C convertible
  Preferred Stock (Note 10)                   178,743          1,787       1,498,213            --              --              --
  Issuance of common stock in private
  placement (Note 10c)                         79,780            798         624,261            --              --              --
  Redemption of common stock
  subscriptions                                    --             --              --      (185,893)          3,120              --
  Exercise of stock options                   885,279          8,853          10,864            --              --              --
  Common stock issued for acquisitions        649,753          6,498       1,629,314            --              --              --
  Issuance of Series D Convertible
  Preferred Stock (Note 10)                   595,535          5,955       4,991,745            --              --              --
  Repurchase of treasury stock                     --             --              --            --              --              --
  Net loss                                         --             --              --            --              --      (5,706,607)
                                         ------------   ------------    ------------    ----------    ------------    ------------

BALANCE, December 31, 1995                  4,491,270         44,913      11,481,478            --              --      (8,776,351)
  Common stock issued for acquisition           8,937             89          44,911            --              --              --
  Exercise of stock options (Note 10)          21,734            217          85,757            --              --              --
  Issuance of common stock in public
  offering, net of expenses of
  $3,921,742 (Note 10c)                     2,645,000         26,450      30,456,718            --              --              --
  Unrealized gain on marketable
  securities, net of deferred income
  taxes of $39,924                                 --             --              --            --              --              --
  Net loss                                         --             --              --            --              --      (1,465,188)
                                         ------------   ------------    ------------    ----------    ------------    ------------

BALANCE, December 31, 1996                  7,166,941   $     71,669    $ 42,068,864            --    $         --    $(10,241,539)
                                         ============   ============    ============    ==========    ============    ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>



                                            Unrealized
                                             Gain On           Treasury Stock
                                            Marketable     ---------------------------
                                             Securities      Shares          Amount           Total
                                            ------------   ------------   ------------    ------------
<S>                                         <C>                           <C>             <C>
BALANCE, January 1, 1994                    $         --             --   $         --    $   (415,589)

  Sale and issuance of common stock
  (Note 10a)                                          --             --             --         639,655

  Issuance of Series B Convertible
  Preferred Stock (Note 10)                           --             --             --       2,000,103
  Net loss                                            --             --             --      (2,548,930)
                                            ------------   ------------   ------------    ------------

BALANCE, December 31, 1994                            --             --             --        (324,761)
  Issuance of Common Stock (Note 10a)                 --             --             --              --
  Issuance of Series C convertible
  Preferred Stock (Note 10)                           --             --             --       1,500,000
  Issuance of common stock in private
  placement (Note 10c)                                --             --             --         625,059
  Redemption of common stock
  subscriptions                                       --             --             --           3,120
  Exercise of stock options                           --             --             --          19,717
  Common stock issued for acquisitions                --             --             --       1,635,812
  Issuance of Series D Convertible
  Preferred Stock (Note 10)                           --             --             --       4,997,700
  Repurchase of treasury stock                        --          8,937        (75,000)        (75,000)
  Net loss                                            --             --             --      (5,706,607)
                                            ------------   ------------   ------------    ------------

BALANCE, December 31, 1995                            --          8,937        (75,000)      2,675,040
  Common stock issued for acquisition                 --             --             --          45,000
  Exercise of stock options (Note 10)                 --             --             --          85,974
  Issuance of common stock in public
  offering, net of expenses of
  $3,921,742 (Note 10c)                               --             --             --      30,483,168
  Unrealized gain on marketable
  securities, net of deferred income
  taxes of $39,924                                59,885             --             --          59,885
  Net loss                                            --             --             --      (1,465,188)
                                            ------------   ------------   ------------    ------------

BALANCE, December 31, 1996                  $     59,885          8,937   $    (75,000)   $ 31,883,879
                                            ============   ============   ============    ============
</TABLE>


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

                                       F-4

<PAGE>
                  ADVANCED HEALTH CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                                               For the Years Ended December 31,
                                                                                       ---------------------------------------------
                                                                                               1994            1995            1996
                                                                                       ------------    ------------    ------------
<S>                                                                                    <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                                             $ (2,548,930)   $ (5,706,607)   $ (1,465,188)
  Adjustments to reconcile net loss to net cash used in operating activities-
    Depreciation and amortization                                                           146,681         456,819         890,346
    Deferred income taxes                                                                        --              --        (976,792)
    Allowance for doubtful accounts                                                              --              --         210,000
    Changes in operating assets and liabilities-
      Accounts receivable                                                                        --      (1,020,558)     (7,826,138)
      Note receivable                                                                            --        (125,000)        125,000
      Prepaid expenses                                                                       (7,134)       (271,171)         96,278
      Advances to affiliates                                                                     --              --        (646,738)
      Other assets                                                                         (125,711)        (33,401)     (1,439,934)
      Accounts payable                                                                      200,713         993,445         655,632
      Accrued expenses                                                                       82,973         280,396         505,523
      Due to affiliate                                                                      270,709        (375,825)             --
      Deferred revenue                                                                     (175,000)      1,500,000      (1,100,000)
                                                                                       ------------    ------------    ------------

              Net cash used in operating activities                                      (2,155,699)     (4,301,902)    (10,972,011)
                                                                                       ------------    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Issuance of note receivable from affiliate                                                     --        (500,000)             --
  Proceeds from repayment of note receivable from affiliate                                      --         500,000              --
  Investments in marketable securities                                                           --              --      (7,290,162)
  Cash paid for acquisitions                                                                     --        (150,000)             --
  Purchases of property and equipment, net                                                 (505,997)       (881,531)     (1,296,131)
                                                                                       ------------    ------------    ------------

              Net cash used in investing activities                                        (505,997)     (1,031,531)     (8,586,293)
                                                                                       ------------    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  (Repayment of) proceeds from loan payable related to acquisition                           50,000         (50,000)        (94,500)
  Net proceeds from sale and issuance of common stock                                       639,655         628,179      30,483,168
  Net proceeds from exercise of stock options                                                    --          19,717          85,974
  Net proceeds from promissory notes                                                             --              --       5,000,000
  Repayment of promissory notes                                                                  --              --      (5,000,000)
  Purchase of treasury stock                                                                     --         (75,000)             --
  Net proceeds from issuance of Series B Convertible Preferred Stock (Note 10)            2,000,103              --              --
  Net proceeds from issuance of Series C Convertible Preferred Stock (Note 10)                   --       1,500,000              --
  Net proceeds from issuance of Series D Convertible Preferred Stock (Note 10)                   --       4,997,700              --
  Repayment of capital lease obligations                                                    (28,435)       (229,639)       (294,775)
                                                                                       ------------    ------------    ------------

              Net cash provided by financing activities                                   2,661,323       6,790,957      30,179,867
                                                                                       ------------    ------------    ------------
              Net change in cash and cash equivalents                                          (373)      1,457,524      10,621,563

CASH AND CASH EQUIVALENTS, beginning of year                                                  7,276           6,903       1,464,427
                                                                                       ------------    ------------    ------------
CASH AND CASH EQUIVALENTS, end of year                                                 $      6,903    $  1,464,427    $ 12,085,990
                                                                                       ============    ============    ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during the year for:
    Interest                                                                           $      3,267    $     21,497    $    160,477
                                                                                       ============    ============    ============
    Income taxes                                                                       $      3,189    $     14,854    $     35,633
                                                                                       ============    ============    ============

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
  Capital lease obligations incurred                                                   $    394,481    $    280,652    $     58,017
                                                                                       ============    ============    ============
  Fair market value of common stock issued for acquisitions                            $         --    $  1,635,812    $     45,000
                                                                                       ============    ============    ============
  Unrealized gain on marketable securities                                             $         --    $         --    $     99,809
                                                                                       ============    ============    ============
  Loan payable issued for acquisition                                                  $         --    $    150,000    $     22,500
                                                                                       ============    ============    ============
</TABLE>

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

                                       F-5
<PAGE>


                  ADVANCED HEALTH CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 1995 AND 1996


1.       ORGANIZATION AND BUSINESS:

The Company

Advanced  Health  Corporation  ("AHC")  and  subsidiaries   (collectively,   the
"Company") provides physician groups and networks with professional practice and
network management services and clinical  information systems and services.  The
Company's  wholly-owned  subsidiary  was  incorporated  on  August  27,  1993 as
Med-E-Systems  Corporation,  and was engaged at  inception to design and develop
clinical  information  systems  for  physician  users.  Effective  August  1995,
Med-E-Systems  Corporation  became a  wholly-owned  subsidiary of AHC, an entity
incorporated  in  March  1995,  through  a  stock-for-stock  transfer  in  which
preferred and common shareholders of Med-E-Systems  Corporation  exchanged their
interests  for the same amounts and classes of preferred and common stock in AHC
as  those  then  outstanding  in  Med-E-Systems  Corporation.  The  Company  was
subsequently merged with and into Majean, Inc. (Note 3), a Delaware corporation,
and the surviving corporation changed its name to Advanced Health Corporation.

The Company operates in a  highly-regulated  environment in which its sources of
revenues are dependent on the Company's  ability to successfully  negotiate with
third  parties  for its various  services.  Currently,  the  Company  depends on
revenue generated by a limited number of customers,  including  physician groups
and networks which are under long-term contracts.

Formation of Management Service Organizations

The  Company  has  established   Management  Service  Organizations ("MSOs")  to
facilitate  the  provision  of  management  services to  physician  practice and
network clients.

In November  1995,  the  Company  obtained a 51%  interest  in Uptown  Physician
Management  , Inc.  ("Uptown") a newly  formed MSO.  The Company  acquired  this
interest as part of the formation of Uptown and concurrent with the signing of a
long-term management services agreement between Uptown and Madison Medical - The
Private   Practice   Group   of  New   York,   L.L.P.("Madison"),   which  is  a
multi-specialist group practice based in the State of New York.

In June 1996,  the  Company  obtained a 51%  interest in  Specialist  Physicians
Management,  Inc. ("Specialist"),  a newly formed MSO. The Company acquired this
interest as part of the formation of Specialist and concurrent  with the signing
of a long-term  management  services agreement between Specialist and Cardiology
First of New  Jersey,  P.A.,  which is a network of  cardiologists  based in the
State of New Jersey.

In  June  1996,  the  Company  obtained  a 51%  interest  in  Diamond  Physician
Management,  Inc.  ("Diamond"),  a newly formed MSO. The Company  acquired  this
interest as part of the formation of Diamond and concurrent  with the signing of
a  long-term  management  services  agreement  between  Diamond  and Long Island
Interventional Cardiology,  which is a private cardiovascular physician practice
based in Long Island, New York.


                                       F-6


<PAGE>



In August  1996,  the Company  obtained a 51%  interest in  Millenium  Physician
Management,  Inc.  ("Millenium"),  a newly formed MSO. The Company acquired this
interest as part of the formation of Millenium and  concurrent  with the signing
of a long-term  management  services  agreement  between Millenium and Millenium
Medical  Associates,  P.C., which is a multi-specialist  group practice based in
the State of New Jersey.

In November 1996, the Company  obtained a 51% interest in Prime Health Physician
Management,  Inc.  ("Prime"),  a newly  formed MSO.  The Company  acquired  this
interest as part of the formation of Prime and concurrent  with the signing of a
long-term   management   services  agreement  between  Prime  and  Primary  Care
Associates,  which is a  multi-specialist  group  practice based in the State of
Pennsylvania.

In November 1996, the Company obtained a 51% interest in Mid-Atlantic Physicians
Management, Inc. ("Mid-Atlantic"), a newly formed MSO. The Company acquired this
interest  as part of the  formation  of  Mid-Atlantic  and  concurrent  with the
signing of a long-term  management  services agreement between  Mid-Atlantic and
Mid-Atlantic  Cardiology,  P.A., which is a cardiologist group practice based in
the State of New Jersey.

In forming  these  MSOs,  the Company  conveyed  49%  interests  (Note 3) to the
physician  practice or network in exchange for the  execution  of the  long-term
management  services  agreements  described  above. The Company records the fair
value of these  arrangements,  which  is, in the  opinion  of  management,  more
readily  determinable  than  the 49% MSO  interest  conveyed.  These  intangible
assets,  which are not material,  will be amortized over the life of the related
contracts.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of Consolidation

The accompanying  consolidated  financial statements include the accounts of AHC
and  its  wholly-owned  subsidiaries,  Advanced  Health  Management  Corporation
("AHM",  formerly  Advanced  Clinical  Networks  Corporation) and  Med-E-Systems
Corporation  ("MES"),  and  the  MSOs  discussed  in Note  1.  The  consolidated
financial  statements for 1994 and 1995 include the results of operations of the
Company,  including  other entities  formed or acquired from their  formation or
acquisition during those years,  through December 31, 1995. The structure of the
Company's wholly or  majority-owned  MSOs presently  provides for the Company to
receive  activity-based  fee  income  from  the  MSOs  for  management  services
provided,  and reimbursement from the MSOs for certain expenses  incurred,  with
the  result  being  that  there are no  profits  in the MSO  entity  for which a
minority  interest is required to be calculated.  Accordingly,  the consolidated
financial  statements do not reflect any minority  interest in the operations of
the MSOs.  In the event  that  profits  remain in MSO  entities  in the  future,
minority  interests  will be reflected in the Company's  consolidated  financial
statements.  Intercompany  accounts and  transactions  have been  eliminated  in
consolidation.

Use of Estimates

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


                                       F-7


<PAGE>



Revenue Recognition

Operating revenues are generated form three principal sources:

(a) Physician  Practice  Revenues:  A physician group practice is a single legal
entity  comprised of multiple  physicians.  Through its majority or wholly-owned
consolidated MSOs, the Company enters into management  services  agreements with
physician  group  practices,  whereby such physician  practices  outsource their
non-medical and  administrative  functions to the MSO.  Activity-based  fees are
generated by the MSO through the provision of these outsourced  services as well
as certain additional management,  marketing and information services.  Fees for
such  services are either fixed or based on the level of services  provided,  as
negotiated in the Company's  various  agreements  for the provision of services,
and are  recognized  monthly or as these  services are  rendered,  respectively,
based on the terms of the related  agreements.  The Company's contracts with its
physician  group  practices  also include  pre-determined  incentives  which are
earned and  recognized as revenue in the event that the Company is successful in
reducing a physician group practice's administrative expenses.

(b)  Physician  Network  Revenues:  A  physician  network is an  aggregation  of
individual  physicians  and physician  groups formed for the purpose of entering
into  contracts  with  third-party  payors.  A physician  network  enters into a
contract with a third-party  payor pursuant to which the  physicians  comprising
the network agree to provide medical services to network enrollees in return for
a fixed per enrollee fee. Such contracts are known as "capitated contracts". The
physician  network then enters into a  management  services  agreement  with the
Company's  majority-owned,  consolidated  MSO,  pursuant to which the  aggregate
capitated payments are assigned to the MSO. From these capitated  payments,  the
MSO pays a fixed percentage of the capitated premium to fund all  administrative
and  management  services  required  under the  contract.  After payment of such
administrative and management  expenses,  the MSO pays the network physicians in
return for the physicians'  provision of medical services to medical  enrollees.
Such  payments are based on a  pre-determined  fee  schedule  based on actuarial
predictions of required medical utilization by the networks'  enrollees.  In the
event  that  total  capitated  premiums  exceed  the  sum  of the  costs  of (i)
administrative  and  management  services  provided  and  (ii)  the  physicians'
provision of medical services to the network enrollees,  such savings are shared
between the MSO and the network physicians in differing  pre-determined amounts.
In the  event  that  total  capitated  premiums  are  less  than  the sum of the
abovementioned costs, such costs are accrued and are borne proportionally by the
MSO.  The Company  has not earned,  recognized  or recorded  any such  capitated
revenues through December 31, 1996.

In the event that contracts between MSOs and physician practices and network are
terminated,  the terms of the related  contracts  do not  require  the  Company,
through the MSOs, to return any previously-earned revenues.

(c) Information  Systems and Services  Revenue:  The Company's  current business
strategy for  providing  integrated  physician  practice and network  management
services  includes  selling its  information  systems and services as a means of
ultimately  providing a full range of services.  In order to generate  operating
funds and demonstrate the uses of its systems and development capabilities,  the
Company has  licensed  and may  continue  licensing  certain  components  of its
software to third parties.

The Company  recognizes  revenue  from the sale of its  information  systems and
services  (upon  installation  and  acceptance),  and from the  licensing of its
software  to third  parties  (upon  delivery).  Certain of these  third  parties
provide  payment in advance for the  development  and  installation of software,
databases  and  systems.  The Company  accounts  for these  advance  payments as
deferred revenue when received,  and recognizes  revenue ratably over the period
of time during which the software is delivered  and services are  performed.  In
December 1991, the American  Institute of Certified  Public  Accountants  issued
Statement  of  Position  ("SOP")  91-1,  "Software  Revenue  Recognition".   The
Company's revenue recognition policy is in compliance with the provisions of the
SOP.

                                       F-8


<PAGE>



Cash and Cash Equivalents

Cash and cash  equivalents  include  cash and  highly  liquid  investments  with
original maturities of three months or less when purchased.

Concentration of Credit Risk

Financial  instruments that potentially subject the Company to concentrations of
credit risk consist  principally of trade  receivables  from physician  practice
revenues,  physician  network  revenues  and  information  systems and  services
rendered.

Investments in Marketable Securities

The Company  accounts for  investments in accordance with Statement of Financial
Accounting  Standards ("SFAS") No. 115,  "Accounting for Certain  Investments in
Debt and Equity  Securities."  In accordance with this  pronouncement,  the debt
securities  held by the Company and  included in the  accompanying  consolidated
balance  sheets  that may be sold in  response  to  changes in  interest  rates,
prepayments, and other factors have been classified as available-for-sale.  Such
securities are reported at fair value, with unrealized gains and losses excluded
from earnings and reported in a separate  component of shareholders'  equity (on
an after-tax  basis).  Gains and losses on the  disposition  of  securities  are
recognized  on the  specific  identification  method in the period in which they
occur.

Property and Equipment

Property and  equipment,  consisting  primarily of  electronic  data  processing
equipment,  are stated at cost and depreciated on a straight-line basis over the
useful lives of the assets (3 to 5 years).  Equipment  held under capital leases
is amortized  utilizing the straight-line  method over the lesser of the term of
the lease or the estimated useful life of the asset.

Intangible Assets

Goodwill,  which represents the excess of the purchase price over the fair value
of the net assets acquired,  covenants  not-to-compete and management  contracts
are included in intangible assets and are presently being amortized over periods
of 4 to 20  years on a  straight-line  basis.  These  amortization  periods  are
evaluated by management on a continuing basis, and will be adjusted if the lives
of the related intangible assets are impaired.

Accounting for Long-Lived Assets

During March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of."
This statement  establishes financial accounting and reporting standards for the
impairment of long-lived assets, certain identifiable intangibles,  and goodwill
related  to those  assets to be held and used,  and for  long-lived  assets  and
certain identifiable  intangibles to be disposed of. This statement is effective
for financial statements for fiscal years beginning after December 15, 1995, and
was adopted by the Company in 1996. The effect of the adoption was not material.


                                       F-9


<PAGE>



Computer Software Costs

The Company develops computer  software which is marketed to third parties.  The
Company  capitalizes such costs in accordance with SFAS No. 86,  "Accounting for
the Costs of  Computer  Software to be Sold,  Leased,  or  Otherwise  Marketed."
Amortization of such costs is provided using the  straight-line  method over the
estimated economic life of the products, which is generally five years.

The Company has $100,569 and  $1,130,143  of  unamortized  capitalized  computer
software costs included in other assets in the accompanying consolidated balance
sheets as of December 31, 1995 and 1996, respectively. Such costs capitalized in
1996 were incurred primarily in the latter part of that year.

Computer  software  amortization  expense  aggregated  $0,  $25,142 and $28,542,
respectively, for the three years ended December 31, 1996.

Research and Development

Research and development costs are expensed as incurred by the Company. Research
and  development  expense  aggregated  $1,582,332,  $3,157,389  and  $2,843,355,
respectively, for the three years ended December 31, 1996.

Income Taxes

The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes,"  which requires  recognition of deferred tax  liabilities and assets for
the  estimated  future tax  effects of events that have been  recognized  in the
financial  statements  or income tax returns.  Under this  method,  deferred tax
liabilities  and assets are  determined  based on (1)  differences  between  the
financial  accounting and income tax bases of assets and liabilities and (2) net
operating loss  carry-forwards,  using enacted tax rates in effect for the years
in which the  differences  and  carry-forwards  are  expected  to reverse and be
utilized, respectively (Note 11).

Net Loss Per Common Share

Net loss per common  share was  computed  by dividing  net loss by the  weighted
average number of common shares and common share equivalents  outstanding during
the respective  years,  which includes,  for all periods,  (i) the effect of the
conversion of Class A, B, C and D Convertible  Preferred  Stock to common stock,
(ii) the retroactive  effect of the reverse stock split,  both described in Note
10, which occurred  concurrent with the  consummation  of the Company's  initial
public  offering and (iii) the impact of the issuance,  in the year prior to the
Company's  initial  public  offering,  of 504,477  warrants  and options for all
periods  presented.  Fully  diluted  net  loss  per  common  share  has not been
presented  since the  inclusion  of the  impact of stock  options  and  warrants
outstanding (Notes 3, 9 and 10) would be antidilutive.

                                      F-10


<PAGE>



Stock-Based Compensation

During October 1995, the FASB issued SFAS No. 123,  "Accounting  for Stock-Based
Compensation."  This statement  establishes  financial  accounting and reporting
standards for stock-based  employee  compensation plans. SFAS No. 123 encourages
entities to adopt a fair value based method of accounting for stock compensation
costs  under  pre-existing  accounting  pronouncements.  If the fair value based
method of accounting is not adopted, SFAS No. 123 requires pro forma disclosures
of net  income  (loss)  and  earnings  (loss)  per  share  in the  notes  to the
consolidated financial statements.  The accounting  requirements of SFAS No. 123
are  effective  for  transactions  entered into in fiscal years that begin after
December  15,  1995,  though  they may be adopted on  issuance.  The  disclosure
requirements  of SFAS No. 123 are effective for financial  statements for fiscal
years beginning after December 15, 1995, or for an earlier fiscal year for which
SFAS No. 123 is initially adopted for recognizing compensation cost. The Company
has adopted this  standard in 1996,  and has elected to continue the  accounting
set forth in Accounting Principles Board No. 25, "Accounting for Stock Issued to
Employees"  ("APB No. 25") and to provide the  necessary  pro-forma  disclosures
(Note 10).

Recently Issued Accounting Standards

Subsequent  to December 31, 1996,  the FASB issued SFAS No. 128,  "Earnings  Per
Share."  This  statement  establishes  standards for  computing  and  presenting
earnings per share ("EPS"),  replacing the  presentation  of currently  required
primary EPS with a presentation  of Basic EPS. For entities with complex capital
structures,  the statement  requires the dual presentation of both Basic EPS and
Diluted EPS on the face of the statement of operations. Under this new standard,
Basic EPS is computed based on weighted average shares  outstanding and excludes
any  potential  dilution.  Diluted  EPS  reflects  potential  dilution  from the
exercise or conversion of securities  into common stock or from other  contracts
to issue common  stock and is similar to the  currently-required  fully  diluted
EPS. SFAS 128 is effective for financial  statements  issued for periods  ending
after December 15, 1997,  including interim periods,  and earlier application is
not  permitted.  When  adopted,  the Company will be required to restate its EPS
data for all prior periods presented.  The Company does not expect the impact of
the  adoption  of this  statement  to be  material to  previously  reported  EPS
amounts.

Reclassifications

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

3.       ACQUISITION OF BUSINESSES:

Acquisitions

The  transaction  with Majean,  Inc.  described in Note 1 was accounted for as a
purchase  through the issuance of 543,564  shares of the Company's  stock to the
shareholders  of  Majean,  Inc.,  who were not  previously  affiliated  with the
Company, for an aggregate purchase price of $1,368,471. Additionally, options to
purchase  283,010 shares of common stock at $.0112 per share were issued as part
of  this  transaction.   These  options  are  only  exercisable,  as  contingent
consideration,  upon the achievement of certain capitalization levels related to
regulatory requirements.  The entire purchase price of this acquisition has been
allocated to intangible assets in the accompanying  consolidated balance sheets,
as will any contingent  consideration  which arises due to the option  described
above,  based on a twenty-year  contract with an MSO, which was  contributed  to
Majean,  Inc. by its shareholders  upon its formation  immediately  prior to the
transaction. Accordingly, this intangible asset is being amortized over a period
of twenty-years.

                                      F-11


<PAGE>



Pursuant to an asset purchase agreement with Peltz  Ventimiglia,  Inc. ("Peltz")
dated  August  28,  1995,  AHC  acquired  certain  assets  and  assumed  certain
liabilities of Peltz for 75,996 shares of common stock for an aggregate purchase
price of $191,327. Additionally, the former owners of Peltz received warrants to
purchase 113,995 shares of the Company's common stock at $4.38 per share,  which
management  believes to be in excess of the fair market  value of such shares at
the  date  of  grant.  These  warrants  are  only  exercisable,   as  contingent
consideration, based on the achievement of targeted operating performance.

Pursuant to a purchase  agreement with U.S. Health  Connections,  Inc.  ("Health
Connections")  dated  September  1, 1995,  the  Company  acquired,  through  its
subsidiary AHM, all of the outstanding stock of Health  Connections for $150,000
in cash,  a note for  $150,000  due in two  installments  within one year of the
acquisition and 30,193 shares of common stock,  for an aggregate  purchase price
of $376,014.  Furthermore,  the Health Connections  purchase agreement calls for
the issuance of an additional 56,611 common shares, as contingent consideration,
based on the achievement of targeted operating performance by this entity.

The Company  will  record the effect of the  contingent  consideration,  if any,
related to these  acquisitions based upon the provisions of Emerging Issues Task
Force  Issue  95-8,  "Accounting  for  Contingent   Consideration  Paid  to  the
Shareholders of an Acquired Company in a Purchase Business  Combination",  which
sets  forth  the  criteria  for   determining   the   allocation  of  contingent
consideration as either additional purchase price or compensation expense. These
criteria provide for the recognition of contingent consideration,  as opposed to
compensation  expense,  upon the  exercisability,  if any,  of such  options and
warrants where relevant facts and circumstances, such as continued employment of
the sellers, components of the selling shareholder group, reasons for contingent
payments and other  agreements  and issues,  indicate  that such  accounting  is
warranted. Management of the Company believes that the terms of the acquisitions
described above meet the criteria for recognition of contingent consideration.

These acquisitions described above were valued based on management's estimate of
the fair value of common stock at the date of acquisition,  which was determined
by the Company's management by comparisons to (i) arms-length  transactions with
unrelated  third-parties  for  the  same  or  similar  securities  and  (ii)  an
independent  third-party appraisal.  Costs in excess of net assets acquired were
recorded as intangible assets as follows:
<TABLE>
<CAPTION>

                                                                      Peltz                U.S. Health
                                             Majean, Inc.       Ventimiglia, Inc.       Connections, Inc.

<S>                                         <C>                 <C>                       <C>
         Accounts receivable                $         -         $        41,555           $       40,775
         Management contracts                    1,368,471                 -                        -
         Goodwill                                     -                 173,551                  355,239
         Covenant not-to-compete                      -                  10,000                   10,000
         Current liabilities                          -                 (33,779)                 (30,000)
                                          ----------------    -----------------       ------------------
              Total purchase price          $    1,368,471      $       191,327           $      376,014
                                            ==============      ===============           ==============
</TABLE>

Pro Forma Results of Operations

Summarized  below are the  unaudited  pro forma  results  of  operations  of the
Company as though these acquisitions had occurred at the beginning of 1994. This
pro forma  information  does not give effect to any operations of Majean,  Inc.,
which  had no  operations  prior to the  merger  transaction  with the  Company.
Adjustments  have been  made for pro forma  income  taxes  and  amortization  of
intangible assets related to these transactions.

                                      F-12


<PAGE>






                                         For the Years Ended December 31,
                                         --------------------------------
                                                1994           1995
          Pro Forma:                     --------------    --------------
             Revenues                       $ 1,228,409    $ 1,619,621
             Net loss                        (2,467,198)    (5,742,954)
             Net loss per share             $     (1.18)   $     (1.66)

These pro forma  results of  operations  are not  necessarily  indicative of the
actual results of operations that would have occurred had the acquisitions  been
made at the beginning of 1994, or of results which may occur in the future.

On April 1, 1996,  the  Company  acquired  certain  assets and  assumed  certain
liabilities of a network development company in exchange for 8,937 shares of the
Company's common stock and $45,000, to be paid in two installments of $22,500 on
the closing date and on the first anniversary thereof, for an aggregate purchase
price of  approximately  $90,000,  all of which is  included  in goodwill in the
accompanying  consolidated  balance  sheets.  The  pro  forma  effects  of  this
transaction  have not been  presented,  as the  results  are  immaterial  to the
Company's consolidated financial statements taken as a whole.

The  stockholders  agreements for these MSOs and those MSOs which were formed as
described  in Note 1, among  other  things,  (i)  restrict  the  transfer of MSO
equity,  (ii) provide the terms upon which the MSO can, at the Company's option,
be  merged  with  and  into  a  wholly-owned  subsidiary  of  the  Company  in a
transaction in which the physician practice or network will receive stock of the
Company in  exchange  for shares in the MSO  and  (iii)  grant to the  physician
practice or network the right to put its equity  share in the MSO to the Company
within one year of the Company's  satisfaction of certain  specified  targets if
the  Company  has not called its right to acquire  those  interests  within that
period.  The agreements provide that these call transactions will be paid in the
Company's  common stock,  and put  transactions  will be paid in cash,  and that
either transaction,  if effected, would be based on an agreed-upon amount at the
time of the transaction.  The Company will, in the event that these transactions
take place,  account for such  transactions as purchases at the agreed-upon fair
market value of the MSO interest being purchased.

4.       RELATED PARTY TRANSACTIONS:

Shared Services

The Company  previously  shared  office space and  administrative  services with
Physicians'  Online,  Inc.  ("POL"),  a privately  held  healthcare  information
services company which is partly owned by several of the Company's shareholders,
including certain officers and directors.

During the three years ended  December  31,  1996,  POL also  incurred  expenses
totaling $135,825,  $180,631 and $94,605, respectively, on behalf of the Company
for which the Company has  reimbursed  POL.  The Company also repaid a loan from
POL in the amount of  $300,000  during  the year ended  December  31,  1995.  In
addition,  during 1995, POL borrowed $500,000 from the Company.  POL repaid this
amount in full prior to December 31, 1995.

Transactions with MSOs

Revenues from MSOs, which are also related parties,  are separately set forth in
the accompanying consolidated financial statements.

                                      F-13


<PAGE>





In December 1996, one of the MSOs purchased accounts receivable from a physician
practice, under the terms of its management services agreement, for an aggregate
amount  of  $4,501,352,   which  is  included  in  accounts  receivable  in  the
accompanying  consolidated  balance sheet as of December 31, 1996. In accordance
with the agreement,  all purchased accounts receivable  outstanding after ninety
days from the  purchase  date are to be sold back to the  physician  practice at
face value. In the event that the physician practice is unable to repurchase the
receivables,  the aggregate  outstanding  amount is converted to a loan which is
collateralized by outstanding  shares of the Company held by the shareholders of
the physician practice.

During 1996, a separate MSO made advances aggregating  $600,000, in the ordinary
course of business,  to a physician  practice with which the MSO has a long-term
management  services  agreement.  These  advances were  satisfied  subsequent to
December 31, 1996, as the physician  practice  simultaneously  assigned  certain
accounts  receivable  to the MSO to satisfy  the  advances  and sold  additional
accounts  receivable  to the  MSO.  This  amount  is  included  in  advances  to
affiliates in the accompanying consolidated balance sheet.

Transactions with Officers

In  accordance  with  the  Company's  Senior  Executive  Loan  Policy,  which is
administered  by the  Compensation  Committee  of the  Board of  Directors,  the
Company has made loans to certain senior  executives of the Company  aggregating
$430,000,  which are included in other assets in the  accompanying  consolidated
balance sheet as of December 31, 1996.  These loans are due three years from the
loan date with interest  payable  monthly at a rate of 6% per annum.  There were
such no loans outstanding at December 31, 1995.

Management of the Company  believes that these related party  transactions  were
effected on terms which approximate fair market value.

5.       INVESTMENTS IN MARKETABLE SECURITIES:

The  amortized  cost,  gross  unrealized  gains and losses and fair value of the
available-for-sale securities as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>

                                               Amortized          Unrealized         Unrealized
                                                 Cost               Gains              Losses           Fair Value
                                             -------------      -------------       -------------      -------------
<S>                                          <C>                <C>                 <C>                <C>
           Commercial paper                  $   7,290,162      $      99,809       $     -            $   7,389,971
                                             =============      =============       =============      =============
</TABLE>

All  available-for-sale  securities are due within one year. There were no sales
of  available-for-sale  securities  for the year ended  December 31,  1996.  The
Company had no marketable securities prior to 1996.

                                      F-14


<PAGE>



6.       PROPERTY AND EQUIPMENT:

Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                            --------------------------------
                                                                                1995              1996
                                                                                ----              ----
<S>                                                                        <C>               <C>
         Computer equipment and software                                   $    1,152,077    $    2,276,484
         Equipment under capital leases                                           681,988           470,856
         Furniture and fixtures                                                   189,448           271,578
         Leasehold improvements                                                    60,236            43,061
                                                                           --------------   ---------------
                                                                                2,083,749         3,061,979

         Less:  Accumulated depreciation and amortization                         544,851         1,008,930
                                                                           --------------   ---------------
         Property and equipment, net                                       $    1,538,898    $    2,053,049
                                                                           ==============    ==============
</TABLE>

Depreciation  and  amortization  aggregated  $146,681,  $396,618  and  $781,980,
respectively, for the three years ended December 31, 1996.

 7.      INTANGIBLE ASSETS:

Intangible assets arising from acquisitions (Note 3) consist of the following:
<TABLE>
<CAPTION>

                                                                                      December 31,
                                                                           -----------------------------------
                                                                                1995                 1996
                                                                                ----                 ----
<S>                                                                        <C>                  <C>
           Management contracts                                            $     1,368,471      $   1,368,471
           Goodwill                                                                528,790            618,790
           Covenant not-to-compete                                                  20,000             20,000
                                                                         -----------------    ---------------
                                                                                 1,917,261          2,007,261

           Less:  Accumulated amortization                                          41,650            149,498
                                                                         -----------------    ---------------
                    Intangible assets, net                                 $     1,875,611      $   1,857,763
                                                                           ===============      =============
</TABLE>

Amortization aggregated $41,650 and $107,848,  respectively, for the years ended
December 31, 1995 and 1996. There were no intangible assets prior to 1995.

8.       ACCRUED EXPENSES:

Accrued expenses consist of the following as of December 31, 1996:

           Reimbursable physician practice expense              $     326,225
           Public stock offering expenses                             244,656
           Other                                                      341,883
                                                              ---------------
                    Total accrued expenses                      $     912,764
                                                                =============

The  Company  had no  individual  accrued  expenses  in excess of 5% of  current
liabilities as of December 31, 1995.


                                      F-15


<PAGE>



9.       BRIDGE FINANCING:

Bridge Financing

On February  28, 1996,  the Company  entered into an agreement to issue three 8%
promissory  notes to an investor  for an  aggregate  amount of  $3,000,000.  The
Company issued one  promissory  note and received  $1,500,000  upon the closing,
issued a second  promissory  note and  received  $750,000 at the second  closing
date,  April 26,  1996,  and issued a third  promissory  note and  received  the
remaining  $750,000 on the third closing date,  June 28, 1996. Each note was due
on the earlier of the initial public offering of the Company's securities or one
year from the respective  closing  dates.  Interest was due quarterly on each of
the notes.

In addition,  the investor received warrants to purchase 16,757 shares of common
stock of the  Company at $16.78 per share  which  expire on June 28,  2001.  The
exercise  price of $16.78 per share is, in the  opinion of  management,  greater
than the fair market value of such shares at the date the warrants  were issued.
The investor also received 8,937  contingent  warrants to purchase the Company's
stock at $8.39 per  share.  These  contingent  warrants  were to be  exercisable
during the period from  January 1, 1997 through June 28, 2001 if payment had not
been made on the notes by the agreed-upon payment dates described above or if an
initial public offering was not consummated  prior to January 1, 1997;  however,
when payments on the notes were made by the specified  dates,  these  contingent
warrants were canceled.

The Company  also entered  into an  agreement  with the owners of the  Company's
Series  D  Convertible  Preferred  Stock  and  related  warrants  (Note  10) for
additional  bridge  financing in the amount of  approximately  $2,000,000.  This
financing was  unsecured,  bore interest at 9% and expired on the earlier of the
consummation  of an initial public  offering or July 31,1997.  On June 19, 1996,
the Company issued three promissory  notes in the aggregate  principal amount of
$1  million  and on  August  13,  1996,  the  Company  issued  three  additional
promissory  notes in the  aggregate  principal  amount of $1 million  under this
agreement.

The Company  used a portion of the  proceeds of the initial  public  offering to
repay this bridge  financing.  The supplementary net loss per share for the year
ended  December 31,  1996,  which  follows,  gives  supplementary  effect to the
issuance of 384,615  shares of common stock for the entire  period  during which
the related  bridge  financing  was  outstanding,  which is the number of shares
issued in the initial public offering,  the proceeds of which were used to repay
the  bridge  financing,  as well as to the  effect of the  reduction  of related
interest  expense,  net of  tax,  in the  period  during  which  that  debt  was
outstanding.  These shares are presumed  outstanding for supplementary  purposes
only,  and were neither issued nor  outstanding  for any purpose during the year
ended December 31, 1996.

                                                    For the year ended
                                                     December 31, 1996

          Supplementary net loss per share             $       (.24)
                                                       =============
          Supplementary weighted average
            common shares outstanding                     5,931,241
                                                       =============

                                      F-16


<PAGE>



10.      SHAREHOLDERS' EQUITY:

Common Stock

(a)      In November 1994,  the Company sold 75,960 common shares  pursuant to a
         private  placement  agreement dated August 22, 1994 for an aggregate of
         $639,655.  Of these  shares  sold,  all of which were paid for in 1994,
         25,319 were issued prior to December 31, 1994 and 50,641 were issued in
         January 1995. In accordance with this  agreement,  the holders of these
         shares  have  the  right,  on  two  occasions,   to  participate  on  a
         "piggy-back"   basis  in  a  registration  by  the  Company  under  the
         Securities  Act of 1933, as amended,  subject to certain  restrictions,
         for a period ending on October 31, 1999, and  commencing  twelve months
         from the closing of an initial public offering of the securities of the
         Company.

(b)      In 1995,  the Company sold 79,780 common  shares  pursuant to a private
         placement  agreement dated April 21, 1995 for an aggregate of $625,059.
         In accordance with this agreement, the holders of these shares have the
         right,  on two occasions,  to participate on a "piggy-back"  basis in a
         registration  by the  Company  under  the  Securities  Act of 1933,  as
         amended,  subject  to  certain  restrictions,  for a period  ending  on
         September 30, 2000, and commencing twelve months from the closing of an
         initial public offering of the securities of the Company.

(c)      In October 1996, the Company  completed an initial  public  offering of
         its securities.  The offering  included the sale of 2,300,000 shares of
         common stock (on a basis which  reflected the reverse  split  described
         below) at $13 per share plus an underwriters'  overallotment of 345,000
         shares. Total net proceeds from this offering were $30,483,168.

Preferred Stock

Prior to the  initial  public  offering,  the Company  had  2,000,000  shares of
authorized  Preferred Stock with a par value of $.01 per share, of which 971,800
shares had been designated  Series A Convertible  Preferred Stock. On August 31,
1993,  the Company sold 971,800 shares of Series A Convertible  Preferred  Stock
for $97,180.  In March 1994,  the Company  authorized and sold 282,900 shares of
Series B  Convertible  Preferred  Stock  for  $2,000,103  pursuant  to a Private
Placement  Agreement.  In January 1995, the Company  authorized and sold 200,000
shares of Series C  Convertible  Preferred  Stock for  $1,500,000  pursuant to a
Private  Placement  Agreement.  In August 1995, the Company  authorized and sold
666,360 shares of Series D Convertible  Preferred Stock for $4,997,700  pursuant
to a Private Placement Agreement. All of the above shares are not redeemable.

Each  individual  share of Series A, B, C and D Convertible  Preferred Stock was
convertible into 1.5 common shares at the holder's option, subject to adjustment
for  antidilution.  The  holders of Series A, B, C and D  Convertible  Preferred
Stock are  entitled  to receive  dividends  as and if  declared  by the Board of
Directors.  In the  event  of  liquidation,  dissolution  or  winding  up of the
Company,  the holders of Series A, B, C and D  Convertible  Preferred  Stock are
entitled to receive all accrued dividends,  if applicable,  plus the liquidation
price per share of $.07, $4.71, $5.00 and $5.00, respectively.

Subject to certain provisions, registration rights, as defined in the agreement,
may be exercised  after the earlier of (1) August 23, 1999  or (2) the effective
date of the first registration  statement for a public offering of securities of
the  Company.  Holders  of Series B, C and D  Convertible  Preferred  Stock have
voting rights. Furthermore, holders of Series D Convertible Preferred Stock have
the right to purchase  446,858 shares of Class D Convertible  Preferred Stock at
$8.39 per share.


                                      F-17


<PAGE>



 Stock Splits and Conversion of Preferred Stock

In January 1995, the Company  authorized a 100 for 1 stock split on its Series A
and B Preferred  Stock and a 100 for 1 stock  split on the common  stock sold in
1993.  In April  1996,  the  Company  authorized  a 1.5 for 1 stock split on its
common stock in the form of a stock dividend.

Pursuant to the terms of the Series A, B, C and D Convertible  Preferred  Stock,
these  securities  were  converted,  on a 1.5 to 1 share basis,  to common stock
immediately prior to the effective date of the initial public offering.

In  connection  with  the  initial  public  offering,  the  Company  effected  a
recapitalization  whereby the  presently  outstanding  common  stock  (including
converted  Series A, B, C and D  Convertible  Preferred  Stock) was converted to
shares of common stock on a .59581 to 1 share basis.

All  information  in the  accompanying  consolidated  financial  statements  and
footnotes has been retroactively restated to give effect to these transactions.

Stock Options

During 1994, the Company issued options to employees to purchase  970,860 shares
of common stock at prices ranging from $.0112 to $2.52 per share.

During  1995,  the Company  adopted the 1995 Stock Option Plan (the "1995 Plan")
for the purpose of granting  incentive  stock options to employees,  officers or
directors  of, or  consultants  or  advisors  to,  the  Company,  provided  that
incentive stock options may only granted to individuals who are employees of the
Company.  Options  granted  under the 1995 Plan  typically  vest annually over a
three-year  period  and expire  ten years  from the date of grant.  The  Company
reserved 1,500,000 shares of common stock for issuance under the 1995 Plan.

The Company also adopted the Advanced Health Corporation Employee Stock Purchase
Plan (the  "Employee  Plan")  during 1996 in order to allow the employees of the
Company to acquire a proprietary interest in the Company through the purchase of
the Company's common stock. Under the Employee Plan,  eligible employees will be
granted  options to purchase  shares of common  stock  through  regular  payroll
deductions.  The total number of shares of common stock that are  authorized for
issuance under the Employee Plan is 1,200,000.  No shares have been issued under
the Employee Plan.

The Company  accounts  for these plans under APB Opinion No. 25,  under which no
compensation cost has been recognized.

Had compensation  cost for these plans been determined  consistent with SFAS No.
123,  the  Company's  net loss and net loss per share would have been changed to
the following pro forma amounts:
<TABLE>
<CAPTION>

                                                                     1995                 1996

<S>                                        <C>                <C>                  <C>
Net loss:                                  As Reported        $     (5,706,607)    $    (1,465,188)
                                           Pro Forma                (5,898,054)         (1,850,482)
Net loss per share:                        As Reported        $          (1.47)    $         (0.26)
                                           Pro Forma                     (1.51)              (0.33)
</TABLE>

Because the SFAS No. 123 method of  accounting  has not been  applied to options
granted prior to January 1, 1995, the resulting pro forma  compensation cost may
not be representative of that to be expected in future years.

                                      F-18


<PAGE>



A summary  of the status of the 1995 Plan at  December  31,  1995 and 1996,  and
changes  during the years then ended,  is presented  in the table and  narrative
below:
<TABLE>
<CAPTION>

                                                        1995                                   1996
                                                                Wtd Avg                                Wtd Avg
                                            Shares             Ex Price             Shares            Ex Price
                                       ----------------  ---------------------  ---------------  -------------------
<S>                                          <C>                <C>                     <C>          <C>
Outstanding at beg. of year                  841,264            $   0.27                888,916      $   0.17
Grant                                        980,968                2.73                154,733          6.77
Exercised                                   (885,279)               0.01                (21,734)         3.71
Forfeited                                    (48,037)               2.52               (217,471)         4.17
                                       -------------                            ---------------
Outstanding at end of year                   888,916                0.17                804,444          1.31
                                       =============                            ===============
Exercisable at end of year                    22,479                 n/a                306,511           n/a
                                       =============                            ===============
Weighted average fair value of
   options granted                        $     1.43                 n/a         $   3.54                 n/a
</TABLE>

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option   pricing  model  with  the  following   weighted-average
assumptions used for grants in 1995 and 1996,  respectively:  risk-free interest
rates  of 6.2%;  expected  dividend  yields  of 0%;  expected  lives of 3 years;
expected stock price volatility of 74%.

Stock Warrants

In October 1995, the Company issued warrants to a financial  advisor to purchase
17,874 shares of common stock at $3.52 per share.  In the opinion of management,
the exercise  price of $3.52 per share  represents the fair value of such shares
at the date the warrants were issued.  Accordingly,  management  has  determined
that the  intrinsic  value of these  warrants is not  material to the  Company's
consolidated financial statements.


                                      F-19


<PAGE>



11.      INCOME TAXES:

Income tax benefit consists of the following:
<TABLE>
<CAPTION>

                                                             Year Ended December 31,
                                                -------------- ------------------ --------------
                                                  1994               1995               1996
                                                  ----               ----               ----
<S>                                              <C>               <C>              <C>
        Federal:
             Current                             $ -               $  -             $     -
             Deferred                              -                  -                  757,014
        State and Local:
             Current                              -                   -                   -
             Deferred                              -                  -                  219,778
                                                 --------          ---------        ------------
               Total income tax benefit          $ -               $  -             $    976,792
                                                 ========          =========        ============
</TABLE>

A  reconciliation  of difference  between the statutory U.S.  Federal Income Tax
Rate and the Company's effective tax rate for the years ended December 31, 1994,
1995 and 1996 follows:

                                              1994       1995       1996
                                               ---        ---        ---

U.S. Federal statutory income tax
  rate                                          34%        34%        34%
State income taxes, net of federal tax
  tax benefit                                    6%         6%         6%
Net operating loss without tax
  benefit                                      (40%)      (40%)       --
                                             ------     -----       -----
                                                --         --         40%
                                              ======     =====       =====

     The tax effects of temporary  differences, that give rise to a  significant
     portion of the deferred income tax asset, net, are as follows:
<TABLE>
<CAPTION>

                                                                  December 31,
                                                       -----------------------------------
                                                            1995                 1996
                                                            ----                 ----
<S>                                                    <C>                 <C>
           Current deferred income tax assets:
              Net operating loss carryforward          $          -        $      976,792
                                                       ---------------     --------------
                    Current deferred tax asset                    -               976,792
                                                       ---------------     --------------

           Noncurrent deferred income tax asset, net:
              Net operating loss carryforwards               2,564,800          3,510,540
              Amortization                                     522,969            380,346
              Deferred revenue                                 240,000            160,000
              Allowance for doubtful accounts                     -                84,000
              Other                                            178,771            (10,924)
                                                       ---------------     --------------
                                                             3,506,540          4,123,962
                                                       ---------------     --------------

           Less:  Valuation allowance                       (3,506,540)        (4,123,962)
                                                       ---------------     --------------
           Total deferred income taxes, net            $          -        $      976,792
                                                       ===============     ==============
</TABLE>


                                      F-20

<PAGE>



As of  December  31,  1996,  the Company had net  operating  loss  carryforwards
("NOLs")  available to offset  future book and taxable  income of  approximately
$10.2 million and $8.7 million,  respectively,  which expire in varying  amounts
through 2011. Certain of these carryforwards are limited as to their utilization
due to  cumulative  changes in ownership of the Company  through 1996 (Note 10).
Future changes in ownership,  as defined by Section 382 of the Internal  Revenue
Code, as amended could limit the amount of net operating loss  carryforwards  in
any one year. In 1996,  management of the Company  determined that it has become
more likely than not that the current  year  deferred  income tax assets will be
realized and has,  accordingly,  recorded the current year  deferred  income tax
asset  of  $976,792,  which  is  included  in  the  income  tax  benefit  in the
accompanying  consolidated  statement of operations for 1996. The  determination
that the net deferred income tax asset of $976,792,  which includes the deferred
income tax benefit for the current year, is realizable is based on the Company's
profitability in the latter part of 1996.

12.      CAPITAL LEASE OBLIGATIONS INCOME TAX:

The Company is the lessee of certain  equipment  under capital  leases  expiring
through  2001.  The  assets and  liabilities  are  recorded  at the lower of the
present value of minimum  lease  payments or the fair market value of the asset.
The interest rates on the capital leases vary from 2.63% to 17.00%.

Future minimum payments under these lease agreements are as follows:

      Year ending December 31,
          1997                                                     $     145,048
          1998                                                            77,818
          1999                                                             8,458
          2000                                                            10,648
          2001                                                             3,550
                                                                   -------------
          Total minimum lease payments                                   245,522

          Less:  Amount representing interest                             33,306
                                                                   -------------
          Present value of net minimum lease payments                    212,216
          Less: Current portion                                          131,441
                                                                   -------------
                                                                   $      80,775
                                                                   =============
13.      COMMITMENTS:

The Company  leases  certain  office space for its  operations.  Leases for this
space expire through 2002 and call for annual rent, with immaterial  escalations
through the end of the leases.

The Company has also entered into several operating leases for office equipment.

Future  minimum  payments  for  operating  leases at  December  31,  1996 are as
follows:

         Year ending December 31,

                  1997                                  $   631,012
                  1998                                      719,016
                  1999                                      784,040
                  2000                                      813,764
                  2001 and thereafter                       792,289

Rent expense was $69,774,  $125,881 and  $629,847,  respectively,  for the three
years ended December 31, 1996.

14.      SUBSEQUENT EVENT:

Subsequent to December 31, 1996, the Company loaned $2,000,000 to Madison at the
prime rate plus 2%, not to exceed 10%,  with  interest  payable  monthly and the
outstanding  principal  payable  in twelve  monthly  installments  beginning  in
January 1998. In conjunction with this loan, the Company has guaranteed a letter
of credit of Madison,  in the amount  $1,727,000,  by depositing and restricting
cash in the same  amount  with the same  financial  institution  providing  that
letter of credit. These obligations are secured by the 49% ownership interest in
Uptown held by Madison.

                                      F-21


<PAGE>


                                  EXHIBIT INDEX

Exhibit No.                   Description of Exhibit                    Page
-----------                   ----------------------                    ----

**2.1          Agreement and Plan of Merger dated as of August 2,
               1995,   among   Med-E-Systems   Corporation,   MES
               Acquisition Corp. and the Registrant

**2.2          Agreement and Plan of Merger dated as of August 7,
               1995, between the Registrant and Majean, Inc.

**2.3          Asset  Purchase  Agreement  dated as of August 28,
               1995,    among    Advanced    Clinical    Networks
               Corporation,   Peltz  Ventimiglia,  Inc.,  Richard
               Ventimiglia and Steven Peltz

**2.4          Agreement and Plan of Merger dated as of September
               1, 1995, among U.S. Health Connections,  Inc., the
               Registrant   and   Advanced    Clinical   Networks
               Corporation

**3.1          Restated   Certificate  of  Incorporation  of  the
               Registrant

**3.2          By-laws of the Registrant


+**10.1        Development  and Marketing  Agreement  dated as of
               August 1, 1995, between Med-E- Systems Corporation
               and Integrated Disease Management,  Inc

+**10.2        Software  License  Agreement dated as of September
               27, 1995,  between Med-E- Systems  Corporation and
               Medco Containment  Services Inc

+**10.3        System  Implementation  Agreement  dated September
               14, 1995, between IDX Systems  Corporation and the
               Registrant

**10.4         Investors' Rights Agreement dated as of August 31,
               1993,  among  Med-E-Mail  Corporation,   Financial
               Strategic  Portfolios,  Inc.  --  Health  Sciences
               Portfolio and The Global Health Sciences Fund

**10.5         Amended and Restated  Investors'  Rights Agreement
               dated  as of  March  16,  1994,  among  Med-E-Mail
               Corporation,  Financial Strategic Portfolios, Inc.
               -- Health Sciences Portfolio and The Global Health
               Sciences Fund

**10.6         Amended and Restated  Investors'  Rights Agreement
               dated as of January 27, 1995, among  Med-E-Systems
               Corporation, Invesco Strategic Portfolios, Inc. --
               Health  Sciences  Portfolio  and The Global Health
               Sciences Fund

**10.7         Investors' Rights Agreement dated as of August 23,
               1995,   among   the   Registrant,   21st   Century
               Communications   Partners,   L.P.,   21st  Century
               Communications T-E Partners, L.P. and 21st Century
               Communications Foreign Partners, L.P

**10.8         Registrant  Rights  Agreement  dated  February 28,
               1996,  among the Registrant,  Park Avenue Capital,
               L.P. and Access Industries, LLC

+**10.9        Management Services Agreement dated as of December
               11, 1995,  between  Madison Medical -- The Private
               Practice  Group of New  York,  L.L.P.  and  Uptown
               Physician Management,  Inc.

**10.10        Stockholders'  Agreement  dated as of December 11,
               1995, among Uptown Physician Management,  Inc. and
               certain stockholders

+**10.11       Management  Services  Agreement dated as of August
               7, 1995,  among  Advanced  Heart  Institute of New
               York,  P.C.,   Valavanur  A.  Subramanian,   M.D.,
               Jeffrey Moses M.D. and Majean Sub 2, Inc.

+**10.12       Management  Services Agreement dated as of July 1,
               1996,  between Specialist  Physicians  Management,
               Inc. and Cardiology First of New Jersey, P.A.


<PAGE>
Exhibit No.                   Description of Exhibit                    Page
-----------                   ----------------------                    ----

**10.13        Stockholders'  Agreement  dated as of July 1, 1996
               among  Specialist  Physicians  Management,   Inc.,
               Specialist  Physicians  MSO,  L.L.C.  and Advanced
               Health Management Corporation.

+**10.14       Management  Services Agreement dated as of July 1,
               1996 between Diamond  Physician  Management,  Inc.
               and Long Island Interventional Cardiology.

**10.15        Stockholders'  Agreement  dated as of July 1, 1996
               among Diamond  Physician  Management,  Inc.,  Long
               Island  Interventional   Cardiology  and  Advanced
               Health Management Corporation.

+**10.16       Administrative Services Base Agreement dated as of
               June 30, 1994,  between U.S.  Health  Connections,
               Inc. and The Emory Clinic, Inc.

**10.17        Tarrytown,  New York Office Lease  Agreement dated
               November 30,  1995,  between  Tarrytown  Corporate
               Center IV, L.P. and the Registrant.

**10.18        Tarrytown,  New  York  Office  Sublease  Agreement
               dated October 31, 1995, between American Software,
               USA, Inc. and the Registrant

*10.19         First Amendment to Lease Agreement between Reckson
               Operating  Partnership,  LP,  as  Owner,  and  the
               Registrant, as Tenant

**10.20        Chicago Office Lease  Agreement  dated December 8,
               1995,   between  Adams  Family,   L.L.C.  and  the
               Registrant

**10.21        Form of Director Indemnification Agreement

**10.22        Employment  Agreement  between the  Registrant and
               Jonathan Edelson, M.D.

**10.23        Employment  Agreement  between the  Registrant and
               Steven Hochberg

**10.24        Employment  Agreement  between the  Registrant and
               Alan B. Masarek

**10.25        Amended and Restated  Advanced Health  Corporation
               1995 Stock Option Plan

**10.26        Employee Stock Purchase Plan

*11.1          Supplemental Net Loss Per Common Share Computation

**21           List of Subsidiaries

*23.2          Consent of Arthur Andersen LLP

*27            Financial Data Schedule

--------
*    Filed herewith.
**   Filed as an exhibit to the Registrant's Registration Statement on Form S-1,
     as  amended  (Registration  No.  333-06283),  and  incorporated  herein  by
     reference.
+    Portions of such exhibit have been deleted  therefrom  pursuant to Rule 406
     promulgated under the Securities Act of 1933, as amended,  and confidential
     treatment has been granted therefor.